UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 20-F
[ ]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
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: 000-50492
CORDOVACANN CORP.
(Exact
name of Registrant as specified in its charter)
Canada
(Jurisdiction
of incorporation or organization)
217 Queen Street West, Suite 401,
Toronto, Ontario, M5V 0R2, Canada
(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 – 40,786,228 as at June 30,
2019
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes
[X] 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.
[X] 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.
[X]Yes
[ ] No
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).
[X]Yes
[] No
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 [ ] Non-accelerated filer
[X]
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
[X]
If
“Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow.
[ ]
Item 17 [ ] Item 18
If this
is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
[ ] Yes
[X] No
TABLE OF CONTENTS
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Page No.
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4
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4
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Part I
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5
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5
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5
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21
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24
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30
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40
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52
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52
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Part II
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53
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53
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53
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55
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Part III
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57
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57
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57
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F
ORWARD-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.
F
OREIGN 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 60% of its common shares is held by
approximately 355 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.
4
I
TEM 1 - IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISORS
Not
applicable.
I
TEM 2 - OFFER STATISTICS AND EXPECTED
TIMETABLE
Not
applicable.
I
TEM 3 - KEY INFORMATION
(A) SELECTED FINANCIAL DATA
This
Report includes audited consolidated financial statements of the
Company for the years ended June 30, 2019, 2018 and 2017. 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 2017 through 2019 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,
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
Revenue
|
-
|
-
|
-
|
|
Net loss for
year
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
Net loss per
share
|
(0.15
)
|
(0.15
)
|
(0.00
)
|
|
|
|
|
|
|
Working capital
(deficit)
|
(3,236,359
)
|
3,882,542
|
(626,476
)
|
|
Total
assets
|
4,645,132
|
4,875,592
|
6,756
|
|
Total
liabilities
|
4,282,562
|
320,321
|
633,232
|
|
Capital
stock
|
14,636,828
|
14,480,241
|
7,880,660
|
|
Contributed
surplus
|
5,226,156
|
3,808,611
|
361,196
|
|
Equity portion of
convertible debentures
|
62,498
|
-
|
-
|
|
Accumulated
deficit
|
(19,570,801
)
|
(13,734,265
)
|
(8,868,332
)
|
|
Accumulated other
comprehensive income
|
7,889
|
684
|
-
|
|
Shareholders’
equity (deficiency)
|
362,570
|
4,555,271
|
(626,476
)
|
5
Summary of Financial Information in Accordance with U.S. GAAP
(CDN)
Operating data – Fiscal year ended June 30
|
For
the Years Ending June 30,
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
Revenue
|
-
|
-
|
-
|
|
Net loss for
year
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
Net loss per
share
|
(0.15
)
|
(0.15
)
|
(0.00
)
|
|
|
|
|
|
|
Working capital
(deficit)
|
(3,236,359
)
|
3,882,542
|
(626,476
)
|
|
Total
assets
|
4,645,132
|
4,875,592
|
6,756
|
|
Total
liabilities
|
4,282,562
|
320,321
|
633,232
|
|
Capital
stock
|
14,636,828
|
14,480,241
|
7,880,660
|
|
Contributed
surplus
|
5,226,156
|
3,808,611
|
361,196
|
|
Equity portion of
convertible debentures
|
62,498
|
-
|
-
|
|
Accumulated
deficit
|
(19,570,801
)
|
(13,734,265
)
|
(8,868,332
)
|
|
Accumulated other
comprehensive income
|
7,889
|
684
|
-
|
|
Shareholders’
equity (deficiency)
|
362,570
|
4,555,271
|
(626,476
)
|
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, 2019, being the last day of November 2019, 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 $0.7525.
The
following table sets out the high and low exchange rates for each
of the last six months.
|
2019
|
November
|
October
|
September
|
August
|
July
|
June
|
|
|
|
|
|
|
|
|
|
High for
period
|
$
0.7606
|
$
0.7659
|
$
0.7603
|
$
0.7566
|
$
0.7670
|
$
0.7641
|
|
Low for
period
|
$
0.7515
|
$
0.7502
|
$
0.7495
|
$
0.7505
|
$
0.7586
|
$
0.7424
|
6
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.
|
|
Year Ended June
30,
|
||||
|
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
Average for the
year
|
$
0.7556
|
$
0.7855
|
$
0.7564
|
$
0.7540
|
$
0.8466
|
Not
applicable.
(C) REASONS FOR THE OFFER AND USE OF PROCEEDS
Not
applicable.
(D) RISK FACTORS
The
following is a brief discussion of those distinctive or special
characteristics of the Company’s operations and industry that
may have a material adverse impact on, or constitute risk factors
in respect of, the Company’s future financial
performance.
Summary of Regulatory Environment
Although
cannabis is federally illegal in the U.S., the U.S. federal
government’s approach to enforcement of such laws has trended
toward non-enforcement. On August 29, 2013, the
U.S. Department of Justice (the
“DOJ”)
, issued a memorandum known as the
“Cole Memorandum” to all U.S. Attorneys’ offices
(federal prosecutors). The Cole Memorandum generally directed U.S.
Attorneys not to prioritize the enforcement of federal cannabis
laws against individuals and businesses that comply with state laws
legalizing cannabis. While not legally binding, and merely
prosecutorial guidance, the Cole Memorandum laid a framework for
managing the tension between state and federal laws concerning
state regulated cannabis businesses.
On
January 4, 2018, the Cole Memorandum was revoked by Attorney
General Jeff Sessions, an opponent of state-regulated medical and
recreational cannabis. While this did not create a change in
federal law, as the Cole Memorandum was not itself legally binding
upon federal prosecutors, the revocation removed the DOJ’s
guidance to U.S. Attorneys that state-regulated cannabis industries
substantively in compliance with the Cole Memorandum’s
guidelines should not be a prosecutorial priority.
In
addition to his revocation of the Cole Memorandum, Attorney General
Sessions also issued a one-page memorandum known as the
“Sessions Memorandum.” The Sessions Memorandum
confirmed the rescission of the Cole Memorandum and explained the
rationale for such rescission. According to the Sessions
Memorandum, the Cole Memorandum was “unnecessary” due
to existing general enforcement guidance set forth in the U.S.
Attorney's Manual (the “USAM”). The USAM enforcement
priorities, similar to the Cole Memorandum priorities, consider the
“seriousness” of the alleged crimes, the
“deterrent effect of criminal prosecution” and
“the cumulative impact of particular crimes on the
community”. Accordingly, U.S. Attorneys presently possess the
same prosecutorial discretion they held while the Cole Memorandum
was in place.
7
U.S.
legal counsel continuously monitors all U.S. Attorney comments
related to regulated medical and recreational cannabis laws to
assess various risks and enforcement priorities within each
jurisdiction. Dozens of U.S. Attorneys across the U.S. have
affirmed that their prosecutorial discretion and/or federal
enforcement priorities have not changed.
In
addition, federal money laundering statutes may be violated in the
event that financial institutions take any proceeds from cannabis
sales or any other Schedule I substance, and Canadian banks are
hesitant to deal with cannabis companies, due to the uncertain
legal and regulatory framework of the industry. Banks and other
financial institutions could be prosecuted and possibly convicted
of money laundering for providing services to cannabis businesses.
Under U.S. federal law, banks or other financial institutions that
provide a cannabis business with a checking account, debit or
credit card, small business loan, or any other service could be
found guilty of money laundering or conspiracy. Nevertheless, the
U.S. Department of the Treasury issued a memorandum in February of
2014 (the “FinCEN Memorandum”) outlining the pathways
for financial institutions to bank state-sanctioned cannabis
businesses. Under these guidelines, financial institutions must
submit a “suspicious activity report”
(“SAR”) as required by federal money laundering laws.
These cannabis related SARs are divided into three categories:
cannabis limited, cannabis priority, and cannabis terminated, based
on the financial institution’s belief that the cannabis
business follows state law, is operating out of compliance with
applicable state law, or where the banking relationship has been
terminated.
Attorney
General Sessions’ revocation of the Cole Memorandum and the
2014 Cole Memo has not affected the status of the FinCEN
Memorandum, nor has the Department of the Treasury given any
indication that it intends to rescind the FinCEN
Memorandum.
Despite
the revocation of the Cole Memorandum, a legislative safeguard for
the medical cannabis industry remains in place. Congress utilized a
rider provision in the FY 2015, 2016 and 2017 Consolidated
Appropriations Acts (currently the “Leahy Amendment”)
to prevent the federal government from using congressionally
appropriated funds to enforce federal cannabis laws against
regulated medical cannabis actors operating in compliance with
applicable state law. The Leahy Amendment was included in the FY
2018 budget passed on March 23, 2018, meaning that, the Leahy
Amendment is still in effect as of today’s date and will
remain in effect until September 30, 2018, when FY 2019
begins.
Compliance with Applicable State Law
Each
licensee of the Intellectual Property complies with applicable U.S.
state licensing requirements as follows: (1) each licensee is
licensed pursuant to applicable U.S. state law to cultivate,
possess and/or distribute cannabis in such state; (2) renewal dates
for such licenses are docketed by legal counsel and/or other
advisors; (3) random internal audits of the licensee’s
business activities are conducted by the applicable state regulator
and by the respective investee to ensure compliance with applicable
state law; (4) each employee is provided with an employee handbook
that outlines internal standard operating procedures in connection
with the cultivation, possession and distribution of cannabis to
ensure that all cannabis inventory and proceeds from the sale of
such cannabis are properly accounted for and tracked, using
scanners to confirm each customer’s legal age and the
validity of each customer’s drivers’ license; (5) each
room that cannabis inventory and/or proceeds from the sale of such
inventory enter is monitored by video surveillance; (6) software is
used to track cannabis inventory from seed-to-sale; and (7) each
licensee is contractually obligated to comply with applicable state
law in connection with the cultivation, possession and/or
distribution of cannabis. CordovaCann’s U.S. legal counsel
reviews, from time to time, the licenses and documents referenced
above in order to confirm such information and identify any
deficiencies.
Colorado’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests held by
CordovaCann in Colorado are classified as “ancillary”
involvement in the U.S. cannabis industry.
Colorado authorized the cultivation, possession and distribution of
cannabis by certain licensed Colorado cannabis businesses. The
Colorado Marijuana Enforcement Division regulates Colorado’s
cannabis regulatory program. CordovaCann is advised by U.S. legal
counsel and/or other advisors in connection with Colorado’s
cannabis regulatory program. CordovaCann only engages in
transactions with Colorado cannabis businesses that hold licenses
that are in good standing to cultivate, possess and/or distribute
cannabis in Colorado in compliance with Colorado’s cannabis
regulatory program. To the extent required by Colorado’s
cannabis regulatory program, CordovaCann has fully disclosed and/or
registered each financial interest CordovaCann holds in such
Colorado cannabis business.
8
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.
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.
9
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 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.
10
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.
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.
11
The Company’s investments in the United States may be subject
to heightened scrutiny by Canadian authorities.
For the reasons set forth above, the Company’s existing
investments in the United States, and any future investments, may
become the subject of heightened scrutiny by regulators, stock
exchanges and other authorities in Canada. As a result, the Company
may be subject to significant direct and indirect interaction with
public officials. There can be no assurance that this heightened
scrutiny will not in turn lead to the imposition of certain
restrictions on the Company’s ability to invest in the United
States or any other jurisdiction, in addition to those described
herein.
Although the TMX MOU has confirmed that there is currently no CDS
ban on the clearing of securities of companies with
cannabis-related activities in the United States, there can be no
guarantee that this approach to regulation will continue in the
future. If such a ban were to be implemented, it would have a
material adverse effect on the ability of holders of Common Shares
to make and settle trades. In particular, the Common Shares would
become highly illiquid as until an alternative was implemented,
investors would have no ability to effect a trade of the Common
Shares through the facilities of a stock
exchange.
Change in laws, regulations and guidelines.
Each investment’s current and proposed operations are subject
to a variety of laws, regulations and guidelines, including, but
not limited to, those relating to the manufacture, management,
transportation, storage and disposal of cannabis, as well as laws
and regulations relating to health and safety (including those for
consumable products), the conduct of operations and the protection
of the environment. These laws and regulations are broad in scope
and subject to evolving interpretations. If any changes to such
laws, regulations and guidelines occur, which are matters beyond
the control of the Company, the Company may incur significant costs
in complying with such changes or it may be unable to comply
therewith, which in turn may result in a material adverse effect on
the Company’s business, financial condition and results of
operation. In addition, violations of these laws, or allegations of
such violations, could disrupt certain aspects of the
Company’s business plan and result in a material adverse
effect on certain aspects of its planned operations.
Changes in regulations, more vigorous enforcement thereof, the
imposition of restrictions on the Company’s ability to
operate in the U.S. as a result of the federally illegal nature of
cannabis in the U.S. or other unanticipated events could require
extensive changes to the Company’s operations, increased
compliance costs or give rise to material liabilities, which could
have a material adverse effect on the business, results of
operations and financial condition of the
Company.
United States tax residence of the Company.
The
Company, which is and will continue to be a Canadian corporation
generally would be classified as a non-United States corporation
(and, therefore, as a non-United States tax resident) under general
rules of United States federal income taxation. Section 7874 of the
United States Tax Code, however, contains rules that can cause a
non-United States corporation to be taxed as a United States
corporation for United States federal income tax purposes. The
rules described in this paragraph are relatively new, their
application is complex and there is little guidance regarding their
application. Under section 7874 of the United States Tax Code, a
corporation created or organized outside the United States (i.e., a
non-United States corporation) will nevertheless be treated as a
United States corporation for United States federal income tax
purposes (such treatment is referred to as an
“Inversion”) if each of the following three conditions
are met (i) the non-United States corporation acquires, directly or
indirectly, or is treated as acquiring under applicable United
States Treasury Regulations, substantially all of the assets held,
directly or indirectly, by a United States corporation, (ii) after
the acquisition, the former stockholders of the acquired United
States corporation hold at least 80% (by vote or value) of the
shares of the non-United States corporation by reason of holding
shares of the United States acquired corporation, and (iii) after
the acquisition, the non-United States corporation’s expanded
affiliated group does not have substantial business activities in
the non-United States corporation’s country of organization
or incorporation when compared to the expanded affiliated
group’s total business activities (clauses (i) – (iii),
collectively, the “Inversion Conditions”). For this
purpose, “expanded affiliated group” means a group of
corporations where (i) the non-United States corporation owns stock
representing more than 50% of the vote and value of at least one
member of the expanded affiliated group, and (ii) stock
representing more than 50% of the vote and value of each member is
owned by other members of the group. The definition of an
“expanded affiliated group” includes partnerships where
one or more members of the expanded affiliated group own more than
50% (by vote and value) of the interests of the
partnership.
If the
Company is treated as a United States corporation for United States
federal income tax purposes under section 7874 of the United States
Tax Code (which is considered likely, although no definitive
determination of this matter has been reached, and no tax ruling
has been sought or obtained in this regard), the Company would be
considered a United States tax resident and subject to United
States federal income tax on its worldwide income. However, for
Canadian tax purposes, the Company is expected, regardless of any
application of section 7874 of the United States Tax Code, to be
treated as a Canadian resident Company (as defined in the Tax Act)
for Canadian income tax purposes. As a result, if the Company is
considered a United States corporation under section 7874, the
Company would be subject to taxation both in Canada and the United
States which could have a material adverse effect on its financial
condition and results of operations. In addition, any distributions
paid by the Company to a holder of Common Shares may be subject to
United States withholding tax as well as any applicable Canadian
withholding tax. A Non-United States Holder may also be subject to
United States tax, including withholding tax, on disposition of its
Common Shares.
12
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.
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.
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.
16
Bankruptcy or insolvency of investments.
There is no guarantee that the Company will be able to effectively
enforce any interests it may have in the Company’s
investments. A bankruptcy or other similar event related to an
investment of CordovaCann that precludes a party from performing
its obligations under an agreement may have a material adverse
effect on the Company. Furthermore, as an equity investor, should
an investment have insufficient assets to pay its liabilities, it
is possible that other liabilities will be satisfied prior to the
liabilities owed to the Company. In addition, bankruptcy or other
similar proceedings are often a complex and lengthy process, the
outcome of which may be uncertain and could result in a material
adverse effect on the Company.
Research and market development.
Although the Company, itself and through its investments, is
committed to researching and developing new markets and products
and improving existing products, there can be no assurances that
such research and market development activities will prove
profitable or that the resulting markets and/or products, if any,
will be commercially viable or successfully produced and
marketed.
The Company must rely largely on its own market research to
forecast sales as detailed forecasts are not generally obtainable
from other sources at this early stage of the medical and
recreational cannabis industry in North America.
The Company is operating its business in a relatively new medical
and recreational cannabis industry and market. Accordingly, there
are no assurances that this industry and market will continue to
exist or grow as currently estimated or anticipated, or function
and evolve in a manner consistent with management’s
expectations and assumptions. Any event or circumstance that
affects the recreational or medical cannabis industry or market
could have a material adverse effect on the Company’s
business, financial condition and results of operations. Due to the
early stage of the regulated cannabis industry, forecasts regarding
the size of the industry and the sales of products by the
Company’s investments are inherently difficult to prepare
with a high degree of accuracy and reliability. A failure in the
demand for products to materialize as a result of competition,
technological change or other factors could have a material adverse
effect on the business, results of operations and financial
condition of the Company’s investments, and consequently, the
Company.
Reliance on management.
The success of the Company is dependent upon the ability,
expertise, judgment, discretion and good faith of its senior
management. Qualified individuals are in high demand, and the
Company may incur significant costs to attract and retain them. In
addition, the Company’s lean management structure may be
strained as the Company pursues growth opportunities in the future.
The loss of the services of such individuals or an inability to
attract other suitably qualified persons when needed, could have a
material adverse effect on the Company’s ability to execute
on its business plan and strategy, and the Company may be unable to
find adequate replacements on a timely basis, or at
all.
