The following management’s discussion and analysis (“MD&A”) prepared effective April 19, 2018 should be read in conjunction with the audited financial statements of FinCanna Capital Corp. (“FinCanna” or the “Company”) for the period from incorporation on November 28, 2016 to April 30, 2017, and accompanying notes thereto which have been prepared in accordance with International Financial Reporting Standards. All figures are in Canadian dollars unless stated otherwise.
Forward-Looking Statements
Certain statements contained in the following MD&A constitute forward-looking statements. Such forward looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Highlights & Recent Developments
CORPORATE
On July 13, 2017, FinCanna and Astar announced they entered into a binding agreement (the “Agreement”) pursuant to which Astar would acquire all of the issued and outstanding shares of FinCanna in exchange for common shares, outstanding options and warrants of Astar, on a one to one basis (the “Transaction”). The proposed transaction was to be carried out by way of a plan of arrangement, pursuant to which FinCanna would become a wholly-owned subsidiary of Astar. As a result of the Transaction, Astar, as the “Resulting Issuer”, would continue on with the business of FinCanna under the name of “FinCanna Capital Corp.” On September 6, 2017, FinCanna and Astar announced that Morris L. Reid was appointed to the Board of Directors of FinCanna.
On December 22, 2017, FinCanna and Astar completed the Transaction.
On December 27, 2017, FinCanna and Astar announced the completion of the contemplated plan of arrangement and the granting a total of 3,350,000 incentive stock options with an exercise price of $0.50 per share of the Resulting Issuer, valid for five years from the date of grant. On December 29, 2017, FinCanna’s common shares commenced trading on the Canadian Securities Exchange (“CSE”) under the trading symbol “CALI”. On March 19, 2018, FinCanna announced it has received its listing on the OTCQB under the symbol “FNNZF”.
FINANCINGS
On May 26, 2017, the Company completed a private placement financing of 8,694,333 common shares at $0.30 per share, for gross proceeds of $2,608,300. Additionally, the Company issued 695,547 finders’ warrants in connection with this financing.
On May 29, 2017, the Company completed a private placement financing of 1,615,000 common shares at $0.30 per share, for gross proceeds of $484,500. Additionally, the Company issued 104,000 finders’ warrants in connection with this financing.
On June 13, 2017, the Company completed a private placement financing of 4,757,299 common shares at $0.30 per share, for gross proceeds of $1,427,190. The Company also issued 241,600 finders’ warrants in connection with this financing. In addition, the Company issued 70,000 common shares with a fair value of $21,000, to a Director of the Company for consulting services.
In connection with this offering, on July 5, 2017, the Company issued 1,900,000 common shares at $0.30 per share, for a total fair value of $570,000, to certain officers of the Company subject to a limited recourse shareholder loan.
On November 23, 2017, the VP Corporate Development left the Company and the 400,000 common shares issued (of which 80,000 had vested) under the limited recourse shareholder loan were returned to treasury and cancelled.
The shareholder loan relating to those shares was also extinguished. On December 22, 2017, the Company completed brokered and non-brokered private placements whereby it issued at total of 14,264,466 units with one-half of one share purchase warrants at $0.50 per share for gross proceeds of $7,132,233, and 7,132,233 warrants. Each warrant shall be exercisable into one common share of the Company at an exercise price of $0.75 for a period of two years.
In connection with the brokered portion of the private placement, the Company issued 420,000 finders’ warrants exercisable into one common share of the Company at an exercise price of $0.50 until December 22, 2018. With respect to the non-brokered portion of the private placement, the Company issued 412,000 finders’ warrants exercisable into one common share of the Company at an exercise price of $0.75 until either November 21, 2019, or December 22, 2019. In addition, the Company issued 150,000 common shares with a fair value of $75,000 as a finder’s fee recorded as share issue costs.
During the period ending January 31, 2018, a total of 2,901,177 warrants were exercised for gross proceeds of $870,354.
Subsequent to January 31, 2018, a total of 813,834 warrants were exercised for gross proceeds of $242,817.
