EX-99.1 2 a18-26052_1ex99d1.htm EX-99.1

Exhibit 99.1

 

 

Aphria Inc.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED MAY 31, 2018 AND MAY 31, 2017

 

(Expressed in Canadian Dollars, unless otherwise noted)

 



 

 

July 31, 2018

 

Independent Auditor’s Report

 

To the Shareholders of

Aphria Inc.

 

We have audited the accompanying consolidated financial statements of Aphria Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at May 31, 2018 and May 31, 2017 and the consolidated statements of income and comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

 

Management’s responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

 

PricewaterhouseCoopers LLP

245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4

T: +1 519 985 8900, F: +1 519 258 5457

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 



 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aphria Inc. and its subsidiaries as at May 31, 2018 and May 31, 2017 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

(Signed) “PricewaterhouseCoopers LLP”

 

Chartered Professional Accountants, Licensed Public Accountants

 

Windsor, Ontario, Canada

 



 

Aphria Inc.

Consolidated Statements of Financial Position

(In thousands of Canadian dollars)

 

 

 

 

 

May 31,

 

May 31,

 

 

 

Note

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

59,737

 

$

79,910

 

Marketable securities

 

4

 

45,062

 

87,347

 

Accounts receivable

 

 

 

3,386

 

826

 

Other current assets

 

5

 

14,384

 

5,571

 

Inventory

 

6

 

22,150

 

3,887

 

Biological assets

 

7

 

7,331

 

1,408

 

Due from related parties

 

8

 

 

464

 

Assets held for sale

 

13

 

40,620

 

 

Current portion of convertible notes receivable

 

12

 

1,942

 

 

 

 

 

 

194,612

 

179,413

 

Capital assets

 

9

 

303,151

 

72,455

 

Intangible assets

 

10

 

226,444

 

1,891

 

Convertible notes receivable

 

12

 

16,129

 

1,534

 

Interest in equity investees

 

13

 

4,966

 

28,376

 

Long-term investments

 

14

 

46,028

 

27,788

 

Deferred tax asset

 

15

 

 

3,315

 

Goodwill

 

11

 

522,762

 

1,200

 

 

 

 

 

$

1,314,092

 

$

315,972

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

$

31,517

 

$

5,874

 

Income taxes payable

 

15

 

3,584

 

 

Deferred revenue

 

 

 

2,607

 

2,800

 

Current portion of promissory note payable

 

17

 

610

 

878

 

Current portion of long-term debt

 

18

 

2,140

 

765

 

Current portion of derivative liability

 

13

 

3,396

 

 

 

 

 

 

43,854

 

10,317

 

Long-term liabilities

 

 

 

 

 

 

 

Promissory note payable

 

17

 

 

366

 

Long-term debt

 

18

 

28,337

 

31,420

 

Derivative liability

 

13

 

9,055

 

 

Deferred tax liability

 

15

 

59,253

 

 

 

 

 

 

140,499

 

42,103

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital

 

19

 

1,113,981

 

274,317

 

Warrants

 

20

 

1,375

 

445

 

Share-based payment reserve

 

 

 

22,006

 

3,230

 

Accumulated other comprehensive loss

 

 

 

(801

)

 

Non-controlling interest

 

22

 

9,580

 

 

Retained earnings (deficit)

 

 

 

27,452

 

(4,123

)

 

 

 

 

1,173,593

 

273,869

 

 

 

 

 

$

1,314,092

 

$

315,972

 

 

Nature of operations (Note 1), Commitments (Note 30), Subsequent events (Note 31)

 

Approved on behalf of the Board:

 

 

 

 

 

“John Cervini”

 

“Cole Cacciavillani”

Signed: Director

 

Signed: Director

 

The accompanying notes are an integral part of these consolidated financial statements

 

2



 

Aphria Inc.

Consolidated Statements of Income and Comprehensive Income

(In thousands of Canadian dollars, except share and per share amounts)

 

 

 

 

 

For the year ended
May 31,

 

 

 

Note

 

2018

 

2017

 

Revenue

 

 

 

$

36,917

 

$

20,438

 

Production costs

 

6

 

8,692

 

4,585

 

Other costs of sales

 

 

 

313

 

 

Gross profit before fair value adjustments

 

 

 

27,912

 

15,853

 

Fair value adjustment on sale of inventory

 

6

 

10,327

 

3,561

 

Fair value adjustment on growth of biological assets

 

7

 

(23,302

)

(5,005

)

Gross profit

 

 

 

40,887

 

17,297

 

Operating expenses:

 

 

 

 

 

 

 

General and administrative

 

23

 

13,901

 

4,678

 

Share-based compensation

 

24

 

17,874

 

2,399

 

Selling, marketing and promotion

 

 

 

11,873

 

6,664

 

Amortization

 

 

 

3,985

 

956

 

Research and development

 

 

 

490

 

492

 

Impairment of intangible asset

 

 

 

 

3,500

 

Transaction costs

 

 

 

5,192

 

 

 

 

 

 

53,315

 

18,689

 

 

 

 

 

(12,428

)

(1,392

)

Non-operating items:

 

 

 

 

 

 

 

Consulting revenue

 

17

 

1,244

 

512

 

Foreign exchange gain

 

 

 

124

 

483

 

(Loss) gain on marketable securities

 

4

 

(2,155

)

209

 

(Loss) gain on sale of capital assets

 

9

 

(191

)

11

 

Gain on dilution of ownership in equity investee

 

13

 

7,535

 

 

(Loss) gain from equity investees

 

13

 

(9,295

)

210

 

Gain on sale of equity investee

 

13

 

26,347

 

 

Deferred gain recognized

 

 

 

1,304

 

 

Finance income, net

 

25

 

5,012

 

728

 

Unrealized gain on embedded derivatives

 

12

 

4,135

 

 

Gain on long-term investments

 

26

 

26,675

 

3,571

 

Unrealized loss on derivative liability

 

13

 

(12,451

)

 

 

 

 

 

48,284

 

5,724

 

Income before income taxes

 

 

 

35,856

 

4,332

 

Income taxes

 

15

 

6,408

 

134

 

Net income

 

 

 

29,448

 

4,198

 

Other comprehensive loss

 

 

 

 

 

 

 

Other comprehensive loss from equity investee

 

13

 

(801

)

 

Net comprehensive income

 

 

 

$

28,647

 

$

4,198

 

Total comprehensive income is attributable to:

 

 

 

 

 

 

 

Owners of Aphria Inc.

