Consolidated Financial Statements
For the years ended
December 31, 2018 and 2017
(in Canadian dollars)
Independent Auditor's Report
To the Shareholders of The Flowr Corporation:
Opinion
We have audited the consolidated financial statements of The Flowr Corporation and its subsidiaries (the "Company"), which comprise
the consolidated statements of financial position as at December 31, 2018 and December 31, 2017, and the consolidated statements of
loss, changes in shareholders’ equity and cash flows for the years then ended, and notes to the consolidated financial statements,
including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2018 and December 31, 2017, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
Basis for Opinion
We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are
independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial
statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises Management’s Discussion & Analysis.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audits of the consolidated financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in
the audits or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this
auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the 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.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's
report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and
significant audit findings, including any significant deficiencies in internal control that we identify during our audits.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor's report is Sandra Alison Solecki.
Mississauga, Ontario
April 4, 2019
Chartered Professional Accountants
Licensed Public Accountants
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31, 2018 and 2017
(in Canadian dollars)
December 31, 2018
December 31, 2017
ASSETS
Current Assets
Cash and cash equivalents
Amounts receivable
Prepaids and other current assets
Inventory
Biological assets
Loan receivable
Non-Current Assets
Investments at fair value
Property, plant and equipment
Intangible assets
Convertible loan receivable
Other long-term assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Due to related parties
Deferred revenue
Current portion of long-term debt
Non-Current Liabilities
Long-term debt
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Share capital
Other reserves
Deficit
Equity attributable to common shareholders of the Company
Non-controlling interests
Notes
4
5, 15
6
7
15
8
9
10
11
12
13,15
15
14
14
14
21
18, 22
26
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
The accompanying notes are an integral part of the consolidated financial statements
Approved by the Board of Directors
27,689,183
2,963,115
913,468
1,398,943
497,102
—
33,461,811
1,238,695
23,326,017
3,056,728
6,000,000
50,000
33,671,440
67,133,251
4,604,727
63,217
1,327,865
287,502
6,283,311
1,304,034
7,587,345
70,002,237
(15,719,745)
(16,532,564)
37,749,928
21,795,978
59,545,906
67,133,251
7,749,699
797,545
152,013
—
—
25,000
8,724,257
335,571
9,279,237
3,112,803
—
50,000
12,777,611
21,501,868
1,928,898
27,562
—
—
1,956,460
—
1,956,460
18,116,920
601,536
(1,131,266)
17,587,190
1,958,218
19,545,408
21,501,868
Steve Klein (signed)
Director
Karen Basian (signed)
Director
THE FLOWR CORPORATION
1
CONSOLIDATED STATEMENTS OF LOSS
For the years ended December 31, 2018 and 2017
(in Canadian dollars, except per share amounts)
Revenue
Cost of sales
Gross loss before fair value adjustments
Fair value adjustments on inventory sold
Unrealized loss on changes in fair value of biological assets
Selling and marketing
General and administrative
Research and development
Share-based compensation
Listing expense
Design and construction income
Depreciation and amortization
Other income
Loss before income taxes
Net loss
Net loss attributable to:
Common shareholders of the Company
Non-controlling interests
Net loss
Loss per share attributable to common shareholders of the Company
-Basic
-Diluted
Year ended
December 31,
2018
2017
2,870,408
3,260,799
(390,391)
(499,793)
420,410
(311,008)
1,266,320
7,265,082
321,824
7,208,273
1,802,830
(172,135)
174,446
(270,460)
(17,907,188)
—
258,038
(258,038)
—
—
(258,038)
29,400
2,259,145
—
601,536
—
—
—
(342,784)
(2,805,335)
(17,907,188)
(2,805,335)
(15,401,298)
(2,505,890)
(17,907,188)
(1,908,684)
(896,651)
(2,805,335)
(0.22)
(0.22)
(0.05)
(0.05)
Notes
17
7
15
18
3(a)
14
19
26
23
23
The accompanying notes are an integral part of the consolidated financial statements
THE FLOWR CORPORATION
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2018 and 2017
(in Canadian dollars)
OPERATING ACTIVITIES
Net loss
Items not affecting cash and other adjustments
Changes in non-cash working capital
Cash used in operating activities
INVESTING ACTIVITIES
Investments
Advance paid for private company investment
Loan advances
Expenditures on property, plant and equipment
Expenditures on intangible assets
Cash used in investing activities
FINANCING ACTIVITIES
Proceeds from shares issued
Share issuance costs
Loan proceeds
Capital contributions to Partnership
Interest (paid) received
Cash provided from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Year ended
December 31,
2018
2017
Notes
24
24
8
12
11
(17,907,188)
9,918,097
(1,697,990)
(2,805,335)
345,295
(136,291)
(9,687,081)
(2,596,331)
(750,000)
—
(6,000,000)
(14,691,091)
(228,611)
—
(50,000)
(25,000)
(8,040,595)
(16,307)
(21,669,702)
(8,131,902)
21
21
14
2.1(c)
51,064,925
(1,487,627)
1,616,536
—
102,433
13,748,032
(134,791)
—
3,750,000
(663)
51,296,267
17,362,578
19,939,484
7,749,699
6,634,345
1,115,354
27,689,183
7,749,699
The accompanying notes are an integral part of the consolidated financial statements
THE FLOWR CORPORATION
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2018 and 2017
(in Canadian dollars, expect for number of shares)
Share Capital
Number of
shares
Share
Capital
Notes
Partnership Warrants Contributed
Flowr ULC share Non-controlling
Interest
(note 22) Surplus (note 18)
issuances
Interest (note 26) Deficit
Total
Other reserves
Balance at January 1, 2017
—
—
1,692,010
—
—
—
—
—
—
—
601,536
—
601,536
—
—
7,208,273
Net loss for the 11 months ended
November 30, 2017
Contributions into Partnership as of
November 30, 2017
Transfer of Partnership Interest to
Flowr - the Reorganization
Issuance of shares for 20%
acquisition of Flowr Okanagan
Equity Financing Dec 2017, net of
share issue costs of $134,791
Share-based compensation
Net loss for the 1 month ended
December 31, 2017
Equity financing Jan 2018, net of
share issue costs of $30,037
Financing Q2-Q3 2018,net of share
issue costs of $59,220
—
—
(777,418)
—
—
—
1,912,495
—
2.1(c)
35,775,000
2,827,087
(2,827,087)
—
3
10,000,000
1,239,624
—
—
21
18
14,185,000
14,050,209
—
—
—
—
—
—
—
—
—
—
—
—
815,000
784,963
—
—
Balance at December 31, 2017
59,960,000
18,116,920
Share-based compensation
18
—
—
5,309,361
13,745,119
—
—
—
—
Shares issued from exercise of
stock options
Transferred from contributed
surplus on exercise of options
RTO Financing, net of share issue
cash costs of $1,398,369 & Broker
warrants
Amalgamation with Needle Capital
Corp.
18
6,205,961
43,380
—
—
—
—
1,770,846
—
—
(1,770,846)
21
13,807,734
33,972,701
—
529,038
—
3(a)
590,769
1,535,999
—
34,937
38,349
—
2,256,988
—
3,948,998
—
(757,732)
—
(1,535,150)
—
1,837,505
—
3,750,000
—
—
—
(1,239,624)
—
—
—
—
—
—
—
14,050,209
—
601,536
(138,919)
(1,131,266)
(1,270,185)
1,958,218
(1,131,266)
19,545,408
—
—
—
—
—
—
—
—
—
—
784,963
—
13,745,119
—
7,208,273
—
43,380
—
—
—
34,501,739
—
1,609,285
—
14,927
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares issued from exercise of
warrants
Valuation transferred from warrants
on exercise
Other changes in non-controlling
interest
22
22
26
Net loss for the year ended
December 31, 2018
11,481
14,927
—
—
—
17,382
—
(17,382)
—
—
—
—
—
—
—
(22,343,650)
22,343,650
—
—
—
—
—
—
(2,505,890)
(15,401,298)
(17,907,188)
Balance at December 31, 2018
86,700,306
70,002,237
—
546,593
6,077,312
(22,343,650)
21,795,978
(16,532,564)
59,545,906
The accompanying notes are an integral part of the consolidated financial statements
THE FLOWR CORPORATION
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
1. CORPORATE INFORMATION
The Flowr Corporation, formerly known as The Needle Capital Corp. (the “Company”), is a publicly traded, cannabis
cultivation company that was incorporated under the Business Corporations Act (Alberta) (“ABCA”) on June 1, 2016. On
September 25, 2018, the Company continued from the ABCA to the Business Corporations Act (Ontario) as part of the
completion of the Qualifying Transaction (defined below). The Head Office of the Company is located at 461 King Street
West, Suite 200, Toronto, Ontario, M5V 1K4. The principal activity of the Company is the production and sale of premium
cannabis in Canada, with a focus on the natural science of cannabis. In December 2017, through its subsidiary The Flowr
Group (Okanagan) Inc. (“Flowr Okanagan”), formerly Cannatech Plant Systems Inc., the Company received its license
from Health Canada to operate as a licensed producer, under the provisions of Access to Cannabis for Medical Purposes
Regulations. On August 10, 2018, Flowr Okanagan received its sales license from Health Canada, allowing the Company
to sell to the Canadian medical market and to the adult-use recreational (“recreational”) market post legalization on
October 17, 2018. The Company’s common shares are listed on the TSX Venture Exchange (the “Exchange”), under the
trading symbol “FLWR”.