Non-brokered Private Placement – March 2018
On February 21, 2018, subsequent to the period end, FinCanna announced its intention to raise up to $5,000,000 by way of a non-brokered private placement of up to 7,142,857 units (the “Units”) at a price of $0.70 per Unit (the “Private Placement”). Each Unit will consist of one common share of FinCanna and one-half of one common share purchase warrant.
Each full warrant will be exercisable to acquire one common share of FinCanna at an exercise price of $1.05 for 24 months from the date of the closing of the Private Placement. The common share purchase warrants will be subject to acceleration at FinCanna’s discretion in the event its common shares trade on the Canadian Securities Exchange on a volume weighted average price (“VWAP”) basis of $1.40 or more for a period of ten consecutive trading days.
On April 5, 2018, the Company closed the first tranche of the private placement announced on February 21, 2018. The Company issued 3,829,944 Units at a price of $0.70 per unit for gross proceeds of $2,680,960. All securities issued will be subject to a four-month hold period expiring on August 6, 2018.
On April 13, 2018, the Company closed the second and final tranche of the private placement announced on February 21, 2018. The Company issued an additional 802,725 Units at a price of $0.70 per unit for gross proceeds of $561,907. All securities issued in the second tranche will be subject to a four-month hold period with expiring on August 11, 2018.
Upon closing of this second and final tranche the Company closed on a total of $3,242,867.
FinCanna paid a finder’s fee of 8% on a portion of the proceeds raised from subscriptions arranged by certain finders in cash and / or warrants equal to 8% of the aggregate Units subscribed for pursuant to the subscriptions arranged by such finders. Each warrant shall be exercisable for one common share at a price of $1.05 for a period of 24 months from closing. The lead finder in the non-brokered private placement is Triview Capital Ltd.
ROYALTY PORTFOLIO DEVELOPMENTS
Cultivation Technologies Inc.
On September 12, 2017, FinCanna’s first investee, Cultivation Technologies Inc. (“CTI”), began operations in Coachella, California with one of the state’s first permitted solvent extraction facilities for medical cannabis. The lab was established as an interim facility in accordance with CTI’s conditional land use permit in Coachella, to remain in operation during the construction of the full 6-acre medical cannabis campus planned for the site.
On October 25, 2017 FinCanna agreed to amend the agreement with CTI. In exchange for FinCanna agreeing to extend certain dates, subject to certain limitations, the amended agreement with CTI provided FinCanna with a 50% share of the profit from CTI’s interim medical cannabis extraction facility. The share in profits will provide FinCanna with a source of monthly revenue before construction of CTI’s Coachella Campus.
On January 15, 2018, FinCanna reported that CTI now had the rights to 100% of the production capacity of its interim extraction facility. The new operating structure is expected to result in significant economic opportunities to CTI, as it now has the ability to add an additional extraction machine and fractional distillation and winterization equipment.
This added working capital will create additional capacity for CTI to process up to 6,000 pounds of biomass per month and the ability to service third party vaporizer, winterization and distillation customers at a scale of approximately 100,000 grams of finished product weekly. FinCanna also announced amendments to its funding agreement with CTI to provide for certain changes to the terms of FinCanna’s investment that, among other things, entitles FinCanna to an increased royalty of 14% of revenue (previously 10%), an increase in the annual interest rate on the loan from 10% to 20% and 7% of CTI’s revenues to be paid to FinCanna and applied against interest and principal on the loan.
On January 24, 2018, FinCanna reported that CTI had secured an additional five megawatts of power from the local utility company, Imperial Irrigation District (“IIF”). This increased CTI’s total available power to seven megawatts, the largest power commitment in the Coachella Cannabis Zone from IID, and provides CTI with the requisite power for construction and operation of the planned Coachella Campus. Green Compliance Inc.
