EX-99.10 11 a18-26052_1ex99d10.htm EX-99.10

Exhibit 99.10

 

 

Aphria Inc.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED MAY 31, 2017 AND MAY 31, 2016

 

(Expressed in Canadian Dollars, unless otherwise noted)

 



 

APHRIA INC.

MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING

 

The accompanying consolidated financial statements and other financial information in this annual report were prepared by management of Aphria Inc., reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These financial statements have been audited by the shareholders’ auditors, PwC LLP, and their report is presented herein.

 

“Vic Neufeld”

“Carl A. Merton”, CPA, CA, FCBV

Chief Executive Officer

Chief Financial Officer

 

July 11, 2017

 



 

 

July 11, 2017

 

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, 2017 and the consolidated statements of earnings, comprehensive earnings, changes in equity (deficiency) and cash flows for the year 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 audit. We conducted our audit 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 audit 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, 2017 and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Other matter

 

The financial statements of Aphria Inc. for the year ended May 31, 2016 were audited by another auditor who expressed an unmodified opinion on those financial statements on July 7, 2016.

 

(Signed) “PricewaterhouseCoopers LLP”

 

Chartered Professional Accountants, Licensed Public Accountants

 

Windsor, Ontario, Canada

 



 

APHRIA INC.

Independent Auditors’ Report

 

To the Shareholders of Aphria Inc.:

 

We have audited the accompanying consolidated financial statements of Aphria Inc., which comprise the consolidated statements of financial position as at May 31, 2016 and May 31, 2015, and the consolidated statements of income (loss) and comprehensive income (loss), changes in equity (deficiency) and cash flows for the years then ended, and 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ 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 auditors’ 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.

 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aphria Inc. as at May 31, 2016 and May 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Toronto, Ontario

July 7, 2016

GRAPHIC

 

 

 

Chartered Professional Accountants

 

Licensed Public Accountants

 

 

 

GRAPHIC

 



 

Aphria Inc.

Consolidated Statements of Financial Position

 

 

 

 

 

May 31,

 

May 31,

 

 

 

Note

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

79,910,415

 

$

16,472,664

 

Marketable securities

 

7

 

87,346,787

 

 

Accounts receivable

 

 

 

825,511

 

1,778,679

 

Other receivables

 

8

 

4,511,639

 

126,952

 

Inventory

 

9

 

3,886,607

 

2,088,850

 

Biological assets

 

10

 

1,362,749

 

697,997

 

Prepaid assets

 

 

 

1,059,624

 

160,156

 

Due from DFMMJ Investments, Ltd.

 

11

 

463,916

 

 

Promissory notes receivable

 

12

 

 

567,588

 

 

 

 

 

179,367,248

 

21,892,886

 

 

 

 

 

 

 

 

 

Capital assets

 

13

 

72,500,148

 

7,309,220

 

Intangible assets

 

4,14

 

1,891,237

 

4,317,680

 

Convertible note receivable

 

15

 

1,360,548

 

 

Embedded derivative

 

15

 

173,000

 

 

Interest in equity accounted investee

 

16

 

28,376,092

 

 

Long-term investments

 

17

 

27,787,578

 

1,560,200

 

Deferred tax asset

 

6

 

3,314,570

 

 

Goodwill

 

4

 

1,200,000

 

1,200,000

 

 

 

 

 

$

315,970,421

 

$

36,279,986

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

$

5,872,962

 

$

1,266,492

 

Deferred gain from equity accounted investee

 

16

 

2,800,000

 

 

Current portion of promissory note payable

 

19

 

877,500

 

 

Current portion of long-term debt

 

20

 

765,224

 

 

 

 

 

 

10,315,686

 

1,266,492

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Promissory note payable

 

19

 

365,625

 

 

Long-term debt

 

20

 

31,420,230

 

 

 

 

 

 

42,101,541

 

1,266,492

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital

 

21

 

274,316,548

 

40,916,880

 

Warrants

 

22

 

444,912

 

693,675

 

Share-based payment reserve

 

23

 

3,229,929

 

1,723,903

 

Deficit

 

 

 

(4,122,509

)

(8,320,964

)

 

 

 

 

273,868,880

 

35,013,494

 

 

 

 

 

$

315,970,421

 

$

36,279,986

 

 

Nature of operations (Note 1)

Commitments (Note 32)

Subsequent events (Note 33)

 

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

 

5



 

Aphria Inc.

Consolidated Statements of Income and Comprehensive Income

 

 

 

 

 

For the year ended
May 31

 

 

 

 

 

 

 

 

Note

 

2017

 

2016

 

Revenue

 

 

 

$

20,438,483

 

$

8,433,929

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

Cost of goods sold, net

 

10

 

3,599,342

 

1,861,440

 

Amortization

 

13,14

 

985,533

 

590,415

 

Net effect of changes in fair value of biological assets and inventory

 

10

 

(1,443,925

)

4,646

 

 

 

 

 

3,140,950

 

2,456,501

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

17,297,533

 

5,977,428

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

General and administrative

 

25

 

4,678,054

 

2,425,123

 

Share-based compensation

 

26

 

2,399,111

 

462,314

 

Selling, marketing and promotion

 

 

 

6,663,862

 

3,598,481

 

Amortization

 

13,14

 

956,043

 

361,763

 

