TO THE SHAREHOLDERS
We are pleased to report on your Company’s
results for the year ended December 31, 2017.
Revenues for the period under review were
$20,697,764 yielding net income of $6,885,430
and a net income per share of $0.09. This
compares to revenues of $4,382,088, a net loss of
$(13,619,943) and a net loss per shares of $(0.32)
in the comparable 2016 period. During our most
recent quarter a number of regular grow rooms at
our Langstaff Facility were used to harvest
Mother Plants for Phase 1 of the Niagara
Greenhouse Facility. As a result, during the
quarter the Company used third party product
purchases as a harvest replacement and bridge to
meet the demand for the Company’s products.
The higher cost of these third party purchases
impacted earnings for the three
negatively
months
ended December 31, 2017 by
approximately $1.8 million.
We continue to experience dynamic growth in all
areas of the Company as we execute our business
plan aimed at being a market leader and innovator
in the development of products and services to
better serve our patients and physicians and to
position us for the pending legislation to legalize
the adult consumer recreational use of cannabis.
We have successfully introduced a number of
new market leading initiatives, including the
launch of the Trust Delivery Service, a new way
to provide superior service to our growing patient
base.
Our 250,000 square foot Phase 1 redevelopment
of our 430,000 square foot Niagara Greenhouse
Facility has received both its Health Canada
Cultivation and Sales License and we have
already had multiple harvests from this facility.
Phase 1 was completed both on budget and on
time. The Phase 2 expansion at the Niagara
Greenhouse Facility, which
currently
underway, is anticipated to be completed and in
cultivation towards the middle of 2018. As a
result, we fully expect to meet our 40,000
kilograms of annual growing capacity from this
facility. This is all perfectly timed in order for us
to supply the international orders we have
recently received and to position us for the
anticipated adult consumer recreational use of
cannabis, which will provide us with further
is
major opportunities. In addition, the Company is
planning a further 600,000 square foot expansion
utilizing a portion of the 36 acres of vacant land
at the Niagara Greenhouse Facility.
During the period we successfully completed our
Special Warrant Financing and a subsequent
Private Placement, for collective gross proceeds
of $45 million. In addition, we recently closed a
$15 million mortgage financing on our Niagara
Greenhouse Facility.
sales
Our standardized, pesticide-free products and our
physician education programs continue
to
position us as one of the premier providers of
cannabis resulting in exceptional new patient
cannabis extracts
growth with
representing over 64% of sales. Our shipments to
Australia and our Joint Venture with Stenocare in
Denmark are just the beginning of what we
believe will be a Global market opportunity for
us. Other countries that we anticipate shipping to
shortly are Germany and Mexico.
in
Our recent graduation to the Toronto Stock
Exchange (“TSX”) reflects the amazing progress
we have made since listing on the Canadian
Securities Exchange (“CSE”) in August last year.
This new listing on the TSX will allow a whole
new category of investors to participate in the
CannTrust story.
We have assembled an amazing team of varying
talents and expertise in our operations, all of
whom have helped us build a business designed
to meet the highest standards and which will
allow us to reach our full potential.
We thank all of our Shareholders for their
ongoing interest and support and we invite you to
visit our investor relations page at:
www.canntrust.ca/investor-relations
On behalf of the Board,
Eric Paul, Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
To the Shareholders of CannTrust Holdings Inc.
We have audited the accompanying consolidated financial statements of CannTrust Holdings Inc.
and its subsidiaries, which comprise the consolidated statements of financial position as at December
31, 2017 and December 31, 2016 and the consolidated statements of income (loss) and
comprehensive income (loss), changes in shareholders' equity and cash flows for the years then
ended and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, 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.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s
judgement, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion these consolidated financial statements present fairly, in all material respects, the
financial position of CannTrust Holdings Inc. as at December 31, 2017 and December 31, 2016, and
its financial performance and its cash flows for the years ended December 31, 2017 and December
31, 2016 in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
March 29, 2018
Toronto, Ontario
3
(signed) “Eric Paul”
Director
(signed) “Mark Litwin”
Director
The accompanying notes are an integral part of the consolidated financial statements.
Subsequent Events (Note 20)
Commitments (Note 13)
Basis of Presentation (Note 2)
Nature of Operations (Note 1)
Total Liabilities and Shareholders' Equity
Total Shareholders' Equity
Deficit
Warrants reserve (Note 12)
Share-based payment reserve (Note 11)
Share capital (Note 10)
Shareholders' Equity
Total Liabilities
Derivative liability (Note 9)
Convertible debt (Note 9)
Promissory note (Note 5)
Total current liabilities
Convertible debt due on demand (Note 9)
Current portion of promissory note (Note 5)
Accounts payable and accrued liabilities
Current
Liabilities
Total Assets
Property and equipment (Note 8)
Restricted cash (Note 6)
Investment (Note 15)
Total current assets
Prepaids
Accounts receivable
Biological assets (Note 7)
Inventory (Note 7)
Harmonized sales tax recoverable
Short term investments (Note 6)
Cash
Current
Assets
(in Canadian dollars)
As at December 31
Consolidated Statements of Financial Position
CannTrust Holdings Inc.
10,468,249
(46,475,318)
3,027,398
53,916,169
-
-
-
6,410,359
1,375,447
1,463,947
3,570,965
1,000,000
2,570,965
5,209,440
25,000
19,313
11,624,855
497,975
140,015
2,320,093
3,674,635
96,992
-
$
4,895,145
$
16,878,608
$
78,448,415
70,868,418
(39,589,888)
3,361,789
2,272,302
104,824,215
7,579,997
-
-
800,000
6,779,997
-
200,000
6,579,997
78,448,415
16,878,608
33,963,685
100,765
156,073
44,227,892
2,465,506
160,383
9,843,690
10,959,022
2,636,710
201,538
17,961,043
$
2017
2016
Mark LitwinEric Paul
CannTrust Holdings Inc.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the Years Ended December 31
(in Canadian dollars)
Revenue
2017
2016
$
20,697,764
$
4,382,088
Cost of goods sold
Amortization expensed to cost of sales (Note 8)
Gross profit, before the unrealized gain on changes in fair value of biological assets
Fair value changes in biological assets included in inventory sold
Unrealized gain on changes in fair value of biological assets (Note 7)
Gross profit
9,017,787
1,252,985
10,426,992
11,302,969
(24,856,050)
23,980,073
2,499,851
854,142
1,028,095
4,339,530
(6,838,140)
3,526,705
Expenses
Amortization (Note 8)
General and administrative
Loss on disposal of property and equipment (Note 8)
Loss on Equity Accounted Investment (Note 15)
Management fees (Note 14)
Marketing and promotion
Professional fees
Rent and facilities
Salaries and benefits
Selling and shipping costs
Share based compensation (Note 11)
Expenses before Financing Activities and Transaction Costs
Income (Loss) from Operations before
Financing Activities and Transaction Costs
Interest expense
Accretion expense (Note 9)
Distributions on preference shares
Transaction costs (Note 5)
Other income
(Loss) Gain on revaluation of derivative liability (Note 9)
Loss on revaluation of redeemable shares (Note 19)
Net Income (Loss) and Comprehensive Income (Loss)
964,396
1,610,312
-
147,056
378,674
198,858
1,136,488
511,334
3,853,314
3,803,056
2,310,678
14,914,166
379,750
756,999
32,816
147,442
590,000
329,866
355,768
83,870
1,589,308
745,831
72,000
5,083,650
9,065,907
(1,556,945)
(260,203)
(233,716)
-
(204,282)
143,060
(1,625,336)
-
$
6,885,430
(473,961)
(276,413)
(1,355,022)
(396,377)
-
245,657
(9,806,882)
(13,619,943)
$
Net Income (Loss) and Comprehensive Income (Loss) Attributable to:
Equity shareholders of the Company
Non-controlling interest
$
6,885,430
-
$
6,885,430
$
$
(12,815,159)
(804,784)
(13,619,943)
Weighted average number of common shares - basic
Weighted average number of common shares - diluted
76,876,971
80,526,105
42,597,871
42,597,871
Earnings (loss) per share - basic and diluted (Note 10)
$
0.09
$
(0.32)
The accompanying notes are an integral part of the consolidated financial statements.
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(
CannTrust Holdings Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31
(in Canadian dollars)
Operating Activities
Net income (loss)
Items not effecting cash
Amortization (Note 8)
Accretion expense
Biological assets expensed to cost of sales
Unrealized gain on changes in fair value of biological assets
Loss on disposal of property and equipment
Loss on Equity Accounted Investment
Loss (gain) on revaluation of derivative liability
Loss on revaluation of redeemable shares
Non-cash transaction costs for convertible debt
Interest expense, net of interest income
Expenses settled with inventory
Expenses settled with issuance of common shares
Share-based compensation
Changes in non-cash working capital
Harmonized sales tax recoverable
Inventory and biological assets
Accounts receivable
Prepaids
Accounts payable and accrued liabilities
Distribution payable on preference shares
Cash flows used in operating activities
Investing Activities
Purchase of property and equipment (Note 8)
Disposal of property and equipment (Note 8)
Acquisition of Greenhouse and related assets (Note 5)
Interest received
Advances to/investment in Joint Venture (Note 15)
Issuance of short term investments (Note 6)
Redemption of short term investments (Note 6)
Cash flows used in investing activities
Financing Activities
Proceeds from private placement, net of share issue costs
Proceeds from issuance of convertible debt, net of transaction costs
Proceeds from exercise of warrants
Proceeds from exercise of stock options
Interest paid
Restricted cash held as collateral on credit card financing
Cash flows provided by financing activities
Net increase in cash
Cash, at beginning of period
Cash, at end of period
2017
2016
$
6,885,430
$
(13,619,943)
2,217,381
233,716
11,302,969
(24,856,050)
-
147,056
1,625,336
-
-
205,664
70,280
135,000
2,310,678
277,460
(2,539,718)
(939,233)
(77,210)
(1,967,531)
4,744,686
-
1,233,892
276,413
4,339,530
(6,838,140)
32,816
147,442
(245,657)
9,806,882
6,513
473,961
-
957,000
72,000
(3,357,291)
(42,964)
(610,941)
(82,185)
(414,726)
1,156,520
1,355,022
(501,546)
(1,996,565)
(23,993,811)
136,235
(6,500,000)
54,539
(283,816)
(900,000)
700,000
(30,786,853)
43,613,330
-
1,332,467
50,000
(566,500)
(75,000)
44,354,297
13,065,898
4,895,145
(1,207,840)
-
-
-
(166,755)
-
300,000
(1,074,595)
4,234,233
1,040,918
-
-
-
-
5,275,151
2,203,991
2,691,154
$
17,961,043
$
4,895,145
See notes 5, 9, 10 and 12 for non-cash financing.
The accompanying notes are an integral part of the consolidated financial statements.
6
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
1. NATURE OF OPERATIONS
Nature of Operations
CannTrust Holdings Inc. ("CannTrust" or the "Company") is a Canadian company incorporated
in Ontario on March 16, 2015. The Company is the parent company of CannTrust Inc., a
Canadian company incorporated in Ontario on August 16, 2013 and Elmcliffe Investments Inc.,
a Canadian company incorporated in Ontario on October 31, 2013. The Company holds 50% of
the outstanding shares of Cannabis Coffee & Tea Pod Company Ltd, a Canadian company
incorporated in Ontario on May 4, 2015. On April 30, 2015, CannTrust Inc. and the Company
completed a share reorganization, whereby the Company became the parent company of
CannTrust Inc. The Company’s common shares are listed on the Toronto Stock Exchange
(“TSX”), under the trading symbol “TRST”. Refer to Subsequent Events Note 20 (i).
The Company is a licensed producer and distributor of medical cannabis in Canada pursuant to
the provisions of the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) and the
Controlled Drugs and Substances Act and its Regulations. The Company began production of
medicinal cannabis at its hydroponic facility located in Vaughan, Ontario in Canada and received
its license from Health Canada to sell on February 9, 2015. The Company commenced sale of
medicinal cannabis under the Marihuana for Medical Purposes Regulations (“MMPR”) in
February 2015.
On January 13, 2017, the Company, through its wholly owned subsidiary Elmcliffe Investments
Inc. executed a Purchase and Sale Agreement to acquire various Greenhouse and related assets
located in the regional municipality of Niagara, Ontario.
The registered head office of the Company is in 3280 Langstaff Road, Building 1, Unit 1,
Vaughan, Ontario, L4K 5B6.
2. BASIS OF PRESENTATION
Basis of Preparation
These consolidated financial statements have been prepared on the going concern basis, under
the historical cost convention, except for certain financial assets and liabilities which are
presented at fair value, as explained in the accounting policies set out in Note 3.
Statement of Compliance
These consolidated financial statements are prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards Board
("IASB") and the interpretations of the IFRS Interpretations Committee (“IFRIC”). These
consolidated financial statements were authorized for issue by the Board of Directors on March
28, 2018.
Basis of Consolidation
These consolidated financial statements include the accounts of the Company and its controlled
subsidiaries. All intercompany transactions and balances have been eliminated.
7
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
2. BASIS OF PRESENTATION (continued)
Functional Currency Translation
All figures presented in these consolidated financial statements and notes thereto are reflected in
Canadian dollars, which is the functional currency of the Company and its subsidiaries.
Foreign currency transactions are translated using the exchange rates prevailing at the dates of
the transactions. Monetary assets and liabilities denominated in foreign currencies are translated
to Canadian dollars at the foreign exchange rate applicable at the statement of financial position
date. Realized and unrealized exchange gains and losses are recognized through profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical costs in a foreign
currency are translated used the exchange rate at the date of the transaction.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash
Cash includes cash on deposit at banking institutions and cash held in trust.
b. Short-term investments
Short-term investments are comprised of GIC’s with terms to maturity of between three and
twelve months or can be redeemed without penalty within 12 months from issuance.
c. Property and Equipment
Property and equipment are measured at historical cost, which is the purchase price as well
as any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management, less accumulated
amortization and impairment losses if applicable. Amortization is provided using the
following methods and terms:
Greenhouse and Improvements
Buildings
Leasehold improvements
Production Equipment
Furniture and fixtures
Vehicles
Computer equipment
Computer software
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
20 years
20 years
10 years
5 years
5 years
5 years
3 years
1 year
Property and equipment's estimated residual value, useful life and amortization method are
reviewed at the end of each reporting period and adjusted if necessary. When parts of an item
of property and equipment have different useful lives, they are accounted for as separate
components of property and equipment.
8
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Property and Equipment (continued)
Gains or losses on the disposal of an item of property and equipment are determined by
comparing the proceeds from the disposal with the carrying amount of the asset and are
recognized in profit or loss.
Mother plants, or bearer plants, are plants grown for the purpose of taking cuttings in order
to grow more quantity of the same plant. Bearer plants are critical to the success of the
business and are measured at directly attributable costs, which are not material for accounting
purposes.
d. Impairment of Property and Equipment
Property and equipment are reviewed for impairment at the end of each reporting period and
tested for impairment whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset's carrying amount
exceeds its recoverable amount. The recoverable amount of property and equipment is the
greater of fair value less costs to sell and value in use. In assessing value in use, estimated
future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the
asset. Impairment losses are recognized through profit or loss. Impairment losses may be
reversed in a subsequent period where the impairment no longer exists or has decreased. The
carrying amount after a reversal must not exceed the carrying amount (net of amortization)
that would have been determined had no impairment loss been recognized. A reversal of
impairment loss is recognized through profit and loss.
e. Investment in Joint Venture
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Investments in a joint venture
are accounted for using the equity method and are initially recognized at cost. The entire
carrying amount of the investment is tested for impairment annually.
Under the equity method, the investment is initially recognized at cost and adjusted thereafter
for the post-acquisition change in the investor’s share of comprehensive income of the joint
venture.
The Company’s share of its joint venture’s post-acquisition profits or losses is recognized in
the statement of profit or loss, and its share of post-acquisition movements in other
comprehensive income is recognized in other comprehensive income. The cumulative post-
acquisition movements are adjusted against the carrying amount of the investment.
Distributions received from an investee reduce the carrying amount of the investment.
If the Company’s share of losses of a joint venture equals or exceeds its interest in the joint
venture, the Company does not provide for additional losses, unless it has incurred obligations
or made payments on behalf of the joint venture.
9
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Business Combinations
Judgment is used in determining whether an acquisition is a business combination or an asset
acquisition. In a business combination, all identifiable assets, liabilities and contingent
liabilities acquired are recorded at their fair values. One of the most significant estimates
relates to the determination of the fair value of these assets and liabilities. The contingent
consideration is measured at its acquisition date fair value and included as part of the
consideration transferred in a business combination. Contingent consideration that is
classified as equity is not re-measured at subsequent reporting dates and its subsequent
settlement is accounted for within equity. Contingent consideration that is classified as an
asset or a liability is re-measured at subsequent reporting dates in accordance with IAS 39, or
IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the
corresponding gain or loss being recognized in profit or loss. For any intangible asset
identified, depending on the type of intangible asset and the complexity of determining its
fair value, an independent valuation expert or management may develop the fair value, using
appropriate valuation techniques, which are generally based on a forecast of the total expected
future net cash flows. The evaluations are linked closely to the assumptions made by
management regarding the future performance of the assets concerned and any changes in the
discount rate applied. Certain fair values may be estimated at the acquisition date pending
confirmation or completion of the valuation process. When provisional values are used in
accounting for a business combination, they may be adjusted retrospectively in subsequent
periods. However, the measurement period may not exceed one year from the acquisition
date.
g. Leases
Leases are classified as an operating lease whenever the terms of the lease do not transfer
substantially all of the risks and rewards of ownership to the lessee. Lease payments are
recognized as an expense on a straight-line basis over the lease term, except where another
systematic basis is more representative of the time pattern in which the economic benefits are
consumed.
h. Revenue Recognition
Revenue is recognized at the fair value of consideration received or receivable. Revenue from
the sale of goods is generally recognized when shipped, which is generally when all the
following conditions have been satisfied:
The Company has transferred to the buyer the significant risks and rewards of
ownership of the goods;
The Company retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
The amounts of revenue can be measured reliably;
It is probable that the economic benefits associated with the transaction will flow to
the entity;
The costs incurred or to be incurred in respect of the transaction can be measured
reliably.
10
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Convertible Debt
When convertible debt is issued, the proceeds (net of issue costs) are split to separately
identify a liability component (equal to the net present value of their scheduled future cash
flows applying interest rates at the date of issue of similar debt that does not have a conversion
option). The remainder of the debt proceeds is deemed to relate to the conversion option and
is credited to an equity reserve. The liability component is carried at amortized cost until
extinguished on conversion of the option or maturity of the debt. The equity component is
not subsequently re-measured.
j. Embedded Derivatives
Derivatives embedded in non-derivative host contracts are treated as separate derivatives
when their risks and characteristics are not closely related to those of the host contracts and
the host contracts are not measured at fair value through profit or loss (“FVTPL”).
k. Biological Assets
The Company measures biological assets consisting of medical cannabis plants at fair value
less costs to sell up to the point of harvest, which becomes the initial basis for the cost of
finished goods inventories after harvest. Seeds are measured at fair market value. Unrealized
gains or losses arising from changes in fair value less cost to sell during the year are included
in the gross margin in the statement of income and comprehensive income.
l.