On February 6, 2018, FinCanna entered into a royalty agreement with Green Compliance, Inc. (“Green Compliance”). Under the Royalty Agreement, FinCanna will fund US$3 million in tranches by September 15, 2018, in return for a perpetual royalty equal to 10% of consolidated gross revenues of Green Compliance, subject to certain buy-back options.
Gram Co Holdings LLC
On February 15, 2018, FinCanna signed a binding term sheet with Gram Co Holdings LLC (“Gram Co”), subject to due diligence by FinCanna, pursuant to which FinCanna would fund US$3 million in tranches. In return, FinCanna will receive a tiered corporate royalty, adjusted based on revenues levels, ranging from 14% to 7.5% of Gram Co’s revenues.
FinCanna Capital Corp. (the "Company") was incorporated pursuant to the provisions of the British Columbia Business Corporations Act on November 28, 2016, under the name 1098119 B.C. Ltd., and changed its name to Coachella Cannabis Corp. on the same date, and further to FinCanna Capital Corp. on May 12, 2017. The Company’s head office address is at Suite 550 – 800 West Pender Street, Vancouver, BC V6C 2V6 and its registered and records office address is 595 Burrard St, Suite 2600, Vancouver, British Columbia, Canada, V7X 1L3. The Company’s principal business activity has been seeking of investment opportunities in the medical cannabis sector in the United States.
The Company and Astar Minerals Ltd., (“Astar”) entered into an Arrangement Agreement on July 11, 2017, pursuant to which Astar acquired all of the issued and outstanding common shares of the Company in exchange for 44,742,763 common shares of Astar, on a one to one basis. In addition, each outstanding option and/or warrant to acquire the Company’s common shares became exercisable for one common share of Astar (the “Transaction”).
The Transaction was carried out by way of a plan of arrangement (the “Agreement”), pursuant to which the Company became a wholly-owned subsidiary of Astar (Note 4). As a result of the Transaction, Astar, as the “Resulting Issuer,” continued on with the business of the Company under the name “FinCanna Capital Corp.” As contemplated by the Agreement, Astar’s common shares were delisted from the TSX Venture Exchange (“TSXV”). On December 22, 2017, the Company completed the Transaction and the common shares of the Resulting Issuer were listed on the Canadian Securities Exchange (“CSE”) and began trading on December 29, 2017 under the symbol “CALI”.
Nature of Business
The Company’s mission is to combine extensive investment expertise, and industry experience in funding best-inclass businesses in the U.S licensed medical cannabis industry with a focus on California.
The Company’s vision is to be the capital partner of choice for high growth, best-in-class businesses focused on the licensed US medical cannabis industry.
Licensed Medical Cannabis
According to analysts at Ameri Research, the global market for licensed medical cannabis is growing at a compound annual rate of more than 21%, and is on track to exceed $63.5 billion by 2024. The Company is focused on this sector and is confident that its investors and portfolio companies will benefit from this focus.
FinCanna is focusing initially on California since it is the sixth largest economy in the world and the largest medical cannabis market in North America. At Arcview Group, analysts estimate the California’s legal cannabis industry will grow at a 21% CAGR to $6.5 billion by 2020, and generate upwards of $1 billion in tax revenue.
Royalty Model
FinCanna’s primary objective is to form part of a “whole capital” solution for businesses in the licensed medical cannabis sector by providing capital investment for a percentage of the future revenues. It seeks to invest in Bestin-Class businesses by aligning the business and financial interests of existing owners and operators with those of FinCanna.
FinCanna’s capital solution seeks to deliver efficient long-term capital under a royalty arrangement to facilitate the growth or other specific objectives of its investees. It also endeavors to provide funds in a timely way to insure the business opportunity is optimized.
FinCanna’s royalty financing offering is an alternative or complement to debt and equity financing. It provides the advantage of allowing investees to maintain financial flexibility and control of their business as opposed to entering into arrangements that may include restrictive debt structures or giving up an ownership stake.
Cultivation Technologies Inc.
