Exhibit 99.1
Aphria Inc.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MAY 31, 2018 AND MAY 31, 2017
(Expressed in Canadian Dollars, unless otherwise noted)
July 31, 2018
Independent Auditor’s Report
To the Shareholders of
Aphria Inc.
We have audited the accompanying consolidated financial statements of Aphria Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at May 31, 2018 and May 31, 2017 and the consolidated statements of income and comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our 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 judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers LLP
245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4
T: +1 519 985 8900, F: +1 519 258 5457
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aphria Inc. and its subsidiaries as at May 31, 2018 and May 31, 2017 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Windsor, Ontario, Canada
Aphria Inc.
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
|
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
59,737
|
|
$
|
79,910
|
|
|
Marketable securities
|
|
4
|
|
45,062
|
|
87,347
|
|
|
Accounts receivable
|
|
|
|
3,386
|
|
826
|
|
|
Other current assets
|
|
5
|
|
14,384
|
|
5,571
|
|
|
Inventory
|
|
6
|
|
22,150
|
|
3,887
|
|
|
Biological assets
|
|
7
|
|
7,331
|
|
1,408
|
|
|
Due from related parties
|
|
8
|
|
—
|
|
464
|
|
|
Assets held for sale
|
|
13
|
|
40,620
|
|
—
|
|
|
Current portion of convertible notes receivable
|
|
12
|
|
1,942
|
|
—
|
|
|
|
|
|
|
194,612
|
|
179,413
|
|
|
Capital assets
|
|
9
|
|
303,151
|
|
72,455
|
|
|
Intangible assets
|
|
10
|
|
226,444
|
|
1,891
|
|
|
Convertible notes receivable
|
|
12
|
|
16,129
|
|
1,534
|
|
|
Interest in equity investees
|
|
13
|
|
4,966
|
|
28,376
|
|
|
Long-term investments
|
|
14
|
|
46,028
|
|
27,788
|
|
|
Deferred tax asset
|
|
15
|
|
—
|
|
3,315
|
|
|
Goodwill
|
|
11
|
|
522,762
|
|
1,200
|
|
|
|
|
|
|
$
|
1,314,092
|
|
$
|
315,972
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
31,517
|
|
$
|
5,874
|
|
|
Income taxes payable
|
|
15
|
|
3,584
|
|
—
|
|
|
Deferred revenue
|
|
|
|
2,607
|
|
2,800
|
|
|
Current portion of promissory note payable
|
|
17
|
|
610
|
|
878
|
|
|
Current portion of long-term debt
|
|
18
|
|
2,140
|
|
765
|
|
|
Current portion of derivative liability
|
|
13
|
|
3,396
|
|
—
|
|
|
|
|
|
|
43,854
|
|
10,317
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
17
|
|
—
|
|
366
|
|
|
Long-term debt
|
|
18
|
|
28,337
|
|
31,420
|
|
|
Derivative liability
|
|
13
|
|
9,055
|
|
—
|
|
|
Deferred tax liability
|
|
15
|
|
59,253
|
|
—
|
|
|
|
|
|
|
140,499
|
|
42,103
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
19
|
|
1,113,981
|
|
274,317
|
|
|
Warrants
|
|
20
|
|
1,375
|
|
445
|
|
|
Share-based payment reserve
|
|
|
|
22,006
|
|
3,230
|
|
|
Accumulated other comprehensive loss
|
|
|
|
(801
|
)
|
—
|
|
|
Non-controlling interest
|
|
22
|
|
9,580
|
|
—
|
|
|
Retained earnings (deficit)
|
|
|
|
27,452
|
|
(4,123
|
)
|
|
|
|
|
|
1,173,593
|
|
273,869
|
|
|
|
|
|
|
$
|
1,314,092
|
|
$
|
315,972
|
|
Nature of operations (Note 1), Commitments (Note 30), Subsequent events (Note 31)
|
Approved on behalf of the Board:
|
|
|
|
|
|
|
|
“John Cervini”
|
|
“Cole Cacciavillani”
|
|
Signed: Director
|
|
Signed: Director
|
The accompanying notes are an integral part of these consolidated financial statements
2
Aphria Inc.
Consolidated Statements of Income and Comprehensive Income
(In thousands of Canadian dollars, except share and per share amounts)
|
|
|
|
|
For the year ended
May 31,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Revenue
|
|
|
|
$
|
36,917
|
|
$
|
20,438
|
|
|
Production costs
|
|
6
|
|
8,692
|
|
4,585
|
|
|
Other costs of sales
|
|
|
|
313
|
|
—
|
|
|
Gross profit before fair value adjustments
|
|
|
|
27,912
|
|
15,853
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
10,327
|
|
3,561
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(23,302
|
)
|
(5,005
|
)
|
|
Gross profit
|
|
|
|
40,887
|
|
17,297
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
23
|
|
13,901
|
|
4,678
|
|
|
Share-based compensation
|
|
24
|
|
17,874
|
|
2,399
|
|
|
Selling, marketing and promotion
|
|
|
|
11,873
|
|
6,664
|
|
|
Amortization
|
|
|
|
3,985
|
|
956
|
|
|
Research and development
|
|
|
|
490
|
|
492
|
|
|
Impairment of intangible asset
|
|
|
|
—
|
|
3,500
|
|
|
Transaction costs
|
|
|
|
5,192
|
|
—
|
|
|
|
|
|
|
53,315
|
|
18,689
|
|
|
|
|
|
|
(12,428
|
)
|
(1,392
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
17
|
|
1,244
|
|
512
|
|
|
Foreign exchange gain
|
|
|
|
124
|
|
483
|
|
|
(Loss) gain on marketable securities
|
|
4
|
|
(2,155
|
)
|
209
|
|
|
(Loss) gain on sale of capital assets
|
|
9
|
|
(191
|
)
|
11
|
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
7,535
|
|
—
|
|
|
(Loss) gain from equity investees
|
|
13
|
|
(9,295
|
)
|
210
|
|
|
Gain on sale of equity investee
|
|
13
|
|
26,347
|
|
—
|
|
|
Deferred gain recognized
|
|
|
|
1,304
|
|
—
|
|
|
Finance income, net
|
|
25
|
|
5,012
|
|
728
|
|
|
Unrealized gain on embedded derivatives
|
|
12
|
|
4,135
|
|
—
|
|
|
Gain on long-term investments
|
|
26
|
|
26,675
|
|
3,571
|
|
|
Unrealized loss on derivative liability
|
|
13
|
|
(12,451
|
)
|
—
|
|
|
|
|
|
|
48,284
|
|
5,724
|
|
|
Income before income taxes
|
|
|
|
35,856
|
|
4,332
|
|
|
Income taxes
|
|
15
|
|
6,408
|
|
134
|
|
|
Net income
|
|
|
|
29,448
|
|
4,198
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Other comprehensive loss from equity investee
|
|
13
|
|
(801
|
)
|
—
|
|
|
Net comprehensive income
|
|
|
|
$
|
28,647
|
|
$
|
4,198
|
|
|
Total comprehensive income is attributable to:
|
|
|
|
|
|
|
|
|
Owners of Aphria Inc.
|
|
|
|
28,867
|
|
4,198
|
|
|
Non-controlling interest
|
|
22
|
|
(220
|
)
|
—
|
|
|
|
|
|
|
$
|
28,647
|
|
$
|
4,198
|
|
|
Weighted average number of common shares - basic
|
|
|
|
161,026,463
|
|
104,341,319
|
|
|
Weighted average number of common shares - diluted
|
|
|
|
165,914,000
|
|
111,427,893
|
|
|
Earnings per share - basic
|
|
27
|
|
$
|
0.18
|
|
$
|
0.04
|
|
|
Earnings per share - diluted
|
|
27
|
|
$
|
0.18
|
|
$
|
0.04
|
|
The accompanying notes are an integral part of these consolidated financial statements
3
Aphria Inc.
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars, except share amounts)
|
|
|
Number of
common shares
|
|
Share capital
(Note 19)
|
|
Warrants
(Note 20)
|
|
Share-based
payment
reserve
|
|
Accumulated
other
comprehensive
loss
|
|
Non-
controlling
interest
(Note 22)
|
|
Retained
earnings
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,917
|
|
$
|
694
|
|
$
|
1,724
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(8,321
|
)
|
$
|
35,014
|
|
|
Share issuance - August 2016 bought deal
|
|
17,250,000
|
|
31,959
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
31,959
|
|
|
Share issuance - November 2016 bought deal
|
|
10,062,500
|
|
37,263
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37,263
|
|
|
Share issuance - February 2017 bought deal
|
|
11,500,000
|
|
53,869
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
53,869
|
|
|
Share issuance - May 2017 bought deal
|
|
13,269,252
|
|
81,323
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
81,323
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,448
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,448
|
|
|
Share issuance - warrants exercised
|
|
15,251,165
|
|
23,647
|
|
(608
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
23,039
|
|
|
Share issuance - options exercised
|
|
1,053,095
|
|
1,534
|
|
—
|
|
(558
|
)
|
—
|
|
—
|
|
—
|
|
976
|
|
|
Share issuance - intangible asset acquisition
|
|
38,759
|
|
100
|
|
359
|
|
—
|
|
—
|
|
—
|
|
—
|
|
459
|
|
|
Share-based payments
|
|
100,000
|
|
257
|
|
—
|
|
2,064
|
|
—
|
|
—
|
|
—
|
|
2,321
|
|
|
Shares held in escrow for services not yet earned
|
|
50,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net comprehensive income for the year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,198
|
|
4,198
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
$
|
445
|
|
$
|
3,230
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4,123
|
)
|
$
|
273,869
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based
|
|
other
|
|
controlling
|
|
Retained
|
|
|
|
|
|
|
Number of
|
|
Share-based
|
|
Warrants
|
|
payment
|
|
comprehensive
|
|
interest
|
|
earnings
|
|
|
|
|
|
|
common shares
|
|
(Note 19)
|
|
(Note 20)
|
|
reserve
|
|
loss
|
|
(Note 22)
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
$
|
445
|
|
$
|
3,230
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4,123
|
)
|
$
|
273,869
|
|
|
Share issuance - November 2017 bought deal
|
|
12,689,675
|
|
86,661
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
86,661
|
|
|
Share issuance - January 2018 bought deal
|
|
8,363,651
|
|
109,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
109,000
|
|
|
Share issuance - Broken Coast acquisition
|
|
14,373,675
|
|
214,168
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
214,168
|
|
|
Share issuance - Nuuvera acquisition
|
|
31,226,910
|
|
411,258
|
|
1,015
|
|
12,133
|
|
—
|
|
—
|
|
—
|
|
424,406
|
|
|
Share issuance - warrants exercised
|
|
2,388,636
|
|
3,767
|
|
(85
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
3,682
|
|
|
Share issuance - options exercised
|
|
2,493,623
|
|
11,559
|
|
—
|
|
(7,230
|
)
|
—
|
|
—
|
|
—
|
|
4,329
|
|
|
Share issuance - deferred share units
|
|
5,050
|
|
62
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
62
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,002
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,002
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
15,780
|
|
—
|
|
—
|
|
—
|
|
15,780
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
187
|
|
|
Share-based payments rescinded
|
|
—
|
|
—
|
|
—
|
|
(1,907
|
)
|
—
|
|
—
|
|
1,907
|
|
—
|
|
|
Non-controlling interest
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9,800
|
|
—
|
|
9,800
|
|
|
Net comprehensive income for the year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(801
|
)
|
(220
|
)
|
29,668
|
|
28,647
|
|
|
Balance at May 31, 2018
|
|
210,169,924
|
|
$
|
1,113,981
|
|
$
|
1,375
|
|
$
|
22,006
|
|
$
|
(801
|
)
|
$
|
9,580
|
|
$
|
27,452
|
|
$
|
1,173,593
|
|
The accompanying notes are an integral part of these consolidated financial statements
4
Aphria Inc.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
|
|
|
|
|
For the year ended
May 31,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
$
|
29,448
|
|
$
|
4,198
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Future income taxes
|
|
15
|
|
3,658
|
|
134
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
10,327
|
|
3,561
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(23,302
|
)
|
(5,005
|
)
|
|
Loss (gain) on marketable securities
|
|
4
|
|
2,155
|
|
(209
|
)
|
|
Unrealized foreign exchange gain
|
|
12
|
|
(94
|
)
|
—
|
|
|
Amortization
|
|
9,10
|
|
6,678
|
|
1,942
|
|
|
Loss (gain) on sale of capital assets
|
|
9
|
|
191
|
|
(11
|
)
|
|
Impairment of intangible asset
|
|
10
|
|
—
|
|
3,500
|
|
|
Accretion interest on convertible note receivable
|
|
12
|
|
(1,808
|
)
|
(34
|
)
|
|
Unrealized gain on embedded derivatives
|
|
12
|
|
(4,135
|
)
|
—
|
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
(7,535
|
)
|
—
|
|
|
Loss (gain) from equity investees
|
|
13
|
|
9,295
|
|
(210
|
)
|
|
Gain on sale of equity investee
|
|
13
|
|
(26,347
|
)
|
—
|
|
|
Deferred gain on recognized
|
|
|
|
(1,304
|
)
|
—
|
|
|
Consulting revenue
|
|
17
|
|
(1,244
|
)
|
(512
|
)
|
|
Other non-cash items
|
|
|
|
(63
|
)
|
71
|
|
|
Share-based compensation
|
|
24
|
|
17,874
|
|
2,399
|
|
|
Gain on long-term investments
|
|
26
|
|
(26,675
|
)
|
(3,571
|
)
|
|
Unrealized loss on derivative liability
|
|
13
|
|
12,451
|
|
—
|
|
|
Transaction costs
|
|
|
|
5,192
|
|
—
|
|
|
Change in non-cash working capital
|
|
28
|
|
(10,411
|
)
|
(928
|
)
|
|
|
|
|
|
(5,649
|
)
|
5,325
|
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
195,661
|
|
204,408
|
|
|
Share capital issued on warrants and options exercised
|
|
|
|
8,011
|
|
24,014
|
|
|
Proceeds from non-controlling interest
|
|
|
|
9,800
|
|
—
|
|
|
Advances from related parties
|
|
8
|
|
11,386
|
|
388
|
|
|
Repayment of amounts due to related parties
|
|
8
|
|
(10,890
|
)
|
(852
|
)
|
|
Proceeds from long-term debt
|
|
18
|
|
—
|
|
32,825
|
|
|
Repayment of long-term debt
|
|
18
|
|
(7,622
|
)
|
(644
|
)
|
|
|
|
|
|
206,346
|
|
260,139
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Investment in marketable securities
|
|
4
|
|
(7,365
|
)
|
(109,269
|
)
|
|
Proceeds from disposal of marketable securities
|
|
4
|
|
47,495
|
|
22,131
|
|
|
Investment in capital and intangible assets, net of shares issued
|
|
9,10
|
|
(216,699
|
)
|
(67,722
|
)
|
|
Proceeds from disposal of capital assets
|
|
9
|
|
431
|
|
33
|
|
|
Convertible notes advances
|
|
12
|
|
(14,001
|
)
|
(1,500
|
)
|
|
Repayment of convertible notes receivable
|
|
|
|
640
|
|
—
|
|
|
Repayment of promissory notes receivable
|
|
|
|
—
|
|
568
|
|
|
Investment in long-term investments and equity investees
|
|
|
|
(51,692
|
)
|
(53,464
|
)
|
|
Proceeds from disposal of long-term investments and equity investees
|
|
|
|
43,077
|
|
7,196
|
|
|
Net cash paid on business acquisitions
|
|
11
|
|
(22,756
|
)
|
—
|
|
|
|
|
|
|
(220,870
|
)
|
(202,027
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
(20,173
|
)
|
63,437
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
79,910
|
|
16,473
|
|
|
Cash and cash equivalents, end of year
|
|
|
|
$
|
59,737
|
|
$
|
79,910
|
|
The accompanying notes are an integral part of these consolidated financial statements
5
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). In February 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”) (Note 11). Broken Coast is licensed to produce and sell medical cannabis under the provision of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). In March 2018, the Company acquired Nuuvera Inc. (“Nuuvera”) (Note 11), Nuuvera is an international organization with a focus on building a global cannabis brand, with operations in Germany, Italy, Spain, Malta, and Lesotho.
1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms. Aphria Diamond has applied for its cultivation licence under the provisions of the ACMPR.
The registered office of the Company is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These consolidated financial statements were approved by the Company’s Board of Directors on July 31, 2018.
2.
Basis of preparation
(a)
Statement of compliance
The policies applied in these consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”).
(b)
Basis of measurement
These consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management is Canadian dollars. These consolidated financial statements are presented in Canadian dollars.
(d)
Foreign currency translation
All figures presented in the consolidated financial statements are reflected in Canadian dollars, which is the functional currency of the Company and all of its subsidiaries.
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the foreign exchange rate applicable at the statement of financial position date. Realized and unrealized exchange gains and losses are recognized through profit and loss.
The assets and liabilities of foreign operations, including marketable securities, long-term investments and promissory notes payable, are translated in Canadian dollars at year-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity.
6
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
(e) Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
|
Subsidiaries
|
|
Jurisdiction of incorporation
|
|
Ownership interest
|
|
|
Pure Natures Wellness Inc. (o/a Aphria)
|
|
Ontario, Canada
|
|
100
|
%
|
|
Aphria (Arizona) Inc.
|
|
Arizona, United States
|
|
100
|
%
|
|
Cannan Growers Inc.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Nuuvera Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Holdings Ltd.
|
|
Ontario, Canada
|
|
100
|
%
|
|
ARA — Avanti Rx Analytics Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Avalon Pharmaceuticals Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589671 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589674 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Israel Ltd.
|
|
Tel Aviv, Israel
|
|
100
|
%
|
|
Nuuvera Deutschland GmbH
|
|
Hamburg, Germany
|
|
100
|
%
|
|
FL-Group
|
|
Genoa, Italy
|
|
100
|
%
|
|
Broken Coast Cannabis Ltd.
|
|
British Columbia, Canada
|
|
99.86
|
%
|
|
Nuuvera Malta Ltd.
|
|
Valletta, Malta
|
|
90
|
%
|
|
ASG Pharma Ltd.
|
|
Valletta, Malta
|
|
90
|
%
|
|
1974568 Ontario Ltd.
|
|
Ontario, Canada
|
|
51
|
%
|
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
(e)
Amalgamation
Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
(f)
Interest in equity investees
The Company’s interest in equity investees is comprised of its interest in Liberty Health Sciences Inc. (“Liberty”) and Althea Company Pty Ltd. (“Althea”). During the year, the Company entered into an agreement which has changed the classification of its investment in Liberty from equity investee to assets held for sale (Note 13).
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.
7
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity investments is tested for impairment in accordance with the policy described in Note 3(j).
3.
Significant accounting policies
The significant accounting policies used by the Company are as follows:
a. Revenue
Revenue is recognized at the fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all the following conditions have been satisfied, which are generally met once the products are shipped to customers.
·
The Company has transferred the significant risks and rewards of ownership of the goods to the purchaser;
·
The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
·
The amount of revenue can be measured reliably;
·
It is probable that the economic benefits associated with the transaction will flow to the entity; and
·
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
The Company recognizes revenue from consulting services on a straight-line basis over the term of its consulting agreement with a third party as the services are provided.
Amounts disclosed as revenue are net of allowances, discounts and rebates.
b.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of changes in value.
c.
Marketable securities
Marketable securities are comprised of liquid investments in federal, provincial and/or corporate bonds with maturities less than 3.5 years. Marketable securities are recognized initially at fair value and subsequently adjusted to fair value through profit or loss (“FVTPL”).
d.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories of harvested cannabis are transferred from biological assets into inventory at their fair value at harvest less costs to sell, which is deemed to be their cost. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost.
8
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
e.
Biological assets
The Company’s biological assets consist of medical cannabis plants which are not yet harvested. These biological assets are measured at fair value less costs to sell. The Company capitalizes all related direct and indirect costs of production to the biological assets to fair value less costs to sell at each reporting date. At the point of harvest, the biological assets are transferred to inventory at their fair value less costs to sell.
Gains or losses arising from changes in fair value less cost to sell are included in the results of operations of the related period.
f.
Assets held for sale
Assets and liabilities held for disposal are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.
g. Capital assets
Capital assets are stated at cost, net of accumulated amortization and accumulated impairment losses, if any.
Amortization is calculated using the following terms and methods:
|
Asset type
|
|
Amortization method
|
|
Amortization term
|
|
Land
|
|
Not amortized
|
|
No term
|
|
Production facility
|
|
Straight-line
|
|
20 years
|
|
Equipment
|
|
Straight-line
|
|
3 – 10 years
|
|
Leasehold improvements
|
|
Straight-line
|
|
Over lease term
|
|
Construction in progress
|
|
Not amortized
|
|
No term
|
An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated statements of income and comprehensive income in the year the asset is derecognized.
The assets’ residual values, useful lives and methods of amortization are reviewed at each financial year end, and adjusted prospectively if appropriate.
h.
Intangible assets
Intangible assets are stated at cost, net of accumulated amortization and accumulated impairment losses, if any.
Amortization is calculated using the following terms and methods:
|
Asset type
|
|
Amortization method
|
|
Amortization term
|
|
Customer relationships
|
|
Straight-line
|
|
3 years
|
|
Corporate website
|
|
Straight-line
|
|
2 years
|
|
Licences, permits & applications
|
|
Straight-line
|
|
90 months – indefinite
|
|
Non-compete agreements
|
|
Straight-line
|
|
Over term of non-compete
|
|
Tokyo Smoke licensing agreement
|
|
Straight-line
|
|
5 years
|
|
Intellectual property, trademarks & brands
|
|
Straight-line
|
|
15 months – 20 years
|
The estimated success of applications, useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
9
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Following initial recognition, intangible assets with indefinite useful lives are carried at cost less any accumulated impairment losses.
i.
Goodwill
Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net tangible and intangible assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.
j.
Impairment of non-financial assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
For the purpose of testing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit, or “CGU”). An impairment loss is recognized for the amount, if any, by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and the value in use (being the present value of expected future cash flows of the asset or CGU). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized.
k.
Income taxes
Income tax expense consisting of current and deferred tax expense is recognized in the consolidated statements of income and comprehensive income. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.
A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
l.
Earnings per share
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. The dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the year. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.
10
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
m.
Share-based compensation
The Company has a stock option plan in place. The Company measures equity settled share-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Company’s estimate of equity instruments that will eventually vest. Fair value is measured using the Black-Scholes option pricing model. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. Any revisions are recognized in the consolidated statements of income and comprehensive income such that the cumulative expense reflects the revised estimate.
n.
Research and development
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures that do not meet the above criteria are recognized in the consolidated statements of income and comprehensive income as incurred.
o.
Financial instruments
Financial assets and other financial liabilities are classified into one of four categories:
·
FVTPL;
·
held-to-maturity (“HTM”);
·
available for sale (“AFS”); and
·
loans and receivables.
(i) FVTPL financial assets
Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of income and comprehensive income. Transaction costs are expensed as incurred.
(ii)
HTM investments
HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction costs and subsequently at amortized cost.
(iii)
AFS financial assets
AFS financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other categories. Gains and losses arising from changes in fair value are recognized in other comprehensive income.
(iv)
Loans and receivables
Loans and receivables are financial assets having fixed or determinable payments that are not quoted in an active market. They are initially recognized at the transaction value and subsequently carried at amortized cost less, when material, a discount to reduce the loans and receivables to fair value.
(v)
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
11
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
The carrying amount of all financial assets, excluding trade receivables, is directly reduced by the impairment loss. The carrying amount of trade receivables is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated statements of income and comprehensive income. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease relates to an event occurring after the impairment was recognized; the previously recognized impairment loss is reversed through the consolidated statements of income and comprehensive income.
(vi)
Financial liabilities and other financial liabilities
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with changes being recognized through the consolidated statements of income and comprehensive income. Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.
(vii)
Embedded derivatives
Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in profit or loss. The Company has convertible loans receivables whereby balances can be converted into equity and a share purchase agreement resulting in an obligation to sell shares at an 18% discount on the market price, based on a 10 day volume weighted trading price (Note 13).
(viii)
Classification of financial instruments
Cash and cash equivalents — FVTPL
Marketable securities — FVTPL
Accounts receivables — loans and receivables
Other receivables — loans and receivables
Convertible note receivable — AFS
Embedded derivative — derivative financial instruments
Long-term investments — FVTPL
Accounts payable and accrued liabilities — other financial liabilities
Promissory note payable — other financial liabilities
Long-term debt — other financial liabilities
Derivative liability — derivative financial instruments
(ix)
Determination on fair value of long-term investments
All long-term investments (other than Level 3 warrants) are initially recorded at the transaction price, being the fair value at the time of acquisition. Thereafter, at each reporting period, the fair value of an investment is adjusted using one or more of the valuation indicators described below. Warrants of private companies are carried at their intrinsic value.
p. Critical accounting estimates and judgments
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.
12
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Long-term investments
The determination of fair value of the Company’s long-term investments at other than initial cost are subject to certain limitations. Financial information for private companies in which the Company has investments may not be available and, even if available, that information may be limited and/or unreliable.
Use of the valuation approach described below may involve uncertainties and determinations based on the Company’s judgment and any value estimated from these techniques may not be realized or realizable.
Company-specific information is considered when determining whether the fair value of a long-term investment should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will take into account trends in general market conditions and the share performance of comparable publicly-traded companies when valuing long-term investments.
The fair value of long-term investments may be adjusted if:
·
There has been a significant subsequent equity financing provided by outside investors at a valuation different than the current value of the investee company, in which case the fair value of the investment is set to the value at which that financing took place;
·
There have been significant corporate, political, or operating events affecting the investee company that, in management’s opinion, have a material impact on the investee company’s prospects and therefore its fair value. In these circumstances, the adjustment to the fair value of the investment will be based on management’s judgment and any value estimated may not be realized or realizable;
·
The investee company is placed into receivership or bankruptcy;
·
Based on financial information received from the investee company, it is apparent to the Company that the investee company is unlikely to be able to continue as a going concern;
·
Important positive/negative management changes by the investee company that the Company’s management believes will have a positive/negative impact on the investee company’s ability to achieve its objectives and build value for shareholders.
Adjustment to the fair value of a long-term investment will be based upon management’s judgment and any value estimated may not be realized or realizable. The resulting values for non-publicly traded investments may differ from values that would be realized if a ready market existed.
Biological assets and inventory
Management is required to make a number of estimates in calculating the fair value less costs to sell of biological assets and harvested cannabis inventory. These estimates include a number of assumptions such as estimating the stage of growth of the cannabis, harvesting costs, sales price, and expected yields.
Estimated useful lives, impairment considerations and amortization of capital and intangible assets
Amortization of capital and intangible assets is dependent upon estimates of useful lives based on management’s judgment.
Goodwill and indefinite life intangible asset impairment testing requires management to make estimates in the impairment testing model. On an annual basis, the Company tests whether goodwill and indefinite life intangible assets are impaired.
Impairment of definite long-lived assets is influenced by judgment in defining a CGU and determining the indicators of impairment, and estimates used to measure impairment losses
The recoverable value of goodwill, indefinite and definite long-lived assets is determined using discounted future cash flow models, which incorporate assumptions regarding future events, specifically future cash flows, growth rates and discount rates.
13
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Share-based compensation
The fair value of share-based compensation expenses are estimated using the Black-Scholes option pricing model and rely on a number of estimates, such as the expected life of the option, the volatility of the underlying share price, the risk free rate of return, and the estimated rate of forfeiture of options granted.
Business combinations
Judgement is used in determining whether an acquisition is a business combination or an asset acquisition. In determining the allocation of the purchase price in a business combination, including any acquisition-related contingent consideration, estimates including market based and appraisal values are used. 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 remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37, as appropriate, with the corresponding gain or loss being recognized in profit or loss.
The Company measures all assets acquired and liabilities assumed at their acquisition-date fair values. Non-controlling interests in the acquiree are measured on the basis of the non-controlling interests’ proportionate share of this equity in the acquiree’s identifiable net assets. Acquisition-related costs are recognized as expenses in the periods in which the costs are incurred and the services are received (except for the costs to issue debt or equity securities which are recognized according to specific requirements). The excess of the aggregate of (a) the consideration transferred to obtain control, the amount of any non-controlling interest in the acquire over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, is recognized as goodwill as of the acquisition date.
q. New standards and interpretations issued but not yet adopted
IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company is assessing the impact of the standard on its convertible notes receivable and its investments where it holds less than significant influence. The Company is currently completing its assessment of the impact of this new standard.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the period of the adoption of the new standard.
The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.
IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard, with a focus on consulting contracts and royalty fees.
The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.
IFRS 16 — Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.
14
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.
4.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating at
purchase
|
|
Interest
rate
|
|
Maturity
date
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Molson Coors Brewing Company
|
|
BBB-
|
|
3.950
|
%
|
10/06/17
|
|
$
|
—
|
|
$
|
1,116
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.320
|
%
|
12/19/17
|
|
—
|
|
1,988
|
|
|
Goldman Sachs & Co. LLC
|
|
A+
|
|
3.375
|
%
|
2/01/18
|
|
—
|
|
5,078
|
|
|
The Manufacturer’s Life Insurance Company
|
|
AA-
|
|
2.819
|
%
|
2/26/18
|
|
—
|
|
1,472
|
|
|
Canadian Western Bank
|
|
A-
|
|
2.531
|
%
|
3/22/18
|
|
—
|
|
3,039
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
8/02/18
|
|
1,015
|
|
1,037
|
|
|
Sobeys Inc.
|
|
BB+
|
|
3.520
|
%
|
8/08/18
|
|
3,040
|
|
3,078
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
2.770
|
%
|
12/11/18
|
|
—
|
|
5,180
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
1/14/19
|
|
1,528
|
|
1,535
|
|
|
Sun Life Financial Inc.
|
|
A
|
|
2.770
|
%
|
5/13/19
|
|
3,018
|
|
3,064
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
6/14/19
|
|
5,101
|
|
5,207
|
|
|
Canadian Natural Resources Ltd.
|
|
BBB+
|
|
3.050
|
%
|
6/19/19
|
|
—
|
|
2,054
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,025
|
|
1,028
|
|
|
Laurentian Bank of Canada
|
|
BBB
|
|
2.500
|
%
|
1/23/20
|
|
3,003
|
|
6,099
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
2/03/20
|
|
3,974
|
|
4,008
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
3/09/20
|
|
5,203
|
|
5,395
|
|
|
Central 1 Credit Union
|
|
A
|
|
1.870
|
%
|
3/16/20
|
|
—
|
|
5,020
|
|
|
Choice Properties REIT
|
|
BBB
|
|
3.600
|
%
|
4/20/20
|
|
5,091
|
|
5,237
|
|
|
Penske Truck Leasing Co., L.P.
|
|
BBB
|
|
2.950
|
%
|
6/12/20
|
|
—
|
|
5,145
|
|
|
Westcoast Energy Inc.
|
|
BBB+
|
|
4.570
|
%
|
7/02/20
|
|
5,293
|
|
5,430
|
|
|
Bank of Montreal (USD)
|
|
A+
|
|
1.400
|
%
|
4/10/18
|
|
—
|
|
4,052
|
|
|
Citigroup Inc. (USD)
|
|
BBB+
|
|
2.050
|
%
|
12/17/18
|
|
3,914
|
|
4,081
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
4/15/19
|
|
3,857
|
|
4,040
|
|
|
Wells Fargo & Company (USD)
|
|
A
|
|
2.150
|
%
|
1/30/20
|
|
—
|
|
3,964
|
|
|
|
|
|
|
|
|
|
|
$
|
45,062
|
|
$
|
87,347
|
|
The cost of marketable securities as at May 31, 2018 was $45,863 (May 31, 2017 — $87,138). During the year ended May 31, 2018, the company divested of certain marketable securities for proceeds of $47,495 (2017 - $22,131), resulting in a (loss) gain on disposal of $(608) (2017 - $35), and re-invested $7,365 (2017 - $109,269). During the year ended May 31, 2018, the Company recognized a (loss) gain of $(2,155) (2017 - $209) on its marketable securities portfolio, of which $(1,547) (2017 - $174) represented unrealized fair value adjustments.
15
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
5.
Other current assets
Other current assets are comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
HST receivable
|
|
$
|
10,840
|
|
$
|
3,675
|
|
|
Accrued interest
|
|
831
|
|
701
|
|
|
Credit card receivable
|
|
170
|
|
103
|
|
|
Prepaid assets
|
|
1,720
|
|
1,060
|
|
|
Other
|
|
823
|
|
32
|
|
|
|
|
$
|
14,384
|
|
$
|
5,571
|
|
6.
Inventory
Inventory is comprised of:
|
|
|
Capitalized
cost
|
|
Fair value
adjustment
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Harvested cannabis
|
|
$
|
4,111
|
|
$
|
8,220
|
|
|
$
|
12,331
|
|
$
|
2,507
|
|
|
Harvested cannabis trim
|
|
810
|
|
1,467
|
|
|
2,277
|
|
421
|
|
|
Cannabis oil
|
|
2,660
|
|
3,918
|
|
|
6,578
|
|
682
|
|
|
Packaging and supplies
|
|
964
|
|
—
|
|
|
964
|
|
277
|
|
|
|
|
$
|
8,545
|
|
$
|
13,605
|
|
|
$
|
22,150
|
|
$
|
3,887
|
|
During the year ended May 31, 2018, the Company recorded $8,313 (2017 - $4,585) of production costs. Included in production costs for the year ended May 31, 2018 is $241 of cannabis oil conversion costs (2017 - $99), $236 related to the cost of accessories (2017 - $58), and amortization of $1,715 (2017 - $986). The Company also included $978 of amortization which remains in inventory for the year ended May 31, 2018 related to capital assets utilized in production. During the year ended May 31, 2018, the Company expensed $10,327 (2017 —$3,561) of fair value adjustments on the growth its biological assets included in inventory sold.
The Company holds 3,221.3 kilograms of harvested cannabis (May 31, 2017 — 668.5 kgs), 702.0 kilograms of harvested cannabis trim (May 31, 2017 — 140.1 kgs) and 7,724.7 litres of cannabis oils or 1,716.6 kilograms equivalent (May 31, 2017 — 1,091.3 litres or 181.9 kilograms equivalent) at May 31, 2018.
7.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance as at May 31, 2016
|
|
$
|
698
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
5,005
|
|
|
Production costs capitalized
|
|
4,188
|
|
|
Transferred to inventory upon harvest
|
|
(8,483
|
)
|
|
Balance as at May 31, 2017
|
|
$
|
1,408
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
23,302
|
|
|
Purchased as part of business acquisition
|
|
826
|
|
|
Production costs capitalized
|
|
12,143
|
|
|
Transferred to inventory upon harvest
|
|
(30,348
|
)
|
|
Balance at May 31, 2018
|
|
$
|
7,331
|
|
16
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
The Company values medical cannabis plants at cost, which approximates fair value from the date of initial clipping from mother plants until half way through the flowering cycle of the plants. Measurement of the biological transformation of the plant at fair value less costs to sell begins in the fourth week prior to harvest and is recognized evenly until the point of harvest. The number of weeks in the growing cycle is between twelve and sixteen weeks from propagation to harvest. The Company has determined the fair value less costs to sell of harvested cannabis and harvested cannabis trim to be $3.75 and $3.00 per gram respectively, upon harvest for greenhouse produced cannabis and $4.25 and $3.50 per gram respectively, upon harvest for indoor produced cannabis.
The effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $23,302 during the year ended May 31, 2018 (2017 — $5,005).
The fair value of biological assets is determined using a valuation model to estimate expected harvest yield per plant applied to the estimated price per gram less processing and selling costs. Only when there is a material change from the expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the year, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.
In determining the fair value of biological assets, management has made the following estimates in this valuation model:
·
The harvest yield is between 40 grams and 80 grams per plant;
·
The selling price is between $2.50 and $10.00 per gram;
·
Processing costs include drying and curing, testing, post-harvest overhead allocation, packaging and labelling costs between $0.30 and $0.80 per gram;
·
Selling costs include shipping, order fulfilment, patient acquisition and patient maintenance costs between $0.00 and $3.00 per gram;
Sales price used in the valuation of biological assets is based on the average selling price of all cannabis products and can vary based on different strains being grown as well as the proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to a variety of factors, such as strains being grown, length of growing cycle, and space allocated for growing. Management reviews all significant inputs based on historical information obtained as well as based on planned production schedules.