The Company, was previously classified as a Capital Pool Company (“CPC”) as defined in Policy 2.4 of the Exchange.
The principal business of the Company as a CPC was to identify and evaluate assets or businesses with a view to potentially
acquire them or an interest therein by completing a purchase transaction. The purpose of such an acquisition was to satisfy
the related conditions of a qualifying transaction under the Exchange rules (“Qualifying Transaction”).
On September 21, 2018, the Company completed its Qualifying Transaction pursuant to a business combination agreement
between the Company, 2652253 Ontario Inc. and a private corporation called The Flowr Corporation (“Flowr PrivateCo”)
the (“Business Combination Agreement”). As a part of the Qualifying Transaction, the Company changed its name from
“The Needle Capital Corp.” to “The Flowr Corporation” and consolidated its 7,679,997 common shares on a 13:1 basis to
590,769 common shares. In connection with the Qualifying Transaction, Flowr PrivateCo exchanged its shares for all of
the issued and outstanding shares of the Company with the former shareholders of Flowr PrivateCo receiving a total of
85,692,095 post-consolidation common shares. Immediately following closing of the Qualifying Transaction, the
Company had a total of 86,282,864 issued and outstanding common shares.
Upon closing of the Qualifying Transaction, the shareholders of Flowr PrivateCo owned 99.3% of the common shares of
the Company, and as a result, the Qualifying Transaction is considered a reverse acquisition of the Company by Flowr
PrivateCo (“RTO”). For accounting purposes, Flowr PrivateCo is considered to be the acquirer and the Company is
considered to be the acquiree. Accordingly, these consolidated financial statements are a continuation of the consolidated
financial statements of Flowr PrivateCo, henceforth referred to as Flowr as applicable (note 3(a)).
On December 1, 2017, FlowCo Services LP and FlowCo Investments LP collectively “FlowCo”, legal entities under
common control, completed a corporate reorganization (the “Reorganization”). Prior to the Reorganization, Flowr
PrivateCo and a new subsidiary called The Flowr Canada Holdings ULC (“Flowr ULC”) were incorporated. As a result
of the Reorganization, all assets and liabilities held in FlowCo including its 80% ownership of Flowr Okanagan were rolled
into the Flowr ULC and a resulting non-controlling interest in the Flowr ULC was established. (note 2.1(c)).
As at December 31, 2018, Flowr’s consolidated financial statements include Flowr and its subsidiary companies
(collectively, the “Company”). Flowr’s principal subsidiaries include, a 66.3% (December 31, 2017 - 57.6%) ownership
of Flowr ULC, which owns, 100% of Flowr Okanagan.
THE FLOWR CORPORATION
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
2.1 BASIS OF PREPARATION
(a) Statement of compliance
The Company’s consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and Interpretations
of the International Financial Reporting Interpretations Committee (“IFRIC”) which the Canadian Accounting Standards
Board has approved for incorporation into Part I of the Chartered Professional Accountants of Canada Handbook –
Accounting. These consolidated financial statements were approved by the Board of Directors on April 3, 2019.
(b) Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis except for certain financial
instruments (note 2.2) that are measured at fair value.
(c) Corporate reorganization
On December 1, 2016, 80% of the outstanding shares of Cannatech Plant Systems Inc. (now operating as Flowr Okanagan)
were acquired by FlowCo (note 3). On December 1, 2017, FIowCo completed the Reorganization, whereby the net assets
of each FlowCo entity were rolled over into Flowr ULC in exchange for 35,775,000 common shares and 44,100,000 class
A preferred shares of Flowr ULC. The holders of the 35,775,000 Flowr ULC common shares were immediately exchanged
for 35,775,000 common shares in Flowr. The Flowr ULC class A preferred shares provide the shareholders thereof with a
right to exchange these shares for common shares of the Company at any point in time. As the right to exchange was not
exercised as a part of the Reorganization, a 49.1% non-controlling interest in Flowr ULC was established on the close of
the Reorganization. In the event that the Company issues additional common shares, a corresponding amount of Flowr
ULC common shares are required to be issued from Flowr ULC to the Company.
Concurrently on December 1, 2017, Flowr acquired the remaining 20% ownership of Cannatech Plant Systems Inc. in
exchange for 10,000,000 common shares of Flowr. The 20% ownership interest was then acquired by Flowr ULC in
exchange for common shares of Flowr ULC, resulting in Flowr ULC owning a 100% interest in Cannatech Plant
Systems Inc.
The consolidated financial statements are prepared under the name of The Flowr Corporation based on the post-
Reorganization structure as of December 31, 2017 and are a continuation of the consolidated financial statements of
FlowCo.
(d) Basis of consolidation
Subsidiaries are entities over which the Company has control. The Company controls an entity when the Company is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity.
The Company uses the acquisition method of accounting to account for business combinations. The fair value of the
acquisition of a subsidiary is based on the fair value of the assets acquired, the liabilities assumed, and the fair value of the
consideration. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values on the acquisition date. The excess,
if any, of the consideration over the fair value of the identifiable net assets acquired is recorded as goodwill.
THE FLOWR CORPORATION
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
For acquisitions that do not meet the definition of a business under IFRS, the Company follows International Accounting
Standard (“IAS”) 16 and IAS 38 guidelines for asset acquisition, where the consideration paid is allocated to assets
acquired based on fair values on the acquisition date and transactions costs are capitalized and allocated to the assets
acquired.
Subsidiaries are fully consolidated from the date on which control is acquired by the Company and they are deconsolidated
from the date that control ceases. The financial statements of the subsidiaries are prepared for the same reporting period
as the parent company using consistent accounting policies. All inter-company balances, revenues and expenses and
earnings and losses resulting from inter-company transactions are eliminated on consolidation.
Non-controlling interests in the net assets of consolidated subsidiaries are a separate component of the Company’s equity.
Non-controlling interests consist of the non-controlling interests on the date of the original acquisition plus the non-
controlling interests’ share of changes in equity since the date of acquisition. Changes in the Company’s interest in a
subsidiary that do not result in a loss of control are accounted for as equity transactions.
(e) Critical accounting estimates and judgments
The preparation of the Company’s consolidated financial statements in conformity with IFRS requires management to
make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities
on the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Estimates and assumptions are evaluated and are based on management’s experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can
differ from these estimates.
The significant areas of estimation and/or judgment considered by management in preparing the consolidated financial
statements include, but are not limited to:
Biological assets (note 2.2(a)(i));
Revenue recognition (note 2.2(b));
Fair value of certain financial instruments (note 2.2(c));
Property, plant and equipment (note 2.3(c));
Share-based compensation (note 2.3(k));
Deferred income tax assets and liabilities (note 2.3(l))
Intangible assets (note 2.3(d));
(f) Presentation and functional currency
These consolidated financial statements are presented in Canadian dollars, which is also the functional currency of the
Company and its subsidiaries.
THE FLOWR CORPORATION
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
2.2 CHANGES IN ACCOUNTING POLICES
(a)
On July 1, 2018, the Company changed its accounting policy with respect to production costs related to biological
assets. Prior to this change, the Company expensed any costs related to the production of biological assets. The Company
now capitalizes production costs related to biological assets and recognizes the expense in cost of sales as the inventory is
sold. This change in policy will more accurately reflect the true costs of production related to the revenues earned in the
period. Non-recurring start-up costs are expensed directly through cost of sales. Fulfillment charges and any related
depreciation are expensed to cost of goods sold in the period in which the costs are incurred. The Company also revised
its presentation in the consolidated statement of loss to separate fair value adjustments for both biological assets and
inventory sold in the period. The amended policy is as follows:
(i) Biological assets
While the Company’s biological assets, consisting of cannabis plants, are within the scope of IAS 41 Agriculture, the
direct and indirect costs of biological assets are determined using an approach similar to the capitalization criteria outlined
in IAS 2 Inventories. The Company capitalizes all the direct and indirect costs as incurred related to the biological
transformation of the biological assets between the point of initial recognition and the point of harvest including labour
related costs, grow consumables, utilities, facilities costs including an allocation of overhead costs related to production
facility, quality and testing costs, and production related depreciation. Capitalized costs are subsequently recorded within
cost of sales in the consolidated statements of loss in the period that the related product is sold.