 

 

 

28,867

 

4,198

 

Non-controlling interest

 

22

 

(220

)

 

 

 

 

 

$

28,647

 

$

4,198

 

Weighted average number of common shares - basic

 

 

 

161,026,463

 

104,341,319

 

Weighted average number of common shares - diluted

 

 

 

165,914,000

 

111,427,893

 

Earnings per share - basic

 

27

 

$

0.18

 

$

0.04

 

Earnings per share - diluted

 

27

 

$

0.18

 

$

0.04

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

3



 

Aphria Inc.

Consolidated Statements of Changes in Equity

(In thousands of Canadian dollars, except share amounts)

 

 

 

Number of
common shares

 

Share capital
(Note 19)

 

Warrants
(Note 20)

 

Share-based
payment
reserve

 

Accumulated
other
comprehensive
loss

 

Non-
controlling
interest
(Note 22)

 

Retained
earnings
(deficit)

 

Total

 

Balance at May 31, 2016

 

70,053,933

 

$

40,917

 

$

694

 

$

1,724

 

$

 

$

 

$

(8,321

)

$

35,014

 

Share issuance - August 2016 bought deal

 

17,250,000

 

31,959

 

 

 

 

 

 

31,959

 

Share issuance - November 2016 bought deal

 

10,062,500

 

37,263

 

 

 

 

 

 

37,263

 

Share issuance - February 2017 bought deal

 

11,500,000

 

53,869

 

 

 

 

 

 

53,869

 

Share issuance - May 2017 bought deal

 

13,269,252

 

81,323

 

 

 

 

 

 

81,323

 

Income tax recovery on share issuance costs

 

 

3,448

 

 

 

 

 

 

3,448

 

Share issuance - warrants exercised

 

15,251,165

 

23,647

 

(608

)

 

 

 

 

23,039

 

Share issuance - options exercised

 

1,053,095

 

1,534

 

 

(558

)

 

 

 

976

 

Share issuance - intangible asset acquisition

 

38,759

 

100

 

359

 

 

 

 

 

459

 

Share-based payments

 

100,000

 

257

 

 

2,064

 

 

 

 

2,321

 

Shares held in escrow for services not yet earned

 

50,000

 

 

 

 

 

 

 

 

Net comprehensive income for the year

 

 

 

 

 

 

 

4,198

 

4,198

 

Balance at May 31, 2017

 

138,628,704

 

$

274,317

 

$

445

 

$

3,230

 

$

 

$

 

$

(4,123

)

$

273,869

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

Share based

 

other

 

controlling

 

Retained

 

 

 

 

 

Number of

 

Share-based

 

Warrants

 

payment

 

comprehensive

 

interest

 

earnings

 

 

 

 

 

common shares

 

(Note 19)

 

(Note 20)

 

reserve

 

loss

 

(Note 22)

 

(deficit)

 

Total

 

Balance at May 31, 2017

 

138,628,704

 

$

274,317

 

$

445

 

$

3,230

 

$

 

$

 

$

(4,123

)

$

273,869

 

Share issuance - November 2017 bought deal

 

12,689,675

 

86,661

 

 

 

 

 

 

86,661

 

Share issuance - January 2018 bought deal

 

8,363,651

 

109,000

 

 

 

 

 

 

109,000

 

Share issuance - Broken Coast acquisition

 

14,373,675

 

214,168

 

 

 

 

 

 

214,168

 

Share issuance - Nuuvera acquisition

 

31,226,910

 

411,258

 

1,015

 

12,133

 

 

 

 

424,406

 

Share issuance - warrants exercised

 

2,388,636

 

3,767

 

(85

)

 

 

 

 

3,682

 

Share issuance - options exercised

 

2,493,623

 

11,559

 

 

(7,230

)

 

 

 

4,329

 

Share issuance - deferred share units

 

5,050

 

62

 

 

 

 

 

 

62

 

Income tax recovery on share issuance costs

 

 

3,002

 

 

 

 

 

 

3,002

 

Share-based payments

 

 

 

 

15,780

 

 

 

 

15,780

 

Shares held in escrow earned in exchange for services

 

 

187

 

 

 

 

 

 

187

 

Share-based payments rescinded

 

 

 

 

(1,907

)

 

 

1,907

 

 

Non-controlling interest

 

 

 

 

 

 

9,800

 

 

9,800

 

Net comprehensive income for the year

 

 

 

 

 

(801

)

(220

)

29,668

 

28,647

 

Balance at May 31, 2018

 

210,169,924

 

$

1,113,981

 

$

1,375

 

$

22,006

 

$

(801

)

$

9,580

 

$

27,452

 

$

1,173,593

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

4



 

Aphria Inc.

