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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

 

TIDAL ROYALTY CORP. (formerly TULLOCH RESOURCES LTD.; ELKHORN GOLD MINING CORPORATION; TREMINCO RESOURCES LTD.)

(Exact name of Registrant specified in its charter)

BRITISH COLUMBIA

(Jurisdiction of incorporation or organization)

789 West Pender Street, Suite 810 Vancouver BC Canada V6C 1H2

(Address of principal executive offices)

Contact Person: Stefania Zilinskas Address: 161 Bay St., Suite 4010 Toronto, ON Canada M5J 2S1 Email: stefania@tidalroyalty.com Telephone: (647)267-0555

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

COMMON SHARES

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

The number of outstanding shares of the Company’s only class of capital or common stock as at June 30, 2018 was 160,425,661 common shares.

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 Yes o   No x

 

If this is an annual report or a transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 Yes o   No o

 

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes o   No x

 

Indicate by check mark whether Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 Yes o   No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

 

 

If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:

 Item 17 o   Item 18 o

 

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes o   No o

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by checkmark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

 Yes o   No o

 

Table of Contents

 

TABLE OF CONTENTS

 

INTRODUCTION		1
PART I		2
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3.	KEY INFORMATION	3
A.	Selected Financial Data	3
B.	Capitalization and Indebtedness	4
C.	Reasons for the Offer and Use of Proceeds	4
D.	Risk Factors	4
ITEM 4.	INFORMATION ON THE COMPANY	15
A.	History and Development of the Company	15
B.	Business Overview	17
C.	Organizational Structure	21
D.	Property, Plants and Equipment	21
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	21
A.	Operating Results	29
B.	Liquidity and Capital Resources	38
C.	Research and Development, Patents and Licenses, etc.	23
D.	Trend Information	23
E.	Off Balance Sheet Arrangements	25
F.	Tabular Disclosure of Contractual Obligations	25
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	25
A.	Directors and Senior Management	25
B.	Compensation	28
C.	Board Practices	31
D.	Employees	34
E.	Share Ownership	34
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	36
A.	Major Shareholders	36
B.	Related Party Transactions	36
C.	Interests of Experts and Counsel	37
ITEM 8.	FINANCIAL INFORMATION	37
A.	Consolidated Statements and Other Financial Information	37
B.	Significant Changes	38
ITEM 9.	THE OFFER AND LISTING	38
A.	Offer and Listing Details - Price History	38
B.	Plan of Distribution	39
C.	Markets	39
D.	Selling Shareholders	39
E.	Dilution	39
F.	Expenses of the Issue	39

 

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ITEM 10.	ADDITIONAL INFORMATION	39
A.	Share Capital	39
B.	Memorandum and Articles of Incorporation	41
C.	Material Contracts	42
D.	Exchange Controls	42
E.	Taxation	43
F.	Dividends and Paying Agents	50
G.	Statement by Experts	50
H.	Documents on Display	50
I.	Subsidiary Information	50
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
A.	Fair Values	50
B.	Credit Risk	50
C.	Foreign Exchange Rate and Interest Rate Risk	51
D.	Liquidity Risk	51
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	51
PART II		51
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	51
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	51
ITEM 15.	CONTROLS AND PROCEDURES	51
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERTS	51
ITEM 16B.	CODE OF ETHICS	51
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	52
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	52
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	52
ITEM 16F.	CHANGES TO REGISTRANT’S CERTIFYING ACCOUNTANT	52
ITEM 16G.	CORPORATE GOVERNANCE	52
ITEM 16H.	MINE SAFETY DISCLOSURE	52
PART III		52
ITEM 17.	FINANCIAL STATEMENTS	52
ITEM 18.	FINANCIAL STATEMENTS	52
ITEM 19.	EXHIBITS	53

 

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GENERAL

 

This Form 20-F is being filed as a registration statement under the Securities Exchange Act of 1934.

 

In this Form 20-F, references to “we”, “us”, “our”, and the “Company” mean collectively and individually, Tidal Royalty Corp.

 

Tidal Royalty has historically used the Canadian dollar as its reporting currency. All references in this document to “dollars” or “$” are to Canadian dollars and all references to “US$” are to United States dollars, unless otherwise indicated.

 

Except as noted, the information set forth in this Form 20-F is as of October 1, 2018 and all information included in this document should only be considered correct as of such date.

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Form 20-F contains certain “forward-looking statements”. Forward-looking statements reflect the current view about future events. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “capable”, “budget”, “pro forma” and similar expressions are intended to identify forward-looking statements. Such statements include, but are not limited to, statements contained in this Form 20-F relating to our business strategy, our future operating results and liquidity and capital resources outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward—looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, our ability to execute our investment strategy on acceptable terms, including our ability to identify potential investments and to successfully negotiate the terms of such investments; our ability to raise capital to fund continuing operations; our ability to manage planned growth and integrate new business opportunities into existing operations; a continued decline in general economic conditions nationally and internationally; our ability to protect our intellectual property rights; the impact of any infringement actions or other litigation brought against us; competition from other providers; changes in government regulation; and other factors (including the risks contained in the section of this Form 20-F entitled “Risk Factors”) relating to our industry, our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

PART I

 

ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

The following table sets forth the name of all of our directors and officers, their business addresses, and their current positions with Tidal Royalty.

 

 

The auditors of Tidal Royalty are Manning Elliott LLP, Chartered Professional Accountants located at 1700-1030 W. Georgia Street, Vancouver, BC, V6E 2Y3. Manning Elliott LLP is independent from Tidal Royalty within the meaning of the Rules of Professional Conduct of the Institute of Chartered Professional Accountants of British Columbia (the “BCICPA”) and is registered with the BCICPA.

 

ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

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ITEM 3 - KEY INFORMATION

 

A. Selected Financial Data

 

Selected Financial Information:

 

The following tables set forth the Company’s selected financial data. Investors should read the following selected consolidated financial data in conjunction with the Company’s audited consolidated financial statements and accompanying notes in Item 18 of this Form 20-F and “Operating and Financial Review and Prospects” included in Item 5 of this Form 20-F.

 

The following selected financial data is based on financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and interpreted by the International Financial Reporting Interpretations Committee (“IFRIC”).

 

The Company has derived the summary statements of comprehensive income data for each of the unaudited nine-month periods ended April 30, 2018 and 2017, and the Company’s five most recently audited fiscal years (in Canadian dollars, except price of shares).

 

		Period Ended April 30, 2018		For the fiscal year ended July 31,
		(unaudited)		2017		2016		2015		2014		2013
Assets
Current assets
Cash		5,538,887		20,265		1,585		9,118		5,419		395
Amounts receivable		80,987		858		2,349		2,835		1,004		50
Prepaid Expenses		79,835		1,211		—		—		—		—
Total assets		5,699,709		22,334		3,934		11,953		6,423		445
Liabilities and Deficiency
Current liabilities
Accounts payable and accrued liabilities		691,877		105,225		57,387		49,273		34,242		25,781
Due to related parties		117,440		22,766		49,780		17,153		—		4,500
Loans payable		40,000		30,000		—		—		—		—
Total current liabilities		849,317		157,991		107,167		66,426		34,242		30,281
Equity (Deficiency)
Share capital		12,297,109		12,297,109		12,297,109		12,242,109		12,172,109		12,172,109
Share subscriptions		—		—		—		45,000		20,000		—
Reserves		6,031,464		27,464		27,464		27,464		19,679		12,571
Deficit		(13,478,181	)	(12,460,230	)	(12,427,806	)	(12,369,046	)	(12,239,607	)	(12,214,516	)
Total Equity (Deficiency)		4,850,392		(135,657	)	(103,233	)	(54,473	)	(27,819	)	(29,836	)
Total Liabilities and Equity		5,699,709		22,334		3,934		11,953		6,423		445

 

		Nine month period ended				Years Ended,
		April 30, 2018		April 30, 2017		2017		2016		2015		2014		2013
Expenses
Advertising and promotion		40,156		504		1,508		6,083		4,487		—		234
Consulting and management fees		440,759		—		6,000		31,480		71,260		260		3,580
Foreign exchange loss		1,591		—		—		—		—		—		—
General and administration		50,974		5,032		1,285		12,518		18,665		6,406		11,216
Professional fees		268,890		—		14,717		8,679		27,242		11,317		18,573
Rent		51,825		—		—		—		—		—		—
Salaries and benefits		89,810		—		—		—		—		—		—
Share based payments		—		—		—		—		7,785		7,108		—
Transfer agent and filing fees		30,538		—		5,919		—		—		—		—
Travel		43,408		2,031		2,995		—		—		—		—
Total expenses		(1,017,951	)	(7,567	)	(32,424	)	(58,760	)	(129,439	)	(25,091	)	(33,603	)
Other items:
Interest income		—		—		—		—		—		—		7
Gain on recognition of accounts payable		—		—		—		—		—		—		3,258
Net loss and comprehensive loss		(1,017,951	)	(7,567	)	(32,424	)	(58,760	)	(129,439	)	(25,091	)	(30,338	)
Loss and comprehensive loss per share, basic and diluted		(0.36	)	(0.00	)	(0.01	)	(0.02	)	(0.05	)	(0.01	)	(0.01	)
Weighted average number of common shares outstanding		2,843,636		2,843,636		2,843,636		2,768,795		2,427,608		2,193,636		2,193,636

 

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Exchange Rates:

 

The following table sets forth information as to the period end, average, the high and the low exchange rate for Canadian dollars (“CDN”) and U.S. Dollars for the periods indicated based on the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York (Canadian dollar amounts = US $1):

 

Year Ended: July 31,		Average		Period End		High		Low
2017		1.3239		1.2490		1.3745		1.2436
2016		1.3276		1.3040		1.4592		1.2544
2015		1.1923		1.3047		1.3059		1.0857
2014		1.0732		1.0889		1.1251		1.0237
2013		1.0070		1.0259		1.0578		0.9710

 

Period ended: April 30		Average		Period End		High		Low
2018		1.2637		1.2818		1.3096		1.2131

 

The following table sets forth the high and low exchange rates for the past six months. As of April 30, 2018, the exchange rate was CDN $ 1.2818 for each US $1.00.