The Company measures biological assets, at fair value less cost to sell up to the point of harvest. Unrealized gains or losses
arising from the changes in fair value less cost to sell during the period are separately recorded in the consolidated statement
of loss for the related period. Cost to sell includes post harvest production costs and fulfilment costs.
The Company commenced cultivating cannabis in January 2018. Biological assets were measured at a fair value of nil in
reporting periods prior to the Company obtaining its sales license on August 10, 2018. All capitalized costs related to
biological assets were expensed through changes in fair value of biological assets.
(ii) Inventory
Inventory of harvested bulk cannabis and finished goods are valued at the lower of cost and net realizable value. Inventories
of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the initial deemed
cost. All subsequent direct and indirect post-harvest costs are capitalized to inventory as incurred, including labour related
costs, consumables, packaging supplies, facilities costs including an allocation of overhead costs related to production
facility, quality and testing costs, and related depreciation. Net realizable value is determined as the estimated selling price
in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the
sale.
Supplies and consumables are valued at the lower of costs and net realizable value, with cost determined based on an
average cost basis.
The change in accounting policy has been applied retrospectively. As there were no biological assets and cannabis
inventory in 2017, comparatives were not impacted by this change in policy. However, the presentation of production
costs in 2017 is now captured as cost of sales in the comparative period.
THE FLOWR CORPORATION
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The change in policy noted in (i) and (ii) above will impact the previously reported periods in 2018. The following table
summarize the effects of the change described above for the six months ended June 30, 2018.
Condensed interim consolidated statement of loss
For the six months ended June 30, 2018
Cost of sales (formerly Production costs)
Unrealized losses on changes in fair value of biological assets
As previously
As
reported Adjustments Restated
900,749 1
(847,100)
1,747,849
847,100
847,100
—
1 Included in cost of sales was an impairment of $169,157 in inventory to net realizable value of $Nil as the Company
did not have the ability to sell cannabis at the time.
Condensed interim consolidated statement of cash flows
For the six months ended June 30, 2018
Items not affecting cash
Changes in non-cash working capital
As previously
As
reported Adjustments Restated
1,014,257
2,003,177
3,017,434
(1,014,257)
913,234
(101,023)
(b) Revenue recognition
The Company adopted IFRS 15, Revenue from Contracts with Customers, in the fourth quarter of 2018 upon
commencement of cannabis sales. Revenue from the sale of cannabis is recognized when control has been transferred,
which is considered to occur when products have been delivered to the location specified in the sales contract and accepted
by the customer. Revenue is measured based on the consideration specified in the contract taking into account any variation
that may result from rights of return.
The Company is required to remit excise tax to the Canada Revenue Agency on the sale of medical and recreational
cannabis in Canada. The Company becomes liable for these excise duties when cannabis products are delivered to the
customer. In accordance with IFRS 15, revenue presented on the Consolidated Statements of Loss, represents revenue
from the sale of goods less applicable excise tax.
Design and construction income relating to construction services are recognized over a period of time as performance
obligations are completed.
Significant areas of judgement include (i) identifying the customer under the definition of IFRS 15 (ii) estimating returns
on product sold and, (iii) assessment of whether control has passed to the customer based on criteria established in IFRS
15.
(c) Financial instruments
Effective January 1, 2018, the Company adopted IFRS 9, Financial Instruments. In accordance with the transitional
provisions, the Company adopted the standard retrospectively without restating comparatives as the change did not impact
the opening balances.
THE FLOWR CORPORATION
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for
the classification, measurement and impairment of financial assets and hedge accounting. It establishes two primary
measurement categories for financial assets: (i) amortized cost and (ii) fair value either through profit or loss (“FVPL”) or
through other comprehensive income (“FVOCI”); establishes criteria for the classification of financial assets within each
measurement category based on business model and cash flow characteristics; and eliminates the existing held for trading,
held to maturity, available for sale, loans and receivable and other financial liabilities categories. IFRS 9 also introduces
a new expected credit loss model for the purpose of assessing the impairment of financial assets.
The following table shows the previous classification under IAS 39 and the new classification under IFRS 9 for the
Company’s financial instruments:
Financial assets
Cash
Amounts receivable
Deposits recoverable
Loan receivable
Plant Properties warrants
Financial Instrument Classification
Under IAS 39
Under IFRS 9
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Held for trading
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVPL
Financial liabilities
Accounts payable and accrued liabilities
Due to related parties
Other financial liabilities
Other financial liabilities
Amortized cost
Amortized cost
The following are the Company’s new accounting policies for financial instruments under IFRS 9:
Financial assets and liabilities
Financial assets
Non-derivative financial assets within the IFRS 9 are classified as “financial assets at fair value” (either through FVOCI
or through FVPL), and “financial assets at amortized costs” as appropriate. The Company determines the classification of
its financial assets at initial recognition based on the Company’s business model and contractual terms of cash flows.
All financial assets are recognized initially at fair value plus, in the case of investments not at FVPL, directly attributable
transaction costs on the trade date at which the Company becomes a party to the contractual provisions of the instrument.
Where the fair values of financial assets recorded on the consolidated statement of financial position cannot be derived
from active markets, they are determined using a variety of valuation techniques. The inputs to these models are derived
from observable market data where possible, but where observable market data are not available, judgment is required to
establish fair values.
THE FLOWR CORPORATION
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Financial assets at FVPL
Financial assets measured at FVPL include financial assets management intends to sell and any derivative financial
instrument that is not designated as a hedging instrument in a hedge relationship. Financial assets measured at FVPL are
carried at fair value in the consolidated statements of financial position with changes in fair value recognized in other
income or expense in the consolidated statements of earnings (loss). The Company’s investment in Plant Properties Corp.
(“Plant Properties”) warrants and Seven Leaf Venture Corp (“Seven Leaf”) warrants are classified as financial assets at
FVPL.
Financial assets at FVOCI
Financial assets measured at FVOCI are non-derivative financial assets that are not held for trading and the Company has
made an irrevocable election at the time of initial recognition to measure the assets at FVOCI. The Company’s investment
in Ace Hill Beer Company (“Ace Hill”) is classified as FVOCI.
After initial measurement, investments measured at FVOCI are subsequently measured at fair value with unrealized gains
or losses recognized in other comprehensive income or loss in the consolidated statements of comprehensive income (loss).
When the investment is sold, the cumulative gain or loss remains in accumulated other comprehensive income or loss and
is not reclassified to profit or loss.
Derecognition
A financial asset is derecognized when the contractual rights to the cash flows from the asset expire, or the Company
transfers substantially all the risks and rewards of ownership of the asset.
Impairment of financial assets
The impairment model under IFRS 9 is applicable to financial assets measured at amortized cost where any expected future
credit losses are provided for, irrespective of whether a loss event has occurred as at the reporting date. The Company’s
only financial assets subject to impairment are amounts receivable and convertible loan receivable, which are measured at
amortized cost. The Company has elected to apply the simplified approach to impairment as permitted by IFRS 9, which
requires the expected lifetime loss to be recognized at the time of initial recognition of the receivable. An impairment loss
is reversed in subsequent periods if the amount of the expected loss decreases and the decrease can be objectively related
to an event occurring after the initial impairment was recognized. The Company has measured the lifetime expected credit
losses taking into consideration historical credit loss experience and financial factors specific to debtors and other relevant
factors.
Financial liabilities
Non-derivative financial liabilities are measured at amortized cost, unless they are required to be measured at FVPL as is
the case for held for trading or derivative instruments, or the Company has opted to measure the financial liability at FVPL.
The Company’s financial liabilities include accounts payable and accrued liabilities, amounts due to related parties and
debt which are each measured at amortized cost.
All financial liabilities are recognized initially at fair value and in the case of loans and borrowings, net of directly
attributable transaction costs.
THE FLOWR CORPORATION
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Financial liabilities at amortized cost
After initial recognition, financial liabilities measured at amortized cost are subsequently measured at the end of each
reporting period at amortized cost using the Effective Interest Rate (“EIR”) method. Amortized cost is calculated by taking
into account any discount or premium on acquisition and any fees or costs that are an integral part of the EIR. The EIR
amortization is included in finance cost in the consolidated statements of earnings (loss).
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires with any
associated gains or losses reported in other income or expense in the consolidated statements of earnings (loss).
2.3 SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and cash equivalents
Cash and cash equivalents comprise cash deposits and/or other highly rated and liquid securities with an original maturity
of less than three months.
(b) Foreign currency
Foreign currency transactions
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates on
the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value
are translated at the exchange rates on the dates that their fair values are determined. Non-monetary assets and liabilities
denominated in foreign currencies that are measured at historical cost are translated at the exchange rates on the dates of
the transactions. Income and expense items are translated at the exchange rate on the dates of the transactions. Exchange
gains and losses resulting from the translation of these amounts are included in net loss.
(c) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment charges.