Management has quantified the sensitivity of the inputs and determined the following:
·
Selling price per gram — a decrease in the average selling price per gram by 5% would result in the biological asset value decreasing by $267 (2017 - $25) and inventory decreasing by $1,040 (2017 - $180)
·
Harvest yield per plant — a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $179 (2017 - $15)
These inputs are level 3 on the fair value hierarchy, and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
8.
Related party transactions
The Company funds a small portion of the Canadian operating costs of Liberty, for which Liberty reimburses the Company quarterly. Additionally, the Company purchases certain electrical generation equipment and pays rent to a company owned by a director. The balance owing from related parties as at May 31, 2018 was $nil (May 31, 2017 - $464). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the year ended May 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $276 (2017 - $388). Included in this amount was rent of $45 charged during the year ended May 31, 2018 (2017 - $49).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc., a related party through an equity investment.
17
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Amount
|
|
|
Balance due to (from) related parties as at May 31, 2017
|
|
$
|
(464
|
)
|
|
Related party charges in the year
|
|
276
|
|
|
Payments to related parties in the year
|
|
(276
|
)
|
|
Non-cash payments made on behalf of related parties in the year
|
|
(32
|
)
|
|
Payments made on behalf of related parties in the year
|
|
(10,614
|
)
|
|
Repayments made by related parties in the year
|
|
11,110
|
|
|
Balance at May 31, 2018
|
|
$
|
—
|
|
During the year ended May 31, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc., its sole holdings being the minority interests in Copperstate and CSF, to Liberty for a purchase price of $20,000 (Note 14). Subsequent to entering into this definitive agreement, the existing investors in Copperstate and CSF exercised their right of first refusal to purchase the minority interests on the same terms. Subsequent to year-end, this transaction closed.
During the year ended May 31, 2018, the Company purchased capital assets for $995 from a company controlled by a director. During the prior year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6,100. The purchase price was allocated as follows: (i) $1,300 to land; (ii) $3,550 to greenhouse infrastructure; and, (iii) $1,250 to licences, permits & applications — intangible assets.
Key management personnel compensation for the year ended May 31, 2018 and 2017 was comprised of:
|
|
|
For the year ended
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Salaries
|
|
$
|
1,699
|
|
$
|
829
|
|
|
Short-term employment benefits (included in office and general)
|
|
70
|
|
84
|
|
|
Share-based compensation
|
|
3,235
|
|
594
|
|
|
|
|
$
|
5,004
|
|
$
|
1,507
|
|
Directors and officers of the Company control 8.5% or 17,902,125 of the voting shares of the Company.
18
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
9.
Capital assets
|
|
|
|
|
Production
|
|
|
|
Leasehold
|
|
Construction
|
|
Total capital
|
|
|
|
|
Land
|
|
Facility
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,499
|
|
$
|
4,812
|
|
$
|
65
|
|
$
|
8,376
|
|
|
Additions
|
|
10,725
|
|
4,018
|
|
1,700
|
|
16
|
|
49,958
|
|
66,417
|
|
|
Transfers
|
|
104
|
|
12,152
|
|
174
|
|
(4,566
|
)
|
(7,864
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(33
|
)
|
—
|
|
—
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
10,829
|
|
16,170
|
|
5,340
|
|
262
|
|
42,159
|
|
74,760
|
|
|
Business acquisitions
|
|
854
|
|
6,992
|
|
2,860
|
|
1,388
|
|
5,947
|
|
18,041
|
|
|
Additions
|
|
12,716
|
|
47,149
|
|
4,759
|
|
15
|
|
151,899
|
|
216,538
|
|
|
Transfers
|
|
105
|
|
29,338
|
|
2,990
|
|
—
|
|
(32,433
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
(207
|
)
|
—
|
|
—
|
|
(415
|
)
|
(622
|
)
|
|
At May 31, 2018
|
|
$
|
24,504
|
|
$
|
99,442
|
|
$
|
15,949
|
|
$
|
1,665
|
|
$
|
167,157
|
|
$
|
308,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
554
|
|
$
|
513
|
|
$
|
—
|
|
$
|
1,067
|
|
|
Amortization
|
|
|
|
458
|
|
717
|
|
74
|
|
—
|
|
1,249
|
|
|
Transfers
|
|
—
|
|
525
|
|
—
|
|
(525
|
)
|
—
|
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
—
|
|
(11
|
)
|
|
At May 31, 2017
|
|
—
|
|
983
|
|
1,260
|
|
62
|
|
—
|
|
2,305
|
|
|
Amortization
|
|
—
|
|
1,517
|
|
1,697
|
|
47
|
|
—
|
|
3,261
|
|
|
At May 31, 2018
|
|
$
|
—
|
|
$
|
2,500
|
|
$
|
2,957
|
|
$
|
109
|
|
$
|
—
|
|
$
|
5,566
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,945
|
|
$
|
4,299
|
|
$
|
65
|
|
$
|
7,309
|
|
|
At May 31, 2017
|
|
$
|
10,829
|
|
$
|
15,187
|
|
$
|
4,080
|
|
$
|
200
|
|
$
|
42,159
|
|
$
|
72,455
|
|
|
At May 31, 2018
|
|
$
|
24,504
|
|
$
|
96,942
|
|
$
|
12,992
|
|
$
|
1,556
|
|
$
|
167,157
|
|
$
|
303,151
|
|
During the year ended May 31, 2018, the Company sold assets that were not yet in use prior to disposal with a cost of $622 (2017 - $33) and a net book value of $622 (2017 - $22), for proceeds of $431 (2017 - $33), resulting in a loss (gain) on sale of capital assets of $191 (2017 - $(11)).
19
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
10.
Intangible assets
|
|
|
Customer
relationships
|
|
Corporate
website
|
|
Licences,
permits &
applications
|
|
Non-compete
agreements
|
|
Tokyo Smoke
licensing
agreement
|
|
Intellectual
property,
trademarks &
brands
|
|
Total
intangible
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
162
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,428
|
|
$
|
4,590
|
|
|
Additions
|
|
|
|
56
|
|
1,250
|
|
—
|
|
459
|
|
—
|
|
1,765
|
|
|
At May 31, 2017
|
|
—
|
|
218
|
|
1,250
|
|
—
|
|
459
|
|
4,428
|
|
6,355
|
|
|
Business acquisitions
|
|
11,730
|
|
39
|
|
137,920
|
|
1,930
|
|
—
|
|
76,190
|
|
227,809
|
|
|
Additions
|
|
—
|
|
152
|
|
—
|
|
—
|
|
—
|
|
9
|
|
161
|
|
|
At May 31, 2018
|
|
$
|
11,730
|
|
$
|
409
|
|
$
|
139,170
|
|
$
|
1,930
|
|
$
|
459
|
|
$
|
80,627
|
|
$
|
234,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
88
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
184
|
|
$
|
272
|
|
|
Amortization
|
|
|
|
68
|
|
153
|
|
—
|
|
57
|
|
414
|
|
692
|
|
|
Impairment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
3,500
|
|
|
At May 31, 2017
|
|
—
|
|
156
|
|
153
|
|
—
|
|
57
|
|
4,098
|
|
4,464
|
|
|
Amortization
|
|
1,274
|
|
100
|
|
124
|
|
314
|
|
92
|
|
1,513
|
|
3,417
|
|
|
At May 31, 2018
|
|
$
|
1,274
|
|
$
|
256
|
|
$
|
277
|
|
$
|
314
|
|
$
|
149
|
|
$
|
5,611
|
|
$
|
7,881
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
74
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,244
|
|
$
|
4,318
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
62
|
|
$
|
1,097
|
|
$
|
—
|
|
$
|
402
|
|
$
|
330
|
|
$
|
1,891
|
|
|
At May 31, 2018
|
|
$
|
10,456
|
|
$
|
153
|
|
$
|
138,893
|
|
$
|
1,616
|
|
$
|
310
|
|
$
|
75,016
|
|
$
|
226,444
|
|
11.
Business Acquisitions
Acquisition of Broken Coast Cannabis Ltd.
On February 13, 2018, the Company entered into a share purchase agreement to purchase all of the shares of Cannan Growers Inc. (“Cannan”), a holding company owning shares of Broken Coast Cannabis Ltd. (“Broken Coast”), and to acquire the remaining shares, for a combined total of 99.86%, of the issued and outstanding shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate 14,373,675 common shares. The share purchase agreement entitled the Company to control Broken Coast effective on February 1, 2018, which became the effective acquisition date.
The Company is in the process of determining the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the acquisition date:
20
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Note
|
|
Number of shares
|
|
Share price
|
|
Amount
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
(i)
|
|
14,373,675
|
|
$
|
14.90
|
|
$
|
214,168
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
2,007
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
299
|
|
|
Other current assets
|
|
|
|
|
|
|
|
43
|
|
|
Inventory
|
|
|
|
|
|
|
|
2,572
|
|
|
Biological assets
|
|
|
|
|
|
|
|
826
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
13,298
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
11,730
|
|
|
Corporate website
|
|
|
|
|
|
|
|
39
|
|
|
Licences, permits & applications
|
|
|
|
|
|
|
|
6,320
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
1,930
|
|
|
Trademark & brands
|
|
|
|
|
|
|
|
72,490
|
|
|
Goodwill
|
|
|
|
|
|
|
|
145,794
|
|
|
Total assets
|
|
|
|
|
|
|
|
257,348
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
10,455
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
922
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
25,889
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
5,914
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
43,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
Share price based on the price of the shares on February 1, 2018.
The amount of net income and comprehensive income of Broken Coast since the acquisition date included in these consolidated financial statements was $1,837. Net income and comprehensive net income for the Company would have been higher by approximately $2,268 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs to date of $1,643.
Acquisition of Nuuvera Corp.
On March 23, 2018, the Company completed the previously announced definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which the Company acquired, by way of a court-approved plan of arrangement, under the Business Corporations Act (Ontario) (the “Transaction”), 100% of the issued and outstanding common shares (on a fully diluted basis) of Nuuvera for a total consideration of $0.62 in cash plus 0.3546 of an Aphria share for each Nuuvera share held. All of Nuuvera’s outstanding options were exchanged for an equivalent option granted pursuant to Aphria’s stock option plan (each, a “Replacement Option”) to purchase from Aphria the number of common shares (rounded to the nearest whole share) equal to: (i) the exchange ratio multiplied by (ii) the number of Nuuvera shares subject to such Nuuvera Option. Each such Replacement Option shall provide for an exercise price per common share (rounded to the nearest whole cent) equal to: (i) the exercise price per Nuuvera share purchasable pursuant to such Nuuvera Option; divided by (ii) the exchange ratio.
The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the acquisition date:
21
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Note
|
|
Number of shares
|
|
Share price
|
|
Amount
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
$
|
54,604
|
|
|
Shares issued
|
|
(i)
|
|
31,226,910
|
|
$
|
13.17
|
|
411,258
|
|
|
Warrants outstanding
|
|
(ii)
|
|
1,345,866
|
|
|
|
1,015
|
|
|
Replacement options issued
|
|
(Ii)
|
|
1,280,330
|
|
|
|
12,133
|
|
|
|
|
|
|
|
|
|
|
479,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of previously held investment
|
|
|
|
|
|
|
|
|
|
|
Shares held by Aphria
|
|
(i)
|
|
1,878,738
|
|
$
|
14.92
|
|
28,028
|
|
|
Warrants held by Aphria
|
|
(ii)
|
|
322,365
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
28,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of consideration
|
|
|
|
|
|
|
|
$
|
507,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
35,033
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
464
|
|
|
Other current assets
|
|
|
|
|
|
|
|
1,142
|
|
|
Inventory
|
|
|
|
|
|
|
|
401
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
4,743
|
|
|
Intellectual property, trademarks & brands
|
|
|
|
|
|
|
|
3,700
|
|
|
Licences, permits & applications
|
|
|
|
|
|
|
|
131,600
|
|
|
Goodwilll
|
|
|
|
|
|
|
|
375,768
|
|
|
Total assets
|
|
|
|
|
|
|
|
552,851
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
9,547
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
36,023
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
45,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
507,281
|
|
(i)
Share price based on the price of the shares on March 23, 2018; shares held by Aphria include the cash consideration paid.
(ii)
Options and warrants are valued using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 2.19%; expected life of 1- 10 years; volatility of 30% based on volatility used for similar instruments on the open market; forfeiture rate of nil; dividend yield of nil; and the exercise price of $2.52 - $20.30.
The amount of net loss and comprehensive loss of Nuuvera since the acquisition date included in these consolidated financial statements was $3,677. Net income and comprehensive net income for the Company would have been lower by approximately $19,611 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs to date of $3,439.
Included in goodwill is $1,200 from the acquisition of CannWay, $145,794 from the acquisition of Broken Coast and $375,768 from the acquisition of Nuuvera.
22
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
12.
Convertible notes receivable
|
|
|
Notes receivable
|
|
Embedded derivatives
|
|
|
|
|
May 31,
|
|
May 31,
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
CannaRoyalty Corp.
|
|
$
|
—
|
|
$
|
1,361
|
|
$
|
—
|
|
$
|
173
|
|
|
Copperstate Farms Investors, LLC
|
|
1,942
|
|
—
|
|
—
|
|
—
|
|
|
HydRx Farms Ltd. (d/b/a Scientus Pharma)
|
|
8,719
|
|
—
|
|
7,410
|
|
—
|
|
|
|
|
10,661
|
|
1,361
|
|
7,410
|
|
173
|
|
|
Deduct - current portion
|
|
(1,942
|
)
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
8,719
|
|
$
|
1,361
|
|
$
|
7,410
|
|
$
|
173
|
|
CannaRoyalty Corp.
During the year, the Company’s note receivable from CannaRoyalty Corp. (“CR”) increased by $139 representing the recognition of accretion interest on the note and the embedded derivative increased by $1,175, representing the change in fair value of the conversion feature on the note. Prior to year-end, the Company converted the notes, and transferred $1,500 from notes receivable and $1,348 from embedded derivatives to long-term investments (Note 14).
Copperstate Farms Investors, LLC
On August 31, 2017, the Company lent Copperstate Farms Investors, LLC (“CSF”) $2,000 USD ($2,501 CAD) in exchange for a senior secured convertible loan. The convertible debenture bears interest at 9%, was originally due on May 15, 2018 (“Maturity Date”). The loan was pre-payable at any time by CSF, however no principal payments were due prior to the Maturity Date. If at least $500 USD of the outstanding loan balance was not repaid by February 28, 2018, then an automatic conversion would be triggered for $500 USD plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at $500 USD per unit of CSF. If the outstanding loan balance was not repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at $500 USD per unit of CSF. The convertible loan was secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. Since the option to settle payments in membership units was solely at the discretion of CSF, no embedded derivative was recognized. Prior to February 28, 2018, the Company received $500 USD as a partial repayment of the convertible note receivable.
On May 15, 2018, the Company entered into an amendment agreement with CSF which extended the maturity date and automatic conversion date to June 30, 2018, which was subsequently extended into July. As at May 31, 2018, the convertible note receivable totalled $1,500 USD ($1,942 CAD). Subsequent to year-end, this note was paid in full.
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria lent $11,500 to Scientus Pharma (“SP”) as a convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days.
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. The fair value of the derivative asset related to the convertible note is $7,410 at May 31, 2018.
During the year, the Company’s note receivable from SP increased by $1,669 representing the recognition of accretion interest on the note and the embedded derivative increased by $2,960, representing the change in fair value of the conversion feature on the note.
As at May 31, 2018, the convertible note receivable totalled $16,129.
23
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
During the year, the Company lent a total of $14,001 in convertible notes, recognized total accretion interest revenue of $1,808, and recorded an unrealized gain on embedded derivatives of $4,135.
The fair value for the embedded derivatives was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 0.85-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
13.
Interest in equity investees
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Associated company
|
|
|
|
|
|
|
Liberty Health Sciences Inc.
|
|
$
|
—
|
|
$
|
28,376
|
|
|
Althea Company Pty Ltd.
|
|
4,966
|
|
—
|
|
|
|
|
$
|
4,966
|
|
$
|
28,376
|
|
Liberty Health Sciences Inc.
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
28,376
|
|
$
|
—
|
|
|
Investment
|
|
—
|
|
28,166
|
|
|
Transfer of fair value of SecureCom shares on reverse takeover
|
|
1,664
|
|
—
|
|
|
Gain on account of dilution of ownership
|
|
7,535
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(9,281
|
)
|
210
|
|
|
Share of reported comprehensive loss
|
|
(801
|
)
|
—
|
|
|
Equity investee sold
|
|
(6,873
|
)
|
—
|
|
|
Transfer to assets available for sale
|
|
(20,620
|
)
|
—
|
|
|
Closing balance
|
|
$
|
—
|
|
$
|
28,376
|
|
During the year ended May 31, 2018, the Company entered into a share purchase agreement (the “Transaction”) to sell 26,716,025 common shares of Liberty in exchange for $33,395. The 26,716,025 common shares sold represented all the Company’s shares in Liberty that were not subject to Canadian Securities Exchange (“CSE”) escrow requirements at the time of the Transaction. The Transaction also included a call/put obligation (“Obligation Agreement”) for the 80,148,077 remaining shares in Liberty held by the Company, which are currently subject to the CSE mandatory escrow requirements. As each new tranche of shares becomes freely trading, the Obligation Agreement results in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price.
The Transaction includes an opt-out for Aphria’s benefit, in the event that the Toronto Stock Exchange amends their regulations such that it permits investments by Canadian companies in U.S. based cannabis businesses, and in such instance the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agrees to pay the buyers a $2,500 termination fee.
Based on the terms of the Obligation Agreement, the Company determined that the remaining shares held in Liberty meet the requirements under IFRS 5 and have been reclassified as held for sale. The Company has ceased accounting for the investment as an equity investment as of November 30, 2017 and transferred the carrying value $20,620 to assets held for sale. Also included in assets held for sale is $20,000 of long-term investments (Note 14). The Company recorded a derivative liability, and unrealized loss on derivative liability of $12,451 as a result of the 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price in the Obligation Agreement.
Based on its closing share price of $0.87 as at May 31, 2018, the Liberty shares held by Aphria have a fair value net of the 18% discount, of $57,178, which is $49,009 higher than the carrying value recorded in assets held for sale net of the derivative liability.
24
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
The Company used a Monte-Carlo simulation to estimate the fair value of the derivative liability, using the following assumptions: risk-free rate of 1%; expected life of 0.4 — 2.4 years; volatility of 60% based on comparable companies; forfeiture rate of 0%; and, dividend yield of nil.
Prior to completion of the Transaction and reclassification of the investment to assets held for sale, Liberty reported a net loss $24,671 and a net comprehensive loss of $(26,798) for the period from May 1, 2017 to November 30, 2017. In accordance with the equity method, Aphria recorded a loss of $9,281 and an other comprehensive loss of $801 for the year ended May 31, 2018, from its investee relative to its ownership of the outstanding common shares at the time. The Company also recorded a gain on dilution of ownership in equity investee of $7,535 for the year ended May 31, 2018. No further loss from equity investee or gain on dilution of ownership in equity investee has been recorded in the year due to the reclassification of the investment from equity investment to asset held for sale.
Althea Company Pty Ltd. (“Althea”)
In February 2018, the Company entered into a subscription agreement with Althea for the purchase of 2,500 common shares for a total cost of $2,500 AUD ($2,483 CAD) (Note 14). On March 21, 2018 the Company acquired an additional 2,000 common shares for $2,500 AUD ($2,497 CAD). As a result of this transaction, the Company’s interest in Althea grew to 37.5%. Upon obtaining 37.5% interest in Althea, the Company determined they had significant influence, and transferred $5,000 AUD ($4,980 CAD) from long-term investments to equity accounted investee (Note 14).
The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements.
|
|
|
March 31,
2018
|
|
May 31, 2017
|
|
|
Current assets
|
|
$
|
3,857
|
|
$
|
—
|
|
|
Non-current assets
|
|
3
|
|
—
|
|
|
Current liabilities
|
|
14
|
|
—
|
|
|
Non-current liabilities
|
|
—
|
|
—
|
|
|
Net assets
|
|
$
|
3,874
|
|
$
|
—
|
|
For the period from March 21, 2018 to March 31, 2018 the investee, Althea, reported a net loss of $41 AUD on its financial statements. In accordance with the equity method, the Company recorded a loss of $14, for the year ended May 31, 2018, from its investee relative to its ownership of the outstanding common shares at the time.
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
—
|
|
$
|
—
|
|
|
Transfer from long-term investments
|
|
2,483
|
|
—
|
|
|
Cash contributions, net of share issuance costs
|
|
2,497
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(14
|
)
|
—
|
|
|
Closing balance
|
|
$
|
4,966
|
|
$
|
—
|
|
25
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
14. Long-term investments
|
|
|
Cost
May 31,
2017
|
|
|
Fair value
May 31,
2017
|
|
Investment
|
|
Divesture/
Transfer
|
|
|
Subtotal
May 31,
2018
|
|
Change in
fair value
|
|
Fair value
May 31,
2018
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,380
|
|
|
$
|
1,793
|
|
$
|
2,848
|
|
$
|
(1,793
|
)
|
|
$
|
2,848
|
|
$
|
917
|
|
$
|
3,765
|
|
|
Kalytera Therapeutics, Inc.
|
|
3,014
|
|
|
1,111
|
|
—
|
|
(1,111
|
)
|
|
—
|
|
—
|
|
—
|
|
|
MassRoots, Inc.
|
|
508
|
|
|
562
|
|
—
|
|
(232
|
)
|
|
330
|
|
(166
|
)
|
164
|
|
|
SecureCom Mobile Inc.
|
|
520
|
|
|
1,664
|
|
—
|
|
(1,664
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Tetra Bio-Pharma Inc.
|
|
2,300
|
|
|
9,500
|
|
—
|
|
—
|
|
|
9,500
|
|
(2,700
|
)
|
6,800
|
|
|
Canabo Medical Inc.
|
|
1,160
|
|
|
316
|
|
—
|
|
(316
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Hiku Brands Company Ltd.
|
|
—
|
|
|
—
|
|
8,775
|
|
1,000
|
|
|
9,775
|
|
3,783
|
|
13,558
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
8,423
|
|
(8,423
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Scythian Biosciences Corp.
|
|
—
|
|
|
—
|
|
9,349
|
|
—
|
|
|
9,349
|
|
(746
|
)
|
8,603
|
|
|
National Access Cannabis
|
|
—
|
|
|
—
|
|
1,093
|
|
—
|
|
|
1,093
|
|
(383
|
)
|
710
|
|
|
|
|
8,882
|
|
|
14,946
|
|
30,488
|
|
(12,539
|
)
|
|
32,895
|
|
705
|
|
33,600
|
|
|
Level 2 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiku Brands Company Ltd.
|
|
—
|
|
|
—
|
|
2,336
|
|
—
|
|
|
2,336
|
|
(430
|
)
|
1,906
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
1,627
|
|
(1,627
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Scythian Biosciences Corp.
|
|
—
|
|
|
—
|
|
3,153
|
|
—
|
|
|
3,153
|
|
(2,492
|
)
|
661
|
|
|
|
|
—
|
|
|
—
|
|
7,116
|
|
(1,627
|
)
|
|
5,489
|
|
(2,922
|
)
|
2,567
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC
|
|
1,755
|
|
|
1,755
|
|
—
|
|
—
|
|
|
1,755
|
|
3,545
|
|
5,300
|
|
|
Copperstate Farms Investors, LLC
|
|
7,539
|
|
|
7,560
|
|
1,868
|
|
—
|
|
|
9,428
|
|
5,272
|
|
14,700
|
|
|
Resolve Digital Health Inc.
|
|
718
|
|
|
1,000
|
|
—
|
|
—
|
|
|
1,000
|
|
2,300
|
|
3,300
|
|
|
Resolve Digital Health Inc.
|
|
282
|
|
|
242
|
|
—
|
|
—
|
|
|
242
|
|
1,674
|
|
1,916
|
|
|
Green Acre Capital Fund
|
|
300
|
|
|
285
|
|
1,300
|
|
—
|
|
|
1,585
|
|
457
|
|
2,042
|
|
|
Scythian Biosciences Inc.
|
|
2,000
|
|
|
2,000
|
|
—
|
|
(2,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
TS BrandCo Holdings Inc.
|
|
—
|
|
|
—
|
|
1,000
|
|
(1,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
6,979
|
|
(6,979
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Green Tank Holdings Corp.
|
|
—
|
|
|
—
|
|
650
|
|
—
|
|
|
650
|
|
(3
|
)
|
647
|
|
|
Althea Company Pty Ltd.
|
|
—
|
|
|
—
|
|
2,483
|
|
(2,483
|
)
|
|
—
|
|
—
|
|
—
|
|
|
IBBZ Krankenhaus GmbH
|
|
—
|
|
|
—
|
|
1,956
|
|
—
|
|
|
1,956
|
|
—
|
|
1,956
|
|
|
|
|
12,594
|
|
|
12,842
|
|
16,236
|
|
(12,462
|
)
|
|
16,616
|
|
13,245
|
|
29,861
|
|
|
|
|
21,476
|
|
|
27,788
|
|
53,840
|
|
(26,628
|
)
|
|
55,000
|
|
11,028
|
|
66,028
|
|
|
Deduct - assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
$
|
21,476
|
|
|
$
|
27,788
|
|
$
|
53,840
|
|
$
|
(26,628
|
)
|
|
$
|
55,000
|
|
$
|
11,028
|
|
$
|
46,028
|
|
The fair value attached to warrants in both Level 2 and Level 3 were determined using the Black-Scholes option pricing model using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 1 and 2 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective warrant.
CannaRoyalty Corp. (“CR”)
During the year, the Company converted its convertible debt into 750,000 shares of CR, and transferred $2,850 from convertible notes receivable (Note 12). In addition, the Company sold 1,100,000 common shares in CR (Note 26). As at May 31, 2018, the Company holds 750,000 common shares at a cost of $1,500, with a fair value of $3,765.
Kalytera Therapeutics, Inc.
During the year ended May 31, 2018, the Company sold its 6,172,000 common shares in Kalytera Therapeutics, Inc. (Note 26).
MassRoots, Inc.
During the year ended May 31, 2018, the Company sold 350,000 common shares in MassRoots, Inc. (Note 26). The Company holds 500,000 common shares at a cost of $251 USD ($304 CAD), with a fair value of $127 USD ($164 CAD) as at May 31, 2018.
26
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
SecureCom Mobile Inc. (“SecureCom”)
In July 2017, SecureCom amalgamated with DFMMJ and was re-named Liberty. As a result, the Company transferred the fair value of its investment in SecureCom into its investment in Liberty recognized as Interest in equity investees (Note 13).
Tetra Bio-Pharma Inc.
The Company owns 10,000,000 common shares at a cost of $2,300, with a fair value of $6,800 as at May 31, 2018.
Canabo Medical Inc.
During the year ended May 31, 2018, the Company sold its 800,000 common shares in Canabo Medical Inc. (Note 26).
Hiku Brands Company Ltd (formerly TS BrandCo Holdings Inc.)
In June 2017, the Company entered into a subscription agreement with TS BrandCo Holdings Inc. (“Tokyo Smoke”) for the purchase of 140,845 common shares, for a total cost of $1,000. In January 2018, TS BrandCo Holdings Inc. merged with DOJA Cannabis Company Ltd. and renamed the reporting issuer Hiku Brands Company Ltd. (“Hiku”). As part of the merger, each common share of Tokyo Smoke was exchanged for 13 common shares of Hiku. Subsequently, the Company contributed $10,000 as an equity investment in Hiku for 7,194,244 common shares and 7,194,244 common share purchase warrants, exercisable at $2.10 per warrant at any time for a period expiring two years from the date of issuance. The Company also entered into a supply agreement with Hiku. As part of the consideration for the supply agreement, the Company received 799,361 common shares and 799,361 common share purchase warrants, exercisable at $2.10 per warrant at any time for a period expiring two years from the date of issuance. As a result of these transactions, the Company holds 9,824,590 common shares and 7,993,605 common share purchase warrants at a cost of $12,111, with a fair value of $15,464 as at May 31, 2018.
Subsequent to year-end, all the issued and outstanding common shares of Hiku were acquired by a third party. The Company maintains the supply agreements identified previously.
Nuuvera Inc. (“Nuuvera”)
In August 2017, the Company entered into a subscription agreement with Nuuvera for the purchase of 2,000,000 common shares, for a total cost of $2,029. In November 2017, the Company purchased an additional 1,980,000 common shares for $4,950. In January 2018, the Company sold 500,000 common shares for gross proceeds of $2,945 (Note 26). In January 2018, Nuuvera began trading on the TSX-Venture Exchange.
In February 2018, the Company purchased an additional 1,818,190 units for $10,050. Each unit is comprised of one common share and one half of one common share purchase warrant. Each whole common share purchase warrant is exercisable to purchase one common share at a price of $7.20 per share for a period of 24 months.
In March 2018, the Company acquired 100% of the issued and outstanding common shares of Nuuvera (Note 11).
Scythian Biosciences Inc. (“Scythian”)
In August 2017, the Company’s subscription receipts converted to common shares. As part of the conversion, Scythian consolidated its shares on a 20:1 basis. On August 8, 2017, Scythian began trading on the TSX-Venture Exchange. In November, 2017, the Company sold its 250,000 common shares in Scythian (Note 26).
In February 2018, the Company purchased 672,125 units of Scythian for $12,502. Each unit is comprised of one common share and one common share purchase warrant. Each common share purchase warrant is exercisable to purchase one common share at a price of $22.00 per share for a period of 24 months. In April 2018, Scythian declared a 4:1 stock split. As a result, the Company received an additional 2,016,375 common shares and each common share purchase warrant is exercisable to purchase four common shares at a price of $22.00 per warrant for a period of 24 months. The Company holds 2,688,500 common shares and 672,125 common share purchase warrants at a cost of $12,502, with a fair value of $9,264 as at May 31, 2018.
National Access Cannabis
In March 2018, the Company acquired 1,000,000 common shares of National Access Cannabis for $1,093. The Company owns 1,000,000 common shares at a cost of $1,093, with a fair value of $710 as at May 31, 2018.
27
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”)
In July 2017, the Company purchased an additional 2,668 membership units in CSF for $1,334 USD ($1,668 CAD). The Company owns 5,000 membership units in Copperstate for total cost of $1,300 USD ($1,755 CAD), with a fair value of $5,300 and owns 13,868 membership units in CSF for a total cost of $7,094 USD ($9,407 CAD) with a fair value of $14,700 as at May 31, 2018.
During the year ended May 31, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc. and its sole holdings being the minority interests in Copperstate and CSF to Liberty for a purchase price of $20,000. Subsequent to entering into this definitive agreement, the existing investors in Copperstate and CSF exercised their right of first refusal to purchase the minority interests on the same terms. The fair value has been determined by the sale price from the definitive agreement with Liberty. As a result of the definitive agreement, the Company has recorded the total value of $20,000 as held for sale (Note 13). Subsequent to year-end, the Company received the $20,000 from the sale of the shares of Copperstate and CSF.
Resolve Digital Health Inc. (“Resolve”)
During the year, the Company received an additional 200,002 penalty units comprised of 200,002 common shares and 200,002 common share purchase warrants, exercisable at $0.65 per warrant at any time for a period expiring December 1, 2021. The warrants contain a forced conversion provision if Resolve trades on a public stock exchange at a price of more than $1.30 for a period of at least 30 days. The Company owns 2,200,026 common shares and 2,200,026 warrants at a total cost of $1,000, with a fair value of $5,216 as at May 31, 2018. The Company determined the fair value of its investment based on Resolve’s most recent financing.
Green Acre Capital Fund
The Company committed $2,000 to the expected $25,000 fund and as of the balance sheet date has funded $1,600. The Company determined that the fair value of its investment, based on its proportionate share of net assets, was $2,042 as at May 31, 2018.
Green Tank Holdings Corp. (“Green Tank”)
In November 2017, the Company entered into a subscription agreement with Green Tank Holdings Corp. for the purchase of 98,425 preferred shares, for a total cost of $500 USD ($650 CAD). The Company determined the fair value of its investment, based on Green Tank’s most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $3 due to changes in the foreign exchange rate.
Althea Company Pty Ltd. (“Althea”)
In February 2018, the Company entered into a subscription agreement with Althea for the purchase of 2,500 common shares, for a total cost of $2,500 AUD ($2,483 CAD). Part of the consideration was satisfied through a promissory note (Note 17). On March 21, 2018, the Company acquired an additional 2,000 common shares for a total cost of $2,500 AUD ($2,497 CAD). As a result of the second investment, the Company has a 37.5% interest in Althea, and has determined that it exercises significant influence on Althea. Accordingly, the cost of this investment has been recorded as interest in equity investees (Note 13).
IBBZ Krankenhaus GmbH Klinik Hygiea (“Krankenhaus”)
In May 2018, the Company acquired a 25.1 % interest in Krankenhaus, which is the owner and operator of Berlin-based Schöneberg Hospital, for €1,294 ($1,956 CAD). Through this investment the Company is entitled to 5% of the net income (loss) for the years 2018 to 2021, and 10% of the net income (loss) for the period thereafter. The Company determined that the fair value of its investment, based on Krankenhaus’ most recent financing at the same price, is equal to its carrying value.
28
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
15.
Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the year ended
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Income before income taxes
|
|
$
|
35,856
|
|
$
|
4,332
|
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
Expected income tax expense at combined basic federal and provincial tax rate
|
|
9,502
|
|
1,148
|
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Permanent differences
|
|
65
|
|
—
|
|
|
Non-deductible share-based compensation and other expenses
|
|
4,737
|
|
659
|
|
|
Non-taxable portion of losses (gains)
|
|
(7,162
|
)
|
(534
|
)
|
|
Utilization of tax attributes not previously recognized
|
|
—
|
|
(876
|
)
|
|
Deductible share issuance costs
|
|
—
|
|
(286
|
)
|
|
Other
|
|
(768
|
)
|
23
|
|
|
Tax assets not recognized
|
|
34
|
|
—
|
|
|
|
|
$
|
6,408
|
|
$
|
134
|
|
|
Income tax expense is comprised of:
|
|
|
|
|
|
|
Current
|
|
$
|
2,750
|
|
$
|
—
|
|
|
Future
|
|
3,658
|
|
134
|
|
|
|
|
$
|
6,408
|
|
$
|
134
|
|
The following table summarizes the components of deferred tax:
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
4,567
|
|
$
|
1,313
|
|
|
Capital loss carry forward
|
|
405
|
|
381
|
|
|
Share issuance and financing fees
|
|
5,443
|
|
3,448
|
|
|
Unrealized loss
|
|
916
|
|
—
|
|
|
Other
|
|
27
|
|
34
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(1,017
|
)
|
(164
|
)
|
|
Intangible assets in excess of tax costs
|
|
(64,120
|
)
|
(194
|
)
|
|
Unrealized gain
|
|
(1,097
|
)
|
(914
|
)
|
|
Biological assets and inventory in excess of tax costs
|
|
(4,377
|
)
|
(589
|
)
|
|
Net deferred tax (liabilities) assets
|
|
$
|
(59,253
|
)
|
$
|
3,315
|
|
16.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the May 31, 2018, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.
29
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
17.
Promissory note payable
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Note payable to Copperstate Farms, LLC - $1,300 USD ($1,755), opening balance, bearing nominal interest, two-year term, repayable in eight quarterly instalments of $162 USD
|
|
$
|
1,244
|
|
$
|
1,539
|
|
|
Reduction of Promissory note payable balance with respect to consulting services provided
|
|
(1,244
|
)
|
(295
|
)
|
|
Balance remaining
|
|
—
|
|
1,244
|
|
|
Deduct - principal portion included in current liabilities
|
|
—
|
|
(878
|
)
|
|
|
|
$
|
—
|
|
$
|
366
|
|
On May 15, 2018, the Company entered into an amendment agreement with CSF which resulted in the Company no longer expecting to provide any further consulting services. Accordingly, the Company has recorded the remaining balance of the loan as consulting revenue.
During the year ended May 31, 2018, the Company entered into a promissory note with Althea for $700 AUD ($686), as part of the purchase of Althea common shares (Note 14). The note is due and payable on December 31, 2020. The Company reached an agreement with Althea where the promissory note amount will be used by Althea to purchase products from the Company in connection with a supply agreement entered into in September 2017.