 

Month		High		Low
October 2018		1.2948		1.2799
September 2018		1.3212		1.2912
August 2018		1.3155		1.2925
July 2018		1.3271		1.3013
June 2018		1.3319		1.2907
May 2018		1.3027		1.2761
April 2018		1.2918		1.2548

 

B. Capitalization and Indebtedness

 

The following table presents our capitalization in accordance with IFRS as of August 31, 2018 (unaudited —in Canadian Dollars). It is important that you read this table together with, and it is qualified by reference to, our audited financial statements set forth in this Form 20-F beginning on page F-1 hereof.

 

		As of August 31, 2018 $
Shareholders’ equity:
Preferred shares		3,894,032
Share capital		45,726,160
Reserves		4,726,934
Total shareholders’ equity		54,347,126
Total capitalization		54,347,126

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Risks Relating to an Investment in our Common Shares

 

We have no source of operating revenue and it is likely we will operate at a loss until we are able to realize cash flow from our financings.

 

We may require additional financing in order to fund our businesses or business expansion. Our ability to arrange such financing in the future will depend in part upon prevailing capital market conditions, as well as our business success. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us, or at all. If additional financing is raised by the issuance of common shares from treasury, control of the Company may change and shareholders may suffer additional dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to operate our businesses at their maximum potential, to expand, to take advantage of other opportunities, or otherwise remain in business.

 

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We may issue a substantial number of our common shares without investor approval to raise additional financing and we may consolidate the current outstanding common shares.

 

Any such issuance or consolidation of our securities in the future could reduce an investor’s ownership percentage and voting rights in us and further dilute the value of the investor’s investment.

 

The market price of our common shares may experience significant volatility.

 

Factors such as announcements of quarterly variations in operating results, revenues, costs, changes in financial estimates or other material comments by securities analysts relating to us, our competitors or the industry in general, announcements by other companies in the industry relating to their operations, strategic initiatives, financial condition or performance or relating to the industry in general, announcements of acquisitions or consolidations involving our portfolio companies, competitors or among the industry in general, as well as market conditions in the cannabis industry, such as regulatory developments, may have a significant impact on the market price of our common shares. Global stock markets and the Canadian Securities Exchange (“CSE”) in particular have, from time to time, experienced extreme price and volume fluctuations, which have often been unrelated to the operations of particular companies. Share prices for many companies in our sector have experienced wide fluctuations that have been often unrelated to the operations of the companies themselves. In addition, there can be no assurance that an active trading or liquid market will be sustained for our common shares.

 

We do not anticipate that any dividends will be paid on our common shares in the foreseeable future.

 

We anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common shares, and shareholders may not be able to sell their shares on favourable terms or at all.

 

Risks Related to the Cannabis Industry

 

The U.S. cannabis industry is highly regulated, highly competitive and evolving rapidly and management may not be able to predict all new emerging risks or be able to predict how such risks may impact on actual results.

 

Participants in the U.S. cannabis industry will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or 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 participant and, thereby, 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. The 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 also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

 

The U.S. cannabis 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 participant 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 investments 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.

 

The Company expects to derive its revenues from the U.S. cannabis industry, which industry is illegal under U.S. federal law. As a result of the conflicting views between state legislatures and the federal government regarding cannabis, financings with cannabis businesses in the U.S. are subject to inconsistent legislation and regulation.

 

The Company’s financings are expected to be focused in those U.S. states that have legalized the medical and/or adult-use of cannabis. Almost half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis without limits on THC, while other states have legalized and regulate the sale and use of medical cannabis with strict limits on the levels of THC. However, the U.S. federal government has not enacted similar legislation and the cultivation, sale and use of cannabis remains illegal under federal law pursuant to the U.S. Controlled Substances Act of 1970 (“CSA”). The federal government of the U.S. has specifically reserved the right to enforce federal law in regard to the sale and disbursement of medical or adult-use use marijuana even if state law sanctioned such sale and disbursement. It is presently unclear whether the U.S. federal government intends to enforce federal laws relating to cannabis where the conduct at issue is legal under applicable

 

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state law. This risk was further heightened by the revocation of the Cole Memorandum in January 2018.

 

Further, 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 will make it extremely difficult or impossible to transact business in the cannabis industry. If the U.S. 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, then the Company’s financings in such businesses would be materially and adversely affected notwithstanding that the Company may not be directly engaged in the sale or distribution of cannabis.

 

U.S. 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 financings. The Company’s funding of businesses involved in the medical and adult-use cannabis industry may be illegal under the applicable federal laws of the United States and other applicable law. There can be no assurances the federal government of the United States or other jurisdictions will not seek to enforce the applicable laws against the Company. The consequences of such enforcement would be materially adverse to the Company and the Company’s business and could result in the forfeiture or seizure of all or substantially all of the Company’s assets.

 

The Company anticipates having a material ancillary involvement in the cannabis industry in the U.S. Currently, the Company is not directly or indirectly engaged in the cultivation, manufacture, importation, possession, use, sale or distribution of cannabis in the medical or adult-use cannabis marketplace in any jurisdiction within the United States.

 

While certain U.S. states have enacted medical and/or adult-use cannabis legislation, cannabis continues to be illegal under U.S. federal law.

 

More than half of the U.S. states have enacted legislation to regulate the sale and use of cannabis on either a medical or adult-use level. However, notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the CSA in the U.S. and as such, activities within the cannabis industry are illegal under U.S. federal law.

 

As a result of the conflicting views between state legislatures and the federal government regarding cannabis, financings with cannabis related businesses in the U.S. are subject to a higher degree of uncertainty and risk. Unless and until the U.S. federal government amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendment there can be no assurance), there can be no assurance that it will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law. Such potential proceedings could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens; or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.

 

The inconsistent regulation of cannabis at the federal and state levels was addressed in 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) acknowledging that although cannabis is a controlled substance at the federal level, several U.S. states have enacted laws relating to cannabis for medical purposes. The Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. However, the Department of Justice (“DOJ”) has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.

 

However, on January 4, 2018 the Cole Memorandum was revoked by Attorney General Jeff Sessions. While this did not create a change in federal law, as the Cole Memorandum was not itself law, the revocation added to the uncertainty of U.S. federal enforcement of the CSA in states where cannabis use is regulated. Sessions also issued a one-page memorandum known as the “Sessions Memorandum.” This confirmed the rescission of the Cole Memorandum and explained that the Cole Memorandum was “unnecessary” due to existing general enforcement guidance as set forth in the U.S. Attorney’s Manual (the “USAM”). The USAM enforcement priorities, like those of the Cole Memorandum, are also based on the federal government’s limited resources, and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.”

 

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While the Sessions Memorandum does emphasize that marijuana is a Schedule I controlled substance and states the statutory view that it is a “dangerous drug and that marijuana activity is a serious crime,” it does not otherwise guide U.S. Attorneys that the prosecution of marijuana-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is firmly in the hands of U.S. Attorneys in deciding whether or not to prosecute marijuana-related offenses. U.S. Attorneys could individually continue to exercise their discretion in a manner similar to that displayed under the Cole Memorandum’s guidance. Dozens of U.S. Attorneys across the country have affirmed their commitment to proceeding in this manner, or otherwise affirming that their view of federal enforcement priorities has not changed, although a few have displayed greater ambivalence. In California, at least one U.S. Attorney has made comments indicating a desire to enforce the CSA. Adam Braverman, Interim U.S. Attorney for the Southern District of California, has stated that the rescission of the Cole Memorandum “returns trust and local control to federal prosecutors” to enforce the CSA. Additionally, Greg Scott, the Interim U.S. Attorney for the Eastern District of California, has a history of prosecuting medical cannabis activity; and his office published a statement that cannabis remains illegal under federal law, and that his office would “evaluate violations of those laws in accordance with our district’s federal law enforcement priorities and resources.”

 

The Rohrabacher Blumenauer Appropriations Amendment (originally the Rohrabacher Farr Amendment) has been included in federal annual spending bills since 2014. This amendment restricts the Department of Justice from using federal funds to prevent states with medical cannabis regulations from implementing laws that authorize the use, distribution, possession or cultivation of medical cannabis. In 2017, Senator Patrick Leahy (D-Vermont) introduced a parity amendment to H.R.1625—a vehicle for the Consolidated Appropriations Act of 2018, preventing federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding (“Leahy Amendment”). The Leahy Amendment was set to expire with the 2018 fiscal year on September 30, 2018; however, Congress approved a nine-week continuing resolution from the 2018 fiscal year (the “Continuing Resolution”). The Continuing Resolution has the result of providing ongoing and consistent protection for the medical cannabis industry until December 7, 2018. Congress has been negotiating the 2019 fiscal year appropriations since February 2018. Although we expect that language protecting the medical cannabis industry will be included in the final 2019 fiscal year appropriations bill, there can be no assurance that the final 2019 fiscal year appropriations bill will include appropriations protecting the medical cannabis industry.

 

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state medical cannabis laws. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business, even those that have fully complied with state law, could be prosecuted for violations of federal law. If Congress restores funding, for example by declining to include the Rohrabacher Blumenauer Appropriations Amendment in the 2019 fiscal year appropriations bill, or by failing to pass necessary budget legislation and causing another government shutdown, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the five-year statute of limitations applicable to non-capital CSA violations. Additionally, it is important to note that the appropriations protections only apply to medical cannabis operations and provide no protection against businesses operating in compliance with a state’s recreational cannabis laws.

 

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, the listing of its securities on any stock exchange, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined.

 

The Company’s financings with entities involved in the U.S. cannabis industry will be made (i) only in those states that have enacted laws legalizing cannabis in an appropriate manner; and (ii) only in those entities that have fully complied with such state (and local) laws and regulations and have the licenses, permits or authorizations to properly carry on each element of their business.

 

In addition, the Company will ensure, prior to advancing funds to a target, that it is in compliance with applicable licensing requirements and the regulatory framework enacted in the applicable state, either by way of a review of the target’s licenses or affirmation certifications from the target prior to each advance of funds.

 

The Company will continue to monitor, evaluate and re-assess the regulatory framework in each state in which it may hold a

 

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financing, and the federal laws applicable thereto, on an ongoing basis; and will update its continuous disclosure regarding government policy changes or new or amended guidance, laws or regulations regarding cannabis in the U.S.