The initial cost of property, plant and equipment comprises its purchase price or construction cost and any costs directly
attributable to bringing it to a working condition for its intended use. The purchase price or construction cost is the
aggregate amount of cash consideration paid and the fair value of any other consideration given to acquire the asset. Where
an item of property, plant and equipment is comprised of significant components with different useful lives, the
components are accounted for as separate items of property, plant and equipment.
Depreciation
For all property, plant and equipment, depreciation is based on the estimated useful life of the asset on a straight-line basis
starting from the date it is available for use.
THE FLOWR CORPORATION
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The estimated useful lives for the current and comparative years are as follows:
Asset Category
Leasehold improvements
Production equipment
Mechanical equipment
Electrical equipment
Office equipment and furniture
Computer and IT equipment
Estimated useful life
(Years)
Term of TFGOK facility lease
5-10 years
5-10 years
5-10 years
5 years
3-5 years
Construction-in-progress includes property, plant and equipment in the course of construction and is carried at cost less
any recognized impairment charge. These assets are reclassified to the appropriate category of property, plant and
equipment and depreciation of these assets commences when they are completed and ready for their intended use.
An item of property, plant and equipment, including any significant part initially recognized, is derecognized upon disposal
or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of
the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included
in net loss when the asset is derecognized.
The residual values, useful lives and methods of depreciation of all assets are reviewed at each financial year end and are
adjusted prospectively, if appropriate. Significant judgment is involved in the determination of estimated residual values
and useful lives and no assurance can be given that actual residual values and useful lives will not differ significantly from
current estimates.
(d) Intangible assets
Intangible assets include costs related to obtaining Health Canada licenses. Intangible assets acquired separately are
measured upon initial recognition at cost, which comprises the purchase price plus any costs directly attributable to the
preparation of the asset for its intended use. Intangible assets acquired through business combinations or asset acquisitions
are initially recognized at fair value as at the date of acquisition. Subsequent to initial recognition, intangible assets are
carried at cost less accumulated amortization and any accumulated impairment charges.
All intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
Asset Category
Health Canada license
Website development
Software
Estimated useful life
(Years)
Term of TFGOK facility lease
2 years
3 years
Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the
intangible assets require the use of estimates and assumptions and are accounted for by changing the amortization period
or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense attributable to an
intangible asset is recognized in the consolidated statements of loss in the expense category consistent with the function
of the intangible asset.
THE FLOWR CORPORATION
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The gain or loss arising from the derecognition of an intangible asset is measured as the difference between the net disposal
proceeds and the carrying amount of the asset and is recognized in net loss when the asset is derecognized.
(e) Impairment of non-financial assets
The carrying value of property, plant and equipment and intangible assets are assessed for impairment at each statement
of financial position date or whenever events or changes in circumstances indicate that the carrying amount of an asset
exceeds its recoverable amount. Events or changes in circumstances which may indicate impairment include: a significant
change to the Company’s operations, significant decline in performance, or a change in market conditions which adversely
affect the Company. The recoverable amount is determined as the higher of the fair value less costs of disposal (“FVLCD”)
and its value in use based on discounted cash flows.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group
of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets
or groups of assets (the cash-generating unit, or "CGU"). The recoverable amount of an asset or a CGU is the higher of its
fair value, less costs to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an
impairment charge is recognized immediately in profit or loss by the amount by which the carrying amount of the asset
exceeds the recoverable amount. 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.
(f) Provisions and contingencies
General
Provisions are recognized when: a) the Company has a present obligation (legal or constructive) as a result of a past event;
and b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
and a reliable estimate can be made for the amount of the obligation. If the effect of the time value of money is material,
provisions are discounted using a current pre-tax discount rate that reflects, where appropriate, the risks specific to the
liability. Where discounting is used, the increase in the provision as a result of the passage of time is recognized in finance
cost in the consolidated statements of loss.
A contingent liability is not recognized in the case where no reliable estimate can be made; however, disclosure is required
unless the possibility of an outflow of resources embodying economic benefits is remote. By its nature, a contingent
liability will only be resolved when one or more future events occur or fail to occur. The assessment of a contingent
liability inherently involves the exercise of significant judgment and estimates of the outcome of future events.
(g) Offsetting of financial instruments
Financial assets and financial liabilities are offset if there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or realize the assets and settle the liabilities simultaneously.
THE FLOWR CORPORATION
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
(h) Deferred revenue
Deferred revenue is recognized in the consolidated statements of financial position when a cash prepayment is received
from one or more customers prior to the sale of product or delivery of service. Revenue is subsequently recognized in the
consolidated statements of loss when the sale occurs, which generally occurs when control has been transferred or in the
case of services, when the services have been rendered.
(i) Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the agreement on the
inception date.
Finance leases
Finance leases which transfer substantially all the risks and rewards incidental to ownership of the leased item to the
Company as a lessee, are capitalized at the inception of the lease at the fair value of the leased asset, or, if lower, at the
present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction
of the lease liability. Finance charges are recognized in finance cost in the consolidated statements of loss.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there
is no reasonable certainty that the Company will obtain ownership by the end of the term of the lease. As of December 31,
2018, the Company did not have any finance leases.
Operating leases
Leases that do not transfer substantially all the risks and rewards incidental to ownership to the Company as a lessee are
classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of
loss on a straight-line basis over the lease term.
(j) 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 are recognized in profit or loss as incurred. To date, no development costs have been capitalized.
(k) Share-based compensation
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. Stock options are measured on the date of grant by reference to the fair value determined using a Black-Scholes
valuation model, further details of which are given in note 18. The value is recognized as share-based compensation
expense in the consolidated statements of loss and an increase to contributed surplus in the consolidated statements of
changes in shareholders’ equity over the period in which the performance and/or service conditions are fulfilled.
For share-based payments granted to non-employees the compensation expense is measured at the fair value of the goods
and services received except where the fair value cannot be estimated in which case it is measured at the fair value of the
equity instruments granted.
THE FLOWR CORPORATION
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Consideration paid by employees or non-employees on the exercise of stock options is recorded as share capital and the
related share-based compensation is transferred from contributed surplus to share capital.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings
per share.
(l) Income taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation
authorities on the taxable loss or income for the period. The tax rates and tax laws used to compute the amount are those
enacted or substantively enacted by the end of the reporting period.
Current income tax assets and current income tax liabilities are only offset if a legally enforceable right exists to offset the
amounts and the Company intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Deferred income tax
Deferred income tax is provided using the balance sheet method on temporary differences on the reporting date between
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax
liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible
temporary differences, and the carry forward of unused tax credits and unused tax losses, to the extent that it is probable
that taxable income will be generated in future periods to utilize these deductible temporary differences.
The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent
that it is no longer probable that sufficient future taxable income will be generated to allow all or part of the deferred
income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period
and are recognized to the extent that it has become probable that future taxable income will be generated to allow the
deferred income tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to be in effect in the period when
the asset is expected to be realized or the liability is expected to be settled, based on tax rates that have been enacted or
substantively enacted by the end of the reporting period.
Deferred income tax assets and liabilities are offset if a legally enforceable right exists to offset current income tax assets
against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation
authority.
Judgment is required in determining whether deferred income tax assets and liabilities are recognized on the consolidated
statements of financial position. Deferred income tax assets, including those arising from unutilized tax losses, require
management to assess the likelihood that the Company will generate future taxable income in order to utilize the deferred
income tax assets. Estimates of future taxable income are based on forecasted cash flows from operations or other activities.
To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to
realize the net deferred income tax assets recorded on the reporting date could be impacted.
THE FLOWR CORPORATION
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
(m) Earnings per share
Basic earnings per share is computed by dividing the net earnings available to common shareholders by the weighted
average number of shares outstanding during the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be
issued under securities that entitle their holders to obtain common shares in the future. The number of additional shares
for inclusion in diluted earnings per share is determined using the treasury stock method, whereby stock options and
warrants, whose exercise price is less than the average market price of the Company’s common shares, are assumed to be
exercised at the beginning of the period with proceeds based on the average market price for the period. The incremental
number of common shares issued under stock options is included in the calculation of diluted earnings per share.
2.3 NEW STANDARDS NOT YET ADOPTED
IFRS 16, Leases
IFRS 16, issued in January 2016, replaces IAS 17. Leases IFRS 16 results in most leases being reported on the statement
of financial position for lessees, eliminating the distinction between a finance lease and an operating lease. The standard
is expected to impact the accounting for the Company’s operating leases, which are currently reflected in the consolidated
statements of loss and in the Company’s disclosure in respect of future commitments. Under IFRS 16, all operating leases,
except for short term and low value leases, are expected to be accounted for as finance leases. As a result, the leased assets
and the associated obligations are recognized in the consolidated statements of financial position. The leased assets will
be depreciated over the shorter of the estimated useful life of the asset and the lease term. The lease payments are
apportioned between finance charges and a reduction of the lease liability. The current operating lease expense will be
replaced with a depreciation charge on the leased assets and a finance charge on the lease liability, which are in aggregate
expected to result in a higher total periodic expense in the earlier periods of the lease.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company has reviewed all leases to
determine and document the expected changes associated with the adoption of IFRS 16. Upon adoption of IFRS 16, all
existing operating leases with a term greater than 1 year, will be recognized as a leased asset and the associated obligation
will be recorded.
