Expanding
Our Roots
CONSOLIDATED
FINANCIAL STATEMENTS
CONSOLIDATED
FINANCIAL
STATEMENTS
FOR THE YEAR
ENDED MAY 31, 2017
AND MAY 31, 2016
(Expressed in Canadian Dollars,
unless otherwise noted)
MANAGEMENTS RESPONSIBILITY
FOR FINANCIAL REPORTING
INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS
OF INCOME AND
COMPREHENSIVE INCOME
5
7
9
10
CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY (DEFICIENCY) 11
CONSOLIDATED STATEMENTS
OF CASH FLOWS
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
12
15
3
PART IV
1,001,000 sq ft
PART III
301,000 sq ft
PART II
101,000 sq ft
Cumulative
greenhouse
growth
MANAGEMENT’S
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
APHRIA INC.
5
APHRIA INC. CONSOLIDATED FINANCIAL STATEMENTS 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
Opinion
earnings, comprehensive earnings, changes in equity (deficiency) and cash flows for the year then ended, and the
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
related notes, which comprise a summary of significant accounting policies and other explanatory information.
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.
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, 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.
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.
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.
Chartered Professional Accountants, Licensed Public Accountants
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.
OPINION
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
Aphria Inc. and its subsidiaries as at May 31, 2017 and their financial performance and their cash flows for the year
position of Aphria Inc. and its subsidiaries as at May 31, 2017 and their financial performance and their
then ended in accordance with International Financial Reporting Standards.
cash flows for the year then ended in accordance with International Financial Reporting Standards.
OTHER MATTER
Other matter
The financial statements of Aphria Inc. for the year ended May 31, 2016 were audited by another auditor who
The financial statements of Aphria Inc. for the year ended May 31, 2016 were audited by another auditor
expressed an unmodified opinion on those financial statements on July 7, 2016.
who expressed an unmodified opinion on those financial statements on July 7, 2016.
Chartered Professional Accountants, Licensed Public Accountants
Chartered Professional Accountants, Licensed Public Accountants
Windsor, Ontario, Canada
7
APHRIA INC. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
NOTE
MAY 31,
2017
MAY 31,
2016
ASSETS
Current assets
Cash and cash equivalents
Marketable securities
Accounts receivable
Other receivables
Inventory
Biological assets
Prepaid assets
Due from DFMMJ Investments, Ltd.
Promissory notes receivable
Capital assets
Intangible assets
Convertible note receivable
Embedded derivative
Interest in equity accounted investee
Long-term investments
Deferred tax asset
Goodwill
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Deferred gain from equity accounted investee
Current portion of promissory note payable
Current portion of long-term debt
Long-term liabilities
Promissory note payable
Long-term debt
Shareholders’ equity
Share capital
Warrants
Share-based payment reserve
Deficit
7
8
9
10
11
12
13
4,14
15
15
16
17
6
4
16
19
20
19
20
21
22
23
$
79,910,415
87,346,787
825,511
4,511,639
3,886,607
1,362,749
1,059,624
463,916
--
179,367,248
72,500,148
1,891,237
1,360,548
173,000
28,376,092
27,787,578
3,314,570
1,200,000
$
16,472,664
--
1,778,679
126,952
2,088,850
697,997
160,156
--
567,588
21,892,886
7,309,220
4,317,680
--
--
--
1,560,200
--
1,200,000
$ 315,970,421
$
36,279,986
$
5,872,962
2,800,000
877,500
765,224
10,315,686
365,625
31,420,230
42,101,541
274,316,548
444,912
3,229,929
(4,122,509)
273,868,880
$
1,266,492
--
--
--
1,266,492
--
--
1,266,492
40,916,880
693,675
1,723,903
(8,320,964)
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”
Signed: Director
“Cole Cacciavillani”
Signed: Director
The accompanying notes are an integral part of these consolidated financial statements
9
APHRIA INC. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIENCY)
Revenue
$
20,438,483
$
8,433,929
Balance at
May 31, 2015
52,479,587
$ 20,246,095
$ 556,589
$ 1,261,589
$ (8,718,925)
$ 13,345,348
NOTE
FOR THE YEAR ENDED
MAY 31,
2017
MAY 31,
2016
NUMBER
OF COMMON
SHARES
SHARE
CAPITAL
(NOTE 21)
WARRANTS
(NOTE 22)
SHARE-BASED
PAYMENT
RESERVE
(NOTE 23)
DEFICIT
TOTAL
Cost of sales:
Cost of goods sold, net
Amortization
Net effect of changes in fair value of
biological assets and inventory
Gross profit
Expenses:
General and administrative
Share-based compensation
Selling, marketing and promotion
Amortization
Research and development
Impairment of intangible asset
Consulting revenue
Foreign exchange gain
Gain on marketable securities
Gain on sale of capital assets
Profit from equity accounted investee
Finance income, net
Gain on long-term investments
Income (loss) before income taxes
Income tax expense (recovery)
10
13,14
10
25
26
13,14
14
19
7
13
16
27
28
6
3,599,342
985,533
(1,443,925)
3,140,950
1,861,440
590,415
4,646
2,456,501
17,297,533
5,977,428
4,678,054
2,399,111
6,663,862
956,043
492,425
3,500,000
18,689,495
2,425,123
462,314
3,598,481
361,763
220,408
--
7,068,089
(1,391,962)
(1,090,661)
511,875
482,596
208,563
11,367
210,400
728,249
3,571,129
--
--
--
7,125
--
281,497
--
4,332,217
(802,039)
133,762
(1,200,000)
Share issued on CannWay
Purchase
Share-based payments
Net income for the year
BALANCE AT
MAY 31, 2016
Balance at
May 31, 2016
Share issuance –
August 2016 bought deal
Share issuance –
November 2016 bought deal
Share issuance –
February 2017 bought deal
Share issuance –
May 2017 bought deal
Income tax recovery on
share issuance costs
Share and warrant issuance –
intangible asset acquisition
Share issuance –
warrants exercised
Share issuance –
options exercised
Warrants exercised
5,127,976
6,191,892
(126,748)
Share issued on Bought Deal
8,846,370
10,136,277
263,834
3,600,000
4,342,616
--
--
--
--
--
--
--
--
--
--
462,314
--
--
--
--
6,065,144
10,400,111
4,342,616
462,314
--
397,961
397,961
70,053,933 $ 40,916,880 $ 693,675
$ 1,723,903 $ (8,320,964) $ 35,013,494
NUMBER
OF COMMON
SHARES
SHARE
CAPITAL
(NOTE 21)
WARRANTS
(NOTE 22)
SHARE-BASED
PAYMENT
RESERVE
(NOTE 23)
DEFICIT
TOTAL
70,053,933 $ 40,916,880 $
693,675 $ 1,723,903 $ (8,320,964)
$ 35,013,494
17,250,000
31,959,093
10,062,500
37,263,475
11,500,000
53,869,357
13,269,252
81,322,498
--
3,448,332
--
--
--
--
--
38,759
100,000
359,480
15,251,165
23,646,825
(608,243)
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
31,959,093
37,263,475
53,869,357
81,322,498
3,448,332
459,480
23,038,582
975,330
2,320,784
--
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
Earnings per share – diluted
29
29
$
$
0.04
0.04
$
$
0.01
0.01
Shares held in escrow
for services not yet earned
Net income for the year
BALANCE AT
MAY 31, 2017
Share-based payments
100,000
256,575
1,053,095
1,533,513
(558,183)
2,064,209
--
--
--
--
50,000
--
--
--
--
--
4,198,455
4,198,455
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
The accompanying notes are an integral part of these consolidated financial statements
1111
APHRIA INC. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash generated from (used in) operating activities:
Net income for the year
Adjustments for:
Income tax expense (recovery)
Net effect of change in fair value of biological assets
Amortization
Gain on sale of capital assets
Disposition and usage of bearer plants
Impairment of intangible assets
Accrued interest on convertible note advanced to debtors
Profit from equity accounted investee
Amortization of finance fees on long-term debt
Gain on marketable securities
Share-based compensation