Research and development

 

 

 

492,425

 

220,408

 

Impairment of intangible asset

 

14

 

3,500,000

 

 

 

 

 

 

18,689,495

 

7,068,089

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,391,962

)

(1,090,661

)

 

 

 

 

 

 

 

 

Consulting revenue

 

19

 

511,875

 

 

Foreign exchange gain

 

 

 

482,596

 

 

Gain on marketable securities

 

7

 

208,563

 

 

Gain on sale of capital assets

 

13

 

11,367

 

7,125

 

Profit from equity accounted investee

 

16

 

210,400

 

 

Finance income, net

 

27

 

728,249

 

281,497

 

Gain on long-term investments

 

28

 

3,571,129

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

4,332,217

 

(802,039

)

 

 

 

 

 

 

 

 

Income tax expense (recovery)

 

6

 

133,762

 

(1,200,000

)

 

 

 

 

 

 

 

 

Net income and comprehensive income

 

 

 

$

4,198,455

 

$

397,961

 

 

 

 

 

 

 

 

 

Weighted average number of common shares — basic

 

 

 

104,341,319

 

58,442,827

 

 

 

 

 

 

 

 

 

Weighted average number of common shares diluted

 

 

 

111,427,893

 

58,442,827

 

 

 

 

 

 

 

 

 

Earnings per share — basic

 

29

 

$

 0.04

 

$

 0.01

 

Earnings per share — diluted

 

29

 

$

 0.04

 

$

 0.01

 

 

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

 

6



 

Aphria Inc.

Consolidated Statements of Changes in Equity (Deficiency)

 

 

 

 

 

 

 

 

 

Share-based

 

 

 

 

 

 

 

Number of common

 

Share capital

 

Warrants

 

payment reserve

 

 

 

 

 

 

 

shares

 

(Note 21)

 

(Note 22)

 

(Note 23)

 

Deficit

 

Total

 

Balance at May 31, 2015

 

52,479,587

 

$

20,246,095

 

$

556,589

 

$

1,261,589

 

$

(8,718,925

)

$

13,345,348

 

Warrants exercised

 

5,127,976

 

6,191,892

 

(126,748

)

 

 

6,065,144

 

Share issued on Bought Deal

 

8,846,370

 

10,136,277

 

263,834

 

 

 

10,400,111

 

Share issued on CannWay Purchase

 

3,600,000

 

4,342,616

 

 

 

 

4,342,616

 

Share-based payments

 

 

 

 

462,314

 

 

462,314

 

Net income for the year

 

 

 

 

 

397,961

 

397,961

 

Balance at May 31, 2016

 

70,053,933

 

$

40,916,880

 

$

693,675

 

$

1,723,903

 

$

(8,320,964

)

$

35,013,494

 

 

 

 

 

 

 

 

 

 

Share-based

 

 

 

 

 

 

 

Number of common

 

Share capital

 

Warrants

 

payment reserve

 

 

 

 

 

 

 

shares

 

(Note 21)

 

(Note 22)

 

(Note 23)

 

Deficit

 

Total

 

Balance at May 31, 2016

 

70,053,933

 

$

40,916,880

 

$

693,675

 

$

1,723,903

 

$

(8,320,964

)

$

35,013,494

 

Share issuance — August 2016 bought deal

 

17,250,000

 

31,959,093

 

 

 

 

31,959,093

 

Share issuance — November 2016 bought deal

 

10,062,500

 

37,263,475

 

 

 

 

37,263,475

 

Share issuance — February 2017 bought deal

 

11,500,000

 

53,869,357

 

 

 

 

53,869,357

 

Share issuance — May 2017 bought deal

 

13,269,252

 

81,322,498

 

 

 

 

81,322,498

 

Income tax recovery on share issuance costs

 

 

3,448,332

 

 

 

 

3,448,332

 

Share and warrant issuance — intangible asset acquisition

 

38,759

 

100,000

 

359,480

 

 

 

459,480

 

Share issuance — warrants exercised

 

15,251,165

 

23,646,825

 

(608,243

)

 

 

23,038,582

 

Share issuance — options exercised

 

1,053,095

 

1,533,513

 

 

(558,183

)

 

975,330

 

Share-based payments

 

100,000

 

256,575

 

 

2,064,209

 

 

2,320,784

 

Shares held in escrow for services not yet earned

 

50,000

 

 

 

 

 

 

Net income for the year

 

 

 

 

 

4,198,455

 

4,198,455

 

Balance at May 31, 2017

 

138,628,704

 

$

274,316,548

 

$

444,912

 

$

3,229,929

 

$

(4,122,509

)

$

273,868,880

 

 

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

 

7



 

Aphria Inc.

