EX-99.142 143 a18-26052_1ex99d142.htm EX-99.142

Exhibit 99.142

 

 

Aphria Inc.

 

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND AUGUST 31, 2017

 

(Unaudited, expressed in Canadian Dollars, unless otherwise noted)

 



 

Aphria Inc.

Condensed Interim Consolidated Statements of Financial Position

(Unaudited - in thousands of Canadian dollars)

 

 

 

Note

 

August 31,
2018

 

May 31,
2018

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

273,087

 

$

59,737

 

Marketable securities

 

4

 

40,895

 

45,062

 

Accounts receivable

 

 

 

3,237

 

3,386

 

Other current assets

 

5

 

16,657

 

14,384

 

Inventory

 

6

 

34,752

 

22,150

 

Biological assets

 

7

 

6,633

 

7,331

 

Assets held for sale

 

13

 

16,496

 

40,620

 

Current portion of convertible notes receivable

 

12

 

26,424

 

1,942

 

 

 

 

 

418,181

 

194,612

 

Capital assets

 

9

 

360,864

 

303,151

 

Intangible assets

 

10

 

235,291

 

226,444

 

Convertible notes receivable

 

12

 

 

16,129

 

Interest in equity investees

 

13

 

10,187

 

4,966

 

Long-term investments

 

14

 

76,675

 

46,028

 

Goodwill

 

11

 

524,512

 

522,762

 

 

 

 

 

$

1,625,710

 

$

1,314,092

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

$

35,134

 

$

31,517

 

Income taxes payable

 

 

 

3,396

 

3,584

 

Deferred revenue

 

 

 

2,096

 

2,607

 

Current portion of promissory note payable

 

17

 

585

 

610

 

Current portion of long-term debt

 

18

 

3,349

 

2,140

 

Current portion of derivative liability

 

13

 

10,376

 

3,396

 

 

 

 

 

54,936

 

43,854

 

Long-term liabilities

 

 

 

 

 

 

 

Long-term debt

 

18

 

52,015

 

28,337

 

Derivative liability

 

13

 

 

9,055

 

Deferred tax liability

 

15

 

58,322

 

59,253

 

 

 

 

 

165,273

 

140,499

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital

 

19

 

1,370,477

 

1,113,981

 

Warrants

 

20

 

1,375

 

1,375

 

Share-based payment reserve

 

 

 

21,726

 

22,006

 

Accumulated other comprehensive loss

 

 

 

(801

)

(801

)

Non-controlling interest

 

22

 

18,821

 

9,580

 

Retained earnings

 

 

 

48,839

 

27,452

 

 

 

 

 

1,460,437

 

1,173,593

 

 

 

 

 

$

1,625,710

 

$

1,314,092

 

 

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 condensed interim consolidated financial statements

 

2



 

Aphria Inc.

Condensed Interim Consolidated Statements of Income and Comprehensive Income

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

 

 

 

 

For the three months ended

 

 

 

 

 

August 31,

 

 

 

Note

 

2018

 

2017

 

Revenue

 

 

 

$

13,292

 

$

6,120

 

Production costs

 

6

 

4,441

 

1,346

 

Other costs of sales

 

 

 

393

 

 

Gross profit before fair value adjustments

 

 

 

8,458

 

4,774

 

Fair value adjustment on sale of inventory

 

6

 

4,205

 

1,136

 

Fair value adjustment on growth of biological assets

 

7

 

(9,511

)

(4,265

)

Gross profit

 

 

 

13,764

 

7,903

 

Operating expenses:

 

 

 

 

 

 

 

General and administrative

 

23

 

8,851

 

1,735

 

Share-based compensation

 

24

 

6,122

 

2,509

 

Selling, marketing and promotion

 

 

 

4,741

 

1,948

 

Amortization

 

 

 

3,274

 

239

 

Research and development

 

 

 

262

 

90

 

Transaction costs

 

 

 

865

 

 

 

 

 

 

24,115

 

6,521

 

 

 

 

 

(10,351

)

1,382

 

Non-operating items:

 

 

 

 

 

 

 

Consulting revenue

 

 

 

 

293

 

Foreign exchange loss

 

 

 

(59

)

(151

)

Loss on marketable securities

 

4

 

(167

)

(1,746

)

Loss on sale of capital assets

 

9

 

 

(7

)

Gain on dilution of ownership in equity investee

 

13

 

2,210

 

7,551

 

Loss from equity investees

 

13

 

(247

)

(8,840

)

Gain on sale of equity investee

 

13

 

9,880

 

 

Deferred gain on sale of intellectual property

 

 

 

233

 

234

 

Finance income, net

 

25

 

1,059

 

466

 

Unrealized gain on convertible notes receivable

 

12

 

295

 

547

 

Gain on long-term investments

 

26

 

22,700

 

19,082

 

Unrealized loss on derivative liability

 

13

 

(415

)

 

 

 

 

 

35,489

 

17,429

 

Income before income taxes

 

 

 

25,138

 

18,811

 

Income taxes

 

15

 

3,962

 

3,770

 

Net income

 

 

 

21,176

 

15,041

 

Other comprehensive loss

 

 

 

 

 

 

 

Other comprehensive loss from equity investee

 

13

 

 

(1,321

)

Net comprehensive income

 

 

 

$

21,176

 

$

13,720

 

Total comprehensive income is attributable to:

 

 

 

 

 

 

 

Owners of Aphria Inc.