 

Access to traditional banking and the application of anti-money laundering rules and regulations to companies engaged in cannabis-related businesses is not clear.

 

The Company is subject to a variety of laws and regulations in Canada and the U.S. 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 U.S. and Canada. Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a chequing 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, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued guidance on February 14, 2014 that laid out a process for financial institutions to open accounts for marijuana-related businesses (the “FinCEN Memorandum”), which guidance was premised on the enforcement priorities of the Cole Memo. 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 in the 2014 Cole Memo issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA on the same day. The 2014 Cole Memo was 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.

 

Overall, since the production and possession of cannabis is illegal under U.S. federal law, there is a strong argument that banks cannot accept for deposit funds from businesses involved with the cannabis industry. Consequently, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. As the Company will have a material ancillary involvement in the U.S. legal cannabis industry, the Company may find that it is unable to open bank accounts with certain Canadian financial institutions, which in turn may make it difficult to operate the Company’s business. Furthermore, the Company’s U.S. subsidiaries may be unable to open bank accounts with U.S. financial institutions, which may also make it difficult to operate the Company’s business.

 

The Company’s future financings, and any proceeds thereof, may be considered proceeds of crime due to the fact that cannabis remains illegal federally in the U.S. This may restrict 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 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 has historically relied entirely on access to both public and private capital in order to support its continuing operations, and the Company expects to continue to rely almost exclusively on the capital markets to finance its business in the U.S. legal cannabis industry.

 

Although such business carries a higher degree of risk, and despite the legal standing of cannabis businesses pursuant to U.S. federal laws, Canadian based issuers involved in the U.S. legal cannabis industry have been successful in raising substantial amounts of private and public financing. However, there is no assurance the Company will be successful, in whole or in part, in raising funds in the future, particularly if the U.S. federal authorities change their position toward enforcing the CSA. Further, access to funding from U.S. residents may be limited due to their unwillingness to be associated with activities which violate U.S. federal laws.

 

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The Company’s involvement in the U.S. cannabis industry may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada.

 

It has been reported in Canada that the Canadian Depository for Securities Limited is considering a policy shift that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis issuers that have investments in the U.S. CDS is Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S., 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. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of the Company’s Shares to make and settle trades. In particular, the Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of the Shares through the facilities of the Exchange.

 

On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The 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 issuers with cannabis-related activities in the U.S. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future.

 

For the reasons set forth above, the Company’s future financings in the U.S. 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 U.S. or any other jurisdiction, in addition to those described herein.

 

The Company’s proposed business operations will indirectly be affected by a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of cannabis, but also including laws and regulations relating to consumable products health and safety, the conduct of operations and the protection of the environment.

 

These laws and regulations are broad in scope and subject to evolving interpretations, which could require participants to incur substantial costs associated with compliance or alter certain aspects of its business plans. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the Company’s business plans and result in a material adverse effect on certain aspects of its planned operations.

 

As consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis evolve, the Company may face unfavourable publicity or consumer perception.

 

The legal cannabis industry in the U.S. is at an early stage of its development. Cannabis has been, and will continue to be, a controlled substance for the foreseeable future. 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. Public opinion and support for medical and adult-use cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing medical and adult-use cannabis, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical marijuana as opposed to legalization in general). The Company’s ability to gain and increase market acceptance of its proposed royalty business may require substantial expenditures on investor relations, strategic relationships and marketing initiatives. There can be no assurance that such initiatives will be successful and their failure may have an adverse effect on the Company.

 

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The Company has a limited operating history with respect to making financings in the U.S. cannabis sector, which can make it difficult for investors to evaluate the Company’s operations and prospects and may increase the risks associated with investment into the Company.

 

The Company has a history of negative cash flow and losses that is not expected to change in the short term. Investments may not begin generating cash flow to the Company for several years following any investment.

 

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.

 

Currently, the U.S. cannabis industry generally is comprised of individuals and small to medium-sized entities, however, the risk remains that large conglomerates and companies who also recognize the potential for financial success through investment in this industry could strategically purchase or assume control of certain aspects of the industry. In doing so, these larger competitors could establish price setting and cost controls which would effectively “price out” many of the individuals and small to medium-sized entities who currently make up the bulk of the participants in the varied businesses operating within and in support of the medical and adult-use marijuana industry. While the trend in most state laws and regulations seemingly deters this type of takeover, this industry remains quite nascent, so what the landscape will be in the future remains largely unknown, which in itself is a risk.

 

Because of the early stage of the industry in which the Company will operate, the Company expects to face additional competition from new entrants. The Company may not have sufficient resources to remain competitive, which could materially and adversely affect the business, financial condition and results of operations of the Company.

 

Company indebtedness could have a number of adverse impacts on the Company.

 

Any indebtedness of the Company could have significant consequences on the Company, including: increase the Company’s vulnerability to general adverse economic and industry conditions; require the Company to dedicate a substantial portion of its cash flow from operations to making interest and principal payments on its indebtedness, reducing the availability of the Company’s cash flow to fund capital expenditures, working capital and other general corporate purposes; limit the Company’s flexibility in planning for, or reacting to, changes in the business and the industry in which it operates; place the Company at a competitive disadvantage compared to its competitors that have greater financial resources; and limit the Company’s ability to complete fundamental corporate changes or transactions or to declare or pay dividends.

 

The Company may be negatively impacted by fluctuations in currency.

 

The Company’s revenues and expenses are expected to be primarily 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. The Company 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, even if the Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks.

 

Risks Related to Royalties

 

Rights of third parties may restrict the Company’s ability to acquire existing royalties.

 

Royalty interests may be subject to: (i) buy-down right provisions pursuant to which the operator may buy-back all or a portion of the royalty; (ii) pre-emptive rights pursuant to which parties have the right of first refusal or first offer with respect to a proposed sale or assignment of the royalty; or (iii) claw back rights pursuant to which the seller of a royalty has the right to re-acquire the royalty. As a result, (a) royalties held by the Company may not continue for the full term of the original contract, and (b) should the Company seek to acquire existing royalties in the future, holders of such rights may exercise them such that certain existing royalty interests would not be available for acquisition.

 

The determination of costs is made by the operator and is beyond the control of the Company but may influence the royalty return received by the Company.

 

Should the Company hold a net profit royalty, it would have the added risk that such royalties allow the operator to account for the effect of prevailing cost pressures on the project before calculating a royalty. These cost pressures may include costs of

 

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labour, equipment, electricity, environmental compliance, and numerous other capital, operating and production inputs. Such costs will fluctuate in ways the royalty holder will not be able to predict and will be beyond the control of such holder and can have a dramatic effect on the amount payable on these royalties. Any increase in the costs incurred by the operators will likely result in a decline in the royalty received by the royalty holder. This, in turn, may have a material adverse effect on its profitability, financial condition, and results of operation.

 

The Company does not control the business operations over which the royalty is determined.

 

Cash flows derived from royalties are based on operations by third parties. These third parties will be responsible for determining the manner in which their business is operated or the relevant assets subject to the royalties are exploited, including decisions to expand, continue or reduce production, decisions about the marketing of products extracted from the asset and decisions to advance expansion efforts and further develop non-producing assets. As a holder of royalties or other interests, the Company will have little or no input on such matters. The interests of third-party owners and operators and those of the Company on the relevant assets may not always be aligned.

 

The Company has limited access to data and disclosure which may make the assessment of the value of the Company’s current or future royalty investments difficult to determine.

 

As a holder of royalties and other non-operator interests, the Company neither serves as the owner or operator, and in almost all cases the Company has limited input into how the operations are conducted. As such, the Company has varying access to data on the operations or to the actual assets themselves. This could affect its ability to assess the value of the royalties or enhance their performance. This could also result in delays in cash flow from that anticipated by the Company based on the stage of development of the applicable business or assets. The Company’s royalty payments may be calculated by the operator in a manner different from the Company’s projections and the Company may or may not have rights of audit with respect to such royalty interests. In addition, some royalties may be subject to confidentiality arrangements which govern the disclosure of information with regard to royalties and as such the Company may not be in a position to publicly disclose non-public information with respect thereto. The limited access to data and disclosure regarding the businesses in which the Company has an interest, may restrict its ability to assess the value or enhance its performance which may have a material adverse effect on the Company’s profitability, results of operation and financial condition.

 

Royalties are largely contractually based and may not always be honoured by the counterparties to the Company’s royalty contracts.

 

Royalties are largely contractually based. Parties to contracts do not always honour contractual terms and contracts themselves may be subject to interpretation or technical defects. To the extent grantors of royalties and other interests do not abide by their contractual obligations, the Company may be forced to take legal action to enforce its contractual rights. Such litigation may be time consuming and costly, and as with all litigation, no guarantee of success can be made. Should any such decision be determined adversely to the Company, it may have a material adverse effect on the Company’s profitability, results of operations and financial condition.

 

General Business Risks

 

There can be no assurance that future financings made by the Company will be profitable.

 

As part of the Company’s overall business strategy, the Company intends to pursue its financing policy and objectives. There are always risks associated with any business transaction, particularly one that involves a largely cash based operation, operating in a new and growing field, with conflicting federal and state laws. There is no assurance any financings will be profitable.

 

As the cannabis industry is nascent, expectations regarding the development of the market may not be accurate and may change.

 

Due to the early stage of the legal cannabis industry, forecasts regarding the size of the industry and the sales of products are inherently subject to significant unreliability. 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.

 

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The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management.

 

While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such people. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results or financial condition.

 

The Company’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.

 

Litigation, complaints, and enforcement actions the Company 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.

 

The Company is a British Columbia corporation governed by the Business Corporations Act (British Columbia) and, as such, our corporate structure, the rights and obligations of shareholders and our corporate bodies may be different from those of the home countries of international investors.

 

Non-Canadian residents may find it more difficult and costlier to exercise shareholder rights. International investors may also find it costly and difficult to effect service of process and enforce their civil liabilities against us or some of our directors, controlling persons and officers.

 

As cannabis products are meant to be ingested by humans, there is 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 operator could result in increased costs, could adversely affect the Company’s investment and reputation, and could have a material adverse effect on the results of operations and financial condition of the Company.

 

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 an operator. 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, an operator 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 operator, and consequently, the Company.