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Note payable to Althea Company Pty Ltd - $700 AUD ($686), opening balance, non-interest bearing, due and payable on December 31, 2020
|
|
$
|
686
|
|
$
|
—
|
|
|
Reduction of Promissory note payable balance with respect to products provided
|
|
(63
|
)
|
—
|
|
|
Foreign exchange (gain) loss
|
|
(13
|
)
|
|
|
|
Balance remaining
|
|
610
|
|
—
|
|
|
Deduct - principal portion included in current liabilities
|
|
(610
|
)
|
—
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
18.
Long-term debt
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Term loan - $25,000 - 3.95%, compounded monthly, 5 year term with a 15-year amortization, repayable in equal monthly installments of $188 including interest, due in April 2022
|
|
$
|
24,107
|
|
$
|
25,000
|
|
|
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021
|
|
1,057
|
|
1,164
|
|
|
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021
|
|
3,515
|
|
3,645
|
|
|
Vendor take-back mortgage owed to related party - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021
|
|
1,869
|
|
2,396
|
|
|
|
|
30,548
|
|
32,205
|
|
|
Deduct - unamortized financing fees
|
|
(71
|
)
|
(20
|
)
|
|
- principal portion included in current liabilities
|
|
(2,140
|
)
|
(765
|
)
|
|
|
|
$
|
28,337
|
|
$
|
31,420
|
|
30
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Total long-term debt repayments are as follows:
|
Next 12 months
|
|
$
|
2,140
|
|
|
2 years
|
|
2,241
|
|
|
3 years
|
|
2,348
|
|
|
4 years
|
|
23,819
|
|
|
Balance of obligation
|
|
$
|
30,548
|
|
The term loan of $24,107 was entered into on May 9, 2017 and is secured by a first charge on the property at 265 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in March 2018.
The term loan of $1,057 and mortgage payable of $3,515 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of $1,869, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St. West. The mortgage is secured by a second charge on the property at 265 Talbot St. West, Leamington, Ontario.
The Company acquired term loans of $3,000 and $1,201, and a mortgage payable of $1,713 as part of the acquisition of Broken Coast (Note 11). These loans and mortgages were paid in full during the year.
19.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at May 31, 2018, the Company has issued 210,169,924 shares, of which 1,777,971 shares were held and subject to various escrow agreements.
|
Common Shares
|
|
Number of
shares
|
|
Amount
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
|
November 2017 bought deal, net of cash issuance costs
|
|
12,689,675
|
|
86,661
|
|
|
January 2018 bought deal, net of cash issuance costs
|
|
8,363,651
|
|
109,000
|
|
|
Broken Coast acquisition
|
|
14,373,675
|
|
214,168
|
|
|
Nuuvera acquisition
|
|
31,226,910
|
|
411,258
|
|
|
Warrants exercised
|
|
2,388,636
|
|
3,767
|
|
|
Options exercised
|
|
2,493,623
|
|
11,559
|
|
|
Deferred share units exercised
|
|
5,050
|
|
62
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,002
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
|
|
|
210,169,924
|
|
$
|
1,113,981
|
|
a)
Throughout the year, 2,388,636 warrants with exercise prices ranging from $1.50 to $1.75 were exercised for a value of $3,767 including any cash consideration.
b)
Throughout the year, 2,493,623 shares were issued from the exercise of stock options with exercise prices ranging from $0.60 to $9.05 for a value of $11,559, including any cash consideration.
c)
Throughout the year, 5,050 shares were issued in accordance with the deferred share unit plan to former directors of the Company.
d)
In January 2017, the Company issued 112,500 common shares in escrow pursuant to a third party consulting agreement for greenhouse related services, net of cash issuance costs. At May 31, 2018, all 112,500 common shares of the shares in escrow have been released.
31
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
e)
In November 2017, the Company closed a bought deal financing in which it issued 12,689,675 common shares at a purchase price of $7.25 per share for $86,661, net of cash issuance costs.
f)
In January 2018, the Company closed a bought deal financing in which it issued 8,363,651 common shares at a purchase price of $13.75 per share for $109,000 net of cash issuance costs.
g)
In February 2018, the Company completed the acquisition of Broken Coast (Note 11) in which it issued 14,373,675 common shares at a deemed price of $14.90 per share for $214,168.
h)
In March 2018, the Company completed the acquisition of Nuuvera (Note 11) in which it issued 31,226,910 common shares at a deemed price of $13.17 per share for $411,258.
i)
During the year, the Company recognized a $3,002 income tax recovery on share issuance costs.
20.
Warrants
The warrant details of the Company are as follows:
|
Type of warrant
|
|
Expiry date
|
|
Number of
warrants
|
|
Weighted
average price
|
|
Amount
|
|
|
Warrant
|
|
December 11, 2018
|
|
36,003
|
|
1.75
|
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
1,261,269
|
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
3.14
|
|
360
|
|
|
Nuuvera warrant
|
|
February 14, 2020
|
|
1,345,866
|
|
20.30
|
|
1,015
|
|
|
|
|
|
|
2,843,138
|
|
$
|
10.52
|
|
$
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2018
|
|
May 31, 2017
|
|
|
|
|
Number of
warrants
|
|
Weighted
average price
|
|
Number of
warrants
|
|
Weighted
average price
|
|
|
Outstanding, beginning of the period
|
|
3,885,908
|
|
$
|
1.61
|
|
18,721,987
|
|
$
|
1.51
|
|
|
Expired during the period
|
|
—
|
|
—
|
|
(50,305
|
)
|
1.20
|
|
|
Issued during the period
|
|
1,345,866
|
|
20.30
|
|
465,391
|
|
2.35
|
|
|
Exercised during the period
|
|
(2,388,636
|
)
|
1.54
|
|
(15,251,165
|
)
|
1.51
|
|
|
Outstanding, end of the period
|
|
2,843,138
|
|
$
|
10.52
|
|
3,885,908
|
|
$
|
1.61
|
|
In March 2018, the Company completed the acquisition of Nuuvera (Note 11) in which it reserved 1,345,866 common shares for issuance to the holders of certain common share purchase warrants of Nuuvera (“Nuuvera Warrants”). There are 3,795,450 Nuuvera Warrants, exercisable for Nuuvera shares at an exercise price of $7.20 per share, the Nuuvera shares would convert to 0.3546 Aphria shares and $0.62 cash.
21.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $15,780 during the year ended May 31, 2018 (2017 - $2,064), including $4,570 of options granted as part of the acquisition of Broken Coast. The total fair value of options granted during the year was $28,912 (2017 - $4,222), including $9,509 of options granted as part of the acquisition of Broken Coast.
32
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
|
|
|
May 31, 2018
|
|
May 31, 2017
|
|
|
|
|
Number of
options
|
|
Weighted
average price
|
|
Number of
options
|
|
Weighted
average price
|
|
|
Outstanding, beginning of the period
|
|
5,926,001
|
|
$
|
1.99
|
|
4,975,000
|
|
$
|
0.84
|
|
|
Exercised during the period
|
|
(2,637,363
|
)
|
2.30
|
|
(1,121,999
|
)
|
1.05
|
|
|
Issued during the period
|
|
6,703,330
|
|
11.12
|
|
2,253,000
|
|
3.99
|
|
|
Cancelled during the period
|
|
(1,035,773
|
)
|
11.77
|
|
(180,000
|
)
|
1.09
|
|
|
Outstanding, end of the period
|
|
8,956,195
|
|
$
|
7.60
|
|
5,926,001
|
|
$
|
1.99
|
|
|
Exercisable, end of the period
|
|
4,507,696
|
|
$
|
4.04
|
|
3,919,542
|
|
$
|
1.36
|
|
In June 2017, the Company issued 250,000 stock options at an exercise price of $5.44 per share, exercisable for 5 years to officers of the company. 83,333 vested immediately and the remainder vest over 2 years.
In July 2017, the Company issued 1,015,000 stock options at an exercise price of $5.24 per share, exercisable for 3 years to employees, officers and consultants of the company. 688,333 vested immediately and the remainder vest over 2 years.
In October 2017, the Company issued 533,000 stock options at an exercise price of $6.90 per share, exercisable for 3 to 5 years to employees, officers and consultants of the company. 244,330 vested immediately and the remainder vest over 2 years.
In November 2017, the Company issued 330,000 stock options at an exercise price of $9.05 - $9.28 per share, exercisable for 3 years to employees and consultants of the company. 109,998 vested immediately and the remainder vest over 2 years.
In December 2017, the Company issued 100,000 stock options at an exercise price of $14.06 per share, exercisable for 3 years to employees of the company. 33,333 vested immediately and the remainder vest over 2 years.
In January 2018, the Company issued 1,000,000 stock options at an exercise price of $20.19 per share, exercisable for 3 years as part of the acquisition of Broken Coast. All of the options vest over 3 years.
In January 2018, the Company issued 725,000 stock options at an exercise price of $21.70 - $22.89 per share, exercisable for 3 — 5 years to employees, officers and consultants of the company. 171,662 vested immediately and the remainder vest over 2 — 3 years.
In March 2018, as part of the acquisition of Nuuvera, the Company issued 1,280,914 replacement options at an exercise price of $2.52 - $14.38, exercisable for 7 — 10 years to former option holders of Nuuvera. 1,211,197 vested immediately and the remainder vest over 8 months.
In March 2018, the Company issued 160,000 stock options at an exercise price of $12.39 - $14.39 per share, exercisable for 3 years to employees of the company. 23,332 vested immediately and the remainder vest over 1 — 3 years.
In April 2018, the Company issued 1,310,000 stock options at an exercise price of $9.98 - $11.40 per share, exercisable for 3 years to employees, officers and consultants of the company. 133,333 vested immediately and the remainder vest over 1 — 3 years.
In May 2018, directors and officers of the Company rescinded 541,000 stock options at an exercise price of $6.90 — $21.70 per share. As at that date, $1,907 was recorded as share based compensation. The Company has reclassified $1,907 from contributed surplus to retained earnings as part of this forfeiture.
33
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
The outstanding option details of the Company are as follows:
|
Expiry date
|
|
Weighted
average exercise
price
|
|
Number of
options
|
|
Vested and
exercisable
|
|
|
October 2018
|
|
$
|
1.17
|
|
20,000
|
|
20,000
|
|
|
November 2018
|
|
$
|
1.49
|
|
20,000
|
|
20,000
|
|
|
December 2018
|
|
$
|
1.30
|
|
20,000
|
|
20,000
|
|
|
April 2019
|
|
$
|
1.67
|
|
30,000
|
|
30,000
|
|
|
June 2019
|
|
$
|
0.60
|
|
1,480,000
|
|
1,480,000
|
|
|
September 2019
|
|
$
|
3.00
|
|
42,365
|
|
35,915
|
|
|
October 2019
|
|
$
|
3.47
|
|
13,400
|
|
6,733
|
|
|
November 2019
|
|
$
|
3.90
|
|
837,052
|
|
516,709
|
|
|
December 2019
|
|
$
|
5.25
|
|
500,000
|
|
133,332
|
|
|
January 2020
|
|
$
|
5.72
|
|
20,668
|
|
5,667
|
|
|
April 2020
|
|
$
|
7.92
|
|
133,334
|
|
88,333
|
|
|
June 2020
|
|
$
|
5.44
|
|
216,668
|
|
49,999
|
|
|
July 2020
|
|
$
|
5.24
|
|
761,658
|
|
456,967
|
|
|
September 2020
|
|
$
|
0.85
|
|
185,000
|
|
185,000
|
|
|
October 2020
|
|
$
|
6.90
|
|
381,000
|
|
94,330
|
|
|
November 2020
|
|
$
|
9.05
|
|
270,000
|
|
83,332
|
|
|
November 2020
|
|
$
|
9.28
|
|
50,000
|
|
16,666
|
|
|
December 2020
|
|
$
|
14.06
|
|
100,000
|
|
33,333
|
|
|
January 2021
|
|
$
|
21.70
|
|
10,000
|
|
3,333
|
|
|
January 2021
|
|
$
|
22.89
|
|
150,000
|
|
33,330
|
|
|
January 2021
|
|
$
|
22.08
|
|
50,000
|
|
16,666
|
|
|
March 2021
|
|
$
|
14.39
|
|
90,000
|
|
23,332
|
|
|
March 2021
|
|
$
|
11.40
|
|
300,000
|
|
—
|
|
|
March 2021
|
|
$
|
9.98
|
|
200,000
|
|
—
|
|
|
March 2021
|
|
$
|
12.39
|
|
50,000
|
|
—
|
|
|
April 2021
|
|
$
|
11.40
|
|
710,000
|
|
100,000
|
|
|
April 2021
|
|
$
|
11.45
|
|
100,000
|
|
33,333
|
|
|
May 2021
|
|
$
|
20.19
|
|
1,000,000
|
|
—
|
|
|
June 2021
|
|
$
|
1.40
|
|
193,336
|
|
100,000
|
|
|
August 2021
|
|
$
|
1.64
|
|
110,000
|
|
69,993
|
|
|
October 2022
|
|
$
|
6.90
|
|
74,000
|
|
74,000
|
|
|
July 2027
|
|
$
|
2.52
|
|
328,369
|
|
268,048
|
|
|
November 2027
|
|
$
|
6.29
|
|
250,693
|
|
250,693
|
|
|
December 2027
|
|
$
|
6.29
|
|
99,482
|
|
99,482
|
|
|
March 2028
|
|
$
|
12.29
|
|
119,378
|
|
119,378
|
|
|
March 2028
|
|
$
|
14.38
|
|
39,792
|
|
39,792
|
|
|
Outstanding, end of the period
|
|
$
|
7.60
|
|
8,956,195
|
|
4,507,696
|
|
The Company used the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 3 – 10 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.
34
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
22.
Non-controlling interest
The following tables summarise the information relating to the Company’s subsidiary, Aphria Diamond, before intercompany eliminations.
|
|
|
May 31,
2018
|
|
May 31,
2017
|
|
|
Current assets
|
|
$
|
7,313
|
|
$
|
—
|
|
|
Non-current assets
|
|
83,207
|
|
—
|
|
|
Current liabilities
|
|
(10,085
|
)
|
—
|
|
|
Non-current liabilities
|
|
(60,884
|
)
|
—
|
|
|
Net assets
|
|
19,551
|
|
—
|
|
|
Non-controlling interest %
|
|
49
|
%
|
—
|
|
|
Non-controlling interest
|
|
$
|
9,580
|
|
$
|
—
|
|
|
|
|
For the year ended
|
|
|
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
|
Total expenses
|
|
(449
|
)
|
—
|
|
|
Net loss and comprehensive loss
|
|
(449
|
)
|
—
|
|
|
Non-controlling interest %
|
|
49
|
%
|
—
|
|
|
|
|
$
|
(220
|
)
|
$
|
—
|
|
23.
General and administrative expenses
|
|
|
For the year ended
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
1,794
|
|
$
|
829
|
|
|
Consulting fees
|
|
1,154
|
|
220
|
|
|
Office and general
|
|
3,562
|
|
1,336
|
|
|
Professional fees
|
|
2,951
|
|
608
|
|
|
Salaries and wages
|
|
3,295
|
|
1,142
|
|
|
Travel and accommodation
|
|
889
|
|
464
|
|
|
Rent
|
|
256
|
|
79
|
|
|
|
|
$
|
13,901
|
|
$
|
4,678
|
|
35
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
24.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
For the year ended
|
|
|
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
$
|
15,780
|
|
$
|
2,064
|
|
|
Share-based compensation accrued in the prior period
|
|
(44
|
)
|
44
|
|
|
Share-based compensation issued on behalf of a related party
|
|
(32
|
)
|
—
|
|
|
Shares for services compensation
|
|
187
|
|
263
|
|
|
Deferred share units expensed in the period
|
|
1,983
|
|
28
|
|
|
|
|
$
|
17,874
|
|
$
|
2,399
|
|
During the year, the Company issued 480,090 deferred share units to certain directors and officers of the Company, under the terms of the Company’s Deferred Share Unit Plan. In May 2018, directors and officers of the Company forfeited 312,000 deferred share units which were granted during the year.
25.
Finance income, net
Finance income, net, is comprised of:
|
|
|
For the year ended
|
|
|
|
|
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Interest income
|
|
$
|
6,362
|
|
$
|
1,115
|
|
|
Interest expense
|
|
(1,350
|
)
|
(387
|
)
|
|
|
|
$
|
5,012
|
|
$
|
728
|
|
26.
Gain on long-term investments
Gain on long-term investments for the year ended May 31, 2018 is comprised of:
|
|
|
|
|
Opening fair
|
|
|
Gain (loss)
|
|
Change in
|
|
|
|
|
|
Investment
|
|
Proceeds
|
|
value / cost
|
|
|
on disposal
|
|
fair value
|
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp. - shares
|
|
$
|
4,389
|
|
$
|
1,793
|
|
|
$
|
2,596
|
|
$
|
—
|
|
|
$
|
2,596
|
|
|
Kalytera Therapeutics, Inc. - shares
|
|
763
|
|
1,111
|
|
|
(348
|
)
|
—
|
|
|
(348
|
)
|
|
MassRoots, Inc. - shares
|
|
102
|
|
232
|
|
|
(130
|
)
|
—
|
|
|
(130
|
)
|
|
Canabo Medical Inc. - shares
|
|
433
|
|
316
|
|
|
117
|
|
—
|
|
|
117
|
|
|
Nuuvera Inc. - shares and warrants
|
|
31,216
|
|
17,029
|
|
|
14,187
|
|
—
|
|
|
14,187
|
|
|
Scythian Biosciences Inc. - shares
|
|
1,225
|
|
2,000
|
|
|
(775
|
)
|
—
|
|
|
(775
|
)
|
|
Long-term investments (Note 14)
|
|
—
|
|
—
|
|
|
—
|
|
11,028
|
|
|
11,028
|
|
|
Year ended May 31, 2018
|
|
$
|
38,128
|
|
$
|
22,481
|
|
|
$
|
15,647
|
|
$
|
11,028
|
|
|
$
|
26,675
|
|
36
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
27.
Earnings per share
The calculation of earnings per share for the year ended May 31, 2018 was based on the net income attributable to common shareholders of $29,448 (2017 — $4,198) and a weighted average number of common shares outstanding of 161,026,463 (2017 — 104,341,319) calculated as follows:
|
|
|
2018
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
29,448
|
|
$
|
4,198
|
|
|
Average number of common shares outstanding during the period
|
|
161,026,463
|
|
104,341,319
|
|
|
Earnings per share - basic
|
|
$
|
0.18
|
|
$
|
0.04
|
|
|
|
|
2018
|
|
2017
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
29,448
|
|
$
|
4,198
|
|
|
Average number of common shares outstanding during the period
|
|
161,026,463
|
|
104,341,319
|
|
|
“In the money” warrants outstanding during the period
|
|
1,293,890
|
|
2,697,681
|
|
|
“In the money” options outstanding during the period
|
|
3,593,647
|
|
4,388,893
|
|
|
|
|
165,914,000
|
|
111,427,893
|
|
|
Earnings per share - diluted
|
|
$
|
0.18
|
|
$
|
0.04
|
|
28.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
For the year ended
May 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
(1,797
|
)
|
$
|
953
|
|
|
Decrease (increase) in other current assets
|
|
(7,628
|
)
|
(5,284
|
)
|
|
Decrease (increase) in inventory, net of fair value adjustment
|
|
(7,045
|
)
|
3,057
|
|
|
Decrease (increase) in biological assets, net of fair value adjustment
|
|
(367
|
)
|
(4,188
|
)
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
3,764
|
|
4,534
|
|
|
Increase (decrease) in income taxes payable
|
|
2,662
|
|
—
|
|
|
|
|
$
|
(10,411
|
)
|
$
|
(928
|
)
|
29.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities, long-term investments, and embedded derivatives as fair value through profit or loss (“FVTPL”), accounts receivable and other current assets as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term debt as other financial liabilities. The convertible notes receivable are accounted for on an amortized cost basis.
The carrying values of accounts receivable and other current assets, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $30,548 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at May 31, 2018 was $29,725.
37
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
Level 1
quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
Level 3
inputs for assets and liabilities not based upon observable market data
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31,
2018
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
59,737
|
|
$
|
—
|
|
$
|
—
|
|
$
|
59,737
|
|
|
Marketable securities
|
|
45,062
|
|
—
|
|
—
|
|
45,062
|
|
|
Embedded derivatives (note 12)
|
|
—
|
|
—
|
|
7,410
|
|
7,410
|
|
|
Long-term investments
|
|
33,600
|
|
2,567
|
|
29,861
|
|
66,028
|
|
|
Outstanding, end of the period
|
|
$
|
138,399
|
|
$
|
2,567
|
|
$
|
37,271
|
|
$
|
178,237
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,910
|
|
$
|
—
|
|
$
|
—
|
|
$
|
79,910
|
|
|
Marketable securities
|
|
87,347
|
|
—
|
|
—
|
|
87,347
|
|
|
Embedded derivatives
|
|
—
|
|
—
|
|
173
|
|
173
|
|
|
Long-term investments
|
|
14,946
|
|
—
|
|
12,842
|
|
27,788
|
|
|
Outstanding, end of the period
|
|
$
|
182,203
|
|
$
|
—
|
|
$
|
13,015
|
|
$
|
195,218
|
|
The following table presents the changes in level 3 items for the years ended May 31, 2018 and May 31, 2017:
|
|
|
Unlisted
equity
securities
|
|
Trading
derivatives
|
|
Total
|
|
|
Closing balance May 31, 2017
|
|
$
|
12,842
|
|
$
|
173
|
|
$
|
13,015
|
|
|
Acquisitions
|
|
16,236
|
|
4,450
|
|
20,686
|
|
|
Reclassification to Level 1
|
|
(9,979
|
)
|
(1,348
|
)
|
(11,327
|
)
|
|
Reclassification to equity Investee
|
|
(2,483
|
)
|
—
|
|
(2,483
|
)
|
|
Unrealized gain on fair value
|
|
13,245
|
|
4,135
|
|
17,380
|
|
|
Closing balance May 31, 2018
|
|
$
|
29,861
|
|
$
|
7,410
|
|
$
|
37,271
|
|
Investments in Scythian Biosciences Corp., TS BrandCo Holdings Inc. and Nuuvera Inc., originally classified as a Level 3 investment, were reclassified subsequent to the investee going public. During the year ended May 31, 2018, the Company sold its shares in Scythian Biosciences Corp. The Company converted the CannaRoyalty Corp. notes, and transferred $1,348 from embedded derivatives to long-term investments.
38
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
(a)
Credit risk
The maximum credit exposure at May 31, 2018 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other current assets and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
61-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
3,386
|
|
$
|
1,622
|
|
$
|
1,005
|
|
$
|
227
|
|
$
|
532
|
|
|
|
|
|
|
48
|
%
|
29
|
%
|
7
|
%
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at May 31, 2018, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at May 31, 2018, management regards liquidity risk to be low.
(c)
Currency rate risk
As at May 31, 2018, a portion of the Company’s financial assets and liabilities held in USD consist of marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.
The Company is exposed to unrealized foreign exchange risk through its convertible notes receivable and long-term investments. A 1% change in the foreign exchange rate would result in an unrealized gain or loss of approximately $28.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
39
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2018 and May 31, 2017
(In thousands of Canadian dollars, except share and per share amounts)
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.
30.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. Subsequent to year-end, the Company entered into a new lease for rental office space from December 2018 until November 30, 2028. The Company has lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9 and $20, respectively. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty with annual rent from $180 to $190 expiring June 2023. The Company has agreed to contribute an additional $400 to Green Acre Capital Fund. The Company has committed purchase orders outstanding at May 31, 2018 related to capital asset expansion of $30,360, all of which are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:
|
|
|
Years ending May 31,
|
|
|
2019
|
|
$
|
30,914
|
|
|
2020
|
|
22
|
|
|
2021
|
|
3
|
|
|
|
|
$
|
30,939
|
|
31.
Subsequent events
Subsequent to year-end, the Company completed the forming of CannInvest Africa Ltd. (“CannInvest”), with the South African Verve Group of Companies. Through the combination of a share-for-share swap and cash payment of $4.05 million, the Company obtained a 50% ownership in CannInvest which in turn acquired a 60% interest in Verve Dynamics Inc. (“Verve”), a licensed producer of medical cannabis extracts in Lesotho.
Subsequent to year-end, the Company closed a bought deal and issued 21,835,510 common shares for gross proceeds of $258,751.
Subsequent to year-end, the Company’s Malta based subsidiary, ASG Pharma Ltd. (“ASG”), received the first import license for medical cannabis issued by the Malta Medicines Authority. The license will allow ASG to import medical cannabis for analytical testing and research and is an important step that will enable ASG to become a cornerstone in testing, research and development of medical cannabis in Europe.
Subsequent to year-end, the Company announced the proposed acquisition of industry-leading companies in Colombia, Argentina, Jamaica and a right of first offer and refusal in respect of Brazil through a definitive share purchase agreement with Scythian. The Company expects to issue 15,678,310 shares, and assume $1,000 of existing debt in connection with the proposed acquisition.
Subsequent to year-end, Aphria Inc. amalgamated with its previously wholly-owned subsidiary, Pure Natures Wellness Inc., pursuant to a short form, vertical amalgamation. The resulting entity retained the name “Aphria Inc.”
Subsequent to year-end, the Company amended its Obligation Agreement, where the Company will accept a 30-day promissory note to settle the next tranche of Liberty shares owned by the Company that became freely trading on July 26, 2018. The Company also paid $480 to enter into a standstill agreement, whereby the purchaser of the Liberty shares will not sell the newly acquired shares for 18 months from the date of purchase. The purchaser also granted the Company an option to buy back the shares at $1.00 per share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25.
Subsequent to year-end, the Company committed to a $15,000 investment in Green Acre Capital Fund II to be launched before December 2018.
40
Exhibit 99.2
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the year ended May 31, 2018. It is supplemental to, and should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes for the year ended May 31, 2018, as well as the financial statements and MD&A for the year ended May 31, 2017. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.ca or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to gram equivalents, “all-in” cost of sales, cash costs to produce, gross profit before fair value adjustments (previously referred to as adjusted gross profit), adjusted gross margin, adjusted EBITDA, adjusted EBITDA from ACMPR operations, adjusted EBITDA from Aphria International, strategic investments, capital and intangible asset expenditures — wholly owned subs, and capital and intangible asset expenditures — majority owned subs which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“Gram equivalents” include both grams of dried cannabis as well as grams of cannabis oil as derived using the an ‘equivalency factor’ of 1 gram per 4.5 mL of cannabis oil, prior year ‘equivalency factor’ of 1 gram per 6 mL of cannabis oil. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
“All-in” cost of sales of dried cannabis per gram is equal to production costs less the costs of accessories less cannabis oil conversion costs (“cost of sales of dried cannabis”) plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. This measure provides the cost per gram of dry cannabis and gram equivalent of oil sold before the packaging and post harvesting processing costs to create oil or other ancillary products.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is gross profit before fair value adjustments divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment of intangible assets, plus transaction costs, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (gain) from equity investee, minus deferred gain recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations exclusive of its equity investee.
·
Adjusted EBITDA from ACMPR operations is calculated on based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements; Aphria Inc., Pure Natures Wellness Inc. (o/a Aphria), Cannan Growers Inc., Broken Coast Cannabis Ltd., and 1974568 Ontario Ltd. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s operations in the ACMPR regulated industry.
·
Adjusted EBITDA from Aphria International is Adjusted EBITDA minus adjusted EBITDA from ACMPR operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by the Company’s international operations.
·
Strategic investments are the total cash out flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - wholly owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for wholly owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - majority owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for majority owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.
This MD&A is prepared as of July 31, 2018.
1
COMPANY OVERVIEW
Aphria Inc. (“
Aphria
”), a company amalgamated under the laws of the province of Ontario, is licensed to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“
ACMPR
”). Aphria received its licence to produce and sell medical cannabis on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. Aphria’s operations are based in Leamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be a scalable low-cost producer of medical cannabis. The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“
TSX
”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Nuuvera Inc. (“
Aphria International
”) is a subsidiary of the Company acquired in March 2018. Aphria International is an international organization with a focus on building a global cannabis brand, through its subsidiaries ARA — Avanti Rx Analytics Inc., Avalon Pharmaceuticals Inc., 2589671 Ontario Inc., 2586974 Ontario Inc., Nuuvera Israel Ltd., Nuuvera Deutschland GmbH, ASG Pharma Ltd. and FL-Group. Through these subsidiaries, Aphria International has operations in Canada, Germany, Italy, Malta and Lesotho.
Broken Coast Cannabis Ltd. (“
Broken Coast
”), a subsidiary of the Company acquired in February 2018, is licensed to produce and sell medical cannabis under the provisions of the ACMPR. Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with ‘B.C. Bud’ and is a leading premium cannabis brand.
1974568 Ontario Ltd. (“
Aphria Diamond
”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms (“
DD
”). Aphria Diamond has applied for a second site cultivation licence under the provisions of the ACMPR.
Throughout this MD&A, Aphria will refer to its original Leamington campus as “Aphria One”.
The Company’s majority and wholly-owned subsidiaries are as follows:
|
Subsidiaries
|
|
Jurisdiction of incorporation
|
|
Ownership interest
|
|
|
Pure Natures Wellness Inc. (o/a Aphria)
|
|
Ontario, Canada
|
|
100
|
%
|
|
Aphria (Arizona) Inc.
|
|
Arizona, United States
|
|
100
|
%
|
|
Cannan Growers Inc.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Nuuvera Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Holdings Ltd.
|
|
Ontario, Canada
|
|
100
|
%
|
|
ARA — Avanti Rx Analytics Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Avalon Pharmaceuticals Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589671 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589674 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Israel Ltd.
|
|
Tel Aviv, Israel
|
|
100
|
%
|
|
Nuuvera Deutschland GmbH
|
|
Hamburg, Germany
|
|
100
|
%
|
|
FL-Group
|
|
Genoa, Italy
|
|
100
|
%
|
|
Broken Coast Cannabis Ltd.
|
|
British Columbia, Canada
|
|
99.86
|
%
|
|
Nuuvera Malta Ltd.
|
|
Valletta, Malta
|
|
90
|
%
|
|
ASG Pharma Ltd.
|
|
Valletta, Malta
|
|
90
|
%
|
|
1974568 Ontario Ltd.
|
|
Ontario, Canada
|
|
51
|
%
|
|
CannInvest Africa Ltd.
|
|
South Africa
|
|
50
|
%
|
2
STRATEGY AND OUTLOOK
Aphria, a leading global cannabis company, is setting the standard for the low-cost production of safe, clean and pure pharmaceutical grade cannabis at scale, grown in the most natural conditions possible. The Company, one of the first cannabis companies in Canada and the first Canadian cannabis company to fully embrace and grow exclusively in a greenhouse, has shown the ability to grow at scale and generate a profit from operations in a growing new industry. The Company continues to drive value for shareholders through its international expansion where Aphria is taking its experience and knowledge in the Canadian cannabis industry and applying it to newly federal legal markets. Aphria drives sustainable long-term shareholder value through a diversified approach to innovation, strategic partnerships and global expansion, with a presence in more than 10 countries across 5 continents.
ACMPR Operations
ACMPR Operations include the results of the parent Aphria Inc., Canadian subsidiaries which hold investments and have no other operations (Cannan Growers Inc.), companies which are applicants and are expected to become ACMPR licensed producers of medical cannabis (Aphria Diamond) and companies which actively produce and sell medical cannabis under the ACMPR license (Aphria and Broken Coast).
As a result of its cumulative net earnings to date exceeding its historical losses, Aphria reported retained earnings of $27,452 as at May 31, 2018. The Company remains as one of the first publicly-traded licensed producers to achieve this milestone. The Company also continues to report positive adjusted EBITDA from ACMPR operations, on a quarter by quarter basis. This marks the eleventh consecutive quarter where the Company has reported positive adjusted EBITDA from ACMPR Operations.
The Company expects a temporary decline in adjusted EBITDA from ACMPR operations in the next two quarters as a result of planned increases in expenditures for advertising, to the extent legally permitted, and marketing for the adult-use market and increased investments in human capital necessary for a company with the global production capabilities of Aphria. Further, the Company consciously limited its sales growth by limiting wholesale sales and accumulating inventory in preparation for adult-use in the short-term, as it continues its focus on the emerging adult-use market. Sales level are expected to increase in the second quarter of its 2019 fiscal year in preparation for retail adult-use sales, beginning October 17, 2018.
As the Company continues its planned expansions using the latest automation technologies, Aphria is committed to bringing breakthrough innovation to the global cannabis market.
Aphria One
The Company’s original flagship greenhouse location continues with the planned expansions and represents over 90% of the Company’s current production. This location serves as the basis on which the Company continues to innovate and develop techniques in cultivation, extraction and processing low-cost cannabis at scale. In early April 2018, the Company recorded its first harvest from product grown from its Part III expansion and product grown in its Part III expansion was available for sale in late May 2018.
The Company currently has 300,000 square feet of licensed production space at Aphria One capable of producing 30,000 kgs annually. The Company allocated a portion of its space from the Part III expansion to mother and vegetative plants which will be required for the Part IV and Part V expansions, effectively lowering Aphria One’s functional capacity today to ensure an as efficient as possible running start to its Part IV growing operations. With the fully capitalized Part IV and Part V expansions, the Company will be poised to have over 1,000,000 sq. ft. of state-of-the-art greenhouse facility producing 110,000 kgs annually in January 2019.
The Company spent approximately $24.7 million on the Part III expansion, compared to the budgeted $24.5 million. The Company is currently on budget with its Part IV and Part V expansions with a total amount spent of approximately $102 million of the combined budgeted $147 million.
3
With the Part IV and Part V expansions, the Company will be positioned to be the first licensed producer to bring in this level of technology into the cultivation of cannabis within a greenhouse environment. This cutting-edge technology will automate the following functions of the plant growing cycle:
·
Transplanting cuttings through various stages into the final pots for flowering;
·
Aiding in evaluation of the health and quality of plants to ensure plants meet the Company’s stringent quality standards throughout the many stages of the growing cycle;
·
Monitoring and providing the necessary water and vital nutrients to the plants during the growing cycle; and
·
Transporting plants through different areas in the greenhouse including to the processing room once harvested.
Once this innovative technology has been implemented, the only human interaction to occur will be at the initial phase of taking the cuttings and throughout the plants’ growth cycle, to trim and prune the plants, which will occur in work bays outside of the greenhouse.
Additional state-of-the-art automation, already operational by the Company, is employed during the processing of the cannabis. The Company is bringing best-in-class innovative technologies to:
·
Cutting the plants, and transferring them to be processed;
·
Automating the de-budding and trimming of plants;
·
Disposing of waste produced in the cutting, de-budding and trimming phased of production; and
·
Distributing the buds into trays in a drying rack to evenly dry and cure the harvested product.
The automation of these above processes will further permit Aphria to not only preserve but enhance its industry leading low-cost production standard within the cannabis industry.
The Company is installing a power co-generation plant that utilizes natural gas to generate is own electricity and as a by-product of this process, hot and cold water and CO
2
. This combined -cycle process will not only generate electricity to be used in the greenhouse to operate the lights and air conditioners, but also the hot and cold water produced will be employed to effectively control the temperature and humidity for the plants. The residual gas emissions created by this process will be directed through a catalytic converter to create CO
2
which will be used during the growing cycle of the plants. At the same time, the Company installed state-of-the-art power switching in all equipment allowing it to switch power between the electrical grid and the power co-generation equipment at a moment’s notice to ensure it is constantly using the most cost effective energy available.
In addition, a system will be instituted that will recycle the water used for the irrigation of the plants. The ‘used’ water will be sterilized through a pasteurization process which will allow the Company to re-use the water to irrigate the plants thereby reducing the amount and cost of water usage.
Not only will Aphria be the first cannabis producer to bring this level of technology and generate its own electricity but also it will effectively make the Company’s power co-generation project net carbon neutral.
Aphria Diamond
Through the 51% owned subsidiary, the Company has partnered with DD, a leader with multi-generational expertise in the commercial greenhouse industry. This partnership allows Aphria to gain access to a large talent base of growers and operators of greenhouses at scale, while also allowing the Company to significantly increase their production.
Bringing the knowledge and experience from the Company’s current operations at Aphria One, the Company anticipates a quick ramp-up and transition for its Aphria Diamond site. As a result of Aphria Diamond, the Company will have access to a further 140,000 kgs annually upon completion of the retrofits in time for its first sale in January 2019.
