Blueprint
Exhibit 99.2
CordovaCann Corp.
(formerly
LiveReel Media Corporation)
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2018
Prepared
as at February 26, 2019
Index
Management’s Discussion and Analysis
The following discussion and analysis by management of the
financial results and condition of CordovaCann Corp. (formerly
LiveReel Media Corporation) for the three and six months ended
December 31, 2018 should be read in conjunction with the unaudited
condensed interim consolidated financial statements for the three
and six months ended December 31, 2018. The unaudited condensed
interim consolidated financial statements and the financial
information herein have been prepared in accordance with
International Financial Reporting Standards (“IFRS”),
as issued by the International Accounting Standards Board
(“IASB”).
This
management discussion and analysis is prepared by management as at
February 26, 2019.
In this
report, the words “us”, “we”
“our”, the “Company” and
“CordovaCann” have the same meaning unless otherwise
stated and refer to CordovaCann Corp. and its
subsidiaries.
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 8 King Street East, Suite 1010, Toronto,
Ontario, M5C 1B5.
The Company’s common shares
(the “Common Shares”) currently trade on the Canadian
Securities Exchange under the symbol “CDVA” and in the
United States on the OTCQB under the symbol
“LVRLF”.
On
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
September 4, 2018, the Company incorporated Cordova Investments
Canada, Inc., a wholly-owned Ontario-based subsidiary
(“Cordova Investments Canada”), to act as the
Company’s parent holding company in Canada.
On
November 6, 2018, the Company incorporated Cordova CA Holdings,
LLC, a California limited liability company (“Cordova
CA”), as a wholly-owned subsidiary of CordovaCann USA to act
as the Company’s primary holding subsidiary in the State of
California.
On
November 6, 2018, the Company incorporated CDVA Enterprises, LLC, a
California limited liability company (“CDVA
Enterprises”), as a wholly-owned subsidiary of CordovaCann
USA, to act as the Company’s primary operating subsidiary in
the State of California.
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, with lease payments to be received monthly.
CordovaCann is in discussions to provide consulting services to
Clearview Industries to assist in initiatives, including, but not
limited to, production and processing facility design, product
formulation and packaging consulting (the “Consulting
Services”). On June 7, 2018, Cordova CO entered into a
revolving promissory note (“Promissory Note”) with
Clearview Industries for up to the principal sum of USD $50,000 for
working capital purposes. During the three and six month period
ended December 31, 2018, the Promissory Note was amended to allow
the customer to draw up to the principal sum of USD $100,000. The
revolving note is unsecured, bearing interest at 8% per annum and
due twelve (12) months from the date of issuance.
Summary of Oregon Transaction
On
April 4, 2018, Cordova OR acquired a membership interest in
cannabis-related assets utilized by Farms of the Future, Inc., an
Oregon corporation (“FOTF”), which holds a Mixed Use
Tier II Production License issued by the Oregon Liquor Control
Commission. The assets include six (6) acres of real estate in
Clackamas County, a 3,400 square foot cultivation facility and
related equipment used in cannabis production utilized in
connection with FOTF’s cannabis business (the “Oregon
Assets”). Under the transaction, Cordova OR acquired a 27.5%
membership interest in Cordova OR Operations, LLC (“OR
Operations”) for USD $400,000 and has agreed to pay an
additional USD $1,050,000 on or before April 3, 2019 to acquire the
remaining 72.5% membership interest in OR Operations which has full
and clear title to the Oregon Assets. Under an equipment lease and
a lease agreement, OR Operations leases the Oregon Assets to FOTF,
with lease payments to be received monthly. CordovaCann is in
discussions to provide additional consulting services to FOTF.
Furthermore, Cordova OR has provided advances to OR Operations to
fund the purchase of additional assets that will also be utilized
by FOTF to expand its operations to 36,000 square feet of
cultivation and to add a processing facility on the premises. The
advances are unsecured, bearing interest at 8% per annum and due
twelve (12) months from the date of issuance.
Summary of the Proposed Transactions in California
On
March 7, 2018, CordovaCann entered into a memorandum of
understanding with Humboldt Healthcare, LLC (“Humboldt
Healthcare”), which grants CordovaCann exclusivity on a
transaction to acquire a majority stake in the real estate and
intellectual property assets owned by Humboldt Healthcare and
utilized by Humboldt Healthcare in connection with the recreational
cannabis market in the state of California (the “Humboldt
Healthcare Assets”). The real estate is located in Humboldt
County, California and would allow for over 100,000 square feet of
canopy for cannabis production and processing. Under the terms of
the memorandum of understanding, CordovaCann has agreed to pay
Humboldt Healthcare up to USD $100,000 for such exclusivity. This
transaction would allow CordovaCann to purchase 100% of the
Humboldt Healthcare Assets for USD $8,000,000, or to purchase 51%
of the Humboldt Healthcare Assets for USD $5,080,000 with the
remaining 49% interest continuing to be held by Humboldt
Healthcare. Under the 51% partnership purchase method, the Company
would be entitled to a USD $1,000,000 reimbursement from the
operating partnership under mutually agreeable terms. If Humboldt
Healthcare were to continue to hold an interest in the Humboldt
Healthcare Assets, CordovaCann and Humboldt Healthcare would
contribute to and operate the Humboldt Healthcare Assets under a
joint venture structure. The exclusivity period to affect the
transaction shall remain in effect until the agreement is
terminated by either party
On
October 31, 2018, the Company announced that it has agreed to
acquire land and assets in Covelo, California (the “Covelo
Assets”) for the total purchase price of USD $6,200,000. The
Covelo Assets to be acquired include 276 acres of contiguous land
parcels suitable for cannabis cultivation and an additional 14
acres of industrial-zoned contiguous land parcels that may also be
utilized for cultivation. The transactions as contemplated are
expected to close on or around March 31, 2019 and are subject to
standard terms and conditions of transactions of this nature. In
conjunction with the purchase of the Covelo Assets, CordovaCann has
also exclusively engaged a team of experienced operators that have
worked in the northern California cannabis market for well over a
decade who will utilize the Covelo Assets for cultivation,
processing, manufacturing and distribution of cannabis
products.
Summary of the Proposed Transaction in Washington
On
November 9, 2018, the Company entered into a letter of intent to
acquire cannabis-related assets (the “Washington
Assets”) utilized by Blue Roots LLC (“Blue
Roots”) for a total purchase price of USD $3,500,000. Blue
Roots is an owner and operator of a Marijuana Producer Tier II
license issued by the Washington State Liquor and Cannabis Board.
Under the terms of the agreement, the Company has agreed to
purchase the Washington Assets in exchange for a cash payment of
USD $3,500,000 and the vendors or their designee retaining a 30%
carried interest in the Washington Assets, all due on closing. The
transaction as contemplated is expected to close on or before March
31, 2019 and is subject to certain closing conditions, including
but not limited to satisfactory due diligence and the approval of
Company’s Board of Directors.
Summary of the Proposed Transaction in Nevada
On
February 1, 2018, CordovaCann entered into a letter of intent with
Forever Green, LLC, a Nevada limited liability company
(“Forever Green”), which holds a Medical Marijuana
Establishment license issued by the Nevada State Department of
Taxation. Under the terms of the letter of intent, CordovaCann will
license certain Intellectual Property to Forever Green so that
Forever Green may manufacture, package, and distribute
cannabis-infused end products for recreational use in the State of
Nevada in accordance with state and local laws. CordovaCann will
receive a royalty and/or packaging and labeling fees from the sale
of products that utilize CordovaCann’s Intellectual Property.
CordovaCann and Forever Green are currently in the process of
negotiating definitive agreements to formalize the terms of the
transaction. CordovaCann is also in discussions to provide Forever
Green with financing for working capital and growth plans as well
as to provide certain Consulting Services to Forever
Green.