Unrealized gain on long-term investments
Realized loss on long-term investments
Consulting revenue
Change in non-cash working capital
Cash provided by financing activities:
Share capital issued, net of cash issuance costs
Share capital issued on warrants exercised
Share capital issued on stock options exercised
Advances from related parties
Repayment of amounts due to related parties
Proceeds from long-term debt, net of finance fees
Repayment of long-term debt
Cash used in investing activities:
Issuance of promissory notes receivable
Repayment of promissory notes receivable
Investment in capital assets
Proceeds from disposal of capital assets
Investment in intangible assets, net of shares issued
Convertible note advanced to debtors
Purchase of equity investments
Investment in marketable securities
Proceeds from disposal of marketable securities
Investment in long-term investments
Proceeds from divestiture of long-term investments
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
YEAR ENDED
MAY 31,
2017
YEAR ENDED
MAY 31,
2016
NOTE
$
4,198,455
$
397,961
6
10
13,14
13
13
14
15
16
20
26
28
28
19
30
11
11
20
20
12
12
13
13
14
15
16
17
28
133,762
(5,004,615)
1,941,576
(11,367)
66,613
3,500,000
(33,548)
(210,400)
4,583
(208,563)
2,399,111
(6,311,979)
2,740,850
(511,875)
2,632,962
5,325,565
204,408,498
23,038,582
975,330
387,892
(851,808)
32,825,000
(644,129)
(1,200,000)
4,646
952,178
(7,125)
--
--
--
--
--
--
462,314
--
--
--
(1,598,108)
(988,134)
10,314,727
6,065,144
--
1,139,788
(1,139,788)
--
--
260,139,365
16,379,871
--
567,588
(200,000)
232,412
(66,416,305)
(4,426,059)
32,823
(1,306,120)
(1,500,000)
(25,365,692)
(109,268,749)
22,130,525
(28,097,293)
7,196,044
36,570
(53,705)
--
--
--
--
(1,560,200)
--
(202,027,179)
(5,970,982)
63,437,751
16,472,664
9,420,755
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
13
APHRIA INC. CONSOLIDATED FINANCIAL STATEMENTS
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.
Aphria (Arizona) Inc.
CannWay Pharmaceuticals Ltd
Ontario
Arizona
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.
15
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor 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.
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by the Company are as follows:
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.
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.
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.
17
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
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
Greenhouse infrastructure
Bearer plants
Production equipment
Office equipment
Automotive equipment
Leasehold improvements
Construction in progress
Not amortized
Straight-line
No term
20 years
Unit of Production
Number of units
Straight-line
Straight-line
Straight-line
Straight-line
Not amortized
5 – 10 years
3 – 5 years
10 years
over lease term
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.
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
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.
19
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
n. Financial instruments
(vi) Financial liabilities and other financial liabilities
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)
(v)
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.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the
end of each reporting period. Financial assets are impaired when there is objective evidence
that, as a result of one or more events that occurred after the initial recognition of the financial
asset, the estimated future cash flows of the investment have been impacted.
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.
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
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.
21
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
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.
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.
Company-specific information is considered when determining whether the fair value of a long-term
investment should be adjusted upward or downward at the end of each reporting period. In addition
to company-specific information, the Company will take into account trends in general market
conditions and the share performance of comparable publicly-traded companies when valuing
long-term investments.
The fair value of long-term investments may be adjusted if:
•
•
•
•
•
There has been a significant subsequent equity financing provided by outside investors at a
valuation different than the current value of the investee company, in which case the fair
value of the investment is set to the value at which that financing took place;
There have been significant corporate, political, or operating events affecting the investee
company that, in management’s opinion, have a material impact on the investee company’s
prospects and therefore its fair value. In these circumstances, the adjustment to the fair value
of the investment will be based on management’s judgment and any value estimated may not
be realized or realizable;
The investee company is placed into receivership or bankruptcy;
Based on financial information received from the investee company, it is apparent to the Company
that the investee company is unlikely to be able to continue as a going concern;
Important positive/negative management changes by the investee company that the Company’s
management believes will have a positive/negative impact on the investee company’s ability to
achieve its objectives and build value for shareholders.
Adjustment to the fair value of a long-term investment will be based upon management’s judgment
and any value estimated may not be realized or realizable. The resulting values for non-publicly traded
investments may differ from values that would be realized if a ready market existed.
BIOLOGICAL ASSETS AND INVENTORY
Management is required to make a number of estimates in calculating the fair value less costs to
sell of biological assets and harvested cannabis inventory. These estimates include a number of
assumptions such as estimating the stage of growth of the cannabis, harvesting costs, sales price,
and expected yields.
ESTIMATED USEFUL LIVES, IMPAIRMENT CONSIDERATIONS AND
AMORTIZATION OF CAPITAL AND INTANGIBLE ASSETS
Amortization of capital and intangible assets is dependent upon estimates of useful lives based on
management’s judgment.
Goodwill and indefinite life intangible asset impairment testing requires management to make 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.
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
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.
23
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
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 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
Goodwill
Deferred tax liability
$
--
4,428,000
1,200,000
(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
$
Accounts receivable
Accounts payable
HST payable
Income taxes payable
NET TANGIBLE ASSETS ACQUIRED
$
269,717
91,872
(219,505)
(58,107)
(83,977)
--
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.
25
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
5. REVERSE ACQUISITION
6. INCOME TAXES AND DEFERRED INCOME TAXES
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.
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)
Net assets acquired
Cash and cash equivalents
Other receivables
Accounts payable and accrued liabilities
Excess attributed to cost of listing
Listing cost:
Excess attributed to cost of listing
Legal
Professional, consulting and other fees
$
2,530,000
$
79,188
16,358
(33,566)
61,980
2,468,020
$
2,530,000
$
2,468,020
570,034
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.