 

 

 

21,387

 

13,720

 

Non-controlling interest

 

22

 

(211

)

 

 

 

 

 

$

21,176

 

$

13,720

 

Weighted average number of common shares - basic

 

 

 

225,659,684

 

138,711,674

 

Weighted average number of common shares - diluted

 

 

 

230,366,310

 

145,731,500

 

Earnings per share - basic

 

27

 

$

0.09

 

$

0.11

 

Earnings per share - diluted

 

27

 

$

0.09

 

$

0.10

 

 

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

 

3



 

Aphria Inc.

Condensed Interim Consolidated Statements of Changes in Equity

(Unaudited - 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, 2017

 

138,628,704

 

$

274,317

 

$

445

 

$

3,230

 

$

 

$

 

$

(4,123

)

$

273,869

 

Share issuance - warrants exercised

 

228,467

 

344

 

 

 

 

 

 

344

 

Share issuance - options exercised

 

31,419

 

38

 

 

(20

)

 

 

 

18

 

Share-based payments

 

 

 

 

2,440

 

 

 

 

2,440

 

Share issuance costs incurred

 

 

(14

)

 

 

 

 

 

(14

)

Income tax recovery on share issuance costs

 

 

4

 

 

 

 

 

 

4

 

Shares held in escrow for services not yet earned

 

 

112

 

 

 

 

 

 

112

 

Net comprehensive income for the period

 

 

 

 

 

(1,321

)

 

15,041

 

13,720

 

Balance at August 31, 2017

 

138,888,590

 

$

274,801

 

$

445

 

$

5,650

 

$

(1,321

)

$

 

$

10,918

 

$

290,493

 

 

 

 

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

 

Total

 

Balance at May 31, 2018

 

210,169,924

 

$

1,113,981

 

$

1,375

 

$

22,006

 

$

(801

)

$

9,580

 

$

27,452

 

$

1,173,593

 

Share issuance - June 2018 bought deal

 

21,835,510

 

245,925

 

 

 

 

 

 

245,925

 

Additional share issuance - Broken Coast acquisition

 

19,963

 

297

 

 

 

 

 

 

297

 

Share issuance - warrants exercised

 

10,000

 

18

 

 

 

 

 

 

18

 

Share issuance - options exercised

 

565,371

 

6,857

 

 

(4,455

)

 

 

 

2,402

 

Income tax recovery on share issuance costs

 

 

3,399

 

 

 

 

 

 

3,399

 

Share-based payments

 

 

 

 

4,175

 

 

 

 

4,175

 

Non-controlling interest

 

 

 

 

 

 

9,452

 

 

9,452

 

Net comprehensive income for the period

 

 

 

 

 

 

(211

)

21,387

 

21,176

 

Balance at August 31, 2018

 

232,600,768

 

$

1,370,477

 

$

1,375

 

$

21,726

 

$

(801

)

$

18,821

 

$

48,839

 

$

1,460,437

 

 

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

 

4



 

Aphria Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited - in thousands of Canadian dollars)

 

 

 

 

 

For the threemonths ended

 

 

 

 

 

August 31,

 

 

 

Note

 

2018

 

2017

 

Cash generated from (used in) operating activities:

 

 

 

 

 

 

 

Net income for the period

 

 

 

$

21,176

 

$

15,041

 

Adjustments for:

 

 

 

 

 

 

 

Future income taxes

 

15

 

2,468

 

3,405

 

Fair value adjustment on sale of inventory

 

6

 

4,205

 

1,136

 

Fair value adjustment on growth of biological assets

 

7

 

(9,511

)

(4,265

)

Loss on marketable securities

 

4

 

167

 

1,746

 

Unrealized foreign exchange gain

 

 

 

(25

)

(8

)

Amortization

 

9,10

 

4,706

 

628

 

Loss on sale of capital assets

 

9

 

 

7

 

Unrealized gain on convertible notes receivable

 

12

 

(295

)

(547

)

Gain on dilution of ownership in equity investee

 

13

 

(2,210

)

(7,551

)

Loss from equity investees

 

13

 

247

 

8,840

 

Gain on sale of equity investee

 

13

 

(9,880

)

 

Deferred gain recognized

 

 

 

(511

)