Summary of Canadian Partnership and 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
advanced $500,000 for the purchase of 500,000 convertible preferred
shares of NWN at a price of $1.00 per preferred share. Each
preferred share is convertible into one common share of NWN,
subject to appropriate adjustments for any stock splits,
consolidations or other recapitalizations. The Company also
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.
Summary of Canadian Investment in Alterna Medicinals
Canada
On
September 5, 2018, the Company announced that it had entered into a
letter of intent to acquire all of the issued and outstanding
common shares of 2366607 Ontario Inc. d/b/a Alterna Medicinals
Canada (“Alterna”) for the total purchase price of
$1,693,750 Canadian Dollars and 1,204,167 Common Shares of the
Company, contingent upon Alterna obtaining receipt of a License to
Cultivate under Health Canada’s Access to Cannabis for
Medical Purposes Regulations (ACMPR) for Alterna’s facility
in Listowel, Ontario. Furthermore, the Company also agreed to loan
up to $1 million Canadian Dollars to Alterna to fund the required
capital expenditures to advance the application process for such
License to Cultivate. CordovaCann and the vendor are currently in
the process of negotiating definitive agreements to formalize the
terms of the transaction.
Selected Financings
On
October 19, 2017 and pursuant to a debt conversion agreement,
CordovaCann issued 7,681,110 Common Shares and fully settled
$384,055 owing under the Shareholder Loan at a price of $0.05 per
Common Share.
On
December 14, 2017 and in connection with a private placement,
CordovaCann issued 5,532,500 Common Shares at a price of $0.10 per
Common Share for total gross proceeds of $553,250; of which
$533,250 was received in cash and $20,000 was received in services
provided by a consultant.
On
March 12, 2018 and in connection with a private placement,
CordovaCann issued 890,074 Common Shares at a price of $1.08 per
Common Share for total gross proceeds of $959,251; all of which was
received in cash.
On June
12, 2018 and June 15, 2018 in connection with a private placement,
CordovaCann issued 2,390,800 and 20,000 Common Shares,
respectively, at a price of $1.95 per Common Share for total gross
proceeds of $4,703,025; of which $4,400,163 was received in cash
and $302,862 was received in services provided by
consultants.
The
following table summarizes financial information for the
2nd
quarter of fiscal 2019 and the preceding seven
quarters:
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
Revenue1
|
-
|
-
|
(8,819)
|
8,819
|
-
|
-
|
-
|
-
|
Gain
(Loss) from continuing operations
|
(1,477,901)
|
(960,879)
|
(2,141,559)
|
(2,305,616)
|
(393,957)
|
(24,801)
|
(27,150)
|
(20,962)
|
Net
loss per share – basic and diluted
|
0.037
|
0.024
|
0.065
|
0.062
|
0.013
|
0.001
|
0.001
|
0.001
|
1 During the three month period ended June 30, 2018, the
Company generated $15,340 in revenue from the rental of
cannabis-related equipment, however, the Company has not yet
recorded such revenue and has furthermore reversed the revenue
previously recorded during the three month period ended March 31,
2018 pending a determination that collectability is reasonably
assured. During the three and six month period ended December 31,
2018, the Company generated $20,628 and $40,388, respectively, in
revenue from the rental of cannabis-related equipment that has also
not been recorded pending such determination of
collectability.
There
were 40,036,228 Common Shares issued and outstanding as at December
31, 2018 and as at February 26, 2019, being the date of this
report. There were 1,750,000 options and 9,400,000 warrants issued
and outstanding as at December 31, 2018 and 1,750,000 options and
8,875,000 warrants issued and outstanding as at February 26,
2019.
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 – Issuers with U.S. Marijuana-Related
Activities) (“Staff Notice 51-352”), the assets
and interests held by CordovaCann in Colorado are classified as
“ancillary” involvement in the U.S. cannabis
industry.
Colorado
authorized the cultivation, possession and distribution of cannabis
by certain licensed Colorado cannabis businesses. The Colorado
Marijuana Enforcement Division regulates Colorado’s cannabis
regulatory program. CordovaCann is advised by U.S. legal counsel
and/or other advisors in connection with Colorado’s cannabis
regulatory program. CordovaCann only engages in transactions with
Colorado cannabis businesses that hold licenses that are in good
standing to cultivate, possess and/or distribute cannabis in
Colorado in compliance with Colorado’s cannabis regulatory
program. To the extent required by Colorado’s cannabis
regulatory program, CordovaCann has fully disclosed and/or
registered each financial interest CordovaCann holds in such
Colorado cannabis business. As of the date hereof and to the best
of CordovaCann’s knowledge, CordovaCann and Clearview
Industries are in compliance with Colorado’s cannabis
regulatory program.
Oregon’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests held by
CordovaCann in Oregon are classified as “ancillary”
involvement in the U.S. cannabis industry.
Oregon
authorized the cultivation, possession and distribution of cannabis
by certain licensed Oregon cannabis businesses. The Oregon Liquor
Control Commission regulates Oregon’s cannabis regulatory
program. CordovaCann is advised by U.S. legal counsel and/or other
advisors in connection with Oregon’s cannabis regulatory
program. CordovaCann only engages in transactions with Oregon
cannabis businesses that hold licenses that are in good standing to
cultivate, possess and/or distribute cannabis in Oregon in
compliance with Oregon’s cannabis regulatory program. To the
extent required by Oregon’s cannabis regulatory program,
CordovaCann has fully disclosed and/or registered each financial
interest CordovaCann holds in such Oregon cannabis business. As of
the date hereof and to the best of CordovaCann’s knowledge,
CordovaCann and FOTF are in compliance with Oregon’s cannabis
regulatory program.
California’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests proposed
to be held by CordovaCann in California are classified as
“ancillary” involvement in the U.S. cannabis
industry.
California
authorized the cultivation, possession and distribution of cannabis
by certain licensed California cannabis businesses. The California
Bureau of Cannabis Control regulates California’s cannabis
regulatory program. CordovaCann is advised by U.S. legal counsel
and/or other advisors in connection with California’s
cannabis regulatory program. CordovaCann only engages in
transactions with California cannabis businesses that hold licenses
that are in good standing to cultivate, possess and/or distribute
cannabis in California in compliance with California’s
cannabis regulatory program. To the extent required by
California’s cannabis regulatory program, CordovaCann has
fully disclosed and/or registered each financial interest
CordovaCann holds in such California cannabis business. As of the
date hereof and to the best of CordovaCann’s knowledge,
CordovaCann and Humboldt Healthcare are in compliance with
California’s cannabis regulatory program.
Washington’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests proposed
to be held by CordovaCann in Washington are classified as
“ancillary” involvement in the U.S. cannabis
industry.
Washington
authorized the cultivation, possession and distribution of cannabis
by certain licensed Washington cannabis businesses. The Washington
State Liquor and Cannabis Board regulates Washington’s
cannabis regulatory program. CordovaCann is advised by U.S. legal
counsel and/or other advisors in connection with Washington’s
cannabis regulatory program. CordovaCann only engages in
transactions with Washington cannabis businesses that hold licenses
that are in good standing to cultivate, possess and/or distribute
cannabis in Washington in compliance with Washington’s
cannabis regulatory program. To the extent required by
Washington’s cannabis regulatory program, CordovaCann has
fully disclosed and/or registered each financial interest
CordovaCann holds in such Washington cannabis business. As of the
date hereof and to the best of CordovaCann’s knowledge,
CordovaCann is in compliance with Washington’s cannabis
regulatory program.
Nevada’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests proposed
to be held by CordovaCann in Nevada are classified as
“ancillary” involvement in the U.S. cannabis
industry.