Consolidated Statements of Cash Flows

(In thousands of Canadian dollars)

 

 

 

 

 

For the year ended
May 31,

 

 

 

Note

 

2018

 

2017

 

Cash generated from (used in) operating activities:

 

 

 

 

 

 

 

Net income for the year

 

 

 

$

29,448

 

$

4,198

 

Adjustments for:

 

 

 

 

 

 

 

Future income taxes

 

15

 

3,658

 

134

 

Fair value adjustment on sale of inventory

 

6

 

10,327

 

3,561

 

Fair value adjustment on growth of biological assets

 

7

 

(23,302

)

(5,005

)

Loss (gain) on marketable securities

 

4

 

2,155

 

(209

)

Unrealized foreign exchange gain

 

12

 

(94

)

 

Amortization

 

9,10

 

6,678

 

1,942

 

Loss (gain) on sale of capital assets

 

9

 

191

 

(11

)

Impairment of intangible asset

 

10

 

 

3,500

 

Accretion interest on convertible note receivable

 

12

 

(1,808

)

(34

)

Unrealized gain on embedded derivatives

 

12

 

(4,135

)

 

Gain on dilution of ownership in equity investee

 

13

 

(7,535

)

 

Loss (gain) from equity investees

 

13

 

9,295

 

(210

)

Gain on sale of equity investee

 

13

 

(26,347

)

 

Deferred gain on recognized

 

 

 

(1,304

)

 

Consulting revenue

 

17

 

(1,244

)

(512

)

Other non-cash items

 

 

 

(63

)

71

 

Share-based compensation

 

24

 

17,874

 

2,399

 

Gain on long-term investments

 

26

 

(26,675

)

(3,571

)

Unrealized loss on derivative liability

 

13

 

12,451

 

 

Transaction costs

 

 

 

5,192

 

 

Change in non-cash working capital

 

28

 

(10,411

)

(928

)

 

 

 

 

(5,649

)

5,325

 

Cash provided by financing activities:

 

 

 

 

 

 

 

Share capital issued, net of cash issuance costs

 

 

 

195,661

 

204,408

 

Share capital issued on warrants and options exercised

 

 

 

8,011

 

24,014

 

Proceeds from non-controlling interest

 

 

 

9,800

 

 

Advances from related parties

 

8

 

11,386

 

388

 

Repayment of amounts due to related parties

 

8

 

(10,890

)

(852

)

Proceeds from long-term debt

 

18

 

 

32,825

 

Repayment of long-term debt

 

18

 

(7,622

)

(644

)

 

 

 

 

206,346

 

260,139

 

Cash used in investing activities:

 

 

 

 

 

 

 

Investment in marketable securities

 

4

 

(7,365

)

(109,269

)

Proceeds from disposal of marketable securities

 

4

 

47,495

 

22,131

 

Investment in capital and intangible assets, net of shares issued

 

9,10

 

(216,699

)

(67,722

)

Proceeds from disposal of capital assets

 

9

 

431

 

33

 

Convertible notes advances

 

12

 

(14,001

)

(1,500

)

Repayment of convertible notes receivable

 

 

 

640

 

 

Repayment of promissory notes receivable

 

 

 

 

568

 

Investment in long-term investments and equity investees

 

 

 

(51,692

)

(53,464

)

Proceeds from disposal of long-term investments and equity investees

 

 

 

43,077

 

7,196

 

Net cash paid on business acquisitions

 

11

 

(22,756

)

 

 

 

 

 

(220,870

)

(202,027

)

Net (decrease) increase in cash and cash equivalents

 

 

 

(20,173

)

63,437

 

Cash and cash equivalents, beginning of year

 

 

 

79,910

 

16,473

 

Cash and cash equivalents, end of year

 

 

 

$

59,737

 

$

79,910

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

1.      Nature of operations

 

Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.

 

Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical cannabis under the provisions of the Access to Cannabis for Medical Purposes Regulations (“ACMPR”). In February 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”) (Note 11). Broken Coast is licensed to produce and sell medical cannabis under the provision of the Access to Cannabis for Medical Purposes Regulations (“ACMPR”). In March 2018, the Company acquired Nuuvera Inc. (“Nuuvera”) (Note 11), Nuuvera is an international organization with a focus on building a global cannabis brand, with operations in Germany, Italy, Spain, Malta, and Lesotho.

 

1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms. Aphria Diamond has applied for its cultivation licence under the provisions of the ACMPR.

 

The registered office of the Company is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.

 

The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.

 

These consolidated financial statements were approved by the Company’s Board of Directors on July 31, 2018.

 

2.      Basis of preparation

 

(a)        Statement of compliance

 

The policies applied in these consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”).

 

(b)        Basis of measurement

 

These consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.

 

(c)        Functional currency

 

The Company and its subsidiaries’ functional currency, as determined by management is Canadian dollars. These consolidated financial statements are presented in Canadian dollars.

 

(d)        Foreign currency translation

 

All figures presented in the consolidated financial statements are reflected in Canadian dollars, which is the functional currency of the Company and all of its subsidiaries.

 

Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the foreign exchange rate applicable at the statement of financial position date. Realized and unrealized exchange gains and losses are recognized through profit and loss.

 

The assets and liabilities of foreign operations, including marketable securities, long-term investments and promissory notes payable, are translated in Canadian dollars at year-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity.

 

6



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

(e)     Basis of consolidation

 

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

 

Subsidiaries

 

Jurisdiction of incorporation

 

Ownership interest

 

Pure Natures Wellness Inc. (o/a Aphria)

 

Ontario, Canada

 

100

%

Aphria (Arizona) Inc.

 

Arizona, United States

 

100

%

Cannan Growers Inc.

 

British Columbia, Canada

 

100

%

Nuuvera Inc.

 

Ontario, Canada

 

100

%

Nuuvera Holdings Ltd.

 

Ontario, Canada

 

100

%

ARA — Avanti Rx Analytics Inc.

 

Ontario, Canada

 

100

%

Avalon Pharmaceuticals Inc.

 

Ontario, Canada

 

100

%

2589671 Ontario Inc.

 

Ontario, Canada

 

100

%

2589674 Ontario Inc.

 

Ontario, Canada

 

100

%

Nuuvera Israel Ltd.

 

Tel Aviv, Israel

 

100

%

Nuuvera Deutschland GmbH

 

Hamburg, Germany

 

100

%

FL-Group

 

Genoa, Italy

 

100

%

Broken Coast Cannabis Ltd.