(234

)

Consulting revenue

 

17

 

 

(293

)

Other non-cash items

 

 

 

4

 

4

 

Share-based compensation

 

24

 

6,122

 

2,509

 

Gain on long-term investments

 

26

 

(22,700

)

(19,082

)

Unrealized loss on derivative liability

 

13

 

415

 

 

Change in non-cash working capital

 

28

 

(8,693

)

(5,137

)

 

 

 

 

(14,315

)

(3,801

)

Cash provided by financing activities:

 

 

 

 

 

 

 

Share capital issued, net of cash issuance costs

 

 

 

245,925

 

(14

)

Share capital issued on warrants and options exercised

 

 

 

2,420

 

362

 

Advances from related parties

 

8

 

915

 

1,583

 

Repayment of amounts due to related parties

 

8

 

(915

)

(1,087

)

Proceeds from long-term debt

 

18

 

24,927

 

 

Repayment of long-term debt

 

18

 

(44

)

(187

)

 

 

 

 

273,228

 

657

 

Cash used in investing activities:

 

 

 

 

 

 

 

Investment in marketable securities

 

4

 

 

(5,000

)

Proceeds from disposal of marketable securities

 

4

 

4,000

 

10,099

 

Investment in capital and intangible assets, net of shares issued

 

9,10

 

(57,763

)

(23,704

)

Proceeds from disposal of capital assets

 

9

 

 

200

 

Notes advanced

 

10

 

 

(833

)

Convertible notes advances

 

12

 

(10,000

)

(14,001

)

Repayment of convertible notes receivable

 

 

 

1,942

 

 

Investment in long-term investments and equity investees

 

 

 

(15,317

)

(5,297

)

Proceeds from disposal of long-term investments and equity investees

 

 

 

35,626

 

 

Net cash paid on investment in CannInvest Africa Ltd.

 

 

 

(4,051

)

 

 

 

 

 

(45,563

)

(38,536

)

Net (decrease) increase in cash and cash equivalents

 

 

 

213,350

 

(41,680

)

Cash and cash equivalents, beginning of period

 

 

 

59,737

 

79,910

 

Cash and cash equivalents, end of period

 

 

 

$

273,087

 

$

38,230

 

 

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

 

5



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - 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 and 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. In July 2018, Aphria Inc. and its wholly-owned subsidiary, Pure Natures Wellness Inc. (o/a Aphria) amalgamated.

 

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 condensed interim consolidated financial statements were approved by the Company’s Board of Directors on October 11, 2018.

 

2.              Basis of preparation

 

(a)                 Statement of compliance

 

The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2018, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.

 

(b)                 Basis of measurement

 

These condensed interim 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 condensed interim consolidated financial statements are presented in Canadian dollars.

 

(d)                 Foreign currency translation

 

All figures presented in the condensed interim 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 period-end exchange rates. Income and expenses, and cash flows of foreign

 

6



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

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.

 

(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 condensed interim consolidated financial statements from the date that control commences until the date that control ceases.

 

Subsidiaries

 

Jurisdiction of incorporation

 

Ownership interest (1)

 

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.

 

Israel

 

100

%

Nuuvera Deutschland GmbH

 

Germany

 

100

%

Aphria Italy S.p.A.

 

Italy

 

100

%

FL-Group

 

Italy

 

100

%

Broken Coast Cannabis Ltd.

 

British Columbia, Canada

 

100

%

Goodfields Supply Co. Ltd.

 

United Kingdom

 

100

%

Nuuvera Malta Ltd.

 

Malta

 

90

%

ASG Pharma Ltd.

 

Malta

 

90

%

QSG Pharma Ltd.

 

Malta

 

90

%

1974568 Ontario Ltd.

 

Ontario, Canada

 

51

%

CannInvest Africa Ltd.

 

South Africa

 

50

%

Verve Dynamics Incorporated (Pty) Ltd.

 

Lesotho

 

30

%

 


(1) The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Ownership of some subsidiaries are held through other subsidiaries, which the Company controls.

 

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.

 

Effective July 23, 2018, Pure Natures Wellness Inc. (o/a Aphria). (“PNW”), a wholly-owned subsidiary of the Company, was amalgamated with Aphria Inc. The Company has historically presented all balances and activities of PNW as a fully consolidated entity for financial statement presentation purposes. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.

 

7



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

(f)                   Interest in equity investees

 

The Company’s interest in equity investees is comprised of its interest in Althea Company Pty Ltd. (“Althea”).

 

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 condensed interim 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.

 

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

 

These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2018.

 

New standards applicable during the reporting period

 

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.

 

Under IFRS 9, financial instruments are initially measured at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. Subsequently, all assets within scope of IFRS 9 are measured at:

 

(i)                  Amortized cost;

 

(ii)               Fair value through other comprehensive income (“FVOCI”); or

 

(iii)            Fair value through profit or loss (“FVTPL”).