Nevada
authorized the cultivation, possession and distribution of cannabis
by certain licensed Nevada cannabis businesses. The Nevada
Department of Taxation regulates Nevada’s cannabis regulatory
program. CordovaCann is advised by U.S. legal counsel and/or other
advisors in connection with Nevada’s cannabis regulatory
program. CordovaCann only engages in transactions with Nevada
cannabis businesses that hold licenses that are in good standing to
cultivate, possess and/or distribute cannabis in Nevada in
compliance with Nevada’s cannabis regulatory program. To the
extent required by Nevada’s cannabis regulatory program,
CordovaCann has fully disclosed and/or registered each financial
interest CordovaCann holds in such Nevada cannabis business. As of
the date hereof and to the best of CordovaCann’s knowledge,
CordovaCann is in compliance with Nevada’s cannabis
regulatory program.
The following are certain risk factors relating to the business
carried on by the Company that prospective holders of Common Shares
should carefully consider.
Risks specifically related to the United States regulatory
system.
The Company’s investments operate in a new industry which is
highly regulated, highly competitive and evolving rapidly. As such,
new risks may emerge, and management may not be able to predict all
such risks or be able to predict how such risks may result in
actual results differing from the results contained in any
forward-looking statements.
The Company’s investments incur ongoing costs and obligations
related to regulatory compliance. Failure to comply with
regulations may result in additional costs for corrective measures,
penalties or in restrictions of operations. In addition, changes in
regulations, more vigorous enforcement thereof or other
unanticipated events could require extensive changes to operations,
increased compliance costs or give rise to material liabilities,
which could have a material adverse effect on the business, results
of operations and financial condition of the Company’s
investments and, therefore, on the Company’s prospective
returns. Further, the Company may be subject to a variety of claims
and lawsuits. Adverse outcomes in some or all of these claims may
result in significant monetary damages or injunctive relief that
could adversely affect our ability to conduct our business.
Litigation and other claims are subject to inherent uncertainties
and management’s view of these matters may change in the
future. A material adverse impact on our financial statements could
also occur for the period in which the effect of an unfavorable
final outcome becomes probable and reasonably capable of being
estimated. The industry is subject to extensive controls and
regulations which may significantly affect the financial condition
of market participants. The marketability of any product may be
affected by numerous factors that are beyond the control of the
Company’s investments and which cannot be predicted, such as
changes to government regulations, including those relating to
taxes and other government levies which may be imposed. Changes in
government levies, including taxes, could reduce the
Company’s investments’ earnings and could make future
capital investments or the Company’s investments’
operations uneconomic. The industry is also subject to numerous
legal challenges, which may significantly affect the financial
condition of market participants and which cannot be reliably
predicted.
CordovaCann is expected to continue to derive a portion of its
revenues from the cannabis industry in certain states of the United
States, which is illegal under United
States federal law. While the
Company’s business activities are compliant with applicable
state and local laws, such activities remain illegal under United
States federal law. CordovaCann is involved in the cannabis
industry in the United States where local and state laws permit
such activities or provide limited defenses to criminal
prosecutions. The enforcement of relevant laws is a significant
risk.
Thirty of the states in the United States have enacted
comprehensive legislation to regulate the sale and use of medical
cannabis. Notwithstanding the permissive regulatory environment of
medical cannabis at the state level, cannabis continues to be
categorized as a Schedule 1 controlled substance under the United
States Controlled Substances Act of 1970. As such, cannabis-related
practices or activities, including without limitation, the
cultivation, manufacture, importation, possession, use or
distribution of cannabis, are illegal under United States federal
law. Strict compliance with state laws with respect to cannabis
will neither absolve the Company of liability under United States
federal law, nor will it provide a defense to any federal
proceeding which may be brought against the Company. Any such
proceedings brought against the Company may adversely affect the
Company’s operations and financial performance.
Because of the conflicting views between state legislatures and the
federal government of the United States regarding cannabis,
investments in cannabis businesses in the United States are subject
to inconsistent legislation, regulation, and enforcement. Unless
and until the United States Congress amends the United States
Controlled Substances Act with respect to cannabis or the Drug
Enforcement Agency reschedules or de-schedules cannabis (and as to
the timing or scope of any such potential amendments there can be
no assurance), there is a risk that federal authorities may enforce
current federal law, which would adversely affect the current and
future investments of the Company in the United States. As a result
of the tension between state and federal law, there are a number of
risks associated with the Company’s existing and future
investments in the United States.
For the reasons set forth above, the Company’s existing
interests in the United States cannabis market may become the
subject of heightened scrutiny by regulators, stock exchanges,
clearing agencies and other authorities in Canada. It has been
reported by certain publications in Canada that the Canadian
Depository for Securities Limited may implement policies that would
see its subsidiary, CDS Clearing and Depository Services Inc.
(“CDS”), refuse to settle trades for cannabis 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 five states
that have legalized the medical and/or recreational use of
cannabis, being Oregon, Colorado, California, Washington and
Nevada. Over half of the U.S. states have enacted legislation to
legalize and regulate the sale and use of medical cannabis.
However, the U.S. federal government has not enacted similar
legislation. As such, the cultivation, manufacture, distribution,
sale and use of cannabis remains illegal under U.S. federal
law.
Further, on January 4, 2018, U.S. Attorney General, Jeff Sessions,
formally rescinded the standing DOJ federal policy guidance
governing enforcement of marijuana laws, as set forth in a series
of memos and guidance from 2009-2014, principally the Cole
Memorandum. The Cole Memorandum generally directed U.S. Attorneys
not to enforce the federal marijuana laws against actors who are
compliant with state laws, provided enumerated enforcement
priorities were not implicated. The rescission of this memo and
other Obama-era prosecutorial guidance did not create a change in
federal law as the Cole Memorandums were never legally binding;
however, the revocation removed the DOJ’s guidance to U.S.
Attorneys that state-regulated cannabis industries substantively in
compliance with the Cole Memorandum’s guidelines should not
be a prosecutorial priority. The federal government of the United
States has always reserved the right to enforce federal law
regarding the sale and disbursement of medical or recreational
marijuana, even if state law sanctioned such sale and disbursement.
Although the rescission of the above memorandums does not
necessarily indicate that marijuana industry prosecutions are now
affirmatively a priority for the DOJ, there can be no assurance
that the federal government will not enforce such laws in the
future.
Additionally, there can be no assurance that state laws legalizing
and regulating the sale and use of cannabis will not be repealed or
overturned, or that local governmental authorities will not limit
the applicability of state laws within their respective
jurisdictions. It is also important to note that local and city
ordinances may strictly limit and/or restrict the distribution of
cannabis in a manner that could make it extremely difficult or
impossible to transact business in the cannabis industry. If the
federal government begins to enforce federal laws relating to
cannabis in states where the sale and use of cannabis is currently
legal, or if existing state laws are repealed or curtailed, the
Company’s investments in such businesses would be materially
and adversely affected notwithstanding the fact that the Company is
not directly engaged in the sale or distribution of cannabis.
Federal actions against any individual or entity engaged in the
marijuana industry or a substantial repeal of marijuana related
legislation could adversely affect the Company, its business and
its investments.
In light of the political and regulatory uncertainty surrounding
the treatment of U.S. cannabis-related activities, including the
rescission of the Cole Memorandum discussed above, on February 8,
2018, the CSA published Staff Notice 51-352 setting out the
CSA’s disclosure expectations for specific risks facing
companies with cannabis-related activities in the United States.
Staff Notice 51-352 confirms that a disclosure-based approach
remains appropriate for companies with U.S. cannabis-related
activities. Staff Notice 51-352 includes additional disclosure
expectations that apply to all companies with U.S. cannabis-related
activities, including those with direct and indirect involvement in
the cultivation and distribution of cannabis, as well as companies
that provide goods and services to third parties involved in the
U.S. cannabis industry. The Company views Staff Notice 51-352
favourably, as it provides increased transparency and greater
certainty regarding the views of the exchanges and the regulators
regarding the Company’s existing operations and strategic
business plan as well as the Company’s ability to pursue
further investments and opportunities in the United
States.