 

The success of the Company may depend, in part, on the ability of an operator to maintain and enhance trade secret protection over its various existing and potential proprietary techniques and processes, or trademark and branding developed by it.

 

Each operator may also 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 operator. 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.

 

Insurance coverage obtained by an operator may be insufficient to cover all claims to which the operator may become subject.

 

The Company will require an operator to have insurance coverage for applicable risks. However, there can be no assurance that such coverage will be available or sufficient to cover claims to which the operator may become subject. Each operator may be affected by a number of operational risks and may not be adequately insured for certain risks, including: civil litigation; 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, an operator’s properties, grow facilities and extraction facilities, personal injury or death, environmental damage, adverse impacts on the operator’s operations, costs, monetary losses, potential legal liability and adverse governmental action,

 

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any of which could have an adverse impact on the Company’s future cash flows, earnings and financial condition. Also, an operator may be subject to or affected by liability or sustain loss for certain risks and hazards against which it may elect not to insure because of the cost. If insurance coverage is unavailable or insufficient to cover any such claims, an operator’s financial resources, results of operations and prospects, as well as the Company’s investment, could be adversely affected.

 

Maintaining a public listing is costly.

 

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 the CSE 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. The Company may also elect to devote greater resources than it otherwise would have on communication and other activities typically considered important by publicly traded companies.

 

The Company 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 Shares. Even if the Company is involved in litigation and wins, litigation can redirect significant resources.

 

The Company may experience difficulty implementing its 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 involving the Company’s directors and officers may arise and may be resolved in a manner that is unfavourable to the Company.

 

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 corporations, partnerships, joint ventures, etc. 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 is a party 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 contract. 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.

 

The available talent pool may not be large enough for the Company to identify and hire personnel required to develop the business.

 

As the Company grows, it will need to hire additional human resources to continue to develop the business. However, experienced talent in the areas of financings and cannabis may be difficult to source, and there can be no assurance that the appropriate individuals will be available or affordable to the Company. Without adequate personnel and expertise, the growth of the Company’s business may suffer.

 

If the requirements of the Investment Company Act of 1940 (the “1940 Act”) were imposed on the Company, such requirements would adversely affect our operations.

 

The Company intends to conduct its operations so that it is not required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of

 

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investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

 

The Company is organized as a holding company that conducts business primarily through wholly-owned or majority-owned subsidiaries. The Company intends to conduct operations so that it complies with the 40% test. The Company will monitor our holdings to comply with this test. Failure to comply with the 40% test could require the Company to register as an investment company under the 1940 Act, which would have a material adverse effect on our operations.

 

There could be adverse tax consequence for our shareholders in the United States if we are deemed a passive foreign investment company.

 

Under United States federal income tax laws, if a company is (or for any past period was) a passive foreign investment company (which we refer to as “PFIC”), it could have adverse United States federal income tax consequences to U.S. shareholders even if the company is no longer a PFIC. The determination of whether we are a PFIC is a factual determination made annually based on all the facts and circumstances and thus is subject to change. Furthermore, the principles and methodology used in determining whether a company is a PFIC are subject to interpretation. The Company believes based on current business plans and financial expectations that it may be a PFIC for the current tax year and future tax years. United States purchasers of our common shares are urged to consult their tax advisors concerning United States federal income tax consequences of holding our common shares if we are considered to be a PFIC.

 

If we are a PFIC, U.S. holders would be subject to adverse U.S. federal income tax consequences such as the ineligibility for any preferred tax rates on capital gains, the ineligibility for actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws or regulations. Whether or not U.S. holders make a timely qualified electing fund (or QEF) election or mark-to-market election may affect the U.S. federal income tax consequences to U.S. holders with respect to the acquisition, ownership, and disposition of our common shares and any distributions such U.S. holders may receive. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our common shares.

 

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ITEM 4                   INFORMATION ON THE COMPANY

 

We are a British Columbia corporation existing under the Business Corporations Act (British Columbia) (the “BCBCA”) which conducts business a life sciences company with a focus on the legal cannabis industry in the United States.

 

A. History and Development of the Company

 

Name

 

Our legal and commercial name is Tidal Royalty Corp.

 

Registered and Principal Offices

 

Our registered office is Suite 810 — 789 West Pender Street, Vancouver, British Columbia, V6C 1H2. Our principal place of business is 161 Bay St., Suite 4010, Toronto ON, M5J 2S1.

 

Incorporation and Continuation

 

We are a British Columbia corporation existing with perpetual existence under the BCBCA.

 

The Company was incorporated on March 12, 1980 as Treminco Resources Ltd. under the laws of British Columbia as a mineral exploration company. Treminco Resources Ltd. was listed initially on the Vancouver Stock Exchange (as it was then known) and subsequently on the Toronto Stock Exchange (“TSE”).

 

The name of the Company was changed to Elkhorn Gold Mining Corporation on February 8, 1999.  On September 4, 2001, the common shares of Elkhorn Gold Mining Corporation were delisted from the TSE for failure to meet the continued listing requirements of the TSE. Cease Trade Orders (“CTOs”) were imposed on Elkhorn Gold Mining Corporation by the Ontario Securities Commission and the British Columbia Securities Commissions (the “Commissions”) on January 11, 2002 and January 3, 2002, respectively.

 

Between April 2001 and July 2010, Elkhorn Gold Mining Corporation was inactive and did not carry on any business.

 

On October 12, 2011, Elkhorn Gold Mining Corporation changed its name to Tulloch Resources Ltd.

 

On January 16, 2012, pursuant to Section 171 of the British Columbia Securities Act and Section 144 of the Ontario Securities Act, the Commissions issued revocation orders with respect to the prior CTOs issued against Elkhorn Gold Mining Corporation. As part of the revocation, Tulloch Resources Ltd. undertook not to complete a transaction that would result in a reverse takeover while it was not listed on a “recognized stock exchange” unless, prior to closing of such transaction, the Company provided the British Columbia Securities Commission with 10 business days’ notice of the transaction.

 

Between 2012 and 2016, Tulloch Resources Ltd. undertook three equity financings, raising an aggregate of $125,000, through private placements of its pre-Consolidated (as defined below) common shares to cover expenses involved in the restoration of the Company, ongoing costs, and expenses involved in searching for an appropriate project. From 2014 to 2017, Tulloch Resources Ltd. identified and reviewed a number of opportunities but did not proceed with any project.

 

On July 18, 2017 the Company changed its name to Tidal Royalty Corp. and changed its business to become a financing company with a focus on the U.S. legal cannabis industry. On July 26, 2017, we consolidated our share capital on a one-for-three basis (the “Consolidation”).

 

Our common shares began trading in CAD on the Canadian Securities Exchange (“CSE”) on June 25, 2018 under the symbol “RLTY”. We received approval from the CSE to begin trading our common shares in USD and commenced trading our common shares in USD on June 29, 2018 under the symbol “RLTY.U”.

 

On July 16, 2018 our common shares began trading on the OTC Markets under the symbol “TDRYF”. On August 13, 2018 we secured Depository Trust & Clearing Corp. (“DTC”) eligibility for our common shares on the OTC Markets.

 

After the close of trading on September 10, 2018 OTC Markets ceased listing our common shares on the OTC Markets under the symbol “TDRYF” as a result of an October 12, 2010 order issued by the SEC. The order, issued pursuant to Section 12(j) of the Securities Exchange Act of 1934 (the “Exchange Act”), revoked the registration of the securities of Elkhorn Gold Mining

 

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Corp., registered pursuant to Section 12(g) of the Exchange Act, as Elkhorn Gold Mining Corp. was delinquent in its periodic filings with the SEC having not filed any periodic reports since it filed an amended Form 20-F registration statement on November 4, 1999. Prior to being notified of the actions of the OTC Markets, management of Tidal Royalty was not aware of the filing of the amended Form 20-F by Elkhorn Mining Corp. nor the order of the SEC revoking the registration of the registered securities of Elkhorn Gold Mining Corp.

 

Change of Business

 

On September 5, 2017 we received approval from our shareholders to change our business from mineral exploration to that of a financing company with a focus on the U.S. legal cannabis industry. Among others, we took the following steps to develop and execute our new business:

 

1.              Retained new management with a track record in the U.S. legal cannabis industry and of acquiring and divesting in arm’s-length enterprises;

2.              Changed our name from Tulloch Resources Ltd. to Tidal Royalty Corp.;

3.              Consolidated our common shares on a three (3) old for one (1) new basis;

4.              Considered and created a clearly defined financing policy; and

5.              Undertook various financing transactions, described in greater detail below.

 

Financing Following the Change of Business

 

On February 2, 2018, the Company completed a non-brokered private placement, of 59,370,000 special warrants of the Company at a price of $0.05 per special warrant for gross proceeds of $2,968,500. Each special warrant entitled the holder to receive, without payment of any additional consideration or need for further action, one unit of the Company, each unit comprising of one common share and one share purchase warrant; each warrant entitling the holder to acquire one additional share at $0.05 for a period of 24 months. An additional 3,757,000 special warrants were issued as finders’ fees with the same terms as the special warrants received pursuant to the private placement. The fair value of $187,850 was charged to warrant issue costs. On June 8, 2018, the Company converted the special warrants and special finders’ warrants into an equivalent number of units in the capital of the Company.

 

On March 1, 2018, the Company completed a non-brokered private placement, of 57,120,000 special warrants of the Company at a price of $0.05 per special warrant for gross proceeds of $2,856,000. Each special warrant entitled the holder to receive, without payment of any additional consideration or need for further action, one unit of the Company, each unit comprising of one common share and one share purchase warrant; each warrant entitling the holder to acquire one additional share at $0.05 for a period of 24 months. An additional 5,292,000 special warrants were issued as finders’ fees with the same terms as the special warrants received pursuant to the private placement. The fair value of $264,600 was charged to warrant issue costs. On July 1, 2018, the Company converted the special warrants and special finders’ warrants into an equivalent number of units in the capital of the Company.

 

On April 30, 2018, the Company completed a non-brokered private placement, of 12,690,000 special warrants of the Company at a price of $0.05 per special warrant for gross proceeds of $634,500. Each special warrant entitled the holder to receive, without payment of any additional consideration or need for further action, one unit of the Company, each unit comprising of one common share and one share purchase warrant; each warrant entitling the holder to acquire one additional share at $0.05 for a period of 24 months. An additional 61,000 special warrants were issued as finders’ fees with the same terms as the special warrants received pursuant to the private placement. The fair value of $61,000 was charged to warrant issue costs. On August 31, 2018, the Company will convert the special warrants and special finders’ warrants into an equivalent number of units in the capital of the Company on September 1, 2018.