CordovaCann’s future success depends substantially on the
continued services of its executive officers, consultants and
advisors. If one or more of its executive officers or key personnel
were unable or unwilling to continue in their present positions,
the Company might not be able to replace them easily or at all. In
addition, if any of its executive officers or key employees joins a
competitor or forms a competing Company, the Company may lose
know-how, key professionals and staff members. These executive
officers and key employees could compete with and take customers
away which could materially and adversely affect the
Company’s prospects, financial performance and results of
operations.
Operation permits and authorizations.
The Company’s investments may not be able to obtain or
maintain the necessary licenses, permits, authorizations or
accreditations, or may only be able to do so at great cost, to
operate their respective businesses. In addition, the
Company’s investments may not be able to comply fully with
the wide variety of laws and regulations applicable to the cannabis
industry. Failure to comply with or to obtain the necessary
licenses, permits, authorizations or accreditations could result in
restrictions on an investment’s ability to operate in the
cannabis industry, which could have a material adverse effect on
the Company’s business.
17
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.
18
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.
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.
19
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.
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.
20
I
TEM 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.
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
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.
21
Transaction Summaries
Summary of Colorado Transaction
On
January 18, 2018, Cordova CO, entered into a license agreement with
Clearview Industries, LLC, a Colorado limited liability company
(“Clearview Industries”), which holds a Medical and
Retail Infused Product license issued by Colorado’s Marijuana
Enforcement Division. Under the terms of the license agreement,
Cordova CO granted Clearview Industries a limited, non-exclusive,
non-transferable license to utilize certain technology, standard
operating procedures and other intellectual property of CordovaCann
(the “Intellectual Property”) for the purpose of
manufacturing, packaging and distributing cannabis infused products
for consumption in the State of Colorado and in accordance with the
laws of the State of Colorado. Under the license agreement, Cordova
CO shall receive 29% of the gross profits generated by any products
produced and sold by Clearview Industries utilizing the
Intellectual Property. The license agreement has an initial term of
five (5) years. Furthermore, Cordova CO has also purchased assets
from Clearview Industries which Cordova CO leases back to Clearview
Industries along with new additional assets under a master
equipment lease. To date, the operations of Clearview Industries
have not yet been profitable and the Company has not received any
payments towards the license agreement or the equipment
lease.
On June
7, 2018, Cordova CO entered into a revolving promissory note
receivable (“Promissory Note”) with Clearview
Industries for up to the principal sum of US $50,000 for working
capital purposes. Subsequently, the Promissory Note was amended to
allow the customer to draw up to the principal sum of US $100,000
and the maturity date was extended until June 7, 2020. The
Promissory Note is unsecured, bearing interest at 8% per annum. The
equipment and the promissory note were deemed impaired during the
year ended June 30, 2019.
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 and Cordova OR also incurred transaction costs in the
amount of $203,453 in relation to the asset acquisition. The
Company intends to continue its buildout the Oregon property to
complete the construction and establish cultivation and processing
facilities on the premises.
Summary of the Proposed California Transaction
On
October 10, 2019, Cordova CA entered into a non-binding letter of
intent (the “LOI”) to purchase real assets and
intellectual property (the “Assets”) of a third party
Los Angeles-based cannabis venture (the “Transaction).
Pursuant to the terms of the LOI, the CordovaCann has agreed to
issue a total of ten million (10,000,000) common shares of the
Company, valued at $2,658,800 (US $2,000,000), to the vendor in
exchange for the Assets. Post-closing of the Transaction, the
vendors would own approximately twenty percent of the outstanding
common shares of the Company. Furthermore, Cordova has also agreed
to commit a further US $1,500,000 to fund the required capital
expenditures and efforts of the Operators to advance the operations
in California. Cordova CA has also provided a $398,820 (US
$300,000) as a loan to the vendors as a deposit towards the
$1,994,100 (US $1,500,000) required capital expenditure
amount.
Summary of Investment in NWN Inc.
On
September 18, 2018, Cordova Investments Canada entered into a
letter of intent with NWN Inc. (“NWN”) to form a
strategic partnership. This new partnership would allow CordovaCann
to license from NWN industry-leading cannabinoid technology and
intellectual property for use in a number of U.S. jurisdictions
currently served by the Company. NWN is a privately-held Canadian
company that is conducting research on the effects of cannabinoids
to develop novel compilations and formulations of cannabis-derived
products for global commercial use. NWN’s intellectual
property and product development initiatives are focused on the
manufacturing of consistent cannabinoid derivative products. NWN
also conducts research on the genetic properties of cannabis to
develop genetically differentiated cannabis plants that improve
yields and enhance specific attributes of cultivated flower.
Furthermore, on September 18, 2018, Cordova Investments Canada paid
$500,000 for the purchase of 500,000 convertible preferred shares
of NWN at a price of $1.00 per preferred share. Each preferred
share is convertible into one common share of NWN, subject to
appropriate adjustments for any stock splits, consolidations or
other recapitalizations. The Company also received a right of first
refusal to participate in any future equity offerings of NWN. NWN
is considered to be a related party by virtue of a common officer
and director with CordovaCann.
22
(B) BUSINESS OVERVIEW
CordovaCann
is committed to assembling a premier cannabis business with a
vision to becoming a worldwide industry leader. The Company is
focused on working with leading cannabis production and processing
operators in key jurisdictions that will enable CordovaCann to
serve national and international markets that have legal and
regulated medical and/or recreational cannabis industries. The
Company intends to leverage its production and processing
investments to establish a global multi-jurisdictional platform
that delivers consistent formulations of best-of-breed brands and
predictable consumer experiences.
CordovaCann
has entered into strategic relationships and investments with
cannabis operators in Oregon, Colorado and California. The Company
will provide a variety of resources and services to these
respective operators including, but not limited to: capital
commitments, strategic positioning, brand development, best
operating practices, access to intellectual property,
administrative assistance, and general business consulting. Over
the next twelve months, CordovaCann is focused on growing the
operations of these strategic relationships. Moving forward, the
Company will also seek partnerships with cannabis operators in key
legal markets not currently served by CordovaCann, as well as seek
to expand operations in those markets where the Company already has
a presence. CordovaCann plans to immediately develop various end
products for distribution in each of its current markets as well as
to service other brands and intellectual property owners with its
growing processing and manufacturing platforms with a view to
allowing these clients and prospective clients to gain access to
our channels to market and to also generate additional revenue for
the Company. The platform that the Company is building will seek to
ensure that the end products are consistent across all
jurisdictions by maintaining strict and professional standard
operating procedures covering everything from marketing, sales,
packaging, and branding through to the ultimate end user
experience.
Over
the longer-term, CordovaCann will focus on continuing to expand its
reach into additional legal markets, with an increasing focus on
international operations. The Company expects to organically build
and forge strategic relationships with cannabis producers and
processors in North America, South America, Europe, and Asia, but
expects it should also be able to serve these markets through the
export of products from Canada where legal. As the Company works to
penetrate each of these markets with its branded products, 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 such as distribution
and retail dispensaries, in markets where such assets are legal and
provide a competitive advantage and significant operating leverage
for the Company.
Competition
The
Company competes with other companies for financing and investment
opportunities in the cannabis industry. Some of these companies may
possess greater financial resources than the Company. Such
competition may result in the Company being unable to enter into
desirable strategic agreements or similar transactions, to recruit
or retain qualified employees or to acquire the capital necessary
to fund its investments. Existing or future competition in the
cannabis industry, including, without limitation, the entry of
large multinational entities into the industry, could materially
adversely affect the Company’s prospects for entering into
additional agreements in the future. In addition, the Company
currently competes with other cannabis streaming and royalty
companies, some of which may possess greater financial resources
than the Company.
There
is potential that the Company will face intense competition from
other companies, some of which can be expected to have longer
operating histories and more financial resources and experience
than the Company. Increased competition by larger and better
financed competitors, including competitors to the Company’s
investments, could materially and adversely affect the business,
financial condition and results of operations of the Company. It is
possible that larger competitors could establish price setting and
cost controls which would effectively “price out”
certain of the Company’s investments operating within and in
support of the medical and recreational cannabis
industry.
Because
of the early stage of the industry in which the Company will
operate, the Company expects to face additional competition from
new entrants. To become and remain competitive, the Company will
require research and development, marketing, sales and support. The
Company may not have sufficient resources to maintain research and
development, marketing, sales and support efforts on a competitive
basis, which could materially and adversely affect the business,
financial condition and results of operations of the
Company.
(C) ORGANIZATIONAL STRUCTURE
The
following diagram presents the corporate subsidiaries of the
Company, all of which are wholly-owned subsidiaries (the
“Subsidiaries”):
The
following table presents the corporate subsidiaries of the Company,
all of which are wholly-owned subsidiaries (the
“Subsidiaries”):
|
Subsidiary
Name
|
|
Jurisdiction of
Incorporation
|
|
Percentage of
Ownership
|
|
CordovaCann
Holdings Canada, Inc.
|
|
Ontario
(Canada)
|
|
100%
|
|
Cordova
Investments Canada, Inc.
|
|
Ontario
(Canada)
|
|
100%
|
|
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%
|
|
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)
Cordova CO
Holdings, LLC is a 100% subsidiary of CordovaCann Holdings,
Inc.
(2)
Cordova CA
Holdings, LLC is a 100% subsidiary of CordovaCann Holdings,
Inc.
(3)
CDVA Enterprises,
LLC is a 100% subsidiary of CordovaCann Holdings, Inc.
(4)
Cordova OR
Holdings, LLC is a 100% subsidiary of CordovaCann Holdings,
Inc.
(5)
Cordova OR
Operations, LLC is a 100% subsidiary of Cordova OR Holdings,
LLC.
(6)
Cannabilt Holdings,
Inc. is a 100% subsidiary of CordovaCann Holdings,
Inc.
(7)
Cannabilt Farms,
LLC is a 100% subsidiary of Cannabilt Holdings, Inc.
(8)
Cannabilt OR
Retail, LLC is a 100% subsidiary of Cannabilt Holdings,
Inc.
(9)
Future Processing,
LLC is a 100% subsidiary of Cannabilt Holdings, Inc.
23
(D) PROPERTY PLANTS AND EQUIPMENT
The
Company does not lease any real property.
The
Company, through its wholly-owned subsidiary OR Operations a
premise located at 17551 SE Hwy 224, Damascus, Oregon 97089. The
Premises consists of approximately 231,000 square
feet.
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.
I
TEM 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,
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
Revenue
|
-
|
-
|
-
|
|
Cost of
sales
|
30,529
|
12,770
|
-
|
|
Expenses
|
5,547,863
|
4,880,359
|
88,405
|
|
Other expense
(income)
|
258,114
|
(27,196
)
|
-
|
|
Net loss for
year
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
Net loss per
share
|
(0.15
)
|
(0.15
)
|
(0.00
)
|
Revenues
During
the year ended June 30, 2019, 2018 and 2017, the Company recorded
$nil in revenue from the rental of cannabis-related equipment or
other sources. The Company has not recorded any revenue during such
periods pending a determination that collectability is reasonably
assured. The Company will recognize its revenue upon
receipt.
In
relation to the aforementioned cannabis-related equipment rental
revenue, cost of sales for the year ended June 30, 2019 were
$30,529 as compared to $12,770 for the year ended June 30, 2018.
Cost of sales for the year ended June 30, 2017 were $nil. Cost of
sales is a result of the Company’s depreciation expense on
its cannabis-related equipment.
24
Expenses
The
overall analysis of the expenses is as follows:
|
2019
|
2018
|
2017
|
|
|
|
$
|
$
|
$
|
|
Consulting
fees
|
2,448,560
|
977,410
|
-
|
|
Share based
compensation
|
1,413,919
|
3,447,415
|
-
|
|
Professional
fees
|
371,079
|
225,151
|
8,250
|
|
Shareholders
information services
|
379,058
|
52,714
|
19,107
|
|
Advertising
costs
|
88,917
|
-
|
-
|
|
Office and
general
|
605,334
|
120,274
|
5,468
|
|
Financing
costs
|
-
|
14,845
|
55,580
|
|
Exclusivity
fee
|
48,367
|
42,550
|
-
|
|
Impairment of
promissory note receivable
|
85,114
|
-
|
-
|
|
Impairment of
equipment
|
107,515
|
-
|
-
|
|
|
5,547,863
|
4,880,359
|
88,405
|
Consulting Fees
Consulting
fees for the year ended June 30, 2019 were $2,448,560 as compared
to $977,410 for the year ended June 30, 2018 and $nil for the year
ended June 30, 2017. Consulting fees increased due to the hiring of
consultants in late fiscal 2018 and during fiscal 2019, as a result
of the Company’s increased activity in the cannabis
sector.
Share Based Compensation
Share
based compensation expense for the year ended June 30, 2019 were
$1,413,919 as compared to $3,447,415 for the year ended June 30,
2018 and $nil for the year ended June 30, 2017. Share based
compensation expense was the result of warrants issued to
consultants and options issued under the stock option plan during
the years ended June 30, 2019 and 2018.
Professional Fees
Professional
fees for the year ended June 30, 2019 were $371,079 as compared to
$225,151 for the year ended June 30, 2018 and $8,250 for the year
ended June 30, 2017. Professional fees consisted of legal and audit
fees. The increase in professional fees during the year ended June
30, 2019 was primarily due to an increase in legal and accounting
bills related to the Company’s growing operations in the
cannabis industry.
25
Shareholder Information Services
Shareholder
information services for the year ended June 30, 2019 were $379,058
as compared to $52,714 for the year ended June 30, 2018 and $19,107
for the year ended June 30, 2017. Shareholder information services
for the year ended June 30, 2019, 2018 and 2017 were comprised of
annual general meeting costs and accruals, transfer agent fees,
other filing fees and investor relation services.
Advertising
Advertising
costs for the year ended June 30, 2019 were $88,917 as compared to
$nil for the years ended June 30, 2018 and 2017. Advertising costs
during the year ended June 30, 2019 were primarily a result of the
Company’s efforts to increase traction to potential investors
and other opportunities.
Office and General
Office
and general costs for the year ended June 30, 2019 were $605,334 as
compared to $120,274 for the year ended June 30, 2018 and $5,468
for the year ended June 30, 2017. 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,
2019 were primarily a result of increased travel and administrative
expenses in relation to the Company’s pursuit of new
opportunities.
Financing Costs
Financing
costs for the year ended June 30, 2019 were $nil as compared to
$14,845 for the year ended June 30, 2018 and $55,580 for the year
ended June 30, 2017. Financing costs were in relation to accrued
interest on the Company’s liabilities. The decrease in
financing costs during the year ended June 30, 2018 and 2019 were
in relation to the settlement of a shareholder loan and repayments
of related party loans as compared to the year ended June 30,
2017.
Exclusivity Fee
On
March 7, 2018, the Company entered into a memorandum of
understanding (the “MOU”) with a third party which
granted the Company exclusivity on a transaction to acquire a
majority stake in real estate and intellectual property assets
owned by the third party. Under the terms of the MOU, the Company
agreed to pay the third party up to USD $100,000 for such
exclusivity. During the year ended June 30, 2019, the Company paid
and expensed $48,367 as compared to $42,550 for the year ended Jun
30, 2018 as a result of the exclusivity fee.
Impairment of Promissory Note Receivable
During
the year ended June 30, 2019, the Company impaired a promissory
note receivable in the amount of $85,114 as compared to $nil for
the years ended June 30, 2018 and 2017. The impairment during the
year ended June 30, 2019 was due to issues related to the
collectability of the principal amount of the promissory
note.
26
Impairment of Equipment
During
the year ended June 30, 2019, the Company recorded an impairment of
equipment of $107,515 as compared to $nil for the years ended June
30, 2018 and 2017. The impairment of equipment during the year
ended June 30, 2019 was in relation to the equipment that was
leased to a third party in the State of Colorado.
Other Income
The
overall analysis of other income is as follows:
|
For
the Years Ending June 30,
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
Interest
expense
|
39,215
|
-
|
-
|
|
Accretion
expense
|
24,680
|
-
|
-
|
|
Loss on settlement
of fees
|
12,700
|
-
|
-
|
|
Foreign exchange
loss (gain)
|
57,121
|
(27,196
)
|
-
|
|
Loss on
deposit
|
124,428
|
-
|
-
|
|
|
258,144
|
(27,196
)
|
-
|
Interest Expense
During
the year ended June 30, 2019, the Company recorded interest expense
of $39,215 as compared to $nil for the years ended June 30, 2018
and 2017. The interest expense during the year ended June 30, 2019
was in relation to convertible debentures, promissory notes and a
mortgage issued during the year.
Accretion Expense
During
the year ended June 30, 2019, the Company recorded an accretion
expense of $24,680 as compared to $nil for the years ended June 30,
2018 and 2017. The accretion expense during the year ended June 30,
2019 was in relation to discount on convertible debentures and
promissory notes issued during the year.
Loss on Settlement of Fees
During
the year ended June 30, 2019, the Company recorded a loss on
settlement of fees of $12,700 as compared to $nil for the years
ended June 30, 2018 and 2017. The loss on settlement of fees during
the year ended June 30, 2019 was in relation to outstanding fees
that were settled with the issuance of $250,000 in convertible
debentures.
Foreign Exchange Loss (Gain)
Foreign
exchange losses for the year ended June 30, 2019 were $57,121 as
compared to a foreign exchange gain of $27,196 for the year ended
June 30, 2018. The foreign exchange changes for the year ended June
30, 2019 was a result of in transactions based in United States
Dollars.
27
Loss on Deposit
During
the year ended June 30, 2019, the Company recorded a loss on
deposit of $124,428 as compared to $nil for the years ended June
30, 2018 and 2017. The loss on deposit relates to a non-refundable
deposit made on a proposed asset purchase and the transaction was
effectively terminated.