The Company’s investments in the United States are subject to
applicable anti-money laundering laws and regulations.
The Company is subject to a variety of laws and regulations
domestically and in the United States that involve money
laundering, financial recordkeeping and proceeds of crime,
including the U.S. Currency and Foreign Transactions Reporting Act
of 1970 (commonly known as the Bank Secrecy Act), as amended by
Title III of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act (Canada), as amended and the rules and
regulations thereunder, and any related or similar rules,
regulations or guidelines, issued, administered or enforced by
governmental authorities in the United States and Canada. Further,
under U.S. federal law, banks or other financial institutions that
provide a cannabis business with a checking account, debit or
credit card, small business loan, or any other service could be
found guilty of money laundering, aiding and abetting, or
conspiracy.
Despite these laws, FinCEN issued a memorandum on February 14, 2014
outlining the pathways for financial institutions to bank marijuana
businesses in compliance with federal enforcement priorities. The
FinCEN Memorandum states that in some circumstances, it is
permissible for banks to provide services to cannabis-related
businesses without risking prosecution for violation of federal
money laundering laws. It refers to supplementary guidance that
Deputy Attorney General Cole issued to federal prosecutors relating
to the prosecution of money laundering offenses predicated on
cannabis-related violations of the United States Controlled
Substances Act on the same day (the “2014 Cole Memo”).
The 2014 Cole Memo has been rescinded as of January 4, 2018, along
with the Cole Memorandum, removing guidance that enforcement of
applicable financial crimes was not a DOJ priority.
Attorney General Sessions’ revocation of the Cole Memorandum
and the 2014 Cole Memo has not affected the status of the FinCEN
Memorandum, nor has the Department of the Treasury given any
indication that it intends to rescind the FinCEN Memorandum itself.
Though it was originally intended for the 2014 Cole Memo and the
FinCEN Memorandum to work in tandem, the FinCEN Memorandum appears
to remain in effect as a standalone document which explicitly lists
the eight enforcement priorities originally cited in the rescinded
Cole Memorandum. Although the FinCEN Memorandum remains intact,
indicating that the Department of the Treasury and FinCEN intend to
continue abiding by its guidance, it is unclear whether the current
administration will continue to follow the guidelines of the FinCEN
Memorandum.
The Company’s investments, and any proceeds thereof, are
considered proceeds of crime due to the fact that cannabis remains
illegal federally in the United States. This restricts the ability of the Company to
declare or pay dividends, effect other distributions or
subsequently repatriate such funds back to Canada. Furthermore,
while the Company has no current intention to declare or pay
dividends on its Common Shares in the foreseeable future, the
Company may decide or be required to suspend declaring or paying
dividends without advance notice and for an indefinite period of
time.
The Company’s investments in the United States may be subject
to heightened scrutiny by Canadian authorities.
For the reasons set forth above, the Company’s existing
investments in the United States, and any future investments, may
become the subject of heightened scrutiny by regulators, stock
exchanges and other authorities in Canada. As a result, the Company
may be subject to significant direct and indirect interaction with
public officials. There can be no assurance that this heightened
scrutiny will not in turn lead to the imposition of certain
restrictions on the Company’s ability to invest in the United
States or any other jurisdiction, in addition to those described
herein.
Although the TMX MOU has confirmed that there is currently no CDS
ban on the clearing of securities of companies with
cannabis-related activities in the United States, there can be no
guarantee that this approach to regulation will continue in the
future. If such a ban were to be implemented, it would have a
material adverse effect on the ability of holders of Common Shares
to make and settle trades. In particular, the Common Shares would
become highly illiquid as until an alternative was implemented,
investors would have no ability to effect a trade of the Common
Shares through the facilities of a stock exchange.
Change in laws, regulations and guidelines.
Each investment’s current and proposed operations are subject
to a variety of laws, regulations and guidelines, including, but
not limited to, those relating to the manufacture, management,
transportation, storage and disposal of cannabis, as well as laws
and regulations relating to health and safety (including those for
consumable products), the conduct of operations and the protection
of the environment. These laws and regulations are broad in scope
and subject to evolving interpretations. If any changes to such
laws, regulations and guidelines occur, which are matters beyond
the control of the Company, the Company may incur significant costs
in complying with such changes or it may be unable to comply
therewith, which in turn may result in a material adverse effect on
the Company’s business, financial condition and results of
operation. In addition, violations of these laws, or allegations of
such violations, could disrupt certain aspects of the
Company’s business plan and result in a material adverse
effect on certain aspects of its planned operations.
Changes in regulations, more vigorous enforcement thereof, the
imposition of restrictions on the Company’s ability to
operate in the U.S. as a result of the federally illegal nature of
cannabis in the U.S. or other unanticipated events could require
extensive changes to the Company’s operations, increased
compliance costs or give rise to material liabilities, which could
have a material adverse effect on the business, results of
operations and financial condition of the Company.
United States tax residence of the Company.
The Company, which is and will continue to be a Canadian
corporation generally would be classified as a non-United States
corporation (and, therefore, as a non-United States tax resident)
under general rules of United States federal income taxation.
Section 7874 of the United States Tax Code, however, contains rules
that can cause a non-United States corporation to be taxed as a
United States corporation for United States federal income tax
purposes. The rules described in this paragraph are relatively new,
their application is complex and there is little guidance regarding
their application. Under section 7874 of the United States Tax
Code, a corporation created or organized outside the United States
(i.e., a non-United States corporation) will nevertheless be
treated as a United States corporation for United States federal
income tax purposes (such treatment is referred to as an
“Inversion”) if each of the following three conditions
are met (i) the non-United States corporation acquires, directly or
indirectly, or is treated as acquiring under applicable United
States Treasury Regulations, substantially all of the assets held,
directly or indirectly, by a United States corporation, (ii) after
the acquisition, the former stockholders of the acquired United
States corporation hold at least 80% (by vote or value) of the
shares of the non-United States corporation by reason of holding
shares of the United States acquired corporation, and (iii) after
the acquisition, the non-United States corporation’s expanded
affiliated group does not have substantial business activities in
the non-United States corporation’s country of organization
or incorporation when compared to the expanded affiliated
group’s total business activities (clauses (i) – (iii),
collectively, the “Inversion Conditions”). For this
purpose, “expanded affiliated group” means a group of
corporations where (i) the non-United States corporation owns stock
representing more than 50% of the vote and value of at least one
member of the expanded affiliated group, and (ii) stock
representing more than 50% of the vote and value of each member is
owned by other members of the group. The definition of an
“expanded affiliated group” includes partnerships where
one or more members of the expanded affiliated group own more than
50% (by vote and value) of the interests of the
partnership.
If the Company is treated as a United States corporation for United
States federal income tax purposes under section 7874 of the United
States Tax Code (which is considered likely, although no definitive
determination of this matter has been reached, and no tax ruling
has been sought or obtained in this regard), the Company would be
considered a United States tax resident and subject to United
States federal income tax on its worldwide income. However, for
Canadian tax purposes, the Company is expected, regardless of any
application of section 7874 of the United States Tax Code, to be
treated as a Canadian resident Company (as defined in the Tax Act)
for Canadian income tax purposes. As a result, if the Company is
considered a United States corporation under section 7874, the
Company would be subject to taxation both in Canada and the United
States which could have a material adverse effect on its financial
condition and results of operations. In addition, any distributions
paid by the Company to a holder of Common Shares may be subject to
United States withholding tax as well as any applicable Canadian
withholding tax. A Non-United States Holder may also be subject to
United States tax, including withholding tax, on disposition of its
Common Shares.
Passive Foreign Investment Company.