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
Business combination
Non-deductible share-based compensation and other expenses
Non-taxable portion of gains
Utilization of tax attributes not previously recognized
Deductible share issuance costs
Other
Tax assets not recognized
--
--
658,759
(533,658)
(876,608)
(285,953)
22,916
269
(101,560)
1,200,000
--
--
(1,331,062)
--
--
(754,838)
$
133,762
$ (1,200,000)
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
Cumulative eligible capital
--
--
183,157
695,356
Deductible share issuance costs to be claimed
$
--
$ 1,968,361
27
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
The following table summarizes the components of deferred tax:
7. MARKETABLE SECURITIES
MAY 31,
2017
MAY 31,
2016
Marketable securities are classified as fair value through profit or loss, and are comprised of:
Deferred tax assets
Non-capital loss carry forward
$ 1,312,849
$ 1,171,189
Capital loss carryforward
Share issuance and financing fees
Undepreciated capital cost in excess of net book value
Other
Deferred tax liabilities
Net book value in excess of undepreciated capital cost
Intangible assets in excess of tax costs
Unrealized gain
Biological assets and inventory in excess of tax costs
380,362
3,448,332
--
34,138
(164,027)
(193,890)
(914,019)
(589,175)
--
--
159,873
--
--
(1,124,528)
--
(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:
Balance at beginning of year
Recognized in net income
Recognized in goodwill
Recognized in equity
Other
Balance at end of year
MAY 31,
2017
MAY 31,
2016
$
--
$
--
(133,762)
1,200,000
--
(1,200,000)
3,448,332
--
$ 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
2032
2033
2034
2035
2036
2037
$
1,284
74,702
67,880
81,588
399,860
793,742
3,535,092
$
4,954,148
S&P
RATING AT
PURCHASE
EFFECTIVE
INTEREST
RATE
MATURITY
DATE
MAY 31,
2017
MAY 31,
2016
Ford Motor Credit Co. LLC
Ford Motor Credit Co. LLC
Ford Motor Credit Co. LLC
Goldman Sachs
Canadian Western Bank
Royal Bank of Canada
Sobeys Inc.
Molson Coors Brewing Company
Canadian Western Bank
Sunlife Financial
Canadian Natural Resources Limited
Canadian Western Bank
Laurentian Bank
Enercare Solutions Inc.
Enbridge Inc.
Central 1 Credit Union
Choice Property REIT
Penske Truck Leasing Co., L.P.
Westcoast Energy Inc.
The Manufacturer’s Life Insurance Company
Bank of Montreal (USD)
Citigroup Inc. (USD)
Royal Bank of Canada (USD)
Wells Fargo & Company (USD)
BBB
BBB
BBB
A
A-
AA-
BBB-
BBB-
A-
A-
BBB+
A-
BBB
BBB
BBB+
A+
BBB
BBB
BBB
AA-
A+
BBB
AA-
A
3.320%
3.700%
3.140%
3.375%
2.531%
2.770%
3.520%
3.950%
3.077%
2.770%
3.050%
3.463%
2.500%
4.600%
4.530%
1.870%
3.600%
2.950%
4.570%
2.819%
1.400%
2.050%
1.625%
2.150%
12/19/17
08/02/18
06/14/19
02/01/18
03/22/18
12/11/18
08/08/18
10/06/17
01/14/19
05/13/19
06/19/19
12/17/19
01/23/20
02/03/20
03/09/20
03/16/20
04/20/20
06/12/20
07/02/20
02/26/18
04/10/18
12/17/18
04/15/19
01/30/17
1,988,184
1,036,613
5,206,828
5,078,194
3,038,997
5,179,711
3,078,141
1,116,524
1,534,717
3,063,816
2,053,607
1,027,752
6,098,888
4,007,550
5,394,630
5,020,565
5,236,870
5,145,483
5,429,820
1,471,818
4,051,775
4,081,546
4,039,998
3,964,760
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
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.
$ 87,346,787
$ --
29
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
8. OTHER RECEIVABLES
10. BIOLOGICAL ASSETS
Other receivables are comprised of:
HST receivable (payable)
Accrued interest
Credit card receivable
Other
9. INVENTORY
Inventory is comprised of:
Harvested cannabis
Harvested trim
Cannabis oil
Packaging and supplies
MAY 31,
2017
MAY 31,
2016
$ 3,675,188
$
(35,909)
700,827
103,004
32,620
98,197
64,621
43
$ 4,511,639
$
126,952
MAY 31,
2017
MAY 31,
2016
$ 2,506,963
$ 1,714,897
420,322
682,056
277,266
--
165,060
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.
Biological assets are comprised of:
Balance as at May 31, 2016
Cost incurred until harvest
Effect of unrealized changes in fair value of biological assets
Transferred to inventory upon harvest
Transferred to capital assets
BALANCE AS AT MAY 31, 2017
Net effect of changes in fair value of biological assets and inventory include:
Unrealized change in fair value of biological assets
Realized fair value increments on inventory sold in the year
AMOUNT
$
697,997
4,188,319
5,004,615
(8,415,957)
(112,225)
$
1,362,749
AMOUNT
$
(5,004,615)
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.
31
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
11. RELATED PARTY TRANSACTIONS
12. PROMISSORY NOTES RECEIVABLE
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).
Balance as at May 31, 2016
Related party charges in year
Payments to related parties in year
Payments made on behalf of related parties in year
$
AMOUNT
--
387,892
(387,892)
(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:
Salaries
Short-term employment benefits
(included in office and general)
Share-based compensation
MAY 31,
2017
MAY 31,
2016
$
828,924
$
752,337
84,176
594,400
31,846
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.
MAY 31,
2016 ADDITIONS PAYMENTS
MAY 31,
2017
$ 93,039 $
--
$ 93,039 $
--
274,549
--
274,549
--
Note receivable - $100,000, bearing
interest at prime + 3%, one-year term,
collected during the year
Note receivable - $500,000, bearing
interest at 3%, repayable in 24 equal
blended monthly instalments,
collected during the year
Note receivable - $100,000, non-interest
bearing, one-year term, collected
during the year
Note receivable - $100,000, non-interest,
one-year term, collected during the year
100,000
--
100,000
100,000
--
100,000
--
--
$ 567,588 $
--
$ 567,588 $
--
33
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
13.CAPITAL ASSETS
14. INTANGIBLE ASSETS
LAND
GREENHOUSE
INFRASTRUCTURE
BEARER
PLANTS EQUIPMENT
LEASEHOLD
IMPROVEMENTS
CONSTRUCTION
IN PROCESS
TOTAL
CAPITAL
ASSETS
Cost
At May 31, 2015 $
--
$
--
$
--
$ 1,450,011 $ 2,231,612 $
304,701 $ 3,986,324
Additions
Transfers
Disposals
At May 31, 2016
Additions
Transfers
Disposals
--
--
--
--
--
--
--
--
--
--
--
--
1,051,980
221,204
3,152,875 4,426,059
1,033,433 2,359,337
(3,392,770)
--
(35,896)
--
--
(35,896)
3,499,528 4,812,153
64,806 8,376,487
10,724,551
4,018,080
112,225 1,699,989
16,129 49,957,556 66,528,530
104,283
12,151,836
--
173,834 (4,565,987)
(7,863,966)
--
--
--
(66,613)
(32,823)
--
--
(99,436)
CORPORATE
LICENSES
WEBSITE
& PERMITS
TOKYO
SMOKE
LICENSING
AGREEMENT
CANNWAY
BRAND
TOTAL
INTANGIBLE
ASSETS
Cost
At May 31, 2015
$ 107,995 $
--
$
--
$
--
$
107,995
Additions
At May 31, 2016
Additions
53,705
161,700
--
--
--
--
4,428,000
4,481,705
4,428,000
4,589,700
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, 2017 $ 10,828,834
$ 16,169,916
$ 45,612 $ 5,340,528 $
262,295 $ 42,158,396 $ 74,805,581
At May 31, 2015
$
33,397 $
--
$
--
$
-- $
33,397
Accumulated amortization
At May 31, 2015
$
--
$
--
$
--
$
172,860 $
187,303
Amortization
Disposals
At May 31, 2016
Amortization
Transfers
Disposals
--
--
--
--
--
--
--
--
--
457,891
524,749
--
--
--
--
--
--
--
387,992
325,563
(6,451)
--
554,401
512,866
717,207
74,435
--
(524,749)
(11,367)
--
--
--
--
--
--
--
--
$
360,163
713,555
(6,451)
1,067,267
1,249,533
--
(11,367)
AT MAY 31, 2017 $
--
$
982,640
$
--
$ 1,260,241 $
62,552
$
--
$ 2,305,433
Net book value
At May 31, 2015
At May 31, 2016
--
--
--
--
-- $ 1,277,151 $ 2,044,309 $
304,701 $ 3,626,161
-- $ 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.