Net Loss and Comprehensive Loss
Net
loss for the year ended June 30, 2019 was $5,836,536 as compared to
$4,865,933 for the year ended June 30, 2018 and $88,405 for the
year ended June 30, 2017.
Comprehensive
loss for the year ended June 30, 2019 was $5,829,331 as compared to
$4,865,249 for the year ended June 30, 2018 and $88,405 for the
year ended June 30, 2017.
(B) LIQUIDITY AND CAPITAL RESOURCES
Working
Capital
As at
June 30, 2019, the Company had total assets of $4,645,132 (June 30,
2018 – $4,875,592) consisting of cash and cash equivalents of
$71,849, prepaid expenses and deposits of $427,894, investment in a
related party of $500,000 and property and equipment of $3,645,389.
At June 30, 2018, the Company had total assets of $4,875,592
consisting of cash and cash equivalents of $3,250,697, promissory
note receivable of $15,802, prepaid expenses and deposits of
$325,659, advances to OR Operations of $610,705, long term
investment in OR Operations of $534,311 and property and equipment
of $138,418.
The
decrease in assets from June 30, 2018 to June 30 2019 was primarily
the result of operating expenses incurred during the year, offset
with proceeds from the issuance of promissory notes, mortgage
payable and convertible debentures. The increase in prepaid
expenses and deposits at June 30, 2019 were primarily the result of
increased prepaid activity closer to year end. The Company’s
investment in a related party was a new investment made during the
year. The increase in property and equipment was a result of the
Company’s acquisition of OR Operations and the assets
acquired during the year ended June 30, 2019.
As at
June 30, 2019, the Company had total liabilities of $4,282,562
(June 30, 2018 – $320,321) consisting of accounts payable and
accrued liabilities of $1,371,386, a mortgage payable of $657,633,
debenture unit deposits of $594,889, promissory notes payable of
$1,112,194 and long term convertible debentures of $546,460. At
June 30, 2018, the Company had total liabilities of $320,321
consisting of accounts payable and accrued
liabilities.
The
increase in accounts payable and accrued liabilities from June 30,
2018 to June 30, 2019 was a result of the Company’s increased
operations and limited cash flow. During the year ended June 30,
2019, the Company issued debt through a mortgage payable,
promissory notes payable, convertible debentures and subscriptions
thereto to assist in financing its operations and
investments.
As at
June 30, 2019, the Company had a working capital deficiency of
$3,236,359 as compared to a working capital surplus of $3,882,542
as at June 30, 2018. The Company’s ability to continue as a
going concern is dependent upon its ability to access sufficient
capital until it has profitable operations and raises a material
concern. The Company’s ability to continue as a going concern
is dependent upon its ability to access sufficient capital until it
has profitable operations and raises a material concern. To this
point, all operational activities and overhead costs have been
funded through equity issuances, debt issuances and related party
advances.
The Company
believes that continued funding from equity and debt issuances will
provide sufficient cash flow for it to continue as a going concern
in its present form, however, there can be no assurances that the
Company will achieve this.
28
Cash Used in Operating Activities
The
Company used cash in operating activities of $2,936,734 (June 30,
2018 – $1,177,474; June 30, 2017 – $2,420) for the
year-ended June 30, 2019 due to the reasons as discussed
above.
Cash Used in Investing Activities
The
Company used cash in investing activities of $3,069,685 (June 30,
2018 – $1,304,415; June 30, 2017 – $nil) for the year
ended June 30, 2019. The increase was primarily attributable to
cash used for the asset acquisition of OR Operations and investment
in a related party during the year.
Cash From Financing Activities
The
Company received proceeds from financing activities of $2,820,366
(June 30, 2018 – $5,731,902; June 30, 2017 – $2,420)
during the year ended June 30, 2019. The decrease was attributable
to decreased proceeds from financings during the year ended June
30, 2019 as compared to 2018. During the year ended June 30, 2019,
the Company was primarily financed through debt issuances though a
mortgage payable, promissory notes payable, convertible debentures
and subscriptions thereto as compared to equity issuances during
the year ended June 30, 2018.
(C)
RESEARCH AND DEVELOPMENT, PATENTS AND
LICENSES
The
Company has not spent any funds on research and development during
the fiscal years ended 2019, 2018 and 2017.
(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, 2019, 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, 2019, 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.
29
I
TEM 6 - DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
(A) DIRECTORS AND SENIOR MANAGEMENT
Mr. Thomas (Taz) M. Turner, Jr.
joined the Board of
Directors on November 22, 2017 and as Chief Executive Officer of
the Company on September 22, 2017. Mr. Turner is currently the
Chairman of the Board of Directors. Mr. Turner has over 15 years of
experience in the capital markets focused on both debt and equity
securities in the technology and consumer industries. Since
founding Southshore Capital Partners, LP in 2009, Mr. Turner has
guided the growth of Southshore’s long/short global equity
hedge fund as General Partner. Through his fund, Mr. Turner has
invested in public and private cannabis companies since 2012. Prior
to Southshore, Mr. Turner held progressive positions at hedge funds
and private equity funds with Tala Investments, Trafelet Delta
Funds and ABS Capital Partners, where he specialized in technology
and consumer investments. Mr. Turner graduated from the University
of Virginia with a Bachelor of Science in both Commerce and
Mathematics.
We
believe Mr. Turner is well-qualified to serve as Chairman of the
Board of Directors due to his investment experience, operational
experience and business contacts.
Mr. Ashish Kapoor
joined the Board of Directors on March 10,
2015. Mr. Kapoor also assumed the roles of Chief Financial Officer
and Corporate Secretary of the Company, effective March 10, 2015.
Mr. Kapoor has over 18 years of experience in providing capital
markets advisory and assurance services as a finance professional.
After obtaining his Chartered Accountant designation at Ernst &
Young, Mr. Kapoor has gained over 10 years of experience in
investment banking; advising clients across various industries. As
a senior vice president at Macquarie Capital Markets Canada Ltd.,
Mr. Kapoor was responsible for the Canadian telecom, media,
entertainment and technology investment banking and principal
investing group. During his 10 years at Macquarie, Mr. Kapoor
completed in excess of $3 billion in successful principal
investments and advised on a further $4 billion of mergers and
acquisitions for third party clients. Mr. Kapoor was formerly the
CFO of DealNet Capital Corp., a consumer finance company, and
Transeastern Power Trust (prior to its current name, Blockchain
Power Trust), an independent power producer focused on renewable
energy sources. Mr. Kapoor is currently the CFO of Gilla Inc., an
E-liquid manufacturing business with distribution to over 25
countries, and a director of The Mint Corporation, a globally
certified payments company. Mr. Kapoor obtained his Chartered
Accountant designation as part of the Ernst & Young’s
Toronto practice and was awarded the Gold Medal for first place in
Ontario, and the Bronze Medal for third place in Canada on the 2000
Chartered Accountancy Uniform Final Examination. Mr. Kapoor is also
a CFA Charter holder and holds a Masters of Accounting and a
Bachelor of Arts degree from University of Waterloo.
We
believe Mr. Kapoor is well-qualified to serve as a member of the
Board of Directors due to his public company experience, financial
markets knowledge and business contacts.
Mr. Nathan Nienhuis
joined the Board of Directors on
November 22, 2018. Mr. Nienhuis was also appointed as Chief
Operating Officer of the Company on May 17, 2018. Mr. Nienhuis has
extensive experience consulting to both public and private
companies on all aspects of cannabis operations; including general
operations, facility design, management of production and
processing facilities, product development and dispensary
oversight. Mr. Nienhuis has served as a consultant to various
public and private companies since 1996. Over the course of his
career, Mr. Nienhuis has served as head horticulturalist at
licensed medical cannabis companies in California, Arizona,
Colorado, Washington, Oregon, Nevada, Washington DC, and Canada.
Furthermore, Mr. Nienhuis has developed and sold cutting-edge
equipment for the safe extraction of cannabinoids and has been at
the forefront of devising new extraction methods for processing at
scale. As an extraction expert, Mr. Nienhuis has consulted on
facility design for commercial cannabis extraction laboratories
across the world, including ensuring compliance with Class 1
Division 1 standards for the use of volatile
chemicals.
We
believe Mr. Nienhuis is well-qualified to serve as a member of the
Board of Directors due to his industry experience, operational
experience and business contacts.
Mr. Henry J. Kloepper
joined the Board of Directors on March
10, 2015. Mr. Kloepper is a leading financier and has been involved
in investment banking and corporate finance for over 30 years. Mr.
Kloepper has a rounded knowledge of the capital markets, strategic
growth and investments. Mr. Klopper has served as a director and
officer of a number of public and private corporations and has held
executive positions with Award Capital, JP Morgan, Citibank, Bank
of America, and North American Trust in the US, Canada, and
Europe.
We
believe Mr. Kloepper is well-qualified to serve as a member of the
Board of Directors and Chairman of the Audit Committee due to his
public company experience, financial markets knowledge and business
contacts.
30
(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.
On
November 22, 2017, the Company’s shareholders approved and
the Company adopted a new rolling stock option plan (the
“Option Plan”), under which the Board of Directors may
from time to time, in its discretion, grant to directors, officers,
employees and consultants of the Company. Pursuant to the Option
Plan, the Company may issue options for such period and exercise
price as may be determined by the Board of Directors, and in any
case not exceeding ten (10) years from the date of grant with the
total options issued under the Option Plan not exceeding ten
percent (10%) of the common shares of the Company, outstanding at
the time of the granting of such options. The minimum exercise
price of an option granted under the Option plan must not be less
than the market value of the common shares on the date such option
is granted. The Option Plan is filed as Exhibit 4.(d) to this
Annual Report and is incorporated herein by reference.
2. Statement of Executive Compensation
The
following table and accompanying notes set forth all compensation
paid by the Company to all persons who served as the
Company’s Directors and Officers during the fiscal year ended
June 30, 2019. The information is provided for the fiscal years
ended 2019, 2018 and 2017.
|
|
|
|
|
|
Non-equity
incentive plan compensation
(CAD
$)
|
|
|
|
|
|
Name
and
principal
position
|
Year
|
Salary
(CAD
$)
|
Share-based
awards
(CAD
$)
|
Option-based
awards
(CAD
$)
|
Annual incentive
plans
|
Long-term
incentive plans
|
Pension
value
(CAD
$)
|
All other
compensation
(CAD
$)
|
Total
compensation
(CAD
$)
|
|
Thomas M, Turner,
Jr.,
|
2019
|
264,740
|
-
|
-
|
-
|
-
|
-
|
-
|
264,740
|
|
Chairman and Chief
Executive Officer
|
2018
|
141,126
|
-
|
216,694
(1)
|
-
|
-
|
-
|
-
|
357,820
|
|
|
2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Ashish
Kapoor,
|
2019
|
264,740
|
-
|
-
|
-
|
-
|
-
|
-
|
264,740
|
|
Director, Chief
Financial Officer and
|
2018
|
141,126
|
-
|
216,694
(1)
|
-
|
-
|
-
|
-
|
357,820
|
| Corporate Secretary |
2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Nathan
Nienhuis,
|
2019
|
264,740
|
-
|
-
|
-
|
-
|
-
|
-
|
264,740
|
| Director and Chief Operating Officer |
2018
|
56,574
|
-
|
1,815,029
(1)
|
-
|
-
|
-
|
-
|
1,871,603
|
|
|
2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Henry J.
Kloepper,
|
2019
|
31,769
|
-
|
-
|
-
|
-
|
-
|
-
|
31,769
|
|
Director
|
2018
|
7,747
|
-
|
18,851
(1)
|
-
|
-
|
-
|
-
|
26,598
|
|
|
2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Eric
Lowy,
|
2019
|
31,769
|
-
|
-
|
-
|
-
|
-
|
-
|
31,769
|
|
Former
Director
|
2018
|
7,747
|
-
|
18,851
(1)
|
-
|
-
|
-
|
-
|
26,598
|
|
|
2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Note:
(1)
See Item 6(E) below
for details of option based awards.
31
Employment Agreements; Termination and Change of Control
Benefits
As at
the date of this Annual Report, the Company is a party to the
following employment agreements with the Company’s Directors
and Officers:
Thomas (Taz) M. Turner, Jr.
Pursuant to the employment
agreement entered into with Mr. Turner, Mr. Turner serves as Chief
Executive Officer of the Company and is entitled to an annual base
salary of USD $200,000 and is eligible to earn a cash performance
bonus.
Mr.
Turner’ employment agreement may be terminated by the Company
without notice or payment in lieu of notice for just cause. Mr.
Turner may terminate his employment for any reason by providing at
least two months’ notice in writing. If the Company elects to
terminate the employment of Mr. Turner without cause, and provided
Mr. Turner is in compliance with the relevant terms and conditions
of his employment agreement, the Company shall be obligated to pay
Mr. Turner eighteen months of his monthly base salary and any
accrued and unpaid expenses and fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Turner has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Turner, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four
months of the base salary immediately prior to the date of the
Change of Control;
(b)
the
annual premium cost to the Company of all the benefits provided to
Mr. Turner by the Company under his employment agreement
immediately prior to the date of the Change of Control;
and
(c)
any
other outstanding amounts owed to Mr. Turner under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Turner the lump
sum of any other outstanding amounts owed to Mr. Turner (including
entities related to or controlled by Mr. Turner) regardless of the
terms of such amounts which will become immediately due and payable
upon Involuntary Termination.
Ashish Kapoor.
Pursuant to the employment agreement entered
into with Mr. Kapoor, Mr. Kapoor serves as Chief Financial Officer
of the Company and is entitled to an annual base salary of USD
$200,000 and is eligible to earn a cash performance
bonus.
Mr.
Kapoor’ employment agreement may be terminated by the Company
without notice or payment in lieu of notice for just cause. Mr.
Kapoor may terminate his employment for any reason by providing at
least two months’ notice in writing. If the Company elects to
terminate the employment of Mr. Kapoor without cause, and provided
Mr. Kapoor is in compliance with the relevant terms and conditions
of his employment agreement, the Company shall be obligated to pay
Mr. Kapoor eighteen months of his monthly base salary and any
accrued and unpaid expenses and fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Kapoor has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Kapoor, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four
months of the base salary immediately prior to the date of the
Change of Control;
(b)
the
annual premium cost to the Company of all the benefits provided to
Mr. Kapoor by the Company under his employment agreement
immediately prior to the date of the Change of Control;
and
(c)
any
other outstanding amounts owed to Mr. Kapoor under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Kapoor the lump
sum of any other outstanding amounts owed to Mr. Kapoor (including
entities related to or controlled by Mr. Kapoor) regardless of the
terms of such amounts which will become immediately due and payable
upon Involuntary Termination.
32
Nathan Nienhuis.
Pursuant to the employment agreement
entered into with Mr. Nienhuis, Mr. Nienhuis serves as Chief
Operating Officer of the Company and is entitled to an annual base
salary of USD $200,000 and is eligible to earn a cash performance
bonus.
Mr.
Nienhuis’ employment agreement may be terminated by the
Company without notice or payment in lieu of notice for just cause.
Mr. Nienhuis may terminate his employment for any reason by
providing at least two months’ notice in writing. If the
Company elects to terminate the employment of Mr. Nienhuis without
cause, and provided Mr. Nienhuis is in compliance with the relevant
terms and conditions of his employment agreement, the Company shall
be obligated to pay Mr. Nienhuis eighteen months of his monthly
base salary and any accrued and unpaid expenses and
fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Nienhuis has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Nienhuis, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four
months of the base salary immediately prior to the date of the
Change of Control;
(b)
the
annual premium cost to the Company of all the benefits provided to
Mr. Nienhuis by the Company under his employment agreement
immediately prior to the date of the Change of Control;
and
(c)
any
other outstanding amounts owed to Mr. Nienhuis under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Nienhuis the lump
sum of any other outstanding amounts owed to Mr. Nienhuis
(including entities related to or controlled by Mr. Nienhuis)
regardless of the terms of such amounts which will become
immediately due and payable upon Involuntary
Termination.
For the
purposes of the aforementioned employment agreements, the
occurrence of any one or more of the following events shall
constitute a change of control (a “
Change of Control
”):
(a)
the
acceptance by the Company’s shareholders representing in the
aggregate more than fifty percent (50%) of all the issued and
outstanding Common Shares of the Company, of any offer, whether by
way of take-over bid or otherwise, for all or any of the Common
Shares of the Company;
(b)
the
acquisition hereafter, by whatsoever means (including, without
limitation by way of arrangement, merger or amalgamation), by any
person (or two or more persons acting jointly or in concert),
directly or indirectly, of the beneficial ownership of the Common
Shares of the Company or rights to acquire the Common Shares of the
Company that, together with such person’s then owned Common
Shares and rights to acquire Common Shares, if any, representing in
the aggregate more than fifty percent (50%) of all issued and
outstanding Common Shares of the Company;
(c)
the
passing of a resolution by the Board of Directors or the common
shareholders to substantially liquidate the assets or wind-up or
significantly rearrange the affairs of the Company in one or more
transactions or series of transactions (including by way of an
arrangement, merger or amalgamation) or the commencement of
proceedings for such a liquidation, winding-up or
re-arrangement;
(d)
the
sale by the Company of all or substantially all of its assets
(other than to an affiliate of the Company) in circumstances where
the affairs of the Company are continued, directly or indirectly,
and where the shareholders of the Company remain substantially the
same following the sale as existed prior to the sale;
(e)
persons
who were proposed as nominees (but not including nominees under a
common shareholder proposal) to become members of the Board of
Directors immediately prior to a meeting of the common shareholders
involving a contest for, or an item of business relating to the
election of the Company’s directors, not constituting a
majority of the directors of the Company following such election;
and
(f)
any
other event which, in the opinion of the Board of Directors,
reasonably constitutes a change of control of the
Company.