Inventory
Inventories of work-in-process dried cannabis, harvested finished goods, oil and packing
materials are valued at the lower of cost and net realizable value. Inventories of harvested
cannabis are transferred from biological assets at their fair value less costs to sell at harvest,
which becomes deemed cost. Any subsequent post-harvest costs are capitalized to inventory
to the extent that cost is less than net realizable value. Net realizable value is determined as
the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale. Cost is determined using the
average cost basis. Products for resale and supplies are valued at cost.
m. Share Capital
An equity instrument is any contract that evidences a residual interest in the assets of the
Company after deducting all of its liabilities. Equity instruments issued by the Company are
recorded at the proceeds received, net of issue costs. For unit offerings, the Company has
adopted the relative fair value method with respect to measurement of shares and warrants
issued as equity units. The relative fair value method requires an allocation of the net proceeds
received based on the pro rata relative fair values of the components. The fair value of the
warrants is estimated using the Black-Scholes option valuation model.
11
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
n. Share Issuance Costs
Costs incurred in connection with the issuance of share capital are netted against the proceeds
received, net of tax. Costs related to the issuance of share capital and incurred prior to issuance
are recorded as deferred share issuance costs and subsequently netted against proceeds when
they are received.
o. Research and Development
Research costs are expensed as incurred and are included in general and administrative
expenses in the statement of income and comprehensive income. 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 through profit and loss as incurred. To
date no development costs have been capitalized.
p. Income Taxes
Current tax expense is the expected tax payable on the taxable income for the year, using tax
rates enacted or substantively enacted at year end, adjusted for amendments to tax payable
with regards to previous years.
Deferred tax is provided using the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to temporary differences between the financial statement carrying
value and tax basis of assets and liabilities and the benefit of tax losses available to be carried
forward for tax purposes.
Deferred tax assets and liabilities are measured using substantively enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred income tax assets are recorded in the consolidated financial
statements if realization is considered probable. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the year that the rate changes.
q. Share-based Payments
In situations where equity instruments are issued to non-employees, shares issued are
recognized at the fair value of services or goods received by the entity. In situations where
some or all of the goods or services received by the entity as consideration cannot be estimated
reliably, they are measured at the fair value of the equity instrument granted. The fair value
of the share-based payments is recognized together with a corresponding increase in equity
over a period that services are provided or goods are received.
12
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
r. Share-based Compensation - Employees
The Company has an employee stock option plan (“ESOP”) in place. The Company measures
equity settled share-based payments based on their fair value at the grant date and recognizes
compensation expense over the vesting period based on the Company’s estimate of equity
instruments that will eventually vest. Fair value is measured using the Black-Scholes option
pricing model. Expected forfeitures are estimated at the date of grant and subsequently
adjusted if further information indicates actual forfeitures may vary from the original
estimate. Any revisions are recognized in the consolidated statements of income and
comprehensive income such that the cumulative expense reflects the revised estimate.
s. Earnings/Loss per Share
The Company presents basic and diluted earnings per share for its common shares. Basic
earnings per share is calculated by dividing the profit or loss attributable to common
shareholders by the weighted average number of common shares outstanding for the period.
Diluted earnings per share is calculated by adjusting the weighted average number of common
shares outstanding to assume conversion of all diluted potential common shares. When the
effect of all outstanding warrants or options are anti-dilutive during a year when the Company
incurs a loss, diluted loss per share does not differ from basic loss per share.
t. Financial Instruments
Financial Assets
All financial assets are recognized initially on the date at which the Company becomes a party
to the contractual provisions of the instrument. The Company derecognizes a financial asset
when the contractual rights to the cash flows from the asset expire, or it transfers the rights to
receive the contractual cash flows of the financial asset in a transaction in which substantially
all the risks and rewards of ownership of the financial asset are transferred.
The Company classifies its financial assets as FVTPL, loans and receivables, held to maturity
or available for sale. A financial asset is classified at FVTPL if it is classified as held for
trading or is designated as such upon initial recognition. Financial assets classified as FVTPL
are measured at fair value with any resultant gain or loss recognized in profit or loss. Loans
and receivables are financial assets with fixed or determinable payments that are not quoted
in an active market. Subsequent to initial recognition, loans and receivables are measured at
amortized cost using the effective interest rate method, less any impairment losses. As at
December 31, 2017 and December 31, 2016, the Company has not classified any financial
assets as held to maturity or available for sale.
Transaction costs associated with FVTPL financial assets are expensed as incurred, while
transaction costs associated with all other financial assets are included in the initial carrying
amount of the asset.
13
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
t. Financial Instruments (continued)
Financial Liabilities
All financial liabilities are recognized initially on the date at which the Company becomes a
party to the contractual provisions of the instrument. The Company derecognizes a financial
liability when its contractual obligations are discharged or cancelled or expire.
The Company classifies its financial liabilities as either FVTPL or other liabilities. Financial
liabilities classified as FVTPL are measured at fair value with any resultant gain or loss
recognized in profit or loss. Transaction costs associated with FVTPL financial liabilities are
expensed as incurred. Financial liabilities classified as other financial liabilities are initially
measured at fair value less directly attributable transaction costs, and are subsequently
measured at amortized cost using the effective interest rate method. The effective interest rate
is the rate that exactly discounts estimated future cash payments through the expected life of
the financial liability.
Classification of Financial Instruments
The Company has classified its financial instruments as follows:
Cash
Accounts receivable
Restricted cash
Short-term investments
Accounts payable and accrued liabilities
Convertible debt
Promissory note
Derivative liability
FVTPL
Loans and receivables
FVTPL
Loans and receivables
Other financial liabilities
Other financial liabilities
Other financial liabilities
FVTPL
Fair Value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date, regardless of
whether that price is directly observable or estimated using another valuation technique. In
estimating the fair value of an asset or a liability, the Company takes into account the
characteristics of the asset or liability if market participants would take those characteristics
into account when pricing the asset or liability at the measurement date.
The Company categorizes its assets and liabilities measured at fair value into one of three
different levels depending on the observability of the inputs used in the measurement.
Level 1: This level includes assets and liabilities measured at fair value based on unadjusted
quoted prices for identical assets and liabilities in active markets that are accessible at the
measurement date.
14
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
t. Financial Instruments (continued)
Level 2: This level includes valuations determined using directly or indirectly observable
inputs other than quoted prices included within Level 1. Derivative instruments in this
category are valued using models or other standard valuation techniques derived from
observable market inputs.
Level 3: This level includes valuations based on inputs which are less observable, unavailable
or where the observable data does not support a significant portion of the instruments’ fair
value.
The Company designated its cash and restricted cash as fair value through profit and loss,
which are measured at fair value and classified as level 1.
Derivative liabilities are classified as level 2 which are valued using Black-Scholes model.
Biological assets are classified as level 3.
The carrying values of the Company’s accounts receivables, accounts payable and accrued
liabilities approximate their fair value due to the relatively short periods to maturity of these
instruments. The fair value of promissory notes are not materially different from carrying
value. There were no transfers of amounts between levels during the year.
u. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control
the other party or exercise significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they are subject to common
control or common significant influence. Related parties may be individuals or corporate
entities. A transaction is considered to be a related party transaction when there is a transfer
of resources or obligations between related parties. Related party transactions are measured
at the amounts agreed to by the parties.
v. Segment Reporting
A segment is a component of the Company that i) engages in business activities from which
it may earn revenue and incur expenses, ii) whose operating results are reviewed by the board
of directors and iii) for which discrete financial information is available. Throughout the years
ended December 31, 2017 and December 31, 2016, the Company operated in one segment,
the production and sale of medicinal cannabis in Canada.
w. Selling costs
Expenses are recognized when the corresponding service has been incurred. For selling costs
that require a prepayment, the prepayment is expensed evenly throughout the agreed upon
term.
15
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
x. New Standards Adopted in Current Year
IAS 7 ‘Disclosures’, required entities to provide disclosures in their financial statements
about changes in liabilities arising from financing activities, including both changes
arising from cash flow and non-cash changes. The adoption of this amendment did not
have a material impact on the Company’s consolidated financial statements.
IAS 12 ‘Income taxes – Deferred Tax’ clarifies the recognition of deferred tax assets for
unrealized losses. It was amended to specify (i) the requirement for recognizing deferred
tax assets or unrealized losses; (ii) deferred tax where an asset is measured at a fair value
below the asset’s tax base; and (iii) certain other aspects of accounting for deferred tax
assets. The adoption of this amendment did not have a material impact on the Company’s
consolidated financial statements.
y. New Accounting Standards to be Adopted in the Future
At the date of authorization of these consolidated financial statements, the IASB and IFRIC
has issued the following new and revised Standards and Interpretations which are not yet
effective for the relevant reporting periods and which the Company has not early adopted.
The Company is currently assessing and still evaluating what impact the application of these
standards or amendments will have on the consolidated financial statements of the Company.
IFRS 2 ‘Share-based Payment’ was issued by the IASB in June 2016. These amendments
provide clarification on how to account for certain types of share-based transaction. The
amendments are effective for the annual period beginning on or after January 1, 2018.
IFRS 9 ‘Financial Instruments: Classification and Measurement’, introduces new
requirements for the classification and measurement of financial instruments, a single
forward-looking expected loss impairment model and a substantially reformed approach
to hedge accounting. IFRS 9 is effective for annual periods beginning on or after January
1, 2018.
IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in June
2014. The objective of IFRS 15 is to provide a single, comprehensive revenue
recognition model for all contracts with customers. The underlying principle is that an
entity will recognize revenue to depict the transfer of goods or services to customers at
an amount that the entity expects to be entitled to in exchange for those goods or services.
It also contains new disclosure requirements. IFRS 15 will be effective for the Company
on January 1, 2018.
16
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
z. New Accounting Standards to be Adopted in the Future
IFRS 16 ‘Leases’ was issued by the IASB in January 2016 and specifies the requirements
to recognize, measure, present and disclose leases. IFRS 16 is effective for annual
periods beginning on or after January 1, 2019 with early adoption permitted.
4.
SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of these consolidated financial statements in accordance with IFRS requires
management to make estimates and assumptions based on management’s best knowledge of current
events and actions that the Company may undertake in the future. Actual results could differ from
those estimates. The impacts of such estimates are pervasive throughout the consolidated financial
statements, and may require accounting adjustments based on future occurrences. Revisions to
accounting estimates are recognized in the period in which the estimate is revised and the revision
affects both current and future periods.
Significant judgments include the following:
(i) Assessing whether material uncertainties exist which would cause doubt about the Company’s
ability to continue as a going concern.
(ii) Assessing whether a joint arrangement is a joint operation or a joint venture. Refer to Note 15.
(iii) The valuation and recoverability of deferred taxes. The Company has determined that the
realization of certain assets related to income tax losses carried forward is not yet probable due
to uncertainty of future taxable income and has not recorded a deferred income tax asset relating
to those losses. Refer to Note 16.
Significant estimates include the following:
(i) Valuation of net assets acquired in acquisition. Refer to Note 5.
(ii) The valuation of inventory at the lower of cost and net realizable value. Refer to Note 7.
(iii) The valuation of biological assets, including estimating the stage of growth up to the point of
harvest, harvesting costs, selling costs, sales price, wastage and expected yields per plant.
Refer to Note 7.
(iv) The estimated useful lives and residual values of Property and Equipment and related
amortization included in profit and loss, as well as impairment on property and equipment.
Refer to Note 8.
(v)
Inputs to Black Scholes model used for valuation of warrants and options. Refer to Note 11
and 12.
17
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
5.
ACQUISITION
On March 6, 2017, the Company, through its wholly owned subsidiary Elmcliffe Investments
Inc., executed a Purchase and Sale Agreement to acquire various Greenhouse assets located in
the regional municipality of Niagara, Ontario. The aggregate purchase price for the Greenhouse
assets was $7,500,000. On execution of the Purchase and Sale Agreement, the operating
business and all related intangible assets and intellectual property was assigned to a related party.
Upon closing of the transaction, the existing operations ceased and the Company began a site
conversion project in order to convert the facility into a Health Canada Approved Marijuana
growth facility. With this purchase, the Company expects to enhance its ability to serve the
medicinal Marijuana market in Canada. The Company received its Health Canada Sales License
for the completed Greenhouse Phase 1 conversion on February 12, 2018.
The Company has allocated the purchase price as follows:
Assets
Land
Residential Buildings
Greenhouses and Equipment
Plant and Equipment
Vehicles
Total of assets at fair value
Consideration of the acquisition is comprised of:
Cash consideration
Promissory note (a)
Total
Allocation
484,507
$
571,000
4,215,192
2,115,301
114,000
7,500,000
$
$
6,500,000
1,000,000
7,500,000
$
a. As part of the consideration for the acquisition, a non-interest bearing promissory note was
issued in the amount of $1,000,000 payable over 5 years in 5 consecutive annual payments of
$200,000.
The following table reflects a continuity of the Company’s promissory note:
Carrying amount, December 31, 2016
Issuance of promissory note
Carrying amount, December 31, 2017
$
-
1,000,000
1,000,000
$
Costs incurred related to the acquisition totaled $204,282 which are included in transaction costs
expense. No receivables, payables or inventory were acquired through the acquisition. There was no
goodwill that arose from this transaction. Revenue was not impacted by the acquisition for the year
ended December 31, 2017. Subsequent to the acquisition there were $559,268 of expenses relating
to the Greenhouse acquisition impacting net income for the year ended December 31, 2017. These
expenses related to amortization of the acquired assets.
18
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
6.
RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Short-term investment - GIC (i)
Restricted cash - GIC held as collateral (ii)
Total restricted cash and short-term investments
2017
201,538
100,765
302,303
$
$
2016
$
-
25,000
25,000
$
(i)
The GIC, redeemable without penalty on the 15th of each month was issued on January 4, 2017
and matures on January 4, 2020. The investment is a three-year GIC held with a large Canadian
financial institution at a fixed interest rate of 0.75% in year 1, 0.8% in year 2 and 0.85% in year
3.
(ii) The $100,000 GIC at an interest rate of 1.53% is held by the bank as collateral against credit
cards issued to management of the Company. The credit cards have a combined credit limit of
$100,000.
The Company has a letter of credit with a large Canadian financial institution for up to $200,000. The
letter of credit has a one-year expiry from the date of issue, and an automatic annual extension with
30 days’ notice. The letter of credit is required as a covenant to the building lease agreement in the
event of a default in lease payments. No funds have been drawn from the credit facility as at
December 31, 2017 or December 31, 2016.
7.
INVENTORY AND BIOLOGICAL ASSETS
The Company’s biological assets consist of seeds and medical cannabis plants. The continuity of the
Company’s biological assets for the years ended December 31 is as follows:
Carrying amount, January 1
Seeds used
Changes in fair value less costs to sell due to biological
transformation
Transferred to inventory upon harvest
Carrying amount, December 31
$
2017
2,320,093
(979)
$
2016
137,790
(1,611)
24,856,050
6,838,140
(17,331,474)
9,843,690
$
(4,654,226)
2,320,093
$
As at December 31, 2017, included in the carrying amount of biological assets is $25,316 of seeds
(December 31, 2016 - $26,295) and $9,818,374 of live plants (December 31, 2016 - $2,293,798).
19
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
7.
INVENTORY AND BIOLOGICAL ASSETS (continued)
Biological assets are classified as level 3 in the fair value hierarchy. There have been no transfers
between levels. The significant assumptions used in determining the fair value of medical cannabis
plants are as follows:
wastage of plants based on their various stages;
yield by plant;
price per gram of yield;
percentage of costs incurred to date compared to the costs to be incurred are used to
estimate fair value of an in-process plant; and
percentage of costs incurred for each stage of plant growth was estimated.
All of the plants are to be harvested as agricultural produce and all of the plants, on average, were
52% from harvest as at December 31, 2017 (2016 – 33%).
The Company estimates the harvest yields for the plants at various stages of growth. As at December
31, 2017, it is expected that the Company’s biological assets will yield approximately 1,911,972
grams (2016 - 450,000 grams) of biological produce, with selling prices ranging from $7.00 to $12.00
per gram, before discounts.
The Company’s estimates are, by nature, subject to change. Changes in the anticipated yield will be
reflected in future changes in the gain or loss on biological assets. The Company performed a
sensitivity analysis on the fair value of biological assets and noted that a 10% decrease in selling
prices would result in a $1,261,124 (2016 - $331,915) decrease in the fair value of the biological
assets.
Inventories on hand consist of harvested finished goods, harvested cannabis in process, extracts,
accessories and packaging supplies. Inventory is valued at the lower of cost and net realizable value.
As at December 31, 2017, the Company held 626,935 grams of dry cannabis (2016 - 321,517 grams)
and 977,186 grams of extracts (2016 - 226,744 grams).
Inventory is comprised of the following items:
Accessories
Finished Goods
Work-in-Progress
Packaging and supplies
Total Inventory
$
$
2017
116,974
3,406,124
7,298,424
137,500
10,959,022
2016
17,002
956,227
2,628,509
72,897
3,674,635
$
$
As at December 31, 2017, included in the carrying amount of finished goods is $1,279,339 of dry
cannabis (2016 - $700,543) and $2,126,785 of finished extracts (2016 - $255,684). As at December
31, 2017, included in the carrying amount of work-in-process is $3,355,635 of dry cannabis (2016 -
$1,503,700) and $3,942,789 of extracts (2016 - $1,124,809).
20
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
8.
PROPERTY AND EQUIPMENT
Land
Leasehold
Improvements
Buildings,
Greenhouse and
Improvements
Equipment
Other
T otal
Balance at December 31, 2015
$
-
$
2,620,079
$
-
$
4,031,998
$
461,702
$
7,113,779
Additions
Disposals
176,277
-
-
-
-
843,155
(59,666)
188,407
1,207,839
-
(59,666)
Balance at December 31, 2016
$
-
$
2,796,356
$
-
$
4,815,487
$
650,109
$
8,261,952
Additions
-
170,568
11,741,952
11,735,935
345,356
23,993,811
Acquisition of Greenhouse (Note 5)
484,507
Disposals
-
-
-
4,786,192
2,229,301
(90,000)
(46,235)
-
-
7,500,000
(136,235)
Balance at December 31, 2017
$
484,507
$
2,966,924
$
16,438,144
$
18,734,488
$
995,465
$
39,619,528
Accumulated Amortization
Balance at December 31, 2015
$
-
$
(339,456)
$
-
$
(1,084,011)
$
(184,943)
$
(1,608,410)
Amortization
Disposals
-
-
(272,985)
-
-
-
(911,341)
(286,626)
(1,470,952)
26,850
-
26,850
Balance at December 31, 2016
$
-
$
(612,441)
$
-
$
(1,968,502)
$
(471,569)
$
(3,052,512)
Amortization
-
(290,359)
(293,922)
(1,833,009)
(186,041)
(2,603,331)
Balance at December 31, 2017
$
-
$
(902,800)
$
(293,922)
$
(3,801,511)
$
(657,610)
$
(5,655,843)
Carrying Amounts
Balance at December 31, 2016
$
-
$
2,183,915
$
-
$
2,846,985
$
178,540
$
5,209,440
Balance at December 31, 2017
$
484,507
$
2,064,124
$
16,144,222
$
14,932,977
$
337,855
$
33,963,685
As at December 31, 2017, $385,950 (December 31, 2016 - $237,060) of amortization was
capitalized to ending inventory.