4
The Company provided $10,200 of seed capital to go along with DD’s $9,800. Aphria Diamond acquired 100 acres of land, including almost 32 acres of greenhouses for $42,389, and spent an additional $40,817 as at May 31, 2018 on the retrofit. The Company expects the project to cost an additional $40,000 to complete. All funds above the initial seed capital are currently being funded by the Company, and will be repaid in full by Aphria Diamond.
Aphria Diamond has purchased similar levels of automation, as described above in Aphria One, for its location.
All production from Aphria Diamond will be sold to Aphria at an agreed upon transfer price, allowing Aphria to recognize 100% of the remaining profit from any further processing into derivative, and 100% of the retail margin from branding on all product from Aphria Diamond.
Broken Coast
Broken Coast represents the Company’s premium brand of indoor-grown high-margin, low-cost cannabis. Broken Coast provides the Company access to the quality associated with ‘B.C. Bud’ and access to an award winning genetic bank of cannabis, which can be produced at scale through the Company’s Aphria One and Aphria Diamond facilities. Broken Coast will continue the development of new premium strains and continue to represent what is the highest level of premium cannabis grown through their state-of-the-art custom built indoor facilities.
In April 2018, Broken Coast received a license amendment from Health Canada on its Phase III expansion project, increasing capacity to 4,500 kgs annually. The Company spent approximately $67 as at May 31, 2018 on its Broken Coast Phase IV expansion. The Phase IV expansion will provide the Company with an additional 6,000 kgs annually.
Extraction Centre of Excellence
The Company also committed to spending an additional $55 million to build a state-of-the-art Extraction Centre of Excellence. This facility will provide the necessary production capacity to process over 200,000 kgs per year. Further, it will start with the Company’s developed extraction technologies and build off of the latest extraction technologies and techniques, creating new and innovative product offerings for the adult-use market as they become allowable to sell in Canada. The facility will be equipped to conduct a wide range of cannabis extractions, including CO
2
, butane, ethanol, and produce world-class cannabis concentrates, including fractionated distillates.
To this point in the development of the Canadian cannabis market, the sale of cannabis has been about the sale of cannabis as a product, in forms like flower or bud, shake or trim, and cannabis oil. The Company believes that as the global cannabis industry evolves, this focus on cannabis as a product will morph into cannabis as an ingredient. The Extraction Centre of Excellence is designed around demonstrating Aphria’s leadership in the concept of cannabis as an ingredient.
Canadian medical market brands
Since 2014, the Aphria brand has been a leading choice for patients seeking safe, clean, and pure pharmaceutical grade medical cannabis. Despite the launch of the adult-use market, the Company will continue to focus and invest in the Canadian medical market. This will be achieved through an unrelenting focus on product innovation, patient-centric service and a commitment to accountability.
The Company plans to continue offering ‘B.C. Bud’ as a medical product under both the Aphria and Broken Coast brands.
Canadian adult-use market brands
The Company continues to invest significant capital and resources to prepare for the launch of the adult-use market in Canada. These efforts are focused on brand development, product innovation, marketing, sales, education and research and will set the stage for the Company to be a sizeable player in the Canadian adult use market.
Aphria has been thoughtfully and diligently preparing for the adult-use market by thoroughly researching existing and emerging consumer segments and developing a portfolio of brands designed to specifically meet the needs of those segments across a range of brands, prices and products.
5
In April 2018, the Company unveiled the first of many brands that it intends to launch in Canada’s new adult-use market. Solei Sungrown Cannabis (“
Solei
”) brings simplicity to cannabis through a demystified experience. The brand enables current and novice users alike to enrich their cannabis journey, pairing an assortment of carefully curated strains and product formats with different experiences.
Additionally, the Company will offer its flagship premium-brand, Broken Coast, to adult-use consumers, a brand and product designed to meet the needs of Canada’s most discerning cannabis consumer. Broken Coast craft cannabis is grown on the shores of the Salish Sea in small batches by choice, using single-strain rooms. All flower is hand-trimmed and slow-cured ensuring the optimal cannabis experience.
Over the course of the coming months, Aphria will be launching its additional suite of brands, offering Canadians a broad portfolio of brands designed to specifically meet the needs of each segment.
Product development
The Canadian government has committed to regulating the sale of cannabis infused products in 2019. Based on existing legal markets, cannabis infused products typically represent more than 50% of the total cannabis market. Aphria continues to commit significant resources to drive product innovation in anticipation of these new emerging categories. As a part of its ongoing R&D efforts, the Company is investing in the capability to not only extract to scale using different methods, but also in scaling the isolation of terpenes, cannabinoids and other cannabis compounds in order to develop consistent and unique formulations that can be used in our end-products. The Company’s focus is on developing a suite of edibles, RDTs (ready-to-drink), concentrates, topicals and vapes. These new products will be available across a range of brands and will be available for sale once permitted by law.
Licences
The Company holds two ACMPR licences: Aphria One and Broken Coast. The Company also has submitted an application for a second site license for Aphria Diamond. Further, the Company maintains a Dealer Licence from Health Canada to export medical cannabis oil and resin to international markets.
The ACMPR licence provides the Company with the ability to cultivate, process and sell cannabis within Canada. The Dealer Licence provides the Company with the opportunity to possess, sell and transport medical cannabis oil and resin produced in Canada to other federally legal countries internationally. On October 17, 2018, the Dealer Licence will no longer be required, as all elements of the Dealer Licence will be covered through the Company’s Cannabis Licence. The Company anticipates relinquishing its Dealer Licence as part of the transition to
The Cannabis Act
.
Distribution
The Company signed an exclusive distribution agreement with Great North Distributors Inc. (“
Great North Distributors
”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits (“
Southern Glazer’s
”). This exclusive distribution agreement provides the Company with access to an experienced sales staff from a Company with over 100 years in the distribution business and one of the largest distributors of spirits and wine in North America. As part of the distribution agreement, Great North Distributors provides Aphria with a cannabis exclusivity from the Company’s competitors, which restricts their ability to engage in cannabis distribution to Aphria and micro-cultivators.
The experience brought from this partnership will ensure Aphria’s adult-use product offerings are on shelves, fully stocked, in the appropriate store and on the appropriate shelf location and that there is sufficient education surrounding Aphria’s product offerings. The experience from Southern Glazer’s sales staff with products, which are retailed largely through the same government bodies that will be responsible for retail cannabis, will provide unparalleled knowledge for the sales strategy used in the adult-use market.
The Company continues to sign supply agreements with provinces throughout Canada, showing the Company’s commitment to becoming the leader in the upcoming adult-use market. The Company currently has agreements with the following provincial bodies: British Columbia, Alberta, Manitoba, Quebec, New Brunswick and the Yukon Territory
6
Based on the initial orders placed by the above provincial bodies, the Company secured orders for over 21,000 kgs. The Company believes these orders will serve as an entrance into a larger market, as the demand continues to grow for the Company’s various brands and product offerings throughout all of Canada.
In addition to the above new distribution agreements for the adult-use market, the Company is expanding their distribution in the medical cannabis market with its five-year supply agreement with Shoppers Drug Mart.
Aphria International
The Company continues to focus on new and emerging federally legal cannabis markets, and continued growth for the Company and its shareholders. The Company’s international strategy is focused on medical cannabis markets with rigorous regulatory rules, markets with limited license opportunities and stable economic environments.
Through the acquisition of Aphria International, and the conditional acquisition of LATAM Holdings Inc. subsequent to year-end, the Company secured access to key international markets, management team bench strength with a proven knowledge and high levels of executional success within the industries and jurisdictions in which they operate. The Company believes that with its significant experience in the highly regulated Canadian ACMPR market, it will be able to export its industry leading knowledge and practices to its global subsidiaries.
As part of its international strategy, the Company is developing regional hubs in Pan-Asia, the European Union, South America, North America, the Caribbean and Africa. These hubs will represent key countries for investment and will aid in the flow of cannabis goods across the globe. The Company chose Australia as its Pan-Asian hub and is currently exploring opportunities in New Zealand and Thailand. The Company chose Malta as its hub for the European Union and Colombia for South America, where it continues to pursue opportunities in Brazil, Peru, Chile and Argentina. The Company chose Jamaica as its hub for the Caribbean and Lesotho as its hub for Africa, where it continues to pursue opportunities in Swaziland and Zimbabwe.
The Company has international operations in Australia, Germany, Italy, Portugal, Malta, Lesotho, Columbia, Jamaica, Argentina and maintains an option for entry into Brazil. With these markets still in their infancy, and the regulatory environment around them still being formed, these countries are looking to Canada as a leader in developing the regulatory environment. The Company provides a unique opportunity to bring the experience from working within Canada during the development of the cannabis regulations, to provide this expertise and knowledge to develop these global cannabis markets.
Export facility from Canada
Through the acquisition of Aphria International, the Company acquired ARA - Avanti RX Analytics Inc. (“
Avanti
”), which currently holds four licences: (i) Dealer Licence; (ii) Establishment Licence; (iii) Site Licence; and, (iv) Medical Device Establishment Licence.
These licences allow the Company to possess and handle cannabis and cannabis derivative products and allow Avanti to engage in the possession, production, packaging, sale, transportation and delivery and testing of codeine, morphine, cocaine, cannabis and related cannabinoids. The Company is also able to complete testing/analysis of active pharmaceutical ingredients and pharmaceutical, and distribution of pharmaceuticals.
The Company is currently in process of securing Good Manufacturing Practice from the European Medicines Agency (“
EU-GMP
”) certification on the Avanti lab, which will then be used as the Canadian staging site for international bound GMP certified products. The Company’s EU-GMP certification will cover extraction, post processing, testing, packaging and shipping process.
7
Pan-Asia
Australia
The Australian market is very similar to the Canadian medical cannabis market three years ago. The Company has access to the Australian medical cannabis market through a 37.5% equity investment in Althea Company Pty Ltd., and a supply agreement with Althea until they are able to complete construction of their new facility and fulfill their own production requirements.
Althea currently holds a licence to cultivate and manufacture cannabis-derivative medications issued by the Office of Drug Control (“
ODC
”). Althea previously secured import permits from the ODC. Aphria secured the related export permit from Health Canada and Aphria shipped product to Althea in Australia. The products sold by Althea in Australia is co-branded with Aphria.
Aphria International also maintains relationships in Australia with two companies conducting medical cannabis clinically trials. Medlab Pty Ltd. is currently in Phase 2b of a clinical trial related to oncology pain using an Aphria proprietary blend of cannabis strains oil, subsequently converted in Australia into a nanocell mucosol spray. CannPal Pty Ltds, is currently in Phase 2a of a clinical trial related to animal pain in cats and dogs, using Aphria strains.
European Union
Germany
The German market is considered to be one of the most highly sought-after medical cannabis markets in the world. German law currently permits import of cannabis only. The German government recently re-launched its tender process to award licences for in-country cultivation. Aphria International through its German wholly-owned subsidiary Nuuvera Deutschland GmnbH (“
Deutschland
”) participated in the previous tender process, which was stopped by the German courts on a technicality related to the bid rules, and will participate in the current tender process being launched by the German government. Germany currently allows cannabis and cannabis extracts in pharmacies, these cannabis-based products are also required by German law to be covered by insurance companies. This coverage provides a greater number of medical cannabis patients with access to the full use and benefits of these products.
The Company’s approach in Germany is a three-pronged approach covering: demand; supply; and, distribution.
Demand
Through the acquisition of a 25.1% interest in Berlin-based Schöneberg Hospital, the Company has access to doctors and patients, to support the education of the benefits of medical cannabinoids. The Company also plans to build and operate pain treatment centers including the new possibilities of digital health care throughout Germany, which will further provide access to patients.
Supply
As previously discussed, the Company will, through imports and participation in the German tender process, supply products into the German market.
Distribution
Through the acquisition of Aphria International, the Company obtained a letter of intent to supply 1,200 kgs of cannabis products through CC Pharma GmbH, a leading distributor of pharmaceutical products. To secure a constant delivery of imported cannabis for German patients, the Company is building one of the biggest state-of-the-art GMP certified cannabis vaults in Bad Bramstedt, northern Germany with a storage capacity of 5,000 kgs.
8
Malta
Through majority-owned subsidiary ASG Pharma Ltd. (“
ASG
”), the Company received the first import licence for medical cannabis issued by the Malta Medicines Authority. The Company intends on using the Malta import license and facility to import cannabis resin and dried flower for processing, packaging and distribution of EU-GMP certified cannabis products throughout large parts of Europe.
This Malta facility will provide the Company with the ability to bring low-cost production of cannabis product from outside of Europe into an EU-GMP certified facility for further processing and distribution throughout Europe.
Italy
The Company’s wholly owned subsidiary FL-Group is authorized for the distribution of pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies, holding one of only seven cannabis import licenses in Italy. The FL-Group acts as the Company’s distributor to the Italian cannabis market.
Spain
The Company previously announced a Letter of Intent to enter Spain as part of a joint venture with Medalchemy and Cafina for the cultivation and importation of medical cannabis in Spain. After further review of opportunities in Spain, the Company elected to not pursue its relationship with Medalchemy further, effectively exiting Spain for now and concentrating its efforts in Portugal.
Portugal
Identified as one of the primary areas for cultivation in the European Union, Aphria International is currently pursuing strategic partners to begin operations in Portugal.
Africa
Lesotho
The Company entered into a new venture in CannInvest Africa Ltd. (“
CannInvest
”), a South African corporation. Aphria’s partner in CannInvest is the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years experience in phytoextraction of African medicinal plants. Through this transaction, the Company obtained a controlling interest in Verve Dynamics Inc. (PTY) Ltd. (“
Verve
”). Verve holds a licence in Lesotho for prohibited drug operations, which allows Verve to cultivate, manufacture, supply, distribute, store, export and import cannabis and cannabis resin for medical purposes or scientific use.
The Company also entered into a supply agreement with Verve, where Verve will supply cannabis THC and CBD extract from its planned EU-GMP certified facility. This is expected to provide the Company with access to low-cost GMP certified extract for distribution into South Africa and other federally legal markets, including the European Union.
South America
Colombia
The Company signed an exclusive supply agreement with Colcanna SAS (“
Colcanna
”), a Colombia-based pharmaceutical import and distribution company, which is licensed to import, sell and distribute medical cannabis, medical products and derivatives in Colombia. Under the terms of the agreement, Aphria will be the exclusive supplier of cannabis products to Colcanna for the Colombian market and Colcanna will purchase medical cannabis products from Aphria exclusively.
Argentina
In March 2018, the Company signed an exclusive supply agreement with ABP S.A. (“
ABP
”), an Argentina-based pharmaceutical import and distribution company, which is licensed to import CBD oil into Argentina for a clinical drug trial studying epilepsy in children. Under the terms of the agreement, Aphria is the exclusive supplier of cannabis oil to ABP for the Argentinian market and ABP will purchase medical cannabis products from Aphria exclusively.
9
LATAM Holdings Inc.
Subsequent to year-end, the Company announced that it would acquire LATAM Holdings Inc. (“
LATAM
”). The acquisition of LATAM provides the Company with immediate access to the high profile, attractive countries in South America and the Caribbean, including Colombia, Argentina, Jamaica and potentially Brazil.
Colombia
The acquisition of LATAM, provides the Company with 90% ownership of Colcanna. This ownership provides the Company with the ability to further develop the global Aphria brand with Aphria branded products distributed to patients in Columbia. Upon Colcanna developing its 34 acres of land for the cultivation of cannabis, which is expected to provide 50,000 kgs annually, the Company will maintain the control of the cultivation and distribution of cannabis in Columbia. Until the emerging Colombian market demand grows to match the Company’s Colombian production, the Company will be able to utilize its export licence to distribute the excess production globally.
Argentina
The acquisition of LATAM, provides the Company with sole ownership of APB, providing the Company with a significant first-mover advantage, as APB is the first company with an in-country medical cannabis research licence. The Company also continues to work with Hospital Garrahan, a leading pediatric hospital in Buenos Aires. The Company believes that, once the Argentinian government approves medical cannabis, in-country cultivation opportunities will be attractive.
Jamaica
The acquisition of LATAM provides the Company with a 49% ownership interest in Marigold Projects Jamaica Limited (“
Marigold
”), through multiple subsidiaries and a 95% royalty on profits through an Intellectual Property agreement. This acquisition will provide the Company with several key licences including a Tier 3 cultivation licence, a Tier 2 herb house licence, as well as licences for import, export and research purposes.
Brazil
Finally, the acquisition of LATAM provides the Company with an option to purchase 50.1% of a Brazilian entity for $24 million (USD), once it secures a medical cannabis licence from the Brazilian government and a right of first offer and refusal on another 20-39% of the Brazilian entity. This right of first refusal provides the Company with lower risk at a fixed price to enter into the Brazil market pending the Brazilian Company obtaining a licence.
Strategic Investments and Acquisitions
The Company continues to invest in companies, to advance its corporate strategic goals. These investments allow the Company access into ancillary markets within the cannabis industry, in which the Company is otherwise not active, lead to supply or purchasing agreements or other relationships furthering these corporate strategic goals.
Green Acre Capital Fund
Aphria agreed to invest $2,000 in Green Acre Capital Fund. (“
Green Acre
”), of which $1,600 had been invested by May 31, 2018. Green Acre is a private investment fund dedicated exclusively to the Canadian medical and recreational cannabis industry. The fund invests in sectors across the cannabis value chain including production, research, consumer products and retail.
This investment provides the Company a way of recognizing a share of the growth of the ancillary markets of the cannabis industry in which it is not currently active. The investment also serves to assist in identifying new technology and innovations, which the Company may participate in directly, or acquire. These opportunities are identified and analyzed by management of Green Acre, without any further costs to the Company. Subsequent to year-end, the Company committed to a $15,000 investment in Green Acre Capital Fund II to be launched before December 2018.
10
TS BrandCo Holdings Inc. and Hiku Brands Company Lts.
The Company entered into supply agreements and a subscription agreement for $1,000 with TS BrandCo Holdings Inc. (“
Tokyo Smoke
”) in 2017. Subsequently, Tokyo Smoke merged with DOJA Cannabis Company Ltd., renaming the reporting issuer Hiku Brands Company Ltd. (“
Hiku
”). Upon the merger, the Company entered into a subscription agreement and supply agreement with Hiku. Hiku, through multiple brands, was focused on the retail and branding sides of the adult-use cannabis market. The supply agreement provided the Company with an exclusive right to sell Tokyo Smoke branded medical cannabis and contained a change of law provision designed to morph the exclusive medical cannabis supply agreement into an adult-use supply agreement.
Subsequent to year-end, all the issued and outstanding common shares of Hiku were acquired by a third party. The Company maintains the supply agreements identified previously.
Green Tank Holdings Corp.
The Company made a strategic investment in Green Tank Holdings Corp. (“
Green Tank
”). The Company made this investment to share in the ancillary market and profits from the sale of Green Tank’s products within the upcoming adult-use cannabis market.
The Company also entered into a supply agreement to purchase Green Tank products.
Divesture of equity investment in passive US assets
During the year, the Company announced a divestiture process of its equity investment in Liberty Health Sciences Inc. (“
Liberty
”) and of its wholly owned subsidiary Aphria (Arizona) Inc., which holds minority interests in Copperstate Farms, LLC (“
Copperstate
”) and Copperstate Farms Investors, LLC (“
CSF
”).
Subsequent to year-end, the Company fully divested of its holdings in Copperstate and CSF. The total cost of the investments in Copperstate and CSF is $11,162 and the investment was recorded in the Company’s financial statements at its fair value of $20,000, resulting in a realized gain of $8,838 on the sale of the asset.
The Company also announced a staged sale of its Liberty investment based on the release of its Liberty shares from CSE mandated escrow provisions. At the end of the year, the Company sold over 26.7 million of its common shares of Liberty. Subsequent to year-end, the Company sold another 16.0 million of its Liberty shares; however, as part of the sale process, the Company negotiated a stand-still and option agreement with the purchaser that prevents the purchaser from disposing of the shares for 18 months, while at the same time granting the Company an option to acquire the shares back in the next 18 months should the US federal government amend its rules on cannabis and should the Toronto Stock Exchange approve the purchase.
The Company recognized a gain from the sale of the Liberty shares of $26,347 during the year. Based on the closing share price of Liberty as at May 31, 2018, the Liberty shares held by Aphria have a fair value, net of the 18% discount, of $57,178, which is $49,009 higher than the carrying value recorded in assets held for sale net of the derivative liability.
Equity Financing Activities
As the Company continues its facility expansions and developing the adult-use market, the Company required additional funds to support both Canadian and international activities. During the year, the Company completed two equity financings. Under the equity financings, the Company raised net proceeds of almost $200,000. Subsequent to year-end, the Company closed an additional bought deal financing for net proceeds of over $245,000.
The $445,000 of net proceeds raised over the past twelve months provides the Company with sufficient capital to fund its current international activities from the development stage through to production where they are expected to generate cash independently. There are also sufficient funds to complete the existing expansion of the ACMPR operations including capital investments for the build out of the Company’s Aphria One, Aphria Diamond and Broken Coast facilities.
11
INVESTOR HIGHLIGHTS
|
|
|
YE - 2018
|
|
Q4 - 2018
|
|
Q3 - 2018
|
|
|
Revenue
|
|
$
|
36,917
|
|
$
|
12,026
|
|
$
|
10,267
|
|
|
Kilograms equivalents sold
|
|
4,829.7
|
|
1,312.6
|
|
1,428.1
|
|
|
Production costs
|
|
$
|
8,692
|
|
$
|
2,245
|
|
$
|
2,355
|
|
|
Cash cost to produce dried cannabis / gram
1
|
|
$
|
1.08
|
|
$
|
0.95
|
|
$
|
0.96
|
|
|
“All-in” cost of sales of dried cannabis / gram
1
|
|
$
|
1.72
|
|
$
|
1.60
|
|
$
|
1.56
|
|
|
Adjusted gross margin
1
|
|
75.6
|
%
|
78.7
|
%
|
77.1
|
%
|
|
Adjusted EBITDA from ACMPR operations
1
|
|
$
|
8,419
|
|
$
|
2,227
|
|
$
|
2,940
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
104,799
|
|
$
|
104,799
|
|
$
|
173,683
|
|
|
Working capital
|
|
$
|
150,758
|
|
$
|
150,758
|
|
$
|
234,589
|
|
|
Capital and intangible asset expenditures - wholly owned subsidiaries
1
|
|
$
|
133,492
|
|
$
|
39,042
|
|
$
|
35,427
|
|
|
Capital and intangible asset expenditures - majority owned subsidiaries
1
|
|
$
|
83,207
|
|
$
|
24,052
|
|
$
|
59,155
|
|
|
Strategic investments
1
|
|
$
|
65,693
|
|
$
|
5,946
|
|
$
|
34,016
|
|
1
— Non-GAAP measure
·
On June 21, 2018, Bill C-45, the
Cannabis Act
, reached Royal Assent, and is expected to come into force October 17, 2018
·
Current production capacity increased to 34,500 kgs (annualized) in April 2018 after Health Canada approval of Broken Coast’s Phase III expansion
·
Mid-term capacity upgrade to 255,000 kgs (annualized) production capability expected by November 2018, with a further 5,000 kgs (annualized) within one year thereafter
·
First full quarter of inventory build for adult-use market in Canada and International opportunities
·
Acquired Nuuvera Inc. and launch of Aphria International
·
Completed first shipment of medical cannabis to Australia-based partner Althea Company Pty Ltd. (“
Althea
”)
·
Signed an exclusive supply agreement with Columbia-based cannabis company Colcanna SAS
·
Signed an exclusive supply agreement with Argentinian based pharmaceutical import and distribution company ABP
·
Acquired 25.1% interest in Berlin-based Schöneberg Hospital
·
Formed landmark venture with South African Verve Group of Companies
·
Launched the Company’s first adult-use brand, Solei Sungrown Cannabis
·
Signed an exclusive distribution agreement with a wholly-owned subsidiary of Southern Glazer’s Wine & Spirits
·
Eleven consecutive quarters of positive adjusted EBITDA from ACMPR operations
·
Bought deal closed subsequent to year-end for net proceeds of over $245,000
·
Expanded executive team with appointment of Chief Commercial Officer, Chief Legal Officer and Vice President of Sales
·
Strong executive team
·
20+ years of Pharmaceutical experience
·
35+ years of potted plant greenhouse growing experience
·
30+ years of vegetable greenhouse growing experience
·
10+ years of tobacco sales and marketing experience
·
30+ years of spirit sales and marketing experience
12
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth for Aphria One and ninth week of growth for Broken Coast. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation to recognize the eventual fair value of the plant. At the time of harvest, the Company increases the carrying value of the harvested produce to its full fair value less costs to sell.
As at May 31, 2018, the Company’s harvested cannabis and cannabis oil, as detailed in Note 6, and biological assets, as detailed in Note 7 of its financial statements, are as follows:
|
|
|
May 31,
2018
|
|
February 28,
2018
|
|
|
Harvested cannabis - at cost
|
|
$
|
4,111
|
|
$
|
2,367
|
|
|
Harvested cannabis - fair value increment
|
|
8,220
|
|
4,149
|
|
|
Harvested cannabis trim - at cost
|
|
810
|
|
506
|
|
|
Harvested cannabis trim - fair value increment
|
|
1,467
|
|
775
|
|
|
Cannabis oil - at cost
|
|
2,660
|
|
1,591
|
|
|
Cannabis oil - fair value increment
|
|
3,918
|
|
1,668
|
|
|
Biological assets - at cost
|
|
3,708
|
|
1,916
|
|
|
Biological assets - fair value increment
|
|
3,623
|
|
1,185
|
|
|
Cannabis products - at fair value
|
|
$
|
28,517
|
|
$
|
14,157
|
|
In an effort to increase transparency, Aphria One’s biological assets are carried at cost plus fair value increments of $0.64, $1.28, $1.92 and $2.56 per gram for weeks 13, 14, 15 and 16, respectively. Broken Coast’s biological assets are carried at cost plus fair value increments of $0.72, $1.44, $2.16 and $2.89 per gram for weeks 10, 11, 12 and 13 respectively. Harvested cannabis, harvested cannabis trim and cannabis oil are carried at fair values of $3.75 per gram, $3.00 per gram and $0.84 per mL, respectively for greenhouse produced cannabis. Harvested cannabis, harvested cannabis trim and cannabis oil are carried at fair values of $4.25 per gram, $3.50 per gram and $1.19 per mL, respectively for indoor produced cannabis. The increase in the fair value of the oil per mL is due to the Company changing its oil production process, where previously oil was made on an equivalency factor of 1 gram per 6mL of oil, to 1 gram per 4.5 mL of oil. The individual components of fair values are as follows:
|
|
|
May 31,
2018
|
|
February 28,
2018
|
|
|
Harvested cannabis - at cost - per gram
|
|
$
|
1.28
|
|
$
|
1.36
|
|
|
Harvested cannabis - fair value increment - per gram
|
|
$
|
2.55
|
|
$
|
2.39
|
|
|
Harvested cannabis trim - at cost - per gram
|
|
$
|
1.15
|
|
$
|
1.19
|
|
|
Harvested cannabis trim - fair value increment - per gram
|
|
$
|
2.09
|
|
$
|
1.81
|
|
|
Cannabis oil - at cost - per mL
|
|
$
|
0.34
|
|
$
|
0.31
|
|
|
Cannabis oil - fair value increment - per mL
|
|
$
|
0.51
|
|
$
|
0.33
|
|
13
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Year ended
|
|
Three months ended
|
|
|
|
|
May 31,
|
|
May 31,
|
|
February 28,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2018
|
|
2018
|
|
2018
|
|
|
Production costs
|
|
$
|
8,692
|
|
$
|
2,245
|
|
$
|
2,355
|
|
|
Add (less):
|
|
|
|
|
|
|
|
|
Cost of accessories
|
|
$
|
(236
|
)
|
$
|
(67
|
)
|
$
|
(71
|
)
|
|
Cannabis oil conversion costs
|
|
$
|
(241
|
)
|
$
|
(84
|
)
|
$
|
(62
|
)
|
|
Increase in plant inventory
|
|
$
|
100
|
|
$
|
—
|
|
$
|
—
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
8,315
|
|
$
|
2,094
|
|
$
|
2,222
|
|
|
Gram equivalents sold during the quarter
|
|
4,829,621
|
|
1,312,571
|
|
1,428,097
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
1.72
|
|
$
|
1.60
|
|
$
|
1.56
|
|
1
In prior quarters the Company recorded adjustments to “All-in” cost of sales of dried cannabis per gram, for increases in plant inventory. This adjustment was made as a result of the Company using a standard cost method and allocating additional costs to plant inventory, when as part of a planned expansion, there was a significant increase in the number of plants, while the incremental costs with the new capacity have not materialized. The increase in number of plants before the corresponding increase in costs, led to the Company allocating more costs than incurred to date, to biological assets resulting in over absorbed overhead. To maintain comparability of this figure from quarter to quarter, the Company determined it was appropriate to normalize this item as part of the above calculation. This adjustment is subjective, and requires management to make significant assumptions as to whether the increase in cost included in biological assets, is a result of improved operations, a result of an expansion or a result of other factors.
Calculation of cash costs to produce dried cannabis per gram
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Year ended
|
|
Three months ended
|
|
|
|
|
May 31,
|
|
May 31,
|
|
February 28,
|
|
|
Cash costs to produce dried cannabis per gram
|
|
2018
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
8,315
|
|
$
|
2,094
|
|
$
|
2,222
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
(1,715
|
)
|
$
|
(353
|
)
|
$
|
(473
|
)
|
|
Packaging costs
|
|
$
|
(1,369
|
)
|
$
|
(493
|
)
|
$
|
(373
|
)
|
|
Cash costs to produce dried cannabis
|
|
$
|
5,231
|
|
$
|
1,248
|
|
$
|
1,376
|
|
|
Gram equivalents sold during the quarter
|
|
4,829,621
|
|
1,312,571
|
|
1,428,097
|
|
|
Cash costs to produce per gram
|
|
$
|
1.08
|
|
$
|
0.95
|
|
$
|
0.96
|
|
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended May 31, 2018 was $12,026 versus $5,718 in the same period of the prior year and $10,267 in the third quarter of fiscal 2018, representing an increase of 110.3% from the prior year and a 17.1% increase from the prior quarter.
14
The increase in revenue during the quarter from the prior quarter was related to:
·
Acquisition of Broken Coast, which provided an additional 309,844 gram equivalents sold in the quarter;
·
Continued patient onboarding, including sales of 172,227 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 798,048 gram equivalents to patients on-boarded prior to the quarter; and,
·
Increased average retail selling price (excluding wholesale) during the quarter from $8.30 to $9.25. The increase in average retail selling price is due to a full quarter of Broken Coast sales which had an average selling price of over $10.
These factors were partially offset by:
·
A minor decrease in the percentage of cannabis oil sold for retail sales, from 33.1% to 29.2%; and,
·
A decrease in wholesale orders to other Licensed Producers during the quarter from 445,206 gram equivalents to 32,452 gram equivalents as a result of the Company’s shift to focus on building inventory for the adult-use market.
Revenue for the year ended May 31, 2018 was $36,917 versus $20,438 in the same period of the prior year, representing a 80.6% increase.
The increase in revenue for the year, as compared to the prior year, is consistent with the Company’s increase in patients and the acquisition of Broken Coast.
Gross profit and gross margin
The gross profit for the three months ended May 31, 2018 was $18,212, compared to $5,825 in the same quarter in the prior year and $8,570 in the previous quarter. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year, the acquisition of Broken Coast, and the increase in the net fair value adjustment for biological assets.
The gross profit for the year ended May 31, 2018 was $40,887, compared to $17,297 in the prior year. The increase in gross profit from the prior year is consistent with the Company’s much larger patient base over the prior year, the acquisition of Broken Coast, and the increase in the net fair value adjustments for biological assets as a result of the Company’s increased production levels.
|
|
|
Year ended
|
|
Three months ended
|
|
|
|
|
May 31,
|
|
May 31,
|
|
February 28,
|
|
|
|
|
2018
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
36,917
|
|
$
|
12,026
|
|
$
|
10,267
|
|
|
Production costs
|
|
8,692
|
|
2,245
|
|
2,355
|
|
|
Other costs of sales
|
|
313
|
|
313
|
|
—
|
|
|
Gross profit before fair value adjustments
|
|
27,912
|
|
9,468
|
|
7,912
|
|
|
Fair value adjustment on sale of inventory
|
|
10,327
|
|
3,077
|
|
3,443
|
|
|
Fair value adjustment on growth of biological assets
|
|
(23,302
|
)
|
(11,821
|
)
|
(4,101
|
)
|
|
|
|
(12,975
|
)
|
(8,744
|
)
|
(658
|
)
|
|
Gross profit
|
|
$
|
40,887
|
|
$
|
18,212
|
|
$
|
8,570
|
|
|
Gross margin
|
|
110.8
|
%
|
151.4
|
%
|
83.5
|
%
|
15
Cost of sales currently consist of three main categories: (i) production costs (formerly defined as cost of goods sold) and, (ii) fair value adjustment on sale of inventory and (iii) fair value adjustment on growth of biological assets:
(i)
Production costs include all direct and indirect costs of production, related to the medical cannabis sold. This includes costs relating to growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii)
Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of inventory sold in the period.
(iii)
Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced in the period. In an effort to increase transparency, inventory of harvested cannabis (Note 6 — Consolidated financial statements for the year ended May 31, 2018) consists of harvested cannabis, harvested cannabis trim and cannabis oil, of which harvested cannabis is carried at a value of $3.75 and $4.25 per gram, harvested cannabis trim is carried at $3.00 and $3.50 per gram and cannabis oil is carried at $0.84 and $1.19 per mL (4.5mL of cannabis oil is equivalent to 1 gram of dried product).
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of gross profit before fair value adjustments and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Gross profit before fair value adjustments and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the three months ended May 31, 2018:
|
|
|
Three months ended
May 31, 2018
(IFRS)
|
|
Adjustments
|
|
Three months ended
May 31, 2018
(Adjusted)
|
|
|
Revenue
|
|
$
|
12,026
|
|
$
|
—
|
|
$
|
12,026
|
|
|
Production costs
|
|
2,245
|
|
—
|
|
2,245
|
|
|
Other costs of sales
|
|
313
|
|
—
|
|
313
|
|
|
Fair value adjustment on sale of inventory
|
|
3,077
|
|
(3,077
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(11,821
|
)
|
11,821
|
|
—
|
|
|
|
|
(6,186
|
)
|
8,744
|
|
2,558
|
|
|
Gross profit
|
|
$
|
18,212
|
|
$
|
(8,744
|
)
|
$
|
9,468
|
|
|
Gross margin
|
|
151.4
|
%
|
|
|
78.7
|
%
|
16
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the year ended May 31, 2018:
|
|
|
Year ended May 31,
2018 (IFRS)
|
|
Adjustments
|
|
Year ended May 31,
2018 (Adjusted)
|
|
|
Revenue
|
|
$
|
36,917
|
|
$
|
—
|
|
$
|
36,917
|
|
|
Production costs
|
|
8,692
|
|
—
|
|
8,692
|
|
|
Other costs of sales
|
|
313
|
|
—
|
|
313
|
|
|
Fair value adjustment on sale of inventory
|
|
10,327
|
|
(10,327
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(23,302
|
)
|
23,302
|
|
—
|
|
|
|
|
(3,970
|
)
|
12,975
|
|
9,005
|
|
|
Gross profit
|
|
$
|
40,887
|
|
$
|
(12,975
|
)
|
$
|
27,912
|
|
|
Gross margin
|
|
110.8
|
%
|
|
|
75.6
|
%
|
Selling, general and administrative costs
|
|
|
Three months ended
May 31,
|
|
Year ended May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
General and administrative
|
|
$
|
7,399
|
|
$
|
1,263
|
|
$
|
13,901
|
|
$
|
4,678
|
|
|
Share-based compensation
|
|
7,206
|
|
688
|
|
17,874
|
|
2,399
|
|
|
Selling, marketing and promotion
|
|
4,115
|
|
1,610
|
|
11,873
|
|
6,664
|
|
|
Amortization
|
|
2,715
|
|
241
|
|
3,985
|
|
956
|
|
|
Research and development
|
|
210
|
|
58
|
|
490
|
|
492
|
|
|
Impairment of intangible asset
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
|
Transaction costs
|
|
939
|
|
—
|
|
5,192
|
|
—
|
|
|
|
|
$
|
22,584
|
|
$
|
3,860
|
|
$
|
53,315
|
|
$
|
18,689
|
|
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development, impairment of intangible asset and transaction costs. These costs increased by $18,724 to $22,584 from $3,860 in the same quarter in the prior year and increased $34,626 to $53,315 from $18,689 in the prior year.