There is a risk that the Company may, in the future, be construed
as a passive foreign investment Company (“PFIC”). If
the Company is a PFIC, its shareholders in the U.S. are likely
subject to adverse U.S. tax consequences. Under U.S. federal income
tax laws, if a Company is a PFIC for any year, it could have
adverse U.S. federal income tax consequences to a U.S. shareholder
with respect to its investment in 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.
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.
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.
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.
Bankruptcy or insolvency of investments.
There is no guarantee that the Company will be able to effectively
enforce any interests it may have in the Company’s
investments. A bankruptcy or other similar event related to an
investment of CordovaCann that precludes a party from performing
its obligations under an agreement may have a material adverse
effect on the Company. Furthermore, as an equity investor, should
an investment have insufficient assets to pay its liabilities, it
is possible that other liabilities will be satisfied prior to the
liabilities owed to the Company. In addition, bankruptcy or other
similar proceedings are often a complex and lengthy process, the
outcome of which may be uncertain and could result in a material
adverse effect on the Company.
Research and market development.
Although the Company, itself and through its investments, is
committed to researching and developing new markets and products
and improving existing products, there can be no assurances that
such research and market development activities will prove
profitable or that the resulting markets and/or products, if any,
will be commercially viable or successfully produced and
marketed.
The Company must rely largely on its own market research to
forecast sales as detailed forecasts are not generally obtainable
from other sources at this early stage of the medical and
recreational cannabis industry in North America.
The Company is operating its business in a relatively new medical
and recreational cannabis industry and market. Accordingly, there
are no assurances that this industry and market will continue to
exist or grow as currently estimated or anticipated, or function
and evolve in a manner consistent with management’s
expectations and assumptions. Any event or circumstance that
affects the recreational or medical cannabis industry or market
could have a material adverse effect on the Company’s
business, financial condition and results of operations. Due to the
early stage of the regulated cannabis industry, forecasts regarding
the size of the industry and the sales of products by the
Company’s investments are inherently difficult to prepare
with a high degree of accuracy and reliability. A failure in the
demand for products to materialize as a result of competition,
technological change or other factors could have a material adverse
effect on the business, results of operations and financial
condition of the Company’s investments, and consequently, the
Company.
Reliance on management.
The success of the Company is dependent upon the ability,
expertise, judgment, discretion and good faith of its senior
management. Qualified individuals are in high demand, and the
Company may incur significant costs to attract and retain them. In
addition, the Company’s lean management structure may be
strained as the Company pursues growth opportunities in the future.
The loss of the services of such individuals or an inability to
attract other suitably qualified persons when needed, could have a
material adverse effect on the Company’s ability to execute
on its business plan and strategy, and the Company may be unable to
find adequate replacements on a timely basis, or at
all.
CordovaCann’s future success depends substantially on the
continued services of its executive officers, consultants and
advisors. If one or more of its executive officers or key personnel
were unable or unwilling to continue in their present positions,
the Company might not be able to replace them easily or at all. In
addition, if any of its executive officers or key employees joins a
competitor or forms a competing Company, the Company may lose
know-how, key professionals and staff members. These executive
officers and key employees could compete with and take customers
away which could materially and adversely affect the
Company’s prospects, financial performance and results of
operations.
Operation permits and authorizations.
The Company’s investments may not be able to obtain or
maintain the necessary licenses, permits, authorizations or
accreditations, or may only be able to do so at great cost, to
operate their respective businesses. In addition, the
Company’s investments may not be able to comply fully with
the wide variety of laws and regulations applicable to the cannabis
industry. Failure to comply with or to obtain the necessary
licenses, permits, authorizations or accreditations could result in
restrictions on an investment’s ability to operate in the
cannabis industry, which could have a material adverse effect on
the Company’s business.
Litigation.
CordovaCann may become party to litigation from time to time in the
ordinary course of business which could adversely affect its
business. Should any litigation in which the Company becomes
involved be determined against the Company, such a decision could
adversely affect the Company’s ability to continue operating
and the market price for the Common Shares and could use
significant resources. Even if the Company is involved in
litigation and wins, litigation can redirect significant resources.
Litigation may also create a negative perception of the
Company.
On January 23, 2019, a subsidiary of the Company was identified as
a defendant to a four count complaint in the District Court of
Denver County, Colorado (Case No. 2019CV30284) alleging trademark
infringement and other claims for relief for unspecified damages.
The Company intends on defending such complaint, however, it is not
practical to estimate the potential effect of this complaint at
such time. There can be no assurance that the outcome of this
complaint would not have a material adverse effect on the business,
results of operations and financial condition of the
Company.
Liability, enforcement complaints, etc.
CordovaCann’s participation in the cannabis industry may lead
to litigation, formal or informal complaints, enforcement actions,
and inquiries by various federal, state, or local governmental
authorities into or against the Company or its investments.
Litigation, complaints, and enforcement actions involving either of
the Company or its investments could consume considerable amounts
of financial and other corporate resources, which could have an
adverse effect on the Company’s future cash flows, earnings,
results of operations and financial condition.
Product liability.
Certain of the Company’s investments manufacture, process
and/or distribute products designed to be ingested by humans, and
therefore face an inherent risk of exposure to product liability
claims, regulatory action and litigation if products are alleged to
have caused significant loss or injury. In addition, previously
unknown adverse reactions resulting from human consumption of
cannabis alone or in combination with other medications or
substances could occur. A product liability claim or regulatory
action against an investment entity of CordovaCann could result in
increased costs, could adversely affect the Company’s
reputation, and could have a material adverse effect on the results
of operations and financial condition of the Company.
Reliance on key inputs.
The cultivation, extraction and processing of cannabis and
derivative products is dependent on a number of key inputs and
their related costs including raw materials, electricity, water and
other local utilities. Any significant interruption or negative
change in the availability or economics of the supply chain for key
inputs could materially impact the business, financial condition
and operating results of the Company’s investments. Some of
these inputs may only be available from a single supplier or a
limited group of suppliers. If a sole source supplier was to go out
of business, the relevant investment entity might be unable to find
a replacement for such source in a timely manner or at all. Any
inability to secure required supplies and services or to do so on
appropriate terms could have a materially adverse impact on the
business, financial condition and operating results of an
investment, and consequently, the Company.
Price volatility of publicly traded securities.
In recent years, the securities markets in the United States and
Canada have experienced a high level of price and volume
volatility, and the market prices of securities of many companies
have experienced wide fluctuations in price which have not
necessarily been related to the operating performance, underlying
asset values or prospects of such companies. There can be no
assurance that continuing fluctuations in price will not occur. It
may be anticipated that any quoted market for the Common Shares of
CordovaCann will be subject to market trends generally,
notwithstanding any potential success of CordovaCann in creating
revenues, cash flows or earnings. The value of the Common Shares
would be affected by such volatility. An active public market for
the Company’s Common Shares might not develop or be
sustained. If an active public market for the Company’s
Common Shares does not develop, the liquidity of a
shareholder’s investment may be limited and the share price
may decline.
Management of growth.
CordovaCann may experience a period of significant growth in the
number of personnel that may place a strain upon its management
systems and resources. Its future will depend in part on the
ability of its officers and other key personnel to implement and
improve financial and management controls, reporting systems and
procedures on a timely basis and to expand, train, motivate and
manage the workforce. CordovaCann’s current and planned
personnel, systems, procedures and controls may be inadequate to
support its future operations.
Dividends.
CordovaCann has not paid dividends in the past and the Company does
not anticipate paying any dividends in the foreseeable future.
Dividends paid by the Company would be subject to tax and,
potentially, withholdings.
Any decision to declare and pay dividends in the future will be
made at the discretion of the Company’s Board of Directors
and will depend on, among other things, financial results, cash
requirements, contractual restrictions and other factors that the
Company’s Board of Directors may deem relevant. As a result,
investors may not receive any return on an investment in the Common
Shares unless they sell their Common Shares for a price greater
than that which such investors paid for them.