 

On May 25, 2018, the Company issued 40,000,000 preferred common shares pursuant to the exercise of 40,00,000 preferred share warrants raising $4,000,000. A total of 4,000,000 special finders’ warrants were granted with a fair value of $105,968; each special finder warrant entitling the holder to acquire one additional common share at $0.05 for a period of 24 months. The special finders’ warrants fair value was determined using the Black Scholes Option Pricing Model with the following assumptions: stock price -  $0.05; exercise price - $0.05; expected life — 2 years; volatility — 100%; dividend yield — $0; and risk-free rate — 1.98%.

 

On June 12, 2018, the Company issued 94,355,026 common shares at a price of $0.33 per common share for gross proceeds of $31,137,159.  In consideration for their services, the underwriters received a cash commission of $2,855,950. A total of 5,182,365 finder’s warrants were granted with a fair value of $905,709; each finder warrant entitling the holder to acquire one additional common share at $0.33 for a period of 24 months. The finders’ warrants fair value was determined using the Black

 

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Scholes Option Pricing Model with the following assumptions: stock price -  $0.33; exercise price - $0.33; expected life — 2 years; volatility — 100%; dividend yield — $0; and risk-free rate — 1.90%. The Company paid legal and finders fees of $2,855,960.

 

Each of these capital raises was primarily conducted in Canada.

 

Reporting Issuer Status under Canadian Securities Laws

 

The Company became a Canadian reporting issuer on November 27, 1985 whereby the Company and its insiders became subject to the continuous disclosure obligations under the securities laws of the province of British Columbia, Canada. The Company is now also a reporting issuer in the province of Ontario, Canada. British Columbia is the principal regulator of the Company.

 

Capital Expenditures and Divestitures

 

Capital expenditures and divestitures in the last five years have not been material.

 

Takeover Offers

 

We are not aware of any indication of any public takeover offers by third parties in respect of our Common Shares during our last and current financial years.

 

B. Business Overview

 

The Company is a publicly traded life sciences company with a focus on financing in businesses that pertain in any way to cannabis which are carried out in compliance with applicable U.S. state laws (“legal cannabis industry”). For a historical overview of the development of the Company, please see “A. History and Development of the Company — Incorporation and Continuation”.

 

The Company’s business objective is to provide capital solutions to companies in the U.S. legal cannabis industry with large-scale potential and a highly-skilled and experienced management team across multiple industry verticals, including cultivation, processing and distribution. Such financing arrangements may involve royalties, debt, equity and other forms of financings in both private and public companies. Our team has cannabis-related legal, financial and strategic experience.

 

The Company is actively pursuing opportunities to provide expansion capital to licensed, qualified operators. An investment in Tidal Royalty allows shareholders to participate in the broader US cannabis market’s growth while diversifying against specific operational risks.

 

Royalties

 

A royalty is a largely contractually-based financing arrangement whereby, in exchange for expansion capital, the Company receives the legal right to collect future streams of royalty payments that are based on a percentage of revenues from specified operations. Royalty transactions are intended to provide durable, predictable returns for Tidal Royalty while not restricting or inhibiting the growth potential of the portfolio company. Our benchmark standard royalty terms include a royalty of 15% of net revenue, for a period of 99 years and secured by first priority interests on assets of the operator. Specific financing arrangements may vary from the benchmark standard terms depending on the agreement reached by the parties. In addition to royalties, we may explore transactions that are structurally similar to royalties, for example a stream of payments tied to the revenue of a particular asset or business over a defined period of time, in so long as the transaction meets our deal selection criteria and complements our portfolio composition.

 

Deal Assessment

 

We pursue transactions after assessing expected internal rate of return weighted against the expected risks of the particular transaction. We generally seek to mitigate transaction risks by obtaining some form of security against the portfolio company’s assets.

 

In order to assess financing opportunities, we undertake a comprehensive due diligence process and use a scorecard method to evaluate the accretive potential of an opportunity. While we evaluate many financing opportunities, only selected opportunities that align with our scorecard metrics are pursued.

 

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In addition to the assessment of the qualities of a particular transaction, we also assess the macro factors that may impact a financing, for example regulatory developments, market changes and consumer behavior. We regularly assess these macro factors and continually refine our conclusions with respect to the expected impact of such factors on current and future financings. As such, we strive to select and structure financings such that Tidal Royalty benefits from the outcomes relating to a particular selected portfolio company as well as from market growth in general.

 

Portfolio

 

We seek to balance our portfolio of financings such that there is no concentration of financings in any particular states, with any particular operators or in any particular industry vertical. As such, the composition of our portfolio may vary over time.

 

On August 31, 2018 we executed a definitive agreement with Diem Cannabis (“Diem”) to finance its expansion into Massachusetts. Diem is an experienced licensed operator in the highly-competitive Oregon market. Pursuant to the agreement, we will provide Diem Cannabis with up to US$12.5 million over the next three years to develop and operate a large-scale cultivation and processing facility and up to four dispensaries in Massachusetts (the “Financing”). The Financing will be secured by all of Diem assets and 100% of all shares, membership interest and other equity interests in Diem. The Company will be entitled to 15% of all net sales generated by the financed operations in Massachusetts.

 

On August 27, 2018 we entered into a binding letter of intent (“CR LOI”) to acquire a royalty entitlement and equity interests in Alternative Medical Enterprises, LLC (d/b/a AltMed) from CannaRoyalty Corp. AltMed is a leading multi-state, vertically-integrated operator. Pursuant to the agreement, we will acquire a royalty on U.S. and international sales of AltMed’s MüV™ product line as well as equity interests in AltMed. Pursuant to the terms of the CR LOI, the Company will acquire 1,500 units in AltMed and a royalty on U.S. and international sales of the MüV™ product line for aggregate consideration of $8,000,000 in a combination of cash and common stock. The closing of the transaction is subject to, among other things, the satisfactory completion of due diligence and the receipt of all corporate and regulatory approvals.

 

To date, we have entered into non-binding letters of intent with cannabis operators in California and Nevada. In addition, we are currently evaluating multiple additional opportunities across the U.S., including in New York, Illinois, Ohio, Pennsylvania, Texas and Michigan.

 

We seek to create lasting partnerships with our portfolio companies such that we participate in their growth and success over time. Further, we expect that the synergies among our portfolio companies will also contribute to the success of our portfolio companies.

 

Competition

 

As the cannabis industry is at an early stage, we expect to face intense competition from other financing companies, including from new entrants, in the future. Currently, we are experiencing intensifying competition among financiers in the legal cannabis industry. As investors worldwide are becoming more accustomed to cannabis investments, family offices, private equity funds and high-net-worth individuals are beginning to offer financing alternatives to cannabis companies. However, we believe that our experienced management team, deal selection process and financing product distinguishes us from alternative sources of financing.

 

Effects of Government Regulations

 

In the U.S., cannabis is largely regulated at the state level. To the Company’s knowledge and as of the date of this Form 20-F, 30 states and Washington, DC have legalized medical cannabis, while nine states and Washington, DC have legalized recreational cannabis use. Notwithstanding the permissive regulatory environment of medical or recreational cannabis at the state level in certain states, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such violates federal law in the U.S. As a result of the conflicting views between state legislatures and the federal government regarding cannabis, financings with cannabis businesses in the U.S. are subject to inconsistent legislation and regulation.

 

The federal government of the U.S. has specifically reserved the right to enforce federal law in regard to the sale and disbursement of medical or adult-use use marijuana even if state law sanctioned such sale and disbursement. It is presently unclear whether the U.S. federal government intends to enforce federal laws relating to cannabis where the conduct at issue is legal under applicable state law. This risk was further heightened by the revocation of the Cole Memorandum in January 2018.

 

The inconsistent regulation of cannabis at the federal and state levels was addressed in 2013 when then Deputy Attorney

 

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General, James Cole, authored the Cole Memorandum acknowledging that although cannabis is a controlled substance at the federal level, several U.S. states have enacted laws relating to cannabis for medical purposes. The Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. However, the DOJ has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.

 

However, on January 4, 2018 the Cole Memorandum was revoked by Attorney General Jeff Sessions. While this did not create a change in federal law, as the Cole Memorandum was not itself law, the revocation added to the uncertainty of U.S. federal enforcement of the CSA in states where cannabis use is regulated. Sessions also issued a one-page memorandum known as the “Sessions Memorandum.” This confirmed the rescission of the Cole Memorandum and explained that the Cole Memorandum was “unnecessary” due to existing general enforcement guidance as set forth in the USAM. The USAM enforcement priorities, like those of the Cole Memorandum, are also based on the federal government’s limited resources, and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.”

 

While the Sessions Memorandum does emphasize that marijuana is a Schedule I controlled substance and states the statutory view that it is a “dangerous drug and that marijuana activity is a serious crime,” it does not otherwise guide U.S. Attorneys that the prosecution of marijuana-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is firmly in the hands of U.S. Attorneys in deciding whether or not to prosecute marijuana-related offenses. U.S. Attorneys could individually continue to exercise their discretion in a manner similar to that displayed under the Cole Memorandum’s guidance. Dozens of U.S. Attorneys across the country have affirmed their commitment to proceeding in this manner, or otherwise affirming that their view of federal enforcement priorities has not changed, although a few have displayed greater ambivalence. In California, at least one U.S. Attorney has made comments indicating a desire to enforce the CSA. Adam Braverman, Interim U.S. Attorney for the Southern District of California, has stated that the rescission of the Cole Memorandum “returns trust and local control to federal prosecutors” to enforce the CSA. Additionally, Greg Scott, the Interim U.S. Attorney for the Eastern District of California, has a history of prosecuting medical cannabis activity; and his office published a statement that cannabis remains illegal under federal law, and that his office would “evaluate violations of those laws in accordance with our district’s federal law enforcement priorities and resources.”