 

The classification is based on whether the contractual cash flows give rise to payments on specified dates that are solely payments of principal and interest (the “SPPI test”), and the objective of the Company’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (the “Business Model test”). Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date.

 

The impairment requirements under IFRS 9 are based on an expected credit loss model, replacing the IAS 39 incurred loss model. The expected credit loss model applies to debt instruments recorded at amortized cost or at FVOCI, such as loans debt securities and trade receivables, lease receivables and most loan commitments and financial guarantee contracts.

 

8



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

The following table summarizes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets and financial liabilities:

 

Financial assets/liabilities

 

IAS 39 Classification

 

IFRS 9 Classification

Cash and cash equivalents

 

FVTPL

 

FVTPL

Marketable securities

 

FVTPL

 

FVTPL

Accounts receivable

 

loans and receivables

 

amortized cost

Other receivables

 

loans and receivables

 

amortized cost

Convertible notes receivable

 

AFS

 

FVTPL

Long-term investments

 

FVTPL

 

FVTPL

Accounts payable and accrued liabilities

 

other financial liabilities

 

other financial liabilities

Income taxes payable

 

other financial liabilities

 

other financial liabilities

Promissory note payable

 

other financial liabilities

 

other financial liabilities

Long-term debt

 

other financial liabilities

 

other financial liabilities

Derivative liability

 

derivative financial instruments

 

FVTPL

 

IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, specifies how and when to recognize revenue, based on a five-step model, and enhances relevant disclosures to be applied to all contracts with customers.

 

The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is as follows:

 

To recognize revenue under IFRS 15, the Company applies the following five steps:

 

1.              Identify the contract(s) with a customer

2.              Identify the performance obligations in the contract

3.              Determine the transaction price

4.              Allocate the transaction price to the performance obligations in the contract

5.              Recognize revenue when or as the Company satisfies a performance obligation

 

Revenue from the direct sale of cannabis to medical customers for a fixed price is recognized when the company transfers control of the good to the customer

 

New standards and interpretations issued but not yet adopted

 

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 and review of existing lease arrangements, 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 financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.

 

9



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

4.              Marketable securities

 

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

 

 

 

S&P rating at

 

Interest

 

Maturity

 

August 31,

 

May 31,

 

 

 

purchase

 

rate

 

date

 

2018

 

2018

 

Fixed Income:

 

 

 

 

 

 

 

 

 

 

 

Ford Motor Credit Co. LLC

 

BBB

 

3.700

%

8/02/18

 

$

 

$

1,015

 

Sobeys Inc.

 

BB+

 

3.520

%

8/08/18

 

 

3,040

 

Canadian Western Bank

 

A-

 

3.077

%

1/14/19

 

1,511

 

1,528

 

Sun Life Financial Inc.

 

A

 

2.770

%

5/13/19

 

3,033

 

3,018

 

Ford Motor Credit Co. LLC

 

BBB

 

3.140

%

6/14/19

 

5,049

 

5,101

 

Canadian Western Bank

 

A-

 

3.463

%

12/17/19

 

1,013

 

1,025

 

Laurentian Bank of Canada

 

BBB

 

2.500

%

1/23/20

 

2,984

 

3,003

 

Enercare Solutions Inc.

 

BBB

 

4.600

%

2/03/20

 

3,905

 

3,974

 

Enbridge Inc.

 

BBB+

 

4.530

%

3/09/20

 

5,233

 

5,203

 

Choice Properties REIT

 

BBB

 

3.600

%

4/20/20

 

5,119

 

5,091

 

Westcoast Energy Inc.

 

BBB+

 

4.570

%

7/02/20

 

5,199

 

5,293

 

Citigroup Inc. (USD)

 

BBB+

 

2.050

%

12/17/18

 

3,931

 

3,914

 

Royal Bank of Canada (USD)

 

AA-

 

1.625

%

4/15/19

 

3,918

 

3,857

 

 

 

 

 

 

 

 

 

$

40,895

 

$

45,062

 

 

The cost of marketable securities as at August 31, 2018 was $41,770 (May 31, 2018 — $45,863). During the three months ended August 31, 2018, the company divested of certain marketable securities for proceeds of $4,000 (2017 - $10,099), resulting in a loss on disposal of $55 (2017 - $131), and re-invested $nil (2017 - $5,000). During the three months ended August 31, 2018, the Company recognized a loss of $167 (2017 - $1,746) on its marketable securities portfolio, of which $112 (2017 - $1,615) represented unrealized fair value adjustments.