Additions
At May 31, 2016
Additions
Impairment
54,123
87,520
--
--
--
--
184,500
238,623
184,500
67,845
152,879
56,939
414,380
272,020
692,043
--
--
--
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
At May 31, 2016
$
$
74,598 $
74,180 $
--
$
--
$
--
$
-- $
74,598
--
$ 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.
35
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
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.
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
DFMMJ Investments, Ltd.
$ 28,376,092
$
--
MAY 31,
2017
MAY 31,
2016
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:
Current assets
Non-current assets
NET ASSETS
Reconciliation to carrying amount
Opening net assets June 1, 2016
Intangible asset contributed
Cash contributions
Cash contributions on May 24, 2017
Profit for the period ended April 30th
Closing net assets
APRIL 30,
2017
APRIL 30,
2016
$
5,723,960 $
5,000,000
10,723,960
--
--
--
MAY 31,
2017
MAY 31,
2016
--
5,000,000
792,600
50,167,600
478,200
56,438,400
--
--
--
--
--
--
--
--
--
--
Company’s share in %
46.1%
Company’s share of net assets
$
26,018,102
$
Fair value adjustment due to profit elimination
Goodwill
(2,200,000)
4,557,990
CARRYING AMOUNT OF INTEREST IN ASSOCIATE
$ 28,376,092 $
On May 24, 2017, the Company released $25,311,794, comprised of $625,000 Cdn and $18,340,857
USD, which itself was comprised of $24,375,000 Cdn converted into USD in March 2017 as required
in the business combination agreement ($24,686,794 Cdn), from escrow to DFMMJ, after satisfaction
of the escrow release conditions. In addition, the Company incurred $53,898 of transaction fees
related to the investment. In exchange, the Company received 120,192,308 common shares of
DFMMJ. Concurrently, DFMMJ issued a further 120,192,308 common shares to third parties
in exchange for $25,000,000 Cdn in cash. As a result of these transactions, the Company owns
312,592,308 common shares in DFMMJ, representing approximately 46.1% of DFMMJ’s issued and
outstanding common shares.
Based on the most recent financing transaction share price, the DFMMJ shares held by Aphria have a
fair value of approximately $65,000,000.
37
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
17. LONG-TERM INVESTMENTS
COST AND
FAIR VALUE
MAY 31,
2016 INVESTMENT
DIVESTITURE
(COST)
COST
MAY 31,
2017
CUMULATIVE
CHANGE
IN FAIR
VALUE
FAIR VALUE
MAY 31, 2017
Level 1
on fair value hierarchy
CannaRoyalty Corp.
$ 1,510,200 $ 1,625,000 $ (1,755,712)
$ 1,379,488 $
413,512 $ 1,793,000
Kalytera Therapeutics, Inc.
MassRoots, Inc.
SecureCom Mobile Inc.
Tetra Bio-Pharma Inc.
Canabo Medical Inc.
Level 3
on fair value hierarchy
--
--
--
--
--
3,014,320
--
3,014,320
(1,903,360)
1,110,960
945,000
(436,575)
508,425
53,850
520,000
2,300,000
--
--
520,000
1,144,000
2,300,000
7,200,000
562,275
1,664,000
9,500,000
8,854,033 (7,694,607)
1,159,426
(843,426)
316,000
$ 1,510,200 $ 17,258,353 $ (9,886,894)
$ 8,881,659 $ 6,064,576 $ 14,946,235
Ample Organics Inc.
$
50,000 $
--
$
(50,000)
$
-- $
--
$
--
Copperstate Farms, LLC
Copperstate Farm Investors, LLC
Resolve Digital Health Inc.
Resolve Digital Health Inc.
Green Acre Capital Fund
Scythian Biosciences Inc.
--
--
--
--
--
--
1,755,000
7,538,940
718,000
282,000
300,000
2,000,000
--
--
--
--
--
--
1,755,000
7,538,940
718,000
282,000
300,000
--
1,755,000
21,060
282,012
(40,000)
(15,669)
7,560,000
1,000,012
242,000
284,331
2,000,000
--
2,000,000
$
50,000 $ 12,593,940 $
(50,000)
$ 12,593,940 $
247,403 $ 12,841,343
$ 1,560,200 $ 29,852,293 $ (9,936,894)
$ 21,475,599 $ 6,311,979 $ 27,787,578
At year end, the Company has concluded that the fair value and carrying value of the Level 3 investments are equal to the
most recent financing transactions, which represent the best proxy for fair value. The fair value attached to warrants in
both Level 1 and Level 3 were determined using the Black-Scholes option pricing model.
CANNAROYALTY CORP.
On September 9, 2016, Aphria exercised 750,000 warrants, issued by CR to acquire 750,000 common shares of CR for
$1,125,000 and subsequently purchased an additional 250,000 common shares of CR for $500,000 on September 27,
2016. In addition, CR licenced, for a five-year period, its Canadian portfolio of cannabis products in exchange for a 5%
royalty fee paid by Aphria. In December 2016, Aphria sold 1,300,000 shares for total proceeds of $3,539,050, through
three separate transactions, realizing a gain of $1,908,746 on disposal. On May 17, 2017, Aphria sold 100,000 shares
for total proceeds of $198,000, realizing a gain of $72,592 on disposal. In summary, during the year the Company sold
1,400,000 common shares for proceeds of $3,737,050, realizing a gain of $1,981,338 on disposal. On May 31, 2017,
CR shares closed trading at $1.63. As a result of these transactions, the Company holds 1,100,000 common shares at
a cost of $1,379,488, with a fair value of $1,793,000.
KALYTERA THERAPEUTICS, INC.
On November 7, 2016, Aphria entered into a subscription agreement with Kalytera Therapuetics, Inc.
(“Kalytera”). The Company purchased 2,500,000 subscription receipts at a price of $0.40 per receipt for a
total of $1,000,000. On December 30, 2016, the Company’s subscription receipts converted into common
shares of Kalytera on a one-for-one basis. On January 31, 2017, Aphria subscribed for an additional
2,222,000 common shares of Kalytera for a purchase price of $999,900 pursuant to a private placement
which closed on February 7, 2017. On February 22, 2017, the Company purchased an additional 1,450,000
common shares of Kalytera in the secondary market at a price of $0.70 per share for a total of $1,014,420.
On May 31, 2017, Kalytera shares closed trading at $0.18 per share. As a result of these transactions, the
Company owns 6,172,000 common shares in Kalytera for aggregate costs of $3,014,320 and a fair value of
$1,110,960.
MASSROOTS, INC.