Cultivation Technologies Inc. (“CTI”) is comprised of a team of experts from Fortune 150 agriculture, medical cannabis, law, engineering and technology. CTI has demonstrated the ability to navigate permitting in California, the largest medical cannabis market in North America.
CTI is constructing a medical marijuana manufacturing and testing facility. CTI has been granted a multitude of local permits that allow for the construction of the project and permit CTI to conduct on-site cannabis operations, subject to regulatory requirements. Subsequent to amendments to the laws of the State of California with respect to cultivating marijuana that took effect on January 1, 2018, CTI has applied for and received a Temporary State License which will remain in effect until such time as a Permanent State License can be obtained. The Permanent State License will then be subject to renewal on an annual basis.
Presently, this industry is illegal under United States federal law. CTI has, and intends to adhere strictly to the state statutes in its operation. FinCanna provides funding to CTI for its planned, fully-entitled, large-scale indoor medical cannabis facility to be developed in Coachella, Southern California. In return, FinCanna is entitled to a Royalty of 14% of CTI’s revenues from its Coachella Project. FinCanna also has the right to finance CTI’s next 2 licensed cannabis facility projects on the same terms as the Coachella Project.
Green Compliance
Green Compliance, headquartered in Fort Lauderdale, Florida, offers a state-of-the-art enterprise compliance and point-of-sale software solution (“ezGreen”) for licensed medical cannabis dispensaries and cultivators. Green Compliance helps its customers comply with both the Health Insurance Portability and Accountability Act (“HIPAA”) and State Laws by ensuring patients’ confidential data is being handled properly, helping to protect from possible security breaches and financial and criminal liability resulting from potential violations.
Green Compliance developed the software with Automated Healthcare Solutions (“AHCS”) and has an exclusive licensing and support agreement with them. AHCS is a leading point of care tracking and dispensing software solution in the U.S. dedicated to the workers compensation vertical in the pharmaceutical industry, and a proven HIPAA compliant solution. AHCS supports thousands of active physicians that dispense medication onsite and has tracked, monitored, reported, and protected patient information for the past 16 years across thousands of physician practices, while maintaining HIPAA compliance and following Health and Human Services protocols in the United States Green Compliance has commenced sales in the United States, and its target market is every licensed operating dispensary and cultivator in the states which have passed laws legalizing medical cannabis - currently 29 states and Washington, D.C.
FinCanna entered into a royalty agreement with Green Compliance. Under the Royalty Agreement, FinCanna will fund US$3 million in tranches by September 15, 2018. In return, FinCanna will receive a perpetual royalty equal to 10% of consolidated gross revenues of Green Compliance, subject to certain buy-back options.
Gram Co Holdings LLC
Gram Co Holdings LLC (“Gram Co”), based in Oakland, California, is a cannabinoid research and refinement facility focussed on the medical cannabis industry to provide B2B and B2C products and services to licensed medical dispensaries, infused product manufacturers and numerous others in the cannabis supply chain.
FinCanna Capital Corp.
Gram Co has leased a facility in Oakland, California in which they are retrofitting a large, state-of-the-art medical cannabis extraction laboratory, which is expected to be operating by the end of the third quarter of 2018. Gram Co plans to be a premier producer of bulk quantities of THC distillate and various concentrates produced via hydrocarbon-based solvent extraction. Gram Co also plans to provide white labeling services to licensed brand and infused product manufacturers who do not have direct access to compliant production facilities.
Brands and manufacturers who work in conjunction with Gram Co will also be able to utilize in house distribution and marketing services as a part of operational collaborations. Gram Co principles have extensive experience in extraction, manufacturing and business operations, and will also be bringing over their existing brand from their registered collective “California Extracts” to operate under the Gram Co family. California Extracts already has an existing industry following and market presence.
FinCanna has signed a binding term sheet with Gram Co, subject to due diligence by FinCanna. Under the term sheet, FinCanna would fund US$3 million in tranches. In return, FinCanna will receive a tiered corporate royalty, adjusted based on revenues levels, ranging from 14% to 7.5% of Gram Co’s revenues.