 

5.              Other current assets

 

Other current assets are comprised of:

 

 

 

August 31,

 

May 31,

 

 

 

2018

 

2018

 

HST receivable

 

$

12,763

 

$

10,840

 

Accrued interest

 

988

 

831

 

Credit card receivable

 

168

 

170

 

Prepaid assets

 

2,701

 

1,720

 

Other

 

37

 

823

 

 

 

$

16,657

 

$

14,384

 

 

10



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

6.                   Inventory

 

Inventory is comprised of:

 

 

 

Capitalized

 

Fair value

 

 

August 31,

 

May 31,

 

 

 

cost

 

adjustment

 

 

2018

 

2018

 

Harvested cannabis

 

$

7,321

 

$

11,497

 

 

$

18,818

 

$

12,331

 

Harvested cannabis trim

 

831

 

1,449

 

 

2,280

 

2,277

 

Cannabis oil

 

3,122

 

5,289

 

 

8,411

 

6,578

 

Distillate

 

1,252

 

1,582

 

 

2,834

 

 

Softgel capsules

 

124

 

175

 

 

299

 

 

Packaging and supplies

 

2,110

 

 

 

2,110

 

964

 

 

 

$

14,760

 

$

19,992

 

 

$

34,752

 

$

22,150

 

 

During the three months ended August 31, 2018, the Company recorded $4,441 (2017 - $1,346) of production costs. Included in production costs for the three months ended August 31, 2018 is $147 of cannabis oil conversion costs (2017 - $41), $65 related to the cost of accessories (2017 - $37), and amortization of $513 (2017 - $389). The Company also included $919 of amortization which remains in inventory for the three months ended August 31, 2018 related to capital assets utilized in production. During the three months ended August 31, 2018, the Company expensed $4,205 (2017 —$1,136) of fair value adjustments on the growth of its biological assets included in inventory sold.

 

During the quarter, the Company also disposed of 13,642 plants prior to harvest. Included in production costs is $979 of accumulated costs relating to these plants which were not harvested.

 

The Company holds 4,893.7 kilograms of harvested cannabis (May 31, 2018 — 3,221.3 kgs), 699.7 kilograms of harvested cannabis trim (May 31, 2018 — 702.0 kgs), 9,295.6 litres of cannabis oils or 2,065.7 kilograms equivalent (May 31, 2018 — 7,724.7 litres or 1,716.6 kilograms equivalent), 3,026.1 litres of distillate or 672.5 kilograms equivalent and 316.9 litres (May 31, 2018 — nil) of softgel capsules or 70.4 kilograms equivalent (May 31, 2018 — nil) at August 31, 2018.

 

7.                   Biological assets

 

Biological assets are comprised of:

 

 

 

Amount

 

Balance at May 31, 2018

 

$

7,331

 

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

 

9,511

 

Production costs capitalized

 

7,667

 

Transferred to inventory upon harvest

 

(17,876

)

Balance at August 31, 2018

 

$

6,633

 

 

The Company values medical cannabis plants at fair value. Management determined cost 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 $9,511 during the three months ended August 31, 2018 (2017 — $4,265).

 

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 period, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.

 

11



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

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 historical 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, at each reporting period, 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 $187 (May 31, 2018 - $267) and inventory decreasing by $1,657 (May 31, 2018 - $1,040)

·                  Harvest yield per plant — a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $125 (May 31, 2018 - $179)

 

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 portion of the Canadian operating costs of Liberty Health Sciences Inc. (“Liberty”), for which Liberty reimburses the Company quarterly. Additionally, the Company purchases certain electrical generation equipment from and pays rent to a company owned by a director. These parties are related as they are corporations that are controlled by certain officers and directors of the Company.

 

During the three months ended August 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $85 (2017 - $39). Included in this amount was rent of $4 charged during the three months ended August 31, 2018 (2017 - $8).

 

 

 

Amount

 

Balance due to (from) related parties as at May 31, 2018

 

$

 

Related party charges in the period

 

85

 

Payments to related parties in the period

 

(85

)

Payments made on behalf of related parties in the period

 

(830

)

Repayments made by related parties in the period

 

830

 

Balance at August 31, 2018

 

$

 

 

Key management personnel compensation for the three months ended August 31, 2018 and 2017 was comprised of:

 

 

 

For the three months ended

 

 

 

August 31,

 

 

 

2018

 

2017

 

Salaries

 

$

788

 

$

306

 

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

 

27

 

18

 

Share-based compensation

 

1,980

 

1,758

 

 

 

$

2,795

 

$

2,082

 

 

12



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

Directors and officers of the Company control 8.13% or 18,902,125 of the voting shares of the Company.