9.
CONVERTIBLE DEBT
The following table reflects a continuity of the Company’s long term convertible debt:
Carrying amount, January 1
Exercise of convertible debt (i)
Automatic conversion of convertible debt (iv)
Issuance of convertible debt
Accretion
Carrying amount, December 31
$
2017
1,463,947
(256,256)
(1,441,407)
-
233,716
$
-
2016
1,175,908
$
-
-
11,626
276,413
1,463,947
$
In connection with the Company’s listing on the Canadian Securities Exchange on August 17, 2017,
all remaining convertible debt was converted into common shares.
21
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
9.
CONVERTIBLE DEBT (continued)
The following table reflects a continuity of the Company’s derivative liability:
Carrying amount, January 1
Settlement of derivative liability on conversion of debt (i)
Automatic conversion of derivative liability (iv)
Issuance of derivative liability
Loss (Gain) on revaluation of derivative liability
Carrying amount, December 31
$
2017
1,375,447
(512,551)
(2,488,232)
-
1,625,336
$
-
2016
1,601,345
$
-
-
19,759
(245,657)
1,375,447
$
The following table reflects a continuity of the Company’s convertible debt due on demand:
Carrying amount, January 1
Exercise of convertible debt due on demand (ii and iii)
Issuance of convertible debt due on demand (ii and iii)
Carrying amount, December 31
$
2017
1,000,000
(1,000,000)
-
$
-
2016
-
$
-
1,000,000
1,000,000
$
(i)
On March 6, 2017, $600,000 of convertible debt and $108,690 in accrued interest were
converted into common shares at $1.10 per share resulting in the issuance of 644,264 common
shares. The carrying value of the associated convertible debt was $256,256. The derivative
liability on the convertible debt was valued at $226,665 at December 31, 2016 and was valued
at $512,551 at March 6, 2017, prior to conversion.
(ii) On March 15, 2017, the $500,000 convertible debt due on demand and $35,978 in accrued
interest due to a related party were converted into common shares at $1 per share resulting in
the issuance of 535,978 common shares with a carrying value of $535,978.
(iii) On March 15, 2017, the $500,000 convertible debt due on demand and $32,183 in accrued
interest due to a related party were converted into common shares at $1 per share resulting in
the issuance of 532,182 common shares with a carrying value of $532,182.
(iv) On August 17, 2017, in connection with the Company’s listing on the Canadian Securities
Exchange, $3,040,919 of convertible debt and $132,967 in accrued interest were automatically
converted into common shares at $1.10 per share resulting in the issuance of 2,885,354
common shares. The carrying value of the associated convertible debt was $1,441,407. The
derivative liability on the convertible debt was valued at $1,148,782 at December 31, 2016
and was valued at $2,488,232, prior to the automatic conversion.
22
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
10. SHARE CAPITAL
The authorized capital stock of the Company consists of an unlimited number of common shares
and unlimited number of Class A preference shares.
Balance, December 31, 2015
February 2016 Pre-emptive Rights Issuance (i)
February 2016 Share issuance to Employees (ii)
August 2016 Share issuance as partial consideration for Bridge Financing (iii)
September 2016 Share issuance as partial consideration for Bridge Financing (iv)
September 2016 Share issuance to Employee (v)
October 2016 Shares issued in exchange for Class A Preferred Shares of
CannTrust Inc. (vi)
November 2016 Shares issued to non-controlling interest of CannTrust Inc. in
exchange for Shares of CannTrust Holdings Inc. (vii)
December 2016 Private Placement (viii)
December 2016 Share issuance in lieu of services (ix)
December 2016 Share issuance in consideration of surrender of Put Option and
reclassification of Redeemable Shares (x)
Share issuance costs
Balance, December 31, 2016
February 2017 Private Placement (xi)
March 2017 Share issuance on exercise of convertible debt (xii)
March 2017 Exercise of warrants (xiii)
March 2017 Share issuance on exercise of convertible debt due on demand (xiv)
March 2017 Share issuance as partial consideration for Warrant Financing (xv)
April 2017 Share issuance in lieu of services (xvi)
August 2017 Share issuance on automatic conversion of convertible debt (xvii)
August 2017 Share issuance on automatic conversion of Special Warrants (xviii)
September 2017 Exercise of warrants (xix)
November 27, 2017 Exercise of stock options (xx)
November 30, 2017 Private Placement (xxi)
Exercise of broker warrants (xxii)
Balance, December 31, 2017
Share Capital
Number of
common shares
29,595,848
35,646
50,000
200,000
200,000
30,000
Amount -
Common shares
$
6,684,903
32,081
45,000
180,000
180,000
27,000
9,039,317
8,135,386
2,759,909
3,416,208
403,846
2,483,918
4,441,070
525,000
22,265,145
31,420,729
-
67,995,919
510,000
644,264
1,000,000
1,068,161
75,000
100,000
2,885,354
12,584,100
4,963
25,000
4,000,000
13,504
90,906,265
$
(238,918)
53,916,169
1,020,000
877,497
1,845,919
1,068,161
150,000
200,000
4,062,606
23,099,955
9,716
88,376
18,447,465
38,351
104,824,215
$
(i) As part of their pre-emptive rights under CannTrust Holdings Inc. Shareholders Agreement,
on February 28, 2016 shareholders of the Company were issued 35,646 common shares at
$0.90 per share for total proceeds of $32,081.
(ii) On February 29, 2016, 50,000 common shares were issued to employees of the Company. The
value of the shares issued was measured by reference to the fair value of the common shares
of the Company at the grant date. The fair value at the grant date was $0.90 per share.
(iii) On August 9, 2016 as part of a bridge financing agreement, a $500,000 convertible promissory
note was issued to a related party. As partial consideration for the funds advanced, the note
holder was issued 200,000 common shares of the Company. The value of the transaction costs
could not be estimated reliably, thus the value of the shares issued was measured by reference
to the fair value of the common shares of the Company at the grant date. The fair value at the
grant date was $0.90 per share.
23
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
10. SHARE CAPITAL (continued)
(iv) On September 1, 2016 as part of a second tranche to the bridge financing agreement, a $500,000
convertible promissory note was issued to a related party. As partial consideration for the funds
advanced, the note holder was issued 200,000 common shares of the Company. The value of
the transaction costs could not be estimated reliably, thus the value of the shares issued was
measured by reference to the fair value of the common shares of the Company at the grant date.
The fair value at the grant date was $0.90 per share.
(v) On September 28, 2016, 30,000 common shares were issued to an employee of the Company.
The value of the shares issued was measured by reference to the fair value of the common
shares of the Company at the grant date. The fair value at the grant date was $0.90 per share.
(vi) On October 30, 2016 the Company entered into separate agreements with all of the Class A
Preference Shareholders of CannTrust Inc. to issue to them an aggregate number of 9,039,317
common shares with a fair value of $8,135,386 and 11,356,055 redeemable shares with a fair
value of $10,220,450 of the Company in exchange for the transfer by them to the Company of
an aggregate number of 7,175,001 Class A Preference shares of CannTrust Inc. with a carrying
value of $7,175,001 and settlement of $3,027,403 of distributions payable. A loss on settlement
of $8,262,438 was recognized in the accumulated deficit.
(vii) On November 23, 2016 the Non-Controlling Shareholders of CannTrust Inc. exchanged their
2,759,909 common shares of CannTrust Inc. with a carrying value of $1,337,168 for 2,759,909
common shares of CannTrust Holding Inc. with a fair value of $2,483,918. A loss on settlement
of $3,694,282 was recognized in the accumulated deficit.
(viii) On December 23, 2016 3,416,208 common shares were issued for gross proceeds of $1.30 per
share.
(ix) On December 23, 2016 403,846 common shares were issued as consideration for unpaid
management fees to related parties. The shares were valued at $1.30 per share, as determined
by the value of services received and invoiced.
(x) On December 23, 2016 2,000,000 common shares with a fair value of $2,600,000 and a warrant
to acquire 1,000,000 common shares at $1.30 per common share with a fair value of $1,061,975
were issued to Cannamed Financial Corp. in consideration for the surrender by Cannamed of
its Put Rights under the Unanimous Shareholders Agreement. Upon settlement, 20,265,145
redeemable shares at a carrying value of $28,820,729 were reclassified as common shares, and
a loss on settlement of $3,661,975 was recognized in the accumulated deficit.
(xi) On February 17, 2017, the Company issued, on a private placement basis, 510,000 common
shares at a price of $2.00 per share for gross proceeds of $1,020,000. No broker fees were paid
in respect of the 510,000 common shares issued.
(xii) On March 6, 2017, $600,000 of convertible debt and related derivative liability with a total
carrying value of $768,807 and $108,690 in accrued interest were converted into common
shares at $1.10 per share resulting in the issuance of 644,264 common shares.
(xiii) On March 9, 2017, 2 warrants were exercised to purchase 1,000,000 common shares at $1.30
per share for gross proceeds of $1,300,000. The carrying value of the warrants were $545,919.
(xiv) On March 15, 2017, $1,000,000 of due on demand convertible debt and $68,161 in accrued
interest were converted into common shares at $1.00 per share resulting in the issuance of
1,068,161 common shares.
24
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
10. SHARE CAPITAL (continued)
(xv) On March 16, 2017, as consideration for the special warrant subscription (see Note 12(iii)),
the Company issued 75,000 common shares to the Agent. The value of the shares was
measured by reference to the fair value of the common shares of the Company at the grant
date. The fair value at the grant date was $2.00 per share.
(xvi) On April 28, 2017, 100,000 common shares were issued as consideration for management fees
to related parties. The shares were valued at $2.00 per share, as determined by the value of
services received.
(xvii) On August 17, 2017, in connection with the Company’s listing on the Canadian Securities
Exchange, $3,040,919 of convertible debt and related derivative liability with a total carrying
value of $3,929,639 and $132,967 in accrued interest were converted into common shares at
$1.10 per share resulting in the issuance of 2,885,354 common shares.
(xviii) On August 17, 2017, in connection with the Company’s listing on the Canadian Securities
Exchange, 12,584,100 Special Warrants were automatically converted into 12,584,100
common shares at $2.00 per share at a carrying value of $23,099,955. There were no proceeds
from the conversion of Special Warrants to common shares.
(xix) On September 19, 2017, 4,963 warrants were exercised to purchase 4,963 common shares at
$1.10 per share for gross proceeds of $5,459. The carrying value of the warrants was $4,257.
(xx) On November 27, 2017, 25,000 stock options were exercised at $2.00 per share for gross
proceeds of $50,000.
(xxi) On November 30, 2017, the Company issued, on a private placement basis, 4,000,000 common
shares at $5.00 per share for gross proceeds of $20,000,000. The Company’s Agent for the
private placement was paid an Agent’s Fee of $1,100,000 and was issued Broker Warrants
equaling 5.5% of the number of common shares issued as part of the private placement. Total
transaction costs for the private placement were $1,552,535.
(xxii) During the year 13,504 broker warrants were exercised to purchase 13,504 common shares at
$2.00 per share for gross proceeds $27,008. The carrying value of the warrants was $11,343.
25
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
10. SHARE CAPITAL (continued)
Earnings per share have been calculated using the weighted average number of shares outstanding
during the year on a total outstanding and fully dilutive basis. The potential conversion of warrants
and stock options into common shares have a dilutive effect on earnings per share.
The calculation of diluted loss per share excludes the effects of various conversions and exercise of
options and warrants that would be anti-dilutive. The weighted average number of basic and diluted
shares and their respective earnings per share amounts are presented in the table below:
Numerator - basic and diluted earnings per share:
Net income (loss) and comprehensive income (loss)
$
6,885,430
$
(13,619,943)
2017
2016
Denominator - basic earnings per share:
Weighted average number of shares - basic
Denominator - diluted earnings per share:
Stock Options
Warrants
Weighted average number of shares - diluted
76,876,971
42,597,871
1,218,015
2,431,119
80,526,105
-
-
42,597,871
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
$
$
0.09
0.09
$
$
(0.32)
(0.32)
11. EMPLOYEE STOCK OPTION PLAN
The Company has an Employee Stock Option Plan (“ESOP”) that is administered by the Board of
Directors of the Company. The Board of Directors establishes expiry dates and exercise prices (at
not less than market price as determined by recent transactions) at the date of grant. Options under
the Plan are exercisable in increments of 1/3 on each of the first, second and third anniversaries from
the date of grant, except as otherwise approved by the Board of Directors. The maximum number of
common shares reserved for issuance for options that may be granted under the Plan is equal to 10%
of the issued and outstanding common shares.
The following is a summary of the changes in the Company’s ESOP options outstanding:
December 31, 2015 and 2016
Options granted
Options forfeited
Options exercised
December 31, 2017
Options issued
-
3,670,500
(119,500)
(25,000)
3,526,000
Weighted Average
exercise price
-
$
3.40
2.11
2.00
3.45
$
The weighted average share price for the options exercised had a fair value of $7.75 at the time of
exercise.
26
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
11. EMPLOYEE STOCK OPTION PLAN (continued)
The following is a summary of the outstanding stock options as at December 31, 2017.
Options Outstanding
We ighte d Average
Remaining Contractual Life
(years)
Exercise Price
per share
$
Options Exercisable
Exe rcise Price
per share
$
Number
Exercisable
375,000
-
-
-
-
-
-
-
-
-
-
-
-
375,000
2.00
2.20
2.28
3.00
3.50
4.58
4.65
5.20
6.21
7.85
8.10
8.35
9.00
3.45
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
9.1
2.00
-
-
-
-
-
-
-
-
-
-
-
-
2.00
Number
Outstanding
1,772,500
60,000
30,000
900,000
20,000
4,000
30,000
94,500
90,000
195,000
7,000
73,000
250,000
3,526,000
$
$
For the year ended December 31, 2017, the Company recorded $2,310,678 (December 31, 2016 –
Nil) in share-based compensation expense related to options which are measured at fair value at the
date of grant and expensed over the option’s vesting period. For the year ended December 31, 2016,
the Company recorded $72,000 in share-based compensation related to shares issued to employees.
In determining the amount of share-based compensation the Company used the Black-Scholes option
pricing model applying the following assumptions to establish the fair value of options granted during
the year:
Risk-free interest rate
Expected life of options (years)
Expected annualized volatility
Expected dividend yield
Exercise price (per share)
1.7% - 2.1%
9.1 - 10
73.1% - 175.7%
Nil
$2.00 - $9.00
Volatility was estimated by using the historical volatility of other companies having trading and
volatility history that the Company considers comparable. Comparable companies with lower
volatilities have been used for options granted by the Company after it was listed publicly. The
expected life in years represents the period of time that options granted are expected to be outstanding.
The risk-free rate was based on the zero-coupon Government of Canada bonds with a remaining term
equal to the expected life of the options.
27
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
12. RESERVE FOR WARRANTS
The following table reflects the continuity of warrants:
December 31, 2015
February 2016 Warrants issued with convertible debt (i)
December 2016 Warrants issued for the surrender of Put
Right (ii)
December 31, 2016
February 2017 Private Placement (iii)
February 2017 Warrants issued as partial consideration for
Private Placement (iv)
March 2017 Exercise of warrants (v)
August 2017 Share issuance on automatic conversion of
Special Warrants (iii)
September 2017 Exercise of warrants (vi)
November 30, 2017 Warrants issued as partial consideration
for Private Placement (vii)
Exercise of broker warrants (viii)
December 31, 2017
Number of
Warrants
1,636,202
18,598
1
1,654,801
12,584,100
Number of
common shares to
be issued on exercise
of warrants
2,636,200
18,598
$
Amount
1,949,501
15,922
Weighted
average
exercise
price
$
1.18
1.10
Weighted
average
remaining
life in years
1.67
3.16
1,000,000
3,654,798
12,584,100
$
1,061,975
3,027,398
23,099,955
$
1.30
1.21
2.00
594,390
(2)
594,390
(1,000,000)
499,169
(545,919)
(12,584,100)
(4,963)
(12,584,100)
(4,963)
(23,099,955)
(4,257)
2.00
1.30
2.00
1.10
220,000
(13,504)
2,450,722
220,000
(13,504)
3,450,721
396,741
(11,343)
3,361,789
$
5.00
2.00
1.56
$
1.98
1.76
1.13
2.64
1.92
1.13
2.17
(i)
In connection with the February 28, 2016 convertible debenture issuance, each debenture
holder was granted 4,545 warrants per debenture, exercisable by the holder for a period of 5
years from the closing date, at a price of $1.10 per common share. The warrants were valued
at $15,922 at the grant date using an option pricing model with the following assumptions: (i)
expected dividend yield of 0%; (ii) average expected volatility of 179%; (iii) average risk-free
interest rate of 0.56%; (iv) share price of $0.90; (v) forfeiture rate of 0; and (vi) expected life
of five years.
(ii) On December 23, 2016, a warrant to acquire 1,000,000 common shares at $1.30 per common
share was issued to Cannamed Financial Corp. as part of the consideration for the surrender by
Cannamed of its Put Right (Note 10(x)). The warrant is exercisable by the holder at any time
during the three-year period following its issuance. The warrant was valued at $1,061,975 at
the grant date using an option pricing model with the following assumptions: (i) expected
dividend yield of 0%; (ii) average expected volatility of 189%; (iii) average risk-free interest
rate of 1.1%; (iv) share price of $1.30; (v) forfeiture rate of 0; and (vi) expected life of three
years.
(iii) On February 16, 2017, the Company issued, on a private placement basis, 12,584,100 Special
Warrants at a price of $2.00 per Special Warrant for gross proceeds of $25,168,200. Each
Special Warrant was exercisable into one common share of the Company at no additional
consideration. The warrants were to be automatically exercised two business days following
the earlier of 12 months following the initial closing date and the date the common shares were
listed on a recognized stock exchange. The holder had the right to exercise any time prior to
the automatic exercise. The Company’s Agent for the Special Warrant Financing was paid an
Agent’s Fee of $1,188,780 equal to 6% of the gross proceeds to the Company from the
financing excluding those special warrants subscribed to by Employees of the Company and
other persons participating on a non-brokered basis. The Company also issued 75,000 common
shares to the Agent at a value of $150,000 and incurred other issuance costs of $230,296 for
total costs of $2,068,245 in connection with the issuance of the warrants.