33
For the
purposes of the aforementioned employment agreements, involuntary
termination (“
Involuntary
Termination
”) shall mean:
(a)
any
requirement by the Company that the Officer’s position and
principal office be relocated to a location materially different
than the Officer’s location on the date of the Change of
Control, without the consent of the Officer;
(b)
any
material reduction in the Officer’s title, reporting
relationship, responsibilities or authority;
(c)
any
reduction in the base salary of the Officer;
(d)
any
material reduction in the value of the Officer’s employee
benefit programs; or
(e)
the
termination of the Officer’s employment other than for
cause.
Director Compensation
The
Company has no formal agreements for compensating its Directors for
their services in their capacity as directors. The Company’s
Board of Directors agreed to pay each of the Company’s
non-executive directors USD $2,000 per month for their services.
The payment or non-payment of non-executive director fees is made
by the Board of Directors from time to time. Directors are expected
in the future to receive stock options to purchase Common Shares as
may be awarded by the Board of Directors.
Long Term Incentive Plan (LTIP) Awards
The
Company does not have a LTIP, pursuant to which cash or non-cash
compensation intended to serve as an incentive for performance
(whereby performance is measured by reference to financial
performance or the price of the Company’s securities) was
paid or distributed during the most recently completed fiscal
year.
Defined Benefit or Actuarial Plan Disclosure
There
is no pension plan or retirement benefit plan that has been
instituted by the Company and none are proposed at this
time.
(C) BOARD PRACTICES
The
Board is currently comprised of four (4) directors; being; Thomas
(Taz) M. Turner, Jr. (Chairman); Ashish Kapoor; Nathan Nienhuis and
Henry J. Kloepper who were each elected by the Company’s
shareholders to hold office until the next annual meeting of
shareholders or until a successor is duly elected or appointed,
unless his office is earlier vacated in accordance with the by-laws
of the Company. Mr. Kloepper is currently the only
“independent” director. Mr. Turner, the Company’s
Chief Executive Officer; Mr. Kapoor, the Company’s Chief
Financial Officer; and Mr. Nienhuis, the Company’s Chief
Operating Officer; are not considered to be independent. The Board
has determined that a board of four (4) members will be effective
in the governance and supervision of the management of the
Company’s business and affairs at this time.
Other
than the Audit Committee, the Board has no other committees. The
directors are regularly informed of or are actively involved in the
operations of the 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.
34
Mandate of the Board
The
Board has adopted a mandate, in which it has explicitly assumed
responsibility for the stewardship of the Company. In carrying out
its mandate the Board holds at least four meetings (or consent
resolutions, where applicable) annually. The frequency of meetings,
as well as the nature of the matters dealt with, will vary from
year to year depending on the state of our business and the
opportunities or risks, which we face from time to time. To assist
in the discharge of its responsibilities, the Board has designated
an Audit Committee, as more particularly discussed
below.
Audit Committee
The
current members of the Company’s Audit Committee are Henry J.
Kloepper, who is also the Chair of the Audit Committee, Thomas
(Taz) M. Turner, Jr., Ashish Kapoor and Nathan Nienhuis. Mr.
Kloepper is currently the only “independent” member of
the Audit Committee. Mr. Turner, the Company’s Chief
Executive Officer; Mr. Kapoor, the Company’s Chief Financial
Officer; and Mr. Nienhuis, the Company’s Chief Operating
Officer, are not considered to be independent members of the Audit
Committee. All members of the Audit Committee are considered to be
financially literate.
The
Audit Committee’s primary function is to assist the Board of
Directors in fulfilling its oversight responsibilities with respect
to accounting and financial reporting processes, the integrity of
the financial statements the Company, compliance with legal and
regulatory requirements, the overall adequacy and maintenance of
the systems of internal controls that management has established
and the overall responsibility for the Company’s external and
internal audit processes including the external auditor’s
qualifications, independence and performance.
The
Audit Committee has the duty to review and ensure that the
Company’s financial disclosures are complete and accurate,
are in accordance with generally accepted accounting principles and
fairly present the financial position and risks of the
organization. The Audit Committee should, where it deems
appropriate, review compliance with laws and regulations and the
Company’s own policies.
The
Audit Committee provides the Board of Directors with such
recommendations and reports with respect to the financial
disclosures of the Company as it deems advisable. A copy of the
Audit Committee Charter is filed as Exhibit 14(a)(ii) to this
Annual Report and is incorporated herein by reference.
Corporate Governance Committee
The
Company does not currently have a Corporate Governance Committee.
The directors determined that, in light of the Company’s size
and resources, setting up such a committee would not be practical
for the Company at this time.
Compensation Committee
The
Company does not currently have a Compensation Committee. The
directors determined that, in light of the Company’s size and
resources, setting up such a committee would be too expensive for
the Company at this time.
(D) EMPLOYEES
The
Company presently has no permanent employees. It uses the services
of consultants from time to time.
35
(E) SHARE OWNERSHIP
The
Corporation had the following plans as at June 30, 2019 and the
date of this Annual Report:
2017 Stock Option Plan
- On November 22, 2017, the
Company’s shareholders approved and the Company adopted a new
rolling stock option plan (the “Option Plan”), under
which the Board of Directors may from time to time, in its
discretion, grant to directors, officers, employees and consultants
of the Company. Pursuant to the Option Plan, the Company may issue
options for such period and exercise price as may be determined by
the Board of Directors, and in any case not exceeding ten (10)
years from the date of grant with the total options issued under
the Option Plan not exceeding ten percent (10%) of the common
shares of the Company, outstanding at the time of the granting of
such options. The minimum exercise price of an option granted under
the Option plan must not be less than the market value of the
common shares on the date such option is granted. The 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, 2019:
|
|
|
Option-Based
Awards
|
Share-Based
Awards
|
|||
|
Name
|
Number
of
Shares
Held
|
Number
of securities underlying unexercised
options
|
Option
exercised price
|
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
$)
|
|
(#)
|
(CAD
$)
|
|
|
Thomas
M, Turner, Jr.,
|
2,947,523
(1)
|
150,000
(3)
|
0.4
|
Jan 15, 2021
|
-
|
-
|
|
Chairman
and Chief Executive Officer
|
|
150,000
(3)
|
1.15
|
Mar 8, 2021
|
|
|
|
Ashish
Kapoor,
|
5,997,380
(2)
|
150,000
(3)
|
0.4
|
Jan 15, 2021
|
-
|
-
|
|
Director, Chief Financial Officer and
|
|
150,000
(3)
|
1.15
|
Mar 8, 2021
|
|
|
|
Corporate Secretary
|
|
|
|
|
|
|
|
Nathan
Nienhuis,
|
-
|
1,500,000
(4)
|
1.15
|
Mar 8, 2020
|
-
|
-
|
|
Director
and Chief Operating Officer
|
|
150,000
(3)
|
0.4
|
Jan 15, 2021
|
|
|
|
|
|
150,000
(3)
|
1.15
|
Mar 8, 2021
|
|
|
|
Henry
J. Kloepper,
|
-
|
50,000
(3)
|
0.4
|
Jan 15, 2021
|
-
|
-
|
|
Director
|
|
|
|
|
|
|
|
Eric
Lowy,
|
-
|
50,000
(3)
|
0.4
|
Jan 15, 2021
|
-
|
-
|
|
Former
Director
|
|
|
|
|
|
|
Note:
(1)
Includes 2,947,523
Common Shares owned by T3 Research, LLC. Mr. Turner also may be
seen to have control or direction over an additional 2,947,523
Common Shares held by Southshore Capital Partners, LP, a private
investment fund.
(2)
Includes 5,895,046
Common Shares owned by 2364201 Ontario Corp. 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)
On March 9, 2018
and in connection to a consulting agreement, Mr. Nienhuis was
issued warrants for the purchase of 1,500,000 common shares of the
Company exercisable until March 8, 2020 at an exercise price of
$1.15 per share, such warrants vesting immediately upon
issuance.
There
were 40,786,228 Common Shares issued and outstanding as at June 30,
2019 and as at the date of this Annual Report. There were 1,750,000
options and 8,375,000 warrants issued and outstanding as at June
30, 2019 and 1,750,000 options and 5,331,500 warrants issued and
outstanding as at the date of this Annual Report.
36
I
TEM 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 56.0% 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, 2019. 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
|
|
|
|
|
|
2364201 Ontario
Corp.
|
5,895,046
|
14.45
%
|
|
Southshore Capital
Partners, LP
|
2,947,523
|
7.23
%
|
|
T3 Research,
LLC
|
2,947,523
|
7.23
%
|
|
Crimson Fund I,
LLC
|
2,054,491
|
5.04
%
|
All of
the Company’s shareholders have the same voting
rights.
As at
the date of this Annual Report, the Company had 40,786,228 common
shares outstanding, which, as per the details provided by TSX Trust
Company, the Company’s registrar and transfer agent, were
held by approximately 415 record holders (excluding the beneficial
shareholders held through the intermediaries) of which 60
shareholders are based in the United States (including the
beneficial shareholders held through the intermediaries) and hold
an aggregate of 16,124,667 shares or less than 40% of the Common
Shares.
The
Registrant is a publicly owned Canadian corporation, the shares of
which are owned by Canadian residents, U.S. residents, and
residents of other countries. The Registrant is not owned or
controlled directly or indirectly by another corporation (other
than as indicated in the chart above) or any foreign government.
There are no arrangements, known to the Company, the operation of
which may at a subsequent date result in a change of control of the
Company.
(B) RELATED PARTY TRANSACTIONS
Transactions
with related parties are incurred in the normal course of business
and are measured at the exchange amount which is the amount of
consideration established by and agreed to by the related parties.
Related party transactions for the years ended June 30, 2019, 2018
and 2017 and balances as at those dates, not disclosed elsewhere in
these consolidated financial statements are:
1.
During
the year ended June 30, 2019, the Company received $nil (June 30,
2018 – $nil; June 30, 2017 – $2,420) in advances from
related parties, for working capital purposes;
2.
During
the year ended June 30, 2019, the Company purchased equipment
valued at $nil (June 30, 2018 – $44,439; June 30, 2017
– $nil) from a corporation related by virtue of a common
officer and a director;
3.
During
the year ended June 30, 2019, the Company expensed $1,116,103 (June
30, 2018 – $508,399; June 30, 2017 – $nil), in fees
payable to officers and directors of the Company and in fees
payable to a corporation related by virtue of a common officer and
director. As at June 30, 2019, the Company has a prepaid expense
amount paid to such related corporation in the amount of $nil (June
30, 2018 – $74,147) and fees payable to officers and
directors of the Company of $546,653 (June 30, 2018 –
$59,518); and
4.
During
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $2,286,120; June 30, 2017 – $nil) in share based
compensation related to officers and directors of the
Company.
37
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.
I
TEM 8 - FINANCIAL INFORMATION
(A) CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION
Information
regarding our financial statements is contained under the caption
"Item 18. Financial Statements" below.
Legal Proceedings
The
Company is not currently involved in any litigation nor is it aware
of any litigation pending or threatened.
Dividend Policy
Since
its incorporation, the Company has not declared or paid, and has no
present intention to declare or to pay in the foreseeable future,
any cash dividends with respect to its common shares. Earnings will
be retained to finance further growth and development of the
business of the Company. However, if the Board of Directors
declares dividends, all common shares will participate equally in
the dividends, and, in the event of liquidation, in the net assets,
of the Company.
(B) SIGNIFICANT CHANGES
On
September 22, 2017, Graham Simmonds resigned as Chief Executive
Officer and was replaced by Thomas M. Turner, Jr., effective
immediately.
On
November 22, 2017, the Company’s shareholders elected Graham
Simmonds, Henry J. Kloepper, Thomas (Taz) M. Turner, Jr., Ashish
Kapoor, Nathan Nienhuis and Eric Lowy to serve as Directors of the
Company until the next annual shareholders meeting of the
Company.
On May
17, 2018, Graham Simmonds resigned as a Director of the Company and
Thomas (Taz) M. Turner, Jr. replaced Mr. Simmonds as Chairman of
the Company. Furthermore, the Board of Directors also appointed
Nathan Nienhuis to serve as the Company’s Chief Operating
Officer.
On
October 28, 2019, Eric Lowy resigned as a Director of the
Company.
38
I
TEM 9 - THE OFFER AND LISTING
(A) OFFER AND LISTING DETAILS
The
Company’s Common Shares are listed for trading on the CSE
under the symbol “CDVA” and are quoted on the OTCQB
marketplace in the United States under the symbol
“LVRLF”.
The
following table sets forth the reported high and low prices and the
trading volume of the Common Shares on the CSE for each month for
the twelve (12) months prior to the date of this Annual
Report.
|
Date
|
High
($)
|
Low
($)
|
Volume
|
|
November,
2019
|
0.18
|
0.18
|
59,000
|
|
October,
2019
|
0.50
|
0.16
|
862,242
|
|
September,
2019
|
0.30
|
0.20
|
271,475
|
|
August,
2019
|
0.44
|
0.28
|
221,313
|
|
July,
2019
|
0.59
|
0.38
|
74,025
|
|
June,
2019
|
0.70
|
0.48
|
200,516
|
|
May,
2019
|
0.92
|
0.68
|
155,801
|
|
April,
2019
|
0.90
|
0.65
|
149,670
|
|
March,
2019
|
0.93
|
0.80
|
389,960
|
|
February,
2019
|
0.98
|
0.79
|
234,050
|
|
January,
2019
|
0.95
|
0.82
|
215,069
|
|
December,
2018
|
1.03
|
0.85
|
103,077
|
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,
2019
|
0.34
|
0.13
|
218,500
|
|
October,
2019
|
0.58
|
0.13
|
1,424,400
|
|
September,
2019
|
0.24
|
0.14
|
457,400
|
|
August,
2019
|
0.40
|
0.21
|
500,100
|
|
July,
2019
|
0.49
|
0.28
|
231,500
|
|
June,
2019
|
0.56
|
0.37
|
452,600
|
|
May,
2019
|
0.70
|
0.51
|
386,700
|
|
April,
2019
|
0.70
|
0.50
|
296,100
|
|
March,
2019
|
0.71
|
0.59
|
429,500
|
|
February,
2019
|
0.75
|
0.61
|
345,500
|
|
January,
2019
|
0.81
|
0.67
|
193,500
|
|
December,
2018
|
0.80
|
0.62
|
72,300
|
39
(B)
PLAN OF DISTRIBUTION
Not
applicable.
(C) MARKETS
The
Company’s Common Shares are listed for trading on the CSE
under the symbol “CDVA” and the OTCQB marketplace in
the United States under the symbol
“LVRLF”.
(D) SELLING SHAREHOLDERS
Not
applicable.
(E) DILUTION
Not
applicable.
(F) EXPENSES OF THE ISSUE
Not
applicable.
I
TEM 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.
40
(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.
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.
41
Except
as may be provided under the
Investment Canada Act
(the "ICA"),
there are no specific limitations under the laws of Canada or in
the Articles of the Company with respect to the rights of
non-residents of Canada to hold and/or vote securities of the
Company.
The ICA
requires each individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a
“Canadian” as defined in the ICA (a
“non-Canadian”) making an investment to acquire control
of a Canadian business, the gross assets of which exceed certain
defined threshold levels, to file an application for review with
the Investment Review Division of Industry Canada. The
threshold level for non-Canadians who are private sector World
Trade Organization investors (as defined in the ICA) is in excess
of $600 million in enterprise value and from non-Canadians who are
state-owned World Trade Organization investors is in excess of $369
million in asset value, subject to an annual adjustment on the
basis of a prescribed formula in the ICA to reflect inflation and
real growth within Canada.
In the
context of the Company, in essence, three methods of acquiring
control of a Canadian business are regulated by the ICA: (i) the
acquisition of all or substantially all of the assets used in
carrying on business in Canada; (ii) the acquisition, directly or
indirectly, of voting shares of a Canadian corporation carrying on
business in Canada; (iii) the acquisition of voting shares of an
entity which controls, directly or indirectly, another entity
carrying on business in Canada. An acquisition of a majority
of the voting interests of an entity, including a corporation, is
deemed to be an acquisition of control under the ICA.
However, under the ICA, there is a rebuttable presumption
that control is acquired if one-third of the voting shares of a
Canadian corporation or an equivalent undivided interest in the
voting shares of such corporation are held by a non-Canadian person
or entity. An acquisition of less than one-third of the
voting shares of a Canadian corporation is deemed not to be an
acquisition of control. An acquisition of less than a
majority, but one-third or more, of the voting shares of a Canadian
corporation is presumed to be an acquisition of control unless it
can be established that on the acquisition the Canadian corporation
is not, in fact, controlled by the acquirer through the ownership
of voting shares. Certain transactions relating to the
acquisition of common shares would be exempt from review from the
ICA, including:
(a)
acquisition
of common shares by a person in the ordinary course of a
person’s business as a trader or dealer in
securities;
(b)
acquisition
of control of a Canadian corporation in connection with the
realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of the
ICA; and
(c)
acquisition
of control of a Canadian corporation by reason of an amalgamation,
merger, consolidation or corporate reorganization following which
the ultimate direct or indirect control in fact of the corporation,
through the ownership of voting interests, remains
unchanged.
In
addition, if less than a majority of voting interests of a Canadian
corporation are owned by Canadians, the acquisition of control of
any other Canadian corporation by such corporation may be subject
to review unless it can be established that the corporation is not
in fact controlled through the ownership of voting interests and
that two-thirds of the members of the board of directors of the
corporation are Canadians.
Where
an investment is reviewable under the ICA, it may not be
implemented unless it is likely to be of net benefit to Canada.
If an applicant is unable to satisfy the Minister responsible
for Industry Canada that the investment is likely to be of net
benefit to Canada, the applicant may not proceed with the
investment. Alternatively, an acquiror may be required to
divest control of the Canadian business that is the subject of the
investment.