 

9.                     Capital assets

 

 

 

 

 

Production

 

 

 

Leasehold

 

Construction

 

Total capital

 

 

 

Land

 

Facility

 

Equipment

 

improvements

 

in process

 

assets

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Additions

 

2,217

 

1,251

 

6,771

 

 

49,324

 

59,563

 

Transfers

 

 

1,389

 

1,194

 

(1,389

)

(1,194

)

 

At August 31, 2018

 

$

26,721

 

$

102,082

 

$

23,914

 

$

276

 

$

215,287

 

$

368,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Amortization

 

 

833

 

1,009

 

8

 

 

1,850

 

At August 31, 2018

 

$

 

$

3,333

 

$

3,966

 

$

117

 

$

 

$

7,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

At August 31, 2018

 

$

26,721

 

$

98,749

 

$

19,948

 

$

159

 

$

215,287

 

$

360,864

 

 

During the three months ended August 31, 2018, the Company sold assets that were not yet in use with a cost of $nil (2017 - $207) and a net book value of $nil (2017 - $207), for proceeds of $nil (2017 - $200), resulting in a loss (gain) on sale of capital assets of $nil (2017 - $7).

 

13



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - 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, 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

 

Additions

 

 

 

11,703

 

 

 

 

11,703

 

At August 31, 2018

 

$

11,730

 

$

409

 

$

150,873

 

$

1,930

 

$

459

 

$

80,627

 

$

246,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2017

 

$

 

$

156

 

$

153

 

$

 

$

 

$

4,155

 

$

4,464

 

Amortization

 

1,274

 

100

 

124

 

314

 

92

 

1,513

 

3,417

 

At May 31, 2018

 

1,274

 

256

 

277

 

314

 

92

 

5,668

 

7,881

 

Amortization

 

986

 

30

 

332

 

243

 

23

 

1,242

 

2,856

 

At August 31, 2018

 

$

2,260

 

$

286

 

$

609

 

$

557

 

$

115

 

$

6,910

 

$

10,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2017

 

$

 

$

62

 

$

1,097

 

$

 

$

459

 

$

273

 

$

1,891

 

At May 31, 2018

 

$

10,456

 

$

153

 

$

138,893

 

$

1,616

 

$

367

 

$

74,959

 

$

226,444

 

At August 31, 2018

 

$

9,470

 

$

123

 

$

150,264

 

$

1,373

 

$

344

 

$

73,717

 

$

235,291

 

 

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. During the quarter, the Company came to terms with the holder of the remaining 0.14% of the issued and outstanding shares of Broken Coast, accordingly the Company set aside 19,963 shares to be issued for the remaining 0.14%. Subsequent to quarter-end these shares were issued.

 

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the acquisition date:

 

14



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - 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

 

Shares to be issued

 

(i)

 

19,963

 

$

14.90

 

297

 

Total consideration paid

 

 

 

 

 

 

 

$

214,465

 

 

 

 

 

 

 

 

 

 

 

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

 

Intellectual property, trademarks & brands

 

 

 

 

 

 

 

72,490

 

Goodwill

 

 

 

 

 

 

 

146,091

 

Total assets

 

 

 

 

 

 

 

257,645

 

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

 

 

 

 

 

 

 

$

214,465

 

 


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

 

Net income and comprehensive net income for the Company would have been higher by approximately $567 for the three months ended August 31, 2017, if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $1,643.

 

Acquisition of Nuuvera Corp.

 

On March 23, 2018, the Company completed a 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 exchanged for an equivalent option granted pursuant to Aphria’s stock option plan (each, a “Replacement Option”) to purchase from Aphria the number of common shares (rounded to the nearest whole share) equal to: (i) the exchange ratio multiplied by (ii) the number of Nuuvera shares subject to such Nuuvera Option. Each such Replacement Option shall provide for an exercise price per common share (rounded to the nearest whole cent) equal to: (i) the exercise price per Nuuvera share purchasable pursuant to such Nuuvera Option; divided by (ii) the exchange ratio.

 

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

 

15



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

 

 

Note

 

Number of shares

 

Share price

 

Amount

 

Consideration paid

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

$

54,604

 

Shares issued

 

(i)

 

31,226,910

 

$

13.17

 

411,258

 

Warrants outstanding

 

(ii)

 

1,345,866

 

 

 

1,015

 

Replacement options issued

 

(Ii)

 

1,280,330

 

 

 

12,133

 

 

 

 

 

 

 

 

 

479,010

 

 

 

 

 

 

 

 

 

 

 

Fair value of previously held investment

 

 

 

 

 

 

 

 

 

Shares held by Aphria

 

(i)

 

1,878,738

 

$

14.92

 

28,028

 

Warrants held by Aphria

 

(ii)

 

322,365

 

 

 

243

 

 

 

 

 

 

 

 

 

28,271

 

Total fair value of consideration

 

 

 

 

 

 

 

$

507,281

 

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

35,033

 

Accounts receivable

 

 

 

 

 

 

 

464

 

Other current assets

 

 

 

 

 

 

 

1,142

 

Inventory

 

 

 

 

 

 

 

401

 

Long-term assets

 

 

 

 

 

 

 

 

 

Capital assets

 

 

 

 

 

 

 

4,743

 

Intellectual property, trademarks & brands

 

 

 

 

 

 

 

3,700

 

Licences, permits & applications

 

 

 

 

 

 

 

131,600

 

Goodwilll

 

 

 

 

 

 

 

377,221

 

Total assets

 

 

 

 

 

 

 

554,304

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

 

 

 

 

11,000

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

 

 

 

 

 

36,023

 

Total liabilities

 

 

 

 

 

 

 

47,023

 

Total net assets acquired

 

 

 

 

 

 

 

$

507,281

 

 


(i)                           Share price based on the price of the shares on March 23, 2018; shares held by Aphria include the cash consideration paid.

