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Report on Business Cannabis Professional High-profile board resignations at Eureka as company struggles with lawsuits and licences

HIGHLIGHTS
  1. Michael Mueller and Paul G. Smith have resigned from the board of Eureka 93, formerly called LiveWell Canada.
  2. The CBD-focused company lost its license to buy hemp directly from farmers in Montana after failing to pay for $8-million worth of hemp.
  3. Eureka terminated its partnerships with Canopy Growth and Canopy Rivers in May.

Two high-profile directors have resigned from the board of Eureka 93 Inc. as the CBD-focused company faces lawsuits, problems with licencing and questions about whether the business can continue as a going concern.

Eureka, which began trading on the Canadian Securities Exchange last month, is the result of a merger between Gatineau, Que-based LiveWell Canada Inc. and Vitality CBD Natural Health Products Inc., which owns hemp processing assets in Montana and New Mexico.

Despite backing from several Canadian business notables, Eureka’s operations on both sides of the border are generating little revenue, and the company is rapidly running out of money it needs to finance expansion. It is also having licencing difficulties in Canada and Montana.

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On Monday, Eureka said that Michael Mueller and Paul G. Smith have resigned from the company’s board. Mr. Mueller is the chair of Laurentian Bank of Canada and former head of Global Investment Banking at TD Bank Financial Group; Mr. Smith is the CEO of Frontline Broadband Inc., and was chair of VIA Rail Canada’s board from 2010 to 2014. Their resignations come three weeks after Owen Kenney, another director, resigned from the board.

The company said in a news release that Mr. Mueller is stepping down for health reasons and Mr. Smith for personal reasons. Robin Crossman, CEO of Florida nutraceutical company Arisanna Group, has joined the board.

The company declined to further comment on the resignations.

Eureka has two main assets in Canada: Artiva, a large vegetable greenhouse near Ottawa, and Acenzia, a nutraceutical manufacturer in Tecumseh, Ont. Neither have been licensed by Health Canada for cannabis operations.

LiveWell had been working with Canopy Growth Corp. and Canopy Rivers Inc., two early investors in the company, to get these properties licensed. However, following LiveWell’s merger with Vitality to form Eureka, Canopy Growth and Canopy Rivers commenced legal proceedings against the company, claiming the firm had “breached a number of covenants in favour of Canopy Growth and Canopy Rivers.”

Eureka cut ties with Canopy Rivers and Canopy Growth in May, and is now handling the Health Canada licencing process on its own. The lawsuit was settled in July “for an immaterial amount,” according to filings from Eureka.

“There is no guarantee that Health Canada will approve the Artiva facility in a timely fashion, or at all. The delay or denial of such approvals would mean that the Corporation may not pursue the Hemp business in Canada,” the company said in recent filings.

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Eureka is also being sued by a contractor for not paying for demolition services it received in 2018. The contractor claims $1.6-million in unpaid work, although Eureka says it only owes $854,000.

The company’s U.S. business is facing problems of its own. In February, ahead of the merger, Montana’s Department of Agriculture suspended Vitality’s commodity dealer license, which allows it to buy hemp directly from farmers, after a subsidiary failed to pay $8-million it owed to 21 farmers. The farmers are suing the company. It is still able to source hemp from third-party brokers.

“Payments have not been made [due] to lack of liquidity,” Eureka said in July. “We intend to fully settle these amounts due in the near term.”

The company has a second U.S. processing facility in New Mexico, although it is not yet in operation. Eureka says it needs to raise an additional $25-million to complete the conversion, and that “there is no assurance that the Corporation will successfully raise sufficient capital on reasonable terms or at all.”

In March, auditor MNP LLP warned that Vitality “has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.”

Ahead of the merger between LiveWell and Vitality, independent members of LiveWell’s board, including Mr. Smith, asked a third-party adviser for a fairness opinion about the transaction. The adviser determined that it was “unable to provide a fairness opinion… primarily because of the significant uncertainty over production capacity and sales forecasts and the then unknown impact of the dispute with Montana farmers.”

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LiveWell’s board went ahead with the merger anyway.

In Eureka’s annual information form filed in early August, the company acknowledged that LiveWell’s board had voted in favour of the merger to forestall a possible bankruptcy.

“In the judgment of the Livewell Board, there was a risk of bankruptcy or a requirement to sell LiveWell Canada at a price reflective of a distressed asset because the secured convertible notes issued during the first quarter of 2019 would become immediately due in the event that the Vitality Combination was not approved by LiveWell Canada’s shareholders,” Eureka said.

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