 

British Columbia, Canada

 

99.86

%

Nuuvera Malta Ltd.

 

Valletta, Malta

 

90

%

ASG Pharma Ltd.

 

Valletta, Malta

 

90

%

1974568 Ontario Ltd.

 

Ontario, Canada

 

51

%

 

Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.

 

The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.

 

(e)       Amalgamation

 

Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.

 

(f)       Interest in equity investees

 

The Company’s interest in equity investees is comprised of its interest in Liberty Health Sciences Inc. (“Liberty”) and Althea Company Pty Ltd. (“Althea”). During the year, the Company entered into an agreement which has changed the classification of its investment in Liberty from equity investee to assets held for sale (Note 13).

 

In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.

 

Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.

 

7



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.

 

Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

The carrying amount of equity investments is tested for impairment in accordance with the policy described in Note 3(j).

 

3.     Significant accounting policies

 

The significant accounting policies used by the Company are as follows:

 

a. Revenue

 

Revenue is recognized at the fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all the following conditions have been satisfied, which are generally met once the products are shipped to customers.

 

·                  The Company has transferred the significant risks and rewards of ownership of the goods to the purchaser;

·                  The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

·                  The amount of revenue can be measured reliably;

·                  It is probable that the economic benefits associated with the transaction will flow to the entity; and

·                  The costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

The Company recognizes revenue from consulting services on a straight-line basis over the term of its consulting agreement with a third party as the services are provided.

 

Amounts disclosed as revenue are net of allowances, discounts and rebates.

 

b.              Cash and cash equivalents

 

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of changes in value.

 

c.               Marketable securities

 

Marketable securities are comprised of liquid investments in federal, provincial and/or corporate bonds with maturities less than 3.5 years. Marketable securities are recognized initially at fair value and subsequently adjusted to fair value through profit or loss (“FVTPL”).

 

d.              Inventory

 

Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories of harvested cannabis are transferred from biological assets into inventory at their fair value at harvest less costs to sell, which is deemed to be their cost. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost.

 

8



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

e.   Biological assets

 

The Company’s biological assets consist of medical cannabis plants which are not yet harvested. These biological assets are measured at fair value less costs to sell. The Company capitalizes all related direct and indirect costs of production to the biological assets to fair value less costs to sell at each reporting date. At the point of harvest, the biological assets are transferred to inventory at their fair value less costs to sell.

 

Gains or losses arising from changes in fair value less cost to sell are included in the results of operations of the related period.

 

f.    Assets held for sale

 

Assets and liabilities held for disposal are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.

 

g. Capital assets

 

Capital assets are stated at cost, net of accumulated amortization and accumulated impairment losses, if any.

 

Amortization is calculated using the following terms and methods:

 

Asset type

 

Amortization method

 

Amortization term

Land

 

Not amortized

 

No term

Production facility

 

Straight-line

 

20 years

Equipment

 

Straight-line

 

3 – 10 years

Leasehold improvements

 

Straight-line

 

Over lease term

Construction in progress

 

Not amortized

 

No term

 

An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated statements of income and comprehensive income in the year the asset is derecognized.

 

The assets’ residual values, useful lives and methods of amortization are reviewed at each financial year end, and adjusted prospectively if appropriate.

 

h.   Intangible assets

 

Intangible assets are stated at cost, net of accumulated amortization and accumulated impairment losses, if any.

 

Amortization is calculated using the following terms and methods:

 

Asset type

 

Amortization method

 

Amortization term

Customer relationships

 

Straight-line

 

3 years

Corporate website

 

Straight-line

 

2 years

Licences, permits & applications

 

Straight-line

 

90 months – indefinite

Non-compete agreements

 

Straight-line

 

Over term of non-compete

Tokyo Smoke licensing agreement

 

Straight-line

 

5 years

Intellectual property, trademarks & brands

 

Straight-line

 

15 months – 20 years

 

The estimated success of applications, useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

9



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

Following initial recognition, intangible assets with indefinite useful lives are carried at cost less any accumulated impairment losses.

 

i.      Goodwill

 

Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net tangible and intangible assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

 

j.      Impairment of non-financial assets

 

Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

For the purpose of testing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit, or “CGU”). An impairment loss is recognized for the amount, if any, by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and the value in use (being the present value of expected future cash flows of the asset or CGU). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized.

 

k.     Income taxes

 

Income tax expense consisting of current and deferred tax expense is recognized in the consolidated statements of income and comprehensive income. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.

 

Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.

 

A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

 

l.      Earnings per share

 

Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. The dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the year. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.

 

10



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

m.  Share-based compensation

 

The Company has a stock option plan in place. The Company measures equity settled share-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Company’s estimate of equity instruments that will eventually vest. Fair value is measured using the Black-Scholes option pricing model. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. Any revisions are recognized in the consolidated statements of income and comprehensive income such that the cumulative expense reflects the revised estimate.

 

n.   Research and development

 

Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures that do not meet the above criteria are recognized in the consolidated statements of income and comprehensive income as incurred.

 

o.   Financial instruments

 

Financial assets and other financial liabilities are classified into one of four categories:

 

·    FVTPL;

·    held-to-maturity (“HTM”);

·    available for sale (“AFS”); and

·    loans and receivables.

 

(i)            FVTPL financial assets

 

Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of income and comprehensive income. Transaction costs are expensed as incurred.

 

(ii)             HTM investments

 

HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction costs and subsequently at amortized cost.

 

(iii)            AFS financial assets

 

AFS financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other categories. Gains and losses arising from changes in fair value are recognized in other comprehensive income.

 

(iv)            Loans and receivables

 

Loans and receivables are financial assets having fixed or determinable payments that are not quoted in an active market. They are initially recognized at the transaction value and subsequently carried at amortized cost less, when material, a discount to reduce the loans and receivables to fair value.