(ii)                        Options and warrants are valued using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 2.19%; expected life of 1- 10 years; volatility of 30% based on volatility used for similar instruments on the open market; forfeiture rate of nil; dividend yield of nil; and the exercise price of $2.52 - $20.30.

 

Net income and comprehensive net income for the Company would have been lower by approximately $4,902 for the three months ended August 31, 2017, if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $3,439.

 

Goodwill is comprised of:

 

CannWay goodwill

 

$

1,200

 

Broken Coast goodwill

 

146,091

 

Nuuvera goodwill

 

377,221

 

Total goodwill

 

$

524,512

 

 

16



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

12.            Convertible notes receivable

 

 

 

August 31,

 

May 31,

 

 

 

2018

 

2018

 

Copperstate Farms Investors, LLC

 

$

 

$

1,942

 

HydRx Farms Ltd. (d/b/a Scientus Pharma)

 

16,284

 

16,129

 

Fire & Flower Inc.

 

10,140

 

 

 

 

26,424

 

18,071

 

Deduct - current portion

 

(26,424

)

(1,942

)

 

 

$

 

$

16,129

 

 

Copperstate Farms Investors, LLC

 

On May 15, 2018, the Company entered into an amendment agreement with Copperstate Farms Investors, LLC (“CSF”) which extended the maturity date and automatic conversion date to June 30, 2018, which was subsequently extended into July. As at August 31, 2018, this note was paid in full.

 

HydRx Farms Ltd. (d/b/a Scientus Pharma)

 

On August 14, 2017, Aphria purchased $11,500 in secured convertible debentures of Scientus Pharma (“SP”). The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days. The Company maintains a first charge on all assets of SP. Subsequent to quarter-end, the Company agreed to share its first charge on all assets of SP with a third party on a pari passu basis.

 

During the period, the Company’s note receivable from SP increased by $155, representing the change in fair value on the note. As at August 31, 2018, the convertible note receivable totalled $16,284.

 

Fire & Flower Inc.

 

On July 26, 2018, Aphria purchased $10,000 in unsecured convertible debentures of Fire & Flower Inc. (“F&F”). The convertible debentures bear interest at 8% per annum compounded, accrued and paid semi-annually in arrears (the “Debentures”). The Debentures mature on the earlier of a public liquidity event or July 31, 2019 at which point they automatically convert into common shares of F&F at the rate of $1.15. The Debentures may also be converted into a loan on July 31, 2019 bearing interest at 12%, at the holder’s option.

 

During the period, the Company’s note receivable from F&F increased by $140, representing the change in fair value on the note. As at August 31, 2018, the convertible note receivable totalled $10,140.

 

During the period, the Company purchased a total of $10,000 in convertible notes. The unrealized gain on convertible notes receivable recognized in the results of operations amounts to $295 (2017 - $547).

 

The fair value for the was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 0.85-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.

 

17



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

13.              Interest in equity investees

 

 

 

August 31,

 

May 31,

 

 

 

2018

 

2018

 

Associated company

 

 

 

 

 

Althea Company Pty Ltd.

 

$

10,187

 

$

4,966

 

 

 

$

10,187

 

$

4,966

 

 

Liberty Health Sciences Inc.

 

In February 2018, the Company entered into a call/put obligation (“Obligation Agreement”) for the remaining shares held in Liberty, which were subject to CSE mandatory escrow requirements. As each new tranche of shares becomes freely trading, the Obligation Agreement resulted in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price.

 

The Obligation Agreement included an opt-out for Aphria’s benefit, in the event that the Toronto Stock Exchange amended their regulations such that it permitted investments by Canadian companies in U.S. based cannabis businesses, and in such instance, the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agreed to pay the buyers a $2,500 termination fee.

 

Based on the terms of the Obligation Agreement, the Company determined that the remaining shares held in Liberty met the requirements under IFRS 5 and were reclassified from interest in equity investees to assets held for sale. The Company ceased accounting for the investment as an equity investment as of November 30, 2017 and transferred the carrying value to assets held for sale.