On October 18, 2016, Aphria purchased 500,000 common shares of MassRoots, Inc. (“MassRoots”) for an
aggregate purchase price of $250,000 USD ($337,500 Cdn) and received warrants to purchase an additional
500,000 common shares at $0.90 USD per common share, expiring October 17, 2019. Subsequent to
October 18, 2016, Aphria divested itself of its 500,000 common shares of MassRoots for total proceeds
of $600,599, realizing a gain of $263,099 on disposal. On March 30, 2017, the Company exercised its
500,000 warrants held in MassRoots for the aggregate price of $450,000 USD ($607,500 Cdn) and received
an additional 500,000 common shares, subject to a six-month hold under MassRoots long-term incentive
plan. During April and May, the Company sold 150,000 common shares for total proceeds of $123,395,
realizing a gain of $24,320. In summary, during the year the Company sold 650,000 common shares for
proceeds of $723,994, recognizing a gain of $287,419. On May 31, 2017, MassRoots shares closed trading
at $0.49 USD ($0.66 Cdn). As a result of these transactions, the Company holds 850,000 shares at a cost of
$508,425 with a fair value of $562,275.
SECURECOM MOBILE INC.
On November 23, 2016, Aphria invested $200,000 in SecureCom Mobile Inc. (“SecureCom”) via an
unsecured convertible debenture. The debenture bore interest at 12% and was convertible into equity at
$0.05 per share, and included the right to a warrant for each share of equity on conversion, priced at $0.08.
The warrant expired on December 1, 2019 and the conversion right expired November 20, 2018. On March
31, 2017, the Company exercised its conversion rights under the debenture and received 4,000,000 shares
and 4,000,000 warrants priced at $0.08. Concurrently, the Company exercised its warrants at a cost of
$320,000 and received an additional 4,000,000 shares. On May 31, 2017, SecureCom shares last traded
at $0.46, however they were considered to have a fair value of $0.208 per share based on the DFMMJ and
SecureCom business combination agreement. As a result of these transactions, Aphria owns 8,000,000
shares in SecureCom at a cost of $520,000 with a fair value of $1,664,000.
TETRA BIO-PHARMA INC.
On December 6, 2016, Aphria purchased 5,000,000 common shares of Tetra Bio-Pharma Inc. (“TBP”) at
a price of $0.20 per share for an aggregate purchase price of $1,000,000, pursuant to a private placement.
As part of the transaction, Aphria also received 5,000,000 warrants, each for conversion into one common
share, at a price of $0.26 per warrant for a period of three years. The warrants were subject to an accelerated
expiry if TBP’s shares traded above $0.45 for 30 consecutive trading days at which time the warrants became
subject to a 30-day expiry period if not exercised. On March 20, 2017, the Company exercised its 5,000,000
warrants held in TBP for the aggregate price of $1,300,000. On May 31, 2017, TBP shares closed trading at
$0.95 per share. As a result of these transactions, the Company owns 10,000,000 common shares at a cost
of $2,300,000, with a fair value of $9,500,000.
39
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
CANABO MEDICAL INC.
On December 23, 2016, Aphria purchased 6,000,000 common shares of Canabo Medical Inc. at a price
of $1.40 per common share for an aggregate price of $8,483,333, including issuance costs, pursuant
to a private placement. On March 9, 2017, the Company sold 500,000 shares held in Canabo Medical
Inc. for net proceeds of approximately $340,000, realizing a loss of $360,000, which were subject to a
mandatory 4-month holding period, expiring April 23, 2017. The Company purchased 500,000 shares
on March 13, 2017 for an aggregate purchase price of $370,700. In May 2017, the Company sold
5,200,000 shares held in Canabo Medical Inc. for net proceeds of approximately $2,345,000, realizing
a loss of $4,649,607 on disposal. On May 31, 2017, Canabo Medical Inc. closed trading at $0.40 per
share. As a result of these transactions, the Company owns 800,000 common shares with a cost of
$1,159,426 and a fair value of $316,000.
AMPLE ORGANICS INC.
On May 31, 2017, Aphria received proceeds of $50,000 from Ample Organics Inc., the same amount as
its initial investment.
COPPERSTATE FARMS
On October 27, 2016, Aphria entered into an intellectual property (“IP”) transfer agreement with
Copperstate Farms, LLC (‘‘Copperstate’’). Under the terms of the agreement, Aphria licensed its IP to
Copperstate in exchange for 5,000 membership units in Copperstate through a consulting agreement
which will be used to forgive payments otherwise owing on a $1,300,000 USD ($1,755,000 Cdn)
promissory note in eight equal quarterly installments beginning in February 2017. On the same
date, Aphria made a direct cash contribution of $1,300,000 USD ($1,755,000 Cdn) to Copperstate
Farms Investors, LLC, the parent company of Copperstate, in return for 2,600 membership units. On
December 20, 2016, Aphria made a further investment of $1,300,000 USD ($1,733,940 Cdn) in
Copperstate Farms Investors, LLC for 2,600 membership units. On March 27, 2017, the Company
purchased an additional 6,000 additional membership units for $3,000,000 USD ($4,050,000 Cdn).
The Company has determined that due to a current open membership unit offering at the same price,
the Company’s carrying value and fair value are equal. As a result of these transactions, the Company
owns 5,000 membership units in Copperstate for total cost of $1,300,000 USD ($1,755,000 Cdn), with
a fair value of $1,755,000 and owns 11,200 membership units in Copperstate Farms Investors, LLC for a
total cost of $5,600,000 USD ($7,538,940 Cdn) with a fair value of $7,560,000.
RESOLVE DIGITAL HEALTH INC.
On December 1, 2016, Aphria purchased 10,432 common shares of Resolve Digital Health Inc.
(‘‘Resolve’’) and an equivalent number of common share purchase warrants for gross proceeds of
$1,000,000. Following a stock split in January 2017, Aphria now owns 2,000,024 common shares and
2,000,024 common share purchase warrants of Resolve, exercisable at $0.65 per warrant at any time
for a period expiring five years from the date of issuance. The warrants contain a forced conversion
provision if Resolve trades on a public stock exchange at a price of more than $1.30 for a period of
at least 30 days. The Company has determined that due to a recent financing at the same price, the
Company’s carrying value of the shares is equal to its fair value. The fair value of the warrants have been
valued using the Black Scholes model. As a result of these transactions, the Company owns 2,000,024
common shares and 2,000,024 warrants at a total cost of $1,000,000, with a fair value of $1,242,012.
GREEN ACRE CAPITAL FUND
On January 23, 2017, Aphria agreed to invest in Green Acre Capital Fund. In relation to its participation,
the Company committed $2,000,000 to the expected $30,000,000 fund and as of the balance sheet
date has invested $300,000. At May 31, 2017, the Company determined that the fair value of its
investment was $284,331.
SCYTHIAN BIOSCIENCES INC.
On March 17, 2017, the Company entered into a subscription agreement with Scythian Biosciences Inc.
The Company purchased 5,000,000 subscription receipts at a price of $0.40 per receipt for a total of
$2,000,000. At May 31, 2017, the subscription receipts have yet to converted into common shares.
18. BANK INDEBTEDNESS
The Company secured an operating line of credit in the amount of $1,000,000 which bears interest
at the lender’s prime rate plus 75 basis points. As of the end of the year, the Company has not drawn
on the line of credit. The operating line of credit is secured by first charge on 265 Talbot St West,
Leamington, Ontario, and a first ranking position on a general security agreement.
19. PROMISSORY NOTE PAYABLE
MAY 31,
2016
ADDITIONS
REDUCTION
MAY 31,
2017
Note payable to Copperstate
Farms, LLC - $1,300,000 USD
($1,755,000), bearing nominal
interest, two-year term, repayable
in eight quarterly instalments of
$162,500 USD in exchange for the
provision of consulting services
Deduct – principal portion
included in current liabilities
$
--
$
1,755,000 $
511,875 $ 1,243,125
--
--
$
--
--
(877,500)
$ 1,755,000 $
511,875 $
365,625
41
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
20. LONG-TERM DEBT
21. SHARE CAPITAL
Term loan – $25,000,000 – 3.95%, compounded monthly,
15-year amortization due in April 2022.