General and administrative costs
|
|
|
Three months ended
May 31,
|
|
Year ended May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
567
|
|
$
|
209
|
|
$
|
1,794
|
|
$
|
829
|
|
|
Consulting fees
|
|
944
|
|
88
|
|
1,154
|
|
220
|
|
|
Office and general
|
|
1,807
|
|
230
|
|
3,562
|
|
1,336
|
|
|
Professional fees
|
|
1,589
|
|
217
|
|
2,951
|
|
608
|
|
|
Salaries and wages
|
|
1,919
|
|
353
|
|
3,295
|
|
1,142
|
|
|
Travel and accomondation
|
|
372
|
|
144
|
|
889
|
|
464
|
|
|
Rent
|
|
201
|
|
22
|
|
256
|
|
79
|
|
|
|
|
$
|
7,399
|
|
$
|
1,263
|
|
$
|
13,901
|
|
$
|
4,678
|
|
17
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Executive compensation increased as a result of the increase in executive headcount over the same period in the prior year;
·
Salaries and wages, office and general, and travel and accommodation as a result of increased headcount and other activity within the business over the same period in the prior year;
·
Professional fees, predominantly comprised of legal costs associated with various negotiations and reviews of current and potential business relationships necessary to sustain the growth of the Company, including recurring costs related to our listing on the TSX.
Share-based compensation
The Company recognized share-based compensation expense of $7,206 for the three months ended May 31, 2018 compared to $688 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is a result of an increase in deferred share units (“
DSUs
”), stock options vesting, as well as an increase in stock price used in the valuation of DSUs and options issued in the current period. The Company issued 32,000 DSUs and 1,470,000 stock options in the current period compared, to 16,000 DSUs and 140,000 stock options in the same period of the prior year. Of the stock options granted in the quarter, 156,665 vested in the quarter.
For the year ended May 31, 2018, the Company incurred share-based compensation of $17,874 as opposed to $2,399 for the prior year. The increase in share-based compensation is a result of an increase in DSUs issued, stock options vesting, as well as an increase in stock price used in the valuation of options issued in the current year. The Company issued 263,000 DSUs and 5,123,000 stock options in the current year compared to 32,000 DSUs and 2,253,000 stock options in the prior year. Of the stock options granted in the year, 1,018,621 vested in the year. The Company also rescinded 515,000 stock options which were issued during the year, the fair value of the options rescinded was $5,256, of which $1,906 was included in share-based compensation prior to the options being rescinded.
Selling, marketing and promotion costs
For the three months ended May 31, 2018, the Company incurred selling, marketing and promotion costs of $4,115, or 34.2% of revenue versus $1,610 or 28.2% of revenue in the comparable prior period. These costs relate to patient acquisition and ongoing patient maintenance, the Company’s call center operations, shipping costs, marketing department, as well as the development of promotional and information materials. Patient acquisition and ongoing patient maintenance costs include payments to individual clinics to perform medical studies as well as reimbursement of operating costs incurred by clinics on the Company’s behalf. The increase in selling, marketing and promotion cost is correlated with the increase in patient and sales volumes over the comparable period. During the quarter, the Company also increased marketing costs related to the upcoming adult-use market.
For the year ended May 31, 2018, the Company incurred selling marketing and promotion costs of $11,873 or 32.2% of revenue, as opposed to $6,664 or 32.6% of revenue in the prior year. The increase in costs in the year is consistent with the increase in the three-month period.
Amortization
The Company incurred non-production related amortization charges of $2,715 for the three months ended May 31, 2018 compared to $241 for the same period in the prior year. The increase in amortization charges are a result of the capital expenditures made during the prior fiscal year, which assets the Company transferred into use during the current fiscal year.
The Company incurred non-production related amortization charges of $3,985 for the year ended May 31, 2018 compared to $956 for the prior year. The increase for the year is consistent with the increase for the three-month period.
18
Research and development
Research and development costs of $210 were expensed during the three months ended May 31, 2018 compared to $58 in same period last year. These relate to costs associated with the development of new cannabis products.
For the year ended May 31, 2018, the Company incurred research and development costs of $490 as opposed to $492 in the prior year.
Transaction costs
Transaction costs of $939 were expensed during the three months ended May 31, 2018 compared to $nil in same period last year. These relate to costs associated with the acquisition of Aphria International.
For the year ended May 31, 2018, the Company incurred transaction costs of $5,192 as opposed to $nil in the prior year. $1,643 relates to the acquisition of Broken Coast, $3,439 relates to the acquisition of Aphria International, and the remaining transaction costs relate to other transactions which have been abandoned, or were still under consideration at year-end.
Non-operating items
|
|
|
Three months ended
May 31,
|
|
Year ended May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Consulting revenue
|
|
$
|
555
|
|
$
|
295
|
|
$
|
1,244
|
|
$
|
512
|
|
|
Foreign exchange gain
|
|
55
|
|
418
|
|
124
|
|
483
|
|
|
(Loss) gain on marketable securities
|
|
38
|
|
195
|
|
(2,155
|
)
|
209
|
|
|
(Loss) gain on sale of capital assets
|
|
—
|
|
—
|
|
(191
|
)
|
11
|
|
|
Gain on dilution of ownership in equity investee
|
|
—
|
|
—
|
|
7,535
|
|
—
|
|
|
(Loss) gain from equity investees
|
|
(14
|
)
|
210
|
|
(9,295
|
)
|
210
|
|
|
Gain on sale of equity investee
|
|
—
|
|
—
|
|
26,347
|
|
—
|
|
|
Deferred gain recognized
|
|
604
|
|
—
|
|
1,304
|
|
—
|
|
|
Finance income, net
|
|
1,479
|
|
30
|
|
5,012
|
|
728
|
|
|
Unrealized gain on embedded derivatives
|
|
3,559
|
|
—
|
|
4,135
|
|
—
|
|
|
(Loss) gain on long-term investments
|
|
(13,026
|
)
|
(5,572
|
)
|
26,675
|
|
3,571
|
|
|
Unrealized gain (loss) on derivative liability
|
|
4,399
|
|
—
|
|
(12,451
|
)
|
—
|
|
|
|
|
$
|
(2,351
|
)
|
$
|
(4,424
|
)
|
$
|
48,284
|
|
$
|
5,724
|
|
During the quarter ended May 31, 2018, the Company recognized a loss on long-term investment of $(13,026). This loss relates to largely to unrealized losses of $(4,482) on Hiku and $(9,075) on Scythian Biosciences Inc. During the year-ended May 31, 2018, the Company recognized a gain on long-term investments of $26,675. This gain relates largely to a $14,187 realized gain on Nuuvera Inc., and an unrealized gain of $8,817 on Copperstate and CSF. The Company also recognized an unrealized gain (loss) on derivative liability for the quarter and the year ended May 31, 2018 as a result of the 18% discount on market price of Liberty, based on Liberty’s 10-day volume weighted trading price in the Obligation Agreement. Based on its closing share price of $0.87 as at May 31, 2018, the LHS shares held by Aphria have a fair value, net of the 18% discount, of $57,178, which is $49,009 higher than the carrying value recorded in assets held for sale net of the derivative liability.
Net income
The Company recorded a net loss for the three months ended May 31, 2018 of $(4,992) or $(0.04) per share as opposed to net loss of $(2,593) or $(0.02) per share in the prior year.
19
The Company recorded net income for the year ended May 31, 2018 of $29,448 or $0.18 per share as opposed to net income of $4,198 or $0.04 per share in the same period of the prior year.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA from operations as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment of intangible assets, plus transaction costs, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (gain) from equity investee, minus deferred gain recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management, all as follows:
|
|
|
Three months ended
May 31,
|
|
Year ended May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Net (loss) income
|
|
$
|
(4,992
|
)
|
$
|
(2,593
|
)
|
$
|
29,448
|
|
$
|
4,198
|
|
|
Income taxes (recovery)
|
|
(1,731
|
)
|
134
|
|
6,408
|
|
134
|
|
|
Finance income, net
|
|
(1,479
|
)
|
(30
|
)
|
(5,012
|
)
|
(728
|
)
|
|
Amortization
|
|
3,809
|
|
509
|
|
6,678
|
|
1,942
|
|
|
Share-based compensation
|
|
7,206
|
|
688
|
|
17,874
|
|
2,399
|
|
|
Fair value adjustment on growth of biological assets
|
|
(11,821
|
)
|
(808
|
)
|
(23,302
|
)
|
(5,005
|
)
|
|
Fair value adjustment on sale of inventory
|
|
3,077
|
|
(115
|
)
|
10,327
|
|
3,561
|
|
|
Impairment of intangible asset
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
|
Transaction costs
|
|
939
|
|
—
|
|
5,192
|
|
—
|
|
|
Loss (gain) on sale of capital assets
|
|
—
|
|
—
|
|
191
|
|
(11
|
)
|
|
Foreign exchange loss (gain)
|
|
(55
|
)
|
(418
|
)
|
(124
|
)
|
(483
|
)
|
|
Loss (gain) on marketable securities
|
|
(38
|
)
|
(195
|
)
|
2,155
|
|
(209
|
)
|
|
Loss (gain) from equity investees
|
|
14
|
|
(210
|
)
|
9,295
|
|
(210
|
)
|
|
Deferred gain recognized
|
|
(604
|
)
|
—
|
|
(1,304
|
)
|
—
|
|
|
Gain on dilution of ownership in equity investee
|
|
—
|
|
—
|
|
(7,535
|
)
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
(3,559
|
)
|
—
|
|
(4,135
|
)
|
—
|
|
|
Unrealized (gain) loss on derivative liability
|
|
(4,399
|
)
|
—
|
|
12,451
|
|
—
|
|
|
Loss (gain) on long-term investments
|
|
13,026
|
|
5,572
|
|
(26,675
|
)
|
(3,571
|
)
|
|
Gain on sale of equity investee
|
|
—
|
|
—
|
|
(26,347
|
)
|
—
|
|
|
Adjusted EBITDA from Aphria International
|
|
2,834
|
|
—
|
|
2,834
|
|
—
|
|
|
Adjusted EBITDA from ACMPR operations
|
|
$
|
2,227
|
|
$
|
2,534
|
|
$
|
8,419
|
|
$
|
5,517
|
|
|
|
|
Three months ended
May 31,
|
|
Year ended May 31,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Adjusted EBITDA from ACMPR operations
|
|
$
|
2,227
|
|
$
|
2,534
|
|
$
|
8,419
|
|
$
|
5,517
|
|
|
Adjusted EBITDA from Aphria International
|
|
(2,834
|
)
|
—
|
|
(2,834
|
)
|
—
|
|
|
Adjusted EBITDA
|
|
$
|
(607
|
)
|
$
|
2,534
|
|
$
|
5,585
|
|
$
|
5,517
|
|
20
Last year, the Company reported adjusted EBITDA of $2,827 for the three months ended May 31, 2017 and $6,083 for the year ended May 31, 2017. In the current year, the company has re-assessed the definition of adjusted EBITDA, particularly as it relates to presenting a repeatable proxy for cash. As a result, the Company removed the following from EBITDA adjustments from the current periods but also removed from the prior periods for comparison purposes:
(i)
allowance for bad debts as although this is a non-cash item the Company believes it represents an estimate on future cash flows in the amount of $(84) for the three months ended May 31, 2017 and $61 for the year ended May 31, 2017;
(ii)
EBITDA loss from equity accounted investees in the amount of $(44) for the three months ended May 31, 2017 and $(44) for the year ended May 31, 2017
(iii)
amortization of certain non-capital assets in the amount of $3 for the three months ended May 31, 2017 and $66 for the year ended May 31, 2017.
The Company also added an EBITDA adjustment for foreign exchange of $(418) for the three months ended May 31, 2017 and $(483) for the year ended May 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from (used in) operations for the year decreased by $10,974 from cash flow generated from operations of $5,325 in the prior year to cash flow used in operations of $(5,649) in the current year. The decrease in cash flow generated from operations is primarily a result of:
·
Increase in non-cash working capital of $10,411, comprised primarily of increased HST receivable, inventory and other current assets offset by increased accounts payable and accrued liabilities and income taxes payable.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at May 31, 2018, Aphria maintained $59,737 of cash and cash equivalents on hand plus $45,062 in liquid marketable securities, compared to $79,910 in cash and cash equivalents plus $87,347 marketable securities at May 31, 2017. Liquid sources of cash decreased $62,458 in the year.
Working capital provides funds for the Company to meet its operational and capital requirements. As at May 31, 2018, the Company maintained working capital of $150,758. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 12 months.
Capital and intangible asset expenditures
For the year ended May 31, 2018, the Company invested $133,492 in capital and intangible assets through wholly owned subsidiaries, exclusive of business acquisitions, of which $1,961 are considered maintenance CAPEX and the remaining $131,531 growth CAPEX, related to Broken Coast Phase IV expansion and Aphria One’s Part III and Part IV expansions.
For the year ended May 31, 2018, the Company invested $83,207 in capital and intangible assets through majority owned subsidiaries, exclusive of business acquisitions, of which $nil are considered maintenance CAPEX and the remaining $83,207 growth CAPEX, related to Aphria Diamond land and building acquisition and retrofits.
In addition, the Company paid non-cash consideration of $214,168 for the Broken Coast acquisition in the year, of which $105,807 has been allocated to capital and intangible assets. The Company also acquired Aphria International for total consideration of $507,281, of which $140,043 has been allocated to capital and intangible assets.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
21
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its equity investee, Liberty Health Sciences Inc.
During the previous fiscal year, the Company terminated its lease commitment for rental of greenhouse and warehouse space in conjunction with the purchase of the 265 Talbot St. West property. The Company continues to lease office space from a related party. The lease commitment ends December 31, 2018 with the option to renew for two additional 5 year periods. As disclosed previously, the Company has agreed to contribute an additional $400 to Green Acre. The Company has lease commitments until September 2019 and August 2020 for the use of two motor vehicles.
Minimum payments payable over the next five years are as follows:
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1
year
|
|
1 - 3 years
|
|
4 - 5 years
|
|
After 5 years
|
|
|
Outstanding capital related commitments
|
|
$
|
30,360
|
|
$
|
30,360
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Investment commitment
|
|
400
|
|
400
|
|
—
|
|
—
|
|
—
|
|
|
Operating leases
|
|
125
|
|
125
|
|
—
|
|
—
|
|
—
|
|
|
Motor vehicle leases
|
|
54
|
|
29
|
|
25
|
|
—
|
|
—
|
|
|
Long-term debt
|
|
30,548
|
|
2,140
|
|
4,589
|
|
23,819
|
|
—
|
|
|
Total
|
|
$
|
61,487
|
|
$
|
33,054
|
|
$
|
4,614
|
|
$
|
23,819
|
|
$
|
—
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the period.
Share capital
Aphria has the following securities issued and outstanding, as at July 31, 2018:
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Presently
|
|
|
|
& in-the-
|
|
Fully
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
money
|
|
diluted
|
|
|
Common stock
|
|
232,372,569
|
|
—
|
|
—
|
|
232,372,569
|
|
|
Warrants
|
|
2,843,138
|
|
2,843,138
|
|
1,497,272
|
|
1,497,272
|
|
|
Stock options
|
|
8,839,060
|
|
4,836,920
|
|
4,251,090
|
|
4,251,090
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
238,120,931
|
|
*
Based on closing price on July 31, 2018
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the fourth quarter of fiscal 2018, ended May 31, 2018. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2018 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
22
|
|
|
Aug/17
|
|
Nov/17
|
|
Feb/18
|
|
May/18
|
|
|
Revenue
|
|
$
|
6,120
|
|
$
|
8,504
|
|
$
|
10,267
|
|
$
|
12,026
|
|
|
Net income (loss)
|
|
15,041
|
|
6,455
|
|
12,944
|
|
(4,992
|
)
|
|
Earnings (loss) per share - basic
|
|
0.11
|
|
0.05
|
|
0.08
|
|
(0.06
|
)
|
|
Earnings (loss) per share - fully diluted
|
|
0.10
|
|
0.04
|
|
0.08
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug/16
|
|
Nov/16
|
|
Feb/17
|
|
May/17
|
|
|
Revenue
|
|
$
|
4,375
|
|
$
|
5,226
|
|
$
|
5,119
|
|
$
|
5,718
|
|
|
Net income
|
|
895
|
|
945
|
|
4,950
|
|
(2,592
|
)
|
|
Earnings per share - basic
|
|
0.01
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
|
Income per share - fully diluted
|
|
0.01
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RELATED PARTY BALANCES AND TRANSACTIONS
The Company funds a small portion of the Canadian operating costs of Liberty, for which Liberty reimburses the Company quarterly. Additionally, the Company purchases certain electrical generation equipment and pays rent to a company owned by a director. The balance owing from related parties as at May 31, 2018 was $nil (May 31, 2017 - $464). These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani and Mr. John Cervini).
During the year ended May 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $276 (2017 - $350). Included in this amount was rent of $45 charged during the year ended May 31, 2018 (2017 - $49).
ISSUERS WITH U.S. CANNABIS-RELATED ACTIVITIES
On February 8, 2018, the Canadian Securities Administrators revised their previously released Staff Notice 51-352 Issuers with U.S. Marijuana Related Activities (the “
Staff Notice
”) which provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis related activities in the U.S. as permitted within a particular state’s regulatory framework. All issuers with U.S. cannabis related activities are expected to clearly and prominently disclose certain prescribed information in MD&A filings and other required disclosure documents.
On October 16, 2017, the TSX provided clarity regarding the application of Sections 306 (Minimum Listing Requirements) and 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities) of the TSX Company Manual (collectively, the “
Requirements
”) to applicants and TSX listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review.
23
As a result of the Company’s investments in certain U.S. entities (as described herein), Aphria is properly subject to the Staff Notice and accordingly provides the following disclosure:
Nature of U.S. Investments:
Liberty Health Sciences Inc. (Florida)
In May 2017, Aphria invested $25 million into DFMMJ Investments, Ltd. (“
DFMMJ
”), which acquired all or substantially all of the assets of Chestnut Hill Tree Farm LLC, (“
Chestnut
”) through its subsidiary DFMMJ Investments, LLC, and subsequently amalgamated into a subsidiary of SecureCom Mobile Inc. (“
SecureCom
”), a public company listed on the Canadian Securities Exchange, as part of a business combination. The funds, when combined with an additional $35 million raised in a brokered private placement led by Clarus, were invested and used in an entity renamed Liberty Health Sciences Inc. On July 20, 2017, DFMMJ completed its business combination with SecureCom through a reverse takeover acquisition. Upon the completion of the transaction, Liberty consolidated its issued and outstanding common shares and other securities on the basis of three pre-consolidation common shares held for one post consolidation common share. As a result of the three for one exchange and at the time of the completion of the reverse takeover, Aphria held 106,864,102 common shares of Liberty, a reporting issuer on the Canadian Securities Exchange, representing a 37.6% ownership.
Liberty, through its subsidiary, is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. The Company agreed to license its intellectual property in registered marks Aphria, Solei and an unnamed brand to Liberty, in exchange for a 3% perpetual royalty on all sales of cannabis and related products. The licensing of brand names does not require regulatory approval in the State of Florida.
On February 5, 2018, Aphria announced that it entered into a purchase and sale agreement to sell 26,716,025 shares representing all its shares in Liberty that were not otherwise subject to the escrow requirements of the CSE to the Purchasers. Following this transaction, Aphria retained an ownership position of 28.1% of the issued and outstanding shares of Liberty subject, however, to a binding and reciprocal put/call obligation for the Remaining Shares, which are currently subject to the CSE escrow requirements. Pursuant to the agreement, as each new tranche of Remaining Shares is released from escrow (such final escrow release scheduled to occur in July, 2020), Aphria has granted to each of the Purchasers a call option to purchase the Remaining Shares, and each of the Purchasers has granted to Aphria a put option to sell the Remaining Shares, at a pre-determined valuation.
On July 23, 2018, Aphria announced that it had entered into an amended purchase and sale agreement related to the July 26, 2018 tranche of Liberty shares when they left escrow. The amended purchase and sale agreement, including Aphria agreeing to hold a 30-day promissory note for payment of the shares, Aphria paying $480,000 and the purchasers agreeing to an 18-month stand still on selling the shares and agreeing to grant Aphria an 18-month option to repurchase the shares, exercisable at $1.00 per share, subject to certain conditions.
In the event that the relevant provisions of the TSX Company Manual related to issuers with cannabis assets in the United States are revoked, amended or superseded or any other policies, positions, guidelines, directives, rules or regulations of the TSX are implemented such that Aphria would be permitted to hold, directly or indirectly, cannabis related assets or other investments in the United States (including the Remaining Shares), then the aforementioned put/call obligation shall forthwith be terminated, upon payment by Aphria to the Purchasers of an agreed termination fee.
Non-Material Investees: CannaRoyalty Corp. and MassRoots Inc.
CannaRoyalty is a diversified operator in the regulated cannabis industry with a focus on building and supporting a diversified portfolio of branded cannabis consumer products. It holds investments in Arizona, California, Colorado, Florida, Oregon and Washington. Aphria holds 750,000 of the issued and outstanding common shares of CannaRoyalty.
24
MassRoots is an internet based advertising platform that connects patients with medical cannabis in Canada and the United States. Aphria holds 500,000 common shares of MassRoots. To Aphria’s knowledge, MassRoots is not involved in the cultivation of cannabis.
Enforcement of U.S. Federal Laws
Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the ACMPR, in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam that have legalized cannabis in some form. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such, violates federal law in the United States.
As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “
Cole Memorandum
”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “
Sessions Memorandum
”)
that rescinded the Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well established principles governing federal prosecution that are already in place. Those principals are included in chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
As a result of the Sessions Memorandum, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute marijuana activities despite the existence of state level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how actively federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal prosecutors. Medical cannabis is currently protected against enforcement by enacted legislation from United States Congress in the form of the Rohrabacher Blumenauer Amendment (also described as the Rohrabacher Leahy Amendment, each as defined herein) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. See “
U.S. Enforcement Proceedings
”. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance
25
that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, and also divert the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
Additionally, under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to accept any proceeds from cannabis sales or any other Schedule I narcotics. Canadian banks are similarly reluctant to transact with cannabis companies, due to the uncertain legal and regulatory framework characterizing the industry at present. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. Despite these laws, in February 2014, the Financial Crimes Enforcement Network (“
FCEN
”) of the Treasury Department issued a memorandum (the “FCEN Memo”) providing instructions to banks seeking to provide services to cannabis related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
Since the issuance of the Sessions memorandum on January 4, 2018, no public comments have been made by United States attorneys in Florida regarding the enforcement of federal law related to cannabis. This includes Mr. Christopher Canova, U.S. Attorney for the Northern District of Florida, Mr. Benjamin Greenberg, U.S. Attorney for the Southern District of Florida and Mr. Chapa Lopez, U.S. Attorney for the Middle District of Florida.
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
26
U.S. Enforcement Proceedings
The United States Congress has passed appropriations bills each of the last three years that included the Rohrabacher Amendment Title: H.R.2578 — Commerce, Justice, Science, and Related Agencies Appropriations Act, 2016 (the “
Rohrabacher Blumenauer Amendment
”), which by its terms does not appropriate any federal funds to the U.S. Department of Justice for the prosecution of medical cannabis offenses of individuals who are in compliance with state medical cannabis laws. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher Blumenauer Amendment language (referred to in 2018 as the “
Rohrabacher Leahy Amendment
”) and continued the protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice up and through the 2018 appropriations deadline of September 30, 2018. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business — even those that have fully complied with state law — could be prosecuted for violations of federal law. If Congress restores funding, the United States government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five year statute of limitations.
Ability to Access Public and Private Capital
The Company has historically, and continues to have, robust access to both public and private capital in Canada in order to support its continuing operations. This is evidenced by the Company’s consistent ability to access public capital on separate occasions. The Company has had cannabis related activities in the U.S. since 2015. As disclosed earlier in August of this year, the Company’s Common Shares have traded on the TSX and previously the TSX Venture Exchange for almost three years during which time the Company has raised over $625 million from investors by way of seven offerings by short form prospectus. In addition to certain Canadian Schedule 1 banks accepting deposits from entities positioned in the legal medical cannabis sectors, there are also a number of credit unions that have historically provided, and continue to provide, debt financings in this space. More particularly, the Company itself has previously closed a suite of financings with one of the largest credit unions in Ontario in amounts totaling approximately $35,000,000 and at interest rates below 4%. The Company has never needed to access public equity capital in the United States. All capital requirements have been adequately met in Canada and the Company expects that to continue.
In respect of Liberty, the Company has limited means to cause this investment to access capital as they each have their own boards and management that make such decisions largely independent of the Company. Liberty has been successful in raising private capital with and without the participation of the Company. Liberty also undertook private placements. We are not aware of any inability of Liberty to continue as a going concern, irrespective of their ability to access public equity capital.
Regulation of Medical Cannabis in Florida
Liberty is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Medical Marijuana Use under the provisions of the Senate Bill 8A, Fla. Stat. 386.981 et seq. The Florida Department of Health issued the license (the “Liberty License”) to Chestnut on November 23, 2015 and Liberty acquired the rights to the Liberty License on May 23, 2017 via the exclusive management agreement entered into between Liberty and Chestnut. On September 28, 2017, the Florida Department of Health, Office of Medical Marijuana Use, approved the transfer of the Liberty License to DFMMJ, the wholly owned subsidiary of Liberty, which now solely owns and is entitled to utilize the License in Florida.
The Liberty License permits the sale of low THC cannabis (now grandfathered to produce and sell high THC cannabis) and medical cannabis to treat a number of medical conditions in the State of Florida which are delineated in Florida Statutes section 386.981. Under the terms of the Liberty License, Liberty is permitted to sell medical cannabis only to qualified medical patients that are registered with the state. Only certified physicians who have successfully completed a medical cannabis
27
educational program can register patients and their medical cannabis orders on the Florida Office of Compassionate Use Registry. Liberty maintains an open and collaborative relationship with the Florida Department of Health and Liberty’s operations are in full compliance with all laws and regulations.
Under the Liberty License, Liberty can operate up to 25 dispensaries statewide. Currently, the dispensaries can be in any geographic location within the state as long as the local municipality’s zoning regulations authorize such a use and/or the proposed site is zoned for a pharmacy use and is not within 500 feet of a church or school. In the State of Florida, only cannabis that is grown in the state can be sold in the state. As Florida is a vertically integrated system, Liberty (and other licensees) is required to cultivate, harvest, process and sell/dispense/deliver its own medical cannabis products. The state also allows Liberty to make a wholesale purchase of medical cannabis from, or a distribution of medical cannabis to, another licensed dispensing organization within the state. At the present time, Liberty’s principal products include cannabis oil in capsule, oral solution, sublingual solution, and vaporizer forms due to regulatory restrictions on the sale of dry flower in the state.
Regulatory Framework
The State of Florida Statutes 381.986(8)(a) provides a regulatory framework that requires licensed producers, which are statutorily defined as “Medical Marijuana Treatment Centers” (“MMTC”), to both cultivate, process and dispense medical cannabis in a vertically integrated marketplace.
Licensing Requirements
Licenses issued by the Department of Health, Office of Medical Marijuana Use (the “Department”) may be renewed biennially so long as the licensee meets requirements of the law and pays a renewal fee. License holders can only own one license and MMTC’s can operate up to a maximum of 25 dispensaries throughout the State of Florida.
Applicants must demonstrate (and licensed MMTC’s must maintain) that: (i) they have been registered to do business in the State of Florida for the previous five years, (ii) they possess a valid certificate of registration issued by the Florida Department of Agriculture, (iii) they have the technical and technological ability to cultivate and produce cannabis, including, but not limited to, low THC cannabis, (iv) they have the ability to secure the premises, resources, and personnel necessary to operate as an MMTC, (v) they have the ability to maintain accountability of all raw materials, finished products, and any by products to prevent diversion or unlawful access to or possession of these substances, (vi) they have an infrastructure reasonably located to dispense cannabis to registered qualified patients statewide or regionally as determined by the Department, (vii) they have the financial ability to maintain operations for the duration of the 2 year approval cycle, including the provision of certified financial statements to the department, (viii) all owners, officers, board members and managers have passed a Level II background screening, inclusive of fingerprinting, and ensure that a medical director is employed to supervise the activities of the MMTC, and (ix) they have a diversity plan and veterans plan accompanied by a contractual process for establishing business relationships with veterans and minority contractors and/or employees.
Upon approval of the application by the Department, the applicant must post a performance bond of up to US$5 million, which may be reduced by meeting certain criteria.
Dispensary Requirements
An MMTC may not dispense more than a 70 day supply of cannabis. The MMTC employee who dispenses the cannabis must enter into the registry his or her name or unique employee identifier. The MMTC must verify that: (i) the qualified patient and the caregiver, if applicable, each has an active registration in the registry and active and valid medical cannabis use registry identification card, (ii) the amount and type of cannabis dispensed matches the physician certification in the registry for the qualified patient, and (iii) the physician certification has not already been filled. An MMTC may not dispense to a qualified patient younger than 18 years of age, only to such patient’s caregiver. An MMTC may not dispense or sell any other
28
type of cannabis, alcohol, or illicit drug related product, except a cannabis delivery device as specified in the physician certification. An MMTC must, upon dispensing, record in the registry: (i) the date, time, quantity and form of cannabis dispensed, (ii) the type of cannabis delivery device dispensed, and (iii) the name and registry identification number of the qualified patient or caregiver to whom the cannabis delivery device was dispensed. An MMTC must ensure that patient records are not visible to anyone other than the patient, caregiver, and MMTC employees.
Security Requirements for Cultivation, Processing and Dispensing Facilities
With respect to security requirements for cultivation, processing and dispensing facilities, an MMTC must maintain a fully operational alarm system that secures all entry points and perimeter windows, and is equipped with motion detectors, pressure switches, and duress, panic and hold-up alarms. The MMTC must also have a 24-hour video surveillance system with specified features. MMTCs must retain video surveillance recordings for at least 45 days, or longer upon the request of law enforcement. An MMTC’s outdoor premises must have sufficient lighting from dusk until dawn.
An MMTC’s dispensing facilities must include a waiting area with sufficient space and seating to accommodate qualified patients and caregivers and at least one private consultation area and such facilities may not display products or dispense cannabis or cannabis delivery devices in the waiting area and may not dispense cannabis from its premises between the hours of 9:00 p.m. and 7:00 a.m. but may perform all other operations and deliver cannabis to qualified patients 24-hours a day.
Transportation and Storage Requirements
Cannabis must be stored in a secured, locked room or a vault. An MMTC must have at least two employees, or two employees of a security agency, on the premises at all times where cultivation, processing, or storing of cannabis occurs. MMTC employees must wear an identification badge and visitors must wear a visitor pass at all times on the premises. An MMTC must report to law enforcement within 24 hours after the MMTC is notified of or becomes aware of the theft, diversion or loss of cannabis. A cannabis transportation manifest must be maintained in any vehicle transporting cannabis or a cannabis delivery device. The manifest must be generated from the MMTC’s seed to sale tracking system and must include the: (i) departure date and time, (ii) name, address, and license number of the originating MMTC, (iii) name and address of the recipient, (iv) quantity and form of any cannabis or cannabis delivery device being transported, (v) arrival date and time, (vi) delivery vehicle make and model and license plate number; and (vii) name and signature of the MMTC employees delivering the product. Further, a copy of the transportation manifest must be provided to each individual, MMTC that receives a delivery. MMTCs must retain copies of all cannabis transportation manifests for at least three years. Cannabis and cannabis delivery devices must be locked in a separate compartment or container within the vehicle and employees transporting cannabis or cannabis delivery devices must have their employee identification on them at all times. Lastly, at least two people must be in a vehicle transporting cannabis or cannabis delivery devices, and at least one person must remain in the vehicle while the cannabis or cannabis delivery device is being delivered.
Department Inspections
The Department shall conduct announced or unannounced inspections of MMTCs to determine compliance with the laws and rules. The Department shall inspect an MMTC upon receiving a complaint or notice that the MMTC has dispensed cannabis containing mold, bacteria, or other contaminants that may cause an adverse effect to humans or the environment. The Department shall conduct at least a biennial inspection of each MMTC to evaluate the MMTC’s records, personnel, equipment, security, sanitation practices, and quality assurance practices.
Compliance of U.S. Investments
Liberty is in compliance with applicable licensing requirements and the regulatory framework enacted by the State of Florida, including but not limited to the FCEN Memo. Liberty maintains a banking relationship in Florida, with a certain bank that is
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in full compliance with the Treasury Department’s federal rules and regulations as they pertain to a state approved cannabis business. More specifically, and as further detailed above, Liberty is licensed to operate as a “medical cannabis treatment center” under applicable Florida law pursuant to the terms of the Liberty License issued by the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. The Liberty License grants Liberty the authority to possess, cultivate, process, dispense and sell medical cannabis in the State of Florida. Liberty has not experienced any non compliance nor has been subject to any notices of violation by the Florida Department of Health, Office of Medical Marijuana Use.
The Company understands that Liberty has implemented measures designed to ensure compliance with applicable U.S. state laws on an ongoing basis, including:
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weekly correspondence and updates with advisors;
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development of standard operating procedures;
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appropriate employee training for all standard operating procedures; and
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subscription to monitoring programs with large banks to monitor and ensure compliance with the FinCEN Memo.
The Company confirms that the U.S. cannabis related activities of Liberty, and to the best of the Company’s knowledge, each Non Material Investee are conducted in a manner consistent with the U.S. federal enforcement priorities articulated in the Cole Memorandum and to the best of the Company’s knowledge each of the Non-Material Investees are in compliance with licensing requirements and applicable state regulatory frameworks.
Potential impact of risk in holding U.S. investments
The Company currently holds one U.S. cannabis investment plus the Non-Material Investments, being its interest in Liberty.
The Company’s net assets invested in Liberty are $8,169, as at May 31, 2018. These net assets are comprised of assets held for sale of $20,620 offset by a derivative liability of $12,451. The Company’s entire net assets invested in Liberty are at risk and, in the event of a full loss, the Company would record a loss of $8,169 in its profit and loss statement. For the year ended May 31, 2018, the Company recognized a net gain of $12,150 from all profit and loss activities associated with Liberty. The net gain is comprised of a gain on dilution of ownership in equity investee of $7,535, gain on sale of equity investee of $26,347, offset by loss from equity investee of $9,281 and an unrealized loss on derivative liability of $12,451.
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties, of which the below are considered to be the Company’s principal risks. For a more detailed and complete discussion of economic, industry and risk factors of the Company, please see our Annual Report, each in respect of the year ended May 31, 2017 and in our Short Form Prospectus, dated June 22, 2018, December 22, 2017, November 1, 2017, May 3, 2017 and February 17, 2017.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares.
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Financial markets historically at times experience significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risk Factors Related to Dilution
The Company may issue additional Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.
Reliance on Veterans Affairs Canada (“VAC”) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a three gram per day limit, subject to certain exceptions, and an $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed in the Company’s previous continuous disclosure, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, when adult use of cannabis is implemented by the Canadian Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult use of cannabis, the Company may be materially adversely affected.
Reliance on Key Personnel
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management (collectively, “
Key Personnel
”). The Company’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of a Key Person, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Further, as a Licensed Producer, each Key Person is subject to 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 Person 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 Person 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. While employment agreements are customarily used as a primary method of retaining the services of Key Personnel, these agreements cannot assure the continued services of such employees.
Environmental Regulations and Risks
The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental
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legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations. Government approvals and permits are currently, and may in the future be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Reliance on a Single Facility
To date, the Company’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on the Company’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Regulatory Compliance
The commercial medical cannabis industry is a new industry in Canada and the Company anticipates that once in force, the Cannabis Act and its regulations will subject the Company to a new regulatory regime governed by new regulations, guidelines and policies relating to the manufacture, processing, import, export, management, packaging/labelling, advertising, sale, transportation, storage and disposal of cannabis but also laws and regulations relating to drugs containing cannabis, amended security measures and outdoor cultivation. While, to the knowledge of management, the Company is currently in compliance with the current regulatory regime and is on track to transition its licences under the Cannabis Act, any changes to such laws, regulations, guidelines and policies may have a material adverse effect on its business, financial condition and results of operations.