Consolidated Statements of Cash Flows

 

 

 

 

 

Year ended

 

Year ended

 

 

 

 

 

May 31,

 

May 31

 

 

 

Note

 

2017

 

2016

 

Cash generated from (used in) operating activities:

 

 

 

 

 

 

 

Net income for the year

 

 

 

$

4,198,455

 

$

397,961

 

Adjustments for:

 

 

 

 

 

 

 

Income tax expense (recovery)

 

6

 

133,762

 

(1,200,000

)

Net effect of change in fair value of biological assets

 

10

 

(5,004,615

)

4,646

 

Amortization

 

13,14

 

1,941,576

 

952,178

 

Gain on sale of capital assets

 

13

 

(11,367

)

(7,125

)

Disposition and usage of bearer plants

 

13

 

66,613

 

 

Impairment of intangible assets

 

14

 

3,500,000

 

 

Accrued interest on convertible note advanced to debtors

 

15

 

(33,548

)

 

Profit from equity accounted investee

 

16

 

(210,400

)

 

Amortization of finance fees on long-term debt

 

20

 

4,583

 

 

Gain on marketable securities

 

 

 

(208,563

)

 

Share-based compensation

 

26

 

2,399,111

 

462,314

 

Unrealized gain on long-term investments

 

28

 

(6,311,979

)

 

Realized loss on long-term investments

 

28

 

2,740,850

 

 

Consulting revenue

 

19

 

(511,875

)

 

Change in non-cash working capital

 

30

 

2,632,962

 

(1,598,108

)

 

 

 

 

5,325,565

 

(988,134

)

Cash provided by financing activities:

 

 

 

 

 

 

 

Share capital issued, net of cash issuance costs

 

 

 

204,408,498

 

10,314,727

 

Share capital issued on warrants exercised

 

 

 

23,038,582

 

6,065,144

 

Share capital issued on stock options exercised

 

 

 

975,330

 

 

Advances from related parties

 

11

 

387,892

 

1,139,788

 

Repayment of amounts due to related parties

 

11

 

(851,808

)

(1,139,788

)

Proceeds from long-term debt, net of finance fees

 

20

 

32,825,000

 

 

Repayment of long-term debt

 

20

 

(644,129

)

 

 

 

 

 

260,139,365

 

16,379,871

 

Cash used in investing activities:

 

 

 

 

 

 

 

Issuance of promissory notes receivable

 

12

 

 

(200,000

)

Repayment of promissory notes receivable

 

12

 

567,588

 

232,412

 

Investment in capital assets

 

13

 

(66,416,305

)

(4,426,059

)

Proceeds from disposal of capital assets

 

13

 

32,823

 

36,570

 

Investment in intangible assets, net of shares issued

 

14

 

(1,306,120

)

(53,705

)

Convertible note advanced to debtors

 

15

 

(1,500,000

)

 

Purchase of equity investments

 

16

 

(25,365,692

)

 

Investment in marketable securities

 

 

 

(109,268,749

)

 

Proceeds from disposal of marketable securities

 

 

 

22,130,525

 

 

Investment in long-term investments

 

17

 

(28,097,293

)

(1,560,200

)

Proceeds from divestiture of long-term investments

 

28

 

7,196,044

 

 

 

 

 

 

(202,027,179

)

(5,970,982

)

Increase in cash and cash equivalents

 

 

 

63,437,751

 

9,420,755

 

Cash and cash equivalents, beginning of year

 

 

 

16,472,664

 

7,051,909

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year:

 

 

 

$

79,910,415

 

$

16,472,664

 

 

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

 

8



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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 marijuana under the provisions of the Access to Cannabis for Medical Purposes Regulations (“ACMPR”). The registered office 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 11, 2017.

 

2.              Basis of preparation

 

(a)                 Statement of compliance

 

The policies applied in this 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 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)                 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.

 

Wholly owned subsidiaries

 

Jurisdiction of incorporation

Pure Natures Wellness Inc.

 

Ontario

Aphria (Arizona) Inc.

 

Arizona

CannWay Pharmaceuticals Ltd

 

Ontario

 

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. Unrealized losses are eliminated to the extent of the gains, but only to the extent that there is no evidence of impairment.

 

9



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

(e)    Foreign currency translation

 

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

 

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 at the statement of financial position date are translated to Canadian dollars at the foreign exchange rate applicable as at that date. Realized and unrealized exchange gains and losses are recognized through profit or loss.

 

The assets and liabilities of foreign operations, including marketable securities, long-term investments and promissory note 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 recognised in other comprehensive income and accumulated in equity.

 

(f)     Interest in equity-accounted investees

 

The Company’s interest in equity accounted investees is comprised of its interest in associates.

 

Equity accounted investee

 

Jurisdiction of incorporation

DFMMJ Investments, Ltd.

 

British Columbia

 

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 accounted investees until the date on which significant influence ceases.

 

If the Company’s share of losses in an equity-accounted 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-accounted investments is tested for impairment in accordance with the policy described in Note 3(i).

 

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.

 

10



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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 recognized 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 with original maturities of three months or less.

 

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.

 

11



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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 and costs to complete. At the point of harvest, the biological assets are transferred to inventory at fair value less costs to sell and costs to complete.

 

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.                        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:

 

Land

 

Not amortized

 

No term

Greenhouse infrastructure

 

Straight-line

 

20 years

Bearer plants

 

Unit of Production

 

Number of units

Production equipment

 

Straight-line

 

5 10 years

Office equipment

 

Straight-line

 

3 – 5 years

Automotive equipment

 

Straight-line

 

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.

 

g.                       Intangible assets

 

Intangible assets are comprised of an e-commerce platform, a purchased private label brand, licenses and permits as well as a licensing agreement with a third party. All are recorded at cost less accumulated amortization. Amortization of the e-commerce platform is recorded on a straight-line basis over the estimated useful life of 2 years. Amortization of the private label brand is recorded on a straight-line basis over the remaining useful life of 15 months. Amortization for the licenses and permits is recorded on a straight-line basis over the estimated useful life of 90 months. Amortization of the licensing agreement is recorded on a straight-line basis over the estimated useful life of 60 months.