Risk factors related to dilution.
The Company may issue additional securities in the future, which
may dilute a shareholder’s holdings in the Company. The
Company’s articles permit the issuance of an unlimited number
of Common Shares. The Directors of the Company have discretion to
determine the price and the terms of further issuances. Moreover,
additional Common Shares will be issued by the Company on the
exercise of options under the Company’s Option Plan and upon
the exercise of outstanding warrants.
Intellectual property and proprietary protection.
The success of the Company will depend, in part, on the ability of
the Company and the Company’s investments to maintain,
enhance and protect its intellectual property, including various
existing and potential proprietary techniques and processes. The
Company and the Company’s investments may be vulnerable to
competitors who develop competing technology, whether independently
or as a result of acquiring access to the proprietary products and
trade secrets of the Company or the Company’s investments. In
addition, effective future patent, copyright and trade secret
protection may be unavailable or limited in certain foreign
countries and may be unenforceable under the laws of certain
jurisdictions.
The Company relies on a combination of laws and contractual
provisions to establish and protect its rights in 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.
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.
Forward Looking Statements
Certain statements contained in this report are forward-looking
statements. All statements, other than statements of historical
facts, included herein or incorporated by reference herein,
including without limitation, statements regarding the
Company’s business strategy, plans and objectives of
management for future operations and those statements preceded by,
followed by or that otherwise include the words
“believe”, “expects”,
“anticipates”, “intends”,
“estimates” or similar expressions or variations on
such expressions are forward-looking statements. We can give no
assurances that such forward-looking statements will prove to be
correct.
Each forward-looking statement reflects the Company’s current
view of future events and is subject to risks, uncertainties and
other factors that could cause actual results to differ materially
from any results expressed or implied by the Company’s
forward-looking statements.
Risks and uncertainties include, but are not limited
to:
●
lack
of substantial operating history;
●
the
impact of competition; and
●
the
enforceability of legal rights.
Important factors that could cause the actual results to differ
from materially from the Company’s expectations are disclosed
in more detail set forth under the heading “Risk
Factors” above. The Company’s forward-looking
statements are expressly qualified in their entirety by this
cautionary statement.
Business Plan and Strategy
CordovaCann
is committed to assembling a premier cannabis business with a
vision to becoming a worldwide industry leader. The Company is
focused on working with leading cannabis production and processing
operators in key jurisdictions that will enable CordovaCann to
serve national and international markets that have legal and
regulated medical and/or recreational cannabis industries. The
Company intends to leverage its production and processing
investments to establish a global multi-jurisdictional platform
that delivers consistent formulations of best-of-breed brands and
predictable consumer experiences.
CordovaCann
has entered into strategic relationships and investments with
cannabis operators in Oregon, Colorado, California, Washington,
Nevada and Canada. The Company will provide a variety of resources
and services to these respective operators including, but not
limited to: capital commitments, strategic positioning, brand
development, best operating practices, access to intellectual
property, administrative assistance, and general business
consulting. Over the next twelve months, CordovaCann is focused on
growing the operations of these strategic relationships. Moving
forward, the Company will also seek partnerships with cannabis
operators in key legal markets not currently served by CordovaCann,
as well as seek to expand operations in those markets where the
Company already has a presence. CordovaCann plans to immediately
develop various end products for distribution in each of its
current markets as well as to service other brands and intellectual
property owners with its growing processing and manufacturing
platforms with a view to allowing these clients and prospective
clients to gain access to our channels to market and to also
generate additional revenue for the Company. The platform that the
Company is building will seek to ensure that the end products are
consistent across all jurisdictions by maintaining strict and
professional standard operating procedures covering everything from
marketing, sales, packaging, and branding through to the ultimate
end user experience.
Over
the longer-term, CordovaCann will focus on continuing to expand its
reach into additional legal markets, with an increasing focus on
international operations. The Company expects to organically build
and forge strategic relationships with cannabis producers and
processors in North America, South America, Europe, and Asia, but
expects it should also be able to serve these markets through the
export of products from Canada where legal. As the Company works to
penetrate each of these markets with its branded products, 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.
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
|
|
|
|
Revenue
|
-
|
-
|
-
|
-
|
Cost of sales
|
(7,832)
|
-
|
(15,263)
|
-
|
Expenses
|
1,497,740
|
393,957
|
2,477,468
|
418,758
|
Interest
income from joint venture
|
27,197
|
-
|
42,199
|
-
|
Share
of profit of a joint venture
|
474
|
-
|
11,752
|
-
|
Net
loss for the period
|
(1,477,901)
|
(393,957)
|
(2,438,780)
|
(418,758)
|
Net
loss per share
|
(0.037)
|
(0.013)
|
(0.061)
|
(0.015)
|
Revenue
During
the three and six month periods ended December 31, 2018, the
Company generated $20,628 and $40,388, respectively, in revenue
from the rental of cannabis-related equipment as compared to $nil
for the three and six month periods ended December 31, 2017. The
Company has not recorded any revenue during such period pending a
determination that collectability is reasonably assured. The
Company does expect to collect the outstanding balance related to
the lease agreement and will recognize revenue upon
receipt.
In
relation to the aforementioned revenue, cost of sales for the three
and six months ended December 31, 2018 was $7,832 and $15,263,
respectively, as compared to $nil for the three and six month
periods ended December 31, 2017. Cost of sales is the result of
depreciation expense on its cannabis-related
equipment.
Expenses
The
overall analysis of the expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
|
|
|
|
Consulting
fees
|
750,655
|
230,151
|
1,446,244
|
230,151
|
Share
based compensation
|
586,410
|
115,034
|
586,410
|
115,034
|
Professional
fees
|
96,962
|
17,285
|
141,285
|
19,410
|
Shareholders
information services
|
34,754
|
7,519
|
77,285
|
15,356
|
Office
and general
|
164,524
|
28,681
|
272,696
|
28,681
|
Financing
costs
|
-
|
-
|
-
|
14,877
|
Depreciation
|
-
|
1,873
|
-
|
1,873
|
Exclusivity
fee
|
-
|
-
|
15,682
|
-
|
Foreign
exchange loss (gain)
|
(135,565)
|
(6,586)
|
(62,134)
|
(6,624)
|
|
1,497,740
|
393,957
|
2,477,468
|
418,758
|
Consulting Fees
Consulting
fees for the three and six month periods ended December 31, 2018
were $750,655 and $1,446,244, respectively, as compared to $230,151
for the three and six month periods ended December 31, 2017.
Consulting fees during the three and six month periods ended
December 31, 2018 increased as a result of the hiring of new
consultants subsequent to December 31, 2017 to assist the Company
with its continued focus in the cannabis industry.
Share Based Compensation
Share
based compensation for the three and six months ended December 31,
2018 were $586,410 as compared to $115,034 for the three and six
months ended December 31, 2017. Share based compensation expense
increased as a result of warrants issued by the Company to certain
consultants.
Professional Fees
Professional
fees during the three and six month periods ended December 31, 2018
were $96,962 and $141,285, respectively, as compared to $17,285 and
$19,410, respectively for the three and six month periods ended
December 31, 2017. Professional fees consisted of legal and audit
fees. The increase in legal and professional fees during the three
and six months ended December 31, 2018 was due to an increase in
legal fees related to the Company’s involvement in the
negotiation of various agreements.
Shareholders Information Services
Shareholders
information services for the three and six month periods ended
December 31, 2018 were $34,754 and $77,285, respectively, as
compared to $7,519 and $15,356, respectively, for the three and six
month periods ended December 31, 2017. Shareholders information
costs for the three and six month periods ended December 31, 2018
and 2017 were comprised of annual general meeting accruals and
costs, transfer agent fees and related filing fees. The increase in
shareholders information services fees during three and six month
period ended December 31, 2018 was due to the Company’s
increased business operations and the Company’s listing on
the Canadian Securities Exchange.
