Avicanna Inc., 2021 CanLII 76645

Ontario Commission des 22^nd Floor 22e étage

Securities valeurs mobilières 20 Queen Street West 20, rue queen ouest

Commission de l’Ontario Toronto ON M5H 3S8 Toronto ON M5H 3S8

AVICANNA INC.

PARTIAL REVOCATION ORDER

Under the securities legislation of Ontario

(the Legislation)

Background

1. Avicanna Inc. (the Issuer) is subject to a failure-to-file cease trade order (the FFCTO) issued by the Ontario Securities Commission (the Principal Regulator) on June 11, 2021.

2. The Issuer has applied to the Principal Regulator under National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions (NP 11-207) and Section 144 of the Securities Act (Ontario) for a partial revocation order of the FFCTO.

Interpretation

Terms defined in National Instrument 14-101 Definitions or in NP 11-207 have the same meaning if used in this order, unless otherwise defined.

Representations

1. This decision is based on the following facts represented by the Issuer:

(a) The Issuer was incorporated under the Business Corporations Act (Ontario) on November ‎‎25, 2016. On July 8, 2019, the Articles of the Issuer were amended to remove the private ‎company restrictions. On July 18, 2019, the Issuer’s common shares (the Common Shares) commenced trading ‎on the Toronto Stock Exchange (the TSX) under the symbol “AVCN”. ‎The Common Shares are also quoted on the OTCQX International Exchange under the symbol “AVCNF” and are quoted on the Frankfurt Stock Exchange under the symbol “0NN”. The securities of the Issuer are not listed or quoted on any other exchange or marketplace in Canada or elsewhere.

(b) The Issuer’s head office is located in Toronto, Ontario.‎

(c) The Issuer is a reporting issuer in each of the provinces of Ontario, Alberta, British Columbia, Saskatchewan and Manitoba.‎

(d) The authorized capital of the Issuer consists of an unlimited number of Common Shares and an unlimited number of preferred shares (Preferred Shares), of which 41,271,574 Common Shares and no Preferred Shares are issued and ‎outstanding.‎ In addition, the Issuer has ‎warrants outstanding which are exercisable into 10,934,740 Common Shares, options outstanding which are exercisable into 1,802,417 Common Shares ‎210,379 ‎restricted share units outstanding and $300,000 principal amount of debt outstanding which is convertible into ‎300,000 ‎Common Shares.

(e) The FFCTO was issued as a result of the Issuer’s failure to file the following continuous disclosure materials as required by Ontario securities law (collectively, the Documents):

(i) audited annual financial statements for the year ended December 31, 2020, as required by National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102);

(ii) management’s discussion and analysis relating to the audited annual financial statements for the year ended December 31, 2020, as required by NI 51-102;

(iii) annual information form for the year ended December 31, 2020, as required by NI 51-102;

(iv) interim financial statements for the period ended March 31, 2021, as required by NI 51-102;

(v) management’s discussion and analysis relating to the interim financial statements for the period ended March 31, 2021, as required by NI 51-102;

(vi) CEO and CFO certificates relating to the annual financial statements, annual information form and interim financial statements, as applicable, as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings.

(f) In connection with the FFCTO, on June 11, 2021, the Common Shares were suspended from trading on the TSX.

(g) The Issuer intends to conduct a financing on a private placement basis (the Proposed Financing), pursuant to which one or more investors (each, an Investor) will advance between $1,000,000 and $2,000,000 (the Principal Amount) in favour of the Issuer in the form of a secured debenture (the Debentures), each of which Debentures will have an Original Issue Discount of approximately 15%. It is anticipated that the Debentures will have a term of 14 months plus one day from the date of issuance thereof and will accrue interest at a rate of 5% per annum, subject to an increase to 18% per annum upon the occurrence of certain events of default. The Issuer will be expected to ‎repay the Principal ‎Amount for the ‎Debentures in 12 ‎equal monthly ‎installments ‎beginning on the ‎two-month ‎anniversary of the issuance date thereof, with a right of prepayment in full, subject to the payment of interest that would have accrued had the Debentures remained outstanding for the full 14 month term. The Debentures are expected to be secured against the assets of the Issuer of sufficient value. In connection with the loan, the Issuer will issue such number of warrants (each, a Warrant) of the Issuer representing 100% warrant coverage for the funded Principal Amount, each of which Warrants will be transferable and entitle the holder to acquire one Common Share for a period of 36 months. The exercise price of the Warrants is proposed to be 125% of the ‎volume-‎weighted ‎average ‎closing ‎price of the ‎Common Shares ‎on the TSX for a period ‎of five ‎(5) ‎trading ‎days ‎following the full revocation of the FFCTO, satisfaction of all additional conditions set by the Toronto Stock Exchange, and resumption of trading of the Common Shares on the TSX, subject to an upward adjustment in the event that such exercise price would otherwise result in the Investors holding Warrants exercisable for such number of Common Shares representing more than 25% of the number of Common Shares outstanding, on a partially-diluted basis, as at such date.

(h) The Proposed Financing will be conducted on a prospectus exempt basis with Investors located in the United States in accordance with OSC Rule 72-503 Distributions Outside Canada and applicable exemptions ‎under United States securities laws and, in the event any Investors are resident in any province or territory of Canada, to Investors in such jurisdictions who are accredited investors (as defined in section 73.3 of the Securities Act (Ontario) (the Act) and National Instrument 45-106 Prospectus Exemptions.