 

h.                      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.

 

12



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

i.                          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.

 

j.                                 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.

 

k.                      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.

 

l.                          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

 

13



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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.

 

m.                  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.

 

n.                      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

 

14



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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.

 

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

 

The Company has convertible loans receivables whereby balances can be converted into equity. 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.

 

(viii) Classification of financial instruments

 

Cash and cash equivalents — FVTPL

Marketable securities — FVTPL

Accounts receivables — loans and receivables

Other receivables loans and receivables

Promissory notes receivable loans and receivables

Convertible note receivable — AFS

Embedded derivative — embedded derivatives

Long-term investments — FVTPL

Accounts payable and accrued liabilities — other financial liabilities

Promissory note payable other financial liabilities

Long-term debt — other financial liabilities

 

(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 may be adjusted using one or more of the valuation indicators described

 

15



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

below. These are included in Level 3 in Note 17. Warrants of private companies are carried at their intrinsic value.

 

o.                      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.

 

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.

 

16



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

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 critical 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.

 

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.

 

p.                      New standards and interpretations issued but not yet adopted

 

A number of new standards, amendments to standards and interpretations are not yet effective for the year ended May 31, 2017 and have not been applied in preparing these consolidated financial statements:

 

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 has performed a preliminary assessment of the potential impact of the adoption of IFRS9 on its consolidated financial statements based on its positions at May 31, 2017, which are discussed below.

 

Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS9 largely retains the existing requirements in IAS39 for the classification of financial liabilities. Based on its preliminary assessment, the Company does not believe that the new classification requirements will have a significant impact on its consolidated financial statements.

 

Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortized cost or those

 

17



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

measured at fair value through other comprehensive income, except for investments in equity instruments, and to contract assets. The Company is currently assessing the impact of this change on its consolidated financial statements and is continuing to assess the impact of the ECL model on its other financial assets.

 

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 year 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 on its investees with a focus on consulting contracts and royalty fees.

 

The Company is still considering the impact on its customer loyalty programme, which is currently under consideration. The new standard will require that the total consideration received be allocated to the points and goods based on relative stand-alone selling prices rather than based on the residual method.

 

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.

 

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 income and comprehensive income to improve clarity.

 

4.              Disclosure of business transaction

 

Effective January 13, 2016, Aphria acquired 100% of the issued and outstanding shares of CannWay Pharmaceuticals Inc. (“CannWay”). CannWay provides support services to veteran and first responders in the form of medical consultations, group therapy, and rehabilitation.

 

Pursuant to the acquisition, Aphria issued 3,600,000 common shares at $1.23 per share to the former shareholders of CannWay, of which 1,800,000 shares are being held in escrow and will be either (i) released to

 

18



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

the former shareholders of CannWay, based on the achievement of certain operating metrics or (ii) released to the Company for cancellation, if the operating metrics are not achieved by December 31, 2018.

 

The shares held in escrow are recorded as equity and will be continuously evaluated and adjusted based on the probability of the operating metrics being achieved, as of May 31, 2017 management expects 0% of the remaining milestones to be achieved by December 31, 2018.

 

Purchase price allocation was as follows:

 

Net tangible assets acquired

 

$

 

Intangible asset — CannWay brand

 

4,428,000

 

Goodwill

 

1,200,000

 

Deferred tax liability

 

(1,200,000

)

Total purchase price recorded

 

$

4,428,000

 

 

Net tangible assets acquired included the following:

 

Cash held in trust to fund liabilities outstanding at closing

 

$

269,717

 

Accounts receivable

 

91,872

 

Accounts payable

 

(219,505

)

HST payable

 

(58,107

)

Income taxes payable

 

(83,977

)

Net tangible assets acquired

 

$

 

 

The CannWay brand was originally being amortized, beginning January 2016, over 10 years on a straight-line basis. Subsequent to an impairment adjustment applied in February 2017, management revised its estimate for the remaining useful life and is amortizing the brand over 15 months from date of impairment on a straight-line basis.

 

Goodwill arose in the acquisition of the CannWay brand because the cost of the acquisition reflected revenue growth and the future market development of the brand. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill arising on the acquisition is expected to be deductible for tax purposes.

 

Acquisition costs of $10,375 have been expensed in the prior year under General and administrative. Costs of issuing equity of $85,384 were applied against the fair value of the equity issued at the time of the acquisition.

 

5.              Reverse acquisition

 

In December 2015, the Company completed its proposed transaction between Black Sparrow and PNW as previously disclosed in July 2015. PNW amalgamated with a new and direct wholly-owned subsidiary of Black Sparrow to become a direct, wholly-owned subsidiary of Black Sparrow. Black Sparrow changed its name to Aphria Inc. and remained as the resulting issuer. The transaction constituted the qualifying transaction of Black Sparrow under the policies of the TSX-V.

 

Immediately prior to the completion of the transaction, Black Sparrow consolidated its issued and outstanding common shares on the basis of one post-consolidation common share for each ten pre-consolidation common shares held. By way of a three-cornered amalgamation, Black Sparrow acquired all of the issued and outstanding shares of PNW by issuing one post-consolidation share for each PNW common share held. Each of the stock options and warrants to purchase common shares of PNW thereafter was exercisable for one post-consolidation common share of Aphria Inc.