28
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
12. RESERVE FOR WARRANTS (continued)
On August 17, 2017, in connection with the Company’s listing on the Canadian Securities
Exchange, 12,584,100 Special Warrants with a carrying value of $23,099,955 were
automatically converted into 12,584,100 common shares. There were no proceeds from the
conversion of Special Warrants to common shares.
(iv) As additional consideration to the Special Warrants issued on February 17, 2017, the
Company’s Agent was issued that number of Broker Warrants which is equal to 6% of the
number of Special Warrants sold pursuant to the Special Warrant Offering excluding those
Special Warrants subscribed to by Employees of the Company and other persons participating
on a non-brokered basis. The 594,390 warrants issued to the Company’s Agent are exercisable
by the Agent for a period of 2 years from the closing date at a price of $2.00 per common share.
The warrants were valued at $499,169 at the grant date using an option pricing model with the
following assumptions: (i) expected dividend yield of 0%; (ii) average expected volatility of
77%; (iii) average risk-free interest rate of 1.04%; (iv) share price of $2.00; (v) forfeiture rate
of 0; and (vi) expected life of two years.
(v) On March 9, 2017, 2 warrants were exercised to purchase 1,000,000 common shares at $1.30
per share for gross proceeds of $1,300,000. The carrying value of the warrants were $545,919.
(vi) On September 19, 2017, 4,963 warrants were exercised to purchase 4,963 common shares at
$1.10 per share for gross proceeds of $5,459. The carrying value of the warrants was $4,257.
(vii) On November 30, 2017, the Company issued, on a private placement basis, 4,000,000 common
shares at $5.00 per share for gross proceeds of $20,000,000. The Company’s Agent was issued
Broker Warrants equaling 5.5% of the number of common shares issued as part of the private
placement. The 220,000 warrants issued to the Company’s Agent are exercisable by the Agent
for a period of 2 years from the closing date at a price of $5.00 per common share. The warrants
were valued at $396,741 at the grant date using an option pricing model with the following
assumptions: (i) expected dividend yield of 0%; (ii) average expected volatility of 64%; (iii)
average risk-free interest rate of 1.43%; (iv) share price of $5.00; (v) forfeiture rate of 0; and
(vi) expected life of two years.
(viii) On December 4, 2017, 13,504 broker warrants were exercised to purchase 13,504 common
shares at $2.00 per share for gross proceeds $27,008. The carrying value of the warrants was
$11,343.
The weighted average share price for warrants exercised had a fair value of $2.00 at the time of
exercise.
13. COMMITMENTS
The Company’s commitments consist of the following:
Lease obligations
Total
Total
3,270,184
3,270,184
$
$
2018
527,597
527,597
$
$
2019
550,269
550,269
$
$
2020
551,299
551,299
$
$
2021
562,635
562,635
$
$
2022
562,635
562,635
$
$
Beyond
$
515,749
$
515,749
29
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
14. RELATED PARTY TRANSACTIONS
Convertible Debt
On March 15, 2017, a director of the Company converted $1,000,000 of convertible debt due on
demand and $68,161 of accrued interest into common shares.
In March 2017, the Company paid all of the accrued and outstanding interest on its convertible debt.
Included in this payment was $197,743 to related parties. On August 17, 2017, in connection with
the Company’s listing on the Canadian Securities Exchange, $1,030,000 of convertible debt and
$45,038 in accrued interest belonging to related parties was automatically converted into common
shares at $1.10 per share resulting in the issuance of 977,302 common shares. The carrying value of
the associated convertible debt was $494,117. The derivative liability on the convertible debt was
valued at $389,108 at December 31, 2016 and was valued at $842,798, prior to the automatic
conversion.
Key Management Compensation
The compensation of key management of the Company totaled $1,223,773 (2016 - $430,893) and
consisted of salaries, bonuses and director fees. There were 2,427,000 (2016 - Nil) stock options
valued at $6,620,570 issued to key management and directors during the year ended December 31,
2017. 25,000 of these stock options were exercised in 2017. Director fees of $32,839 were unpaid
and included in accounts payable at December 31, 2017. Key management includes those persons
having authority and responsibility for planning, directing and controlling the activities, directly or
indirectly, of the Company.
Other related party transactions
During the year the Company incurred $378,674 (2016 - $590,000) of management fees to related
parties of which $26,667 (2016 - $266,500) was unpaid and included in accounts payable at
December 31, 2016. During the year, 100,000 common shares were issued as consideration of
management fees valued at $200,000 (2016 - $525,000). The Company incurred legal fees of
$549,387 (2016 - $27,501) relating to corporate services provided by a firm at which a director of the
Company is a partner.
15.
JOINT VENTURE
On July 15, 2015, the Company entered into a joint venture with Club Coffee L.P., in which each
entity holds 50% of the outstanding shares of Cannabis Coffee & Tea Pod Company Ltd (the Joint
Venture). The Joint Venture will have access to patents and IP developed by CannTrust and Club
Coffee and will build a network of licensees who will be licensed to manufacture product using
patents and Intellectual Property owned by the Joint Venture. The cost of the investment was nominal.
During the year, the Joint Venture had a net loss and comprehensive loss after tax of $294,112 (2016
- $294,884) of which $147,056 (2016 - $147,442) was the Company’s share. The Company’s interest
in the Joint Venture was recorded as an equity accounted investment of $156,073 as at December 31,
2017 (2016 - $19,313). Included in the investment balance is the cumulative net loss of $294,498
(2016 - $147,442) and a net receivable of $450,571 (2016 - $166,755) of which $283,816 was
advanced during the year ending December 31, 2017. Refer to Subsequent Events Note 20 (ii).
30
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
16.
INCOME TAXES
The income tax provision recorded differs from the income tax obtained by applying the statutory
income tax rate to the income for the year and is reconciled as follows:
Net income (loss) before income taxes
Combined federal and provincial statutory income tax rate
Tax expense (recovery) at statutory rate
2017
6,885,430
26.5%
1,824,639
$
$
2016
(13,619,943)
26.5%
(3,609,285)
$
$
Non-deductible expenses and other permanent differences
Change in deferred tax assets not recognized
Other
Deferred income tax expense
1,540,457
(3,238,475)
(126,621)
$
-
1,588,058
2,021,227
-
$
-
As at December 31, 2017, the Company has not recognized a deferred tax asset in respect of its
deductible temporary differences and past losses incurred as it has not been demonstrated that the
Company will be able to generate sufficient future taxable income to utilize this tax asset over a
reasonable period of time.
Deferred Tax
Undepreciated Capital Cost in excess of book value
Reserves and loss carry-forwards
Biological assets and inventory
Share issue costs
Deferred tax asset not recognized
$
2017
606,812
4,661,627
(5,180,989)
120,817
(208,267)
$
-
$
2016
691,502
4,152,511
(1,494,943)
97,672
(3,446,741)
$
-
The expiry of the Company’s non-capital losses are as follows:
2033
2034
2035
2036
2037
$
186,270
4,416,211
5,134,335
5,933,035
1,921,193
17,591,044
$
31
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
17. FINANCIAL INSTRUMENTS
Financial Risk Management Objectives and Policies
The Company manages its exposure to a number of different financial risks arising from its
operations as well as its use of financial instruments including market risks (foreign currency
exchange rate and interest rate), credit risk and liquidity risk through its risk management strategy.
The objective of the strategy is to support the delivery of the Company's financial targets while
protecting its future financial security and flexibility.
Financial risks are primarily managed and monitored through operating and financing activities. The
financial risks are evaluated regularly with due consideration to changes in the key economic
indicators and up-to-date market information.
A summary of the Company's risk exposures as it relates to financial instruments are reflected below:
Interest Rate Risk
Interest rate risk is the risk that the cash flows of a financial instrument will fluctuate due to changes
in market interest rates. The Company has no exposure to interest rate risk as all of the Company’s
convertible debt was converted into common shares in connection with the Company listing on the
Canadian Securities Exchange.
As at December 31, 2017, the Company had $200,000 (December 31, 2016 - Nil) in short-term
investments held with a large Canadian financial institution. The GIC was issued on January 4, 2017
and matures on January 4, 2020. The Company redeems amounts as required to fund its ongoing
working capital requirements. The GIC is redeemable without penalty on the 15th of each month.
There is minimal interest rate risk associated with the instrument.
Liquidity Risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated
with financial liabilities. As at December 31, 2017, the Company had accounts payable and accrued
liabilities and
the current portion of promissory note of $6,779,997 (December 31,
2016 - $3,570,965, which included convertible debt due on demand), and cash, short-term
investments, HST recoverable and accounts receivable of $20,959,674 (December 31,
2016 - $5,132,152) to meet its current obligations.
The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements.
During the year ended December 31, 2017, the Company completed two private placements for gross
proceeds of $46,188,200.
32
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
17. FINANCIAL INSTRUMENTS (continued)
In addition to the commitments disclosed in Note 13, the Company is obligated to the following
contractual maturities of undiscounted cash flows:
As at December 31, 2017
Accounts payable and accrued liabilities
Promissory Note
Total
Credit Risk
$
Carrying
amount
6,579,997
1,000,000
7,579,997
$
$
Year 1
6,579,997
200,000
6,779,997
$
Year 2-3
$
-
400,000
400,000
$
Years 4
and after
$
-
400,000
400,000
$
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails
to meet its contractual obligations. The Company is not exposed to significant credit risk as the
Company’s sales are typically paid at the time of transaction with an immaterial balance to be
collected subsequently.
The carrying amount of cash and cash equivalents, short-term and restricted cash and accounts
receivable represents the maximum exposure to credit risk. At December 31, 2017, this amounted to
$18,423,729 (December 31, 2016 - $5,060,160). Since the inception of the Company, no losses have
been suffered in relation to cash at the Bank.
18. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to:
Maintain a capital structure that allows it to finance its growth strategy with cash flows from
its operations;
Preserve its ability to meet its financial obligations by funding the capital needs via private and
public sources; and
Optimize the use of capital to provide an appropriate return on investment to its shareholders.
The Company defines its capital as shareholders’ equity.
The Company is not subject to externally imposed capital requirements and there has been no change
with respect to the capital management strategy during the year ended December 31, 2017.
33
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
19. REDEEMABLE SHARES
Cannamed Financial Corp. had an option to send a put notice to the Company requiring the Company
to purchase all of the shares in the capital of the Company then owned by Cannamed Financial Corp.
The purchase price payable to Cannamed Financial Corp. was the fair market value as of the date
Cannamed Financial Corp. issued the put notice. Cannamed Financial Corp could exercise its put
option at any time from and after the earlier of: (a) January 31, 2019, (b) a period of ten business days
immediately following each anniversary after January 31, 2019 and (c) six months following the sale
by the Company of all or substantially all of its assets where the Company has not distributed the
proceeds of sale to the shareholders.
December 31, 2015
October 2016 preference share exchange (i)
Loss on revaluation of redeemable shares (ii)
Settlement of redeemable shares (iii)
December 31, 2016 and 2017
Redeemable Shares
Number of Shares
8,909,090
11,365,055
-
(20,265,145)
$
Amount
8,793,398
10,220,450
9,806,882
(28,820,730)
-
$
-
i) On October 30, 2016, the Company entered into separate agreements with all of the Class A
preference shareholders of CannTrust Inc. to issue to them an aggregate of 20,395,372 common
shares of the Company, in exchange for the transfer by them to the Company an aggregate
number of 7,175,001 Class A preference shares of CannTrust Inc. 11,356,055 of these common
shares were issued to Cannamed Financial Corp. and were classified as redeemable shares in
accordance with the Unanimous Shareholders’ Agreement.
ii) Redeemable Shares are measured at fair value, with any resulting gain or loss recognized in
profit or loss. The redeemable shares were revalued at each reporting period until settlement.
iii) On December 23, 2016, 2,000,000 common shares with a fair value of $2,600,000 and a
warrant to acquire 1,000,000 common shares at $1.30 per common share for three years with a
fair value of $1,061,975, were issued to Cannamed Financial Corp. in consideration for the
surrender by Cannamed Financial Corp. of its put rights under the Unanimous Shareholders’
Agreement. Upon settlement, 20,265,145 redeemable shares with a fair value of $28,820,730
were reclassified as common shares and a loss on settlement of $3,661,975 was recognized in
the accumulated deficit.
34
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
20. SUBSEQUENT EVENTS
i)
Cannabis Coffee & Tea Pod Company Ltd. (“CCTP”), the corporation through which the
Company participates in a Joint Venture (see Note 15), held certain US License Agreements
for the use of its intellectual property rights related to US patents.
As a condition of permitting the Company to trade its Common shares on the TSX, the TSX
required of the Company that the two license agreements entered into by CCTP with
Lighthouse Strategies LLC and Silver State Wellness LLC in respect of certain geographic
areas of the United States of America (collectively, the “US License Agreements”), be assigned
to an entity in which the Company does not have an economic interest therein.
Accordingly, on January 22, 2018 the Company and the other party to the Joint Venture, Club
Coffee, agreed to amend the Shareholder’s Agreement in which the parties agreed to assign the
US License Agreements to a related party of the Joint Venture in which the Company has no
economic interest. In exchange CCTP received the option at the Company’s sole decision and
after having met certain pre-stipulated conditions, to repurchase the US License Agreements
for a nominal amount. These conditions are:
a) marijuana being legalized federally in the United States of America, and/or
b) the TSX revising its rules such that it no longer has a prohibition against its listed
companies having an interest in US assets which are involved in the marijuana business,
and/or
c)
the Common shares of the Company are involuntarily delisted from the TSX, and/or
d) control of the Company is acquired by another entity, provided that the shares of the
Company will be delisted from the TSX upon the change of control.
The transaction constitutes a disposal of the US License and IP whereby the Company is no
longer entitled to any future economic benefits from the US Licenses and IP until such time
that the option to reassign is exercised.
ii)
iii)
In January 2018, 175,000 stock options were exercised by related parties to purchase 175,000
common shares of the Company at $2.00 per share for gross proceeds of $350,000.
In February 2018, the Company secured $15,000,000 of mortgage financing on the Niagara
Greenhouse Facility. On closing $10,000,000 was advanced to the Company with the
remaining $5,000,000 to be advanced following the completion of the Greenhouse Phase 2.
iv) On March 2, 2018 the Company delisted from the Canadian Stock Exchange and commenced
trading on the Toronto Stock Exchange effective March 5, 2018.
v) On March 7, 2018, the Company executed a long-term agreement with Envest Corp. to provide
cogeneration derived heat and power at its 430,000 square foot Greenhouse Facility.
35
CannTrust Holdings Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
(in Canadian dollars)
20. SUBSEQUENT EVENTS (continued)
vi) On March 8, 2018, the Company executed a Joint Venture agreement with a Danish Company
(“Stenocare”). The Company received a 25% equity stake in Stenocare together with the right
to appoint half of its Board of Directors. Stenocare is one of the first Danish companies to
receive its license to grow and produce medical cannabis, as well as to import and sell cannabis
products in Denmark.
vii) Subsequent to the year end 561,406 broker warrants were exercised to purchase 561,406
common shares of the Company at $2 per share for gross proceeds of $1,122,812 and 847,185
broker warrants were exercised to purchase 847,185 common shares of the Company at $1.10
per share for gross proceeds of $931,904.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
This following Management's Discussion and Analysis provides a review of the financial condition
and results of operations for CannTrust Holdings Inc. (the "Company" or “CannTrust”) for the
year ended December 31, 2017 (the "MD&A"). This MD&A should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for the year ended
December 31, 2017 (“Financial Statements”). The financial information presented in this MD&A
is derived from the Financial Statements. This MD&A contains forward-looking information that
involve risks, uncertainties and assumptions, including statements regarding anticipated
developments in future financial periods and our plans and objectives. There can be no assurance
that such information will prove to be accurate, and readers are cautioned not to place undue
reliance on such forward-looking information. In addition, the Company expressly disclaims any
obligation to publicly update or alter its previously issued forward-looking information.
In this document and in the Company’s Financial Statements unless otherwise noted, all financial
data is prepared in accordance with International Financial Reporting Standards (“IFRS”). All
amounts, unless specifically identified as otherwise, both in the Financial Statements, and in the
MD&A, are expressed in Canadian dollars. Unless otherwise stated all dollar amounts in the
tables in this MD&A are in thousands of Canadian dollars (other than per share amounts and
operating statistics).
This MD&A refers to certain non-IFRS financial measures. These measures are not recognized
measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore
unlikely to be comparable to similar measures presented by other companies. Rather, these
measures are provided as additional information to complement those IFRS measures by
providing further understanding of the Company's results of operations from management's
perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis
of financial information reported under IFRS. The Company uses Adjusted EBITDA, a non-IFRS
financial measure, as a supplemental measure of operating performance and thus highlight trends
in core business that may not otherwise be apparent when relying solely on IFRS financial
measures. The Company believes that securities analysts, investors and other interested parties
frequently use non-IFRS financial measures in the evaluation of issuers. The Company’s
management also uses this non-IFRS financial measure to facilitate operating performance
comparisons from period to period, prepare annual operating budgets and assess the Company’s
ability to meet capital expenditure and working capital requirements. See "Selected Information"
and "Non-IFRS Financial Measure Reconciliation in this MD&A".
The discussion and analysis in this MD&A is based on information available to management as of
March 29, 2018.
1
Overview
The Company is a publicly traded corporation incorporated in Canada with its head office located
at 3280 Langstaff Road, Vaughan, Ontario L4K4Z8. The Company is the parent company of
CannTrust Inc. ("CannTrust Opco") and Elmcliffe Investments Inc. ("Elmcliffe").
CannTrust Opco is a Licenced Producer and distributor of medical cannabis pursuant to the
provisions of the Access to Cannabis for Medical Purposes Regulations (Canada) ("ACMPR").
CannTrust Opco received its license from Health Canada on June 12, 2014 and began production
of medical cannabis at its state-of-the-art hydroponic indoor facility in Vaughan, Ontario (the
“Vaughan Facility”). The Company's primary focus is to produce and deliver the highest quality,
standardized, pharmaceutical grade cannabis products and in so doing strengthen its market share
in legal cannabis markets in Canada and to establish positions for its products in legal cannabis
markets abroad.
Public health concerns and awareness around the dangers of opioids are expected to drive
development of alternative approaches to pain management, creating a significant market
opportunity for cannabis-based products, and could drive substantial upstream demand for
Licensed Producers. The development of pharmaceuticals based on cannabis could significantly
expand the addressable market by ensuring consistent, quantifiable dosing, which should help
physicians gain comfort in prescribing it.