(i) The Proposed Financing is subject to certain filings required by the Toronto Stock Exchange and will be completed in accordance with all applicable laws.

(j) The Issuer incurred unanticipated fees and expenses in connection with the delay in filing the Documents and the work performed to date in connection with the preparation thereof. In addition, the demand for the Issuer’s products has continued to increase, thereby resulting in increased working capital requirements for the Issuer. The Issuer has historically relied upon debt and equity financings to fund its expenditures.

(k) The Issuer is seeking a partial revocation of the FFCTO to conduct the Proposed Financing to enable it to raise the funds necessary to prepare and file the Documents and provide it with sufficient working capital to fund the expenses as outlined below in order to continue its operations and achieve its operational milestones until it can apply for a full revocation of the FFCTO.

(l) The Issuer is not considering, nor is it involved in, any discussions relating to a reverse take-over, merger, amalgamation or other form of combination or transaction similar to any of the foregoing.

(m) Other than the failure to file the Documents, the Issuer is not in default of any of the requirements of the Act or the rules and regulations made pursuant thereto. The Issuer’s SEDAR and SEDI profiles are up to date.

(n) The Issuer intends to use ‎the proceeds of the Proposed Financing to satisfy its operational and contractual commitments as well as its operating expenses during the period that the FFCTO remains in effect to ensure the continuity of the Issuer’s business during such time, in each case until the Issuer is in a position to raise capital from other sources upon the issuance of a full revocation order in respect of the FFCTO. The proposed allocation of the proceeds of the Proposed Financing for such purposes is as follows:

PURPOSE

AMOUNT

Operating Expenses

Funds required for payment of audit, legal fees‎ and other professional fees, including:

i. audit fees in connection with the completion of the audited financial statements for ‎the year ended December 31, 2020,⁽¹⁾

ii. accounting advisory fees in connection with the Documents; and

iii. legal fees in connection with the Proposed Financing.

i. $193,600

ii. $34,684

iii. $150,000

Salaries⁽²⁾

$910,874

Research and Development⁽³⁾

$22,950

General Operating Expenditures⁽⁴⁾

$398,437

Working Capital

Production deposits and payments⁽⁵⁾

$282,000

TOTAL:

$1,992,545

Notes:

1. Anticipated to satisfy, among other things, all outstanding amounts owing to the Issuer’s former auditor, MNP LLP, as well as amounts due and owing to its successor auditor, Kingston Ross Pasnak LLP prior to obtaining a full revocation of the FFCTO.

2. Include salaries for global operations, to be paid over the next 90 days.

3. Represents the research and development fees owed to certain key partners over the next 90 days.

4. Includes rent for operations, marketing expenditures, IT related expenses, insurance expenses, travel expenses, consultant fees and general office expenses over the next 90 days.

5. Capital requirements to fund the Issuer’s manufacturing, which is expected to increase as a result of recent and anticipated growth in the sale of the Issuer’s products in North America over the next 90 days.

(o) Subsequent to this order being granted and within a reasonable time following the completion of the Proposed Financing, the Issuer intends to apply for and ‎obtain a full revocation of the FFCTO by filing the Documents, paying all outstanding fees and correcting any other continuous disclosure ‎deficiencies that may subsequently arise.

(p) The Issuer anticipates filing all of the Documents and bringing its continuous disclosure record up to date on or before September 10, 2021.

(q) The Issuer reasonably believes that the proceeds from the Proposed Financing will be sufficient to bring its continuous disclosure obligations up to date and pay all related outstanding fees and provide it with sufficient working capital to continue its business.

(r) The Proposed Financing would involve a trade of securities and acts in furtherance of trades and cannot be completed without a partial revocation of the FFCTO.

(s) Upon issuance of a Partial Revocation Order and completion of the necessary filings for the Proposed Financing with the TSX, the Issuer will issue a press release announcing the Partial Revocation Order and the intention to complete the Proposed Financing. Upon completion of the Proposed Financing, the Issuer will issue a press release and file a material change report. As other material events transpire, the Issuer will issue appropriate press releases and material change reports as applicable.

Order

1. The Principal Regulator is satisfied that a partial revocation order of the FFCTO meets the test set out in the Legislation to make the decision.

2. The decision of the Principal Regulator under the Legislation is that the FFCTO is partially revoked solely to permit the trades in securities of the Issuer (including for greater certainty, acts in furtherance of trades in securities of the Issuer) that are necessary for and are in connection with the Proposed Financing, provided that

a. prior to completion of the Proposed Financing, each Investor will receive:

(i) a copy of the FFCTO;

(ii) a copy of this Partial Revocation Order; and

(iii) written notice from the Issuer, to be acknowledged by each Investor in writing, that all of the Issuer’s securities, including the securities issued in connection with the Proposed Financing, will remain subject to the FFCTO until such orders are revoked and that the issuance of the partial revocation order does not guarantee the issuance of a full revocation in the future.

b. the Issuer undertakes to make available a copy of the written acknowledgements to staff of the Principal Regulator on request; and

c. the partial revocation order only varies the FFCTO order and does not provide an exemption from the prospectus requirement.

This order will terminate on the earlier of:

a. the completion of the Proposed Financing; and

b. 90 days from the date hereof.

DATED this 30^th day of July, 2021.

‘Marie-Frace Bourret’’

Marie-France Bourret

Manager, Corporate Finance

Ontario Securities Commission