Changes in Laws, Regulations and Guidelines
On December 20, 2017, the Prime Minister communicated that the Canadian Federal Government intends to legalize cannabis in the summer of 2018, despite previous reports of a July 1, 2018 deadline. On June 7, 2018, Bill C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act. On June 20, 2018, Prime Minister Trudeau announced that marijuana would be legal by October 17, 2018. On June 21, 2018, the Government of Canada announced that Bill C-45 received Royal Assent. The Bill-C-45 will come into force on October 17, 2018. On July 11, 2018, the regulations made pursuant to the Cannabis Act were published. The regulations under the Cannabis Act contemplate the various licences including cultivation, processing, analytical testing, sale (including medical sales), analytical testing and scientific research. The regulations introduced the nursery and made outdoor cultivation permissible. Finally, the requirements for packaging and labelling of products for both medical and non-medical consumption were explicitly set forth. The impact of changes in the regulatory enforcement by Health Canada under the Cannabis Act and its regulations, particularly in respect of product packaging, labelling, marketing, advertising and promotions and product approvals and its impact on the Company’s business are unknown at this time.
In addition, when the Cannabis Act comes into effect, there is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult use purposes will be enacted according to the terms announced by such provinces, or at all, or that any such legislation, if enacted, will create the opportunities for growth anticipated by the Company. For
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example, the Provinces of Ontario (Canada’s most populous province), Québec and New Brunswick have announced sales and distribution models that would create government-controlled monopolies over the legal retail and distribution of cannabis for adult use purposes in such provinces, which could limit the Company’s opportunities in those provinces.
Reliance on Third Party Suppliers, Manufacturers and Contractors
The Company intends to maintain a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the novel regulatory landscape for regulating cannabis in Canada and the variability surrounding the regulation of cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors may have a material adverse effect on the Company’s business and operational results.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party mail and courier services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation and/or rising costs associated with these services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential 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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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
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management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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.
Insurance coverage
The Company has insurance to protect its assets, operations, directors and employees. The Company is currently pursuing additional insurance coverage over its crop, product liability claims and for business interruption. While the Company believes the insurance coverage addresses all material risks to which it is exposed and is adequate and customary in the 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 to. In addition, no assurance can be given that such insurance will be adequate to cover our 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, the business, results of operations and financial condition could be materially adversely affected.
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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 Company’s ability to continue operating and the value of the Common Shares and could use significant resources. Even if Aphria is involved in litigation and wins, litigation can redirect significant Company resources, including the time and attention of management and available working capital. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as Aphria may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the business, financial condition and results of operations of the Company.
In addition, other parties may claim that the Company’s products infringe on their proprietary rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, Aphria may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.
Negative Consumer Perception
The Company believes the cannabis industry is highly dependent upon consumer perception regarding the medical benefits, safety, efficacy and quality of the cannabis distributed for medical purposes to such consumers. Consumer perception of Aphria’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements both in Canada and in other countries, media attention and other publicity (whether or not accurate or with merit) regarding the consumption of cannabis products for medical or recreational purposes, including unexpected safety or efficacy concerns arising with respect to the products of the Company or its competitors. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable 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 favorable 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 and financial condition 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 an adverse effect on any demand for Aphria’s products which could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis for medical purposes in general, or the Company’s products specifically, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material adverse effect. Such
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adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products legally, appropriately or as directed.
Risk Factors Related to International Activities
Expansion into Foreign Jurisdictions
The Company’s expansion into jurisdictions outside of Canada is subject to risks. In addition, in jurisdictions outside of Canada, there can be no assurance that any market for the Company’s products will develop. 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 ability to successfully expand its operations into such jurisdictions and may have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s Operations in Emerging Markets are Subject to Political and Other Risks Associated with Operating in a Foreign Jurisdiction
The Company has operations in various emerging markets and may have operations in additional emerging markets in the future. Such operations expose the Company to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates, military repression; war or civil war; social and labour unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licenses, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, banking and currency controls and governmental regulations that favour or require the Company to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction.
Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in marijuana industry or investment policies or shifts in political attitude in the countries in which the Company operates may adversely affect the Company’s operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of concessions, licenses, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licenses, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.
The Company continues to monitor developments and policies in the emerging markets in which it operates and assess the impact thereof to its operations; however such developments cannot be accurately predicted and could have an adverse effect on the Company’s operations or profitability.
Corruption and Fraud in Certain Emerging Markets Relating to Ownership of Real Property May Adversely Affect the Company’s Business
There are uncertainties, corruption and fraud relating to title ownership of real property in certain emerging markets in which the Company operates or may operate. Property disputes over title ownership are frequent in emerging markets, and, as a result, there is a risk that errors, fraud or challenges could adversely affect the Company’s ability to operate in such jurisdictions.
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Inflation in Emerging Markets, Along with Governmental Measures to Combat Inflation, may have a Significant Negative Effect on Local Economies and also on the Company’s Financial Condition and Results of Operations
In the past, high levels of inflation have adversely affected emerging economies and financial markets, and the ability of government to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. The emerging markets in which the Company operates or may operate may experience high levels of inflation in the future. Inflationary pressures may weaken investor confidence in such countries and lead to further government intervention in the economy. If countries in which the Company operates experience high levels of inflation in the future and/or price controls are imposed, the Company may not be able to adjust the rates the Company charges the Company’s customers to fully offset the impact of inflation on the Company’s cost structures, which could adversely affect the Company’s results of operations or financial condition.
The Company’s Operations may be Impaired as a Result of Restrictions on the Acquisition or Use of Properties by Foreign Investors or Local Companies under Foreign Control
Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which the Company operates in certain countries. Accordingly, the Company’s current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and the Company’s ownership or access rights in respect of any property it owns or leases in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
The Company May Expand into Other Geographic Areas, which could Increase the Company’s Operational, Regulatory and Other Risks
In addition to the jurisdictions described elsewhere in this MD&A, the Company may in the future expand into other geographic areas, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. The Company may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with the Company’s existing operations.
The Company may be Responsible for Corruption and Anti-bribery Law Violations
The Company’s business is subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, the Company is subject to the anti-bribery laws of any other countries in which it conducts business now or in the future. The Company’s employees or other agents may, without its knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and anti-bribery laws for which the Company may be held responsible. The Company’s policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that the Company’s internal control policies and procedures will always protect it from recklessness, fraudulent behaviour, dishonesty or other inappropriate acts committed by its affiliates, employees, contractors or agents. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.
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Risk Factors Related to the United States
Aphria is indirectly involved (through investments in third-party corporate entities in Canada) in the cannabis industry in the United States where local state law permits such activities, as well the medical cannabis industry in Canada. Although Aphria has publicly announced its intention to divest itself of its material U.S. assets and equity interests, such divestitures are not yet complete. Accordingly, until such time as the Company has divested itself of all U.S. assets and equity interests, the Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of such current investments in entities involved with medical cannabis in the United States, including Liberty.
Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
In light of recent announcements, the TSX may initiate delisting reviews for companies with U.S. assets more expeditiously than it would have previously, in the absence of such announcements
On October 16, 2017, the TSX provided clarity regarding the application of the Requirements to applicants and TSX-listed issuers in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. In order to comply with the Requirements, the Company may be required to effect one or more reorganizations, restructurings, transactions or series of transactions, which may include a divesture of U.S. cannabis assets.
While cannabis is legal in many U.S. state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the ACMPR, investors are cautioned that in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam that have legalized cannabis in some form, including Florida as noted above in connection with the legacy investment in Liberty. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a controlled substance under the CSA and as such, violates federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business — even those that have fully complied with state law — could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial
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position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
This MD&A involves an entity that derives a portion of its revenues from the cannabis industry in certain states of the United States, which industry is illegal under United States federal law. While the Company’s business activities are compliant with applicable state and local law, such activities remain illegal under United States federal law. The enforcement of relevant laws is a significant risk.
The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued the Sessions Memorandum, which rescinded the Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those principals are included in chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
As a result of the Sessions Memorandum, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how actively federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal prosecutors.
Medical cannabis is currently protected against enforcement by enacted legislation from United States Congress in the form of the Rohrabacher-Blumenauer Amendment (as defined herein) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher-Blumenauer Amendment language (referred to in 2018 as the Rohrabacher-Leahy Amendment) and continued the
39
protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice up and through the 2018 appropriations deadline of September 30, 2018. See “U.S. Enforcement Proceedings”. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of corporate assets; however as of the date hereof, the Company believes and has obtained legal advice in respect thereof that proceedings of this nature are remote.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued a memorandum providing instructions to banks seeking to provide services to cannabis-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
In the event that any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the legacy investments Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
The Company’s investments in the United States may be subject to heightened scrutiny
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction, in addition to those described herein.
Given the heightened risk profile associated with cannabis in the United States, CDS may implement procedures or protocols that would prohibit or significantly curtail the ability of CDS to settle trades for cannabis companies that have cannabis businesses or assets in the United States. Although the TMX MOU has confirmed that there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, there can be no guarantee that this
40
approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of the Common Shares through the facilities of a stock exchange. While there can be no assurance that this would occur, and while it would be subject to regulatory approval, a third party has publicly expressed interest in providing clearing services should CDS decide not to do so.
In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the Canadian Securities Administrators revised their previously released CSA Staff Notice 51-352 Issuers with U.S. Marijuana Related Activities (the “Staff Notice”) setting out their disclosure expectations for specific risks facing issuers with cannabis-related activities in the United States. The Staff Notice confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. The Staff Notice includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry. The Company views the Staff Notice favourably, as it provides increased transparency and greater certainty regarding the views of its exchange and its regulator of existing operations and strategic business plan as well as the Company’s ability to pursue further investment and opportunities in the United States.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Although Aphria has publicly announced its intention to divest itself of its material U.S. assets and equity interests, such divestitures are not yet complete and remain subject to the risk that they will not be completed in a timely manner, if at all
Following the exercise of the rights of first refusal by the existing investors of Copperstate, the full divesture of CSF and Copperstate has been completed subsequent to yea-end. In addition, Aphria has entered into agreements to sell its remaining interest of the issued and outstanding shares of Liberty, subject to the satisfaction of various escrow and related timing requirements of the CSE. Until such time as the divestitures are in fact complete, intervening events and other execution risks may delay the effective closing of the transactions. In the event that the Company is not successful in divesting itself of its U.S. assets, it will continue to be subject to the heightened regulatory scrutiny and other risks described herein.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“
CEO
”) and the Chief Financial Officer (“
CFO
”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2018, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“
COSO
”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
41
Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the year ended May 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
SUBSEQUENT EVENTS
Subsequent to year-end, the Company completed the forming of CannInvest, with the South African Verve Group of Companies. Through the combination of a share-for-share swap and cash payment of $4.05 million, the Company obtained a 50% ownership in CannInvest which in turn acquired a 60% interest in Verve, a licensed producer of medical cannabis extracts in Lesotho.
Subsequent to year-end, the Company closed a bought deal and issued 21,835,510 common shares for gross proceeds of $258,751.
Subsequent to year-end, the Company’s Malta based subsidiary, ASG, received the first import license for medical cannabis issued by the Malta Medicines Authority. The license will allow ASG to import medical cannabis for analytical testing and research and is an important step that will enable ASG to become a cornerstone in testing, research and development of medical cannabis in Europe.
Subsequent to year-end, the Company announced the proposed acquisition of industry-leading companies in Colombia, Argentina, Jamaica and a right of first offer and refusal in respect of Brazil through a definitive share purchase agreement acquiring LATAM. The Company expects to issue 15,678,310 shares, and assume $1,000 of existing debt in connection with the proposed acquisition.
Subsequent to year-end, Aphria Inc. amalgamated with its previously wholly-owned subsidiary, Pure Natures Wellness Inc., pursuant to a short form, vertical amalgamation. The resulting entity retained the name “Aphria Inc.”
Subsequent to year-end, the Company amended its Obligation Agreement, where the Company will accept a 30-day promissory note to settle the next tranche of Liberty shares owned by the Company that became freely trading on July 26, 2018. The Company also paid $480 to enter into a standstill agreement, whereby the purchaser of the Liberty shares will not sell the newly acquired shares for 18 months from the date of purchase. The purchaser also granted the Company an option to buy back the shares at $1.00 per share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25.
Subsequent to year-end, the Company committed to a $15,000 investment in Green Acre Capital Fund II to be launched before December 2018.
42
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to process cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical cannabis and cannabis-related offenses in the United States.
43
Exhibit 99.3
APHRIA INC.
ANNUAL INFORMATION FORM
For the fiscal year ended May 31, 2018
DATED: July 31, 2018
TABLE OF CONTENTS
|
ANNUAL INFORMATION FORM
|
3
|
|
FORWARD-LOOKING STATEMENTS
|
3
|
|
CORPORATE STRUCTURE
|
4
|
|
GENERAL DEVELOPMENT OF THE BUSINESS
|
6
|
|
Qualifying Transaction
|
6
|
|
Licences
|
6
|
|
Expansion and Property Acquisitions
|
7
|
|
Regulatory Developments
|
9
|
|
Recent Business
|
14
|
|
DESCRIPTION OF THE BUSINESS
|
17
|
|
Company Overview
|
17
|
|
Licence and Regulations
|
18
|
|
Reporting Requirements under the ACMPR
|
20
|
|
Principal Products
|
23
|
|
Distribution
|
23
|
|
Operations
|
23
|
|
Storage and Security
|
24
|
|
Specialized Skill and Knowledge
|
24
|
|
Competitive Conditions
|
25
|
|
Employees
|
25
|
|
RISK FACTORS
|
26
|
|
DIVIDENDS
|
43
|
|
CAPITAL STRUCTURE
|
43
|
|
MARKET FOR SECURITIES
|
43
|
|
PRIOR SALES
|
44
|
|
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
|
46
|
|
DIRECTORS AND OFFICERS
|
47
|
|
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
|
53
|
|
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
|
53
|
|
TRANFER AGENT AND REGISTAR
|
53
|
|
MATERIAL CONTRACTS
|
53
|
|
AUDIT COMMITTEE INFORMATION
|
54
|
|
INTERESTS OF EXPERTS
|
55
|
|
ADDITIONAL INFORMATION
|
55
|
ANNUAL INFORMATION FORM
In this annual information form (“
Annual Information Form
”), unless otherwise noted or the context indicates otherwise, the “
Company
”, “Aphria”, “we”, “us” and “our” refer to Aphria Inc. and its principal wholly-owned subsidiary, Pure Natures Wellness Inc. d/b/a Aphria and the term “
cannabis
” has the meaning given to the term “marihuana” in the
Access to Cannabis for Medical Purposes Regulations
(“
ACMPR
”). All financial information in this Annual Information Form is prepared in Canadian dollars and using International Financial Reporting Standards as issued by the International Accounting Standards Board. The information contained herein is dated as of May 31, 2018 unless otherwise stated.
FORWARD-LOOKING STATEMENTS
This Annual Information Form contains certain information that may constitute “forward-looking information” and “forward-looking statements” (collectively, “
forward-looking statements
”) which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as “expect,” “likely”, “may,” “will,” “should,” “intend,” or “anticipate”, “potential”, “proposed”, “estimate” and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. The forward-looking statements included in this Annual Information Form are made only as of the date of this Annual Information Form. Forward-looking statements in this Annual Information Form include, but are not limited to, statements with respect to:
·
the performance of the Company’s business and operations;
·
the intention to grow the business and operations of the Company;
·
the Company’s intentions to complete Parts IV & V Expansion (as defined herein), the intention to complete Aphria Diamond (as defined herein), the respective costs and anticipated timing associated therewith, and receipt of approval from Health Canada in relation to such expansions;
·
the anticipated timing to complete construction in connection with Parts IV & V Expansion and the Aphria Diamond Retro-fit;
·
underlying market conditions continuing to demonstrate a reasonable basis to execute on Parts IV & V Expansion and the Aphria Diamond Retro-fit;
·
the expected growth in the amount of medical cannabis sold by the Company;
·
the expected growth in the Company’s growing capacity;
·
expectations with respect to future production costs;
·
expectations with respect to the renewal and/or extension of the Company’s licences;
·
the number of grams of medical cannabis used by each patient;
3
·
the methods used by the Company to deliver medical cannabis;
·
the competitive conditions of the industry;
·
any commentary related to the legalization of cannabis and the timing related thereto;
·
the applicable laws, regulations and any amendments thereof;
·
the competitive and business strategies of the Company;
·
the Company’s investments in the United States, the characterization and consequences of those investments under federal law, and the framework for the enforcement of medical cannabis and cannabis-related offenses in the United States;
·
the grant and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof; and
·
the anticipated future gross margins of the Company’s operations.
Certain forward-looking statements and forward-looking information and other information contained herein concerning the medical cannabis industry and the general expectations of Aphria concerning the medical cannabis industry are based on estimates prepared by Aphria using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which Aphria believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While Aphria is not aware of any misstatement regarding any industry or government data presented herein, the medical cannabis industry involves risks and uncertainties that are subject to change based on various factors.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement. In particular, but without limiting the foregoing, disclosure in this Annual Information Form under “
Description of the Business
” as well as statements regarding the Company’s objectives, plans and goals, including future operating results, economic performance and patient acquisition efforts may make reference to or involve forward-looking statements. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. You should not place undue reliance on forward-looking statements contained in this Annual Information Form. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
CORPORATE STRUCTURE
Aphria Inc. was incorporated under the Business Corporations Act (Alberta) on June 22, 2011 as Black Sparrow Capital Corp. (“
Black Sparrow
”, a capital pool company listed on the TSX Venture Exchange (the “
TSXV
”). 2427745 Ontario Inc. (“
Subco
”), a wholly-owned subsidiary of Black Sparrow, was incorporated on July 24, 2014 in order to effect a business combination with Pure Natures Wellness Inc. d/b/a Aphria (“
Pure
4
Natures
”) whereby Black Sparrow would acquire all of the issued and outstanding shares of Pure Natures pursuant to a court-approved plan of arrangement. Pure Natures amalgamated with Subco under the
Ontario Business Corporations Act
(“
OBCA
”) to form a wholly owned subsidiary of Black Sparrow, and together with Black Sparrow, was continued in Ontario on December 1, 2014 as “Aphria Inc.” under the OBCA. On March 22, 2017, Aphria graduated from the TSXV to the Toronto Stock Exchange (“
TSX
”). The Company’s common shares (the “
Common Shares
”) are listed under the symbol “APH” on the TSX and under the symbol “APHQF” on the OTCQB.
The Company is licensed to produce and sell medical cannabis in Canada. The Company has wholly-owned and majority owned subsidiaries in foreign jurisdictions establishing operations to import, produce and / or sell medical cannabis, in federally legal jurisdictions, including Germany, Italy, Lesotho, Malta. In addition, the Company maintains investments in business licensed to import, produce and / or sell medical cannabis in Australia and the United States. The Company notes that its investment in the United States is in a jurisdiction which is not federally legal, however, the Company’s investments operate in states for which it is legal to operate a medical cannabis business.
In Canada, the Company is licensed to produce and sell medical cannabis as a Licensed Producer under the provisions of the ACMPR. The Company’s Leamington location received its initial licence to produce and sell medical cannabis on November 26, 2014. The Company’s BC location, Broken Coast Cannabis, received its initial licence to produce and sell medical cannabis on March 1, 2014. For a further description of the Company’s licences, see
General Development of the Business — Licences
and
Description of the Business — License and Regulations
.
Aphria’s operations are based in Leamington, Ontario. Our head office is located at 245 Talbot St W, Suite 103, Leamington, ON N8H 1N8 and our registered office is located at c/o 5300 Commerce Court West, 199 Bay Street, Toronto, ON, M5L 1B9. Our telephone number is (844) 427-4742 and our corporate website is http://www.aphria.ca/
The following chart illustrates, as of the date hereof, the Company’s corporate structure, together with the place of incorporation/governing law of each subsidiary. Unless otherwise indicated, each subsidiary is wholly-owned by the Company.
1
Nuuvera Malta Ltd. is a holding company having no active operations and no business other than holding shares of ASG Pharma Ltd.
5
GENERAL DEVELOPMENT OF THE BUSINESS
Qualifying Transaction
On July 31, 2014, Black Sparrow and Pure Natures entered into a business combination agreement pursuant to which Black Sparrow agreed, among other things, to change its name to “Aphria Inc.”, to continue under the OBCA and to effect a consolidation of the outstanding Black Sparrow common shares on a 10 to 1 basis. Under the agreement, Black Sparrow acquired all of the outstanding shares of Pure Natures by way of a three-cornered amalgamation pursuant to which Black Sparrow was continued in Ontario on December 1, 2014 under the OBCA and on December 2, 2014, Black Sparrow completed its Qualifying Transaction, as defined under the policies of the TSXV, with Pure Natures.
Licences
On November 26, 2014, Aphria received its licence from Health Canada to cultivate and sell cannabis under the MMPR. Prior to receiving its final licence to distribute medical cannabis, Aphria was operating under a partial licence at its facility in Leamington. In February 2015, the Company successfully amended its licence with Health Canada to allow for wholesale shipping within Canada of medical cannabis plant cuttings. In March 2015, the Company amended its licence to allow for wholesale shipping of medical cannabis in dried bud form. In December 2015, Health Canada amended the Company’s licence to produce and sell medical cannabis, increasing the Company’s production and selling limits during the licence term. In February 2016, Health Canada amended the Company’s licence to produce medical cannabis by approving the Company’s Part I Expansion (defined below) for growing medical cannabis. In May 2017, Health Canada amended the Company’s licence in connection with the approval of the Part II Expansion (as defined below) and issued an amended licence pursuant to the Access to Cannabis for Medical Purposes Regulations ( the “ACMPR”).
On August 26, 2015, the Company received from Health Canada a licence to produce (and only produce) cannabis oil extracts under the section 56 exemption the (the “
Section 56 Exemption
”) of the Controlled Drugs and Substances Act (the “
CDSA
”). On August 17, 2016, Aphria announce that Health Canada amended the Company’s licence to allow it to sell cannabis oil extracts.
Aphria’s licence currently does not contain a cap on production or sales but is based on the Company storing no more than 6,875 kilograms and/or the kilogram equivalent of cannabis oil in its vaults at any given time (the “
Licence
”). The Licence has a current term that ends on September 25, 2019. On March 13, 2018, the Company received a licence amendment from Health Canada that provides Aphria with additional production space of 200,000 square feet, as part of its Part III Expansion at its facility in Leamington, Ontario. The licence is set to expire on September 25, 2019. In addition to the licence for the facility in Leamington, Ontario, the Company equally holds a producer licence issued pursuant to the ACMPR in the name of its 99.86% owned subsidiary, Broken Coast Cannabis Ltd. (“
Broken Coast
”).
Broken Coast operates a fully licensed indoor cannabis production facility on Vancouver Island. Currently 26,000 sq. ft, the facility is undergoing an expansion that is near complete and will bring the total square footage to 44, 000 sq ft. capable of producing a cumulative 4,500 kgs per year. The facility sits on 4.5 acre parcel of owned land that has the necessary surrounding infrastructure to support further expansion. Broken Coast’s Licence under the ACMPR was recently renewed on April 20, 2018 and incorporated the approval of a licence amendment from Health Canada that provided Broken Coast with an additional 18,000 sq. ft of production space as part of its Phase II expansion, bringing total production space to 44, 000 sq. ft. As a result of the amendment, Broken Coast’s capacity can attain up to 4,500 kg annually.
6
It is anticipated that Health Canada will extend or renew the Licence at the end of its current term. See
Risk Factors — Reliance on Licence.
Medical cannabis cultivated by Aphria is processed for sale or wholesale distribution to other Licensed Producers. Aphria may sell medical cannabis to patients who have obtained a valid prescription from a doctor or authorized health care professional or to other Licensed Producers.
On November 23, 2017, Aphria was issued a dealer licence by Health Canada pursuant to the CDSA. Under the Dealer Licence, the Company is permitted to possess, sell and transport medical cannabis oil and resin to international markets, including the shipment of product of research and development purposes to regions such as Australia, Germany, Argentina and Italy.
In addition, Aphria’s indirect wholly-owned subsidiary, Avanti RX Analytics Inc. (“
Avanti
”), currently holds four licences: (i) a Dealer Licence; (ii) an Establishment Licence; (iii) a Site Licence; and (iv) a Medical Device Establishment Licence. Each of the foregoing licences is issued pursuant to the
Food and Drugs Act
and related regulations, namely the
Food and Drug Regulations
(the “
FDR
”), the
Natural Health Products Regulations
and the
Medical Devices Regulations
, respectively
On March 16, 2018, Aphria announced that it had received third-party independent GMP certification of its Leamington, Ontario growing and processing facilities. The certification is for the current GMP standards of CFR 21 parts 210/211 established by the United States Food and Drug Administration for Active Pharmaceutical Ingredients and Finished Pharmaceuticals.
Expansion and Property Acquisitions
In March 2015, Aphria’s board of directors (the “
Board
”) approved a two-part expansion. The first part of the Company’s greenhouse expansion (“
Part I Expansion
”) involved the retrofit of three existing greenhouses adjacent to the current facilities for an additional 20,700 square feet, for a total annual growing capacity of approximately 2,500 kilograms, and also involved Aphria building a research & development laboratory and investing in related advanced equipment at its Leamington, Ontario facility. Part I Expansion was completed in October 2015. Subsequently, on February 7, 2016, Health Canada amended the Company’s Licence to approve the use of Part I Expansion for the purposes of growing medical cannabis.
The second part (the “
Part II Expansion
”) was approved by the Board on June 2, 2016 and the Company began construction of the $10 million fully-funded capital project on July 1, 2016. On May 15, 2017 Health Canada approved the greenhouse portion of the Part II Expansion, which added an incremental 57,000 square feet of greenhouse capacity and a “level nine” vault. Part II Expansion increased the Company’s production capacity for medical cannabis to approximately 8,000 kilograms on an annualized basis. The Part II Expansion also includes 8,000 square feet of corporate office space and electrical and sewer upgrades necessary for the operation of the Company’s current and future greenhouse space. Part II Expansion, with respect to the corporate office space, has recently begun with the hiring of an architect to design the space. The Company currently anticipates commencing the office space portion of Part II Expansion in September 2017. Part II Expansion, with respect to the electrical and sewer upgrades, is currently on hold as a result of Hydro One indicating that the earliest they can complete the upgrades is March 2018. The Company continues to explore alternative sources of power including a larger cogeneration project as part of the Part IV Expansion (as defined below).
On June 30, 2016, Aphria acquired the greenhouse facilities it previously leased from Cacciavillani and F.M. Farms Ltd. operating as CF Greenhouses (“
CF Greenhouses
”) and terminated the existing lease agreement for total consideration of $6.1 million. CF Greenhouses is a greenhouse growing company controlled in part
7
by Cole Cacciavillani, Director and Chief Operating Officer of Aphria. As a result of the acquisition, Aphria now owns a total of 360,000 square feet of production space located on 36 acres of land (the “
Greenhouse Property
”). The $6.1 million purchase price was satisfied by a $3.25 million cash payment and CF Greenhouses assuming a vendor take back mortgage, in the amount of $2.85 million, with a 5-year amortization period and bearing interest at 6.75%.
On July 22, 2016, Aphria closed a financing comprised of three separate facilities (a mortgage, a term loan and an operating line of credit) totaling $6,000,000 with WFCU Credit Union (the “
WFCU Facility
”). The mortgage facility is for $3,750,000, bearing interest at 3.95%, with a 20-year amortization and a 5-year term (the “
Mortgage Facility
”). The term loan is for $1,250,000 bearing interest at 3.99%, with a 10-year amortization and a 5-year term (the “
Term Loan
”). The operating line of credit is for $1,000,000, bearing interest at WFCU’s prime lending rate plus 75 basis points and revolves annually (the “
Line of Credit
”). Aphria used $3.25 million of the WFCU Facility to fund the acquisition of the Greenhouse Property (as defined above) and has allocated the remaining $1.75 million of the drawn portion of the WFCU Facility towards capital projects in 2017 unrelated to Part II Expansion, Part III Expansion or Part IV Expansion. The Line of Credit remains undrawn and available to the Company for future use.
On August 19, 2016, Aphria entered into an agreement to purchase 11 acres of additional greenhouse property adjacent to its existing campus from DiNiro Farms Inc. for a $2,100,000 cash payment. The property consists of 345,000 square feet of existing greenhouse space which the Company demolished as part of Part IV Expansion. Concurrently with the closing of this transaction, the abutting property was merged into Aphria’s existing municipal address, thereby avoiding the need to apply for a new Health Canada site licence.
On September 16, 2016, the Board approved the commencement of a fully-funded $24.5 million capital project (“
Part III Expansion
”), which the Company anticipates will increase its capacity under the ACMPR from 100,000 square feet to 300,000 square feet and its growing capabilities from 8,000 kilograms (following Part II Expansion) to 22,000 kilograms annually. The project includes (1) 200,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouse operations in Leamington, (2) 21,000 square feet of infrastructure, (3) an additional four “Level 9” vaults, (4) automation for both the greenhouses and processing areas, and (5) security consistent with ACMPR standards. On March 13, 2018, Health Canada approved the Part III expansion and production within this area began immediately.
On December 14, 2016, Aphria entered into a purchase and sale agreement to acquire 200 acres of fully serviced vacant land for $6.24 million. As the land acquired is not adjacent to the Company’s existing operations, the Company will require a new site licence from Health Canada for the property. The purchase and sale closed on January 31, 2017.
On January 16, 2017, the Board approved the commencement of a $137 million capital project (“
Part IV Expansion
”). It was originally anticipated that Part IV Expansion would include approximately 350,000 square feet of state-of-the-art greenhouses, approximately 160,000 square feet of infrastructure, and the purchase and development of additional land, with a total cost between $70 million to $90 million; however, following further internal review and consultation, the Company has since increased the scope of the expansion to meet anticipated demand. Part IV Expansion is now fully-funded and anticipated to include (1) 700,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouses operations in Leamington, for total greenhouse growing space of 1,000,000 square feet, (2) 230,000 square feet of infrastructure, including a 15 MW power co-generation facility designed to provide supplemental power to the Greenhouse Property to support existing operations and potential future
8
operations currently contemplated on the existing Greenhouse Property, (3) 10 additional “Level 9” vaults, (4) additional automation of greenhouses and warehouse facilities, and (5) security consistent with ACMPR standards. Part IV Expansion is expected to be completed within 15 months and is expected to provide an additional 53,000 kilograms of annual production capacity, subject to the receipt of necessary Health Canada approvals to increase Aphria’s capacity under its Licence. The Company expects the first sale of product grown in the Part III Expansion to occur in late January 2019.
The Company continues to refine and improve its industry leading greenhouse agricultural growing practices, combined with unique engineering changes embedded in its expansions, presently underway. Management believes that once full crop rotation has been attained after Part IV expansion is complete, annualized capacity will exceed 100,000 kilograms. Supporting management’s revised capacity projections are recent yield improvements resulting from the introduction of new lighting strategies, growing techniques and leveraging other “unique to greenhouse” strengths.
Effective February 1, 2018, Aphria acquired 99.86% of all of the issued and outstanding Class A common shares of Broken Coast, as well as all of the issued and outstanding shares of Cannan Growers Inc. (“
Cannan
”). The closing was effected pursuant to the terms of a definitive share purchase agreement dated February 13, 2018 (the “SPA”) by and among the Company and the vendors party. Pursuant to the SPA, the Company acquired 99.86% of the Class A common shares of Broken Coast and all of the issued and outstanding shares of Cannan, for an aggregate purchase price of approximately CAN$217 million, subject to customary adjustments. The purchase price has been satisfied by Aphria issuing to the Broken Coast and Cannan an aggregate of 14,373,675 common shares in the capital of the Company. The total transaction value was approximately $239 million, with $10 million paid in cash and the remainder in Aphria shares at a deemed price of $15.09. The purchase by the Company of Broken Coast: (i) increases the Company’s leading market position and geographic diversification; (ii) establish brand and solidified recreational positioning; (iii) adds to the Company’s current genetic library and helps differentiate its product offering; (iv) combines production practice and proprietary technical know-how; and (vi) brings on board a highly experienced management team with West Coast foothold.
On January 8, 2018, the Company further entered into a strategic relation to form “Aphria Diamond” with Double Diamond Farms, a Leamington greenhouse grower, to provide an additional 120,000 kgs of annual cannabis production. The deal is expected to increase the Company’s production capacity. The share ownership of Aphria Diamond is 51% the Company and 49% Double Diamond Farms, where Double Diamond is supplying the land, new state of the art Dutch style greenhouses, existing infrastructure and employees for the venture. The Company, holding a controlling 51% interest, will supply its Standard Operating Procedures (“SOPs”), quality oversight and will apply for a second Health Canada cultivation licence for the site. The 100 acre site is located on Highway 77 in Leamington, Ontario and has never had another crop planted inside and abuts the Company’s existing second campus.
Please see “
General Development of the Business — Recent Business
” below for additional discussion on expansions and property acquisitions that occurred during the most recently completed fiscal year ending May 31, 2018.
Regulatory Developments
On August 24, 2016, the ACMPR replaced the MMPR as the governing regulations in respect of the production, sale and distribution of medical cannabis and related oil extracts. The replacement regulations were implemented as a result of the ruling by the Federal Court of Canada in the case of
Allard v Canada
(the “
Allard Decision
”) which found the MMPR unconstitutional in violation of the plaintiffs’ rights under
9
section 7 of the Charter of Rights and Freedoms due to the restrictions placed on a patient’s ability to reasonably access medical cannabis.
The ACMPR effectively combines the regulations and requirements of the MMPR, the
Marihuana Medical Access Regulations
(“
MMAR
”) and the Section 56 Exemptions relating to cannabis oil under the CDSA into one set of regulations. In addition, among other things, the ACMPR sets out the process patients are required to follow to obtain authorization from Health Canada to grow cannabis and to acquire seeds or plants from Licensed Producers to grow their own cannabis. Under the ACMPR, patients have three options for obtaining cannabis:
(a)
they can continue to access quality-controlled cannabis by registering with Licensed Producers;
(b)
they can register with Health Canada to produce a limited amount of cannabis for their own medical purposes; or
(c)
they can designate someone else to produce it for them.
With respect to (b) and (c), starting materials, such as plants or seeds, must be obtained from Licensed Producers. It is possible that (b) and (c) could significantly reduce the addressable market for the Company’s products and could materially and adversely affect the business, financial condition and results of operations of the Company. That said, management of the Company believes that many patients may be deterred from opting to proceed with options (b) or (c) since such steps require applying for and obtaining registration from Health Canada to grow cannabis, as well as the up-front costs of obtaining equipment and materials to produce such cannabis. Further details on the ACMPR are found below under
Description of the Business — Licence and Regulation.
On November 27, 2017, the House of Commons passed Bill C-45 and on June 21, 2018, the Government of Canada announced that Bill C-45 received Royal Assent. The Cannabis Act will come into force on October 17, 2018. On July 11, 2018, the regulations issued pursuant to the Cannabis Act (the “Regulations”) were released by the government setting forth:
1.
Licences, Permits and Authorizations;
2.
Security Clearances
3.
Cannabis Tracking System;
4.
Cannabis Products;
5.
Packaging and Labelling;
6.
Cannabis for Medical Purposes; and
7.
Health Products and Cosmetics Containing Cannabis.
10
Licences, Permits and Authorizations
The Regulations establish different types of authorizations based on the activity being undertaken and, in some cases, the scale of the activity. Rules and requirements for different categories of authorized activities are intended to be proportional to the public health and safety risks posed by each category of activity. The types of authorizations include: (i) cultivation; (ii) processing; (iii) sale to the public for medical purposes and non-medical purposes in provinces and territories that have not enacted a retail framework; (iv) analytical testing; (v) import/export; and (vi) research.
Cultivation licences would allow for both large-scale and small-scale (i.e. micro) growing of cannabis, subject to a stipulated threshold. Industrial hemp and nursery licenses would also be issued as a subset of cultivation licences. Health Canada is considering a number of options for establishing and defining a “micro-cultivator” threshold, such as plant count, size of growing area, total production, or gross revenue. Part of the stated purpose of the Regulations is to solicit feedback from interested stakeholders regarding the most appropriate basis for determining what such threshold should be.