 

The Rohrabacher Blumenauer Appropriations Amendment (originally the Rohrabacher Farr Amendment) has been included in federal annual spending bills since 2014. This amendment restricts the Department of Justice from using federal funds to prevent states with medical cannabis regulations from implementing laws that authorize the use, distribution, possession or cultivation of medical cannabis. In 2017, Senator Patrick Leahy (D-Vermont) introduced the Leahy  Amendment, a parity amendment to H.R.1625—a vehicle for the Consolidated Appropriations Act of 2018, preventing federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. The Leahy Amendment was set to expire with the 2018 fiscal year on September 30, 2018, however, Congress approved the Continuing Resolution, a nine-week continuing resolution from the 2018 fiscal year. The Continuing Resolution has the result of providing ongoing and consistent protection for the medical cannabis industry until December 7, 2018. Congress has been negotiating the 2019 fiscal year appropriations since February 2018. The much relied on appropriations protecting the medical cannabis industry was renewed in both the House and Senate versions of the 2019 fiscal year appropriations bills, with the expectation that the language will be enacted in the final 2019 fiscal year appropriations bill. However, it should be noted that there is no assurance that the final 2019 fiscal year appropriations bill will include appropriations protecting the medical cannabis industry.

 

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state medical cannabis laws. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business, even those that have fully complied with state law, could be prosecuted for violations of federal law. If Congress restores funding, for example by declining to include the Rohrabacher Blumenauer Appropriations Amendment in the 2019 fiscal year appropriations bill, or by failing to pass necessary budget legislation and causing another government shutdown, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the five-year statute of limitations applicable to non-capital CSA violations. Additionally, it is important to note that the appropriations protections only apply to medical cannabis operations and provide no protection against businesses operating in compliance with a state’s recreational cannabis laws.

 

Further, there can be no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or

 

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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 will make it extremely difficult or impossible to transact business in the cannabis industry. If the U.S. 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, then the Company’s investments in such businesses would be materially and adversely affected notwithstanding that the Company may not be directly engaged in the sale or distribution of cannabis.

 

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, the listing of its securities on any stock exchange, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined.

 

The Company will continue to monitor, evaluate and re-assess the regulatory framework in each state in which it may hold a financing, and the federal laws applicable thereto, on an ongoing basis; and will update its continuous disclosure regarding government policy changes or new or amended guidance, laws or regulations regarding cannabis in the U.S.

 

The Company is subject to a variety of laws and regulations in Canada and the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, the 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 U.S. and Canada. Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a chequing 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, the FinCEN issued the FinCEN 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 in the 2014 Cole Memo issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA on the same day. The 2014 Cole Memo was 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.

 

Overall, since the production and possession of cannabis is illegal under U.S. federal law, there is a strong argument that banks cannot accept for deposit funds from businesses involved with the cannabis industry. Consequently, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. As the Company will have a material ancillary involvement in the U.S. legal cannabis industry, the Company may find that it is unable to open bank accounts with certain Canadian financial institutions, which in turn may make it difficult to operate the Company’s business.

 

Proceeds of the Company’s financings may be considered proceeds of crime due to the fact that cannabis remains illegal federally in the U.S. This may restrict 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 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.

 

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C. Organizational Structure

 

The following table sets out the current organizational structure of the Company and its subsidiaries:

 

 

D. Property, Plants and Equipment

 

Corporate Office

 

Our executive offices are located at 161 Bay St., Suite 4010, Toronto, ON, M5J 2S1.

 

ITEM 5                           OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

The following is a discussion and analysis of our activities, consolidated results of operations and financial condition as of April 30, 2018. It should be read in conjunction with our financial statements and related notes for the nine-month period ended April 30, 2018. Our financial statements have been prepared in accordance with IFRS as issued by the IASB.

 

For the nine-month period ended April 30, 2018 and 2017

 

		Nine-months period ended
		April 30, 2018		April 30, 2017
		$		$
Expenses
Advertising and promotion		40,156		504
Consulting and management fees		440,759		—
Foreign exchange loss		1,591		—
General and administration		50,974		5,032
Professional fees		268,890		—
Rent		51,825		—
Salaries and benefits		89,810		—
Transfer agent and filing fees		30,538		—
Travel		43,408		2,031
Net loss and comprehensive loss for the period		(1,017,951	)	(7,567	)

 

Most categories of expenses showed increases in 2018 compared with 2017, as the Company reorganized management and redirected its business. The increase in expenses relates to an increase in activity associated with the Company’s reorganization of management and related duties. Explanations of the nature of costs incurred, along with explanations for those significant changes in costs are discussed below:

 

·                  Advertising and promotion consists of marketing costs to promote the Company. The increase is a result of the Company’s officers increasing their presence at several industry related conferences throughout the period.

·                  Consulting and management fees increased as a result of the focus of Q2 2018 to explore royalty opportunities with companies in the legal cannabis industry. The Company relies heavily on Consultants to help them achieve their goals on all facets of business. Consultants include Management, Advisors, Technical Support and other support roles.

·                  General and administration relates to general office expenditures and its increase is a result of the Company’s activity level during the period along with other costs associated with operations in the Company’s office in Toronto.

·                  Professional fees increased due to accounting and legal fees associated with preparing the Company’s filing with the CSE that was completed after period end, the preliminary prospectus and professional fees incurred on due diligence.

 

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·                  Rent increased as a result of the Company’s office lease in Toronto and Vancouver.

·                  Salaries and benefits increased as a result of the Company hiring additional employees to support the growth of business and its corporate finance department.

·                  Transfer agent and filing fees increased as a result of listing fees to the CSE in respect to the Company’s listing that was completed after the period end.

·                  Travel increased as a result of flights to various industry conferences and meetings in furtherance of financing opportunities.

 

Fiscal year ended July 31, 2017 compared to fiscal year ended July 31, 2016

 

Year ended July 31,		2017		2016
		$		$
Expenses
Advertising and promotion		1,508		6,083
Consulting fees		6,000		31,480
General and administration		1,258		12,518
Professional fees		14,717		8,679
Transfer agent and filing fees		5,919		—
Travel		2,995		—
Net loss and comprehensive loss for the period		32,424		58,760

 

The Company did not have any revenues from operations during the fiscal years ended July 31, 2017, July 31, 2016 and July 31, 2015. During fiscal 2017, the Company’s net loss decreased by $26,336 from a net loss of $58,760 for fiscal 2016 ($0.02 per Share) to a net loss of $32,424 ($0.01 per Share) for fiscal 2017.

 

Most categories of expenses showed decreases in 2017 compared with 2016, as the Company reorganized management and redirected its business. The increase in transfer agent and filing fees includes payments made to prior period outstanding invoices to the transfer agent. Increased professional fees and travel costs are related to activity associated with the Company’s reorganization. The substantial decreases in general and administrative expenses are due to decreased activity during the period and the decrease in consulting fees due to the reorganization of management and related duties.

 

Fiscal year ended July 31, 2016 compared to fiscal year ended July 31, 2015

 

		2016		2015
		$		$
Expenses
Advertising and promotion		6,083		4,487
Consulting fees		31,480		71,260
General and administration		12,518		18,665
Professional fees		8,679		27,242
Share based payment		—		7,785
Net loss and comprehensive loss for the period		58,760		129,439

 

During fiscal 2016, the Company’s net loss decreased by $70,679 from a net loss of $129,439 for fiscal 2015 ($0.06 per Share) to a net loss of $58,760 ($0.03 per Share) for fiscal 2016.

 

Most categories of expenses showed decreases in 2016 compared with 2015, as the Company finalized and thereafter commenced implementation of its business plan.

 

Inflation

 

Historically, inflation has not affected the Company’s business in the current locations where it is doing business and the Company does not expect it to affect the Company’s operations in the future.

 

Foreign exchange risk

 

The Company’s interest rate risk management policy is to purchase highly liquid investments with terms to maturity of three months or less on the date of purchase or redeemable at the option of the Company. The Company does not engage in any hedging activity. The Company does not have significant interest rate risk.

 

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During the nine months ended April 30, 2018 and 2017, the Company held financial assets and liabilities and incurred expenses denominated primarily in Canadian dollars. The Company does not have significant foreign exchange risk.

 

B. Liquidity and Capital Resources

 

Liquidity

 

At April 30, 2018, the Company had cash of $5,538,887, compared to July 31, 2017 cash of $20,265. In order to continue operations, and in particular, to fund ongoing expenditure commitments to pursue its business strategy & goals and service its obligations listed in the financial statements, the Company will need to raise additional capital. The Company expects to finance operating costs by private placement of common shares, preferred shares, exercise of warrants, and exercise of options, as well as debt financing. See below for further financings subsequent to April 30, 2018.

 

On May 25, 2018, the Company issued 40,000,000 preferred common shares pursuant to the exercise of 40,00,000 preferred share warrants raising $4,000,000. A total of 4,000,000 special finders’ warrants were granted with a fair value of $105,968; each special finder warrant entitling the holder to acquire one additional common share at $0.05 for a period of 24 months. The special finders’ warrants fair value was determined using the Black Scholes Option Pricing Model with the following assumptions: stock price - $0.05; exercise price - $0.05; expected life — 2 years; volatility — 100%; dividend yield — $0; and risk-free rate — 1.98%.

 

On June 12, 2018, the Company issued 94,355,026 common shares at a price of $0.33 per common share for gross proceeds of $31,137,159.  In consideration for their services, the underwriters received a cash commission of $2,855,950. A total of 5,182,365 finder’s warrants were granted with a fair value of $905,709; each finder warrant entitling the holder to acquire one additional common share at $0.33 for a period of 24 months. The finders’ warrants fair value was determined using the Black Scholes Option Pricing Model with the following assumptions: stock price - $0.33; exercise price - $0.33; expected life — 2 years; volatility — 100%; dividend yield — $0; and risk-free rate — 1.90%. The Company paid legal and finders fees of $2,855,960.

 

During the period ended July 31, 2018, the Company issued 5,050,000 common shares pursuant to the exercise of 5,050,000 warrants for proceeds of $252,500.

 

Capital Resources

 

The Company manages its capital to maintain its ability to continue as a going concern and to provide returns to shareholders and benefits to other stakeholders.  The capital structure of the Company consists of cash and cash equivalents and equity comprised of issued share capital and deficit.