3. SIGNIFICANT TRANSACTIONS
(a) Reverse Acquisition
On September 21, 2018, the Company, then operating as The Needle Capital Corp. (“Needle”) completed its Qualifying
Transaction, pursuant to the Business Combination Agreement. Through the Qualifying Transaction, Needle acquired all
the issued and outstanding common shares of Flowr PrivateCo through a three-cornered amalgamation, whereby Flowr
amalgamated with 2652253 Ontario Inc., a subsidiary of Needle into a newly formed entity. On January 1, 2019, the
amalgamated entity was amalgamated into The Flowr Corporation. The resulting legal entities are The Flowr Corporation,
Flowr ULC and Flowr Okanagan.
THE FLOWR CORPORATION
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The Qualifying Transaction was a reverse acquisition of Needle and has been accounted for under IFRS 2, Share-based
Payments. As a result, the transaction has been accounted for at the fair value of equity instruments issued by the Company
to the option holders, warrant holders and shareholders of Needle holding such equity instruments as of the date of the
Qualifying Transaction. The difference between the fair value of equity instruments issued and the net assets acquired has
been recognized as a listing expense in the consolidated statements of loss for the year ended December 31, 2018.
Additional legal and professional fees of $402,610 were incurred to complete the transaction.
The following table represents the fair value of the net assets acquired and the total consideration transferred upon closing
of the Qualifying Transaction:
Fair value of shares issued (590,769 shares)
Fair value of warrants issued (23,077 warrants)
Fair value of options issued (18,461 options)
Total consideration transferred
Net assets acquired (Cash)
Excess attributed to cost of listing
Legal and other professional fees
Listing expense
1,535,999
34,937
38,349
1,609,285
209,065
1,400,220
402,610
1,802,830
The warrants and options were valued using the Black-Scholes pricing model. The inputs used in the measurement of the
fair value of the option and warrants granted were as follows:
Risk free interest rate
Expected life in years
Expected volatility
Dividends per share
Options Warrants
2.33 %
5
90 %
—
2.02 %
1
90 %
—
(b) Acquisition of Cannatech Plant Systems (now operating as Flowr Okanagan)
On December 1, 2016, Flowr acquired an 80% ownership in Cannatech Plant Systems Inc., now operating as The Flowr
Group (Okanagan) Inc. Total consideration paid to acquire the net assets of Flowr Okanagan amounted to $2,536,804
which includes transaction costs of $136,804.
On December 1, 2017, through the Reorganization (note 2.1(c)), Flowr acquired the remaining 20% ownership in Flowr
Okanagan in exchange for 10,000,000 common shares of Flowr. The 20% ownership interest was then acquired by Flowr
ULC from Flowr in exchange for common shares of Flowr ULC, resulting in Flowr ULC owning a 100% interest in Flowr
Okanagan. As this does not result in a change of control, the acquired assets and liabilities remain at their carrying values.
The fair value of consideration paid was comparable to the carrying value of the assets acquired.
THE FLOWR CORPORATION
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
4. AMOUNTS RECEIVABLE
Accounts receivable
GST HST receivable
Subscription receivable
December 31, December 31,
2018
2017
41,386
268,991
487,168
797,545
2,507,577
455,538
—
2,963,115
5. PREPAIDS AND OTHER CURRENT ASSETS
Prepaid expenses
Deposits recoverable
Due from related parties (note 15)
6. INVENTORY
Capitalized
December 31, December 31,
2018
2017
56,122
—
95,891
152,013
552,948
360,520
—
913,468
Biological asset fair
valuation adjustment
Carrying
value
costs
Harvested cannabis
Work in process
Finished goods
Supplies and consumables
Balance as at December 31, 2018
945,211
199,650
1,144,861
281,562
1,426,423
40,776
(68,256)
(27,480)
—
(27,480)
985,987
131,394
1,117,381
281,562
1,398,943
During the year ended December 31, 2018, there was no impairment of inventory.
For the year ended December 31, 2018, the Company capitalized $254,942 (2017 – nil) of depreciation and amortization
to harvested cannabis inventory and expensed $465,844 (2017 – nil) capitalized inventory costs to cost of sales.
THE FLOWR CORPORATION
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
7. BIOLOGICAL ASSETS
Biological assets consist of cannabis of plants. The changes in the carrying value of biological assets are as follows:
Balance at December 31, 2017
Production costs capitalized
Changes in fair value less cost to sell due to biological transformation
Transferred to inventory upon harvest
Balance as at December 31, 2018
—
2,652,926
(420,410)
(1,735,414)
497,102
The Company measures its biological assets at their fair value less costs to sell. This is determined using a model which
estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the
expected selling price less costs to sell per gram.
The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the
valuation technique used. The Company’s method of accounting for biological assets attributes value accretion on a
straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest.
The following table quantifies each significant unobservable input, and provides the impact a 10% increase/decrease in
each input would have on the fair value of biological assets:
Assumptions:
(i) Weighted average of expected loss of plants
until harvest (a)
(ii) Expected yields for cannabis plants
(average grams per plant)
(iii) Weighted average number of growing weeks
completed as a percentage of total growing
weeks as at year end
(iv) Estimated selling price (per gram) (b)
(v) After harvest cost to complete and sell (per
gram)
(vi) Reasonable margin on after harvest costs to
complete and sell (per gram)
$
$
$
$
As at December 31, 2018
Input
10% change
16 % $
13.46
grams dry flower
4.11
grams dry trim $
50 % $
6.98
for dry flower
0.88
for dry trim $
6,428
49,710
49,710
82,035
2.73 $
35,854
0.25 $
3,259
(a)
Weighted average of expected loss of plants until harvest represents loss via plants that do not survive to the point
of harvest. It does not include any financial loss on a surviving plant.
THE FLOWR CORPORATION
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
(b)
The estimated selling price (per gram) represents the average contractual sales price for the Company’s various
strains sold as recreational products or expected selling price in recreational and medical market for strains with
no contractual sales price.
The Company obtained its sales license in August 2018. Prior to obtaining its sales license, the fair value of biological
assets was determined to be nil.
These estimates are subject to volatility in market prices and a number of uncontrollable factors, which could significantly
affect the fair value of biological assets in future periods.
The Company estimates the harvest yields for medical cannabis at various stages of growth. As of December 31, 2018, it
is expected that the Company’s cannabis plants biological assets will yield approximately 239,406 grams of dry cannabis
and 73,115 grams of dry trim when harvested.
The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected
in the gain or loss on biological assets in future periods.
For the year December 31, 2018, the Company capitalized $104,586 (2017 - nil) of depreciation and amortization expense
to biological assets.
8. FINANCIAL INSTRUMENTS
Set out below is a comparison, by category, of the carrying amounts of the Company’s financial instruments that are
recognized in the consolidated statements of financial position:
The carrying values of all the financial assets and liabilities measured at amortized cost approximate their fair values as at
December 31, 2018 and December 31, 2017.
Financial assets
Cash
Amounts receivable
Deposits recoverable
Loan receivable
Investment in private securities - shares
Investment in private securities - warrants
Convertible loan receivable
Financial liabilities
Accounts payable and accrued liabilities
Due to related parties
Debt
Financial Instrument December 31, December 31,
2017
Classification
2018
Carrying Amount
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVOCI
FVPL
FVPL
27,689,183
2,963,115
360,520
—
750,000
488,695
6,000,000
7,749,699
797,545
—
25,000
—
335,571
—
Amortized cost
Amortized cost
Amortized cost
4,604,727
63,217
1,591,536
1,928,898
27,562
—
THE FLOWR CORPORATION
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Investments private securities – Shares
On October 10, 2018, the Company acquired 319,149 shares of Ace Hill at a cost of $750,000. As Ace Hill is not a listed
public company, the valuation of the shares at the time of issuance was based on a discounted projected cash flow model.
As of December 31, 2018, the Company re-assessed the fair value of the shares based on the projected cash flow model
and concluded there were no significant changes in fair value. As of December 31, 2018, the cost of the investment
approximated the fair value. No adjustments in fair value were reported through other comprehensive income.
Investments private securities – Warrants
(i) Plant Properties Warrants
On December 31, 2018, the Company’s 1,500,000 warrants in Plant Properties were terminated. Each warrant was
exercisable into one common share of Plant Properties any time prior to June 13, 2019, at an exercise price of $0.50 per
common share. For the year ended December 31, 2018, the Company recognized a realized loss on Plant Properties
warrants of $335,571 (2017 – unrealized gain $207,194) in other income (note 19) in the Consolidated Statements of Loss.