In
addition to the foregoing, the ICA requires formal notification to
the Canadian government of all other acquisitions of control of
Canadian businesses by non-Canadians. These provisions
require a foreign investor to give notice in the required form,
which notices are for information, as opposed to review
purposes.
(E) TAXATION
Canadian Federal Income Tax Consequences
We
consider that the following general summary fairly describes the
principal Canadian federal income tax considerations applicable to
holders of our common shares who, for purposes of the
Income Tax Act
(Canada) (the
“ITA”), deal at arm’s length with the Company,
hold such shares as capital property, do not carry on business in
Canada, have not been at any time residents of Canada for purposes
of the ITA and are residents of the United States (“U.S.
Residents”) under the Canada-United States Income Tax
Convention (1980) (the “Convention”).
42
This
summary is based upon the current provisions of the ITA, the Income
Tax Regulations (the “Regulations”), the current
publicly announced administrative and assessing policies of the
Canada Revenue Agency (formerly Canada Customs and Revenue Agency),
and all specific proposals (the “Tax Proposals”) to
amend the ITA and Regulations publicly announced prior to the date
hereof by the Minister of Finance (Canada). This description
is not exhaustive of all possible Canadian federal income tax
consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative,
governmental or judicial action, nor does it take into account
provincial or foreign tax considerations which may differ
significantly from those discussed herein.
The
following discussion is for general information only and it is not
intended to be, nor should it be construed to be, legal or tax
advice to any holder or prospective holder of our common shares and
no opinion or representation with respect to any Canadian federal,
provincial or foreign tax consequences to any such holder or
prospective holder is made. Accordingly, holders and
prospective holders of our common shares should consult with their
own tax advisors about the Canadian federal, provincial and foreign
tax consequences of purchasing, owning and disposing of our common
shares.
Dividends
Dividends,
including stock dividends, paid or credited or deemed to be paid or
credited on our common shares to a U.S. Resident will be subject to
withholding tax at a rate of 25%. The Convention provides that
the normal 25% withholding tax rate will generally be reduced to
15% on dividends paid on shares of a corporation resident in Canada
for federal income tax purposes (such as the Company) to U.S.
Residents, and also provides for a further reduction of this rate
to 5% where the beneficial owner of the dividends is a corporation
which is a resident of the United States and owns at least 10% of
the voting shares of the corporation paying the dividend.
These Convention reductions are not available to beneficial
owners who are a U.S. LLC corporation.
Capital Gains
The
Convention provides that a U.S. Resident will not be subject to tax
under the ITA in respect of any capital gain on the disposition of
our common shares unless such shares constitute taxable Canadian
property of the U.S. Resident and the U.S. Resident is not entitled
to the benefits of the Convention with regards to capital gains.
Our common shares will constitute taxable Canadian property
if at any time during the five year period immediately preceding
the disposition of our common shares, the U.S. Resident, or persons
with whom the U.S. Resident did not deal at arm’s length, or
the U.S. Resident together with persons with whom the U.S. resident
did not deal at arm’s length owned 25% or more of the issued
shares of any class of our capital stock.
Where a
U.S. Resident realizes a capital gain on a disposition of shares
that constitute “taxable Canadian property”, the
Convention relieves the U.S. Resident from liability for Canadian
tax on such capital gains unless:
(a)
the
value of the shares is derived principally from “real
property” in Canada, including the right to explore for or
exploit natural resources and rights to amounts computed by
reference to production,
(b)
the
shareholder was resident in Canada for 120 months during any period
of 20 consecutive years preceding the disposition, was resident in
Canada at any time during the 10 years immediately preceding the
disposition and the shares were owned by him when he ceased to be
resident in Canada, or
(c)
the
shares formed part of the business property of a “permanent
establishment” or pertained to a fixed base used for the
purpose of performing independent personal services that the
shareholder has or had in Canada within the 12 months preceding the
disposition.
These
Convention benefits are generally not available to beneficial
owners who are a U.S. LLC corporation.
43
U.S. Federal Income Tax Consequences
The
following is a summary of the anticipated material U.S. federal
income tax consequences to a U.S. Holder (as defined below) arising
from and relating to the acquisition, ownership, and disposition of
our common shares (“Common Shares”).
This
summary is for general information purposes only and does not
purport to be a complete analysis or listing of all potential U.S.
federal income tax consequences that may apply to a U.S. Holder as
a result of the acquisition, ownership, and disposition of Common
Shares. In addition, this summary does not take into account
the individual facts and circumstances of any particular U.S.
Holder that may affect the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares.
Accordingly, this summary is not intended to be, and should
not be construed as, legal or U.S. federal income tax advice with
respect to any U.S. Holder. Each U.S. Holder should consult
its own financial advisor, legal counsel, or accountant regarding
the U.S. federal, U.S. state and local, and foreign tax
consequences of the acquisition, ownership, and disposition of
Common Shares.
Scope of this Disclosure
Authorities
This
summary is based on the
Internal
Revenue Code of 1986
, as amended (the “Code”),
Treasury Regulations (whether final, temporary, or proposed),
published rulings of the Internal Revenue Service
(“IRS”), published administrative positions of the IRS,
the Convention Between Canada and the United States of America with
Respect to Taxes on Income and on Capital, signed September 26,
1980, as amended (the “Canada-U.S. Tax Convention”),
and U.S. court decisions that are applicable and, in each case, as
in effect and available, as of the date of this Annual Report.
Any of the authorities on which this summary is based could
be changed in a material and adverse manner at any time, and any
such change could be applied on a retroactive basis. This
summary does not discuss the potential effects, whether adverse or
beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive basis.
U.S. Holders
For
purposes of this summary, a “U.S. Holder” is a
beneficial owner of Common Shares that, for U.S. federal income tax
purposes, is (a) an individual who is a citizen or resident of
the U.S., (b) a corporation, or any other entity classified as
a corporation for U.S. federal income tax purposes, that is created
or organized in or under the laws of the U.S. or any state in the
U.S., including the District of Columbia, (c) an estate if the
income of such estate is subject to U.S. federal income tax
regardless of the source of such income, or (d) a trust if
(i) such trust has validly elected to be treated as a U.S.
person for U.S. federal income tax purposes or (ii) a U.S.
court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of such
trust.
Non-U.S. Holders
For
purposes of this summary, a “non-U.S. Holder” is a
beneficial owner of Common Shares other than a U.S. Holder.
This summary does not address the U.S. federal income tax
consequences of the acquisition, ownership, and disposition of
Common Shares to non-U.S. Holders. Accordingly, a non-U.S.
Holder should consult its own financial advisor, legal counsel, or
accountant regarding the U.S. federal, U.S. state and local, and
foreign tax consequences (including the potential application of
and operation of any tax treaties) of the acquisition, ownership,
and disposition of Common Shares.
44
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).
45
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.
46
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.
47
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.
48
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.
49
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.
50
A U.S.
Holder that makes a Mark-to-Market Election generally also will
adjust such U.S. Holder’s tax basis in the Common Shares to
reflect the amount included in gross income or allowed as a
deduction because of such Mark-to-Market Election. In
addition, upon a sale or other taxable disposition of Common
Shares, a U.S. Holder that makes a Mark-to-Market Election will
recognize ordinary income or loss (not to exceed the excess, if
any, of (a) the amount included in ordinary income because of
such Mark-to-Market Election for prior taxable years over
(b) the amount allowed as a deduction because of such
Mark-to-Market Election for prior taxable years).
A
Mark-to-Market Election applies to the taxable year in which such
Mark-to-Market Election is made and to each subsequent taxable
year, unless the Common Shares cease to be “marketable
stock” or the IRS consents to revocation of such election.
Each U.S. Holder should consult its own financial advisor,
legal counsel, or accountant regarding the availability of, and
procedure for making, a Mark-to-Market Election.
Other PFIC Rules
Under
Section 1291(f) of the Code, the IRS has issued proposed
Treasury Regulations that, subject to certain exceptions, would
cause a U.S. Holder that had not made a timely QEF Election to
recognize gain (but not loss) upon certain transfers of Common
Shares that would otherwise be tax-deferred (e.g., gifts and
exchanges pursuant to corporate reorganizations). However,
the specific U.S. federal income tax consequences to a U.S. Holder
may vary based on the manner in which Common Shares are
transferred.
Certain
additional adverse rules will apply with respect to a U.S. Holder
if we are a PFIC, regardless of whether such U.S. Holder makes a
QEF Election. For example under Section 1298(b)(6) of
the Code, a U.S. Holder that uses Common Shares as security for a
loan will, except as may be provided in Treasury Regulations, be
treated as having made a taxable disposition of such Common Shares.
The
PFIC rules are complex, and each U.S. Holder should consult its own
financial advisor, legal counsel, or accountant regarding the PFIC
rules and how the PFIC rules may affect the U.S. federal income tax
consequences of the acquisition, ownership, and disposition of
Common Shares.
This summary is of a general nature only and is not intended to be
relied on as legal or tax advice or representations to any
particular investor. Consequently, potential investors are
urged to seek independent tax advice in respect of the consequences
to them of the acquisition of common stock having regard to their
particular circumstances.
(F) DIVIDEND AND PAYING AGENTS
Not
applicable.
(G) STATEMENT BY EXPERTS
Not
applicable.
51
(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
.
(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.
I
TEM 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, 2019:
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, 2019, 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, 2019, 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.
The
Company never entered into and did not have at the end of the year
ended June 30, 2019, any foreign currency hedge
contracts.
I
TEM 12 - DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES
Not
required since this is an annual report.
52
I
TEM 13 - DEFAULTS, DIVIDEND ARREARAGES
AND DELINQUENCIES
None.
I
TEM 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.
I
TEM 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, 2019.
53
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,
2019 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, 2019
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, 2019 are fairly stated, in
all material respects, in accordance with the accounting principles
generally accepted in Canada.
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,
2019 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over
financial reporting.
54
I
TEM 16 - [RESERVED]
I
TEM 16A - AUDIT COMMITTEE FINANCIAL
EXPERTS
As at
the Company’s financial year ended June 30, 2019, the audit
committee consisted of three 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 Henry J.
Kloepper, who is also the Chair of the Audit Committee, Thomas
(Taz) M. Turner, Jr., Ashish Kapoor and Nathan Nienhuis. Mr.
Kloepper is currently the only “independent” member of
the Audit Committee. Mr. Turner, the Company’s Chief
Executive Officer; Mr. Kapoor, the Company’s Chief Financial
Officer; and Mr. Nienhuis, the Company’s Chief Operating
Officer, are not considered to be independent 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, Kapoor and
Nienhuis, carrying out the responsibilities of a
director.
I
TEM 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.
I
TEM 16C PRINCIPAL ACCOUNTANT’S
FEES AND SERVICES
The
following outlines the expenditures for accounting fees for the
last two fiscal years ended:
|
|
June
30,
2019
|
June
30,
2018
|
|
|
|
|
|
Audit
Fees
|
$
115,000
|
$
87,242
|
|
Audit Related
Fees
|
-
|
-
|
|
Tax
Fees
|
-
|
-
|
|
All Other
Fees
|
-
|
-
|
Under
our existing policies, the audit committee must pre-approve all
audit and non-audit related services provided by the
auditors.
55
I
TEM 16D EXEMPTIONS FROM THE LISTING
STANDARDS FOR AUDIT COMMITTEES
Not
applicable.
I
TEM 16E PURCHASES OF EQUITY SECURITIES
BY THE ISSUER AND AFFILIATED PURCHASERS
Not
applicable.
I
TEM 16F CHANGE IN REGISTRANT’S
CERTIFYING ACCOUNTANT
On
October 17, 2018, the Company’s Board of Directors and Audit
Committee requested that MNP LLP (the “Former Auditor”)
resign as the Company’s auditor to facilitate the appointment
of Marcum 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, 2017 and 2016 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, 2017 and June 30, 2016 and through
October 17, 2018, 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) of Form 20-F. The Company
has provided the Former Auditor with a copy of the foregoing
disclosure and has requested that they furnish the Company with a
letter addressed to the SEC stating whether they agree with such
disclosure and, if not, stating the respects in which they do not
agree.
I
TEM 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.
56
I
TEM 17 - FINANCIAL
STATEMENTS
Not
applicable.
I
TEM 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.
I
TEM 19 - EXHIBITS
(a)
Financial Statements -
|
Description of Document
|
Page No.
|
|
Cover
Sheet
|
F-1
|
|
Index
|
F-2
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-3
– F-5
|
|
Consolidated
Statements of Financial Position as at June 30, 2019 and
2018
|
F-6
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
June 30, 2019, 2018 and 2017
|
F-7
|
|
Consolidated
Statements of Changes in Equity (Deficiency) for the Years Ended
June 30, 2019, 2018 and 2017
|
F-8
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2019, 2018
and 2017
|
F-9
|
|
Notes
to the Consolidated Financial Statements
|
F-10 -
F-36
|
57
b)
Exhibits
The
following documents are filed as part of this Annual Report on Form
20-F
|
Application
for Authorization to continue in another jurisdiction dated October
20, 2006.-
Incorporated herein by
reference
to Exhibit 1.1 to the Company’s Registration
Statement on Form 20-F filed on December 26, 2006.
|
|
|
|
|
|
Articles
of Incorporation of the Company -
Incorporated herein by reference
to
Exhibit 1.1 to the Company’s Registration Statement on Form
20-F filed on March 12, 2004.
|
|
|
|
|
|
By-Laws
of the Company -
Incorporated
herein by reference
to Exhibit 1.3 to the Company’s
Registration Statement on Form 20-F filed on December 26,
2006.
|
|
|
|
|
|
Certificate
of name change from Minedel Mining & Development Company
Limited to Minedel Mines Limited -
Incorporated herein by reference
to
Exhibit 1.3 to the Company’s Registration Statement on Form
20-F filed on March 12, 2004.
|
|
|
|
|
|
Certificate
of name change from Minedel Mines Limited to Havelock Energy &
Resources Inc. -
Incorporated
herein by reference
to Exhibit 1.4 to the Company’s
Registration Statement on Form 20-F filed on March 12,
2004.
|
|
|
|
|
|
Certificate
of name change from Havelock energy & Resources Inc. to
Municipal Ticket Corporation -
Incorporated herein by reference
to
Exhibit 1.5 to the Company’s Registration Statement on Form
20-F filed on March 12, 2004.
|
|
|
|
|
|
Certificate
of name change from Municipal Ticket Corporation to I.D. Investment
Inc. -
Incorporated herein by
reference
to Exhibit 1.6 to the Company’s Registration
Statement on Form 20-F filed on March 12, 2004.
|
|
|
|
|
|
Certificate
of Amalgamation. to Biolink Corporation -
Incorporated herein by reference
to
Exhibit 1.7 to the Company’s Registration Statement on Form
20-F filed on March 12, 2004.
|
|
|
|
|
|
Certificate
of name change from Biolink Corp. to First Empire Entertainment.com
Inc. -
Incorporated herein by
reference
to Exhibit 1.8 to the Company’s Registration
Statement on Form 20-F filed on March 12, 2004.
|
|
|
|
|
|
Certificate
of name change from First Empire Entertainment.com Inc. to First
Empire Corporation Inc. -
Incorporated herein by reference
to
Exhibit 19 to the Company’s Annual Report on Form 20-F filed
on March 12, 2004.
|
|
Certificate
of name change from First Empire Corporation Inc. to Noble House
Entertainment Inc. dated November 4, 2004 -
Incorporated herein by reference
to
Exhibit 1.10 to the Company’s Annual Report on Form 20-F
filed on December 1, 2005.
|
|
|
|
|
|
Articles
of Amendment dated November 19, 2004 consolidating the common
shares of the Company on the basis of one new common share in
exchange for every two old common shares -
Incorporated herein by reference
to
Exhibit 1.11 to the Company’s Annual Report on Form 20-F
filed on December 1, 2005.
|
58
|
Certificate
of name change from First Empire Music Corp. to Noble house Film
& Television Inc. dated January 21, 2005 -
Incorporated herein by reference
to
Exhibit 1.12 to the Company’s Annual Report on Form 20-F
filed on December 1, 2005.
|
|
|
|
|
|
Certificate
of name change from Noble House Film & Television Inc. to
LiveReel Productions Corporation dated August 10, 2006 -
Incorporated herein by
reference
to Exhibit 1.14 to the Company’s
Registration Statement on Form 20-F filed on December 26,
2006.
|
|
|
|
|
|
Certificate
of name change from Noble House Entertainment Inc. to LiveReel
Media Corporation dated October 12, 2006 -
Incorporated herein by reference
to
Exhibit 1.15 to the Company’s Registration Statement on Form
20-F filed on December 26, 2006.
|
|
|
|
|
|
Certificate
of name change from LiveReel Media Corporation to CordovaCann Corp.
dated January 3, 2018 -
Incorporated herein by reference
to
Exhibit 1.16 to the Company’s Annual Report on Form 20-F
filed on December 13, 2018.
|
|
|
|
|
|
2017
Stock Option Plan dated November 22, 2017 -
Incorporated herein by reference
to
Exhibit 4.(d) to the Company’s Annual Report on Form 20-F
filed on December 13, 2018.
|
|
|
|
|
|
Code of
Ethics -
Incorporated herein by
reference
to Exhibit 11 to the Company’s Annual Report
on Form 20-F filed on October 29, 2015.
|
|
|
|
|
|
The
certifications required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or
Rule 15d-14(a) (17 CFR 240.15d-14(a)).
|
|
|
|
|
|
The certifications required by Rule 13a-14(a) (17 CFR
240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).
|
|
|
|
|
|
The
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
The Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Corporate
Governance Charter -
Incorporated
herein by reference
to Exhibit 14 (a)(i) to the
Company’s Registration Statement on Form 20-F filed on
December 26, 2006.