 

19



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

This transaction has been accounted for as a reverse acquisition that does not constitute a business combination. For accounting purposes, the legal subsidiary, PNW, has been treated as the acquirer and Black Sparrow, the legal parent, has been treated as the acquiree.

 

Consideration Transferred (2,300,000 shares at a price of $1.10 per share)

 

$

2,530,000

 

 

 

 

 

Net assets acquired

 

 

 

Cash and cash equivalents

 

$

79,188

 

Other receivables

 

16,358

 

Accounts payable and accrued liabilities

 

(33,566

)

 

 

61,980

 

Excess attributed to cost of listing

 

2,468,020

 

 

 

$

2,530,000

 

 

 

 

 

Listing cost:

 

 

 

Excess attributed to cost of listing

 

$

2,468,020

 

Legal

 

570,034

 

Professional, consulting and other fees

 

240,014

 

 

 

$

3,278,068

 

 

For accounting purposes, these consolidated financial statements reflect a continuation of the financial position, operating results and cash flows of the Company’s legal subsidiary, PNW.

 

6. Income taxes and deferred income taxes

 

A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:

 

 

 

For the twelve months ended May 31

 

 

 

2017

 

2016

 

Income (loss) before income taxes

 

$

4,332,217

 

$

(802,039

)

Statutory rate

 

26.5

%

26.5

%

 

 

 

 

 

 

Expected income tax expense (recovery) at combined basic federal and provincial tax rate

 

1,148,037

 

(212,540

)

Effect on income taxes of:

 

 

 

 

 

Permanent differences

 

 

(101,560

)

Business combination

 

 

1,200,000

 

Non-deductible share-based compensation and other expenses

 

658,759

 

 

Non-taxable portion of gains

 

(533,658

)

 

Utilization of tax attributes not previously recognized

 

(876,608

)

(1,331,062

)

Deductible share issuance costs

 

(285,953

)

 

Other

 

22,916

 

 

Tax assets not recognized

 

269

 

(754,838

)

 

 

$

133,762

 

$

(1,200,000

)

 

20



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

Deferred income tax assets and liabilities have not been recognized in respect of the following deductible temporary differences:

 

 

 

For the year ended May 31

 

 

 

2017

 

2016

 

Non-capital loss carry forward

 

$

 

$

785,964

 

Undepreciated capital cost in excess of net book value

 

 

183,157

 

Cumulative eligible capital

 

 

695,356

 

Deductible share issuance costs to be claimed

 

$

 

$

1,968,361

 

 

The following table summarizes the components of deferred tax:

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

Deferred tax assets

 

 

 

 

 

Non-capital loss carry forward

 

$

1,312,849

 

$

1,171,189

 

Capital loss carryforward

 

380,362

 

 

Share issuance and financing fees

 

3,448,332

 

 

Undepreciated capital cost in excess of net book value

 

 

159,873

 

Other

 

34,138

 

 

Deferred tax liabilities

 

 

 

 

Net book value in excess of undepreciated capital cost

 

(164,027

)

 

Intangible assets in excess of tax costs

 

(193,890

)

(1,124,528

)

Unrealized gain

 

(914,019

)

 

Biological assets and inventory in excess of tax costs

 

(589,175

)

(206,534

)

Net deferred tax assets

 

$

3,314,570

 

$

 

 

Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset. Movement in net deferred tax assets (liabilities) during the year:

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

Balance at beginning of year

 

$

 

$

 

Recognized in net income

 

(133,762

)

1,200,000

 

Recognized in goodwill

 

 

(1,200,000

)

Recognized in equity

 

3,448,332

 

 

Other

 

 

 

Balance at end of year

 

$

3,314,570

 

$

 

 

The Company has non-capital losses available for deduction against taxable income that expire as follows:

 

 

 

Fiscal year ending May 31,

 

2031

 

$

1,284

 

2032

 

74,702

 

2033

 

67,880

 

2034

 

81,588

 

2035

 

399,860

 

2036

 

793,742

 

2037

 

3,535,092

 

 

 

$

4,954,148

 

 

21



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

7.              Marketable securities

 

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

 

 

 

S&P rating

 

 

 

 

 

 

 

 

 

 

 

at

 

Effective

 

Maturity

 

May 31,

 

May 31,

 

 

 

purchase

 

interest rate

 

date

 

2017

 

2016

 

Ford Motor Credit Co. LLC

 

BBB

 

3.320

%

12/19/17

 

1,988,184

 

 

Ford Motor Credit Co. LLC

 

BBB

 

3.700

%

08/02/18

 

1,036,613

 

 

Ford Motor Credit Co. LLC

 

BBB

 

3.140

%

06/14/19

 

5,206,828

 

 

Goldman Sachs

 

A

 

3.375

%

02/01/18

 

5,078,194

 

 

Canadian Western Bank

 

A-

 

2.531

%

03/22/18

 

3,038,997

 

 

Royal Bank of Canada

 

AA-

 

2.770

%

12/11/18

 

5,179,711

 

 

Sobeys Inc.