 

The Company manages its capital structure and makes adjustments to it in light of economic conditions and financial needs.  The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issues or by undertaking other activities as deemed appropriate under the specific circumstances.

 

C.            Research and Development, Patents and Licenses, etc.

 

Not applicable.

 

D.            Trend Information

 

State Legislative Trends

 

While currently a controlled substance under the CSA, cannabis is legalized and regulated by various states. As of the date of this Form 20-F, 30 states and Washington, DC have legalized medical cannabis. Nine states and Washington, DC have legalized adult recreational cannabis use. The trend across the United States has been to legalize cannabis for medicinal purposes in most cases, and recreational use in some cases.

 

During the November 8, 2016 election California, Maine, Massachusetts, and Nevada voted to legalize adult-use cannabis and Arkansas, Florida, Montana, and North Dakota voted to legalize medical cannabis. In June 2018 Oklahoma legalized medical cannabis. In November 2018, Utah and Missouri will vote on the legalization of medical cannabis, while Michigan and North Dakota will vote on legalizing cannabis for recreational use.

 

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State Regulatory Infrastructure

 

Development of state programs for the regulation of medical or adult-use cannabis is state-specific. Following the approval of medical or adult-use cannabis, some states have developed the regulatory infrastructure quickly, while other states have taken several years to develop such systems. State-specific advisory boards and committees have been created with the mandate to manage the implementation of the new industries.

 

According to Marijuana Business Daily, the average amount of time that elapsed between the legalization of medical cannabis sales and the opening of the first dispensaries in six states that recently commenced sales was 28 months. Also, according to Marijuana Business Daily, there are signs that the industry is maturing, and states are increasingly able to efficiently and quickly establish regulatory frameworks following legalization, especially where adult-use cannabis is legalized in states where regulated medical-use cannabis systems are already in place. For example, according to Marijuana Business Daily, the average amount of time that elapsed between voters approving adult-use cannabis production and sales to the opening of the first retail stores in Colorado, Washington and Oregon was 15 months.

 

Pennsylvania and Ohio offer two contrasting instances of the implementation of state regulatory infrastructure having both committed to a two-year implementation timeframe at the time of legalization. The launch of Pennsylvania’s medical program has largely been on-time. Successfully opened medical dispensaries within the two-year target, the state is now working to bolster the supply chain by issuing more licenses. Ohio on the other hand missed their deadline of September 8th, 2018 to have implemented a fully operational supply chain. Despite the longer than expected rollout, Ohio continues to move ahead evaluating and issuing licenses.

 

Even where regulatory frameworks for cannabis production and sales are in place, states tend to revise these rules over time. These revisions often impact sales, making it difficult to predict the potential of new markets. States may, for example, restrict the number of cannabis businesses permitted which can limit growth of the cannabis industry in those states. Alternatively, states may relax their initial regulations relating to cannabis production and sales, which would likely accelerate growth of the cannabis industry in such states. A common adjustment to medical programs is the addition of qualifying medical conditions. Several states including Michigan, New York, Connecticut, and Arizona have added new qualifying conditions following initial legislature. Common among those new qualifying conditions are opioid replacement and chronic and severe or intractable pain. These conditions affect a wide group of people and are catalysts for medical cannabis adoption.

 

Federal Legislative and Legal Trends

 

The recent political and administrative shift with the election of President Donald Trump has created uncertainty about the future of the cannabis industry. In January 2018 U.S. Attorney General. Jefferson Sessions rescinded a trio of memos including the Cole Memorandum. The Cole Memorandum was a memo created during the Obama Administration, which provided states with legal cannabis protection from Federal prosecution. Jeff Sessions said that the policy shift would be a “return to the rule of law” but did not provide details regarding pending prosecutions or the magnitude of a crackdown on legal cannabis companies.

 

In April 2018 Senator Cory Gardner revealed that President Trump vocalized he would support states enforcing their own cannabis laws without Federal interference. This was the first time that there were differing viewpoints between President Trump and the Attorney General Jeff Sessions with regards to cannabis regulation. In June 2018 a new bipartisan bill called the STATES Act (Strengthening the Tenth Amendment Through Entrusting States) was introduced by Massachusetts’s Senator Elizabeth Warren and Colorado’s Senator Cory Gardner. If passed it would exempt Federal prosecution in legal cannabis states, as well as provide banking to legal cannabis companies. Although 10 senators and 28 members of the House of Representatives support the bill, The STATES Act has seen less progression in the last several months due to opposition from Senate Majority Leader Mitch McConnell and current chair of the House Rule Committee Pete Sessions. If the Democrats can regain the Senate on November 6, 2018, the STATES Act will have a much higher probability of being passed.

 

Public Opinion

 

The increase in state legalization of cannabis use is largely a result of changing public opinion in the United States. According to an October 2017 poll conducted by Gallup, 64% of Americans think that the use of cannabis should be made legal, the highest level in the 48 years that Gallup has conducted the poll. Further, in the 2016 Gallup poll, support among adults aged 18 to 34 increased from 35% to 77% between 2005 and 2016 and support among adults aged 35 to 54 increased from 35% to 61% over the same period. In addition, according to a recent Quinnipiac University Poll, 94% of U.S. voters support the medical use of cannabis if recommended by a physician.

 

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Industry Outlook

 

Due to increases in state legalization and shifting public opinion, legal cannabis industry sales have grown substantially in recent years. According to ArcView Market Research (ArcView), 2018 legal cannabis sales are expected between $8.5 billion to $11 billion. Furthermore, sales are projected to reach $23.4 billion by 2022, which is over a 22% compound annual growth rate for the four years from 2018 to 2022.

 

ArcView expects the distribution of industry sales between medical and adult-use to shift substantially between 2017 and 2022 as more states legalize adult-use cannabis. Adult-use sales were approximately $2.6 billion, equating to over 30% of total industry sales. By 2022, adult-use sales are expected to increase to $15.7 billion or 67% of total industry sales.

 

E.            Off Balance Sheet Arrangements

 

The Company has no material off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition.

 

F.             Tabular Disclosure of Contractual Obligations

 

As at July 31, 2018, the Company’s following contractual obligations are:

 

		Payments due by period
		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Consulting and lease obligations		1,054,296		307,776		615,552		130,968		—

 

ITEM 6                           DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The size of our board of directors (the “Board”) is currently set at five. Our directors are elected annually by the shareholders and hold office until the next annual general meeting or until their successors are duly elected and qualified, unless their office is earlier vacated in accordance with the BCBCA and our articles of incorporation. Our current directors and senior management are as follows:

 

Name(1)		Position
Paul Rosen		Director and Chief Executive Officer
Terry Taouss		President
Theo van der Linde(2)		Director, Corporate Secretary and Chief Financial Officer
Brendan Purdy(2)(4)		Director
Stuart Wooldridge		Director
Brian Penny(2)(3)(4)		Director

 

(1)         Neither age nor date of birth of directors or senior management is required to be reported in our home country of Canada nor otherwise publicly disclosed.

(2)         Member of the Audit Committee.

(3)         Chair of the Audit Committee

(4)         “Independent” for purposes of National Instrument 52-110 — Audit Committees (“NI 52-110”).

 

The following is biographical information on our directors and officers who are acting in the capacity of director or officer as of the date hereof:

 

Paul Rosen — Director and Chief Executive Officer

 

Mr. Rosen is a leading entrepreneur in the Canadian cannabis industry. He was the co-founder and former CEO of PharmaCan Capital Corp. (now operating as The Cronos Group Inc.) from November 2013 until May 2016. The Cronos

 

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Group Inc. (MJN-X) is a Canadian cannabis company, and recently became the first cannabis company to list on the NASDAQ exchange. He is the founder and Managing Director of BreakWater Venture Capital, one of Canada’s largest cannabis-focused private venture capital firms with investments in over 100 private companies across the world. In addition to investments, Breakwater provides advisory services to some of the leading cannabis companies, both in Canada and internationally. Mr. Rosen is also a director of iAnthus Capital Holdings, Inc. (CSE: IAN), which owns, operates, and partners with licensed cannabis operations throughout the United States.

 

Mr. Rosen is a member of the Law Society of Upper Canada and previously practiced constitutional and criminal law. Mr. Rosen received a B.A. in Economics from the University of Western Ontario in 1985 and an L.L.B from the University of Toronto in 1988.

 

Mr. Rosen, in his capacity as the CEO of the Issuer, is an independent contractor and is not subject to the terms of a formal engagement agreement with the Company.

 

Terry Taouss — President

 

Mr. Taouss is an entrepreneur with operational experience scaling fast-growing businesses. Mr. Taouss was part of the founding management team at SiteScout, an advertising technology company that he helped profitably build through its successful acquisition in 2013. In that role, Mr. Taouss had carriage over all finance, legal, and corporate development functions. Mr. Taouss then served as the Managing Director of Centro Canada, with responsibility for strategy, product, marketing and sales, and was a member of the Centro executive team, helping guide strategy for the company’s broader technology and services offering. Mr. Taouss is a member of the Law Society of Upper Canada and practiced corporate law in Canada for several years. He built a corporate practice advising high-growth clients in a diverse range of industries and led numerous M&A transactions (buy and sell side). Mr. Taouss received a J.D. from Osgoode Hall Law School and an MBA from the University of Toronto.

 

Theo van der Linde — Director, Corporate Secretary and Chief Financial Officer

 

Mr. van der Linde is a Chartered Accountant with 20 years extensive experience in finance, reporting, regulatory requirements, public company administration, equity markets and financing of publicly traded companies. He has served as a CFO & Director for a number of TSX Venture Exchange and Canadian Securities Exchange listed companies over the past several years. Mr. van der Linde has extensive experience in financial services, manufacturing, oil & gas, mining and retail industries. Most recently, he has been involved with future use trends of natural resources as well as other disruptive technologies. Mr. van der Linde received a B.Comm. (Hons) in Finance, is a Chartered Accountant and is a member of good standing of the Institute of the Chartered Public Accountants of British Columbia.

 

Mr. van der Linde, in his capacity as the CFO of the Issuer, is an independent contractor, providing his services on a part-time basis.