 

In July 2018, 16,029,615 shares were released from escrow and sold as part of the Obligation Agreement. The Company received gross proceeds of $11,514 and recognized a gain on sale of equity investee of $9,880. As part of the transaction, the Company paid $480 in exchange for an option to buy back the shares at $1.00 a share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25. The option to repurchase the shares is subject to the following conditions (collectively, the enumerated conditions (1) through (5), the “Conditions”):

 

(1)              Cannabis becoming legalized federally in the United States; and

One or more of the following conditions have been satisfied:

(2)              The TSX has provided its approval for the re-purchase of the Liberty shares;

(3)              The TSX revises its rules such that it no longer has a prohibition against its listed companies having an interest in US assets which are involved in the cannabis business;

(4)              The common shares of the Company are voluntarily or involuntarily delisted from the TSX; and/or

(5)              The Company is acquired by another entity, provided that the common shares of the Company will be delisted from the TSX upon the change of control.

 

This option has been included in long-term investments (Note 14).

 

As at August 31, 2018, there were 64,118,462 Liberty shares held in escrow (May 31, 2018 — 80,148,077) with a carrying value of $16,496 (May 31, 2018 - $20,620), which remains in assets held for sale. Also included in assets held for sale is $nil of long-term investments (May 31, 2018 - $20,000). The Company maintained a derivative liability of $10,376 (May 31, 2018 - $12,451) and during the three months ended August 31, 2018, recognized an unrealized loss on derivative liability of $415 (2017 - $nil) as a result of the 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price in the Obligation Agreement.

 

During the three months ended August 31, 2017, the Company reported a total gain on dilution of ownership in equity investee of $7,551. For the four months ended August 31, 2017, Liberty reported a net loss of $23,493 and a net comprehensive loss of $27,001. In accordance with the equity method, the Company recorded a loss of $8,840 and other comprehensive loss of $1,321.

 

18



 

Aphria Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended August 31, 2018 and August 31, 2017

(Unaudited - in thousands of Canadian dollars, except share and per share amounts)

 

The Company used a Monte-Carlo simulation to estimate the fair value of the derivative liability, using the following assumptions: risk-free rate of 1%; expected life of 0.4 — 2.4 years; volatility of 60% based on comparable companies; forfeiture rate of 0%; and, dividend yield of nil.

 

Subsequent to quarter-end, the Company secured an exemption from the CSE allowing it to have the remaining Liberty shares released from the CSE mandated escrow. Subsequent to the release from escrow, the Company entered into a share purchase agreement to divest of the remaining 64,118,462 Liberty shares in exchange for consideration in the form of a promissory note in the amount of $59,098, bearing interest at a rate of 12% due in 5 years. As a security for the promissory note, the Liberty shares have been placed in trust with an escrow agent. The purchaser is able to remove the Liberty shares from the escrow at any time by paying off the promissory note. In the event that the Company enforces the security, the escrow agent will return the shares to the Company, provided that the Conditions are met. In the event they are not met, the escrow agent will transfer the securities to a third-party investment for liquidation, with the proceeds of liquidation delivered to the Company. Simultaneously with this sale, the Company entered into an option agreement to repurchase the Liberty shares for the amount of the promissory note. The Company will pay an annual fee equal to 12.975% of the face value of the promissory note to maintain this option. The option to repurchase the shares is subject to the Conditions described above. In exchange for the early termination of the Obligation Agreement, the Company paid a $1,000 termination fee.

 

Althea Company Pty Ltd. (“Althea”)

 

As at August 31, 2018 the Company held 50,750,000 common shares of Althea (May 31, 2018 - 4,500) representing an ownership interest of 25% (May 31, 2018 - 37.5%).

 

The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements.

 

 

 

June 30,

 

March 31,

 

 

 

2018

 

2018

 

Current assets

 

$

3,102

 

$

3,857

 

Non-current assets

 

 

3

 

Current liabilities

 

(154

)

(14

)

Non-current liabilities

 

 

 

Net assets

 

$

2,948

 

$

3,846

 

 

For the period from April 1 to June 30, 2018 the investee, Althea, reported a net loss of $766 AUD on its financial statements. In accordance with the equity method, the Company recorded a loss of $247, for the three months ended August 31, 2018, from its investee relative to its ownership of the outstanding common shares at the time.

 

During the three months ended August 31, 2018, Althea completed a share split of 7,500 shares for each existing share. Althea also issued 101,310,000 common shares for total proceeds of $19,650 AUD during the quarter. The Company participated in the financing of Althea contributing $3,400 AUD ($3,258 CAD) of the total $19,650 AUD raised. This additional raise reduced the Company’s ownership interest in Althea from 37.5% to 25% and accordingly, the Company recognized a gain on dilution of $2,210.

 

 

 

August 31,

 

May 31,

 

 

 

2018

 

2018

 

Reconciliation to carrying amount:

 

 

 

 

 

Opening balance

 

$

4,966

 

$

 

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