The Regulations provide that all licences issued under the Cannabis Act would be valid for a period of no more than five years and that no licenced activity could be conducted in a dwelling-house. The Regulations would also permit both outdoor and indoor cultivation of cannabis. The implications of the proposal to allow outdoor cultivation are not yet known, but such a development could be significant as it may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices as capital expenditure requirements related to growing outside are typically much lower than those associated with indoor growing.
Security Clearances
Select personnel (including individuals occupying a “key position”, directors, officers, large shareholders and individuals identified by the Minister of Health) associated with certain licences issued under the Cannabis Act would be obliged to hold a valid security clearance issued by the Minister of Health. The Regulations would enable the Minister of Health to refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. This is the approach in place today under the ACMPR and other related regulations governing the licensed production of cannabis for medical purposes.
Health Canada acknowledges in the Regulations that there are individuals who may have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) who may seek to obtain a security clearance so they can participate in the legal cannabis industry. Under the new set of rules, the Minister of Health would be authorized to grant security clearances to any individual on a case-by-case basis.
Cannabis Tracking System
Under the Cannabis Act, the Minister of Health would be authorized to establish and maintain a national cannabis tracking system. The purpose of this system would be to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the legal market. The Regulations will provide the Minister of Health with the authority to make a ministerial order that would require certain persons named in such order to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister.
11
Cannabis Products
The Regulations would permit the sale to the public of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds. The sale of edible cannabis products and concentrates (such as hashish, wax and vaping products) would only be permitted within one year following the coming into force of the Cannabis Act.
The Regulations acknowledge that a range of product forms should be enabled to help the legal industry displace the illegal market. Additional product forms that are mentioned under the Regulations include “pre-rolled” cannabis and vaporization cartridges manufactured with dried cannabis. Specific details related to these new products are to be set out in a subsequent regulatory proposal.
Packaging and Labelling
The Regulations would set out requirements pertaining to the packaging and labelling of cannabis products. Such requirements would promote informed consumer choice and allow for the safe handling and transportation of cannabis. Consistent with the requirements under the ACMPR, the Regulations would require all cannabis products to be packaged in a manner that is tamper-evident and child-resistant.
While minor allowances for branding would be permitted, Health Canada is proposing strict limits on the use of colours, graphics, and other special characteristics of packaging, and products would be required to be labelled with specific information about the product, contain mandatory health warnings similar to tobacco products, and be marked with a clearly recognizable standardized cannabis symbol.
Cannabis for Medical Purposes
The medical access regulatory framework will remain substantively the same as currently exists under the ACMPR, with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system.
Health Products and Cosmetics Containing Cannabis
Health Canada is proposing a scientific, evidenced-based approach for the oversight of health products with cannabis that are approved with health claims, including prescription and non-prescription drugs, natural health products, veterinary drugs and veterinary health products, and medical devices. Under the Regulations, the use of cannabis-derived ingredients (other than certain hemp seed derivatives containing no more than 10 parts per million THC) in cosmetics, which is currently prohibited, is to be permitted and subject to provisions of the Cannabis Act.
Provincial Regulatory Framework
While the Cannabis Act provides for the regulation of the commercial production of cannabis for recreational purposes and related matters by the federal government, the Cannabis Act proposes that the provinces and territories of Canada will have authority to regulate other aspects of recreational cannabis (similar to what is currently the case for liquor and tobacco products), such as sale and distribution, minimum age requirements, places where cannabis can be consumed, and a range of other matters.
To date, the Governments of Ontario, Manitoba, Alberta, New Brunswick, Québec, Newfoundland and Labrador, the Yukon, the Northwest Territories, Saskatchewan and British Columbia have announced
12
proposed regulatory regimes for the distribution and sale of cannabis for recreational purposes within those jurisdictions. Each of these Canadian jurisdictions has established a minimum age of 19 years old, except for Québec and Alberta, where the minimum age will be 18. The remaining Canadian jurisdictions (Prince Edward Island, Nova Scotia and Nunavut) have engaged in public consultation but have yet to announce a proposed approach to the sale and distribution model for recreational cannabis in their respective jurisdictions.
On September 8, 2017, the Ontario government announced its proposed retail and distribution model of legalized recreational cannabis to be modelled on the current Liquor Control Board of Ontario (“
LCBO
”) framework. On December 12, 2017, the Ontario government passed the
Cannabis Act, 2017
(Ontario), which will regulate the lawful use, sale and distribution of cannabis for adult use in connection with the federal government’s proposed legalization. The
Cannabis Act, 2017
(Ontario) proposes to, among other things:
·
create a new provincial retailer, overseen by the LCBO, to manage the distribution of recreational cannabis through stand-alone stores and an LCBO-controlled online order and distribution service, which together, will comprise the only channels through which consumers in Ontario will be able to legally purchase recreational cannabis;
·
set a minimum age of 19 to use, buy, possess and cultivate cannabis in Ontario; and
·
ban the use of cannabis in public places, workplaces and motor vehicles in Ontario, as is the case with alcohol.
Other details of Ontario’s approach will be set out in regulations to the
Cannabis Act, 2017
(Ontario) developed over winter 2018 for public comment. Ontario has announced that approximately 150 standalone stores will only sell cannabis (no cannabis will be sold alongside alcohol) to be opened by 2020, including 80 by July 1, 2019, serving all regions of the province. Online distribution will also be available across the province.
The Government of Manitoba has announced a “hybrid model” for cannabis distribution when cannabis for recreational purposes is legalized. The supply of cannabis in the Province of Manitoba will be secured and tracked by the Manitoba Liquor and Lotteries Corp., however private retail stores will also be permitted to sell recreational cannabis. Manitoba is currently accepting applications from retailers to open stores for the sale of cannabis for recreational purposes. This process was open until December 22, 2017, with retail stores scheduled to open as early as July 2, 2018.
The Government of Alberta has announced a draft cannabis framework providing for the purchase of cannabis products from retailers that will receive their products from a government-regulated distributor, similar to the distribution system currently in place for alcohol in the province. Only specialized retail outlets will be permitted to sell cannabis (online sales are being considered as a next phase). The Government of Alberta has not determined whether cannabis will be sold through government owned and operated stores or government-licensed and regulated private operators.
Similar to the approach taken by Ontario, the Province of New Brunswick announced that it will set up a network of tightly-controlled, stand-alone stores through the New Brunswick Liquor Corporation.
13
On November 16, 2017, the Government of Québec announced that the legal age for cannabis consumption in that province would be 18 years of age, and that it would create an agency to regulate sales as a parallel organization to its existing government-controlled alcohol sales regulator and chain of outlets commonly known in the province as the “SAQ”. Initial reports from the Québec government indicate that 15 government-run stores will be opened initially, with up to 150 additional retail outlets to open within the following two years.
In November 2017, Newfoundland and Labrador announced that recreational cannabis will be sold through private stores, with its crown-owned liquor corporation overseeing the distribution to private sellers who may sell to consumers. The Government of Newfoundland and Labrador has stated that the Newfoundland and Labrador Liquor Corporation will control the possession, sale and delivery of cannabis, and set prices. It will also be the initial online retailer, although licences may later be issued to private interests. The Government of Newfoundland and Labrador has issued a request for proposals for private retailers.
Similarly, the Yukon has released a “starting point” policy which limits the distribution and sale of recreational cannabis to government outlets and government-run online stores, and allows for the later development of private retailer operations.
The Government of the Northwest Territories has also announced its proposed approach for the distribution and sale of recreational cannabis which relies on the N.W.T. Liquor Commission to control the importation and distribution of cannabis, whether through retail outlets or by mail order service run by the liquor commission. Communities in the Northwest Territories will be able to hold a plebiscite to prohibit cannabis, similar to the options currently available to restrict alcohol.
The Government of British Columbia announced in December 2017 that recreational cannabis will be sold in that province through both public and privately operated stores, with the provincial Liquor Distribution Branch handling wholesale distribution.
The Government of Saskatchewan announced that recreational cannabis will be sold by private companies. The Saskatchewan Liquor and Gaming Authority will issue approximately 60 retail permits to private stores located in roughly 40 municipalities and First Nations across the province, with municipalities having the option of opting out of having a cannabis store if they choose.
There is no guarantee that the provincial and territorial frameworks supporting the legalization of cannabis for recreational use in Canada will be implemented on the terms outlined above or at all.
Recent Business
On August 15, 2017, the Company invested $11.5 million in HydRx Farms, Ltd. (o/a Scientus Pharma) (“
Scientus Pharma
”) by way of a senior, secured convertible debenture (“
Debenture
”). The Debenture has a two-year term, bears interest at the rate of 8% payable, paid semi-annually, is convertible into the common shares of Scientus Pharma at the rate of $2.75 a share and is secured by a first charge on all of the current and future assets of Scientus Pharma. To the best of the Company’s knowledge, Scientus Pharma does not have any exposure to the U.S. cannabis industry at this time.
On October 17, 2017, the Company entered into an agreement with Clarus Securities Inc., on behalf of a syndicate of underwriters for the purchase, on a “bought deal” basis of 11,034,500 common shares at the price of $7.25 per Common Share for the aggregate gross proceeds to the Company of C$80,000,125 wherein the Company used the net proceeds to develop infrastructure, including the purchase of capital
14
and other equipment, the expansion of its geographic footprint in Canada, other strategic investments, and for general working capital purposes. The bought deal offering was successfully closed on November 7, 2017.
On October 25, 2017, Renah Persofsky and Shawn Dym were elected as new directors at the Aphria’s Annual and Special Meeting.
On December 4, 2017, Aphria entered into an agreement to become a medical cannabis supplier to Shoppers Drug Mart. Under the terms of the Agreement, the Company will supply Shoppers Drug mart with Aphria branded medical cannabis products. Subject to Health Canada’s approval of Shoppers Drug Mart as a licensed producer or the issuance of a sale licence under the Cannabis Act, come October 17, 2018, it is expected that Aphria product will be sold online.
On December 21, 2017, the Company announced a $10 million equity investment in the combined entity Hiku Brand Company Ltd. Created from the combination of TS BrandCo Holdings Inc. and DOJA Cannabis Company Limited. In addition to the contemplated equity investment, the Company further entered into a supply agreement with Hiku for dried cannabis in exchange for the issuance of 0.8 million units in Hiku,
On December 13, 2017, the Company entered into a subsequent agreement with Clarus Securities Inc., on behalf of a syndicate of underwriters for the purchase, on a “bought deal” basis of 7,272,740 common share, at the price of C$13.75 for aggregate gross proceeds to the Company of C$100,000,175. The net proceeds of the offering were intended to finance the construction of additional cannabis production facilities globally in both foreign and Canadian jurisdictions where cannabis is legally permitted. The offering of the deal closed on January 3, 2018.
On January 15, 2018, Aphria entered into a supply agreement with Australian based Althea Company Pty Ltd. And invested $2.5 million in Althea in exchange for 25% shareholdings. As part of the supply agreement, the Company will provide Althea with packaged co-branded cannabis oil and dried flower products for the Australian medical cannabis market. On April 24
th
, 2018, the Company completed its first shipment of medical cannabis to Althea.
On January 29, 2018 under a plan of arrangement under the Business Corporations Act (Ontario) the Company announced its acquisition of d 100% of the issued and outstanding shares (on a fully-diluted basis) of Nuuvera Inc. On March 23, 2018, the Company and Nuuvera completed a plan of arrangement. Under the terms of the plan of arrangement, each former Nuuvera shareholder received $0.62 in cash, plus 0.3546 of a common share of Aphria, for each Nuuvera Share held prior to the plan of arrangement. Nuuvera shares were subsequently delisted from the TSX Venture Exchange as of the close of trading on March 26, 2018.
On February 1, 2018, Aphria International, through Nuuvera Holdings Ltd. acquired all of the outstanding shares of FL for an aggregate purchase price of approximately €850,000, with potential contingent consideration of up to an additional €150,000, subject to adjustments in accordance with the underlying transaction agreement. Pursuant to the agreement, the contingent consideration was payable as follows: (i) €50,000 within five business days after the final determination of the purchase price; and (ii) €100,000 within 30 business days following the second anniversary of completion of the transaction, in each case subject to potential downward adjustments.
On February 2, 2018, Aphria announced that it had entered into a definitive share purchase agreement with Liberty to sell its interest in Copperstate Farms, LLC (“CSF”) and Copperstate Farms Investors LLC
15
(“Copperstate”) for a total purchase price of $20 million. The transaction was subject to the provisions of the respective operating agreements of CSF and Copperstate, including compliance with the provisions of, or receipt of duly executed waivers in respect of, rights of first refusal for the existing investors of Copperstate, which afforded such existing investors with the option to acquire Aphria’s interest in CSF and Copperstate. The rights of first refusal were subsequently exercised with the effect that Liberty will no longer acquire Aphria’s interest. The full divestiture of CSF and Copperstate is expected to be completed on or before June 30, 2018. On February 28, 2018, CSF repaid Aphria US$500,000 under the terms of its convertible debenture financing. On May 15, 2018, CSF and Copperstate notified Aphria that certain members of each entity were exercising their right of first refusal on the previously announced divestiture of Aphria’s membership interests in CSF and Copperstate. As part of the notice, CSF, Copperstate and the Company agreed that the divestiture would occur on or before June 30, 2018 and each party agreed that the convertible debenture’s May 15, 2018 payment date would be postponed until June 30, 2018. All other terms of the convertible debenture remained the same.
On February 5, 2018, Aphria entered into the Agreement to sell all of its shares in Liberty that are not subject to CSE escrow requirements. Each of Michael Serruya, Simon Serruya and Jack Serruya are purchasing 80% of all transferred shares from Aphria individually or through an affiliate. The remaining 20% is being purchased by an affiliate of Delavaco Capital owned and/or controlled by Catherine DeFrancesco. After the transaction, the Company will retain an ownership position of 28.1% of the issued and outstanding shares of Liberty.
As part of the transaction, Liberty retains the right to continued use of Aphria’s trademarks and preserves its interest in the Aphria Know-How System (the “License”). Aphria divested these 26,716,025 shares in Liberty at a price of $1.25 per share, a discount of approximately 12% to the market close on February 2, 2018, in exchange for short-term notes for $33,395,031. The short-term notes are noninterest bearing and due on February 26, 2018. As security for the notes, each of the buyers provided Aphria a guarantee. The transaction also includes a call / put option for the remainder of Aphria’s shares, which are currently subject to the Canadian Securities Exchange (““CSE”) mandatory escrow requirements. As each new tranche of shares becomes freely trading, the agreement governing. The call / put option (the “Option Agreement”) results in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price. As security for the Option Agreement, each of the buyers provided Aphria with a guarantee. The transaction includes an opt-out for Aphria’s benefit in the event that the Toronto Stock Exchange (“TSX”) amends their regulations such that it permits U.S. based cannabis investments and in such instance the Option Agreement would be automatically terminated (the “Opt-Out”). In the event the Opt-Out is exercised, Aphria has agreed to pay the buyers, on a pro-rated basis, a $2.5 million termination fee.
On March 21, 2018, the Company announced that it signed an exclusive supply agreement with an Argentinian-based pharmaceutical import and distribution company, ABP Pharma, which is licensed to import, sell and distribute medical products and derivatives in Argentina. Under the terms of the agreement, Aphria will be the exclusive supplier of cannabis products to the importer to the Argentina market.
On April 11, 2018, the Company announced that it finalized a three-year supply agreement with the Société des alcools du Québec for up to 12,000 kilograms annually for sale in the Quebec adult-use market. Under the terms of the agreement, the Company will supply the Société québécoise du cannabis with a variety of branded cannabis products from the Company’s adult-use brand portfolio, which will include cannabis oils and other derivative products and several strains of high-quality grown dried cannabis flower.
16
On April 25, 2018, the Company announced the appointment of Mr. Jakob Ripshtein as the Company’s Chief Commercial Officer (effective May 1, 2018) and Dr. Christelle Gedeon as the Company’s Chief Legal Officer (effective June 1, 2018).
On May 16, 2018, the Company announced that it signed an exclusive supply agreement with Colcanna SAS, a Columbia-based pharmaceutical import and distribution company, which is licensed to import, sell and distribute medical cannabis, medical products and derivatives in Columbia. Under the terms of the agreement, the Company will be the exclusive supplier of cannabis products to Colcanna for the Colombian market and Colcanna will purchase medical cannabis products from Aphria exclusively.
On May 17, 2018, Aphria and Great North Distributors Inc. (“
Great North Distributors
”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits (“
Southern Glazer’s
”) dedicated to the representation of cannabis products, announced that they signed an agreement for Great North Distributors to serve as the exclusive manufacturer’s representative for Aphria’s adult-use cannabis products throughout Canada, following the legalization of adult use cannabis. Under the terms of the agreement, Great North Distributors will be Aphria’s exclusive cannabis representative in Canada, giving Aphria 100% coverage of all cannabis retailers, whether provincially or privately operated beginning on the day of legal adult-use sales and Aphria secured exclusivity from Great North Distributors for cannabis companies above the size of micro-cultivation and micro-processor. Southern Glazer’s will apply their industry-leading data analytics capabilities to the new cannabis industry, providing Aphria with a powerful data-driven approach to cannabis sales.
On May 28, 2018, the Company entered into a new venture known as CannInvest. with the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years’ experience in phytoextraction of African medicinal plants. Through a combination of a share-for-share swap and cash payment of $4.05 million, the Company now holds a 50% ownership in CannInvest which in turn will acquire Verve Group Companies’ existing 60% ownership interest in Verve Dynamics Inc. a licensed producer of medical cannabis extracts in Lesotho.
DESCRIPTION OF THE BUSINESS
Company Overview
The Company is currently licensed to produce and sell medical cannabis, including dried cannabis and cannabis oil, as a Licensed Producer under the provisions of the ACMPR. The Company received its initial licence to produce and sell medical cannabis on November 26, 2014. For a further description of the Company’s Licence, see
General Developments of the Business — Licences
.
The Licence grants Aphria the authority to produce, sell, possess, ship, transport, deliver and destroy dried cannabis and cannabis plants (including live plants, clippings and seeds), as well as cannabis oil extracts. The Licence is issued to Aphria for use at its facility in Leamington, Ontario at 265 Talbot Street West and applies only to such facility. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical cannabis, its business, financial condition and prospects. See
Risk Factors — Reliance on a Single Facility
.
The Company also pursues operations as a cultivator of medical cannabis through Broken Coast, its wholly owned subsidiary in BC and provides analytical testing services through ARA-Avanti Rx Analytics Inc.
17
Licence and Regulations
Pursuant to its Licences under the ACMPR, Aphria may:
(d)
possess, produce, sell, provide, ship, deliver, transport and destroy cannabis or cannabis oil;
(e)
possess and produce cannabis in its natural form, other than cannabis or cannabis oil, for the purpose of producing cannabis oil, and sell, provide, ship, deliver, transport and destroy that cannabis if it was obtained or produced for that purpose; and
(f)
possess and produce cannabis, other than marihuana or cannabis oil, for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marihuana or cannabis oil, and sell, provide, ship, deliver, transport and destroy that cannabis if it was obtained or produced for that purpose.
Aphria may sell or provide:
(a)
cannabis, cannabis oil, cannabis in its natural form, other than marihuana or cannabis oil, that was obtained or produced for the purpose of producing cannabis oil and cannabis, other than marihuana or cannabis oil, that was obtained or produced for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marihuana or cannabis oil (each a “
substance
”) to:
(i)
another Licensed Producer;
(ii)
a licensed dealer (as defined in the ACMPR);
(iii)
the Minister of Health (the “
Minister
”); or
(iv)
a person to whom an exemption relating to the substance has been granted under section 56 of the CDSA; and
(b)
dried cannabis or cannabis oil to
(i)
a client or an individual who is responsible for the client;
(ii)
a hospital employee, if the possession of the dried cannabis or cannabis oil is for the purposes of and in connection with their employment; or
(iii)
a person to whom an exemption relating to the dried cannabis or cannabis oil has been granted under section 56 of the CDSA.
Aphria may also (i) ship dried cannabis or cannabis oil to a health care practitioner (as defined in the ACMPR) in the case referred to in subparagraph 130(1)(f)(iii) of the ACMPR; (ii) import cannabis or a substance if done in accordance with an import permit issued under section 95 of the ACMPR; and (iii) possess cannabis or a substance for the purpose of export and export it if done in accordance with an export permit issued under section 103 of the ACMPR.
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Before the end of the term of the Licence, Aphria must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. The ACMPR requires that the Minister of Health, after examining the application and any supplementary information requested, issue a renewed Licence, unless:
(a)
the applicant is not an adult who ordinarily resides in Canada or a corporation that has its head office in Canada or operates a branch office in Canada and whose officers and directors are all adults;
(b)
the requirements regarding notification of local authorities pursuant to the ACMPR have not been met (such notifications would only be required in connection with a renewal if there are changes to the information since the original application);
(c)
an inspector, who has requested an inspection, has not been given the opportunity by the applicant to conduct an inspection;
(d)
the Minister has reasonable grounds to believe that false or misleading information or false or falsified documents were submitted in or with the application;
(e)
information received from a peace officer, a competent authority or the United Nations raises reasonable grounds to believe that the applicant has been involved in the diversion of a controlled substance or precursor to an illicit market or use;
(f)
the applicant does not have in place the security measures set out in the Security Directive and Subdivision C of the ACMPR in respect of an activity for which the licence is sought;
(g)
the applicant is in contravention of or has contravened in the past 10 years:
i.
a provision of the CDSA or its regulations or the Food and Drugs Act, or
ii.
a term or condition of another licence or a permit issued to it under any of those regulations,
(h)
the renewal of the licence would likely create a risk to public health, safety or security, including the risk of cannabis being diverted to an illicit market or use;
(i)
any of the following persons does not hold a security clearance:
i.
the senior person in charge,
ii.
the responsible person in charge,
iii.
if applicable, the alternate responsible person in charge,
iv.
if the applicant is an individual, that individual, and
v.
if the applicant is a corporation, any of its officers or directors;
(j)
the proposed method of record keeping does not meet the requirements of the ACMPR; or
19
(k)
if applicable, any supplemental information requested has not been provided or is insufficient to process the application.
There can be no guarantee that Health Canada will extend or renew the Licence as necessary or, if it extended or renewed, that the Licence will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the Licence, or should it renew the Licence on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected. See
Risk Factors — Reliance on Licence
.
Medical cannabis cultivated by Aphria is processed for sale or wholesale distribution to other Licensed Producers. Aphria may sell medical cannabis to patients who have obtained a valid medical document from a doctor or authorized health care professional or to other Licensed Producers.
Reporting Requirements under the ACMPR
Until the coming into force of the Cannabis Act, under the ACMPR (see Part 1, Division 5 of the ACMPR), Licensed Producers are required to keep records of, among other things, their activities with cannabis, including all transactions (sale, exportation, and importation), all fresh or dried marihuana or cannabis oils returned from clients, and an inventory of cannabis (e.g. seeds, fresh harvested marihuana, dried marihuana, packaged marihuana, packaged cannabis seeds, cannabis oil, cannabis plants destined to be sold or provided). All records have to be kept for a period of at least two years, in a format that will be easily auditable, and will have to be made available to Health Canada upon request. All communications regarding reports for healthcare licensing authorities, including both those sent and received, are also subject to this two year requirement.
A Licensed Producer must provide Health Canada with a case report for each serious adverse reaction to fresh or dried marihuana or cannabis oil within 15 days of the Licensed Producer becoming aware of the reaction. A Licensed Producer must annually prepare and maintain a summary report that contains a concise and critical analysis of all adverse reactions to have occurred during the previous 12 months (the serious adverse reaction reports and the summary reports must be retained by the Licensed Producer for a period of 25 years after the day on which they were made).
Health Canada released an Information Bulletin titled, “Licensed Producers’ Reporting Requirements” to provide an overview of the information licensed producers must provide to Health Canada on a monthly basis. Licensed Producers must provide the following information to the Office of Controlled Substances for the previous month on or before the 15th day of each month:
(a)
With respect to fresh and dried cannabis, cannabis oil, cannabis seeds and cannabis plants, licensed producers must report the amounts produced, as well as the amounts received from another licensed producer as follows:
i.
total amount produced in the reporting period;
ii.
amount released for sale in the reporting period;
iii.
amount of fresh and dried cannabis produced in the reporting period and intended for extraction activities; and
iv.
amount received from other licensed producers during the reporting period;
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(b)
With respect to fresh and dried cannabis, cannabis oil, cannabis seeds and cannabis plants, licensed producers must report the total amount sold or transferred to the following during the reporting period:
i.
registered clients;
ii.
other licensed producers; and
iii.
licensed dealers;
(c)
Number of clients registered;
(d)
Number of clients registered by province or territory of residence;
(e)
Number of refused registrations and refusals to fill order;
(f)
With respect to fresh and dried cannabis and cannabis oil, licensed producers must report as of the final day of the reporting period the amounts held in inventory as follows:
i.
total amount held in inventory;
ii.
amount intended for sale but not yet approved held in inventory;
iii.
amount approved for sale held in inventory;
iv.
amount of samples in inventory; and
v.
amount of fresh and dried cannabis intended for extraction activities held in inventory;
(g)
With respect to cannabis seeds and cannabis plants, licensed producers must report:
i.
the total number of plants held in inventory;
ii.
the number of plants destined to be sold as starting material held in inventory;
iii.
the total weight of seeds held in inventory; and
iv.
the number and weight of seeds destined to be sold as starting material held in inventory;
(h)
Licensed producers must also include in their report the total amounts ready to be destroyed, but still held in inventory on the final day of the reporting period;
(i)
Total amount of cannabis imported during the reporting period;
(j)
Total amount of cannabis exported during the reporting period;
(k)
Total amount of cannabis lost or stolen during the reporting period;
(l)
With respect to fresh and dried cannabis, cannabis oil, cannabis seeds and cannabis plants, licensed producers must report the total amount:
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i.
that was destroyed during the reporting period; and
ii.
of waste (e.g., plants, leaves, twigs) destroyed during the reporting period;
(m)
With respect to fresh and dried cannabis, cannabis oil, cannabis seeds and cannabis plants, licensed producers must report the total amount returned from clients during the reporting period;
(n)
Licensed producers must report the total number of shipments sent to the following during the reporting period:
i.
registered clients;
ii.
registered clients for interim supply;
iii.
other licensed producers; and
iv.
licensed dealers;
(o)
Licensed producers must report the total number of shipments sent to the following in each province and territory:
i.
registered clients;
ii.
registered clients for interim supply; other licensed producers; and
iii.
licensed dealers;
(p)
Average daily amount of marihuana for medical purposes authorized;
(q)
Median daily amount of marihuana for medical purposes authorized;
(r)
Average shipment size sent to registered clients during the reporting period;
(s)
Median shipment size sent to registered clients during the reporting period;
(t)
List of ten highest unique daily authorized amounts and the frequency with which they occur;
(u)
List of daily authorized amounts in specified increments:
i.
0 to 1 grams;
ii.
1.1 to 2 grams;
iii.
2.1 to 3 grams;
iv.
3.1 to 4 grams;
v.
4.1 to 5 grams;
vi.
5 to 10 grams;
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vii.
10 to 15 grams; and
viii.
> 15 grams;
(v)
Total number of shipments to registered clients per each 10 gram interval between 0 and 150 grams;
(w)
List of all health care practitioners who have completed medical documents for cannabis for medical purposes for registered clients and their location;
(x)
List of all nurse practitioners who have completed medical documents for cannabis for medical purposes for registered clients and their location;
(y)
Cannabis with which they are conducting research and development activities; and
(z)
Activities with respect to cannabis products, other than cannabis or cannabis oil (e.g. cannabis resin).
Principal Products
Medical cannabis can be ingested in a variety of ways, including smoking, vaporizing, consumption in the form of oil, or edibles. Unlike the pharmaceutical options, individual elements within medical cannabis have not been isolated, concentrated and synthetically manipulated to deliver a specific therapeutic effect. Instead medical cannabis addresses ailments holistically through the synergistic action of naturally occurring phytochemicals.
Sativa and Indica are the two main types of cannabis plants, and hybrids can be created when the genetics of each of the two plants are crossed. Within these different types of cannabis plants there are many different varieties. Within each variety of medical cannabis there are many different cannabinoids, with the most common being THC and CBD, which is responsible for many of the non-psychoactive effects from medical cannabis. Aphria has access to over 40 strain varieties and will continue to establish a variety of strains to best suit patient needs.
Distribution
Medical cannabis patients order from the Company primarily through Aphria’s online store or through the phone. Medical cannabis is and will continue to be delivered by secured courier or other methods permitted under the Cannabis Act. Aphria’s prices vary based on growth time, strain yield and market prices. Aphria may from time to time offer volume discount or promotional pricing.
The Company is also authorized for wholesale shipping of medical cannabis plant cuttings and dried bud to other Licensed Producers. Aphria has already completed several sales through its wholesale strategy and based on current costs, management expects the wholesale shipment strategy to continue. This sales channel requires minimal selling, general and administrative costs over and above the cost to produce plant cuttings and dried bud.
Operations
Aphria has assembled a management team with almost 90 years of combined experience in agriculture and agribusiness and over 40 years of combined experience in the pharmaceutical industry. Coupled with operational experience, Aphria expects to be a low-cost producer of medical cannabis, owing to various
23
cost-saving attributes of its operations, such as: (i) lower electrical costs as a result of its greenhouse facilities and the ability to leverage the advantages of passive cooling methods; and, (ii) lower fertilization costs attributable to the fact that Aphria mixes its own fertilizer. Aphria is currently growing in its 100,000 sq. feet of greenhouse space across 10 light and computer controlled glass greenhouses located in Leamington, Ontario. See
General Development of the Business — Expansion and Property Acquisition.
Substantially all of the Company’s revenue is derived from the sale of medical cannabis and cannabis plant material produced, cultivated and/or processed by Aphria at its greenhouse facilities in Leamington, Ontario. Aphria grows cannabis at its greenhouse for the purposes of sale and distribution of finished products in accordance with the ACMPR. Aphria’s current plants are at various stages of growth.
Storage and Security
The ACMPR require production sites to be located indoors, and not in a private dwelling. Subdivision C of the ACMPR set out physical security requirements that are necessary to secure sites where Licensed Producers conduct activities with medical cannabis other than storage. As per Health Canada’s regulations, Aphria’s facilities contain two vaults, deemed to be “security level eight” and “security level nine” respectively, and a “security level nine” safe, as determined by the construction of the vaults and Aphria’s proximity to a major city (Windsor). This allows Aphria to store up to 6,875 kilograms of dried cannabis and/or the kilogram equivalent of cannabis oil on site at any given time.
The vaults are equipped with security cameras, motion sensors, finger print, code locked doors and seismic sensors that set alarms off when vibrations are detected. These security measures ensure Aphria is compliant with all of Health Canada’s necessary security requirements. The vaults can only be accessed by a “Responsible Person in Charge” (as defined under the ACMPR) and at least one Responsible Person in Charge must be present in the vault at all times if the doors are opened.
Health Canada conducts ad hoc, unscheduled site inspections of Licensed Producers. Aphria has experienced these inspections numerous times, previously on a monthly basis but now on a bi-monthly basis. Aphria has responded to and complied with all requests from Health Canada within the time frames indicated in such requests. As of the date hereof, there are no outstanding inspection issues with Health Canada beyond day-to-day adjustments that may occur in order to ensure ongoing compliance. Aphria has not been required to recall distributed product or otherwise been formally reprimanded.
Specialized Skill and Knowledge
Knowledge with respect to cultivating and growing cannabis is important to the cannabis industry. The nature of growing cannabis is not substantially different from the nature of growing other greenhouse products. The Company’s Chief Scientific Officer, Gary Leong has a personal background in quality assurance, quality control, quality system audits, international and domestic regulatory affairs and product research and development. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to produce consistent product and to avoid contamination. The product is cut, sorted and dried under defined conditions that are establish to protect the activity and purity of the product. Once processing is complete, each and every processing batch is subjected to full testing against stringent quality specifications set for activity and purity.
John Cervini, Aphria’s Vice-President — Infrastructure and Technology, has significant experience in greenhouse growing technology and has also overseen greenhouse expansion in California and Mexico. Mr.
24
Cervini’s focus on improved efficiencies, healthier quality and research studies have helped him create food safety programs and skills transferable to the cannabis industry.
Competitive Conditions
The introduction of the Cannabis Act on October 17, 2018, the launch of the recreational cannabis production, distribution and sale 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 only a limited number of licences, under the ACMPR, to produce and sell medical cannabis. There are, however, several hundred applicants for licences and the changes to the licensing framework under the Cannabis Act could introduce significant competition to the business in areas beyond cultivation, such as processing, packaging and labelling, retail and medical sales. Because of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new entrants. With the coming into force of the Cannabis Act on October 17, 2018, the number of users of cannabis, both medical and adult-use, in Canada is expected to increase and 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 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.
The principal aspects of competition between Aphria and its competitors will be the price and quality of cannabis and client service provided to patients. While Aphria will price its cannabis according to market demands, it anticipates a lower cost of production compared to its competitors. This is expected to provide Aphria with pricing flexibility while maintaining healthy margins relative to its competitors. Additionally, Aphria will strive to have better and faster service by having more on hand trained staff than other Licensed Producers. Aphria also plans to maintain a minimum level of inventory to ensure that we can continue to provide our customers with unmatched quality on a consistent basis while also acquiring new customers without supply interruptions.
Employees
As of May 31, 2018 Aphria employed approximately 300 full-time employees.
25
RISK FACTORS
There are a number of risk factors that could cause future results to differ materially from those described herein. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of the following risks actually occur, the Company’s business may be harmed and its financial condition and results of operations may suffer significantly.
Reliance on Licence
The Company’s ability to grow, store and sell cannabis and cannabis oil in Canada is dependent on maintaining its Licence with Health Canada. Failure to comply with the requirements of the Licence or any failure to maintain its Licence would have a material adverse impact on the business, financial condition and operating results of the Company. There can be no guarantees that Health Canada will extend or renew the Licence as necessary or, if it extended or renewed, that the Licence will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the Licence or should it renew the Licence on different terms, the business, financial condition and results of the operation of the Company would be materially adversely affected.
Reliance on Veterans Affairs Canada (“VAC”) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a three gram per day limit, subject to certain exceptions, and an $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed in the Company’s previous continuous disclosure, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, when adult use of cannabis is implemented by the Canadian Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult use of cannabis, the Company may be materially adversely affected.
Expansion of Facilities
There is no guarantee that Health Canada will approve the contemplated expansions in a timely fashion, nor is there any guarantee that the expansion will be completed in its currently proposed form, if at all. The failure of the Company to successfully execute its expansion strategy (including receiving the expected Health Canada approvals in a timely fashion) could adversely affect the business, financial condition and results of operations of the Company and may result in the Company not meeting anticipated or future demand when it arises.
Changes in Laws, Regulations and Guidelines
On December 20, 2017, the Prime Minister communicated that the Canadian Federal Government intends to legalize cannabis in the summer of 2018, despite previous reports of a July 1, 2018 deadline. On June 7, 2018, Bill C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act. On June 20, 2018, Prime Minister Trudeau announced that cannabis would be legal by October 17, 2018. On June 21, 2018, the Government of Canada announced that Bill C-45 received Royal Assent. Bill-C-45 will come into force on October 17, 2018. On July 11, 2018, the regulations made pursuant
26
to the Cannabis Act were published. The regulations under the Cannabis Act contemplate the various licences including cultivation, processing, analytical testing, sale (including medical sales), analytical testing and scientific research. The regulations introduced the nursery and made outdoor cultivation permissible. Finally, the requirements for packaging and labelling of products for both medical and non-medical consumption were explicitly set forth. The impact of changes in the regulatory enforcement by Health Canada under the Cannabis Act and its regulations, particularly in respect of product packaging, labelling, marketing, advertising and promotions and product approvals and its impact on the Company’s business are unknown at this time.
In addition, when the Cannabis Act comes into effect, there is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult use purposes will be enacted according to the terms announced by such provinces, or at all, or that any such legislation, if enacted, will create the opportunities for growth anticipated by the Company. For example, the Provinces of Québec and New Brunswick have announced sales and distribution models that would create government-controlled monopolies over the legal retail and distribution of cannabis for adult use purposes in such provinces, which could limit the Company’s opportunities in those provinces.
Risk Factors Related to the United States
On March 27, 2017, the Company made an additional investment of US$3 million in the parent company of Copperstate, which is a US-based licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act
. On April 4, 2017, the Company announced the launch of its US expansion strategy through a strategic lead investment in Liberty. See
General Development of the Business — Recent Business
for further details concerning Liberty and Copperstate.