Term loan – $1,250,000 – 3.99%, 5-year term, with a
10-year amortization, repayable in equal monthly instalments
of $12,630 including interest, due in July 2021.
Mortgage payable – $3,750,000 – 3.95%, 5-year term,
with a 20-year amortization, repayable in equal monthly
instalments of $22,562 including interest, due in July 2021.
Vendor take-back mortgage owed to related party –
$2,850,000 – 6.75%, 5-year term, repayable in equal
monthly instalments of $56,097 including interest,
due in June 2021
MAY 31, 2017 MAY 31, 2016
$ 25,000,000
$
--
1,163,971
3,645,240
2,396,660
$ 32,205,871
$
--
--
--
--
--
--
Deduct – unamortized finance fees
– principal portion included in current liabilities
(20,417)
(765,224)
Total long-term debt repayments are as follows:
Next 12 months
2 years
3 years
4 years
5 years
Balance of obligation
$ 31,420,230
$ --
YEAR ENDING MAY 31,
$
765,224
811,480
860,675
913,003
28,855,489
$
32,205,871
The term loan of $25,000,000 was entered into on May 9, 2017 and is secured by a first charge on the
Company’s real estate holdings, a first position on a general security agreement, certain cash security
and an assignment of fire insurance to the lender.
The mortgage payable of $3,645,240 and term loan of $1,163,971 were entered into on July 22, 2016
and are secured by a first charge on the property at 265 Talbot St West and a first position on a general
security agreement.
The vendor take-back mortgage payable of $2,396,660, owed to a director of the Company, was entered
into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St West.
The mortgage is secured by a second charge on the property at 265 Talbot St West.
The Company is authorized to issue an unlimited number of common shares. As at May 31, 2017,
the Company has issued 138,628,704 shares, of which 675,000 shares were held and subject to
various escrow agreements.
COMMON SHARES
Balance at May 31, 2016
Bought deals, net of issuance
Warrants exercised
Options exercised
Income tax recovery on share issuance costs
Share issuance in exchange for intangible asset
Shares earned in exchange for services
Shares held in escrow for services not yet earned
NUMBER OF
SHARES
AMOUNT
70,053,933
$
40,916,880
52,081,752
15,251,165
1,053,095
--
38,759
100,000
50,000
204,414,423
23,646,825
1,533,513
3,448,332
100,000
256,575
--
BALANCE AT MAY 31, 2017
138,628,704
$ 274,316,548
a)
b)
c)
d)
e)
f)
g)
h)
In August 2016, the Company closed a bought deal financing in which it issued 17,250,000
common shares at a purchase price of $2.00 per share for $31,959,093, net of cash issuance
costs and taxes.
In November 2016, the Company closed a bought deal financing in which it issued 10,062,500
common shares at a purchase price of $4.00 per share for $37,263,475, net of cash issuance
costs and taxes.
In February 2017, the Company closed a bought deal financing in which it issued 11,500,000
common shares at a purchase price of $5.00 per share for $53,869,357, net of cash issuance
costs and taxes.
In May 2017, the Company closed a bought deal financing in which it issued 13,269,252 common
shares at a purchase price of $6.50 per share for $81,322,498, net of cash issuance costs and taxes.
Throughout the year, 15,251,165 warrants with exercise prices ranging from $0.60 to $1.75 were
exercised for $23,646,825.
Throughout the year, 1,053,095 stock options with exercise prices ranging from $0.60 to $3.90
were exercised for $1,533,513.
In September 2016, the Company issued 38,759 common shares pursuant to execution of an
exclusive supply and licensing agreement.
In January 2017, the Company issued 150,000 common shares in escrow pursuant to a third party
consulting agreement for greenhouse related services, net of cash issuance costs. These shares
are earned straight-line over 12 months and released to the third party on a quarterly basis.
At May 31, 2017, 100,000 common shares of the total shares in escrow have been released.
The following table presents the maximum number of shares that would be outstanding if all the dilutive
“in the money” instruments outstanding as at May 31, 2017 were exercised:
Common shares outstanding at May 31, 2017
Warrants outstanding and “in the money”
Options outstanding and “in the money”
FULLY DILUTED BALANCE AT MAY 31, 2017
138,628,704
3,885,908
5,341,001
147,855,613
43
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
22. WARRANTS
24. STOCK OPTIONS
The warrant details of the Company are as follows
TYPE OF WARRANT
EXPIRY DATE
NUMBER OF
WARRANTS
WEIGHTED
AVERAGE
PRICE
AMOUNT
Compensation warrant / option
December 10, 2018
106,157 $ 1.75 $
85,432
Warrant
Warrant
Warrant
December 11, 2018
327,923
1.75
December 2, 2019
3,251,828
1.50
--
--
September 26, 2021
200,000
3.14
359,480
BALANCE AT MAY 31, 2017
3,885,908 $ 1.61 $ 444,912
MAY 31, 2017
MAY 31, 2016
NUMBER OF
WARRANTS
WEIGHTED
AVERAGE
EXERCISE
PRICE
NUMBER OF
WARRANTS
WEIGHTED
AVERAGE
EXERCISE
PRICE
Outstanding, beginning of the year
18,721,987
$ 1.51
18,093,728 $
1.37
Expired during the year
Issued during the year
Exercised during the year
Cancelled during the year
(50,305)
465,391
(15,251,165)
1.20
2.35
1.51
--
5,756,235
(5,127,976)
--
--
--
--
1.67
1.18
--
OUTSTANDING, END OF YEAR
3,885,908
$ 1.61 18,721,987
$ 1.51
The Company used the Black Scholes option pricing model to determine the fair value of warrants
granted using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life
of 3 and 5 years; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield
of nil; and, the exercise price of the respective warrant.
23. SHARE-BASED PAYMENT RESERVE
Share-based payment reserve is comprised of:
Balance, beginning of year
Amounts deducted from share-based payment reserve in respect
of stock options exercised during the year
Amounts charged to share-based payment reserve in respect of
share-based compensation
BALANCE, END OF YEAR
MAY 31,
2017
MAY 31,
2016
$ 1,723,903
$ 1,261,589
(558,183)
--
2,064,209
462,314
$ 3,229,929
$1,723,903
The Company adopted a stock option plan under which it is authorized to grant options to officers,
directors, employees and consultants enabling them to acquire common shares of the Company. The
maximum number of common shares reserved for issuance of stock options that may be granted under
the plan is 10% of the issued and outstanding common shares of the Company. The options granted
can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors.
The exercise price of each option may not be less than the market price of the common shares on the
date of grant.
The Company recognized a share-based compensation expense of $2,399,111 during the year
ended May 31, 2017 (2016 - $462,314). The total fair value of options granted during the year was
$4,221,974 (2016 - $320,500).