 

(v)             Impairment of financial assets

 

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

 

11



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

The carrying amount of all financial assets, excluding trade receivables, is directly reduced by the impairment loss. The carrying amount of trade receivables is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated statements of income and comprehensive income. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease relates to an event occurring after the impairment was recognized; the previously recognized impairment loss is reversed through the consolidated statements of income and comprehensive income.

 

(vi)            Financial liabilities and other financial liabilities

 

Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with changes being recognized through the consolidated statements of income and comprehensive income. Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.

 

(vii)           Embedded derivatives

 

Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in profit or loss. The Company has convertible loans receivables whereby balances can be converted into equity and a share purchase agreement resulting in an obligation to sell shares at an 18% discount on the market price, based on a 10 day volume weighted trading price (Note 13).

 

(viii)          Classification of financial instruments

 

Cash and cash equivalents — FVTPL

Marketable securities — FVTPL

Accounts receivables — loans and receivables

Other receivables — loans and receivables

Convertible note receivable — AFS

Embedded derivative — derivative financial instruments

Long-term investments — FVTPL

Accounts payable and accrued liabilities — other financial liabilities

Promissory note payable — other financial liabilities

Long-term debt — other financial liabilities

Derivative liability — derivative financial instruments

 

(ix)            Determination on fair value of long-term investments

 

All long-term investments (other than Level 3 warrants) are initially recorded at the transaction price, being the fair value at the time of acquisition. Thereafter, at each reporting period, the fair value of an investment is adjusted using one or more of the valuation indicators described below. Warrants of private companies are carried at their intrinsic value.

 

p.   Critical accounting estimates and judgments

 

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.

 

12



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

Long-term investments

 

The determination of fair value of the Company’s long-term investments at other than initial cost are subject to certain limitations. Financial information for private companies in which the Company has investments may not be available and, even if available, that information may be limited and/or unreliable.

 

Use of the valuation approach described below may involve uncertainties and determinations based on the Company’s judgment and any value estimated from these techniques may not be realized or realizable.

 

Company-specific information is considered when determining whether the fair value of a long-term investment should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will take into account trends in general market conditions and the share performance of comparable publicly-traded companies when valuing long-term investments.

 

The fair value of long-term investments may be adjusted if:

 

·             There has been a significant subsequent equity financing provided by outside investors at a valuation different than the current value of the investee company, in which case the fair value of the investment is set to the value at which that financing took place;

·             There have been significant corporate, political, or operating events affecting the investee company that, in management’s opinion, have a material impact on the investee company’s prospects and therefore its fair value. In these circumstances, the adjustment to the fair value of the investment will be based on management’s judgment and any value estimated may not be realized or realizable;

·    The investee company is placed into receivership or bankruptcy;

·             Based on financial information received from the investee company, it is apparent to the Company that the investee company is unlikely to be able to continue as a going concern;

·             Important positive/negative management changes by the investee company that the Company’s management believes will have a positive/negative impact on the investee company’s ability to achieve its objectives and build value for shareholders.

 

Adjustment to the fair value of a long-term investment will be based upon management’s judgment and any value estimated may not be realized or realizable. The resulting values for non-publicly traded investments may differ from values that would be realized if a ready market existed.

 

Biological assets and inventory

 

Management is required to make a number of estimates in calculating the fair value less costs to sell of biological assets and harvested cannabis inventory. These estimates include a number of assumptions such as estimating the stage of growth of the cannabis, harvesting costs, sales price, and expected yields.

 

Estimated useful lives, impairment considerations and amortization of capital and intangible assets

 

Amortization of capital and intangible assets is dependent upon estimates of useful lives based on management’s judgment.

 

Goodwill and indefinite life intangible asset impairment testing requires management to make estimates in the impairment testing model. On an annual basis, the Company tests whether goodwill and indefinite life intangible assets are impaired.

 

Impairment of definite long-lived assets is influenced by judgment in defining a CGU and determining the indicators of impairment, and estimates used to measure impairment losses

 

The recoverable value of goodwill, indefinite and definite long-lived assets is determined using discounted future cash flow models, which incorporate assumptions regarding future events, specifically future cash flows, growth rates and discount rates.

 

13



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

Share-based compensation

 

The fair value of share-based compensation expenses are estimated using the Black-Scholes option pricing model and rely on a number of estimates, such as the expected life of the option, the volatility of the underlying share price, the risk free rate of return, and the estimated rate of forfeiture of options granted.

 

Business combinations

 

Judgement is used in determining whether an acquisition is a business combination or an asset acquisition. In determining the allocation of the purchase price in a business combination, including any acquisition-related contingent consideration, estimates including market based and appraisal values are used. The contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37, as appropriate, with the corresponding gain or loss being recognized in profit or loss.

 

The Company measures all assets acquired and liabilities assumed at their acquisition-date fair values. Non-controlling interests in the acquiree are measured on the basis of the non-controlling interests’ proportionate share of this equity in the acquiree’s identifiable net assets. Acquisition-related costs are recognized as expenses in the periods in which the costs are incurred and the services are received (except for the costs to issue debt or equity securities which are recognized according to specific requirements). The excess of the aggregate of (a) the consideration transferred to obtain control, the amount of any non-controlling interest in the acquire over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, is recognized as goodwill as of the acquisition date.

 

q.   New standards and interpretations issued but not yet adopted

 

IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company is assessing the impact of the standard on its convertible notes receivable and its investments where it holds less than significant influence. The Company is currently completing its assessment of the impact of this new standard.

 

The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the period of the adoption of the new standard.

 

The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.

 

IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard, with a focus on consulting contracts and royalty fees.

 

The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.

 

IFRS 16 — Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.

 

14



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.

 

The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.