(ii) Seven Leaf Warrants
On December 31, 2018, the Company was granted 2,500,000 warrants in Seven Leaf. Each warrant is exercisable into
one common share of Seven Leaf any time prior to December 31, 2020, at an exercise price of $0.50 per common share.
Seven Leaf has two directors in common with Flowr. For the year ended December 31, 2018, the Company recognized a
gain on issuance of the warrants of $488,695 (2017 – nil) in other income (note 19).
The inputs used in the measurement of the fair value at the time the investments in warrants were granted and subsequently
re-measured were as follows:
Investment in warrants
Risk free interest rate
Expected exercise period in years
Expected volatility
Dividends per share
Fair value hierarchy
December 31,
2018
December 31,
2017
1.6% - 1.86%
0.70 - 2
70% - 97%
—
0.91% - 1.66%
1.45 - 2
97%
—
The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by
valuation technique:
Level 1: based on quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: based on inputs which have a significant effect on fair value that are observable, either directly or
indirectly from market data; and
Level 3: based on inputs which have a significant effect on fair value that are not observable from market data.
THE FLOWR CORPORATION
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The investments in privately held securities have been classified as Level 3 in the fair value hierarchy as at December 31,
2018 and December 31, 2017.
During the years ended December 31, 2018 and 2017, there were no transfers between Level 1 and Level 2 fair value
measurements, and no transfers into or out of Level 3 fair value measurements.
The following table reconciles Level 3 fair value measurements from January 1, 2017 to December 31, 2018:
Balance as at January 1, 2017
Grant date fair value included in net loss
Unrealized gains included in net loss
Balance as at December 31, 2017
Investment in Ace Hill
Convertible loan receivable (note 11)
Realized loss Plant Properties warrants included in net loss (note 19)
Unrealized gain on Seven Leaf warrants included in net loss (note 19)
Balance as of December 31, 2018
9. PROPERTY, PLANT AND EQUIPMENT
—
128,377
207,194
335,571
750,000
6,000,000
(335,571)
488,695
7,238,695
Balance as at
January 1,
2018 Additions
Balance as at
December 31,
2018
Cost:
Land
Leasehold improvements
Construction-in-progress
Production equipment
Mechanical equipment
Electrical equipment
Office equipment and furniture
Computer and IT equipment
Total cost
Accumulated depreciation:
Leasehold improvements
Production equipment
Mechanical equipment
Electrical equipment
Office equipment and furniture
Computer and IT equipment
Total accumulated depreciation
1,380,500
2,577,059
998,657
271,072
2,909,727
1,067,794
25,173
49,255
9,279,237
4,370,836
338,269
8,804,923
356,018
561,963
206,034
69,728
187,375
14,895,146
—
—
—
—
—
—
—
111,299
43,218
481,288
176,617
7,870
28,074
848,366
5,751,336
2,915,328
9,803,580
627,090
3,471,690
1,273,828
94,901
236,630
24,174,383
111,299
43,218
481,288
176,617
7,870
28,074
848,366
Net book value
9,279,237
23,326,017
THE FLOWR CORPORATION
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Balance as at
January 1,
2017 Additions
Balance as at
December 31,
2017
Cost:
Land
Leasehold improvements
Construction-in-progress
Production equipment
Mechanical equipment
Electrical equipment
Office equipment and furniture
Computer and IT equipment
Balance as at December 31, 2017
Accumulated depreciation
Balance as at December 31, 2017
Net book value December 31, 2017
—
—
—
—
—
—
—
—
—
—
—
1,380,500
2,577,059
998,657
271,072
2,909,727
1,067,794
25,173
49,255
9,279,237
1,380,500
2,577,059
998,657
271,072
2,909,727
1,067,794
25,173
49,255
9,279,237
—
—
9,279,237
As the majority of property plant, and equipment additions were acquired in December 2017 or became available for use
in 2018, no depreciation expense was recognized during the year ended December 31, 2017.
10. INTANGIBLE ASSETS
Balance as at
January 1,
2018 Additions
Balance as at
December 31,
2018
Cost:
Software
Website development
License
Total cost
Accumulated amortization:
Software
Website development
License
Total accumulated amortization
15,507
—
3,175,964
3,191,471
9,681
218,930
—
228,611
25,188
218,930
3,175,964
3,420,082
—
—
78,668
78,668
5,499
145,953
133,234
284,686
5,499
145,953
211,902
363,354
Net book value
3,112,803
3,056,728
Capitalized license costs relates to costs incurred by the Company to acquire its licenses from Health Canada.
THE FLOWR CORPORATION
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Balance as at
January 1,
2017 Additions
Balance as at
December 31,
2017
Cost:
Software
License
Total cost
Accumulated amortization:
License
Total accumulated amortization
—
3,175,164
3,175,164
15,507
800
16,307
15,507
3,175,964
3,191,471
—
—
78,668
78,668
78,668
78,668
Net book value
3,175,164
3,112,803
11. CONVERTIBLE LOAN RECEIVABLE
On the November 19, 2018, the Company entered into a binding term sheet with Holigen Holdings Limited (“Holigen”),
pursuant to which the Company agreed to lend $6,000,000 to Holigen. The proceeds received from Flowr are being used
by Holigen to purchase land and obtain certain cannabis related licenses in certain jurisdictions including Portugal. As of
December 31, 2018, $6,000,000 has been advanced to Holigen. Flowr has the right to convert all debt owing under the
loan facility into the same class of shares held by the shareholders of Holigen, that would result in a 4.8% ownership
interest in Holigen (the “Conversion Option”).
On December 19, 2018, the Company signed a share purchase and share subscription agreement (the “SPSA”) with
Holigen which effectively exercises the Company’s Conversion Option and provides the Company with an additional 15%
ownership interest in Holigen, for an aggregate ownership interest of 19.8%. The Company also provided Holigen with
certain intellectual property to accelerate the completion of Holigen’s construction and licensing projects. The closing of
the acquisition of the 19.8% ownership interest of Holigen is subject to various legal, administrative and approval
conditions. As the Conversion Option has been exercised prior to the outside date of January 31, 2019 under the loan
facility, interest will not accrue on the loan balance. However, in the event that the acquisition of the 19.8% interest in
Holigen does not close, the entire outstanding loan balance and related interest will become payable on February 1, 2020
and interest under the loan facility would be calculated at 8% per annum from the first advance made under the loan.
The Conversion Option represents a call option to the Company and is included in the fair value of the loan. There existed
an insignificant difference in fair value between the initial recognition date of November 19, 2018 and the reporting date
of December 31, 2018, and accordingly the transaction price approximated the fair value of the note. The value of the
Conversion Option of the loan is $487,474 as of December 31, 2018. The convertible loan receivable has been classified
as a Level 3 in the fair value hierarchy (note 8).
12. OTHER LONG-TERM ASSETS
Other long-term assets consist of a $50,000 advance payment made to Inplanta Biotechnology (“Inplanta”), to acquire
shares in Inplanta.
THE FLOWR CORPORATION
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable (note 15)
Accrued liabilities
GST/HST, PST, and excise tax payable
14. DEBT
December 31, December 31,
2018
2017
1,638,256
290,642
—
2,782,502
1,472,422
349,803
4,604,727
1,928,898
On January 25, 2018, Hawthorne Canada Limited (“Hawthorne”) and Flowr entered into an agreement to construct a
research and development (“R&D”) facility and provide certain R&D services upon completion of the R&D facility. The
agreement was amended effective December 14, 2018. Under the amended agreement, Flowr Okanagan received a design
and construction fee of $1,500,000 which is initially recorded as deferred revenue in the consolidated statements of
financial position. The revenue is recognized as design and construction income in the consolidated statements of loss
over the period of time the services are rendered. Hawthorne will also finance all approved development expenses through
a loan to Flowr Okanagan to a maximum loan amount of $11,500,000 (the “Hawthorne Loan”). The funds will be
advanced to Flowr on a monthly basis based on the expected expenditures to be incurred for the month. On the opening
date of the R&D facility, the Hawthorne Loan will become payable through an agreed upon payment schedule and will
commence to accrue interest at rate of 4%. The Hawthorne Loan will be fully repaid over 20 years from the opening date
of the R&D Facility.
As of December 31, 2018, Hawthorne advanced $1,591,536 to Flowr Okanagan under the Hawthorne Loan.
As a part of the arrangement, once the R&D facility is operational, Hawthorne will pay Flowr a monthly management fee
and a monthly SR&ED service fee which can be offset against the monthly loan and interest repayments.
As of December 31, 2018, if the contract were to terminate under certain circumstances, the Company could be required
to pay 100% of all costs and expenses loaned by Hawthorne and $1,500,000 in liquidated damages.