Office and General
Office
and general expenses during the three and six month periods ended
December 31, 2018 were $164,524 and $272,696, respectively, as
compared to $28,681 for the three and six month periods ended
December 31, 2017. Office and general expenses for the three and
six month periods ended December 31, 2018 was primarily comprised
of administrative, travel and other expenses incurred by the
Company and its employees and consultants.
Financing Costs
The
Company had financing costs of $nil during the three and six month
periods ended December 31, 2018 as compared to $nil and $14,877,
respectively, for the three and six month periods ended December
31, 2017. The $14,877 in financing costs incurred during the six
month period ended December 31, 2017 was related to the settlements
of shareholder loans, related party loans and accrued interest
thereon.
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 three and six month periods ended December
31, 2018, the Company incurred $nil and $15,682 in exclusivity fee.
No exclusivity fee was paid during the three and six month periods
ended December 31, 2017.
Foreign Exchange
Foreign
exchange gain for the three and six month periods ended December
31, 2018 were $135,565 and $62,134, respectively, as compared to a
gain of $6,586 and $6,624, respectively, for the three and six
month periods ended December 31, 2017. The foreign exchange gain
for the three and six months ended December 31, 2018 was the result
of an increase in United States Dollars settled
transactions.
Share of Profit and Interest Income from Joint Venture
On
April 4, 2018, the Company acquired 27.5% of OR Operations in a
step-up acquisition of land and building. The Company recorded this
as investment in joint venture. The Company recognized $474 and
$11,752, respectively, as its proportional share of profit from
joint venture during the three and six month periods ended December
31, 2018. The Company did not have investment in joint venture
during the three and six month periods ended December 31,
2017.
The
Company has also advanced funds to OR Operations, bearing interest
at 8% per annum. During the three and six month periods ended
December 31, 2018, the Company recorded $27,197 and $42,199,
respectively, in interest income as compared to $nil for the three
and six month periods ended December 31, 2017.
Net Loss and Comprehensive Loss
Net
loss for the three and six month periods ended December 31, 2018
was $1,477,901 and $2,438,780, respectively, as compared to
$393,957 and $418,758, respectively, for the three and six month
periods ended December 31, 2017.
Comprehensive
loss for the three and six month periods ended December 31, 2018
was $1,480,664 and $2,441,658, respectively, as compared to
$393,957 and $418,758, respectively, for the three and six month
periods ended December 31, 2017.
Liquidity and Capital
Resources
As at
December 31, 2018, the Company had total assets of $3,423,923 (June
30, 2018 – $4,875,592) consisting of cash and cash
equivalents of $181,328, promissory note receivable of $87,718,
prepaid expense of $235,009, advances to joint venture of
$1,726,589, long term investment in joint venture of $565,541,
other investment of $500,000 and equipment of $127,738. 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 expense of $325,659, advances to joint venture of
$610,705, long term investment in joint venture of $534,311 and
equipment of $138,418. The net decrease in assets from June 30,
2018 to December 31, 2018 was primarily due to the use of cash in
operations and a decrease of prepaid expenses and deposits. The
impact of reduction in cash and cash equivalents and prepaid
expenses and deposits on total assets was reduced by an increase in
advances to joint venture of $1,115,884 and other investment of
$500,000.
At
December 31, 2018, the Company had total liabilities of $723,900
(June 30, 2018 – $320,321) consisting of accounts payable and
accrued liabilities. Increase in accounts payable and accrued
liabilities was primarily due to increase in amounts owing to the
Company’s consultants. In addition, the Company had debenture
unit deposits amounting to $50,000.
At
December 31, 2018, the Company had a working capital of $1,506,744
(June 30, 2018 – $3,882,542). 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.
Cash Used in Operating Activities
The
Company used cash in operating activities of $1,470,890 (December
31, 2017 - $149,054) for the six month period ended December 31,
2018 due to the reasons as discussed above.
Cash Used in Investing Activities
The
Company used cash in investing activities of $1,645,601 (December
31, 2017 - $37,457) for the six month period ended December 31,
2018. The increase was primarily attributable to cash used in
advances in joint venture amounting to $1,073,685, other investment
amounting to $500,000 and promissory note amounting to
$71,916.
Cash from Financing Activities
The
Company received proceeds from financing activities of $50,000
(December 31, 2017 – $324,274) during the six month period
ended December 31, 2018. The change was primarily attributable to
the proceeds from the debenture unit deposits whereas in the prior
year the proceeds were mainly attributable to the issuance of
common shares reduced by the repayments of related party
loans.
Capital Stock
During
the three and six month periods ending December 31, 2018, the
Company had no common share transactions.
During
the three and six month periods ended December 31, 2017, 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; and
●
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.
Warrants
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. For the three and six months ended
December 31, 2018, the Company expensed $nil (2017 – $87,134)
of the fair value of the warrants as share based
compensation.
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, 250,000 vested during the
three months ended December 31, 2017 and the remaining 500,000
vested during the three months ended June 30, 2018. The fair value
of these issued warrants of $44,087 was determined using the Black
Scholes option-pricing model. For the three and six months ended
December 31, 2018, the Company expensed $nil (2017 – $27,900)
of the fair value of the warrants as share based
compensation.
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. The fair value of these issued warrants of $16,499 was
determined using the Black Scholes option-pricing model. For the
three and six months ended December 31, 2018, the Company expensed
$nil (2017 – $nil) of the fair value of the warrants as share
based compensation.
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. For the three and six months ended
December 31, 2018, the Company expensed $134,052 (2017 –
$nil) of the fair value of the warrants as share based
compensation.
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. The fair value of these issued warrants of $131,421
was determined using the Black-Scholes option-pricing model. For
the three and six months ended December 31, 2018, the Company
expensed $57,040 (2017 – $nil) of the fair value of the
warrants as share based compensation.
On October 31, 2018 and in connection to a consulting agreement,
the Company issued warrants to a consultant 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 $1,275,406 was
determined using the Black-Scholes option-pricing model. For the
three and six months ended December 31, 2018, the Company expensed
$144,432 (2017 – $nil) of the fair value of the warrants as
share based compensation.
On October 31, 2018 and in connection to a consulting agreement,
the Company issued warrants to a consultant 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 $1,275,406 was
determined using the Black-Scholes option-pricing model. For the
three and six months ended December 31, 2018, the Company expensed
$144,432 (2017 – $nil) of the fair value of the warrants as
share based compensation.
On December 1, 2018 and in connection to a consulting agreement,
the Company issued warrants to a consultant 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. For the three and six months
ended December 31, 2018, the Company expensed $106,454 (2017
– $nil) of the fair value of the warrants as share based
compensation.
Debenture Unit Deposits
During
the period ended December 31, 2018, the Company received a total of
$50,000 in deposits related to subscriptions for a convertible
debenture 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
(“Debenture”) and 500 common share purchase warrants
(“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 anytime
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 Debentures and
Warrants related to the Offering remain unissued.
Restatement of Prior Year Financial Statements
The
prior year financial statements for the three and six month periods
ended December 31, 2017 have been restated to correct material
errors in its prior filing. Details of the restatement are as
follows:
a)
The difference
between the fair value of the common shares issued for settlement
of a shareholder loan and the carrying value of such shareholder
loan was originally recorded as a loss on settlement of $382,704 in
the condensed interim consolidated statements of operations and
comprehensive loss rather than as an equity adjustment. As a result
of the restatement, share capital has decreased by $382,704 and the
loss on settlement of debt and net loss for such periods has
decreased by $382,704; and
b)
The warrants and
options issued by the Company during the periods ended December 31,
2017 were originally recorded using an estimated volatility that
was not representative of future volatility of the Company. As a
result of the recalculation of future volatility, share based
compensation and contributed surplus were reduced by
$34,830.