 

4.     Marketable securities

 

Marketable securities are classified as fair value through profit or loss, and are comprised of:

 

 

 

S&P rating at
purchase

 

Interest
rate

 

Maturity
date

 

May 31,
2018

 

May 31,
2017

 

Fixed Income:

 

 

 

 

 

 

 

 

 

 

 

Molson Coors Brewing Company

 

BBB-

 

3.950

%

10/06/17

 

$

 

$

 1,116

 

Ford Motor Credit Co. LLC

 

BBB

 

3.320

%

12/19/17

 

 

1,988

 

Goldman Sachs & Co. LLC

 

A+

 

3.375

%

2/01/18

 

 

5,078

 

The Manufacturer’s Life Insurance Company

 

AA-

 

2.819

%

2/26/18

 

 

1,472

 

Canadian Western Bank

 

A-

 

2.531

%

3/22/18

 

 

3,039

 

Ford Motor Credit Co. LLC

 

BBB

 

3.700

%

8/02/18

 

1,015

 

1,037

 

Sobeys Inc.

 

BB+

 

3.520

%

8/08/18

 

3,040

 

3,078

 

Royal Bank of Canada

 

AA-

 

2.770

%

12/11/18

 

 

5,180

 

Canadian Western Bank

 

A-

 

3.077

%

1/14/19

 

1,528

 

1,535

 

Sun Life Financial Inc.

 

A

 

2.770

%

5/13/19

 

3,018

 

3,064

 

Ford Motor Credit Co. LLC

 

BBB

 

3.140

%

6/14/19

 

5,101

 

5,207

 

Canadian Natural Resources Ltd.

 

BBB+

 

3.050

%

6/19/19

 

 

2,054

 

Canadian Western Bank

 

A-

 

3.463

%

12/17/19

 

1,025

 

1,028

 

Laurentian Bank of Canada

 

BBB

 

2.500

%

1/23/20

 

3,003

 

6,099

 

Enercare Solutions Inc.

 

BBB

 

4.600

%

2/03/20

 

3,974

 

4,008

 

Enbridge Inc.

 

BBB+

 

4.530

%

3/09/20

 

5,203

 

5,395

 

Central 1 Credit Union

 

A

 

1.870

%

3/16/20

 

 

5,020

 

Choice Properties REIT

 

BBB

 

3.600

%

4/20/20

 

5,091

 

5,237

 

Penske Truck Leasing Co., L.P.

 

BBB

 

2.950

%

6/12/20

 

 

5,145

 

Westcoast Energy Inc.

 

BBB+

 

4.570

%

7/02/20

 

5,293

 

5,430

 

Bank of Montreal (USD)

 

A+

 

1.400

%

4/10/18

 

 

4,052

 

Citigroup Inc. (USD)

 

BBB+

 

2.050

%

12/17/18

 

3,914

 

4,081

 

Royal Bank of Canada (USD)

 

AA-

 

1.625

%

4/15/19

 

3,857

 

4,040

 

Wells Fargo & Company (USD)

 

A

 

2.150

%

1/30/20

 

 

3,964

 

 

 

 

 

 

 

 

 

$

45,062

 

$

87,347

 

 

The cost of marketable securities as at May 31, 2018 was $45,863 (May 31, 2017 — $87,138). During the year ended May 31, 2018, the company divested of certain marketable securities for proceeds of $47,495 (2017 - $22,131), resulting in a (loss) gain on disposal of $(608) (2017 - $35), and re-invested $7,365 (2017 - $109,269). During the year ended May 31, 2018, the Company recognized a (loss) gain of $(2,155) (2017 - $209) on its marketable securities portfolio, of which $(1,547) (2017 - $174) represented unrealized fair value adjustments.

 

15



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

5.                   Other current assets

 

Other current assets are comprised of:

 

 

 

May 31,

 

May 31,

 

 

 

2018

 

2017

 

HST receivable

 

$

10,840

 

$

3,675

 

Accrued interest

 

831

 

701

 

Credit card receivable

 

170

 

103

 

Prepaid assets

 

1,720

 

1,060

 

Other

 

823

 

32

 

 

 

$

14,384

 

$

5,571

 

 

6.                   Inventory

 

Inventory is comprised of:

 

 

 

Capitalized
cost

 

Fair value
adjustment

 

 

May 31,
2018

 

May 31,
2017

 

Harvested cannabis

 

$

4,111

 

$

8,220

 

 

$

12,331

 

$

2,507

 

Harvested cannabis trim

 

810

 

1,467

 

 

2,277

 

421

 

Cannabis oil

 

2,660

 

3,918

 

 

6,578

 

682

 

Packaging and supplies

 

964

 

 

 

964

 

277

 

 

 

$

8,545

 

$

13,605

 

 

$

22,150

 

$

3,887

 

 

During the year ended May 31, 2018, the Company recorded $8,313 (2017 - $4,585) of production costs. Included in production costs for the year ended May 31, 2018 is $241 of cannabis oil conversion costs (2017 - $99), $236 related to the cost of accessories (2017 - $58), and amortization of $1,715 (2017 - $986). The Company also included $978 of amortization which remains in inventory for the year ended May 31, 2018 related to capital assets utilized in production. During the year ended May 31, 2018, the Company expensed $10,327 (2017 —$3,561) of fair value adjustments on the growth its biological assets included in inventory sold.

 

The Company holds 3,221.3 kilograms of harvested cannabis (May 31, 2017 — 668.5 kgs), 702.0 kilograms of harvested cannabis trim (May 31, 2017 — 140.1 kgs) and 7,724.7 litres of cannabis oils or 1,716.6 kilograms equivalent (May 31, 2017 — 1,091.3 litres or 181.9 kilograms equivalent) at May 31, 2018.