THE FLOWR CORPORATION
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
15. RELATED PARTY TRANSACTIONS
As at December 31, 2018 and December 31, 2017 related party amounts included in (a) prepaid expenses and other current
assets (b) loan receivable (c) due to related parties (d) property plant and equipment and (e) accounts payable and accrued
liabilities were as follows:
(a) Amounts in relation to reimbursable expenses due from a corporation
whose principal is a director and officer of Flowr
(b) Loan to shareholder and employee of Flowr bearing interest at 1% per
annum
Reimbursable expenses due to a corporation with directors and officers
in common with Flowr
(c)
(i)
(ii) Shareholder advance payable to a director and officer of Flowr
(d) Fees paid to a company for the construction of the Kelowna facility
December 31,
2018
December 31,
2017
—
—
63,217
—
95,891
25,000
2,562
25,000
whose principal is an employee and shareholder of Flowr
2,210,578
5,927,526
(e) Amounts due to a construction company whose principal is an employee
and shareholder of Flowr
82,252
1,103,639
Included in general and administrative expense are amounts paid to shareholders or to companies whose principals are
either a shareholder, director or officer of the Company as follows:
General and administrative
Consulting and administration fees
Rental fees
Refer to Notes 8 and 25.
Year ended
December 31,
2018
95,454
21,000
116,454
2017
50,890
19,250
70,140
All the above transactions are in the normal course of operations and are measured at the exchange amounts, being the
amounts agreed to by the parties.
THE FLOWR CORPORATION
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
16. KEY MANAGEMENT REMUNERATION
The Company’s related parties includes its key management. Key management includes directors, the Chief Executive
Officers (“Co-CEOs”) and the executive officers reporting directly to the Co-CEOs.
The remuneration of the key management of the Company recognized in the consolidated statements of loss for the year
ended December 31, 2018 and 2017 were as follows:
Salaries and short-term benefits
Share-based compensation
Total renumeration
17. REVENUE
Gross revenue
Excise tax
Year ended
December 31, December 31,
2018
1,805,008
6,696,797
8,501,805
2017
439,366
574,977
1,014,343
Year ended
December 31,
2018
3,269,977
399,569
2,870,408
2017
—
—
—
18. SHARE-BASED COMPENSATION
Stock options
The Company has established a stock option plan (“SOP”) for the directors, selected employees and consultants. Pursuant
to the SOP, the exercise price of the option cannot be less than the closing price of Flowr’s common shares on the trading
date preceding the day the option is granted, subject to permitted discounts pursuant to the rules of the Exchange. The
maximum number of common shares reserved for issuance under the SOP is 10% of the total issued and outstanding
common shares of the Company including the 44,100,000 convertible Flowr ULC Class A Preferred Shares (note 2.1(c)).
During the year ended December 31, 2018, the Company granted 8,053,991 (2017 - 10,125,000) stock options at a fair
value of $16,388,192 (2017 - $2,835,000). The estimated value of the options granted will be recognized as an expense in
the consolidated statements of loss and an addition to contributed surplus in the consolidated statements of changes in
shareholders’ equity over the vesting period. The options generally vest over 3 to 3.5 years from the grant date. The
Company recorded stock option expenses of $7,208,273 (2017 – $601,536) for the year ended December 31, 2018.
THE FLOWR CORPORATION
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
As at December 31, 2018, there was $10,750,492 of share-based compensation cost remaining to be charged to net earnings
in future periods relating to stock option grants. The fair value of options granted was estimated using the Black-Scholes
option pricing model. Due to limited historical data, the expected volatility is estimated based on the volatility of
comparable publicly traded companies. The inputs used in the measurement of the fair values at the time the options were
granted were as follows:
Five year risk free interest rate
Expected life in years
Expected volatility
Dividends per share
2018
2017
2.11 - 2.45 %
5.00
86% - 90 %
—
1.65 %
5.00
75.0 %
—
The following is a stock option continuity for the years indicated:
Balance as at January 1, 2017
Options granted
Options forfeited
Options expired
Balance as at December 31, 2017
Options granted
Options exercised
Options forfeited
Options expired
Balance as at December 31, 2018
Weighted
average
exercise price
per share $
—
0.05
—
—
0.05
2.70
0.05
0.23
—
2.13
Number of
options
—
10,125,000
—
—
10,125,000
8,418,991
(6,205,961)
(1,740,750)
—
10,597,280
The following lists the options outstanding and exercisable as at December 31, 2018:
Options outstanding
Options exercisable
$
Range of exercise
prices per share
0.05
2.60
3.43 - 3.60
5.24
Number of
options
outstanding
2,318,750
7,913,530
40,000
325,000
Weighted
average
remaining
years
3.92
4.70
4.83
4.76
Weighted
average
exercise price
per share $
0.05
2.60
3.52
5.24
Number of
options
exercisable
375,000
375,158
—
9,028
Weighted
average
exercise price
per share $
0.05
2.60
—
5.24
$
0.05 -2.60
10,597,280
4.54
2.13
759,186
1.37
THE FLOWR CORPORATION
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
19. OTHER INCOME
Acquisition of warrants investments
Loss (gain) on warrants investment valuation
Interest (income) expense, net
Other income
20. INCOME TAXES
Year ended
December 31,
2018
2017
(488,695)
335,571
(102,433)
(14,903)
(270,460)
(128,377)
(207,194)
662
(7,875)
(342,784)
The major items causing the Company’s effective income tax rate of nil to differ from the combined federal and provincial
enacted rate of 26.75% (2017-CCPC1 rate – 13.81%) were as follows:
Losses before income taxes
Combined Canadian federal and provincial statutory income tax
rates (2017- CCPC1)
Expected income tax recovery
Share based compensation expense and Non-deductible
Losses allocated to former Partnership members
Share issue costs recorded through equity
Other
Tax rate changes and other adjustments
Change in tax benefit not recognized
Income tax expense
1 Canadian controlled private corporation
2018
2017
(17,907,188)
(2,805,335)
26.75%
(4,790,000)
2,326,240
—
(397,940)
15,880
(165,140)
3,010,960
—
13.81%
(387,000)
87,000
210,000
(4,000)
—
(2,000)
96,000
—
Deferred income tax (assets) and liabilities have been recognized in respect of the following (deductible) taxable temporary
differences:
Investments at fair value
Biological assets
Non-capital loss carry-forwards
Net deferred income tax liabilities
2018
130,000
22,000
(152,000)
—
2017
44,000
—
(44,000)
—
THE FLOWR CORPORATION
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
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 intention to offset.
Deferred income tax assets have not been recognized in respect of the following deductible temporary differences:
Non-capital loss carry-forwards
Share issue costs
Other temporary differences
Total deferred income tax assets
2018
2017
8,820,120
1,593,060
1,301,150
11,714,330
1,054,000
108,000
12,000
1,174,000
The Company has a total of $9.4 million in non-capital losses of which $1.1M will expire from 2032 to 2037 and $8.3M
will expire in 2038.
21. SHARE CAPITAL
The authorized capital of the Company consists of an unlimited number of common shares and an unlimited number of
preferred shares issuable in series. As of December 31, 2018, the Company had 86,700,306 common shares issued and
outstanding and no issued and outstanding preferred shares. The Flowr ULC preferred class A shares (note 2.1 (c)) are
convertible into common shares of the Company.
(a) Financings
In December 2017, Flowr completed a private placement where 14,185,000 class A preferred shares were issued at a
price of $1.00 per share, for total proceeds of $14,185,000 of which $487,168 was included in amounts receivable and
$50,200 was oversubscribed and included in accounts payable as of December 31, 2017. Total share issuance costs
were $134,791. In January 2018, the remaining tranche of 815,000 class A preferred shares were issued at a price of
$1.00 per share for gross proceeds of $815,000, and related share issuance costs were $30,037. Total gross proceeds
received from both tranches amounted to $15,000,000.
In the second and third quarters of 2018, Flowr closed a private placement in a series of five tranches as noted in the
table below. Total share issuance costs related to this financing were $59,220.
Tranche
1
2
3
4
5
TOTAL
Closing
date
11-Apr-18
23-Apr-18
28-May-18
11-Jul-18
18-Jul-18
Shares
issued
3,310,330
970,232
84,382
896,151
48,266
5,309,361
Gross
proceeds $
8,606,858
2,522,603
219,393
2,329,993
125,492
13,804,339
THE FLOWR CORPORATION
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
(b) Refer to note 3(a) for shares issued in the Qualifying Transaction classified as a listing expense. As a part of the
Qualifying Transaction, Flowr completed a concurrent RTO Financing issuing 13,807,734 common shares for gross
proceeds of $35,900,108. In relation to the RTO financing the Company incurred $1,927,407 in share issuance costs,
of which $529,038 relate to broker warrants issued (note 22).
All the above noted shares issuances were exchanged for common shares of the Company in connection with the closing
of the Qualifying Transaction.