|
|
|
|
|
|
Audit
Committee Charter dated November 5, 2018 -
Incorporated herein by reference
to
Exhibit 14(a)(ii) to the Company’s Annual Report on Form 20-F
filed on December 13, 2018.
|
|
|
|
|
|
Press
Release dated October 28, 2019 from CordovaCann Corp.
|
|
|
|
|
|
Press
Release dated October 31, 2019 from CordovaCann Corp.
|
|
|
|
|
|
Press
Release dated November 7, 2019 from CordovaCann Corp.
|
59
S
IGNATURE
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 11, 2019.
|
|
CORDOVACANN CORP.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Ashish Kapoor
|
|
|
|
|
Name:
Ashish Kapoor
|
|
|
|
|
Title:
Chief Financial Officer
|
|
60
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Financial Statements
For
the years ended June 30, 2019, 2018 and 2017
(Expressed
in Canadian Dollars)
F-1
INDEX
|
|
Page
|
|
Reports of
Independent Registered Public Accounting Firms
|
2 –
4
|
|
Consolidated
Statements of Financial Position
|
5
|
|
Consolidated
Statements of Operations and Comprehensive Loss
|
6
|
|
Consolidated
Statements of Changes in Equity (Deficiency)
|
7
|
|
Consolidated
Statements of Cash Flows
|
8
|
|
Notes to the
Consolidated Financial Statements
|
9 –
35
|
F-2
F-3
F-4
F-5
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
State
m
ents of Financial
Position
As at June 30, 2019
and 2018
(Expressed in
Canadian Dollars)
|
|
2019
|
2018
|
|
|
$
|
$
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
|
|
|
|
Cash
and cash equivalents
|
71,849
|
3,250,697
|
|
Promissory note receivable
(Note 5)
|
-
|
15,802
|
|
Prepaid
expenses and deposits
|
427,894
|
325,659
|
|
Advances to OR Operations
(Note 6)
|
-
|
610,705
|
|
Total
current assets
|
499,743
|
4,202,863
|
|
|
|
|
|
Investment in OR Operations
(Note 6)
|
-
|
534,311
|
|
Investment in related party (
Note 7
)
|
500,000
|
-
|
|
Property and equipment, net
(Note 8)
|
3,645,389
|
138,418
|
|
Total
assets
|
4,645,132
|
4,875,592
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Current
|
|
|
|
Accounts
payable and accrued liabilities
|
1,371,386
|
320,321
|
|
Mortgage payable (
Note 9
)
|
657,633
|
-
|
|
Debenture unit deposits (
Note 10)
|
594,889
|
-
|
|
Promissory notes payable
(Note 11)
|
1,112,194
|
-
|
|
Total
current liabilities
|
3,736,102
|
320,321
|
|
|
|
|
|
Convertible debentures
(Note 12)
|
546,460
|
-
|
|
Total
liabilities
|
4,282,562
|
320,321
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
Share capital
(Note 13)
|
14,636,828
|
14,480,241
|
|
Contributed
surplus
|
5,226,156
|
3,808,611
|
|
Equity
portion of convertible debentures
|
62,498
|
-
|
|
Accumulated
deficit
|
(19,570,801
)
|
(13,734,265
)
|
|
Accumulated
other comprehensive income
|
7,889
|
684
|
|
Total shareholders' equity
|
362,570
|
4,555,271
|
|
Total liabilities and shareholders' equity
|
4,645,132
|
4,875,592
|
Nature
of operations and going concern (
Note 1
)
Related
party transactions (
Note
18
)
Commitments
(
Note 16
)
Subsequent
events (
Note
23
)
|
Approved
on behalf of the Board:
|
|
|
|
|
|
|
|
|
|
|
“Henry J.
Kloepper”
,
Director
|
|
“Thomas M. Turner,
Jr.”
,
Director
|
|
|
(signed)
|
|
(signed)
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-6
CordovaCann
Corp.
Consolidated
Statements of Operations and Comprehensive Loss
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
|
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Revenue (
Note 8
)
|
-
|
-
|
-
|
|
Cost of sales (
Note 8
)
|
30,529
|
12,770
|
-
|
|
|
(30,529
)
|
(12,770
)
|
-
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Consulting
fees
|
2,448,560
|
977,410
|
-
|
|
Share based compensation (
|
1,413,919
|
3,447,415
|
-
|
|
Professional
fees
|
371,079
|
225,151
|
8,250
|
|
Shareholders
information services
|
379,058
|
52,714
|
19,107
|
|
Advertising
costs
|
88,917
|
-
|
-
|
|
Office
and general
|
605,334
|
120,274
|
5,468
|
|
Financing
costs
|
-
|
14,845
|
55,580
|
|
Exclusivity fee (
|
48,367
|
42,550
|
-
|
|
Impairment of promissory note receivable
(Note
5)
|
85,114
|
-
|
-
|
|
Impairment of equipment
(Note 8)
|
107,515
|
-
|
-
|
|
|
5,547,863
|
4,880,359
|
88,405
|
|
Loss before other income
|
(5,578,392
)
|
(4,893,129
)
|
(88,405
)
|
|
|
|
|
|
|
Interest expense (
|
39,215
|
-
|
-
|
|
Accretion expense (
|
24,680
|
-
|
-
|
|
Loss on settlement of fees
(Note 12)
|
12,700
|
-
|
-
|
|
Foreign
exchange loss (gain)
|
57,121
|
(27,196
)
|
-
|
|
Loss on deposit
(Note 17)
|
124,428
|
-
|
-
|
|
Net loss
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
(0.15
)
|
(0.15
)
|
(0.00
)
|
|
Weighted average number of outstanding common shares - basic and
diluted
|
40,149,242
|
32,255,112
|
23,521,744
|
|
Net loss
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
Foreign
exchange translation adjustment
|
7,205
|
684
|
-
|
|
Total comprehensive loss
|
(5,829,331
)
|
(4,865,249
)
|
(88,405
)
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-7
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Stateme
n
ts of Changes in Equity
(Deficiency)
As at June 30,
2019, 2018 and 2017
(Expressed in
Canadian Dollars)
|
|
|
|
|
Equity
Portion
|
|
Accumulated
|
|
|
|
Number
of
|
Share
|
Contributed
|
of
Convertible
|
Accumulated
|
Other
Comprehensive
|
Shareholders'
|
|
|
Common
Shares
|
Capital
|
Surplus
|
Debentures
|
Deficit
|
Income
|
Equity
|
|
|
#
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Balance, June 30,
2016
|
23,521,744
|
7,880,660
|
361,196
|
-
|
(8,779,927
)
|
-
|
(538,071
)
|
|
Net loss for the
year
|
-
|
-
|
-
|
-
|
(88,405
)
|
-
|
(88,405
)
|
|
Balance, June 30,
2017
|
23,521,744
|
7,880,660
|
361,196
|
-
|
(8,868,332
)
|
-
|
(626,476
)
|
|
Common shares issued for settlement
of loan
(Note
13(b))
|
7,681,110
|
384,055
|
-
|
-
|
-
|
-
|
384,055
|
|
Common shares issued for private
placement
(Note
13(c))
|
5,532,500
|
553,250
|
-
|
-
|
-
|
-
|
553,250
|
|
Common shares issued for private
placement
(Note
13(d))
|
890,074
|
959,251
|
-
|
-
|
-
|
-
|
959,251
|
|
Issuance of options
(Note 14)
|
-
|
-
|
1,177,727
|
-
|
-
|
-
|
1,177,727
|
|
Issuance of warrants
(Note 15)
|
-
|
-
|
2,269,688
|
-
|
-
|
-
|
2,269,688
|
|
Common shares issued for private
placement
(Note
13(e))
|
2,410,800
|
4,703,025
|
-
|
-
|
-
|
-
|
4,703,025
|
|
Foreign currency translation
gain
|
-
|
-
|
-
|
-
|
-
|
684
|
684
|
|
Net loss for the
year
|
-
|
-
|
-
|
-
|
(4,865,933
)
|
-
|
(4,865,933
)
|
|
Balance, June 30,
2018
|
40,036,228
|
14,480,241
|
3,808,611
|
-
|
(13,734,265
)
|
684
|
4,555,271
|
|
Issuance of warrants
(Note 15)
|
-
|
-
|
1,413,919
|
-
|
-
|
-
|
1,413,919
|
|
Equity portion of convertible
debentures
(Note
12)
|
-
|
-
|
29,063
|
62,498
|
-
|
-
|
91,561
|
|
Warrant portion of promissory note
payable
(Note
11)
|
-
|
-
|
18,650
|
-
|
-
|
-
|
18,650
|
|
Common shares issued for exercise of
warrants
(Note
13(a))
|
750,000
|
156,587
|
(44,087
)
|
-
|
-
|
-
|
112,500
|
|
Foreign currency translation
gain
|
-
|
-
|
-
|
-
|
-
|
7,205
|
7,205
|
|
Net loss for the
year
|
-
|
-
|
-
|
-
|
(5,836,536
)
|
-
|
(5,836,536
)
|
|
Balance, June 30,
2019
|
40,786,228
|
14,636,828
|
5,226,156
|
62,498
|
(19,570,801
)
|
7,889
|
362,570
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-8
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Sta
t
ements of Cash Flows
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
|
|
2019
|
2018
|
2017
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
Net
loss for the year
|
(5,836,536
)
|
(4,865,933
)
|
(88,405
)
|
|
|
|
|
|
|
Adjusted
for non-cash items:
|
|
|
|
|
Shares
issued on consulting agreement
|
-
|
322,862
|
-
|
|
Share
based compensation
|
1,413,919
|
3,447,415
|
-
|
|
Impairment
of promissory note receivable
|
85,114
|
-
|
-
|
|
Impairment
of equipment
|
107,515
|
-
|
-
|
|
Depreciation
|
30,529
|
12,770
|
-
|
|
Financing
costs
|
-
|
-
|
55,580
|
|
Interest
expense
|
39,215
|
-
|
-
|
|
Accretion
expense
|
24,680
|
-
|
-
|
|
Convertible
debentures issued for settlement of fees
|
250,000
|
-
|
-
|
|
Transaction
costs
|
-
|
(7,591
)
|
-
|
|
Write
off of receivables
|
-
|
-
|
5,239
|
|
Changes in non-cash working capital items:
|
|
|
|
|
Prepaid
expenses and deposits
|
(102,235
)
|
(318,903
)
|
(2,620
)
|
|
Receivables
|
-
|
-
|
(1,600
)
|
|
Accounts
payable and accrued liabilities
|
1,051,065
|
231,906
|
29,386
|
|
Cash
used in operating activities
|
(2,936,734
)
|
(1,177,474
)
|
(2,420
)
|
|
Investing activities
|
|
|
|
|
Purchase
of property and equipment
|
(2,500,373
)
|
(151,188
)
|
-
|
|
Investment
in OR Operations
|
-
|
(526,720
)
|
-
|
|
Advances
to OR Operations
|
-
|
(610,705
)
|
-
|
|
Investment
in related party
|
(500,000
)
|
-
|
-
|
|
Promissory
note receivable
|
(69,312
)
|
(15,802
)
|
-
|
|
Cash
used in investing activities
|
(3,069,685
)
|
(1,304,415
)
|
-
|
|
Financing activities
|
|
|
|
|
Advances
from (repayments to) related parties
|
-
|
(117,081
)
|
2,420
|
|
Issuance
of mortgage payable
|
654,350
|
-
|
-
|
|
Debenture
unit deposits
|
594,889
|
-
|
-
|
|
Issuance
of promissory notes payable
|
1,108,627
|
-
|
-
|
|
Issuance
of convertible debentures
|
350,000
|
-
|
-
|
|
Proceeds
from the exercise of warrants
|
112,500
|
-
|
-
|
|
Repayments
of related party notes payable
|
-
|
(43,681
)
|
-
|
|
Proceeds
from issuance of common shares
|
-
|
5,892,664
|
-
|
|
Proceeds
from financing activities
|
2,820,366
|
5,731,902
|
2,420
|
|
Effect
of exchange rate changes on cash
|
7,205
|
684
|
-
|
|
Net increase (decrease) in cash and cash equivalents
|
(3,178,848
)
|
3,250,697
|
-
|
|
Cash and cash equivalents, beginning of year
|
3,250,697
|
-
|
-
|
|
Cash and cash equivalents, end of year
|
71,849
|
3,250,697
|
-
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-9
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
1.
NATURE
OF OPER
A
TIONS AND GOING
CONCERN
CordovaCann Corp.
(formerly LiveReel Media Corporation) (the “Company” or
“CordovaCann”) is a Canadian-domiciled company focused
on building a leading, diversified cannabis products business
across multiple jurisdictions including Canada and the United
States. CordovaCann primarily provides services and investment
capital to the processing and production vertical markets of the
cannabis industry. On January 3, 2018, the Company changed its name
from LiveReel Media Corporation to CordovaCann Corp. The
Company’s 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
$5,829,331 (June 30, 2018 – $4,865,249) during the year ended
June 30, 2019 and has a total accumulated deficit of $19,570,801
(June 30, 2018 – $13,734,265) as at June 30, 2019. The
Company’s ability to continue as a going concern is dependent
upon its ability to access sufficient capital until it has
profitable operations and raises a material concern. To this point,
all operational activities and overhead costs have been funded
through equity issuances, debt issuances and related party
advances.
The Company
believes that continued funding from equity and debt issuances will
provide sufficient cash flow for it to continue as a going concern
in its present form, however, there can be no assurances that the
Company will achieve this. Accordingly, these consolidated
financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or the
amount and classification of liabilities or any other adjustments
that might be necessary should the Company be unable to continue as
a going concern.
2.
BASIS
OF PREPARATION
(a)
Statement of Compliance
These consolidated
financial statements of the Company and its subsidiaries were
prepared using accounting policies consistent with IFRS as issued
by the IASB and interpretations of the IFRS Interpretations
Committee (“IFRIC”).
These consolidated
financial statements were authorized for issue by the Board of
Directors on December 2, 2019.
(b)
Basis of Presentation
These consolidated
financial statements have been prepared on a historical cost basis,
except where otherwise disclosed. Historical cost is based on the
fair value of the consideration given in exchange for assets. In
addition, these consolidated financial statements have been
prepared using the accrual basis of accounting, except for cash
flow information.
F-10
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
2.
BASIS
OF PREPARATION (continued)
(c)
Functional and Presentation Currency
These consolidated
financial statements are presented in Canadian dollars, which is
the Company’s presentation currency. The functional
currencies of the group, as determined by management, are as
follows:
|
|
|
Currency
|
|
|
|
|
|
CordovaCann
Corp.
|
Canadian
|
|
|
CordovaCann
Holdings Canada, Inc.
|
Canadian
|
|
|
Cordova
Investments Canada, Inc.
|
Canadian
|
|
|
CordovaCann
Holdings, Inc.
|
United
States
|
|
|
Cordova
CO Holdings, LLC
|
United
States
|
|
|
Cordova
OR Holdings, LLC
|
United
States
|
|
|
CDVA
Enterprises, LLC
|
United
States
|
|
|
Cordova
CA Holdings, LLC
|
United
States
|
|
|
Cordova
OR Operations, LLC
|
United
States
|
|
|
Cannabilt
Farms, LLC
|
United
States
|
|
|
Cannabilt
OR Retail, LLC
|
United
States
|
|
|
Cannabilt
Holdings, Inc.
|
United
States
|
|
|
Future
Processing, LLC
|
United
States
|
|
In translating the
financial statements of the Company's foreign subsidiaries from
their functional currencies into the Company's reporting currency
of Canadian dollars, balance sheet accounts are translated using
the closing exchange rate in effect at the balance sheet date and
income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in accumulated
other comprehensive income (loss) in shareholders'
equity.
(d)
Use of Estimates and Judgements
The preparation of
these consolidated financial statements in accordance with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and reported
amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of expenses during the
reporting period. Actual outcomes could differ from these
estimates. These consolidated financial statements include
estimates, which, by their nature, are uncertain. The impacts of
such estimates are pervasive throughout the financial statements,
and may require accounting adjustments based on future occurrences.
The estimates and underlying assumptions are reviewed on a regular
basis. Revisions to accounting estimates are recognized in the
period in which the estimate is revised and in any future periods
affected.
F-11
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
2.
BASIS
OF PREPARATION (continued)
(d)
Use of Estimates and Judgements (continued)
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.
(e)
Basis of Consolidation
Subsidiaries are
entities controlled by the Company. Control exists when the Company
has the power, directly and indirectly, to govern the financial and
operating polices of an entity and be exposed to the variable
returns from its activities. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control
ceases. These consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries:
CordovaCann Holdings Canada, Inc.; Cordova Investments Canada Inc.;
CordovaCann Holdings, Inc. and its wholly owned subsidiaries:
Cordova CO Holdings, LLC, Cordova CA Holdings, LLC, CDVA
Enterprises, LLC, Cordova OR Holdings, LLC and its wholly owned
subsidiary Cordova OR Operations, LLC, and Cannabilt Holdings, Inc.
and its wholly owned subsidiaries: Cannabilt Farms, LLC, Cannabilt
OR Retail, LLC and Future Processing, LLC.
3.
SIGNIFICANT
ACCOUNTING POLICIES
The significant
accounting policies used in the preparation of these consolidated
financial statements are described below.
Cash
and cash equivalents
Cash consists of
bank balances and cash held in trust. Cash equivalents consist of
short-term deposits with original maturities of three months or
less. As at June 30, 2019 and June 30, 2018, there were no cash
equivalents.
Related
party transactions
Parties are
considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant
influence over the other party in making financial and operating
policy decisions. Parties are also considered to be related if they
are subject to common control. 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-12
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Leases
The Company records
income as a result of an operating lease. The Company presents its
assets subject to the operating leases in its statement of
financial position. The Company recognizes income from its
operating leases on a straight-line basis over the lease terms,
unless another systematic basis better represents the time pattern
in which the economic benefits in the leased asset
diminish.