 

Brendan Purdy — Director

 

Mr. Purdy is a practicing securities lawyer, with experience in public companies, and the capital markets. Mr. Purdy received his J.D. from the University of Ottawa, received a Bachelor of Management and Organizational Studies degree from the University of Western Ontario. Mr. Purdy has significant cannabis industry experience, in both his private practice and in his capacity as management and director of public cannabis issuers. Mr. Purdy most recently acted as Director, CEO, and Chairman of High Hampton Holdings Corp. (CSE: HC), a CSE-listed cannabis financing company focused on acquisitions of cannabis distribution companies, branding opportunities, and state licensed producers in California, USA. Mr. Purdy was involved in identifying and facilitating the acquisition of CoachellaGro Corp., a California-based corporation holding 10.8 acres of land within the designated cannabis cultivation zone in Coachella, California.

 

In his securities law practice, Mr. Purdy has facilitated the acquisition and financing of other licensed producers and cannabis ancillary companies within Canada. Following his resignation as CEO of High Hampton, Mr. Purdy became General Counsel to 3 Sixty Secure Corp., a Canadian company providing static security and secure logistics for the transport and distribution of cannabis for several prominent licensed producers.

 

Mr. Purdy has held several executive and director positions in other publicly traded companies. He is the current Corporate Secretary and a director of Global Blockchain Technologies Corp.; the CEO and President of Element 79 Capital Inc.; former CEO and director of Enforcer Gold Corp.; director of each of Supreme Metals Corp. and ZTest Electronics Inc.; former director and CEO of High Hampton Holdings Ltd. from November 2016 to December 2017; former CEO and Director of

 

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Seaway Energy Services from April, 2016 to October 2016; and a former director of Greenock Resources Inc. from October 2015 to February, 2016.

 

Mr. Purdy, in his capacity as a director of the Company, is an independent contractor, providing his services on a part-time basis and is not subject to the terms of a formal engagement agreement with the Company.

 

Stuart Wooldridge — Director

 

Mr. Wooldridge is a director of 555155 B.C. Ltd. dba Orca Strategy, a private management consulting company through which Mr. Wooldridge has experience with financing and managing publicly listed companies, new listings and regulatory reporting. Mr. Wooldridge was also the CEO of Yuntone Capital Corp. from 2015 to 2018. Stuart obtained a Bachelor of Commerce (Finance and Accounting) and MBA from the University of British Columbia and holds the Accredited Director (Acc.Dir) designation through the ICSA.

 

Mr. Wooldridge, in his capacity as a director of the Company, is an independent contractor, providing his services on a part-time basis and is not subject to the terms of a formal engagement agreement with the Company.

 

Brian Penny — Director

 

Mr. Penny is a Chartered Professional Accountant with over 30 years of experience in financial management, strategic planning, and financial reporting. He was Executive Vice President and CFO of New Gold Inc. (TSX:NGD), a multi-national mining company, from 2009 until 2017. Mr. Penny served as the Vice President of Finance and CFO of Kinross Gold Corporation (TSX:K), one of the world’s largest  gold producers, from 1993 until 2004. He has also served as CFO of Western Goldfields Inc. and Silver Bear Resources, and as a member of the Board of Equinox Minerals Limited, Alamos Gold Inc. and Baffinland Iron Mines Limited. Mr. Penny obtained his Diploma in Business — Accounting and Finance from Cambrian College and is a CPA, CMA.

 

Cease trade orders, bankruptcies, penalties or sanctions

 

For the purposes of this section, “order” means a cease trade order; an order similar to a cease trade order; or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than 30 consecutive days.

 

To the best of our knowledge, other than as disclosed below, no director or executive officer of Tidal Royalty is, as at the date hereof, or has been, within the 10 years before the date hereof, a director, chief executive officer or chief financial officer of any corporation (including Tidal Royalty) that:

 

(a)         was subject to an order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or

 

(b)         was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

 

Stuart Wooldridge was a director of the Company in 2001 - 2002 when the BCSC and the OSC issued CTOs against the Company in January 2002 for failure to file its annual financial statements for the fiscal year ended July 31, 2001. The CTOs were revoked in 2012. Also, Mr. Wooldridge was an independent director of Vendtek Systems Inc. (“Vendtek”) when in 2009, the BCSC and the Alberta Securities Commission (“ASC”) issued cease trade orders against Vendtek for failure to file financial statements in a timely manner. In 2010, the orders were revoked.

 

Brendan Purdy was an independent director of Boomerang Oil, Inc. (“Boomerang”) when cease trade orders were issued by the BCSC and ASC in 2015 due to Boomerang failing to file its annual audited financial statements for the fiscal year ended September 30, 2014, and its management’s discussion and analysis relating thereto, as required under Part 5 of National Instrument 51-102 — Continuous Disclosure Obligations. Boomerang continues to be subject to renewed cease trade orders.

 

To the best of our knowledge, no director or executive officer of Tidal Royalty or a shareholder holding a sufficient number of securities of Tidal Royalty to affect materially the control of Tidal Royalty:

 

(a)         is, as at the date hereof, or has been within the 10 years before the date hereof, a director or executive officer

 

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of any corporation (including Tidal Royalty) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

 

(b)         as, within the 10 years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.

 

To the best of our knowledge, no director or executive officer of the Company, or a shareholder holding a sufficient number of Tidal Royalty’s securities to affect materially the control of Tidal Royalty, has been subject to:

 

(a)         any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or

 

(b)         any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

To the best of our knowledge and other than as disclosed herein, there are no known existing or potential material conflicts of interest between Tidal Royalty and a director, officer or promoter of Tidal Royalty except that certain of the directors, officers and promoters of Tidal Royalty serve as directors, officers and promoters of other companies and therefore it is possible that a conflict may arise between their duties as a director, officer or promoter of Tidal Royalty and their duties as a director, officer and promoter of such other companies.

 

The directors, officers and promoters of Tidal Royalty are aware of the existence of laws governing accountability of directors and officers with respect to conflicts of interest and corporate opportunity and requiring disclosure by directors of conflicts of interest, and Tidal Royalty will rely upon such laws in respect of any directors’ and officers’ conflict of interest or in respect of any breaches of duty by any of its directors or officers. We expect that any such conflicts will be disclosed by such directors or officers in accordance with applicable law and that they will govern themselves in respect thereof to the best of their ability in accordance with the obligation imposed upon them by law.

 

Promoters

 

Stuart Wooldridge can be considered a promoter of Tidal Royalty in that he was responsible for keeping Tidal Royalty’s predecessor entity in good standing from 2001 to 2017 and assisting in bringing in new management who then implemented Tidal Royalty’s new royalty strategy. Mr. Wooldridge holds an aggregate of 315,000 common shares (representing approximately 0.12% of Tidal Royalty’s current issued and outstanding common shares). Mr. Wooldridge has received nothing of value from Tidal Royalty, directly or indirectly, in the 24 months preceding the date of this 20-F other than management services fee payments of $2,500 per month until he stepped down as CEO, and no assets were acquired by Tidal Royalty from Mr. Wooldridge in the past 24 months.

 

B. Compensation

 

During the year ended July 31, 2017, we paid aggregate remuneration to our directors and officers as a group who served in the capacity of director or executive officer during such year of $6,000.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

The overall objective of our compensation strategy is to offer medium-term and long- term compensation components to ensure that we have in place programs to attract, retain and develop management of high caliber and a process to provide for the orderly succession of management, including receipt on an annual basis of any recommendations of the chief executive officer, if any, in this regard. We currently have medium-term and long-term compensation components in place and intend to further develop these compensation components. The objectives of our compensation policies and procedures are to align the interests of our employees with the interests of our shareholders. Therefore, a significant portion of the total compensation is based upon overall corporate performance.

 

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We do not have a compensation committee or a nominating committee. All tasks related to developing and monitoring our approach to the compensation of our officers and to developing and monitoring our approach to the nomination of directors to the Board are performed by the members of the Board. The compensation of our executive officers and employees is reviewed, recommended and approved by our independent directors.

 

We choose to grant stock options to executive officers to satisfy the long-term compensation component. The Board may consider, on an annual basis, an award of bonuses to key executives and senior management. The amount and award of such bonuses is discretionary, depending on, among other factors, our financial performance and the position of a participant. The Board considers that the payment of such discretionary annual cash bonuses satisfies the medium-term compensation component.

 

In the future, the Board may also consider the grant of options to purchase common shares of Tidal Royalty with longer future vesting dates to satisfy the long-term compensation component.

 

We have not retained a compensation consultant or advisor to assist the Board in determining compensation for any of our directors or officers. Given our current stage of development, we have not considered the implications of the risks associated with our compensation practices. We have also not adopted any policies with respect to whether executive officers and directors are permitted to purchase financial instruments, including, for greater certainty, prepaid variable forward contracts, equity swaps, collars, or units of exchange funds, that are designed to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the executive officer or director.

 

Summary Compensation Table

 

The following table provides a summary of compensation that we paid to our senior management and directors during the fiscal year ended July 31, 2017:

 

Non-Equity Incentive Plan Compensation ($)

Names and Principal Position

Salary ($)

Share- Based Awards ($)

Option- Based Awards ($)

Annual incentive plans

Long- term incentive plans

Pension Value ($)

All Other Compensation ($)

Total Compensation ($)

Paul Rosen, CEO

Nil

N/A

Nil

N/A

N/A

N/A

8,870

(1)

8,870

Theo van der Linde, CFO

Nil

N/A

Nil

N/A

N/A

N/A

2,129

(1)

2,129

Courtland Livesley-James, EVP(2)

Nil

N/A

Nil

N/A

N/A

N/A

3,696

(1)

3,696

Brendan Purdy, Director

Nil

N/A

Nil

N/A

N/A

N/A

Nil

Nil

Stuart Wooldridge, Director

Nil

N/A

Nil

N/A

N/A

N/A

Nil

Nil

Kathryn Witter, Corporate Secretary(3)

Nil

N/A

Nil

N/A

N/A

N/A

6,000

6,000

Rob Trenaman, CFO and President(4)

Nil

N/A

Nil

N/A

N/A

N/A

Nil

Nil

Saeed Otufat-Shamsi, Director(5)

Nil

N/A

Nil

N/A

N/A

N/A

Nil

Nil

 

(1)         While no management contracts are currently in place, Tidal Royalty pays certain management fees to its executive officers in the amounts of: $25,000 per month in the case of Paul Rosen, $6,000 per month in the case of Theo van

 

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