MAY 31, 2017
MAY 31, 2016
NUMBER OF
OPTIONS
WEIGHTED
AVERAGE
EXERCISE
PRICE
NUMBER OF
OPTIONS
WEIGHTED
AVERAGE
EXERCISE
PRICE
Outstanding, beginning of the year
4,975,000 $
0.84
4,520,000 $
0.81
Exercised during the year
Issued during the year
Cancelled during the year
(1,121,999)
1.05
--
2,253,000
(180,000)
3.99
1.09
565,000
(110,000)
--
1.13
1.08
OUTSTANDING, END OF YEAR
5,926,001 $ 1.99
4,975,000 $ 0.84
EXERCISABLE, END OF YEAR
3,919,542 $ 1.36
3,906,454 $ 0.76
In June 2016, the Company issued 283,000 stock options at an exercise price of $1.40 per share,
exercisable for 5 years to employees and officers. Of the options issued, 94,329 vest immediately
and 188,671 vest over 2 years.
In June 2016, the Company issued 30,000 stock options at an exercise price of $1.48 per share,
exercisable for 5 years to a consultant of the Company. Of the options issued, 15,000 vest immediately
and 15,000 vest in 1 year.
In July 2016, the Company issued 110,000 stock options at an exercise price of $1.64 per share,
exercisable for 5 years to an employee. Of the options issued, 50,000 vest immediately and 60,000
vest over three years.
In September 2016, the Company issued 75,000 stock options at an exercise price of $3.00 per share,
exercisable for 3 years to consultants and employees of the company. 25,000 vest immediately and
50,000 vest based on certain performance metrics attainable over the three-year period.
In October 2016, the Company issued 20,000 stock options at an exercise price of $ 3.49 per share,
exercisable for 3 years to an employee of the company. 6,666 vest immediately and 13,334 vest over
two years.
In October 2016, the Company issued 50,000 stock options at an exercise price of $ 3.70 per share,
exercisable for 3 years to a director of the company. All 50,000 vest immediately.
45
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
In November 2016, the Company issued 1,000,000 stock options at an exercise price of $3.90 per
share, exercisable for 3 years to directors, officers, consultants and employees of the company. 333,333
vest immediately and 666,667 vest over 2 years.
In December 2016, the Company issued 500,000 stock options at an exercise price of $5.25 per share,
exercisable for 3 years to consultants of the company. All 500,000 vest based on certain performance
metrics attainable over the three-year period.
In January 2017, the Company issued 45,000 stock options at an exercise price of $5.72 per share,
exercisable for 3 years to employees of the company. 5,000 vest immediately and the remainder vest
over 2 years.
In April 2017, the Company issued 140,000 stock options at an exercise price of $7.92 per share,
exercisable for 3 years to employees and consultants of the company. 44,999 vest immediately and the
remainder vest over 2 years.
The option details of the Company are as follows:
EXPIRY DATE
November 2017
December 2017
March 2018
October 2018
November 2018
December 2018
April 2019
June 2019
September 2019
October 2019
November 2019
December 2019
January 2020
April 2020
September 2020
November 2020
June 2021
June 2021
July 2021
BALANCE AT MAY 31, 2017
EXERCISE
PRICE
NUMBER
OF OPTIONS
VESTED
AND
EXERCISABLE
$ 1.10
$ 1.10
$ 0.90
$ 1.17
$ 1.49
$ 1.30
$ 1.67
$ 0.60
$ 3.00
$ 3.49 – 3.70
$ 3.90
$ 5.25
$ 5.72
$ 7.92
$ 0.85
$ 1.19
$ 1.40
$ 1.48
$ 1.64
$ 1.99
35,000
650,000
20,000
20,000
20,000
170,000
33,500
35,000
95,760
20,000
13,333
20,000
170,000
33,500
2,500,000
2,500,000
75,000
70,000
996,167
500,000
45,000
140,000
185,000
50,000
276,334
30,000
110,000
31,635
56,666
329,323
166,665
14,998
44,999
185,000
50,000
87,663
15,000
50,000
5,926,001
3,919,542
The Company used the Black Scholes option pricing model to determine the fair value of options granted
using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life of 3 and
5 years; volatility of 62-70% based on comparable companies; forfeiture rate of 5%; dividend yield of nil;
and, the exercise price of the respective option.
25. GENERAL AND ADMINISTRATIVE EXPENSES
Executive compensation
$
828,924
$
752,337
FOR THE TWELVE MONTHS
ENDED MAY 31
2017
2016
Consulting fees
Office and general
Professional fees
Salaries and wages
Travel and accommodation
Rent
219,619
1,336,508
607,846
1,141,873
463,914
79,370
39,723
591,555
359,580
394,627
242,237
45,064
$ 4,678,054 $ 2,425,123
26. SHARE-BASED COMPENSATION
Share-based compensation is comprised of:
MAY 31,
2017
MAY 31,
2016
Amounts charged to share-based payment reserve
in respect of share-based compensation
$ 2,064,209
$
462,314
Accrued share-based compensation
Shares for services compensation
Deferred share units expensed in the year
44,000
262,500
28,402
--
--
--
TOTAL SHARE-BASED COMPENSATION
$ 2,399,111
$
462,314
During the year, the Company issued 5,240 deferred share units to certain directors of the Company,
under the terms of the Company’s Deferred Share Unit Plan.
27. FINANCE INCOME, NET
Finance income, net is comprised of:
Interest income
Interest expense
MAY 31,
2017
MAY 31,
2016
$ 1,115,348
$
281,497
(387,099)
--
$
728,249
$
281,497
47
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
28. GAIN ON LONG-TERM INVESTMENTS
30. CHANGE IN NON-CASH WORKING CAPITAL
Gain on long-term investments for the year ended May 31, 2017 is comprised of:
INVESTMENT
PROCEEDS
COST
Level 1
on fair value hierarchy
REALIZED
GAIN (LOSS)
ON DISPOSAL
CHANGE IN
FAIR VALUE
TOTAL
CannaRoyalty Corp
$ 3,737,050
$ 1,755,712
$ 1,981,338
$
--
$ 1,981,338
MassRoots Inc.
723,994
436,575
287,419
Canabo Medical Inc.
2,685,000
7,694,607
(5,009,607)
Ample Organics Inc.
50,000
50,000
Long-term investments
(Note 17)
YEAR ENDED
MAY 31, 2017
--
--
--
--
--
287,419
(5,009,607)
--
6,311,979
6,311,979
--
--
$ 7,196,044 $ 9,936,894
$ (2,740,850)
$ 6,311,979
$ 3,571,129
29. EARNINGS PER SHARE
The calculation of earnings per share for the year ended May 31, 2017 was based on the net income
attributable to common shareholders of $4,198,455 (2016 – $397,961) and a weighted average
number of common shares outstanding of 104,341,319 (2016 – 58,442,827) calculated as follows:
Basic earnings per share:
Net income for the year
Average number of common shares
outstanding during the year
EARNINGS PER SHARE
Diluted earnings per share:
Net income for the year
2017
2016
$
4,198,455
$
397,961
104,341,319
58,442,827
$
0.04
$
0.01
2017
2016
$ 4,198,455
$
397,961
Average number of common shares outstanding
during the year
104,341,319
58,442,827
“in the money” warrants outstanding during the year
“in the money” options outstanding during the year
2,697,681
4,388,893
--
--
EARNINGS PER SHARE
111,427,893
58,442,827
$
0.04
$
0.01
Change in non-cash working capital is comprised of:
MAY 31,
2017
MAY 31,
2016
Decrease (increase) in accounts receivable
$
953,168
$ (1,778,679)
(Increase) decrease in other receivables
Change in inventory
Change in biological assets (note 10)
(Increase) decrease in prepaid assets
(4,384,687)
6,618,200
(4,188,319)
(899,468)
Increase in accounts payable and accrued liabilities
4,534,068
632,576
(369,249)
(409,139)
7,114
319,269
$ 2,632,962
$ (1,598,108)
31. FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
The Company has classified its cash and cash equivalents, marketable securities and long-term
investments, with the exception of the debenture in CannaRoyalty Corp., as fair value through profit
or loss, accounts receivable and other receivables and promissory notes receivable as loans and
receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term
debt as other financial liabilities. The debentures in CannaRoyalty Corp. are accounted for on at fair
value with changes in fair value of the debt instrument recorded through other comprehensive income
and changes in the fair value of the embedded derivative recorded in the statement of operations.