 

7.                   Biological assets

 

Biological assets are comprised of:

 

 

 

Amount

 

Balance as at May 31, 2016

 

$

698

 

Changes in fair value less costs to sell due to biological transformation

 

5,005

 

Production costs capitalized

 

4,188

 

Transferred to inventory upon harvest

 

(8,483

)

Balance as at May 31, 2017

 

$

1,408

 

Changes in fair value less costs to sell due to biological transformation

 

23,302

 

Purchased as part of business acquisition

 

826

 

Production costs capitalized

 

12,143

 

Transferred to inventory upon harvest

 

(30,348

)

Balance at May 31, 2018

 

$

7,331

 

 

16



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

The Company values medical cannabis plants at cost, which approximates fair value from the date of initial clipping from mother plants until half way through the flowering cycle of the plants. Measurement of the biological transformation of the plant at fair value less costs to sell begins in the fourth week prior to harvest and is recognized evenly until the point of harvest. The number of weeks in the growing cycle is between twelve and sixteen weeks from propagation to harvest. The Company has determined the fair value less costs to sell of harvested cannabis and harvested cannabis trim to be $3.75 and $3.00 per gram respectively, upon harvest for greenhouse produced cannabis and $4.25 and $3.50 per gram respectively, upon harvest for indoor produced cannabis.

 

The effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $23,302 during the year ended May 31, 2018 (2017 — $5,005).

 

The fair value of biological assets is determined using a valuation model to estimate expected harvest yield per plant applied to the estimated price per gram less processing and selling costs. Only when there is a material change from the expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the year, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.

 

In determining the fair value of biological assets, management has made the following estimates in this valuation model:

 

·                  The harvest yield is between 40 grams and 80 grams per plant;

·                  The selling price is between $2.50 and $10.00 per gram;

·                  Processing costs include drying and curing, testing, post-harvest overhead allocation, packaging and labelling costs between $0.30 and $0.80 per gram;

·                  Selling costs include shipping, order fulfilment, patient acquisition and patient maintenance costs between $0.00 and $3.00 per gram;

 

Sales price used in the valuation of biological assets is based on the average selling price of all cannabis products and can vary based on different strains being grown as well as the proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to a variety of factors, such as strains being grown, length of growing cycle, and space allocated for growing. Management reviews all significant inputs based on historical information obtained as well as based on planned production schedules.

 

Management has quantified the sensitivity of the inputs and determined the following:

 

·                  Selling price per gram — a decrease in the average selling price per gram by 5% would result in the biological asset value decreasing by $267 (2017 - $25) and inventory decreasing by $1,040 (2017 - $180)

·                  Harvest yield per plant — a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $179 (2017 - $15)

 

These inputs are level 3 on the fair value hierarchy, and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

 

8.                   Related party transactions

 

The Company funds a small portion of the Canadian operating costs of Liberty, for which Liberty reimburses the Company quarterly. Additionally, the Company purchases certain electrical generation equipment and pays rent to a company owned by a director. The balance owing from related parties as at May 31, 2018 was $nil (May 31, 2017 - $464). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.

 

During the year ended May 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $276 (2017 - $388). Included in this amount was rent of $45 charged during the year ended May 31, 2018 (2017 - $49).

 

The Company funded the start-up costs and operations of Liberty Health Sciences Inc., a related party through an equity investment.

 

17



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

 

 

Amount

 

Balance due to (from) related parties as at May 31, 2017

 

$

(464

)

Related party charges in the year

 

276

 

Payments to related parties in the year

 

(276

)

Non-cash payments made on behalf of related parties in the year

 

(32

)

Payments made on behalf of related parties in the year

 

(10,614

)

Repayments made by related parties in the year

 

11,110

 

Balance at May 31, 2018

 

$

 

 

During the year ended May 31, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc., its sole holdings being the minority interests in Copperstate and CSF, to Liberty for a purchase price of $20,000 (Note 14). Subsequent to entering into this definitive agreement, the existing investors in Copperstate and CSF exercised their right of first refusal to purchase the minority interests on the same terms. Subsequent to year-end, this transaction closed.

 

During the year ended May 31, 2018, the Company purchased capital assets for $995 from a company controlled by a director. During the prior year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6,100. The purchase price was allocated as follows: (i) $1,300 to land; (ii) $3,550 to greenhouse infrastructure; and, (iii) $1,250 to licences, permits & applications — intangible assets.

 

Key management personnel compensation for the year ended May 31, 2018 and 2017 was comprised of:

 

 

 

For the year ended
May 31,

 

 

 

2018

 

2017

 

Salaries

 

$

1,699

 

$

829

 

Short-term employment benefits (included in office and general)

 

70

 

84

 

Share-based compensation

 

3,235

 

594

 

 

 

$

5,004

 

$

1,507

 

 

Directors and officers of the Company control 8.5% or 17,902,125 of the voting shares of the Company.

 

18



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

9.                   Capital assets

 

 

 

 

 

Production

 

 

 

Leasehold

 

Construction

 

Total capital

 

 

 

Land

 

Facility

 

Equipment

 

improvements

 

in process

 

assets

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

 

$

3,499

 

$

4,812

 

$

65

 

$

8,376

 

Additions

 

10,725

 

4,018

 

1,700

 

16

 

49,958

 

66,417

 

Transfers

 

104

 

12,152

 

174

 

(4,566

)

(7,864

)

 

Disposals

 

 

 

(33

)

 

 

(33

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2017

 

10,829

 

16,170

 

5,340

 

262

 

42,159

 

74,760

 

Business acquisitions

 

854

 

6,992

 

2,860

 

1,388

 

5,947

 

18,041

 

Additions

 

12,716

 

47,149

 

4,759

 

15

 

151,899

 

216,538

 

Transfers

 

105

 

29,338

 

2,990

 

 

(32,433

)

 

Disposals

 

 

(207

)

 

 

(415

)

(622

)

At May 31, 2018

 

$

24,504

 

$

99,442

 

$

15,949

 

$

1,665

 

$

167,157

 

$

308,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

 

$

554

 

$

513

 

$

 

$

1,067

 

Amortization

 

 

 

458

 

717

 

74

 

 

1,249

 

Transfers

 

 

525

 

 

(525

)

 

 

Disposals

 

 

 

(11

)

 