Key Contractual Obligations
There
are no key contractual obligations as at December 31,
2018.
Off Balance Sheet
Arrangements
As at
December 31, 2018, the Company did not have any off balance sheet
arrangements, including any relationships with unconsolidated
entities or financial partnerships to enhance perceived
liquidity.
Transactions with Related
Parties
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 three and six month periods
ended December 31, 2018 and 2017 and balances as at those dates,
not disclosed elsewhere in the Company’s unaudited condensed
interim consolidated financial statements are:
a)
During the three
and six month periods ended December 31, 2017, the Company accrued
interest of $nil (2017 - $nil and $14,877) on outstanding loans due
to related parties;
b)
During the three
and six months ended December 31, 2018, the Company received $nil
(2017 - $1,121 and $1,540) in advances from related parties, for
working capital purposes;
c)
During the three
and six months ended December 31, 2018, the Company repaid $nil
(2017 - $166,835) of related party advances;
d)
During the three
and six months ended December 31, 2018, the Company expensed
$288,507 and $567,509, respectively, (December 31, 2017 –
$153,386) 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 December 31, 2018, the Company has a
prepaid expense amount paid to such related corporation in the
amount of $97,757 and fees payable to Officers and Directors of the
Company of $181,666; and
e)
During the three
and six months ended December 31, 2018, the Company expensed $nil
(December 31, 2017 – $87,134) in share based compensation
related to Officers and Directors of the Company.
Financial and Derivative
Instruments
The
Company, through its financial assets and liabilities, is exposed
to various risks. The Company has established policies and
procedures to manage these risks, with the objective of minimizing
any adverse effect that changes in these variables could have on
these condensed interim consolidated financial statements. The
following analysis provides a measurement of risks as at December
31, 2018:
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company is not exposed to any
significant credit risk.
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due within one year. The
Company’s approach to managing liquidity risk is to ensure,
as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Company’s reputation. At December 31, 2018, there is
substantial doubt about the Company’s ability to continue as
a going concern primarily due to its history of losses. Liquidity
risk continues to be a key concern in the development of future
operations.
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The interest rates on all of the Company’s
existing debt are fixed, and therefore it is not currently subject
to any significant cash flow interest rate risk.
The
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 has never entered into and did not have, at the end of the
period ended December 31, 2018, any foreign currency hedge
contracts.
Critical Accounting
Estimates
The
Company’s condensed interim consolidated financial statements
have been prepared in conformity with IAS 34 – Interim Financial Reporting and do not
include all the information required for full annual consolidated
financial statements in accordance with IFRS and should be read in
conjunction with the audited consolidated financials for the year
ended June 30, 2018. These condensed interim 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”).
Basis of Presentation
These
condensed interim 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
condensed interim consolidated financial statements have been
prepared using the accrual basis of accounting, except for cash
flow information.
Functional and Presentation Currency
The
condensed interim 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 (27.5%)
|
|
United
States
|
In
translating the financial statements of the Company's foreign
subsidiaries from their functional currencies into the Company's
reporting currency of Canadian Dollars, balance sheet accounts are
translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using an
average exchange rate prevailing during the reporting period.
Adjustments resulting from the translation, if any, are included in
accumulated other comprehensive income (loss) in shareholders'
equity.
Use of Estimates and Judgements
The
preparation of these condensed interim 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 condensed interim consolidated
financial statements and reported amounts of expenses during the
reporting period. Actual outcomes could differ from these
estimates. These condensed interim consolidated financial
statements include estimates, which, by their nature, are
uncertain. The impacts of such estimates are pervasive throughout
the financial statements, and may require accounting adjustments
based on future occurrences. The estimates and underlying
assumptions are reviewed on a regular basis. Revisions to
accounting estimates are recognized in the period in which the
estimate is revised and in any future periods
affected.
The key
assumptions concerning the future, and other key sources of
estimation uncertainty as of the date of the statement of financial
position that have a significant risk of causing material
adjustment to the carrying amounts of assets and liabilities within
the next fiscal year arise in connection with the valuation of
financial instruments, fair value of share purchase warrants,
share-based payments and deferred tax assets.
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 condensed interim consolidated
financial statements from the date that control commences until the
date that control ceases. These condensed interim 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 OR
Holdings, LLC, CDVA Enterprises, LLC and Cordova CA Holdings,
LLC.
Joint Venture
A joint
venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets related to
the arrangement. The Company accounts for its interests in joint
ventures using the equity method of accounting. The Company
initially records its interests in joint ventures at cost.
Subsequent to initial recognition, the carrying value of the
Company’s interest in the joint venture is adjusted for the
Company’s share of comprehensive income and distributions of
the investee.
Standards Effective July 1, 2018
IFRS 9 – Financial Instruments
IFRS 9
– Financial
Instruments (“IFRS 9”) 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; or (iii) at fair value through profit or
loss.
●
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
(“FVTOCI”)
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
(“FVTPL”)
Financial
assets classified and measured at FVTPL are those assets that do
not meet the criteria to be classified at amortized cost or at
FVTOCI. This category includes debt instruments whose cash flow
characteristics are not SPPI or are not held within a business
model whose objective is either to collect contractual cash flows,
or to both collect contractual cash flows and sell the financial
asset.
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.
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
|
|
Loans and receivables
|
Amortized
cost
|
|
|
|
|
|
Financial liabilities
|
|
|
|
Accounts payable and accrued liabilities
|
|
Other liabilities
|
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.
IFRS 15 – 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 condensed
interim consolidated financial statements.
New Standards Not Yet Adopted
IFRS 16 - Leases
In
January 2016, the IASB issued a new standard, IFRS 16 –
Leases. The new standard
requires lessees to recognize most leases on the balance sheet
using a single model, thereby eliminating the distinction between
operating and finance leases. Lessor accounting, however, remains
similar to current accounting practice, and the distinction between
operating and finance leases is retained. The standard is effective
for annual periods beginning on or after January 1, 2019 and will
supersede IAS 17 – Leases. Early application is permitted
if IFRS 15 has also been applied. The Company does not intend to
adopt the new standard prior to its effective date and does not
expect the new standard to have a significant impact on the
condensed interim consolidated financial statements.
Evaluation of Disclosure Control and
Procedures
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or
the Exchange Act. This term refers to the controls and procedures
of a company that are designed to ensure that information required
to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified by the Securities
and Exchange Commission. Our management, including our Chief
Executive Officer and Chief Financial Officer, together with the
members of our Audit Committee have evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were ineffective as of the
end of the period covered by this report.
There were no changes to our internal control over financial
reporting since December 31, 2018 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
Current Outlook
Management
is taking an active approach to examining business opportunities in
the cannabis industry that could enhance shareholder
returns.
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 an exercise
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.
On
February 1, 2019, the Company entered into a senior promissory note
(the “Senior Promissory Note”) with a third party,
whereby the third party would make available to the Company the
aggregate principal amount of USD $150,000. The Senior Promissory
Note is unsecured, accrues interest at 10% per annum and is due on
or before May 2, 2019. On February 1, 2019 and in connection with
the Senior Promissory Note, the Company issued warrants for the
purchase of 150,000 common shares of the Company, vesting
immediately and exercisable until January 31, 2020 at an exercise
price of $1.00 per share.
On
February 15, 2019 and in connection to a settlement agreement,
1,000,000 warrants previously issued to a consultant on October 31,
2018 were forfeited.
Public Securities Filings
Additional
information regarding the Company is filed with the Canadian
Securities Administrators at www.sedar.com
and with the United States Securities and Exchange Commission and
can be viewed at www.edgar.gov.