As part of its growth strategy, the Company has also entered into an exclusive joint venture with
Apotex Inc., Canada’s largest and seventh largest generic pharmaceutical manufacturer in the
world, to develop novel dosage formats and products for sale, when permitted, into more than 85
countries where Apotex currently already has market share.
The Company is working to diversify its business by developing new and innovative products and
dosage forms for controlled and responsible use of medical cannabis. In 2015, the Company
together with Club Coffee L.P founded Cannabis Coffee & Tea Pod Company Ltd. ("CCTPC") to
launch BrewBudz™ globally. BrewBudz™ is a patented unit dose pod formulation allowing the
administration of cannabis using single-serve brewing pods for use in Keurig, Nespresso, and
Tassimo type brewers.
In July 2017, further to the Company's Canadian Patent Application, the Canadian Intellectual
Property Office issued a Notice of Allowance to CannTrust Opco and Club Coffee L.P. with
respect to single-serve containers for use in brewing a cannabis-based beverage. CCTPC has also
submitted patent applications in the European Union, Australia and China which are similar to the
CCTPC Patents.
In March 2017, through Elmcliffe, the Company acquired the real estate assets and related
equipment of a Greenhouse in the Town of Fenwick, Ontario within the Niagara Region (the
"Greenhouse Facility"). In October 2017, CannTrust Opco received its Health Canada Cultivation
Licence under the ACMPR for its completed 250,000 square foot Phase 1 redevelopment of its
430,000 square foot Greenhouse Facility and began production there. Phase 1 was completed both
2
on budget and on time. The Company received its Health Canada Sales License for Phase 1 in
February 2018.
The planned Phase 2 expansion at the Greenhouse Facility is currently underway and is anticipated
to be completed and in cultivation towards the middle of 2018. Phase 1 and 2 should conservatively
provide the Company with an additional 40,000 kilograms of annual growing capacity. In addition,
the 36 acres of unused land at this facility provides the Company with the ability for significant
future expansion. On November 6, 2017, CannTrust Opco received Health Canada approval to
export medical marijuana internationally to countries where medical marijuana is legalized and
the Company began shipping to Australia. Australia is the first of many markets that the Company
is expecting to supply. In March 2018, CannTrust expanded internationally through a joint venture
in Denmark with Stenocare. Initially Stenocare will sell CannTrust’s market leading standardized
cannabis products in Denmark while working towards developing a domestic growing facility.
CannTrust received a 25% equity stake in Stenocare. Other countries that the Company anticipates
shipping to shortly are Germany, Mexico and Brazil. With the completion of all phases of the
Niagara expansion, the Company will have the ability to supply a substantial share of the increased
demand arising from these new markets.
In February 2017, the Company, on a private placement basis, issued 12,584,100 special warrants
at a price of $2.00 per Special Warrant pursuant to prospectus exemptions under applicable
securities legislation. The Company subsequently filed its Prospectus with applicable securities
commissions in Canada in order to qualify the distribution of 12,584,100 common shares of the
Company issuable for no additional consideration upon exercise or deemed exercise of the
12,584,100 special warrants. The Prospectus received a final receipt on August 11, 2017 and on
August 17, 2017 all of the Special Warrants were exercised and 12,584,100 common shares of the
Company were issued for no additional consideration.
On August 21, 2017, the Company's common shares (the "Common Shares") were listed and began
trading on the Canadian Securities Exchange (the "CSE") under the trading symbol "TRST". Upon
listing of the Company's Common Shares on the CSE the $3,040,919 principal amount of the
Company's convertible debentures together with accrued and unpaid interest were automatically
converted into 2,885,354 Common Shares of the Company.
On November 1, 2017, the Company announced that it had reached an agreement with a syndicate
of underwriters pursuant to which the Underwriters agreed to purchase on a bought deal basis,
3,500,000 common shares of the Company, at a price of $5.00 per Common Share for aggregate
gross proceeds to the Company of $17,500,000. The Company granted the Underwriters an Over-
Allotment Option to purchase up to 500,000 additional Common Shares of the Company on the
same terms as the Offering. The Underwriters exercised the Over-Allotment Option in full. The
bought deal private placement financing closed on November 30, 2017 with the Company issuing
4,000,000 common shares for gross proceeds of $20,000,000. The net proceeds of the Offering are
being used to fund the Phase 2 build out of the Company’s licensed Greenhouse Facility and for
general corporate and working capital purposes.
3
In February 2018, the Company secured $15,000,000 of mortgage financing on the Greenhouse
Facility. On closing $10,000,000 was advanced to the Company with the remaining $5,000,000 to
be advanced following the completion of Phase 2.
On March 5, 2018, the Company’s common shares commenced trading on the Toronto Stock
Exchange (the “TSX”) under the trading symbol “TRST”. In conjunction with the listing on the
TSX, the common shares of the Company were voluntarily delisted from the CSE. As part of its
application to list on the TSX, CannTrust agreed to assign its interest in the United States
intellectual property and corresponding licensing arrangements held by the joint venture company
CCTPC. The assignment was made to an affiliated company of CannTrust’s joint venture partner
Club Coffee for $1. The parties agreed that the US interests shall be assigned back to CCTPC for
$1 in certain circumstances, including (i) marijuana being legalized federally in the United States,
and/or (ii) the TSX revising its rules such that it no longer has a prohibition against its listed
companies having an interest in US assets which are involved in the marijuana business, and/or
(iii) the Common shares of the Company are involuntarily delisted from the TSX, and/or (iv)
control of the Company is acquired by another entity, provided that the shares of the Company
will be delisted from the TSX upon the change of control.
The Reorganization
CannTrust Opco was incorporated under the OBCA on August 16, 2013. The Company was
incorporated under the OBCA on March 16, 2015.
Prior to the reorganization, shareholders of CannTrust Opco held 7,175,001 Class A preference
Shares, 4,000,000 of which were classified as redeemable shares, and 38,427,625 common shares,
8,909,090 of which were classified as redeemable shares. On April 30, 2015, the Company and
CannTrust Opco completed a corporate reorganization pursuant to which substantially all of the
holders of common shares of CannTrust Opco exchanged their holdings of common shares of
CannTrust Opco for Common Shares, 8,909,090 of which were classified as redeemable shares.
This resulted in CannTrust Opco becoming a subsidiary of the Company.
On October 30, 2016, the Company completed a further corporate reorganization pursuant to
which all of the holders of the Class A preference shares of CannTrust Opco, including the
4,000,000 classified as redeemable shares, exchanged their Class A preference shares of
CannTrust Opco for 9,039,317 Common Shares and 11,365,055 redeemable shares of the
Company. On November 23, 2016 the remaining common shareholders of CannTrust Opco
exchanged their common shares of CannTrust Opco for Common Shares resulting in CannTrust
Opco becoming a wholly-owned subsidiary of the Company.
In December 2016, all of the redeemable shares were reclassified as Common Shares and included
as Equity.
4
Selected Quarterly Financial Information
(CDN $000's, except per share amounts and unless otherwise noted)
2017
2016
Revenue
Net income (loss)
Income (loss) per share
$
Q4
6,983
6,253
0.08
$
Q3
6,141
655
0.01
$
Q2
4,541
755
0.01
$
Q1
3,033
(778)
(0.01)
Q4
2,096
$
(8,260)
(0.15)
Q3
Q2
Q1
787
$
(3,106)
(0.10)
798
$
(1,566)
(0.05)
$
701
(688)
(0.02)
“Q1” refers to the three months ended March 31; “Q2” refers to the three months ended June 30; “Q3” refers to the
three months ended September 30; “Q4” refers to the three months ended December 31; “2017” and “2016” refer to
the twelve month fiscal years ended December 31, 2017 and 2016.
2017 Fourth Quarter Highlights
Record revenues of $7.0M with approximately 37,000 active patients
Operations for the quarter resulted in positive Net Income
Sold 296,200 g of dried medical cannabis at an average gross price of $9.18 per gram
Sold 2,185,040 ml of oils at an average gross selling price of $90 per 40 ml bottle
Cannabis extracts increased to over 64% of cannabis sales
Completed the 250,000 square foot Phase 1 redevelopment of the Greenhouse Facility and
the Company received its Health Canada Cultivation License in respect thereof
Completed the first harvest at the Greenhouse Facility
Received Health Canada’s approval to export medical marijuana internationally
Closed a bought private placement for gross proceeds of $20M
Secured $15M of mortgage financing on the Greenhouse Facility, which was finalized
subsequent to the quarter in February 2018
5
Results of Operations for the three and twelve months ended December 31, 2017 and 2016
The results presented and referred to below include the results of the Company and its wholly
owned subsidiaries CannTrust Opco and Elmcliffe.
Selected Information
(CDN $000's, except per share amounts and unless otherwise noted)
Three months ended
December 31
Twelve months
ended December 31
2017
2016
2017
2016
$
$
$
$
6,983
2,096
20,698
4,382
1,635
1,079
10,427
1,028
Financial Data
Revenue
Gross profit before unrealized gain on
changes in the Fair Value of Biological
Assets
Net Income (Loss)
6,253
(8,260)
6,885
(13,620)
Earnings (Loss) per share (basic and
diluted)
Cash inflows (outflows) from operations
Adjusted EBITDA (loss) (1)
0.08
924
(1,667)
(0.15)
0.09
(0.32)
115
139
(502)
41
(1,997)
(2,750)
Operating Statistics
Dried marijuana sold (g)
Average Revenue per gram (net)
Sales of oils (ml)(2)
Average selling price per ml (net)
Total dried marijuana equivalent sold from
oil (g)(3)
296,200
200,475
1,026,870
619,885
$8.14
$7.39
$8.31
$5.72
2,185,040
273,880
5,594,000
299,360
$1.97
$1.96
$2.02
$1.96
461,469
83,387
1,206,349
91,155
Average Revenue per gram of marijuana
equivalent from oil sales (net)
Notes:
(1) See description of non-IFRS measure in the "Non-IFRS Financial Measure and Reconciliation" section of this MD&A. The term Adjusted
EBITDA does not have any standardized meaning under IFRS and therefore it may not be comparable to similar measures presented by other
companies.
(2) Sales of CannTrust Oils began in August 2016.
(3) Dried equivalent of medical marijuana is calculated on the basis of 4.73 ml of oils equivalent to 1 g of dried medical marijuana for the three
months ended December 31, 2017 compared to 3.28 ml of oils equivalent to 1 g of dried medical marijuana for the three months ended December
31, 2016. The increase is a result of improvements and refinements to the extraction process.
$6.43
$9.34
$9.39
$6.43
6
Review of the Financial Results of Operations for the three and twelve months ended
December 31, 2017 and 2016
Revenue
Revenue for the quarter ended December 31, 2017 was $6,982,917 compared to $2,095,993 for
the comparable 2016 period. Revenue for the year ended December 31, 2017 totalled $20,697,764
compared to $4,382,088 in the 2016 period. The increase in revenue in the quarter and the year
ended December 31, 2017 was attributable to increased sales volumes primarily due to the growth
in the Company's patient base from approximately 10,000 at December 31, 2016 to over 37,000 at
December 31, 2017.
The total quantity of medical cannabis sold to patients during the year ended December 31, 2017
increased 214% to 2,233 kg from the comparable prior year period. During the year ended
December 31, 2017 the Company sold 5,594,000 ml of cannabis oils compared to 299,360 ml in
the comparable 2016 period.
Cost of Sales
Cost of goods sold during the three and twelve months ended December 31, 2017 were $4,679,338
and $9,017,787 respectively, compared to $603,628 and $2,499,851 in the comparable prior year
periods. Cost of goods sold includes production and processing costs of cannabis and inventory
purchased from third parties. Costs of goods sold during the three months and year ended
December 31, 2017 increased compared to the comparable 2016 periods due to increases in the
staff compliment and facility costs related to increases in production and the one-time start-up
costs associated with the Phase 1 Greenhouse Facility. In addition during our most recent quarter
a number of regular grow rooms at our Vaughan Facility were used to harvest Mother Plants for
Phase 1 of the Greenhouse Facility. As a result cost of goods sold during the three months ended
December 31, 2017 were impacted by the increase in product costs associated with one-off third
party product purchases. These third party product purchases were used by the Company as a
replacement and a bridge to meet the increase in demand for the Company’s product. In November
2017 Phase 1 was granted its Health Canada Cultivation Licence and in February 2018 obtained
its Sales Licence.
Plants that are in pre-harvest are considered biological assets and are recorded at fair market value
less cost to sell at their point of harvest. Costs to sell include trimming, fulfillment, testing,
partnership commissions and shipping costs. As they continue to grow through the pre-harvest
stages, a corresponding non-cash unrealized gain is recognized in gross profit, reflecting the
changes in fair value of the biological assets. At harvest, the biological assets are transferred to
inventory at their fair value less cost to sell which becomes the deemed cost of inventory.
Biological assets inventory is later expensed as ‘Fair Value changes in biological assets included
in inventory sold’. Together the gain from changes in the fair value of biological assets, the Fair
Value changes in biological assets included in inventory sold and cost of goods sold are included
in gross profit. The unrealized gain from changes in the fair value of biological assets will vary
from period to period based upon the number of pre-harvest plants, where the plants are in the
grow cycle at the end of the period and the strains being grown.
7
The fair value changes in biological assets included in inventory sold, net of the unrealized gain
on changes in fair value of biological assets, in the three and twelve months ended December 31,
2017 was a gain of $9,400,818 and $13,553,081 respectively, compared to a gain of $2,603,050
and $2,498,610 for the comparable 2016 periods. Harvested production quantities during the 2017
year were approximately 187% greater than the quantities harvested in the prior year.
Gross Profit
The gross profit for the three and twelve months ended December 31, 2017 was $11,035,579 and
$23,980,073 respectively, compared to a gross profit of $3,681,880 and $3,526,705 in the
comparable prior year periods. Gross profit includes the unrealized gains on changes in the fair
value of biological assets. The increase in gross profit was principally due to the increase in sales
and the relative size of the unrealized gain from changes in the fair value of biological assets. The
Company continually refines its production processes in order to increase production yields and
gross margins.
Expenses
Expenses include general and administrative, management fees, marketing and promotion,
professional fees, rent and facilities, salaries and benefits and selling and shipping costs.
Expenses for the three and twelve months ended December 31, 2017 were $3,925,304 and
$11,492,036 respectively, compared to $1,223,967 and $4,484,458 in the prior year comparable
periods. The increase in expenses in the 2017 periods was due mainly to increases in general and
administrative expenses, selling and shipping costs and salaries and benefits, including staff
performance bonuses paid in the fourth quarter, as the Company increased its staff complement to
meet the increase in demand for the Company's products. In addition, professional fees increased
as a result of the additional legal and accounting work required relating to the Company’s 2017
listing on the CSE.
Amortization Expense
Amortization expense for the three and twelve months ended December 31, 2017 were $655,491
and $2,217,381 respectively, compared to $157,193 and $1,233,892 in the prior year comparable
periods. As at December 31, 2017 $385,950 (December 31, 2016 - $237,060) of amortization was
capitalized to ending inventory. The increase in amortization expenses in 2017 was due to an
increase in amortization on equipment purchases during the year and the purchase of the
Greenhouse Facility and the building enhancements thereto during the latter half of the year. The
balance of amortization in the three and twelve months ended December 31, 2017 and 2016 related
to leasehold improvements, equipment and other assets at the Vaughan Facility.
Share-based compensation
For the three and twelve month periods ended December 31, 2017 share-based compensation
expense was $850,086 and $2,310,678 respectively, compared to Nil and $72,000 for the
corresponding 2016 periods. The 2017 share-based compensation was attributable to the 3,670,500
8
stock options granted to employees and Directors which are measured at fair value at the date of
grant and expensed over the option's vesting period. The 2016 share-based compensation was
attributable to the issuance by the Company of 80,000 Common Shares to employees of the
Company.
Finance Activities and Transaction Costs
For the three and twelve months ended December 31, 2017 interest expense was $39,629 and
$260,203 respectively. This compares to interest expense of $155,088 and $473,961 in the
comparable prior year periods. Other income consisted of interest income of $64,678 earned during
the current quarter and a one-time recovery of $78,382 in the prior quarter.
Accretion expense for the three and twelve month periods months ended December 31, 2017, being
the difference in the actual cost on the Company's convertible debt compared to the imputed
interest rate, was $Nil and $233,716 respectively, compared to $84,082 and $276,413 in the
comparable 2016 periods. In August 2017 all of the outstanding convertible debt was converted
into common shares of the Company.
In the three and twelve months ended December 31, 2016 there were accrued distributions on the
CannTrust Opco preference shares of $145,669 and $1,355,022 respectively. In October 2016 all
of the holders of the Class A preference shares exchanged their Class A preference shares,
including all accrued and unpaid distributions thereon, into Common Shares.
Transaction costs of $204,282 for the twelve months ended December 31, 2017 represent the cost
associated with the March 2017 purchase of the Greenhouse Facility. Transaction costs in the
comparable 2016 period represent the cost of the issuance of Common Shares as part of the
Company’s bridge financing arrangements.
The gain (loss) on revaluation of the derivative liability, being the change in value attributable to
the conversion feature on the Company's convertible debt, for the three and twelve months ended
December 31, 2017 was $Nil and ($1,625,336) respectively, compared to a loss of ($622,757) for
the three months ended December 31, 2016 and a gain of $245,657 in the twelve months ended
December 31, 2016. The $3,040,919 principal amount of the Company's convertible debentures
together with accrued and unpaid interest was automatically converted into 2,885,354 Common
Shares of the Company upon the August 2017 listing of the Company's Common Shares on the
CSE.
Under the terms of the Company's unanimous shareholders agreement, Cannamed Financial Corp.
had an option to send a put notice to the Company requiring the Company to purchase all of the
shares in the capital of the Company owned by Cannamed Financial Corp. at a purchase price
equal to the fair market value as of the date of the put notice. Accordingly all of the shares owned
by Cannamed Financial Corp. were classified as redeemable shares and measured at fair value
with any resulting gain or loss recognized in profit and loss. As a result, the Loss on revaluation
of redeemable shares for the year ended December 31, 2016 was $9,806,882. On December 23,
2016, 2,000,000 common shares with a fair value of $2,600,000 and a warrant to acquire 1,000,000
common shares at $1.30 per common share for three years with a fair value of $1,061,975, were
9
issued to Cannamed Financial Corp. in consideration for the surrender by Cannamed Financial
Corp. of its put rights under the Unanimous Shareholders’ Agreement.
Income Tax
The Company’s statutory tax rate is 26.5%. As at December 31, 2017 the Company has not
recognized any deferred tax and a related deferred tax asset in respect of the tax losses incurred to-
date as the Company has not yet demonstrated that it will be able to generate future taxable income.
These losses will be available to offset future taxes.