 

BBB-

 

3.520

%

08/08/18

 

3,078,141

 

 

Molson Coors Brewing Company

 

BBB-

 

3.950

%

10/06/17

 

1,116,524

 

 

Canadian Western Bank

 

A-

 

3.077

%

01/14/19

 

1,534,717

 

 

Sunlife Financial

 

A-

 

2.770

%

05/13/19

 

3,063,816

 

 

Canadian Natural Resources Limited

 

BBB+

 

3.050

%

06/19/19

 

2,053,607

 

 

Canadian Western Bank

 

A-

 

3.463

%

12/17/19

 

1,027,752

 

 

Laurentian Bank

 

BBB

 

2.500

%

01/23/20

 

6,098,888

 

 

Enercare Solutions Inc.

 

BBB

 

4.600

%

02/03/20

 

4,007,550

 

 

Enbridge Inc.

 

BBB+

 

4.530

%

03/09/20

 

5,394,630

 

 

Central 1 Credit Union

 

A+

 

1.870

%

03/16/20

 

5,020,565

 

 

Choice Property REIT

 

BBB

 

3.600

%

04/20/20

 

5,236,870

 

 

Penske Truck Leasing Co., L.P.

 

BBB

 

2.950

%

06/12/20

 

5,145,483

 

 

Westcoast Energy Inc.

 

BBB

 

4.570

%

07/02/20

 

5,429,820

 

 

The Manufacturer’s Life Insurance Company

 

AA-

 

2.819

%

02/26/18

 

1,471,818

 

 

Bank of Montreal (USD)

 

A+

 

1.400

%

04/10/18

 

4,051,775

 

 

Citigroup Inc. (USD)

 

BBB

 

2.050

%

12/17/18

 

4,081,546

 

 

Royal Bank of Canada (USD)

 

AA-

 

1.625

%

04/15/19

 

4,039,998

 

 

Wells Fargo & Company (USD)

 

A

 

2.150

%

01/30/17

 

3,964,760

 

 

 

 

 

 

 

 

 

 

$

87,346,787

 

$

 

 

The cost of marketable securities as at May 31, 2017 was $87,138,224 (2016 $nil). During the year, the company divested of $22,130,525 (2016 - $nil) of marketable securities in its Canadian portfolio, converted the proceeds to United States dollars and then re-invested the United States dollars in its U.S. portfolio.

 

8.              Other receivables

 

Other receivables are comprised of:

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

HST receivable (payable)

 

$

3,675,188

 

$

(35,909

)

Accrued interest

 

700,827

 

98,197

 

Credit card receivable

 

103,004

 

64,621

 

Other

 

32,620

 

43

 

 

 

$

4,511,639

 

$

126,952

 

 

22



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

9.              Inventory

 

Inventory is comprised of:

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

Harvested cannabis

 

$

2,506,963

 

$

1,714,897

 

Harvested trim

 

420,322

 

 

Cannabis oil

 

682,056

 

165,060

 

Packaging and supplies

 

277,266

 

208,893

 

 

 

$

3,886,607

 

$

2,088,850

 

 

Cost of inventory is recognized as an expense and included in cost of sales. Included in costs of sales for the year ended May 31, 2017 is $99,252 of cannabis oil conversion costs and $58,176 related to the cost of accessories.

 

The Company holds 668.5 kilograms of harvested cannabis (2016 457.3 kgs), 140.1 kilograms of harvested trim (2016 nil kgs) and 1,091.3 litres of cannabis oils or 181.9 kilograms equivalent (2016 264.1 litres or 44.1 kilograms equivalent), at May 31, 2017.

 

10.       Biological assets

 

Biological assets are comprised of:

 

 

 

Amount

 

Balance as at May 31, 2016

 

$

697,997

 

Cost incurred until harvest

 

4,188,319

 

Effect of unrealized changes in fair value of biological assets

 

5,004,615

 

Transferred to inventory upon harvest

 

(8,415,957

)

Transferred to capital assets

 

(112,225

)

Balance as at May 31, 2017

 

$

1,362,749

 

 

Net effect of changes in fair value of biological assets and inventory include:

 

 

 

Amount

 

Unrealized change in fair value of biological assets

 

$

(5,004,615

)

Realized fair value increments on inventory sold in the year

 

3,560,690

 

 

 

$

(1,443,925

)

 

The Company values medical cannabis plants at cost from the date of initial clipping from mother plants until the end of the twelfth week of its growing cycle. Measurement of the biological asset at fair value less costs to sell and costs to complete begins at the thirteenth week until harvest. The Company has determined the fair value less costs to sell of harvested cannabis to be $3.75 a gram. The Company has determined the fair value less costs to sell of its collected trim to be $3.00 a gram, upon harvest.

 

The net effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of inventory of $1,443,925 during the year ended May 31, 2017 (2016 decrease of $4,646). In determining the fair value of biological assets, management is required to make several estimates, including: the expected cost required to grow the cannabis up to the point of harvest; harvesting costs; selling costs; sales price; and, expected yields for the cannabis plant. All of which represent Level 3 on the fair value hierarchy. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

 

23



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

11.       Related party transactions

 

Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. The balance owing to related parties as at May 31, 2017 was $nil (May 31, 2016 - $nil). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.