 

(11

)

At May 31, 2017

 

 

983

 

1,260

 

62

 

 

2,305

 

Amortization

 

 

1,517

 

1,697

 

47

 

 

3,261

 

At May 31, 2018

 

$

 

$

2,500

 

$

2,957

 

$

109

 

$

 

$

5,566

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

 

$

2,945

 

$

4,299

 

$

65

 

$

7,309

 

At May 31, 2017

 

$

10,829

 

$

15,187

 

$

4,080

 

$

200

 

$

42,159

 

$

72,455

 

At May 31, 2018

 

$

24,504

 

$

96,942

 

$

12,992

 

$

1,556

 

$

167,157

 

$

303,151

 

 

During the year ended May 31, 2018, the Company sold assets that were not yet in use prior to disposal with a cost of $622 (2017 - $33) and a net book value of $622 (2017 - $22), for proceeds of $431 (2017 - $33), resulting in a loss (gain) on sale of capital assets of $191 (2017 - $(11)).

 

19



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

10.            Intangible assets

 

 

 

Customer
relationships

 

Corporate
website

 

Licences,
permits &
applications

 

Non-compete

agreements

 

Tokyo Smoke
licensing
agreement

 

Intellectual
property,
trademarks &
brands

 

Total
intangible
assets

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

162

 

$

 

$

 

$

 

$

4,428

 

$

4,590

 

Additions

 

 

 

56

 

1,250

 

 

459

 

 

1,765

 

At May 31, 2017

 

 

218

 

1,250

 

 

459

 

4,428

 

6,355

 

Business acquisitions

 

11,730

 

39

 

137,920

 

1,930

 

 

76,190

 

227,809

 

Additions

 

 

152

 

 

 

 

9

 

161

 

At May 31, 2018

 

$

11,730

 

$

409

 

$

139,170

 

$

1,930

 

$

459

 

$

80,627

 

$

234,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

88

 

$

 

$

 

$

 

$

184

 

$

272

 

Amortization

 

 

 

68

 

153

 

 

57

 

414

 

692

 

Impairment

 

 

 

 

 

 

3,500

 

3,500

 

At May 31, 2017

 

 

156

 

153

 

 

57

 

4,098

 

4,464

 

Amortization

 

1,274

 

100

 

124

 

314

 

92

 

1,513

 

3,417

 

At May 31, 2018

 

$

1,274

 

$

256

 

$

277

 

$

314

 

$

149

 

$

5,611

 

$

7,881

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

$

 

$

74

 

$

 

$

 

$

 

$

4,244

 

$

4,318

 

At May 31, 2017

 

$

 

$

62

 

$

1,097

 

$

 

$

402

 

$

330

 

$

1,891

 

At May 31, 2018

 

$

10,456

 

$

153

 

$

138,893

 

$

1,616

 

$

310

 

$

75,016

 

$

226,444

 

 

11.            Business Acquisitions

 

Acquisition of Broken Coast Cannabis Ltd.

 

On February 13, 2018, the Company entered into a share purchase agreement to purchase all of the shares of Cannan Growers Inc. (“Cannan”), a holding company owning shares of Broken Coast Cannabis Ltd. (“Broken Coast”), and to acquire the remaining shares, for a combined total of 99.86%, of the issued and outstanding shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate 14,373,675 common shares. The share purchase agreement entitled the Company to control Broken Coast effective on February 1, 2018, which became the effective acquisition date.

 

The Company is in the process of determining the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the acquisition date:

 

20



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2018 and May 31, 2017

(In thousands of Canadian dollars, except share and per share amounts)

 

 

 

Note

 

Number of shares

 

Share price

 

Amount

 

Consideration paid

 

 

 

 

 

 

 

 

 

Shares issued

 

(i)

 

14,373,675

 

$

14.90

 

$

214,168

 

Total consideration paid

 

 

 

 

 

 

 

$

214,168

 

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

2,007

 

Accounts receivable

 

 

 

 

 

 

 

299

 

Other current assets

 

 

 

 

 

 

 

43

 

Inventory

 

 

 

 

 

 

 

2,572

 

Biological assets

 

 

 

 

 

 

 

826

 

Long-term assets

 

 

 

 

 

 

 

 

 

Capital assets

 

 

 

 

 

 

 

13,298

 

Customer relationships

 

 

 

 

 

 

 

11,730

 

Corporate website

 

 

 

 

 

 

 

39

 

Licences, permits & applications

 

 

 

 

 

 

 

6,320

 

Non-competition agreements

 

 

 

 

 

 

 

1,930

 

Trademark & brands

 

 

 

 

 

 

 

72,490

 

Goodwill

 

 

 

 

 

 

 

145,794

 

Total assets

 

 

 

 

 

 

 

257,348

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

 

 

 

 

10,455

 

Income taxes payable

 

 

 

 

 

 

 

922

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

 

 

 

 

 

25,889

 

Long-term debt

 

 

 

 

 

 

 

5,914

 

Total liabilities

 

 

 

 

 

 

 

43,180

 

 

 

 

 

 

 

 

 

 

 

Total net assets acquired

 

 

 

 

 

 

 

$

214,168

 

 


(i)                           Share price based on the price of the shares on February 1, 2018.

 

The amount of net income and comprehensive income of Broken Coast since the acquisition date included in these consolidated financial statements was $1,837. Net income and comprehensive net income for the Company would have been higher by approximately $2,268 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs to date of $1,643.

 

Acquisition of Nuuvera Corp.

 

On March 23, 2018, the Company completed the previously announced definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which the Company acquired, by way of a court-approved plan of arrangement, under the Business Corporations Act (Ontario) (the “Transaction”), 100% of the issued and outstanding common shares (on a fully diluted basis) of Nuuvera for a total consideration of $0.62 in cash plus 0.3546 of an Aphria share for each Nuuvera share held. All of Nuuvera’s outstanding options were exch