Net Income/Net Loss
Net income for the three and twelve months ended December 31, 2017 was $6,253,161 and
$6,885,430 respectively, compared to a net loss of ($8,260,098) and ($13,619,943) in the
comparable 2016 periods. During the three and twelve months ended December 31, 2016
($130,041) and ($804,784) respectively of this net loss was attributable to CannTrust's Opco's non-
controlling interest. In November 2016 the non-controlling shareholders of CannTrust Opco
exchanged their shares for Common Shares of the Company resulting in CannTrust Opco
becoming a wholly-owned subsidiary of the Company. Earnings (loss) per share as calculated is
based on the weighted number of shares of the Company outstanding during the relevant periods.
Capital Projects
In March 2017, the Company, through its wholly-owned subsidiary Elmcliffe, completed the
acquisition of a 430,000 square foot commercial Greenhouse Facility in the Niagara region for
cash consideration of $6,500,000. In addition, an unsecured promissory note in the amount of
$1,000,000, payable over five years in five consecutive payments of $200,000, was issued to the
Vendor. The Greenhouse Facility will provide the Company with increased production capacity
to meet growing market demand. The Greenhouse Facility, once fully converted to cannabis
production, will provide the Company with the capacity to produce in excess of 40,000 kg of
additional medical cannabis per year. The 250,000 square foot first phase of the conversion to
ACMPR standards which commenced in April 2017 was completed in the fall of 2017 on time and
on budget. The Company received its Health Canada License under the ACMPR on October 6,
2017 for the Phase 1 redevelopment. The Company has completed multiple harvests at the
Greenhouse Facility subsequent to December 31, 2017 and on February 12, 2018 obtained its
Health Canada sales license under the ACMPR. Phase 1 provides the Company with the capacity
to produce up to 20,000 kilograms of additional medical cannabis per year. The Phase 2 expansion
at the Greenhouse Facility, at an estimated cost of $16.5 million, is currently underway and is
anticipated to be completed and in cultivation towards the middle of 2018. In addition, the 36 acres
of unused land at this facility provides the Company with the ability for significant future
expansion. Phase 1 and 2 should conservatively provide the Company with an additional 40,000
kilograms of annual growing capacity as the Company positions itself to capitalize on the increased
demand expected to arise as a result of the anticipated 2018 legalization of adult consumer
recreational use of cannabis and the export of medical cannabis to countries where it has been
legalized.
10
Liquidity and Capital Resources as at December 31, 2017 and December 31, 2016 and for
the periods ended December 31, 2017 and 2016
Operating cash flow and equity and debt financings are the Company's primary source of liquidity.
At December 31, 2017 cash and cash equivalents were $18,162,581 compared to $4,895,145 as at
December 31, 2016.
Set out below is a schedule of the Company's Working Capital as at December 31, 2017 and
December 31, 2016.
Current Assets
Current Liabilities
Working Capital
Ratio of current assets to current liabilities
December 31,
2017
December
31, 2016
$000s
$000s
44,228
6,780
37,448
6.5
11,625
3,571
8,054
3.3
Working capital is primarily represented by cash, short-term investments, accounts receivable,
inventory, biological assets, harmonized sales tax recoverable and prepaids, offset by accounts
payable and the current portion of the promissory note issued on the Greenhouse Facility
acquisition. The Company's working capital increased by $29,394,005 to $37,447,895 as at
December 31, 2017 compared to $8,053,890 at December 31, 2016. The increase in working
capital in the twelve months ended December 31, 2017 was primarily due to the net increase in
cash from the February 2017 Special Warrant and Common Share financing, the November 2017
private placement and the exercise of Warrants, together with an increase in inventory, biological
assets and prepaids and the elimination of the convertible debt due on demand, offset by an
increase in accounts payable. Approximately $30 million of cash was utilized during the period to
purchase the Greenhouse Facility and for equipment purchases, including those associated with
the Greenhouse Facility Phase 1 conversion to ACMPR standards.
Operating Activities
The principal use of operating cash flow is to fund the Company's operating expenditures at its
production facilities, its general and administrative costs and its debt service payments. During the
twelve months ended December 31, 2017 the Company's cash flows used in operating activities
were $501,546 compared to cash flows used in operating activities of $1,996,565 in the
comparable 2016 period. This positive variance is attributable to the $277,460 of cash flow
generated from operations during the 2017 period compared to cash flow used in operations of
$3,357,291 in the comparable 2016 period, offset by the changes in non-cash working capital
items.
11
Investing Activities
Cash used in investing activities during the twelve months ended December 31, 2017 was
$30,786,853 compared to $1,074,595 in the comparable 2016 period. The 2017 investing activities
includes $6,500,000 of cash utilized to purchase the Greenhouse Facility and $23,993,811 of cash
utilized primarily for the building improvements and equipment associated with the Phase 1
conversion of the Greenhouse Facility. In the 2016 period $1,207,840 was invested in additions to
property and equipment.
Financing Activities
Cash of $44,354,297 was generated by financing activities during the twelve months ended
December 31, 2017 compared to $5,275,151 in the comparable 2016 period. The 2017 financing
activities includes net proceeds of $24,769,124 from the February Special Warrant and Common
Share financing, $18,844,206 in net proceeds from the November private placement and
$1,322,467 from the exercise of Warrants, offset by $566,500 in cash used to pay the accrued and
outstanding interest owing on the Company's convertible debt as at March 31, 2017. In the
comparable 2016 period, the Company raised net proceeds of $4,234,233 from a private
placement, $1,000,000 in convertible debt and $40,919 from the issuance of Common Shares and
convertible debt to Shareholders as part of their pre-emptive rights under the Shareholders
Agreement. The $1,000,000 of convertible debt, including all outstanding interest thereon, was
converted into Common Shares in March 2017.
Liquidity
The Company monitors its liquidity on a continuous basis to ensure there is sufficient capital to
meet business requirements and to provide adequate returns to shareholders and benefits to other
stakeholders. The Company manages the capital structure and adjusts it to take into account
changes in economic conditions and the risk characteristics of the underlying assets. To maintain
or adjust the capital structure, the Company may, where necessary, control the amount of working
capital, pursue financing, manage the timing of it capital expenditures, or sell assets. The Company
is not subject to externally imposed capital requirements.
The Company's capital structure is comprised of a combination of debt and shareholders' equity.
Set out below is a schedule of the capital structure of the Company as at December 31, 2017 and
December 31, 2016.
Promissory note
Convertible Debt(1)(2)(3)
December 31, 2017
December 31, 2016
$000s
1,000
-
$000s
-
3,839
12
Shareholders' equity)(3)
70,868
10,468
Debt to equity
(1) Includes convertible debentures and convertible promissory notes as at December 31, 2016.
(2) In March 2017 the $1,000,000 of convertible promissory notes plus accrued interest was converted into Common Shares of the Company.
(3) In August 2017 the convertible debentures together with accrued and unpaid interest were automatically converted into 2,885,354 Common
36.7%
1.4%
Shares of the Company upon listing of the Company's Common Shares on the CSE.
The Company anticipates that together with the additional sales that are expected in 2018 as a
result of the pending legalization of the adult consumer recreational use of cannabis, the Company
will require approximately $60 million to meet its expected ongoing costs for the next twelve
months. These costs include regular operating expenses, rent, insurance, fees for management and
administrative services, audit fees, shareholder costs and interest. In addition the Company
anticipates that with the legalization of the adult consumer recreational use of cannabis, the
Company will incur capital expenditures of approximately $27 million in the next twelve months.
These expenses include capital enhancements at the Vaughan Facility required to serve the adult
consumer recreational use of cannabis as well as the expenses required to complete the conversion
of Phase 2 of the Greenhouse Facility to ACMPR standards.
The Company expects to fund these expenditures from the revenue generated during the period
from the sale of its medical cannabis products and the sale of cannabis to the legalized recreational
market, together with the $18.0 million of cash on hand and the proceeds from its recently
completed $15 million mortgage financing on the Greenhouse Facility.
Financial Instruments, Financial Risk Management and Other Instruments
The Company does not utilize financial instruments such as hedging instruments to manage
financial risks.
The Company's financial instruments consist of cash, accounts receivable, restricted cash, short-
term investments, accounts payable and accrued liabilities, convertible debt, promissory note and
derivative liability. The Company does not believe that it is exposed to significant currency or
credit risk arising from these financial instruments. The fair value of these financial instruments
approximates their carrying value due to their short-term nature. Note 17 to the Financial
Statements discloses risks related to interest rates, liquidity and credit.
Contractual Obligations
In August 2015, the Company issued $3,000,000 12% senior secured convertible debentures and,
in December 2015 and February 2016, issued a further total of $640,000 of 12% unsecured
convertible promissory notes, both maturing four years from closing. Each debenture holder and
note holder was granted 4,545 warrants per $10,000 of debt, exercisable by the holder for a period
of five years from the closing date, at a price of $1.10 per Common Share. The debt and all accrued
and unpaid interest was automatically converted into 2,885,354 common shares upon the listing
of the Company's common shares on the CSE in August 2017.
In December 2016, as part of the arrangement whereby the holder of the redeemable shares
surrendered its put right, a warrant to purchase 1,000,000 Common Shares for 3 years at $1.30 per
share was issued.
13
The Company’s commitments as at December 31, 2017 consisted of the following ($000s):
Total
2018
2019
2020
Lease obligations 3,270
528
550
551
2021
563
2022
563
Beyond
516
In March 2018, as part of the process to stabilize and fix the majority of the Company’s energy
costs at the Greenhouse Facility on a go forward basis, the Company executed a twenty year tolling
agreement for co-generation equipment to be installed as part of the development of the
Greenhouse Facility.
Statements of Financial Position as at December 31, 2017 and December 31, 2016
Select Consolidated Statements of Financial Position Data
Cash and cash equivalents
Inventory
Biological Assets
Total assets
Current liabilities
Non-current liabilities
Assets
December
December
31, 2017
31, 2016
$000s
$000s
18,163
10,959
9,844
78,448
6,780
800
4,895
3,675
2,320
16,879
3,571
2,839
The Company's asset base primarily consists of cash and cash equivalents, accounts receivable,
inventories, biological assets, harmonized sales tax recoverable, prepaids and property and
equipment. The $61,569,807 increase in the asset base resulted largely from increases of cash and
cash equivalents of $13,267,436, $14,807,984 in inventory and biological assets and $28,754,245
in property and equipment.
Liabilities
Total current and non-current liabilities were $7,579,997 at December 31, 2017, an increase of
$1,169,638 from December 31, 2016. This increase was largely attributable to an increase in
14
accounts payable and the issuance of the promissory note on the purchase of the Greenhouse
Facility, offset by debt conversions into Common Shares.
Shareholders' Equity
The Company's shareholders' equity increased by $60,400,169 to $70,868,418 at December 31,
2017 from $10,468,249 at December 31, 2016. This increase is mainly attributable to the net
proceeds received from the completion of the February Special Warrant and Common Share
financings, the November private placement and the exercise of warrants and conversion of debt
into equity.
Related Party Transactions for the twelve months ended December 31, 2017
During the twelve months ended December 31, 2017 the Company entered into transactions and
had outstanding balances with various related parties. The transactions with related parties are in
the normal course of business.
Related party transactions for the twelve months ended December 31, 2017 are summarized as
follows:
Concurrent with the Company's acquisition of the Greenhouse Facility, the Company assigned to
a company controlled by Stan Abramowitz, the Secretary of the Company, the assets acquired as
part of the acquisition which were not required by the Company, namely the "Balfour
Greenhouses" name and customer list. These assets were assigned a value of $1 as part of the
acquisition.
In March 2017, the $1,000,000 in due on demand convertible promissory notes from Dancap
Private Equity Inc. together with $68,161 of accrued interest thereon was converted into Common
Shares of the Company. Dancap Private Equity Inc. a significant shareholder of the Company, is
controlled by Aubrey Dan. Aubrey Dan was a director of the Company until January 2018.
In March 2017, the Company paid all of the accrued and outstanding interest on its convertible
debentures. Included in this payment was interest of $83,494 owing to Forum Financial
Corporation, $75,521 to The Paul Family Trust and $38,728 to the Norman Paul 2013 Family
Trust. Forum Financial Corporation, which is owned by Fred Litwin, has the right to appoint the
majority of the board of directors of Cannamed Financial Corp., the Company's Voting Trustee.
Eric Paul, the Company's CEO and a director, is a Trustee of The Paul Family Trust, a significant
shareholder of the Company. Norman Paul, the Company's co-founder and a director, is a Trustee
of the Norman Paul 2013 Family Trust, a significant shareholder of the Company.
On August 17, 2017, $1,030,000 of convertible debt and $45,038 in accrued interest belonging to
the above related parties was automatically converted into common shares at $1.10 per share, in
connection with the Company listing on the Canadian Securities Exchange, resulting in the
issuance of 977,302 common shares.
Compensation to key management and directors of the Company totalling $1,223,773 was paid to
the Company's Chief Executive Officer, CannTrust Opco's President, the Vice-President of
Innovation and Research, the Vice-President of Production and Quality, the Vice-President of
Marketing, the Vice-President of Business Development, the Vice-President of Professional
15
Services, the Vice-President of Operations, the Company's Chief Financial Officer and Directors
of the Company. There were 2,427,000 stock options valued at $6,620,570 issued to key
management and directors during the twelve month period ended December 31, 2017.
The Company incurred $378,674 of management fees to Forum Financial Corporation, of which
$26,667 was unpaid and included in accounts payable at December 31, 2017.
The Company incurred $200,000 of management fees to Forum Financial Corporation for services
provided in connection with the special warrant financing and the preparation and filing of the
Company's Prospectus, of which $135,000 was expensed during the twelve months ended
December 31, 2017. The Company issued Forum 100,000 Common Shares as consideration for
payment of these management fees.
The Company incurred legal fees of $549,387 (2016 - $27,501) relating to corporate services
provided by a firm at which a director of the Company is a partner.
Share Data
The following table sets forth the Outstanding Share Data for the Company as at March 29, 2018:
Common Shares
Unlimited
92,489,857
Authorized
Issued
Risks and Uncertainties
The Company is subject to a number of broad risks and uncertainties including general economic
conditions. In addition to these broad risks and uncertainties, the Company has specific risks that
it faces, the most significant of which are outlined below. The risks and uncertainties discussed
herein highlight the more important factors that could significantly affect the Company's
operations and profitability. They do not represent and exhaustive list of all the potential
issues that could affect the financial results of the Company. Additional risks and
uncertainties not presently known to the Company or that the Company believes to be
immaterial may also adversely affect the Company's business, operations and profitability.
Reliance on Licenses
The operations of the Company require it to obtain ACMPR Licences for the transportation,
distribution, production and sale of medical cannabis, and in some cases, renewals of existing
licences from, and the issuance of permits by certain national authorities in Canada. The Company
believes that it currently holds or has applied for all necessary licences and permits to carry on the
activities which it is currently conducting under applicable laws and regulations, and also
believes that it is complying in all material respects with the terms of such licences and permits.
16
The failure of the Company to obtain and maintain the applicable licenses and amendments thereto
would have a material adverse impact upon the Company.
In addition, the Company will apply for, as the need arises, all necessary licences and permits to
carry on the activities it expects to conduct in the future. However, the ability of the Company to
obtain, sustain or renew any such licences and permits on acceptable terms is subject to changes
in regulations and policies and to the discretion of the applicable authorities or other governmental
agencies in foreign jurisdictions. The ACMPR License for the Vaughan Facility expires on March
13, 2020 and the ACMPR License for the Greenhouse Facility expires on October 6, 2020. Any
loss of interest in any such required licence or permit, or the failure of any governmental authority
to issue or renew such licences or permits upon acceptable terms, would have a material adverse
impact upon the Company.
Regulatory Risks
Achievement of the Company's business objectives is contingent, in part, upon compliance with
regulatory requirements enacted by governmental authorities and obtaining all regulatory
approvals, where necessary, for the sale of its products. The Company cannot predict the impact
of the compliance regime Health Canada is implementing for the Canadian medical cannabis
industry. Similarly, the Company cannot predict the time required to secure all appropriate
regulatory approvals for its products, or the extent of testing and documentation that may be
required by governmental authorities. The impact of Health Canada's compliance regime, any
delays in obtaining, or failure to obtain regulatory approvals may significantly delay or impact the
development of markets, products and sales initiatives and could have a material adverse effect on
the business, results of operations and financial condition of the Company.
The Company will incur ongoing costs and obligations related to regulatory compliance. Failure
to comply with regulations may result in additional costs for corrective measures, penalties or
restrictions on the Company's operations. In addition, changes in regulations, more vigorous
enforcement thereof or other unanticipated events could require extensive changes to the
Company's operations, increased compliance costs or give rise to material liabilities, which could
have a material adverse effect on the business, results of operations and financial condition of the
Company.
Change in Laws, Regulations and Guidelines
The Company's operations are subject to various laws, regulations and guidelines relating to the
manufacture, management, transportation, storage and disposal of medical cannabis as well as
laws and regulations relating to health and safety, the conduct of operations and the protection of
the environment. To the knowledge of management, other than the requirement that the Company
make routine corrections that may be required by Health Canada from time to time, the Company
is currently in compliance with all such laws. If any changes to such laws, regulations or guidelines
occur, which are matters beyond the control of the Company, the Company may incur significant
costs in complying with such changes or it may be unable to comply therewith, which in turn may
result in a material adverse effect on the Company's business, financial condition and results of
operations.
17
Health Canada inspectors routinely assess the Vaughan Facility and the Greenhouse Facility
against ACMPR regulations and provide the Company with follow up reports noting observed
deficiencies. The Company is continuously reviewing and enhancing its operational procedures at
the Vaughan Facility and the Greenhouse Facility both proactively and in response to routine
inspections. The Company follows all regulatory requirements in response to inspections in a
timely manner.
On June 30, 2016, the Government of Canada established the Task Force on Cannabis Legalization
and Regulation (the “Task Force”) to seek input on the design of a new system to legalize, strictly
regulate and restrict access to adult-use recreational cannabis. On December 13, 2016, the Task
Force completed its review and published a report outlining its recommendations. On April 13,
2017, the Government of Canada released the Cannabis Act. If enacted, the Cannabis Act will
regulate the production, distribution and sale of cannabis for adult use. The target implementation
date of the Cannabis Act will be August or September 2018. However, it is unknown if this
regulatory change will be implemented at all.
Several recommendations made by the Task Force reflected in the Cannabis Act could materially
and adversely affect the business, financial condition and results of operations of the Company.
These recommendations include, but are not limited to, permitting home cultivation, potentially
easing barriers to entry into a Canadian recreational cannabis market and restrictions on advertising
and branding. The recommendations will be considered by the Government of Canada as a new
framework for recreational cannabis is developed and it remains possible that such developments
could significantly and adversely affect the business, financial condition and results of operations
of the Company.