22. WARRANTS
The following lists the warrants outstanding and exercisable as at December 31, 2018:
Balance as at December 31, 2017
Warrants granted
Warrants exercised
Warrants expired
Balance as at December 31, 2018
The following is a warrant continuity for the year:
Balance as at December 31, 2017
Granted in relation to RTO
Broker warrant -RTO Financing
Warrants exercised
Balance as at December 31, 2018
Weighted
average
exercise price
per share $
—
2.60
1.30
—
2.57
Number of
warrants
—
464,797
(11,481)
—
453,316
Number of
warrants
Value $
—
23,077
441,720
(11,481)
453,316
—
34,937
529,038
(17,382)
546,593
The fair value of warrants granted was estimated using the Black-Scholes option pricing model. Due to limited historical
data, the expected volatility is estimated based on the volatility of comparable publicly traded companies. The inputs
used in the measurement of the fair values at the time the warrants were granted were as follows:
Five year risk free interest rate
Expected life in years
Expected volatility
Dividends per share
2018
2.02 - 2.81%
1 - 2
90.0%
-
THE FLOWR CORPORATION
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
23. LOSS PER SHARE
Net loss attributable to common shareholders
Year ended
December 31,
2018
(15,401,298)
2017(1)
(1,908,684)
Basic and diluted weighted average number of common shares outstanding
Basic and diluted loss per share
71,335,830
(0.22)
37,673,616
(0.05)
(1) The 2017 basic weighted average common shares is a reflection of the common shares issued from the Reorganization
in exchange for the partnership interest.
24. SUPPLEMENTARY CASH FLOW INFORMATION
(a) Items not affecting cash and other adjustments:
Depreciation and amortization
Unrealized gain resulting from fair valuation of biological assets
Share-based compensation expense
Gain on investments in warrants
Listing expense
Other, net
Items not affecting cash and other adjustments
(b) Changes in non-cash working capital:
Increase in amounts receivable
Increase in other current assets
Increase in inventories
Increase in biological assets
Increase in accounts payable and accrued liabilities
Increase in deferred revenue
Increase (decrease) in amounts due to related parties
Changes in non-cash working capital
Year ended
December 31,
2018
1,133,052
(79,383)
7,208,273
(153,124)
1,911,710
(102,431)
9,918,097
2017
78,668
—
601,536
(335,571)
—
662
345,295
Year ended
December 31,
2018
(2,652,739)
(761,455)
(899,150)
(917,512)
2,169,347
1,327,865
35,654
(1,697,990)
2017
(293,569)
(101,579)
—
—
603,269
—
(344,412)
(136,291)
THE FLOWR CORPORATION
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
25. COMMITMENTS
Contractual obligations
The Company had the following minimum future contractual obligations as at December 31, 2018:
up to 1 year 1 - 3 years 3 - 5 years over 5 years
Purchase obligations
Operating lease obligations (i)
Total Commitments
2,001,735
454,550
2,456,285
990,285
990,285
565,473
565,473
5,853,244
5,853,244
Total
2,001,735
7,863,552
9,865,287
(i) Included in operating leases, is the Flowr Okanagan facility operating lease. This lease cost has been capitalized
to biological assets and inventory in 2018. The lease is payable to 0954717 B.C. LTD. whose principal owners
are also shareholders of Flowr. The total remaining commitment for this lease is $7,564,123, of which $273,258
is due within one year.
Refer to note 14 for additional contractual commitments.
26. NON-CONTROLLING INTEREST
Set out below is summarized financial information reported by Flowr ULC and its subsidiaries that have been incorporated
into these consolidated financial statements. All of the financial information is presented before any intercompany
eliminations with its parent company (Flowr).
The following table summarizes the consolidated financial position for Flowr ULC as at December 31, 2018 and 2017:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Consolidated net assets
Year ended
December 31,
2018
31,540,775
42,161,662
(5,695,615)
(3,304,034)
64,702,788
2017
11,047,419
12,856,280
(4,055,775)
—
19,847,924
THE FLOWR CORPORATION
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
The following tables summarizes Flowr ULC’s consolidated net loss for the years ended December 31, 2018 and 2017:
Revenue
Expenses
Consolidated net loss
Year ended
December 31,
2018
2,870,408
(10,302,860)
(7,432,452)
2017
—
(2,114,743)
(2,114,743)
Other changes in non-controlling interest as reported in the statement of changes in shareholder’s equity is attributable to
the shares issued by Flowr ULC to the Company as required whenever the Company issues common shares, as established
through the Reorganization (note 2.1(c)).
27. FINANCIAL RISK MANAGEMENT
The Company’s principal financial liabilities comprise of accounts payable and accrued liabilities, amounts due to related
parties and debt. The main purpose of these financial instruments is to assist with the management of the Company’s short
term and long-term cash flow requirements. The Company has various financial assets, such as cash and cash equivalents,
and amounts receivable, which arise directly from its operations.
The main risks that could adversely affect the Company’s financial assets, liabilities or future cash flows are market risk,
liquidity risk and credit risk. Management reviews each of these risks and establishes policies for managing them as
summarized below.
Market risk
Market risk is the risk that the future cash flows or the fair value of a financial instrument will fluctuate because of changes
in market conditions. The Company operates in an industry regulated by Health Canada. Changes in legislation could have
a significant impact on the Company’s operations.
Credit risk
The exposure to credit risk arises through the potential failure of a customer or another third party to meet its contractual
obligations to the Company. As at December 31, 2018, the Company had a convertible loan receivable of $6,000,000
(2017 – Nil) and amounts receivable of $2,963,115 (December 31, 2017 - $797,545). The Company provides credit to its
customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate
credit risk. The Company is not significantly exposed to credit risk as the accounts receivables are primarily due from
provincial government organizations and overall amounts receivable and convertible loan receivables comprise 13.4%
(December 31, 2017 – 3.8%) of the Company’s total assets.
THE FLOWR CORPORATION
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
Liquidity risk
The Company relies on the cash flows generated from its operations and its ability to raise debt and equity from the capital
markets to fund its operating, investment and liquidity needs. To reduce these risks, the Company: (i) prepares regular
cash flow forecasts to monitor its capital requirements and available liquidity (ii) strives to maintain a prudent capital
structure that is comprised primarily of equity financing; and (iii) targets a minimum level of liquidity comprised of surplus
cash balances to avoid having to raise additional capital at times when the costs or terms would be regarded as
unfavourable.
Capital management
The Company considers its capital to be its equity. The Company’s objective for capital management is to: (i) maintain
sufficient levels of liquidity to fund and support its capital projects and operating activities; (ii) maintain a strong financial
position to ensure it has ready access to debt and equity markets to supplement free cash flow being invested in its growth
projects. The Company monitors its financial position and the potential impact of adverse market conditions on an ongoing
basis. The Company manages its capital structure and makes adjustments to it based on prevailing market conditions and
according to its business plan. The Company’s funding strategy is to maintain a capital structure comprised primarily of
equity sourced from equity offerings and net earnings generated from its operations accompanied with financing through
debt.
28. EXPENSE BY NATURE
The operating costs, including cost of sales, selling and marketing, general and administrative expenses and research and
development costs, as reported in the consolidated statements of loss, have been regrouped by the nature of the expenses
as follows:
Salaries and benefits
Professional fees
Production costs
General and administrative
Travel
Selling and marketing
Depreciation and amortization
Research and development
Total operating expenses
Year ended
December 31,
2018
5,027,924
2,303,497
1,708,266
1,124,625
868,725
607,619
465,844
7,525
12,114,025
2017
1,474,236
449,441
258,038
221,833
113,635
—
29,400
—
2,546,583
THE FLOWR CORPORATION
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years December 31, 2018 and 2017
(in Canadian dollars, unless otherwise indicated)
29. OPERATING SEGMENT INFORMATION
Operating segments are components of an entity whose operating results are regularly reviewed by the chief operating
decision maker in deciding how to allocate resources and in assessing performance and for which separate financial
information is available.
The Company primarily operates in one reportable operating segment, being a licensed producer operating in Canada. As
the operations comprise a single reporting segment, amounts disclosed in the consolidated financial statements also
represent segment amounts.
30. SUBSEQUENT EVENTS
(a) Long-Term Incentive Plan
On December 28, 2018, the shareholders of the Company approved the Company’s Long-Term Incentive Plan (“LTIP”),
which was subsequently approved by the TSX-V on January 16, 2019. Under the terms of the LTIP, the Board of Directors
(the “Board”) or a committee on behalf of the Board may grant units, which may be either restricted share units (“RSUs”)
or deferred share units (“DSUs”) to officers, directors, employees or consultants of the Company. The maximum number
of common shares which may be reserved and set aside for issue under the LTIP in respect of awards of DSUs to DSU
participants and for payments in respect of awards of RSUs to RSU participants, shall not exceed 10% of the total issued
and outstanding common shares of the Company, including 44,100,000 convertible Flowr ULC class A preferred shares,
at the time of approval of the LTIP (being 13,057,421 common shares of the Company). There are no RSUs or DSUs
issued and outstanding as at the date of approval of these Consolidated Financial Statements.
THE FLOWR CORPORATION
37