Share-based
payments
Share-based
payments to employees are measured at the fair value of the
instruments issued and recognized over the expected service
periods. Share-based payments to non-employees are measured at the
fair value of goods or services received or the fair value of the
equity instruments issued, if it is determined the fair value of
the goods or services cannot be reliably measured, and are recorded
at the date the goods or services are received. The corresponding
amount is recorded to the stock options reserve. The fair value of
options is determined using the Black-Scholes Option Pricing Model
which incorporates all market vesting conditions. The number of
shares and options expected to vest is reviewed and adjusted at the
end of each reporting period such that the amount recognized for
services received as consideration for the equity instruments
granted shall be based on the number of equity instruments that
will eventually vest.
Compound
financial instruments
Compound financial
instruments issued by the Company are comprised of convertible debt
that can be converted into common shares. 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.
Revenue
from contracts with customers
Effective July 1,
2018, the Company adopted IFRS 15 –
Revenue from Contracts with Customers
(“IFRS 15”), issued in May 2014, and amended in
September 2015 and April 2016. IFRS 15 outlines a single
comprehensive model for entities to use in accounting for revenue
arising from contracts with customers, except for contracts that
are within the scope of the standards on leases, insurance
contracts, and financial instruments. In accordance with the
transitional provisions in IFRS 15, the Company elected to adopt
the new standard using the modified retrospective approach. There
is no impact of adopting IFRS 15 on the Company’s
consolidated financial statements.
F-13
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Financial
Instruments
Effective July 1,
2018, the Company adopted IFRS 9 –
Financial Instruments
(“IFRS
9”) which replaced IAS 39 –
Financial Instruments: Recognition and
Measurement
(“IAS 39”) and all previous versions
of IFRS 9. The Company adopted IFRS 9 using the retrospective
approach where the cumulative impact of adoption will be recognized
in retained earnings as of July 1, 2018 and comparatives will not
be restated.
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.
Fair value through profit or loss
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.
Consistent with IAS
39, financial liabilities under IFRS 9 are generally classified and
measured at fair value at initial recognition and subsequently
measured at amortized cost.
F-14
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Financial
Instruments (continued)
The following table
summarizes the classification of the Company’s financial
instruments under IAS 39 and IFRS 9:
|
|
|
IAS
39
|
IFRS
9
|
|
|
|
Classification
|
Classification
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
Cash
and cash equivalents
|
Loans
and receivables
|
Amortized
cost
|
|
|
Promissory
note receivable
|
Loans
and receivables
|
Amortized
cost
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
Accounts
payable and accrued liabilities
|
Other
liabilities
|
Amortized
cost
|
|
|
Convertible
debentures
|
N/A
|
Amortized
cost
|
|
|
Mortgage
payable
|
N/A
|
Amortized
cost
|
|
|
Debenture
unit deposits
|
N/A
|
Amortized
cost
|
|
|
Promissory
notes payable
|
N/A
|
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.
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").
F-15
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Impairment
of long-lived assets (continued)
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.
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.
Property
and equipment
Equipment is stated
at cost, less accumulated depreciation and any accumulated
impairment losses. The gain or loss arising on the disposal or
retirement of an item of equipment is determined as the difference
between the sales proceeds and the carrying amount of the asset and
is recognized in the statement of operations. Expenditures to
replace a component of an item of equipment that is accounted for
separately are capitalized and the existing carrying amount of the
component written off. Other subsequent expenditures are
capitalized if future economic benefits will arise from the
expenditure. All other expenditures, including repair and
maintenance, are recognized in the statement of operations as
incurred.
Depreciation is
charged to the income statement based on the cost, less estimated
residual value, of the asset on a straight-line basis over the
estimated useful life. Depreciation commences when the assets are
available for use. The estimated useful lives are as
follows:
|
|
Method:
|
Rate:
|
|
Equipment
|
Straight-line
|
5
years
|
Property and
equipment, excluding land, acquired during the year but 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.
F-16
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Loss
per share (continued)
The inclusion of
the Company’s stock options and share purchase warrants in
the computation of diluted loss per share would have an
anti-dilutive effect on loss per share and are therefore excluded
from the computation. Consequently, there is no difference between
basic loss per share and diluted loss per share.
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.
Significant
accounting judgement and estimates
Private company investments (securities of issuers that are not
public companies):
All privately-held
investments (other than options and warrants) are initially
recorded at the transaction price, being the fair value at the time
of acquisition. Thereafter, at each reporting period, the fair
value of an investment may (depending upon the circumstances) be
adjusted using one or more of the valuation indicators described
below. The Company’s private investment consists of an
investment in NWN Inc., as disclosed in Note 7. Options and
warrants of private companies are valued using an option pricing
model when there are sufficient and reliable observable market
inputs; if no such market inputs are available, the warrants and
options are valued using alternative methods representing fair
value.
F-17
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Significant
accounting judgement and estimates (continued)
The determinations
of fair value of the Company’s privately-held investments at
other than initial cost are subject to certain limitations.
Financial information for private companies in which the Company
has investments may not be available and, even if available, that
information may be limited and/or unreliable. Use of the valuation
approach described below may involve uncertainties and
determinations based on the Company’s judgment and any value
estimated from these techniques may not be realized or
realizable.
Company-specific
information is considered when determining whether the fair value
of a privately-held investment should be adjusted upward or
downward at the end of each reporting period. In addition to
company-specific information, the Company will take into account
trends in general market conditions and the share performance of
comparable publicly-traded companies when valuing privately-held
investments.
The absence of the
occurrence of any of these events, any significant change in trends
in general market conditions, or any significant change in share
performance of comparable publicly-traded companies indicates
generally that the fair value of the investment has not materially
changed.
The fair value of a
privately-held investment may be adjusted if:
a)
there has been a
significant subsequent equity financing provided by outside
investors at a valuation different than the current value of the
investee company, in which case the fair value of the investment is
set to the value at which that financing took place;
b)
there have been
significant corporate, political or operating events affecting the
investee company that, in management’s opinion, have a
material impact on the investee company’s prospects and
therefore its fair value. In these circumstances, the adjustment to
the fair value of the investment will be based on
management’s judgment and any value estimated may not be
realized or realizable;
c)
the investee
company is placed into receivership or bankruptcy;
d)
based on financial
information received from the investee company, it is apparent to
the Company that the investee company is unlikely to be able to
continue as a going concern; and
e)
important
positive/negative management changes by the investee company that
the Company’s management believes will have a very
positive/negative impact on the investee company’s ability to
achieve its objectives and build value for
shareholders.
Adjustments to the
fair value of a privately-held investment will be based upon
management’s judgment and any value estimated may not be
realized or realizable. The resulting values for non-publicly
traded investments may differ from values that would be realized if
a ready market existed. In addition, the amounts at which the
Company’s privately-held investments could be disposed of
currently may differ from the carrying value assigned.
F-18
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
4.
STANDARDS
EFFECTIVE JULY 1, 2019
Leases
In January 2016,
the IASB issued a new standard, IFRS 16 –
Leases
. The new standard requires
lessees to recognize most leases on the balance sheet using a
single model, thereby eliminating the distinction between operating
and finance leases. Lessor accounting, however, remains similar to
current accounting practice, and the distinction between operating
and finance leases is retained. The standard is effective for
annual periods beginning on or after January 1, 2019 and superseded
IAS 17 –
Leases
. The
Company does not expect the new standard to have a significant
impact on the consolidated financial statements.
5.
PROMISSORY
NOTE RECEIVABLE
On
June 7, 2018, the Company entered into a revolving promissory note
with a customer (the “Promissory Note”). The Promissory
Note was unsecured, bearing interest at 8% per annum and due twelve
months from the date of issuance. On June 30, 2019, due to issues
related to the expected collectability of the Promissory Note, the
total amount of the promissory note amounting to $85,114 was deemed
impaired. As at June 30, 2019, $nil was outstanding under the
Promissory Note (June 30, 2018 – $15,802).
6.
ASSET
ACQUISITION OF CORDOVA OR OPERATIONS, LLC
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 the
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
(the “Purchase Date”). The assets of OR Operations
consists of land, building and construction in progress. The
acquisition of OR Operations did not meet the minimum requirements
of a business and therefore the Company has accounted for the
transaction as an asset acquisition.
On June 19, 2019,
the total asset acquisition amounted to $3,645,389, comprised of
land, building and construction in progress, which were transferred
to property and equipment, net (
Note 8
).
7.
INVESTMENT
IN RELATED PARTY
On
September 18, 2018, the Company subscribed for 500,000 convertible
preferred shares of NWN Inc. (“NWN”) at a price of
$1.00 per preferred share (a “Preferred Share”) for a
total consideration of $500,000. Each Preferred Share is
convertible into one common share of NWN, subject to appropriate
adjustments for any stock splits, consolidations or other
recapitalizations.
NWN is a private company and management has
determined that the cost of the investment was the most reliable
basis for determining its fair value.
The Company has not
earned any dividend income on these preferred shares. Furthermore,
NWN is considered to be a related party by virtue of a common
officer and director. As at June 30, 2019, the investment in
related party amounted to $500,000 (June 30, 2018 –
$nil).
F-19
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
8.
PROPERTY
AND EQUIPMENT, NET
Property and
equipment, net, consists of the following:
|
|
Equipment
|
Land
|
Building
|
Construction
in
progress
|
Total
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Cost
|
|
|
|
|
|
|
As
at July 1, 2017
|
-
|
-
|
-
|
-
|
-
|
|
Additions
|
151,188
|
-
|
-
|
-
|
151,188
|
|
As
at June 30, 2018
|
151,188
|
-
|
-
|
-
|
151,188
|
|
Additions
|
-
|
523,480
|
1,361,048
|
1,760,861
|
3,645,389
|
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
|
Impairment
charge
|
(151,188
)
|
-
|
-
|
-
|
(151,188
)
|
|
As at June 30, 2019
|
-
|
523,480
|
1,361,048
|
1,760,861
|
3,645,389
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
As
at July 1, 2017
|
-
|
-
|
-
|
-
|
-
|
|
Depreciation
|
12,770
|
-
|
-
|
-
|
12,770
|
|
As
at June 30, 2018
|
12,770
|
-
|
-
|
-
|
12,770
|
|
Depreciation
|
30,529
|
-
|
-
|
-
|
30,529
|
|
Impairment
charge
|
(43,299
)
|
-
|
-
|
-
|
(43,299
)
|
|
As at June 30, 2019
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Net book value ($)
|
|
|
|
|
|
|
At
June 30, 2018
|
138,418
|
-
|
-
|
-
|
138,418
|
|
At June 30, 2019
|
-
|
523,480
|
1,361,048
|
1,760,861
|
3,645,389
|
Construction in progress
Construction in
progress relates to the asset acquisition of OR Operations as
detailed in Note 6. Depreciation on these assets will be recorded
from the date when these assets are available for use.
Equipment
During
the year ended June 30, 2019, the Company expensed $30,529 in
depreciation (June 30, 2018 – $12,770) which has been
recorded as cost of sales in relation to the below lease agreement.
The equipment during the year ended June 30, 2019 was deemed
impaired by management and an impairment charge was recorded in the
amount of $107,515 which included a foreign translation adjustment
of $374.
The Company entered
into an operating lease (the “Lease”) on February 1,
2018, under which the lessee (the “Lessee”) agreed to
lease the above equipment for an initial period of twelve months.
On February 1, 2019, the Lease was automatically extended for an
additional period of twelve months. The Lessee shall make monthly
payments of US $5,040 due on or before the first day of each
respective month.
During the year
ended June 30, 2019
, the Company had unrecognized rental
revenue in the amount of $80,057 (June 30, 2018 – $24,159),
as a result of the Lease. The Company has not recorded rental
revenue pending a determination by the Company that collectability
is reasonably assured. The Company will recognize revenue upon
receipt.
F-20
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
8.
PROPERTY
AND EQUIPMENT, NET (continued)
As at June 30,
2019, it is estimated that future minimum lease payments of US
$35,280 are to be charged within the next year.
9.
MORTGAGE
PAYABLE
On
June 16, 2019, the Company obtained financing through a mortgage
(the “Mortgage”) in the amount of $696,117 (US
$531,915) as part of the acquisition of OR Operations which has
title to 6 acres of real estate in Clackamas County, Oregon (the
“Property”). The Mortgage is due six months from the
date of issuance with an initial draw of US $500,000, implying
interest at a rate of 12.77% per annum. The Mortgage is secured by
a first charge on the Property.
Based on the implied interest rate of 12.77% per
annum, the total Mortgage outstanding as at June 30, 2019 was
$657,633 (June 30, 2018
–
$nil). Total interest expense in relation to the
Mortgage for the year ended June 30, 2019 was implied at $3,002
(June 30, 2018
–
$nil).
10.
DEBENTURE
UNIT DEPOSITS
During the year
ended June 30, 2019, the Company received a total of $594,889 in
deposits related to subscriptions for a convertible debenture unit
offering (the “Offering”). Each $1,000 unit of the
Offering shall be comprised of a $1,000 principal amount of 10%
unsecured subordinated convertible debenture and 500 common share
purchase warrants. The debentures shall mature twenty-four months
from the date of issuance and shall be exercisable into common
shares of the Company at a price of $1.00 per share any time prior
to maturity by the holder and at the option of the Company in
certain circumstances. The warrants shall be exercisable for a
period of twenty-four months from the date of issuance and
exercisable at a price of $1.20 per share. The Offering was closed
on August 13, 2019 and the convertible debenture units were
issued.
11.
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 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 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.
F-21
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
11.
PROMISSORY
NOTES PAYABLE (continued)
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,
2019, the value of the Promissory Note A amounted to $204,484 (US
$156,250). Accretion expense of $8,715 and interest expense of
$8,340 was recorded for the year ended June 30, 2019.
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 matures on March 31, 2020 and bears interest
at a rate of 15% per annum, accrued monthly and due at maturity.
The Promissory Note B is secured by the convertible preferred
shares investment in NWN Inc. Furthermore, this is considered to be
a related party transaction by virtue of a common officer and
director.
As at June 30,
2019, the value of the Promissory Note B amounted to $263,690 (US
$201,479). Interest expense of $1,950 was recorded for the year
ended June 30, 2019.
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 matures 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.
As at June 30,
2019, the value of the Promissory Note C amounted to $644,020 (US
$492,086). Accretion expense of $847 and interest expense of $3,020
was recorded for the year ended June 30, 2019 (June 30, 2018
– $nil).
F-22
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
12.
CONVERTIBLE
DEBENTURES
On March 13, 2019,
the Company closed a non-brokered private placement of unsecured
subordinated convertible debenture units (the “Debenture
Units”) 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
consists of $1,000 principal amount of unsecured subordinated
convertible debentures (the “Debentures”) and 500
common share purchase warrants (the “Warrants”) of the
Company. The Debentures mature on March 12, 2021 (the
“Maturity Date”) and bear interest at a rate of 10% per
annum, accrued monthly and payable on Maturity Date. The
outstanding principal amount of the Debentures 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. Furthermore, the Company also
has the option to force conversion of the Debentures 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 entitles the holder to purchase one common share of
the Company until March 12, 2021 at an exercise price of $1.20 per
share. As a result, 300,000 Warrants were issued related to the
Debenture Units.
The Debenture Units
were determined to be a compound instrument, comprising a
liability, a conversion feature 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
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 carrying 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, 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.
As at June 30,
2019, the value of the Debentures amounted to $546,460. Accretion
expense of $15,118 and interest expense of $22,903 was recorded for
the year ended June 30, 2019 (June 30, 2018 – $nil and $nil,
respectively).
13.
SHARE
CAPITAL
The authorized
share capital of the Company consists of an unlimited number of
common shares.
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.
F-23
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
13.
SHARE
CAPITAL (continued)
During the year
ended June 30, 2018, the Company had the following common share
transactions:
●
On October 19,
2017, an outstanding shareholder loan in the amount of $384,055 was
settled with the issuance of 7,681,110 common shares of the Company
at a price of $0.05 per share;
●
On December 14,
2017, the Company issued 5,532,500 common shares valued at $0.10
per share as part of a private placement for total gross proceeds
of $553,250; of which $533,250 was received in cash and $20,000 was
issued pursuant to a consulting agreement;
●
On March 12, 2018,
the Company issued 890,074 common shares valued at $1.08 per share
as part of a private placement for total gross proceeds of
$959,251; all of which was received in cash; and
●
On June 12, 2018
and June 15, 2018, the Company issued 2,390,800 and 20,000 common
shares, respectively, valued at $1.95 per share as part of a
private placement for total gross proceeds of $4,703,025; of which
$4,400,163 was received in cash and $302,862 was received in
services provided by consultants.
14.
OPTIONS
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.
Outstanding options
as at June 30, 2019 are as follows:
|
|
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted Average
Life
Remaining
(years)
|
|
Executive
Officers
|
900,000
|
$
0.78
|
1.62
|
|
Directors
|
100,000
|
$
0.40
|
1.55
|
|
Consultants
|
750,000
|
$
0.70
|
1.60
|
|
|
1,750,000
|
|
|
F-24
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
14.