While the production of cannabis will be under the regulatory oversight of the Government of
Canada, the distribution of adult-use recreational cannabis will be the responsibility of the
provincial and territorial governments. To date, no provincial legislation has been approved to
govern retail sales. However, all of the provinces in Canada have announced that the wholesale
distribution of cannabis will fall under the responsibility of their provincial liquor authorities. The
legal retail business for adult-use recreational cannabis will initially fall under a framework of new
provincially owned and run stand-alone cannabis outlets in Ontario, Quebec, New Brunswick,
Nova Scotia and Prince Edward Island. Crown corporation run retail outlets will thus have a
monopoly over the legal retailing and distribution of cannabis in these provinces, which represent
approximately 67% of the Canadian population. The provinces of Alberta, Saskatchewan,
Manitoba and Newfoundland and Labrador have indicated they would allow private retailers to
manage the retail sales of cannabis in their provinces, while British Columbia will allow a mix of
private and Crown corporation run retail stores.
On October 3, 2017, the Parliamentary Standing Committee on Health proposed amendments to
the Cannabis Act, which if approved, would allow for cannabis edibles and concentrates to be
available for sale within 12 months of the Cannabis Act coming into force. Health Canada launched
a 60-day public consultation on the proposed approach to the regulation of cannabis on November
21, 2017. A few of the provisions under consideration, such as the inclusion of micro-producers
and micro-processers and the allowance of outdoor production, could significantly adversely affect
18
the business, financial condition and results of operations of the Company. On March 22, 2018
Bill C-45 passed the second reading of the Senate. It is expected that the Cannabis Act would
replace the ACMPR. The impact of any such new legislative system on the medical cannabis
industry and the Company's business plan and operations is uncertain.
Competition
The Cannabis Act and the introduction of a recreational model for cannabis production and
distribution may impact the medical cannabis market. The impact of this potential development
may be negative for the Company, and could result in increased levels of competition in its existing
medical market and/or the entry of new competitors in the overall cannabis market in which the
Company operates.
There is potential that the Company will face intense competition from other companies, some of
which can be expected to have longer operating histories and more financial resources and
manufacturing and marketing experience than the Company. Increased competition by larger and
better financed competitors could materially and adversely affect the business, financial condition
and results of operations of the Company.
The government has only issued to date a limited number of ACMPR Licenses to produce and sell
medical cannabis. According to Health Canada, as of March 2018, there are currently 94 licensed
producers under the ACMPR. There are, however, several hundred applicants for licenses. The
number of licenses granted could have an impact on the operations of the Company. Because of
the early stage of the industry in which the Company operates, the Company expects to face
additional competition from new entrants. The Company also faces competition from illegal
cannabis dispensaries that are selling cannabis to individuals despite not having a valid ACMPR
License.
If the number of users of medical cannabis in Canada increases, the demand for products will
increase and the Company expects that competition will become more intense, as current and
future competitors begin to offer an increasing number of diversified products. To remain
competitive, the Company will require a continued high level of investment in research and
development, marketing, sales and client support. The Company may not have sufficient resources
to maintain research and development, marketing, sales and client support efforts on a competitive
basis which could materially and adversely affect the business, financial condition and results of
operations of the Company.
As well, the legal landscape for medical and recreational cannabis is changing internationally.
More countries have passed laws that allow for the production and distribution of medical cannabis
in some form or another. The Company has some international partnerships in place, which may
be affected if more countries legalize medical cannabis. Increased international competition might
lower the demand for the Company's products on a global scale.
19
Reliance on Management
The success of the Company is dependent upon the ability, expertise, judgment, discretion and
good faith of its senior management. While employment agreements are customarily used as a
primary method of retaining the services of key employees, these agreements cannot assure the
continued services of such employees. Any loss of the services of such individuals could have a
material adverse effect on the Company's business, operating results or financial condition.
Further, as a licensed producer under the ACMPR, certain key employees are subject to a security
clearance by Health Canada. Under the ACMPR a security clearance cannot be valid for more than
five years and must be renewed before the expiry of a current security clearance. There is no
assurance that any of the Company's existing personnel who presently or may in the future require
a security clearance will be able to obtain or renew such clearances or that new personnel who
require a security clearance will be able to obtain one. A failure by a key employee to maintain or
renew his or her security clearance, would result in a material adverse effect on the Company's
business, financial condition and results of operations. In addition, if a key employee leaves the
Company, and the Company is unable to find a suitable replacement that has a security clearance
required by the ACMPR in a timely manner, or at all, there could occur a material adverse effect
on the Company's business, financial condition and results of operations.
Clinical Research
Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety,
efficacy, dosing and social acceptance of cannabis or isolated cannabinoids remains in early stages.
There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids.
Shelf Life of Inventory
We hold finished goods in inventory and our inventory has a shelf life. Finished goods in our
inventory include herbal cannabis and cannabis oil products. We have completed shelf life stability
testing on our herbal cannabis. This testing concluded that the potency of our herbal cannabis
remains static for approximately 20 months. In consultation with Health Canada, we elected to set
the shelf life for our herbal cannabis products at 12 months once it is bottled. The Company is
currently completing shelf life stability tests for cannabis oils, which it anticipates will have a
longer shelf life than herbal cannabis. Typical turnover rate for inventory has been within 4 months
of final production, however this turnover rate may change and inventory may reach its expiration
and not be sold. Management regularly reviews the amount of inventory on hand, reviews the
remaining shelf life and estimates the time required to manufacture and sell such inventory, write-
down of inventory may still be required. Any such write-down of inventory could have a material
adverse effect on the Company’s business, financial condition, and results of operations.
ACMPR Patient Acquisitions
The Company's success depends on its ability to attract and retain patients. There are many factors
which could impact the Company's ability to attract and retain ACMPR Patients, including but not
limited to the Company's ability to continually produce desirable and effective products, the
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successful implementation of the Company's patient-acquisition plan and the continued growth in
the aggregate number of ACMPR Patients selecting medical cannabis as a treatment option. The
Company's failure to acquire and retain ACMPR Patients would have a material adverse effect on
the Company's business, operating results and financial condition.
Marketing Constraints
The development of the Company's business and operating results may be hindered by applicable
restrictions on sales and marketing activities imposed by Health Canada. The regulatory
environment in Canada limits the Company's ability to compete for market share in a manner
similar to other industries. If the Company is unable to effectively market its products and compete
for market share, or if the costs of compliance with government legislation and regulation cannot
be absorbed through increased selling prices for its products, the Company's sales and operating
results could be adversely affected.
Further Funding Requirements
The building and operation of the Company's facilities and business are capital intensive. In order
to execute the anticipated growth strategy, the Company may require additional equity and/or debt
financing to support on-going operations, to undertake capital expenditures or to undertake
acquisitions or other business combination transactions. There can be no assurance that additional
financing will be available to the Company when needed or on terms, which are acceptable. The
Company's inability to raise financing to support on-going operations or to fund capital
expenditures or acquisitions could limit the Company's growth and may have a material adverse
effect upon future profitability.
If additional funds are raised through further issuances of equity or convertible debt securities,
existing shareholders could suffer significant dilution, and any new equity securities issued could
have rights, preferences and privileges superior to those of holders of the Common Shares. Any
debt financing secured in the future could involve restrictive covenants relating to capital raising
activities and other financial and operational matters, which may make it more difficult for the
Company to obtain additional capital and to pursue business opportunities, including potential
acquisitions.
Product Liability
As a manufacturer and distributor of products designed to be ingested by humans, the Company
faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its
products are alleged to have caused significant loss or injury. In addition, the manufacture and sale
of cannabis products involve the risk of injury to consumers due to tampering by unauthorized
third parties or product contamination. Previously unknown adverse reactions resulting from
human consumption of cannabis products alone or in combination with other medications or
substances could occur. The Company may be subject to various product liability claims,
including, among others, that the products produced by the Company caused injury or illness,
include inadequate instructions for use or include inadequate warnings concerning possible side
effects or interactions with other substances. A product liability claim or regulatory action against
21
the Company could result in increased costs, could adversely affect the Company's reputation with
its clients and consumers generally, and could have a material adverse effect on our results of
operations and financial condition of the Company. There can be no assurances that the Company
will be able to maintain product liability insurance on acceptable terms or with adequate coverage
against potential liabilities. Such insurance is expensive and may not be available in the future on
acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product liability claims could prevent or inhibit the
commercialization of products.
Product Recalls
Manufacturers and distributors of products are sometimes subject to the recall or return of their
products for a variety of reasons, including product defects, such as contamination, unintended
harmful side effects or interactions with other substances, packaging safety and inadequate or
inaccurate labeling disclosure. If any of the Company's products are recalled due to an alleged
product defect or for any other reason, the Company could be required to incur the unexpected
expense of the recall and any legal proceedings that might arise in connection with the recall. The
Company may lose a significant amount of sales and may not be able to replace those sales at an
acceptable margin or at all. In addition, a product recall may require significant attention from
management. Although the Company has detailed procedures in place for testing its products, there
can be no assurance that any quality, potency or contamination problems will be detected in time
to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the
products produced by the Company were subject to recall, the image of that product and the
Company could be harmed. A recall for any of the foregoing reasons could lead to decreased
demand for the Company's products and could have a material adverse effect on the results of
operations and financial condition of the Company. Additionally, product recalls may lead to
increased scrutiny of the Company's operations by Health Canada or other regulatory agencies,
requiring further management attention and potential legal fees and other expenses.
Operating Risk and Insurance Coverage
The Company has insurance to protect its assets, operations and employees. While the Company
believes its insurance coverage addresses all material risks to which it is exposed and is adequate
and customary in its current state of operations, such insurance is subject to coverage limits and
exclusions and may not be available for the risks and hazards to which the Company is exposed.
In addition, no assurance can be given that such insurance will be adequate to cover the Company's
liabilities or will be generally available in the future or, if available, that premiums will be
commercially justifiable. If the Company were to incur substantial liability and such damages were
not covered by insurance or were in excess of policy limits, or if the Company were to incur such
liability at a time when it is not able to obtain liability insurance, its business, results of operations
and financial condition could be materially adversely affected.
Nascent Status of the Medical Cannabis Industry
As a licensed producer under the ACMPR, the Company is operating its business in a relatively
new medical cannabis industry and market. In addition to being subject to general business risks,
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a business involving an agricultural product and a regulated consumer product, the Company needs
to continue to build brand awareness in this industry and market through significant investments
in its strategy, its production capacity, quality assurance, and compliance with regulations. These
activities may not promote the Company's brand and products as effectively as intended, or at all.
Competitive conditions, consumer tastes, patient requirements and spending patterns in this new
industry and market are relatively unknown and may have unique circumstances that differ from
existing industries and markets.
In addition, the ACMPR also permits patients to produce a limited amount of cannabis for their
own medical purposes or to designate a person to produce a limited amount of cannabis on their
behalf. This could potentially significantly reduce the market for the Company's products, which
could have a material adverse effect on the Company's business, financial condition and results of
operations.
Accordingly, there are no assurances that this industry and market will continue to exist or grow
as currently estimated or anticipated, or function and evolve in a manner consistent with
management's expectations and assumptions. Any event or circumstance that affects the medical
cannabis industry and market could have a material adverse effect on the Company's business,
financial condition and results of operations.
Management of Growth
The Company may be subject to growth-related risks including capacity constraints and pressure
on its internal systems and controls. The ability of the Company to manage growth effectively will
require it to continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base. The inability of the Company to deal with this growth
may have a material adverse effect on the Company's business, financial condition, results of
operations and prospects.
Research and Development and Product Obsolescence
Rapidly changing markets, technology, emerging industry standards and frequent introduction of
new products characterize the Company's business. The introduction of new products embodying
new technologies, including new manufacturing processes, and the emergence of new industry
standards may render the Company's products obsolete, less competitive or less marketable. The
process of developing the Company's products is complex and requires significant continuing
costs, development efforts and third party commitments. The Company's failure to develop new
technologies and products and the obsolescence of existing technologies could adversely affect the
business, financial condition and operating results of the Company. The Company may be unable
to anticipate changes in its potential customer requirements that could make the Company's
existing technology obsolete. The Company's success will depend, in part, on its ability to continue
to enhance its existing technologies, develop new technology that addresses the increasing
sophistication and varied needs of the market, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The development of the
Company's proprietary technology entails significant technical and business risks. The Company
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may not be successful in using its new technologies or exploiting its niche markets effectively or
adapting its businesses to evolving customer or medical requirements or preferences or emerging
industry standards.
Privacy and Cyber Security
Given the nature of the Company’s products and the lack of legal availability of such products
outside of channels approved by the Government of Canada, as well as the concentration of
inventory in its facilities, despite meeting or exceeding Health Canada’s security requirements,
there remains a risk of shrinkage as well as theft. A security breach at the Company’s facilities
could expose the Company to additional liability and to potentially costly litigation, increased
expenses relating to the resolution and future prevention of these breaches and may deter potential
patients from choosing the Company’s products.
In addition, the Company collects and stores personal information about its ACMPR Patients and
is responsible for protecting that information from privacy breaches. A privacy breach may occur
through procedural or process failure, information technology malfunction, or deliberate
unauthorized intrusions. Theft of data for competitive purposes is an ongoing risk whether
perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such
theft or privacy breach would have a material adverse effect on the Company’s business, financial
condition and results of operations.
In addition, there are a number of federal and provincial laws protecting the confidentiality of
certain patient health information, including patient records, and restricting the use and disclosure
of that protected information. In particular, the privacy rules under the Personal Information
Protection and Electronics Documents Act (Canada) (“PIPEDA”), protect medical records and
other personal health information by limiting their use and disclosure of health information to the
minimum level reasonably necessary to accomplish the intended purpose. If the Company was
found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the
confidentiality of ACMPR Patient health information, it could be subject to sanctions and civil or
criminal penalties, which could increase its liabilities, harm its reputation and have a material
adverse effect on the business, results of operations and financial condition of the Company.
Information Systems Security Threats
The Company has entered into agreements with third parties for hardware, software,
telecommunications and other information technology ("IT") services in connection with its
operations. The Company's operations depend, in part, on how well the Company and its suppliers
protect networks, equipment, IT systems and software against damage from a number of threats,
including, but not limited to, cable cuts, damage to physical plants, natural disasters, terrorism,
fire, power loss, hacking, computer viruses, vandalism and theft. The Company's operations also
depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems
and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and
other events could result in information system failures, delays and/or increase in capital expenses.
The failure of information systems or a component of information systems could, depending on
the nature of any such failure, adversely impact the Company's reputation and results of operations.
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Cyber incidents can result from deliberate attacks or unintentional events. Cyber attacks could
result in any person gaining unauthorized access to digital systems for purposes of
misappropriating assets or sensitive information, including personally identifiable information,
corrupting data, or causing operational disruption. Cyber attacks could also result in important
remediation costs, increased cyber security costs, lost revenues due to a disruption of activities,
litigation and reputational harm affecting customer and investor confidence, which could
materially adversely affect our business and financial results.
The Company has not experienced any material losses to date relating to cyber-attacks or other
information security breaches, but there can be no assurance that the Company will not incur such
losses in the future which could be in excess of any available insurance, and could materially
adversely affect our business and financial results. The Company's risk and exposure to these
matters cannot be fully mitigated because of, among other things, the evolving nature of these
threats. As a result, cyber security and the continued development and enhancement of controls,
processes and practices designed to protect systems, computers, software, data and networks from
attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the
Company may be required to expend additional resources to continue to modify or enhance
protective measures or to investigate and remediate any security vulnerabilities.
Reputational Risk to Third Parties
The parties with which the Company does business may perceive that they are exposed to
reputational risk as a result of the Company's medical cannabis business activities. Failure to
establish or maintain business relationships could have a material adverse effect on the Company.
Holding Company
The Company is a holding company and essentially all of its assets are the capital stock of its
subsidiaries, CannTrust Opco and Elmcliffe. As a result, investors in the Company are subject to
the risks attributable to its subsidiaries. As a holding company, the Company conducts
substantially all of its business through its subsidiaries, which generate substantially all of its
revenues. Consequently, the Company's cash flows and ability to complete current or desirable
future enhancement opportunities are dependent on the earnings of its subsidiaries and the
distribution of those earnings to the Company. The ability of these entities to pay dividends and
other distributions will depend on their operating results and will be subject to applicable laws and
regulations which require that solvency and capital standards be maintained by such companies
and contractual restrictions contained in the instruments governing their debt. In the event of a
bankruptcy, liquidation or reorganization of any of the Company's material subsidiaries, holders
of indebtedness and trade creditors may be entitled to payment of their claims from the assets of
those subsidiaries before the Company.
Lease Risk
The Vaughan Facility is located on property that is not owned by CannTrust Opco. Such property
is subject to a long-term lease. Under the terms of a typical lease, the lessee must pay rent for the
use of the land and is generally responsible for all costs and expenses associated with the building
25
and improvements. Unless the lease term is extended, the land, together with all improvements
made, will revert to the landlord upon the expiration of the lease term. In addition, an event of
default by CannTrust Opco under the terms of the lease could also result in a loss of the property
should the default not be rectified in a reasonable period of time. The reversion or loss of such
property could have a material adverse effect on the Company's operations and results.
Intellectual Property
The Company depends on its ability to protect its proprietary technology. The Company relies on
trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other
agreements with executives, consultants and third parties, all of which offer only limited
protection. If the Company is compelled to spend significant time and money protecting or
enforcing the Company's patents, designing around patents held by others or licensing or acquiring,
potentially for large fees, patents or other proprietary rights held by others, the Company's business
and financial prospects may be harmed. If the Company is unable to effectively protect the
intellectual property that the Company owns, other companies may be able to offer for sale the
same or similar products as the Company's products, which could materially adversely affect the
Company's competitive business position and harm its business prospects. The Company's patents
may be challenged, narrowed, invalidated or circumvented, which could limit the Company's
ability to stop competitors from marketing the same or similar products or limit the length of term
of patent protection that the Company may have for the Company's products. Even if the
Company's patents are unchallenged, they may not adequately protect the Company's intellectual
property, provide exclusivity for the Company's products or prevent others from designing around
the Company's claims. Any of these outcomes could impair the Company's ability to prevent
competition from third parties, which may have an adverse impact on the Company's business.
Conflicts of Interest
The Company may be subject to various potential conflicts of interest because of the fact that some
of its officers and directors may be engaged in a range of business activities. In addition, the
Company's executive officers and directors may devote time to their outside business interests
provided that such activities do not materially or adversely interfere with their duties to the
Company. In some cases, the Company's executive officers and directors may have fiduciary
obligations associated with these business interests that could interfere with their ability to devote
time to the Company's business and affairs and that may adversely affect the Company's
operations. These business interests could require significant time and attention of the Company's
executive officers and directors to the detriment of the Company.
In addition, the Company may also become involved in other transactions which conflict with the
interests of its directors and the officers who may from time to time deal with persons, firms,
institutions or corporations with which the Company may be dealing, or which may be seeking
investments similar to those desired by it. The interests of these persons could conflict with those
of the Company. In addition, from time to time, these persons may be competing with the Company
for available investment opportunities. Conflicts of interest, if any, will be subject to the
procedures and remedies provided under applicable laws. In particular, in the event that such a
26
conflict of interest arises at a meeting of the Company's directors, a director who has such a conflict
will abstain from voting for or against the approval of such participation or such terms. In
accordance with applicable laws, the directors of the Company are required to act honestly, in
good faith and in the best interests of the Company.