 

During the twelve months ended May 31, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totalling $387,892 (2016 - $1,139,788). Included in this amount was rent of $49,389 charged during the twelve months ended May 31, 2017 (2016 - $193,593).

 

The Company funded the start-up costs and operations of DFMMJ Investments, Ltd., a related party through an equity investment. The balance owing from the related party as at May 31, 2017 was $463,916 (May 31, 2016 — $nil).

 

 

 

Amount

 

Balance as at May 31, 2016

 

$

 

Related party charges in year

 

387,892

 

Payments to related parties in year

 

(387,892

)

Payments made on behalf of related parties in year

 

(463,916

)

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

 

$

(463,916

)

 

During the 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 $6.1 million. The purchase price was allocated as follows: (i) $1.3 million to land; (ii) $3.55 million to greenhouse infrastructure; and, (iii) $1.25 million to licenses and permits intangible assets.

 

Key management personnel compensation was comprised of:

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

Salaries

 

$

828,924

 

$

752,337

 

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

 

84,176

 

31,846

 

Share-based compensation

 

594,400

 

247,574

 

 

 

$

1,507,500

 

$

1,031,757

 

 

Directors and officers of the Company control 13.7% or 19,017,866 of the voting shares of the Company.

 

24



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

12.       Promissory notes receivable

 

 

 

May 31, 2016

 

Additions

 

Payments

 

May 31, 2017

 

Note receivable - $100,000, bearing interest at prime + 3%, one-year term, collected during the year

 

$

93,039

 

$

 

$

93,039

 

$

 

Note receivable - $500,000, bearing interest at 3%, repayable in 24 equal blended monthly instalments, collected during the Year

 

274,549

 

 

274,549

 

 

Note receivable - $100,000, non-interest bearing, one-year term, collected during the Year

 

100,000

 

 

100,000

 

 

Note receivable - $100,000, non-interest, one-year term, collected during the year

 

100,000

 

 

100,000

 

 

 

 

$

567,588

 

$

 

$

567,588

 

$

 

 

13.       Capital assets

 

 

 

 

 

Greenhouse

 

Bearer

 

 

 

Leasehold

 

Construction

 

Total capital

 

 

 

Land

 

infrastructure

 

plants

 

Equipment

 

improvements

 

in process

 

assets

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

$

 

$

 

$

 

$

1,450,011

 

$

2,231,612

 

$

304,701

 

$

3,986,324

 

Additions

 

 

 

 

1,051,980

 

221,204

 

3,152,875

 

4,426,059

 

Transfers

 

 

 

 

1,033,433

 

2,359,337

 

(3,392,770

)

 

Disposals

 

 

 

 

(35,896

)

 

 

(35,896

)

At May 31, 2016

 

 

 

 

3,499,528

 

4,812,153

 

64,806

 

8,376,487

 

Additions

 

10,724,551

 

4,018,080

 

112,225

 

1,699,989

 

16,129

 

49,957,556

 

66,528,530

 

Transfers

 

104,283

 

12,151,836

 

 

173,834

 

(4,565,987

)

(7,863,966

)

 

Disposals

 

 

 

(66,613

)

(32,823

)

 

 

(99,436

)

At May 31, 2017

 

$

10,828,834

 

$

16,169,916

 

$

45,612

 

$

5,340,528

 

$

262,295

 

$

42,158,396

 

$

74,805,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

$

 

$

 

$

 

$

172,860

 

$

187,303

 

 

$

360,163

 

Amortization

 

 

 

 

387,992

 

325,563

 

 

713,555

 

Disposals

 

 

 

 

(6,451

)

 

 

 

(6,451

)

At May 31, 2016

 

 

 

 

554,401

 

512,866

 

 

1,067,267

 

Amortization

 

 

457,891

 

 

717,207

 

74,435

 

 

1,249,533

 

Transfers

 

 

524,749

 

 

 

(524,749

)

 

 

Disposals

 

 

 

 

(11,367

)

 

 

(11,367

)

At May 31, 2017

 

$

 

$

982,640

 

$

 

$

1,260,241

 

$

62,552

 

$

 

$

2,305,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

 

 

 

$

1,277,151

 

$

2,044,309

 

$

304,701

 

$

3,626,161

 

At May 31, 2016

 

 

 

 

$

2,945,127

 

$

4,299,287

 

$

64,806

 

$

7,309,220

 

At May 31, 2017

 

$

10,828,834

 

$

15,187,276

 

$

45,612

 

$

4,080,287

 

$

199,743

 

$

42,158,396

 

$

72,500,148

 

 

Included in cost of goods sold is $66,613 of expense related to the disposition and usage of bearer plants.

 

During the year, the Company disposed of capital assets with a net book value of $21,456 for proceeds of $32,823.