There was no change in the fair value of the debt instrument in the period.
The carrying values of other receivables, promissory notes receivable, accounts payable and accrued
liabilities, and promissory notes payable approximate their fair values due to their short periods
to maturity.
The Company’s long-term debt of $32,185,454 is subject to fixed interest rates. The Company’s long-
term debt is valued based on discounting the future cash outflows associated with the long-term debt.
The discount rate is based on the incremental premium above market rates for Government of Canada
securities of similar duration. In each period thereafter, the incremental premium is held constant while
the Government of Canada security is based on the then current market value to derive the discount
rate. The fair value of the Company’s long-term debt in repayment as at May 31, 2017
was $32,154,410.
49
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
FAIR VALUE HIERARCHY
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the
significance of inputs used in making the measurements. Cash and cash equivalents are Level 1.
The hierarchy is summarized as follows:
Level 1
quoted prices (unadjusted) in active markets for identical assets and liabilities
Investments in CannaRoyalty originally classified as a level 3 investments were reclassified subsequent
to the investee going public, where the Company could value its investment based on the share price
quoted in active markets.
FINANCIAL RISK MANAGEMENT
The Company has exposure to the following risks from its use of financial instruments: credit risk;
liquidity; currency rate; and, interest rate price risk.
Level 2
inputs that are observable for the asset or liability, either directly (prices) or indirectly
(derived from prices) from observable market data
(a) Credit risk
Level 3
inputs for assets and liabilities not based upon observable market data
LEVEL 1
LEVEL 2
LEVEL 3
MAY 31, 2017
Financial assets at FVTPL
Cash and cash equivalents
$ 79,910,415
$
--
$
Marketable securities
87,346,787
Embedded derivative
--
--
--
--
--
173,000
79,910,415
87,346,787
173,000
Long-term investments
14,946,235
--
12,841,343
27,787,578
$ 182,203,437
$
--
$ 13,014,343
$ 195,217,780
The maximum credit exposure at May 31, 2017 is the carrying amount of cash and cash
equivalents, marketable securities, accounts receivable and other receivables and promissory
notes receivable. The Company does not have significant credit risk with respect to customers.
All cash and cash equivalents are placed with major Canadian financial institutions. Marketable
securities are placed with major Canadian investment banks and are represented by investment
grade corporate bonds.
The Company mitigates its credit risk and volatility on its marketable securities through its
investment policy, which permits investments in Federal or Provincial government securities,
Provincial utilities or bank institutions and Investment grade corporate bonds.
Trade receivables
$ 825,511 $ 658,675
$ 29,598
$ 29,523 $ 107,715
TOTAL
0-30 days 31-60 days
60-90 days
90+ days
LEVEL 1
LEVEL 2
LEVEL 3
MAY 31, 2016
80%
4%
4%
12%
Financial assets at FVTPL
Cash and cash equivalents
$ 16,472,664 $
-- $
--
16,472,664
Long-term investments
--
--
1,560,200
1,560,200
$
16,472,664 $
-- $
1,560,200 $
18,032,864
The following table presents the changes in level 3 items for the periods ended May 31, 2017
and May 31, 2016:
UNLISTED
EQUITY
SECURITIES
CONTINGENT
CONSIDERATION
TRADING
DERIVATIVES
TOTAL
Opening balance June 1, 2015 $
-- $
Acquisitions
1,560,200
--
--
$
--
$
--
--
1,560,200
Closing balance May 31, 2016
$ 1,560,200 $
--
$
--
$ 1,560,200
Acquisitions
Disposals
12,766,940
(50,000)
Reclassification to Level 1
(1,510,200)
Unrealized gain on fair value
247,403
--
--
--
--
--
--
--
--
12,766,940
(50,000)
(1,510,200)
247,403
CLOSING BALANCE MAY 31, 2017 $ 13,014,343 $
--
$
--
$ 13,014,343
(b)
Liquidity risk
As at May 31, 2017, the Company’s financial liabilities consist of accounts payable and accrued
liabilities, which has contractual maturity dates within one year, promissory note payable,
which has a contractual maturity within 15 months and long-term debt, which has contractual
maturities over the next five years. The Company manages its liquidity risk by reviewing its capital
requirements on an ongoing basis. Based on the Company’s working capital position at May 31,
2017, management regards liquidity risk to be low.
(c) Currency rate risk
As at May 31, 2017, a portion of the Company’s financial assets and liabilities held in USD consist
of marketable securities, long-term investments and a promissory note payable. The Company’s
objective in managing its foreign currency risk is to minimize its net exposure to foreign currency
cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars.
The Company does not currently use foreign exchange contracts to hedge its exposure of its
foreign currency cash flows as Management has determined that this risk is not significant at this
point in time.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the
terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the
sensitivity of the portfolio to the impact of interest rate fluctuations.
51
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016
(e) Capital management
33. SUBSEQUENT EVENTS
On June 1, 2017, the Company’s subsidiary, CannWay was amalgamated with Pure Natures
Wellness Inc. (o/a Aphria).
On June 22, 2017, the Company purchased land and buildings from a third party for
approximately $500,000.
On June 28, 2017, the Company entered into a subscription agreement with Tokyo Smoke
for the purchase of 140,845 common shares, for a total cost of $1,000,000.
The Company’s objectives when managing its capital are to safeguard its ability to continue as
a going concern, to meet its capital expenditures for its continued operations, and to maintain
a flexible capital structure which optimizes the cost of capital within a framework of acceptable
risk. The Company manages its capital structure and adjusts it in light of changes in economic
conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital
structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets.
The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this
approach, given the relative size of the Company, is reasonable. There have been no changes to
the Company’s capital management approach in the year. The Company considers its cash and
cash equivalents and marketable securities as capital.
32. COMMITMENTS
The Company has a lease commitment until December 31, 2018 for rental of office space from a related
party. The Company has an option to extend this lease for two additional 5 year periods. In July of
2016, the Company terminated its lease of greenhouse and warehouse property in conjunction with the
acquisition of the 265 Talbot Street West property. The Company has a lease commitments for the use
of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9,313
and $19,599, respectively, annually and leased office space in Toronto for $4,500 per month until
September 2017. In April of 2017, the Company indemnified the landlord of the office space leased
by DFMMJ Investments, Ltd. at 35 McCaul Street, Toronto. As discussed in note 17, the Company has
agreed to contribute an additional $1,700,000 to Green Acre Capital Fund. Minimum payments payable
over the next five years are as follows:
2018
2019
2020
2021
2022
FISCAL YEAR ENDING MAY 31,
$
8,884,858
13,341,325
21,927
3,267
--
$ 22,251,377
The Company has purchase orders outstanding at May 31, 2017 related to capital asset expansion
of $20,398,567.
53
APHRIA INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended May 31, 2017 and May 31,2016