Risks Inherent in an Agricultural Business
The Company's business involves the growing of medical cannabis, an agricultural product. Such
business is subject to the risks inherent in the agricultural business, such as insects, plant diseases
and similar agricultural risks. Although such growing is completed indoors under climate
controlled conditions, and while all growing conditions are carefully monitored with trained
personnel, there can be no assurance that natural elements will not have a material adverse effect
on the production of its products.
Environmental and Employee Health and Safety Regulations
The Company's operations are subject to environmental and safety laws and regulations
concerning, among other things, emissions and discharges to water, air and land, the handling and
disposal of hazardous and non-hazardous materials and wastes, and employee health and safety.
Changes in environmental, employee health and safety or other laws, more vigorous enforcement
thereof or other unanticipated events could require extensive changes to the Company's operations
or give rise to material liabilities, which could have a material adverse effect on the business,
results of operations and financial condition of the Company.
Unfavourable Publicity or Consumer Perception
The Company believes the medical cannabis industry is highly dependent upon consumer
perception regarding the safety, efficacy and quality of the medical cannabis distributed to such
consumers. Consumer perception of the Company's products can be significantly influenced by
scientific research or findings, regulatory investigations, litigation, media attention and other
publicity regarding the consumption of medical cannabis products. There can be no assurance that
future scientific research, findings, regulatory proceedings, litigation, media attention or other
research findings or publicity will be favourable to the medical cannabis market or any particular
product, or consistent with earlier publicity. Future research reports, findings, regulatory
proceedings, litigation, media attention or other publicity that are perceived as less favourable than,
or that question, earlier research reports, findings or publicity could have a material adverse effect
on the demand for the Company's products and the business, results of operations, financial
condition and cash flows of the Company. The Company's dependence upon consumer perceptions
means that adverse scientific research reports, findings, regulatory proceedings, litigation, media
attention or other publicity, whether or not accurate or with merit, could have a material adverse
effect on the Company, the demand for the Company's products, and the business, results of
operations, financial condition and cash flows of the Company. Further, adverse publicity reports
or other media attention regarding the safety, efficacy and quality of medical cannabis in general,
or the Company's products specifically, or associating the consumption of medical cannabis with
illness or other negative effects or events, could have such a material adverse effect. Such adverse
publicity reports or other media attention could arise even if the adverse effects associated with
27
such products resulted from consumers’ failure to consume such products appropriately or as
directed.
Transportation Risks
Due to its direct-to-client shipping model, the Company depends on fast and efficient courier
services to distribute its product. Any prolonged disruption of this courier service could have an
adverse effect on the financial condition and results of operations of the Company. Rising costs
associated with the courier services used by the Company to ship its products may also adversely
impact the business of the Company and its ability to operate profitably.
Due to the nature of the Company's products, security of the product during transportation to and
from the Company's facilities is of the utmost concern. A breach of security during transport or
delivery could have a material and adverse effect on the Company's business, financial condition
and prospects. Any breach of the security measures during transport or delivery, including any
failure to comply with recommendations or requirements of Health Canada, could also have an
impact on the Company's ability to continue operating under the ACMPR Licenses or the prospect
of renewing the ACMPR Licenses.
Vulnerability to Rising Energy Costs
The Company's medical cannabis growing operations consume considerable energy, which make
the Company vulnerable to rising energy costs. Accordingly, rising or volatile energy costs may
adversely impact the business of the Company and its ability to operate profitably.
Reliance on Key Inputs
The Company's business is dependent on a number of key inputs and their related costs including
raw materials and supplies related to its growing operations, as well as electricity, water and other
local utilities. Any significant interruption or negative change in the availability or economics of
the supply chain for key inputs could materially impact the business, financial condition and
operating results of the Company. Any inability to secure required supplies and services or to do
so on appropriate terms could have a materially adverse impact on the business, financial condition
and operating results of the Company.
Dependence on Suppliers and Skilled Labour
The ability of the Company to compete and grow will be dependent on it having access, at a
reasonable cost and in a timely manner, to skilled labour, equipment, parts and components. No
assurances can be given that the Company will be successful in maintaining its required supply of
skilled labour, equipment, parts and components. It is also possible that the final costs of the major
equipment contemplated by the Company's capital expenditure program may be significantly
greater than anticipated by the Company's management, and may be greater than funds available
to the Company, in which circumstance the Company may curtail, or extend the timeframes for
completing, its capital expenditure plans. This could have an adverse effect on the financial results
of the Company.
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International Expansion
The Company has received Health Canada approval to export medical cannabis internationally to
countries where medical cannabis is legalized. The Company began shipping its products to
Australia and it expects to ship products to Germany, Denmark and Brazil in the near future. There
can be no assurance that any market for the Company’s products will develop in such foreign
jurisdictions. The Company may face new or unexpected risks or significantly increase its
exposure to one or more existing risk factors, including economic instability, changes in laws and
regulations and the effects of competition. These factors may limit the Company's capability to
successfully expand its operations and may have a material adverse effect on the Company’s
business, financial condition and results of operations.
Expansion of the Greenhouse Facility
Any expansion of the Greenhouse Facility is subject to various potential problems and
uncertainties, and may be delayed or adversely affected by a number of factors beyond the
Company's control. These uncertainties include the failure to obtain regulatory approvals, permits,
delays in the delivery or installation of equipment by suppliers, difficulties in integrating new
equipment with existing facilities, shortages in materials or labor, defects in design or construction,
diversion of management resources, and insufficient funding or other resource constraints.
Additionally, sufficient power will be required to expand the Greenhouse Facility, which the
Company may not be able to secure, or secure at economically viable rates. The actual cost of
construction may exceed the amount budgeted for expansion. As the result of construction delays,
cost overruns, changes in market circumstances or other factors, the Company may not be able to
achieve the intended economic benefits from the expansion of operations at existing facilities,
which in turn may affect the Company's business, prospects, financial condition and results of
operations. In particular, any expansion of the Greenhouse Facility is subject to Health Canada
regulatory approvals. The delay or denial of such approvals may have a material adverse impact
on the business of the Company and may result in the Company not meeting anticipated or future
demand when it arises.
Need to Attract and Retain Qualified Personnel
The Company's success depends to a significant extent on its ability to identify, attract, hire, train
and retain qualified personnel. Competition for such personnel may be intense and there can be no
assurance that the Company will be successful in identifying, attracting, hiring and retaining such
personnel in the future. If the Company is unable to identify, attract, hire and retain qualified
personnel in the future, such inability could have a material adverse effect on its business,
operating results and financial condition.
Litigation
The Company may become party to litigation from time to time in the ordinary course of business
which could adversely affect its business. Should any litigation in which the Company becomes
involved be determined against the Company, such a decision could adversely affect the
29
Company's ability to continue operating and the market price for the Common Shares and could
use significant resources. Even if the Company is involved in litigation and wins, litigation can
redirect significant resources.
Dividends
Any decision to declare and pay dividends in the future will be made at the discretion of the
Company's Board and will depend on, among other things, financial results, cash requirements,
contractual restrictions and other factors that the Company's Board may deem relevant. As a result,
investors may not receive any return on an investment in the Common Shares unless they sell their
Common Shares for a price greater than that which such investors paid for them.
Difficulty to Forecast
The Company must rely largely on its own market research to forecast sales as detailed forecasts
are not generally obtainable from other sources at this early stage of the medical cannabis industry
in Canada. A failure in the demand for its products to materialize as a result of competition,
technological change or other factors could have a material adverse effect on the business, results
of operations and financial condition of the Company.
Volatile Market Price for the Common Shares
The market price for the Common Shares may be volatile and subject to wide fluctuations in
response to numerous factors, many of which are beyond the Company's control, including the
following:
actual or anticipated fluctuations in the Company's quarterly results of operations;
recommendations by securities research analysts;
changes in the economic performance or market valuations of companies in the industry in
which the Company operates;
addition or departure of the Company's executive officers and other key personnel;
release or expiration of transfer restrictions on outstanding Common Shares;
sales or perceived sales of additional Common Shares;
operating and financial performance that vary from the expectations of management,
securities analysts and investors;
regulatory changes affecting the Company's industry generally and its business and
operations;
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announcements of developments and other material events by the Company or its
competitors;
fluctuations to the costs of vital production materials and services;
changes in global financial markets and global economies and general market conditions,
such as interest rates and pharmaceutical product price volatility;
significant acquisitions or business combinations, strategic partnerships, joint ventures or
capital commitments by or involving the Company or its competitors;
operating and share price performance of other companies that investors deem comparable
to the Company or from a lack of market comparable companies; and
news reports relating to trends, concerns, technological or competitive developments,
regulatory changes and other related issues in the Company's industry or target markets.
Limited Number of Existing Shareholders
The Company's management, directors and employees own a substantial number of the
outstanding Common Shares (on a fully diluted basis). As such, the Company's management,
directors and employees, as a group, each are in a position to exercise significant influence over
matters requiring shareholder approval, including the election of directors and the determination
of significant corporate actions. As well, these shareholders could delay or prevent a change in
control of the Company that could otherwise be beneficial to the Company's shareholders.
Accounting Estimates
Certain of the Company's accounting policies set out in Note 3 to the Company's Financial
Statements require that management make decisions with respect to the formulation of estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The
Company's significant accounting estimates are contained in Note 4 of the Company's Financial
Statements. The following is a discussion of the accounting estimates that are critical in
determining the Company's financial results.
Acquisitions
In determining the allocation of the purchase price in an acquisition, including any acquisition
related contingent consideration, estimates including market based and appraisal values are used.
Judgement is used in determining whether an acquisition is a business combination or an asset
acquisition.
Valuation of Biological Assets and Inventories
Biological assets, consisting of plants, are measured at fair value less costs to sell up to the point
of harvest.
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Determination of the fair values of the biological assets requires the Company to make
assumptions about how market participants assign fair values to these assets. These assumptions
primarily relate to the level of effort required to bring the plants up to the point of harvest, sales
price, risk, and expected remaining future yields for the plants. As the valuation of biological assets
becomes the basis for the cost of finished goods inventories after harvest, this is also a significant
estimate for the valuation of inventories.
The significant assumptions used in determining the fair value of medical cannabis plants are as
follows:
wastage of plants based on their various stages;
yield by plant;
price per gram of yield;
percentage of costs incurred to date compared to the costs to be incurred are used to
estimate fair value of an in-process plant; and
percentage of costs incurred for each stage of plant growth was estimated.
Estimated Useful lives of Property and Amortization of Plant and Equipment and Intangible Assets
Depreciation and amortization of property and equipment and finite-life intangible assets is
dependent upon estimates of useful lives, which are determined through the exercise of judgment.
The assessment of any impairment of these assets is dependent upon estimates of recoverable
amounts that consider factors such as economic and market conditions and the useful lives of
assets.
Share-based Compensation and Warrants
In calculating the share-based compensation expense and the value of warrants, key estimates such
as the value of the Common Shares, the rate of forfeiture of options granted, the expected life of
the option, the volatility of the value of the Common Shares and the risk-free interest rate are used
as inputs to the Black Scholes model.
Taxes
Deferred tax assets will be recognized for all unused tax losses to the extent that it is probable that
taxable profit will be available against which the losses can be utilized. Significant management
judgement is required to determine the amount of deferred tax assets that can be recognized, based
upon the likely timing and the level of future taxable profits together with tax planning strategies.
The Company has not yet recognized a deferred tax asset in respect of its deductible temporary
differences and past losses incurred as it has not yet demonstrated that it will generate sufficient
taxable income against which to utilize this tax asset.
32
Accounting Standards Adopted in the Period
IAS 7 Statement of Cash Flows
IAS 7 ‘Disclosures’, required entities to provide disclosures in their financial statements about changes in
liabilities arising from financing activities, including both changes arising from cash flow and non-cash
changes. The adoption of this amendment did not have a material impact on the Company’s audited
consolidated financial statements.
IAS 12 Income Taxes
IAS 12 ‘Income taxes – Deferred Tax’ clarifies the recognition of deferred tax assets for unrealized losses.
It was amended to specify (i) the requirement for recognizing deferred tax assets or unrealized losses; (ii)
deferred tax where an asset is measured at a fair value below the asset’s tax base; and (iii) certain other
aspects of accounting for deferred tax assets. The adoption of this amendment did not have a material impact
on the Company’s audited consolidated financial statements.
Future Accounting Pronouncements
These are the changes that the Company reasonably expects will have an impact on its disclosures,
financial position or performance when applied at a future date. The Company intends to adopt
these standards, if applicable, when they become effective.
IFRS 15 – Revenue from contracts with customers
In May 2014, IFRS 15 was issued by the IASB which provides a comprehensive framework for
recognition, measurement, and disclosure of revenue from contracts with customers, excluding
contracts within the scope of the standards on leases, insurance contracts and financial instruments.
IFRS 15 is effective for annual periods beginning on or after January 1, 2018, and must be applied
retrospectively. The Company is still evaluating the impact of adopting this standard.
IFRS 9 – Financial Instruments
IFRS 9 was issued by IASB in November 2009 and October 2010 and will replace IAS 39. IFRS
9 uses a single approach to determine whether a financial asset is measured at amortized cost or
fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an
entity manages its financial instruments in the context of its business model and the contractual
cash flow characteristics of the financial assets. Two measurement categories continue to exist to
account for financial liabilities in IFRS 9, fair value through profit or loss and amortized cost.
Financial liabilities held-for-trading are measured at fair value through profit or loss, and all other
financial liabilities are measured at amortized cost unless the fair value option is applied. The
treatment of embedded derivatives under the new standard is consistent with IAS 39 and is applied
to financial liabilities and non-derivative hosts not within the scope of the standard. The effective
date of IFRS 9 is January 1, 2018. The Company is still evaluating the impact of adopting this
standard.
33
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognize,
measure, present and disclose leases. The standard provides a single lessee accounting model,
requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months
or less or the underlying asset has a low value. Lessors continue to classify leases as operating or
finance, with IFRS 16's approach to lessor accounting substantially unchanged from its
predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after
January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or
alternatively not restate comparative information but recognize the cumulative effect of initially
applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early
adoption is permitted if IFRS 16 has also been adopted. The Company is still evaluating the impact
of adopting this standard.
IFRS 2 Share-Based Payment
In June 2016, the IASB issued amendments to IFRS 2. These amendments provide clarification
on how to account for certain types of share-based payment transactions. The amendments are
effective for the annual period beginning on or after January 1, 2018. The Company is still
evaluating the impact of adopting this standard.
Non-IFRS Financial Measure and Reconciliation
Adjusted Earnings (Loss) before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The term Adjusted EBITDA does not have any standardized meaning under IFRS. Therefore, it
may not be comparable to similar measures presented by other companies.
Management uses Adjusted EBITDA to evaluate the performance of the Company’s business as
it reflects its ongoing profitability. The Company believes that certain investors and analysts use
Adjusted EBITDA to measure a company's ability to service debt and to meet other payment
obligations or as a common measurement to value companies in the biopharmaceutical industry.
Adjusted EBITDA has no directly comparable IFRS financial measure. Such information is
intended to provide additional information and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with IFRS.’
34
The Company measures Adjusted EBITDA as net income (loss) less unrealized gain on changes
in fair value of biological assets plus fair value changes in biological assets included in inventory
sold, income taxes, interest expense, accretion expense, distributions on preference shares,
transaction costs, other income, (gain) loss on revaluation of derivative liability, share based
compensation and depreciation and amortization. The Company believes that this definition is
suited to measure the Company’s ability to service debt and to meet other payment obligations.
The following table provides a reconciliation of earnings as determined under IFRS to Adjusted
EBITDA.
Calculation of Adjusted EBITDA
Net income (loss)
Fair value changes in biological
assets included in inventory sold
Unrealized gain on changes in fair
value of biological assets
Interest expense
Accretion expense
Distributions on preference shares
Transaction costs
Other income
Loss (Gain) on revaluation of
derivative liability
Loss on revaluation of redeemable
shares
Share based compensation
Depreciation and amortization
Adjusted EBITDA (Loss)
Three Months
Ended
December 31
Twelve Months
Ended
December 31
2017
2016
2017
2016
$
6,253
1,463
$
(8,260)
1,484
$
$
6,885
(13,620)
11,303
4,340
(10,864)
(4,087)
(24,856)
(6,838)
41
-
-
-
(65)
-
-
155
84
146
30
-
623
261
234
-
204
(143)
1,625
474
276
1,355
396
-
(246)
9,807
-
9,807
850
655
(1,667)
-
157
139
2,311
2,217
72
1,234
41
(2,750)
35
Disclosure Controls and Internal Controls over Financial Reporting
Internal Control over Financial Reporting
In accordance with National Instrument 52-109 of the Canadian Securities Administrators,
management is responsible for establishing and maintaining adequate Disclosure Controls and
Procedures ("DCP") and Internal Control over Financial Reporting ("ICFR"). The Company’s
CEO and CFO are required to file certifications relating to DCP and ICFR for the Company in
connection with its interim and annual filings.
Changes in Internal Control over Financial Reporting
During the latter part of the year ended December 31, 2016, the Company engaged a new Chief
Financial Officer and in April 2017, to better align its Financial Reporting capabilities with the
growth profile of the Company, created a new position and hired a Director of Finance. In addition,
the Company has entered into management services agreements (the "Service Agreements") with
Forum Financial Corporation ("Forum"). Under the Service Agreements, the Company has
appointed Forum to provide services to the Company to assist it with its continuous disclosure and
reporting requirements. There have been no other significant changes made to the Company's
internal controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Limitations of Controls and Procedures
The Company's management, including the President and Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and procedures or internal control over
financial reporting, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of fraud, if any, within
the Company have been prevented or detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized override of the control. The design
of any control system is also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Accordingly, because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and not be detected.
Additional Information
Additional information relating to the Company, including the Company's audited year-end
financial results and unaudited quarterly financial results, can be accessed on SEDAR
(www.sedar.com). For further information shareholders may also contact the Company by email
via investor@canntrust.ca.
36
NOTES:
NOTES:
DIRECTORS
Mark Litwin
Eric Paul
Mitchell Sanders
Norman Paul
Mark Dawber
Robert Marcovitch
Shawna Page
OFFICERS
Eric Paul – Chief Executive Officer
Ian Abramowitz – Chief Financial Officer
Stan Abramowitz – Secretary
AUDITORS
RSM Canada LLP, Chartered Professional Accountants
Toronto, Canada
REGISTRAR & TRANSFER AGENT
TSX Trust Company
Toronto, Canada
LISTED SECURITIES
Toronto Stock Exchange
Symbol: TRST