 

25



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

14.       Intangible assets

 

 

 

 

 

 

 

Tokyo Smoke

 

 

 

Total

 

 

 

Corporate

 

Licenses &

 

licensing

 

CannWay

 

intangible

 

 

 

Website

 

permits

 

agreement

 

brand

 

assets

 

Cost

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

$

107,995

 

$

 

$

 

$

 

$

107,995

 

Additions

 

53,705

 

 

 

4,428,000

 

4,481,705

 

At May 31, 2016

 

161,700

 

 

 

4,428,000

 

4,589,700

 

Additions

 

56,120

 

1,250,000

 

459,480

 

 

1,765,600

 

At May 31, 2017

 

$

217,820

 

$

1,250,000

 

$

459,480

 

$

4,428,000

 

$

6,355,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

$

33,397

 

$

 

$

 

$

 

$

33,397

 

Additions

 

54,123

 

 

 

184,500

 

238,623

 

At May 31, 2016

 

87,520

 

 

 

184,500

 

272,020

 

Additions

 

67,845

 

152,879

 

56,939

 

414,380

 

692,043

 

Impairment

 

 

 

 

3,500,000

 

3,500,000

 

At May 31, 2017

 

$

155,365

 

$

152,879

 

$

56,939

 

$

4,098,880

 

$

4,464,063

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2015

 

$

74,598

 

$

 

$

 

$

 

$

74,598

 

At May 31, 2016

 

$

74,180

 

$

 

$

 

$

4,243,500

 

$

4,317,680

 

At May 31, 2017

 

$

62,455

 

$

1,097,121

 

$

402,541

 

$

329,120

 

$

1,891,237

 

 

The Company valued the purchase price for the Tokyo Smoke license agreement based on the fair value of the shares (note 21) and warrants (note 22) issued as part of the transaction.

 

In February 2017, the Company recorded an impairment of its intangible asset for the CannWay brand following the changes to reimbursement allowances for veterans, as announced by Veterans Affairs Canada (“VAC”). The changes announced by VAC lowered the reimbursement amount to $8.50 per gram and effective May 26, 2017, limited individual patients usage to 3.0 grams per day. Subsequent to its impairment test management concluded a write-down of $3,500,000 be applied to the value of the CannWay brand, and has reflected this on the statement of income and comprehensive income. In quantifying the impairment, the Company compared the carrying value as at the measurement date to its recoverable amount. The Company calculated its recoverable amount using the discounted cash flow technique, forecasting future sales attributable to the CannWay patient base over the remaining useful life based on the revised cap on VAC reimbursement policies combined with our current cost structure, net present valuing the result using a 15% discount rate.

 

15.       Convertible note receivable

 

 

 

Notes receivable

 

Embedded derivative

 

 

 

May 31, 2017

 

May 31, 2016

 

May 31, 2017

 

May 31, 2016

 

CannaRoyalty Corp.

 

$

1,360,548

 

$

 

$

173,000

 

$

 

 

CannaRoyalty Corp.

 

On October 19, 2016, Aphria loaned $1,500,000 to CannaRoyalty Corp. (“CR”) as a convertible debenture. The convertible debenture bears interest at 5%, paid annually, matures in three years and includes the right to convert the debenture into common shares of CR at $2.00 per common share at any time before maturity. CR maintains the option of forced conversion of the convertible debenture if the common shares of CR trade on a stock exchange at a value of $4.00 or more.

 

26



 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2017 and May 31, 2016

 

The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. This derivative asset is initially recognized by comparing a similar instrument without the conversion option and discounting the fair value of the host contract with the non-convertible instrument interest rate. The fair value of the derivative asset related to the convertible note is $173,000 at May 31, 2017.

 

As at May 31, 2017, the convertible note receivable totalled $1,533,548.

 

16.       Interest in equity accounted investee

 

 

 

May 31,

 

May 31,

 

 

 

2017

 

2016

 

Associated company

 

 

 

 

 

DFMMJ Investments, Ltd.

 

$

28,376,092

 

$

 

 

DFMMJ Investments, Ltd.

 

On April 5, 2017 Aphria announced a strategic investment in DFMMJ Investments, Ltd. (“DFMMJ”), where DFMMJ, through a subsidiary, acquired all or substantially all of the assets of Chestnut Hill Tree Farm LLC (“Chestnut”) and will subsequently amalgamate into a subsidiary of SecureCom Mobile Inc., as part of a business combination. As part of the steps involved in the business combination, Aphria first exchanged rights to use its intellectual property, Aphria’s Know-How System (“System”) to DFMMJ as part of a licensing agreement in exchange for common shares, where through an arm’s length negotiation, the parties determined a value of $5,000,000 for the licensed use of the System. As a result of this in-kind transaction Aphria was issued 192,400,000 common shares in DFMMJ. Aphria is deemed to have significant influence over DFMMJ due to its resulting equity interest (44.2%), whereby the investment is valued under the equity method. For accounting purposes, the Company recorded the transaction at $2,800,000, representing its non-owned interest in the equity accounted investee.

 

DFMMJ and its board of directors elected to use April 30th as its year-end date. for the reporting period ended April 30, 2017 DFMMJ reported net earnings of $478,200 for its fiscal period. In accordance with the equity method, Aphria recorded income of $210,400 from its investee relative to its ownership of the outstanding common shares at the time. As of April 30, 2017, DFMMJ has incurred no major capital spending, has no contingent liabilities and has yet to begin commercial activity. On May 24, 2017, DFMMJ completed its proposed transaction with Chestnut at a cost of $40,000,000 USD ($54,168,620 Cdn).

 

The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements. The table also reconciles the summarized financial information to the carrying amount of the Company’s interest as at May 31, 2017:

 

 

 

April 30,

 

April 30,

 

 

 

2017

 

2016

 

Current assets

 

$

5,723,960

 

$

 

Non-current assets

 

5,000,000

 

 

Net assets

 

10,723,960