OPTIONS
(continued)
|
Grant
Date
|
|
Expiry
Date
|
Options
Outstanding
|
Options
Exercisable
|
Exercise
Price
|
Fair
Value
|
|
Jan. 16,
2018
(i)
|
|
Jan. 15,
2021
|
1,000,000
|
1,000,000
|
$
0.40
|
$
377,024
|
|
Mar. 9,
2018
(ii)
|
|
Mar. 8,
2021
|
750,000
|
750,000
|
$
1.15
|
$
800,703
|
(i)
The options fully
vested on issuance and the fair value of $377,024 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.40
|
|
Risk-free interest
rate
|
1.78
%
|
|
Expected
life
|
3
years
|
|
Estimated
volatility in the market price of the common shares
|
218
%
|
|
Dividend
yield
|
Nil
|
(ii)
The options fully
vested on issuance and the fair value of $800,703 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
3
years
|
|
Estimated
volatility in the market price of the common shares
|
213
%
|
|
Dividend
yield
|
Nil
|
During the year
ended June 30, 2019, the Company expensed $nil (June 30, 2018
– $1,177,727) of the fair value of the options. No options
were issued during the year ended June 30, 2019, and the options
issued during the year ended June 30, 2018 fully vested and were
expensed in the year ended June 30, 2018 as share based
compensation.
15.
WARRANTS
|
|
Warrants
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Life Remaining
(years)
|
|
July
1, 2017
|
-
|
$
-
|
-
|
|
Issued
|
6,650,000
|
0.54
|
1.37
|
|
Expired
|
-
|
-
|
-
|
|
June
30, 2018
|
6,650,000
|
0.54
|
1.37
|
|
Issued
|
3,725,000
|
1.69
|
1.65
|
|
Exercised
|
(750,000
)
|
0.15
|
0.00
|
|
Forfeited
|
(1,000,000
)
|
2.00
|
0.00
|
|
Expired
|
(250,000
)
|
0.10
|
0.00
|
|
June
30, 2019
|
8,375,000
|
$
0.93
|
1.05
|
F-25
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
a)
On
November 1, 2017 and in connection to a consulting agreement with a
director and officer of the Company, the Company issued warrants
for the purchase of 3,000,000 common shares of the Company
exercisable until October 31, 2019 at an exercise price of $0.10
per share. On issuance, warrants for the purchase of 1,000,000
common shares vested immediately and the remaining 2,000,000 vested
during the three months ended June 30, 2018.
The
fair value of these issued warrants of $261,401 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
214
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $261,401) of the fair value of the warrants as share
based compensation.
b)
On November 1, 2017 and in connection to a
consulting agreement, the Company issued warrants for the purchase
of 750,000 common shares of the Company exercisable until April 30,
2019 at an exercise price of $0.15 per share. On issuance, warrants
for the purchase of 250,000 common shares vested immediately and
the remaining 500,000 vested during the three months ended June 30,
2018. On April 30, 2019, the warrants were exercised
(
Note
6
).
The
fair value of these issued warrants of $44,087 was determined using
the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
1.5
years
|
|
Estimated
volatility in the market price of the common shares
|
155
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $44,087) of the fair value of the warrants as share
based compensation.
c)
On
November 1, 2017 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 common shares
of the Company exercisable until April 30, 2019 at an exercise
price of $0.10 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. On April 30, 2019, the deliverables were not met and the
warrants expired.
F-26
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
The
fair value of these issued warrants of $16,499 was determined using
the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
1.5
years
|
|
Estimated
volatility in the market price of the common shares
|
155
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $4,125) of the fair value of the warrants as share
based compensation.
d)
On
March 9, 2018 and in connection to a consulting agreement with a
director and officer of the Company, the Company issued warrants
for the purchase of 1,500,000 common shares of the Company
exercisable until March 8, 2020 at an exercise price of $1.15 per
share, such warrants vesting immediately upon
issuance.
The
fair value of these issued warrants of $1,336,934 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
173
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $1,336,934) of the fair value of the warrants as share
based compensation.
e)
On
March 9, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 750,000 common shares
of the Company exercisable until March 8, 2020 at an exercise price
of $1.15 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. As at June 30, 2019, the deliverables were not
met.
The
fair value of these issued warrants of $668,467 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
173
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $501,350) of the fair value of the warrants as share
based compensation.
F-27
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
f)
On
March 15, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 400,000 common shares
of the Company exercisable until September 14, 2019 at an exercise
price of $1.45 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. As at June 30, 2019, the deliverables were not
met.
The
fair value of these issued warrants of $324,775 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.42
|
|
Risk-free interest
rate
|
1.75
%
|
|
Expected
life
|
1.5
years
|
|
Estimated
volatility in the market price of the common shares
|
129
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $nil (June 30,
2018 – $121,791) of the fair value of the warrants as share
based compensation.
g)
On
October 1, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 common shares
of the Company exercisable until September 30, 2020 at an exercise
price of $1.50 per share. Of these issued warrants, 100,000 vested
immediately upon issuance while the remaining 150,000 warrants
shall vest in six equal tranches of 25,000 warrants every three
months from the date of issuance.
The
fair value of these issued warrants of $207,833 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.35
|
|
Risk-free interest
rate
|
2.27
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
126
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $183,932 (June
30, 2018 – $nil) of the fair value of the warrants as share
based compensation.
h)
On
October 15, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 common shares
of the Company exercisable until October 14, 2020 at an exercise
price of $2.00 per share. The warrants shall vest in four equal
tranches of 62,500 warrants every three months from the date of
issuance.
F-28
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
The
fair value of these issued warrants of $131,421 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.05
|
|
Risk-free interest
rate
|
2.25
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
124
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $119,954 (June
30, 2018 – $nil) of the fair value of the warrants as share
based compensation.
i)
On
October 31, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 1,000,000 common shares
of the Company exercisable until October 30, 2022 at a price of
$2.00 per share. The warrants shall vest in equal tranches of
250,000 every six months from the date of issuance.
The
fair value of these issued warrants of $1,251,625 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.30
|
|
Risk-free interest
rate
|
2.41
%
|
|
Expected
life
|
4
years
|
|
Estimated
volatility in the market price of the common shares
|
215
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $764,874 (June
30, 2018 – $nil) of the fair value of the warrants as share
based compensation.
j)
On
October 31, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 1,000,000 common shares
of the Company exercisable until October 30, 2022 at a price of
$2.00 per share. The warrants shall vest in equal tranches of
250,000 every six months from the date of issuance.
The
fair value of these issued warrants of $1,251,625 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.30
|
|
Risk-free interest
rate
|
2.41
%
|
|
Expected
life
|
4
years
|
|
Estimated
volatility in the market price of the common shares
|
215
%
|
|
Dividend
yield
|
Nil
|
On
February 15, 2019, all 1,000,000 warrants previously issued to the
consultant were forfeited. As a result, the Company has reversed
the previously recorded share based compensation
expense.
F-29
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
k)
On
December 1, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 common shares
of the Company exercisable until November 30, 2020 at a price of
$1.50 per share. Of these issued warrants, 100,000 vested
immediately upon issuance while the remaining 150,000 warrants
shall vest in three equal tranches of 50,000 warrants every three
months from the date of issuance.
The
fair value of these issued warrants of $138,853 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.06
|
|
Risk-free interest
rate
|
2.14
%
|
|
Expected
life
|
2
years
|
|
Estimated
volatility in the market price of the common shares
|
116
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $132,682 (June
30, 2018 – $nil) of the fair value of the warrants as share
based compensation.
l)
On
February 1, 2019 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 325,000 common shares
of the Company exercisable until January 31, 2022 at a price of
$1.00 per share. Of these issued warrants, 81,250 vested
immediately while the remaining 243,750 warrants shall vest in
three equal tranches of 81,250 warrants every three months from the
date of issuance.
The
fair value of these issued warrants of $250,793 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.95
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
3
years
|
|
Estimated
volatility in the market price of the common shares
|
152
%
|
|
Dividend
yield
|
Nil
|
For
the year ended June 30, 2019, the Company expensed $212,477 (June
30, 2018 – $nil) of the fair value of the warrants as share
based compensation.
m)
On February 1, 2019 and in connection with the
Promissory Note A
(Note 11)
, the Company 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 fair value of these issued
warrants of $4,283 was determined by the residual method as noted
in Note 11. For the year ended June 30, 2019, $4,283 (June 30, 2018
– $nil) of the fair value of the warrants was included in
contributed surplus.
F-30
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
15.
WARRANTS (continued)
n)
On March 13, 2019 and in connection with the
private placement of Debenture Units
(Note 12),
the Company issued warrants for the purchase of
300,000 common shares of the Company exercisable until March 12,
2021 at a price of $1.20 per share. The fair value of these issued
warrants of $29,063 was determined by the residual method as noted
in Note 12. For the year ended June 30, 2019, $29,063 (June 30,
2018 – $nil) of the fair value of the warrants was included
in contributed surplus.
o)
On June 19, 2019 and in connection with the
Promissory Note C
(Note 11)
, 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 fair value of these issued
warrants of $14,367 was determined by the residual method as noted
in Note 11. For the year ended June 30, 2019, $14,367 (June 30,
2018 – $nil) of the fair value of the warrants was included
in contributed surplus.
During the year
ended June 30, 2019, the Company expensed $1,413,919 in the fair
value of warrants as a result of the issuances which have been
recorded as share based compensation (June 30, 2018 –
$2,269,688).
16.
COMMITMENTS
(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 assets 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. During the year ended June 30, 2019,
the Company paid and expensed a total of $48,367 as an exclusivity
fee (June 30, 2018 – $42,550).
(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)
Commitments
The following is a
summary of the Company’s minimum operating lease obligations
for its premises due in future years.
|
2020
|
$
112,021
|
|
2021
|
112,991
|
|
2022
|
112,991
|
F-31
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
17.
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 $124,428 (US $94,000), with the balance of US $246,000
to be paid within 45 days. The Company did not make the subsequent
payment of US $246,000 and has recorded a loss on deposit in the
amount of $124,428.
18.
RELATED PARTY TRANSACTIONS
Related party
transactions for the year ended June 30, 2019, 2018 and 2017 and
balances as at those dates, not disclosed elsewhere in these
consolidated financial statements are:
a)
During the year
ended June 30, 2019, the Company received $nil (June 30, 2018
– $nil; June 30, 2017 – $2,420) in advances from
related parties, for working capital purposes;
b)
During the year
ended June 30, 2019, the Company purchased equipment valued at $nil
(June 30, 2018 – $44,439; June 30, 2017 – $nil) from a
corporation related by virtue of a common officer and a
director;
c)
During the year
ended June 30, 2019, the Company expensed $1,116,103 (June 30, 2018
– $508,399; June 30, 2017 – $nil), in fees payable to
officers and directors of the Company and in fees payable to a
corporation related by virtue of a common officer and director. As
at June 30, 2019, the Company has a prepaid expense amount paid to
such related corporation in the amount of $nil (June 30, 2018
– $74,147) and fees payable to officers and directors of the
Company of $546,653 (June 30, 2018 – $59,518);
and
d)
During the year
ended June 30, 2019, the Company expensed $nil (June 30, 2018
– $2,286,120; June 30, 2017 – $nil) in share based
compensation related to officers and directors of the
Company.
19.
FINANCIAL INSTRUMENTS AND RISK FACTORS
The
fair value hierarchy that reflects the significance of inputs used
in making fair value measurements is as follows:
Level 1:
quoted
prices in active markets for identical assets or
liabilities;
Level 2:
inputs
other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. from derived prices); and
Level 3:
inputs
for the asset or liability that are not based upon observable
market data.
Assets
are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
The fair values of
the Company’s financial instruments consisting of 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.
F-32
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
19.
FINANCIAL INSTRUMENTS AND RISK FACTORS (continued)
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, 2019:
Credit
Risk
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company is not exposed to any
significant credit risk.
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due within one year. The
Company’s approach to managing liquidity risk is to ensure,
as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Company’s reputation. As at June 30, 2019, 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 cash flow interest rate risk.
(ii) Foreign
Currency Risk
The
Company is exposed to foreign currency risk from fluctuations in
foreign exchange rates and the degree of volatility in these rates
due to the timing of their accounts payable balances. The risk is
mitigated by timely payment of creditors and monitoring of foreign
exchange fluctuations by management. As at June 30, 2019, 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.
F-33
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
20
. INCOME TAXES
Canadian
Current
Income Taxes
The major factors
that cause variations from the Company’s combined federal and
provincial statutory Canadian income tax rates were the
following:
|
|
June
30,
2019
|
June
30,
2018
|
June
30,
2017
|
|
Loss from Canadian
operations
|
$
(5,057,042
)
|
$
(4,860,659
)
|
$
(88,405
)
|
|
Combined Canadian statutory income
tax rates
|
26.50
%
|
26.50
%
|
26.50
%
|
|
Income tax recovery at statutory
income tax rates
|
$
(1,340,116
)
|
$
(1,288,075
)
|
$
(23,427
)
|
|
Increase (decrease) in taxes
resulting from:
|
|
|
|
|
Stock-based
compensation expense
|
374,689
|
913,565
|
-
|
|
Other
|
11,671
|
4,790
|
-
|
|
Unrecognized
benefit of non-capital losses
|
953,756
|
369,720
|
23,427
|
|
Provision for income
taxes
|
$
-
|
$
-
|
$
-
|
Deferred
Income Taxes
Deferred tax assets
have not been recognized in respect of the following deductible
temporary differences:
|
|
June
30,
2019
|
June
30,
2018
|
|
Amounts
related to tax loss carry forwards
|
$
8,467,000
|
$
4,868,000
|
A deferred tax
asset has not been recognized in respect of the above because it is
not probable that future taxable profits will be available against
which the temporary difference can be utilized.
Non-capital
Losses
As at June 30,
2019, the Company has accumulated non-capital tax loss carry
forwards for income tax purposes of carry-forward of approximately
$8,467,000 which may be applied against future Canadian taxable
income and expire as detailed below. No deferred taxes have been
recognized in these consolidated financial statements in respect of
the following as the probability that future taxable profit will
allow the deferred tax asset to be recognized cannot be predicted
at this time. The Company is in the process of filing its corporate
tax returns for the years ended June 30, 2015 to June 30, 2019. The
net operating losses for these years will not be available to
reduce future taxable income until the returns are
filed.
F-34
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
20
. INCOME TAXES (continued)
|
2027
|
$
536,000
|
|
2028
|
868,000
|
|
2029
|
911,000
|
|
2030
|
260,000
|
|
2031
|
251,000
|
|
2032
|
153,000
|
|
2033
|
25,000
|
|
2034
|
131,000
|
|
2035
|
177,000
|
|
2036
|
74,000
|
|
2037
|
88,000
|
|
2038
|
1,394,000
|
|
2039
|
3,599,000
|
|
|
$
8,467,000
|
United States
Current
Income Taxes
The major factors
that cause variations from the Company’s combined United
States federal and state level income tax rates were the
following:
|
|
June
30, 2019
|
June 30,
2018
|
|
|
$
|
$
|
|
Loss from US
operations
|
(772,238
)
|
(5,274
)
|
|
Combined federal and
state level taxes
|
26.64
%
|
26.21
%
|
|
Expected income tax
payable
|
(205,724
)
|
(1,383
)
|
|
Temporary
difference, Equipment
|
34,826
|
(36,285
)
|
|
Unrecognized benefit
of non-capital losses
|
170,898
|
37,668
|
|
Provision for income
taxes (recovery)
|
-
|
-
|
Deferred
Income Taxes
Deferred tax assets
have not been recognized in respect of the following United States
deductible temporary differences:
|
|
June 30, 2019
|
June
30, 2018
|
|
Amounts
related to tax loss carry forwards
|
$
778,000
|
$
144,000
|
A deferred tax
asset has not been recognized in respect of the above because it is
not probable that future taxable profits will be available against
which the temporary difference can be utilized.
F-35
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2019, 2018 and 2017
(Expressed in
Canadian Dollars)
20
. INCOME TAXES (continued)
Non-capital
Losses
As at June 30,
2019, the Company has accumulated non-capital tax loss carry
forwards for income tax purposes of carry-forward of approximately
$778,000 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
|
$
144,000
|
|
2039
|
634,000
|
|
|
$
778,000
|
|
|
|
21.
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, 2019, the Company’s
shareholders’ equity was $362,570 (June 30, 2018 –
$4,555,271). 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.
22.
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.
23.
SUBSEQUENT
EVENTS
On August 14, 2019,
the Company closed a non-brokered private placement of unsecured
subordinated convertible debenture units of the Company for gross
proceeds of $713,000.
On October 10,
2019, the Company, through its wholly-owned subsidiary Cordova CA
Holdings, LLC (“CA Holdings”), entered into a
non-binding letter of intent (the “LOI”) to purchase
real assets and intellectual property (the “Assets”) of
a third party Los Angeles-based cannabis venture (the
“Transaction). Pursuant to the terms of the LOI, Cordova has
agreed to issue a total of ten million (10,000,000) common shares
of the Company, valued at US $2,000,000, to the vendor in exchange
for the Assets. Post closing of the Transaction, the vendors would
own approximately twenty percent of the outstanding common shares
of the Company. Furthermore, Cordova has also agreed to commit a
further US $1,500,000 to fund the required capital expenditures and
efforts of the Operators to advance the operations in
California.
On November 7, 2019
and in connection with the LOI, CA Holdings made a down payment in
the amount of US $300,000 (the “Down Payment”). In
connection with the LOI, CA Holdings received a promissory note
(the “Promissory Note”) in exchange for the Down
Payment for the principal amount of US $300,000, due six months
from the date of issuance bearing interest at a rate of 5% per
annum. The Promissory Note has been personally guaranteed by the
vendors selling the Assets to CA Holdings (the “Personal
Guarantee”). CA Holdings financed the Down Payment through a
loan (the “Loan”) from a group of investors (the
“Syndicate”), due six (6) months from the date of
issuance bearing interest at a rate of 15% per annum. Furthermore,
CA Holdings transferred the Personal Guarantee to the benefit of
the Syndicate in relation to the Loan. The Syndicate has a right to
settle the Loan on the same terms that CA Holdings finances the
balance of the Cash Commitment. The Syndicate also received a total
upfront fee of US $5,600 for providing the Loan.
F-36
TABLE OF CONTENTS
Part IPart IIPart IIINote 14, 15Note 16(a)Note 9, 11, 12)Note 11, 12)