In light of these recent announcements, the Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of current and future investments in entities involved with medical cannabis in the United States, including Liberty and Copperstate. Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
The Company is indirectly involved (through investments in third-party corporate entities in Canada) in the cannabis industry in the United States where local state law permits such activities, as well the medical cannabis industry in Canada. Although the Company has publicly announced its intention to divest itself of its material U.S. assets and equity interests, such divestitures are not yet complete. Accordingly, until such time as the Company has divested itself of all U.S. assets and equity interests, the Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of such current investments in entities involved with medical cannabis in the United States, including Liberty.
Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
27
In light of recent announcements, the TSX may initiate delisting reviews for companies with U.S. assets more expeditiously than it would have previously, in the absence of such announcements
On October 16, 2017, the TSX provided clarity regarding the application of the Requirements to applicants and TSX-listed issuers in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. In order to comply with the Requirements, the Company may be required to effect one or more reorganizations, restructurings, transactions or series of transactions, which may include a divesture of U.S. cannabis assets.
While cannabis is legal in many U.S. state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the ACMPR, investors are cautioned that in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam that have legalized cannabis in some form, including Florida as noted above in connection with the legacy investment in Liberty. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a controlled substance under the Controlled Substances Act (the “
CSA
”) and as such, violates federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business — even those that have fully complied with state law — could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licences in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
28
This AIF involves an entity that derives a portion of its revenues from the cannabis industry in certain states of the United States, which industry is illegal under United States federal law. While the Company’s business activities are compliant with applicable state and local law, such activities remain illegal under United States federal law. The enforcement of relevant laws is a significant risk.
The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued the Sessions Memorandum, which rescinded the Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those principals are included in chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
As a result of the Sessions Memorandum, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how actively federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal prosecutors.
Medical cannabis is currently protected against enforcement by enacted legislation from United States Congress in the form of the Rohrabacher-Blumenauer Amendment (as defined herein) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis
29
laws enacted at the state level, subject to Congress restoring such funding. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the fourth consecutive year contained the Rohrabacher-Blumenauer Amendment language (referred to in 2018 as the Rohrabacher-Leahy Amendment) and continued the protections for the medical cannabis marketplace and its lawful participants from interference by the Department of Justice up and through the 2018 appropriations deadline of September 30, 2018. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of corporate assets; however as of the date hereof, the Company believes and has obtained legal advice in respect thereof that proceedings of this nature are remote.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued a memorandum providing instructions to banks seeking to provide services to cannabis-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
In the event that any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the legacy investments Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be
30
required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
The Company’s investments in the United States may be subject to heightened scrutiny
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction, in addition to those described herein. The TSX has advised the Company that it reserves the right to enforce its rules and policies against the Company in the manner the TSX deems appropriate. Further, the TSX reserves the right to set whatever requirements it deems appropriate as a condition to its acceptance of notice of any proposed future issuance of Common shares of the Company.
Given the heightened risk profile associated with cannabis in the United States, CDS may implement procedures or protocols that would prohibit or significantly curtail the ability of CDS to settle trades for cannabis companies that have cannabis businesses or assets in the United States. Although the TMX MOU has confirmed that there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of the Common Shares through the facilities of a stock exchange. While there can be no assurance that this would occur, and while it would be subject to regulatory approval, a third party has publicly expressed interest in providing clearing services should CDS decide not to do so.
In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the Canadian Securities Administrators revised their previously released CSA Staff Notice 51-352 Issuers with U.S. Marijuana Related Activities (the “Staff Notice”) setting out their disclosure expectations for specific risks facing issuers with cannabis-related activities in the United States. The Staff Notice confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. The Staff Notice includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry. the Company views the Staff Notice favourably, as it provides increased transparency and greater certainty regarding the views of its exchange and its regulator of existing operations and strategic business plan as well as the Company’s ability to pursue further investment and opportunities in the United States.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
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Although the Company has publicly announced its intention to divest itself of its material U.S. assets and equity interests, such divestitures are not yet complete and remain subject to the risk that they will not be completed in a timely manner, if at all
Following the exercise of the rights of first refusal by the existing investors of Copperstate, the full divesture of CSF and Copperstate has been completed subsequent to year-end. In addition, the Company has entered into agreements to sell its remaining interest of the issued and outstanding shares of Liberty, subject to the satisfaction of various escrow and related timing requirements of the CSE. Until such time as the divestitures are in fact complete, intervening events and other execution risks may delay the effective closing of the transactions. In the event that the Company is not successful in divesting itself of its U.S. assets, it will continue to be subject to the heightened regulatory scrutiny and other risks described herein.
Risk Factors Related to International Activities
Expansion into Foreign Jurisdictions
The Company’s expansion into jurisdictions outside of Canada is subject to risks. In addition, in jurisdictions outside of Canada, there can be no assurance that any market for the Company’s products will develop. 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 ability to successfully expand its operations into such jurisdictions and may have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s Operations in Emerging Markets are Subject to Political and Other Risks Associated with Operating in a Foreign Jurisdiction
The Company has operations in various emerging markets and may have operations in additional emerging markets in the future. Such operations expose the Company to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates, military repression; war or civil war; social and labour unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licences, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, banking and currency controls and governmental regulations that favour or require the Company to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction.
Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in marijuana industry or investment policies or shifts in political attitude in the countries in which the Company operates may adversely affect the Company’s operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of concessions, licences, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licences, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.
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the Company continues to monitor developments and policies in the emerging markets in which it operates and assess the impact thereof to its operations; however such developments cannot be accurately predicted and could have an adverse effect on the Company’s operations or profitability.
Corruption and Fraud in Certain Emerging Markets Relating to Ownership of Real Property May Adversely Affect the Company’s Business
There are uncertainties, corruption and fraud relating to title ownership of real property in certain emerging markets in which the Company operates or may operate. Property disputes over title ownership are frequent in emerging markets, and, as a result, there is a risk that errors, fraud or challenges could adversely affect the Company’s ability to operate in such jurisdictions.
Inflation in Emerging Markets, Along with Governmental Measures to Combat Inflation, may have a Significant Negative Effect on Local Economies and also on the Company’s Financial Condition and Results of Operations
In the past, high levels of inflation have adversely affected emerging economies and financial markets, and the ability of government to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. The emerging markets in which the Company operates or may operate may experience high levels of inflation in the future. Inflationary pressures may weaken investor confidence in such countries and lead to further government intervention in the economy. If countries in which the Company operates experience high levels of inflation in the future and/or price controls are imposed, the Company may not be able to adjust the rates the Company charges its customers to fully offset the impact of inflation on the Company’s cost structures, which could adversely affect the Company’s results of operations or financial condition.
The Company’s Operations may be Impaired as a Result of Restrictions on the Acquisition or Use of Properties by Foreign Investors or Local Companies under Foreign Control
Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which the Company operates in certain countries. Accordingly, the Company’s current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and the Company’s ownership or access rights in respect of any property it owns or leases in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
The Company May Expand into Other Geographic Areas, which could Increase the Company’s Operational, Regulatory and Other Risks
In addition to the jurisdictions described elsewhere in this AIF, the Company may in the future expand into other geographic areas, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those
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associated with infrastructure, staff and regulatory compliance. the Company may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with the Company’s existing operations.
The Company may be Responsible for Corruption and Anti-bribery Law Violations
The Company’s business is subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, the Company is subject to the anti-bribery laws of any other countries in which it conducts business now or in the future. the Company’s employees or other agents may, without its knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and anti-bribery laws for which the Company may be held responsible. the Company’s policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that the Company’s internal control policies and procedures will always protect it from recklessness, fraudulent behaviour, dishonesty or other inappropriate acts committed by its affiliates, employees, contractors or agents. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.
Legislative or Regulatory Reform and Compliance
The commercial cannabis industry is a new industry and the Company anticipates that such regulations will be subject to change as the Federal Government monitors Licensed Producers in action. The Company’s operations are subject to a variety of laws, regulations, guidelines and policies relating to the manufacture, import, export, management, packaging/labelling, advertising, sale, transportation, storage and disposal of medical cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management, the Company is currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the control of the Company may cause adverse effects to its operations.
Environmental Regulations and Risks
The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.
Government approvals and permits are currently, and may in the future be required in connection with The Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical cannabis or from proceeding with the development of its operations as currently proposed.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease
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or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production of medical cannabis, or more stringent implementation thereof, could have a material adverse impact on the company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risks Related to Dilutions
The Company may issue additional Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.
Risks Inherent in an Agricultural Business
The Company’s business involves the growing of medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the Company expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.
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Reliance on a Single Location
To date, the Company’s principle activities and resources have been primarily focused on the premises in Leamington, Ontario. the Company expects to continue to focus its operation in this facility for the foreseeable future. Adverse changes or developments affecting the existing facility and location could have a material and adverse effect on the Company’s ability to continue producing medical cannabis, its business, financial condition and prospects.
Third Party Transportation
In order for customers of the Company to receive their product, the Company must rely on third party transportation services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by the Company. Any delay by third party transportation services may adversely affect the Company’s financial performance.
Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on the Company’s business, financials and prospects. Any such breach could impact the Company’s ability to continue operating under its licences or the prospect of renewing its licences.
Reliance on Third Party Suppliers, Manufacturers and Contractors
The Company intends to maintain a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the novel regulatory landscape for regulating cannabis in Canada and the variability surrounding the regulation of cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors may have a material adverse effect on the Company’s business and operational results.
Reliance on Key Personnel
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management (collectively, “
Key Personnel
”). The Company’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of a Key Person, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Further, as a Licensed Producer, each Key Person is subject to a security clearance by Health Canada.. 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 Person 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 Person 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. While employment agreements are customarily used as a primary method of retaining the services of Key Personnel, these agreements cannot assure the continued services of such employees.
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Limited Operating History
The Company, while incorporated in 1994, began carrying on business in 2012 and did not generate revenue from the sale of products until late 2014. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
Product Liability
As a 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 sale of the Company’s products involves 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 the Company’s 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 Company’s products 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 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 obtain or 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 the Company’s potential 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 labelling 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 management attention. 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 Company’s significant brands were subject to recall, the image of that brand 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 and the Resulting Issuer. 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.
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Results of Future 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 (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of Offered Shares should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to medical cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition and results of operations.
Insurance Coverage
The Company has insurance to protect its assets, operations, directors 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, there could be a material adverse effect on the Company’s business, financial condition and results of operation.
Negative Consumer Perception
The Company believes the cannabis industry is highly dependent upon consumer perception regarding the medical benefits, safety, efficacy and quality of the cannabis distributed for medical purposes to such consumers. Consumer perception of the Company’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements both in Canada and in other countries, media attention and other publicity (whether or not accurate or with merit) regarding the consumption of cannabis products for medical or recreational purposes, including unexpected safety or efficacy concerns arising with respect to the products of the Company or its competitors. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable 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 favorable 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 and financial condition 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 an adverse effect on any demand for the Company’s products which could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis for medical purposes in general, or the Company’s products specifically, or associating the consumption of
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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 such products resulted from consumers’ failure to consume such products legally, appropriately or as directed.
Securing Adequate Financing to Fund Operations and Meet Expected Consumer Demand
There is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company ceasing to carry on business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. In addition, from time to time, the Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may increase the Company’s debt levels above industry standards. 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. Debt financings may also contain provisions which, if breached, may entitle lenders or their agents to accelerate repayment of loans and/or realize upon security over the assets of the Company, and there is no assurance that the Company would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to such debt financing.
Identify and Execute Future Acquisitions or Dispositions, or to Successfully Manage the Impact of Such Transactions on its Operations
Although there is no present intention to undertake any of the following transactions, material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations, and (vi) loss or reduction of control over certain of the Company’s assets.
The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the results of operations, business prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require the Company to pay substantial amounts of money, harming its financial condition. There can be no assurance that any
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pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Litigation
The Company is currently a party to litigation and may, in the future, 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 decided against the Company, such a decision could adversely affect the Company’s ability to continue operating and the value of the Common Shares and could impose a significant burden on the Company’s resources. Even if the Company is involved in litigation and wins, litigation can redirect significant Company resources, including the time and attention of management and available working capital. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as the Company may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anticompetitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the business, financial condition and results of operations of the Company.
In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licences from third parties who allege that the Company has infringed on their lawful rights. However, such licences may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licences or other rights with respect to intellectual property that it does not own.
Constraints on Marketing Products
In view of the restrictions on marketing, advertising and promotional activities set forth in the Cannabis Act and related regulations, the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with
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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.
Fraudulent or Illegal activity by its employees, contractors and consultants
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Information technology systems and cyber-attacks
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 it 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, intentional damage and destruction, 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.
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. 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.
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Breaches of security at its facilities, or in respect of electronic documents and data storage and may face risks related to breaches of applicable privacy laws
Given the nature of the Company’s product and its lack of legal availability 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 one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase 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 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, particularly patient lists and preferences, 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 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.
History of Losses
The Company incurred losses in prior periods. The Company may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, the Company expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If the Company’s revenues do not increase to offset these expected increases in costs and operating expenses, the Company will not be profitable.
Competition
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 only a limited number of licences, under the ACMPR, to produce and sell medical cannabis. There are, however, several hundred applicants for licences and the changes to the licensing framework under the Cannabis Act could introduce significant competition to the business in areas beyond cultivation, such as processing, packaging and labelling, retail and medical sales. Because of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new entrants. With the coming into force of the Cannabis Act on October 17, 2018, the
42
number of users of cannabis, both medical and adult-use, in Canada is expected to increase and 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 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.
DIVIDENDS
As of the date of this Annual Information Form, the Company has no current intention to declare dividends on its Common Shares in the foreseeable future. Any decision to pay dividends on its Common Shares in the future will be at the discretion of the Company’s board of directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the board of directors may deem relevant.
CAPITAL STRUCTURE
The company is authorized to issue an unlimited number of Common Shares. As of May 31, 2018, there were 210,169,924 Common Shares issued and outstanding. The holders of the Common Shares are entitled to one vote per share at all meetings of the shareholders of the Company. The holders of Common Shares are also entitled to dividends, if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company.
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees, and consultants enabling them to acquire Common Shares of the Company. The maximum number of Common Shares reserved for issuance of stock options that may be granted under the plan is 10% of the issued and outstanding Common Shares of the Company. The options granted can be exercised for a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option may not be less than the market price of the Common Shares on the date of grant. As of May 31, 2018, there are 8,956,195 options outstanding to purchase Common Shares.
In addition, the Company has warrants outstanding to purchase up to an aggregate of 2,843,138 Common Shares.
MARKET FOR SECURITIES
Common Shares
Common Shares are listed and traded on the TSX under the trading symbol “APH” and under the symbol “APHQF” on the OTCQB. Prior to March 22, 2017, the Common Shares were traded on the TSXV, and not the TSX. The following table sets forth the reported intraday high and low prices and monthly trading volumes of the Common Shares for the 12-month period prior June 1, 2017 and May 31, 2018:
43
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
Trading
|
|
Trading
|
|
|
|
|
Period
|
|
Price
|
|
Price
|
|
Volume
|
|
|
May 2018
|
|
$
|
10.32
|
|
$
|
7.48
|
|
17,183,190
|
|
|
April 2018
|
|
$
|
10.06
|
|
$
|
7.04
|
|
13,810,130
|
|
|
March 2018
|
|
$
|
11.87
|
|
$
|
8.86
|
|
10,193,320
|
|
|
February 2018
|
|
$
|
14.72
|
|
$
|
9.33
|
|
20,208,870
|
|
|
January 2018
|
|
$
|
19.87
|
|
$
|
13.30
|
|
33,327,760
|
|
|
December 2017
|
|
$
|
15.81
|
|
$
|
8.64
|
|
15,142,430
|
|
|
November 2017
|
|
$
|
10.08
|
|
$
|
5.86
|
|
15,350,420
|
|
|
October 2017
|
|
$
|
7.92
|
|
$
|
6.48
|
|
88,940,321
|
|
|
September 2017
|
|
$
|
7.12
|
|
$
|
5.93
|
|
32,318,825
|
|
|
August 2017
|
|
$
|
6.39
|
|
$
|
5.73
|
|
22,793,312
|
|
|
July 2017
|
|
$
|
6.63
|
|
$
|
5.17
|
|
36,245,705
|
|
|
June 2017
|
|
$
|
5.65
|
|
$
|
4.71
|
|
37,764,175
|
|
PRIOR SALES
The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued by Aphria during the twelve month period between June 1, 2017 and May 31, 2018:
|
Date
|
|
Type of Security Issued
|
|
Issuance/Exercise
Price per Security
|
|
Number of
Securities
Issued
|
|
|
June 1, 2018
|
|
Stock Options
|
|
$11.78
|
|
250,000
|
|
|
May 1, 2018
|
|
Common Shares
|
|
N/A
|
|
44,512
|
(2)
|
|
April 27, 2018
|
|
Common Shares
|
|
$1.50
|
|
50,000
|
(1)
|
|
April 27, 2018
|
|
Common Shares
|
|
$2.52 – $6.29
|
|
323,238
|
(2)
|
|
April 23, 2018
|
|
Common Shares
|
|
N/A
|
|
71,208
|
(2)
|
|
April 17, 2018
|
|
Stock Options
|
|
$11.45
|
|
100,000
|
|
|
April 13, 2018
|
|
Stock Options
|
|
$11.40
|
|
1,050,000
|
|
|
April 10, 2018
|
|
Stock Options
|
|
$9.98
|
|
200,000
|
|
|
April 9, 2018
|
|
Stock Options
|
|
$9.92
|
|
300,000
|
|
|
April 4, 2018
|
|
Stock Options
|
|
$9.95
|
|
50,000
|
|
|
March 28, 2018
|
|
Common Shares
|
|
$1.50
|
|
227,300
|
(1)
|
|
March 27, 2018
|
|
Common Shares
|
|
$1.75
|
|
300,000
|
(1)
|
|
March 26, 2018
|
|
Common Shares
|
|
$1.50
|
|
227,300
|
(1)
|
|
March 26, 2018
|
|
Common Shares
|
|
N/A
|
|
595
|
(2)
|
|
March 23, 3018
|
|
Warrants
|
|
$7.20
|
|
4,704,547
|
(8)
|
|
March 23, 2018
|
|
Common Shares
|
|
$13.17
|
|
31,226,910
|
(7)
|
|
March 23, 2018
|
|
Stock Options
|
|
$2.52 – $14.38
|
|
1,280,330
|
(7)
|
|
March 16, 2018
|
|
Stock Options
|
|
$14.39
|
|
90,000
|
|
|
March 15, 2018
|
|
Common Shares
|
|
N/A
|
|
1,059
|
(2)
|
|
February 26, 2018
|
|
Common Shares
|
|
N/A
|
|
1,791
|
(2)
|
|
February 21, 2018
|
|
Common Shares
|
|
$3.90 – $5.24
|
|
850
|
(2)
|
|
February 16, 2018
|
|
Common Shares
|
|
$5.24
|
|
666
|
(2)
|
|
February 14, 2018
|
|
Common Shares
|
|
N/A
|
|
524
|
(2)
|
|
February 13, 2018
|
|
Common Shares
|
|
$15.07
|
|
14,373,675
|
(6)
|
|
February 6, 2018
|
|
Common Shares
|
|
$1.30
|
|
10,000
|
(2)
|
|
February 5, 2018
|
|
Common Shares
|
|
$5.72
|
|
8,333
|
(2)
|
44
|
February 5, 2018
|
|
Common Shares
|
|
$1.50
|
|
30,250
|
(1)
|
|
February 2, 2018
|
|
Common Shares
|
|
$1.30 – $5.24
|
|
10,000
|
(2)
|
|
January 29, 2018
|
|
Common Shares
|
|
$1.50
|
|
210,250
|
(2)
|
|
January 24, 2018
|
|
Common Shares
|
|
N/A
|
|
2,525
|
(4)
|
|
January 21 2018
|
|
Stock Options
|
|
$22.08
|
|
50,000
|
|
|
January 18, 2018
|
|
Common Shares
|
|
$5.24 – $6.90
|
|
66,666
|
(2)
|
|
January 18, 2018
|
|
Common Shares
|
|
$1.50
|
|
251,250
|
(1)
|
|
January 16, 2018
|
|
Common Shares
|
|
$0.60 – $5.24
|
|
1,408,714
|
(2)
|
|
January 15, 2018
|
|
Common Shares
|
|
N/A
|
|
99,538
|
(2)
|
|
January 15, 2018
|
|
Stock Options
|
|
$21.70
|
|
10,000
|
|
|
January 12, 2018
|
|
Common Shares
|
|
$1.50
|
|
46,250
|
(1)
|
|
January 11, 2018
|
|
Common Shares
|
|
N/A
|
|
6,212
|
(2)
|
|
January 10, 2018
|
|
Common Shares
|
|
N/A
|
|
4,978
|
(2)
|
|
January 9, 2018
|
|
Stock Options
|
|
$22.89
|
|
100,000
|
|
|
January 9, 2018
|
|
Common Shares
|
|
N/A
|
|
18,296
|
(2)
|
|
January 8, 2018
|
|
Common Shares
|
|
N/A
|
|
27,615
|
(2)
|
|
January 5, 2018
|
|
Common Shares
|
|
$3.00
|
|
5,000
|
(2)
|
|
January 5, 2018
|
|
Common Shares
|
|
$1.50
|
|
20,000
|
(1)
|
|
January 4, 2018
|
|
Common Shares
|
|
$1.50
|
|
167,000
|
(1)
|
|
January 3, 2018
|
|
Common Shares
|
|
$1.50
|
|
22,500
|
(1)
|
|
January 3, 2018
|
|
Common Shares
|
|
$13.75
|
|
8,363,651
|
(5)
|
|
January 2, 2018
|
|
Stock Options
|
|
$21.09
|
|
1,000,000
|
(6)
|
|
January 2, 2018
|
|
Common Shares
|
|
$1.50
|
|
267,000
|
(1)
|
|
January 2, 2018
|
|
Common Shares
|
|
N/A
|
|
8,850
|
(2)
|
|
December 29, 2017
|
|
Common Shares
|
|
N/A
|
|
2,355
|
(2)
|
|
December 28, 2017
|
|
Common Shares
|
|
N/A
|
|
28,757
|
(2)
|
|
December 28, 2017
|
|
Common Shares
|
|
$1.50
|
|
27,000
|
(1)
|
|
December 27, 2017
|
|
Common Shares
|
|
$1.50 – $1.75
|
|
82,181
|
(2)
|
|
December 22, 2017
|
|
Common Shares
|
|
$1.50
|
|
14,000
|
(1)
|
|
December 18, 2017
|
|
Stock Options
|
|
$14.06
|
|
100,000
|
|
|
December 12, 2017
|
|
Common Shares
|
|
N/A
|
|
1,089
|
(2)
|
|
December 11, 2017
|
|
Common Shares
|
|
$1.50
|
|
20,000
|
(1)
|
|
December 8, 2017
|
|
Common Shares
|
|
N/A
|
|
1,017
|
(2)
|
|
December 8, 2017
|
|
Common Shares
|
|
$1.48
|
|
30,000
|
(2)
|
|
December 7, 2017
|
|
Common Shares
|
|
$3.70
|
|
50,000
|
(2)
|
|
December 7, 2017
|
|
Common Shares
|
|
$1.75
|
|
8,500
|
(1)
|
|
December 4, 2017
|
|
Common Shares
|
|
N/A
|
|
120,672
|
(2)
|
|
November 29, 2017
|
|
Common Shares
|
|
$1.50
|
|
20,000
|
(1)
|
|
November 28, 2017
|
|
Common Shares
|
|
N/A
|
|
1,090
|
(2)
|
|
November 28, 2017
|
|
Common Shares
|
|
$1.50 – $1.75
|
|
14,077
|
(1)
|
|
November 27, 2017
|
|
Common Shares
|
|
$1.50
|
|
59,000
|
(1)
|
|
November 24, 2017
|
|
Common Shares
|
|
$1.10
|
|
50,000
|
(2)
|
|
November 17, 2017
|
|
Common Shares
|
|
$1.50
|
|
13,175
|
(1)
|
|
November 14, 2017
|
|
Common Shares
|
|
$1.50
|
|
23,636
|
(1)
|
|
November 9, 2017
|
|
Common Shares
|
|
$1.10 – $1.40
|
|
38,333
|
(2)
|
|
November 8, 2017
|
|
Common Shares
|
|
$3.47 – $3.90
|
|
9,900
|
(2)
|
|
November 7, 2017
|
|
Common Shares
|
|
$1.75
|
|
21,000
|
(1)
|
|
November 7, 2017
|
|
Common Shares
|
|
$1.75
|
|
16,500
|
(1)
|
45
|
November 7, 2017
|
|
Common Shares
|
|
$7.25
|
|
12,689,675
|
(3)
|
|
November 2, 2017
|
|
Common Shares
|
|
N/A
|
|
2,525
|
(4)
|
|
November 2, 2017
|
|
Common Shares
|
|
$3.90
|
|
1,000
|
(2)
|
|
October 26, 2017
|
|
Common Shares
|
|
$1.50
|
|
10,000
|
(1)
|
|
October 2, 2017
|
|
Common Shares
|
|
$1.50
|
|
12,000
|
(1)
|
|
October 2, 2017
|
|
Common Shares
|
|
N/A
|
|
746
|
(2)
|
|
August 2, 2017
|
|
Common Shares
|
|
$1.75
|
|
5,000
|
(1)
|
|
July 31, 2017
|
|
Common Shares
|
|
$1.50
|
|
7,500
|
(1)
|
|
July 28, 2017
|
|
Common Shares
|
|
N/A
|
|
17,226
|
(2)
|
|
July 19, 2017
|
|
Common Shares
|
|
N/A
|
|
2,561
|
(2)
|
|
July 19, 2017
|
|
Common Shares
|
|
$1.50
|
|
33,467
|
(1)
|
|
July 11, 2017
|
|
Stock Options
|
|
$5.24
|
|
1,015,000
|
|
|
July 10, 2017
|
|
Common Shares
|
|
$1.40
|
|
3,332
|
(2)
|
|
June 21, 2017
|
|
Common Shares
|
|
$1.50
|
|
182,500
|
(1)
|
|
June 19, 2017
|
|
Common Shares
|
|
$1.40
|
|
2,000
|
(2)
|
|
June 19, 2017
|
|
Common Shares
|
|
$3.90
|
|
1,300
|
(2)
|
|
June 2, 2017
|
|
Common Shares
|
|
$1.10
|
|
5,000
|
(2)
|
|
June 1, 2017
|
|
Stock Options
|
|
$5.44
|
|
250,000
|
|
Notes:
(1)
Securities issued pursuant to the exercise of warrants.
(2)
Securities issued pursuant to the exercise of stock options.
(3)
Securities issued pursuant to the Company’s offering of Common Shares in November 2017.
(4)
Securities issued pursuant to the deferred share unit plan.
(5)
Securities issued pursuant to the Company’s offering of Common Shares in January 2018.
(6)
Securities issued pursuant to the Company’s acquisition of Broken Coast Cannabis.
(7)
Securities issued pursuant to the Company’s acquisition of Nuuvera Inc.
(8)
Securities issued pursuant to the Company’s acquisition of Nuuvera Inc. Each warrant entitles the holder to receive $0.62 per warrant in cash and 0.3546 Common Shares. Warrants represent legacy warrants in Nuuvera Inc. at time of transaction. Includes 909,090 warrants held by Aphria.
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
The following table summarizes details of the Company’s securities of each class held, to the Company’s knowledge, in escrow or that are subject to a contractual restriction on transfer as of the date of this Annual Information Form:
|
Designation of Class
|
|
Number of securities held in escrow
or that are subject to a contractual
restriction on transfer escrow
|
|
Percentage of class
|
|
|
Common Shares
|
|
1,777,971
|
|
0.8
|
%(1)
|
Notes:
(1) Based on 210,169,924 Common Shares outstanding.
46
DIRECTORS AND OFFICERS
Name, Occupation and Security Holding
Below are the names, province or state and country of residence, principal occupation and periods of service of the directors and executive officers of the Company.
|
Name and
Municipality
Residence
|
|
Principal Occupations
For Last Five Years
|
|
Director
of Aphria
Since
|
|
Position with Aphria
|
|
Number of Common
Shares Beneficially
Owned, Controlled or
Directed, Directly or
Indirectly
(4)
|
|
|
Vic Neufeld
Lakeshore, ON
|
|
Chief Executive Officer of Aphria
Chief Executive Officer of Jamieson Laboratories Ltd.
|
|
December 1, 2014
(1)
|
|
President, Chief Executive Officer and Director
|
|
925,342
(0.44)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cole Cacciavillani
Leamington, ON
|
|
Vice-President — Growing Operations of Aphria
Chief Operating Officer of Aphria
Secretary-Treasurer of CF Greenhouses
|
|
December 1, 2014
(1)
|
|
Vice-President — Growing Operations and Director
|
|
7,099,483
(2)
(3.38)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Cervini
Leamington, ON
|
|
Vice-President — Infrastructure and Technology of Aphria
Chief Agronomist Officer of Aphria
President of Cervini Farms California
|
|
December 1, 2014
(1)
|
|
Vice-President — Infrastructure and Technology and Director
|
|
9,683,118
(3)
(4.61)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Merton
Belle River, ON
|
|
Chief Financial Officer of Aphria
Chief Financial Officer of Reko International Group
|
|
N/A
|
|
Chief Financial Officer
|
|
74,730
(0.04)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jakob Ripstein
Toronto, ON
|
|
President and Chief Financial Officer, Diageo North America
|
|
N/A
|
|
Chief Commercial Officer
|
|
Nil
|
|
47
|
Christelle Gedeon
Toronto, ON
|
|
Partner, Fasken Martineau DuMoulin LLP
Associate, Fasken Martineau DuMoulin, LLP
|
|
N/A
|
|
Chief Legal Officer
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Leong
Vancouver, BC
|
|
Chief Scientific Officer, Aphria Inc. President, Neautrical Solutions Inc. Chief Science Officer, Jamieson Laboratories Ltd.
|
|
N/A
|
|
Chief Scientific Officer
|
|
22,050
(nmf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis Staudt
(5)(6)
Kingsville, ON
|
|
Retired Partner at PricewaterhouseCoopers LLP
|
|
December 1, 2014
(1)
|
|
Director
|
|
57,730
(0.03)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip Waddington
(6)
Chelsea, QC
|
|
Consultant
|
|
December 1, 2014
(1)
|
|
Director
|
|
30,610
(0.02)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renah Persofsky
(5)(6)
|
|
Executive consultant in the Innovation Group at CIBC.
|
|
October 25, 2017
|
|
Director
|
|
7,662
(nmf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shawn Dym
(5)
|
|
Managing Director, York Plains Investment Corp.
|
|
October 25, 2017
|
|
Director
|
|
9,298
(nmf)
|
|
Notes:
(1) Mr. Cacciavillani was a director of the predecessor corporation to Aphria, Pure Natures Wellness Inc. (“
PNW
”) from its incorporation on June 3, 1994. Mr. Neufeld became a director and officer of PNW on June 3, 2014. Mr. Cervini became a director of PNW on July 17, 2013. Mr. Staudt became a director of PNW on July 1, 2014. Mr. Waddington became a director of PNW on August 14, 2014
(2) Mr. Cacciavillani owns 5,371,7,06 Common Shares directly and exercises control over an additional 1,727,777 Common Shares held by the Cacciavillani Family Trust
(3) Mr. Cervini owns 783,117 directly and exercises control over an additional 8,900,001 Common Shares indirectly through Fulfill Holdings Inc., a company which he is the President and sole shareholder.
(4) Based on 210,169,924 Common Shares outstanding as of May 31, 2018.
(5) Member of the Audit Committee.
(6) Member of the Compensation, Nomination and Governance Committee.
The term of each director of Aphria will expire on the date of the next annual meeting of shareholders of Aphria.
48
The following is a summary biography of each of the directors and executive officers of Aphria:
Vic Neufeld
President, Chief Executive Officer and Director
Vic Neufeld is the President and Chief Executive Officer of Aphria. Mr. Neufeld is the former CEO of Jamieson Laboratories (“Jamieson”) Canada’s largest manufacturer and distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. Mr. Neufeld brings 15 years of experience as a chartered accountant and partner with Ernst & Young and 21 years as CEO of Jamieson. During his tenure with Jamieson, the company went from $20 million in annual sales to over $250 million and expanded the company’s distribution network to over 40 countries, building Jamieson to a globally recognized brand name. Mr. Neufeld, a native of Leamington, Ontario, earned a Bachelor’s degree in Economics from Western University, Honours degree in business from the University of Windsor and an MBA from the University of Windsor. Mr. Neufeld is also a CPA.
Cole Cacciavillani
Co-Founder, Vice President-Growing Operations and Director
Cole Cacciavillani, Aphria’s co-founder, is an industrial engineer with 35 years of experience in the agricultural and greenhouse industry. Cole has accumulated expertise of how to best utilize nature’s light and proprietary growing techniques and technologies to create competitive, safe and cost effective products. Mr. Cacciavillani sits on a number of charitable and associative boards including serving as: past Chairman of the Board for Leamington Memorial District Hospital as well as serving on the Hospital’s Foundation Board. Cole was a founding chair of The Ontario Greenhouse Alliance; serves on the board of The Agricultural Institute of Ontario, Police Services Board, F.V. Energy Co-op, and the Leamington Economic Development Committee. Currently he serves as Co-Chair of Fundraising for the Erie Shores Campus Hospice. Mr. Cacciavillani’s dedication to his community has received much recognition, including: the Queen Elizabeth II Diamond Jubilee Medal, which is awarded to honour significant contributions and achievements by Canadians. Ontario’s greenhouse industry recognized Mr. Cacciavillani’s leadership and vision as the founding Chair of the industry organization with its first service award. Recently, Mr. Cacciavillani was awarded the St. Clair alumni distinction award based on the success he pursued within the community.
John Cervini
Co-Founder, Vice President-Infrastructure and Technology and Director
John Cervini, Aphria’s co-founder, comes from fourth generation growers in southwestern Ontario with hydroponic agricultural experience. Together with his father and brother, Mr. Cervini helped established Lakeside Produce, a of North America sales and marketing companies selling fresh produce from Canada to multinational retailers throughout North America. Mr. Cervini has significant experience in greenhouse growing technology and has also overseen greenhouse expansions to California and Mexico. Mr. Cervini’s focus on improved efficiencies, healthier quality and the latest research studies helped him create an industry leading food safety program. Mr. Cervini understands the need and importance of product safety, product traceability and standardized industry procedures. Mr. Cervini is the founding chair of the Ontario Greenhouse Marketing Association remains involved in the industry as part of the Ontario Greenhouse Vegetable Growers Association.
49
Carl Merton
Chief Financial Officer
Carl Merton, Chief Financial Officer, has over 20 years of financial and business experience, having spent almost 12 years combined with Ernst & Young LLP and KPMG LLP prior to serving as Vice-President, Special Projects at Atlas Tube Canada ULC, Chief Financial Officer of Reko International Group Inc. (TSXV: REK) and Chief Financial Officer of Aphria Inc. Mr. Merton is a Chartered Professional Accountant, Chartered Accountant and is a Fellow of the Canadian Institute of Chartered Business Valuators (the “CICBV”). As the Chief Financial Officer of Aphria, Mr. Merton is responsible for leading strategic discussions, acquisitions and divestitures, budgeting, financing, financial reporting and internal controls. Mr. Merton holds an Honours Bachelor of Commerce in Sports Administration from Laurentian University. In addition Mr. Merton, is currently a member of the Board of Directors of Motor City Community Credit Union, is the Chair of their Audit Committee, serves as an external member of the Audit Committee of the Greater Windsor & Essex County District School Board and has served as a past Chair of both the CICBV and the International Association of Professional Business Valuators.
Jakob Ripstein
Chief Commercial Officer
Jakob Ripshtein most recently served as Chief Financial Officer of Diageo North America, a position he has held since 2016. In his 10 years with Diageo, he also served as President of Diageo Canada and also held a variety of Finance and Commercial roles in Canada, the United States and England. While serving as CFO and President of Diageo Canada concurrently, Mr. Ripshtein managed Diageo Canada’s overall operations and resources. Prior to Diageo, he oversaw business, sales and tax functions in the Canadian spirits, pharmaceutical and financial sectors.
Christelle Gedeon
Chief Legal Officer
Christelle Gedeon was mostly recently a Partner at Fasken Martineau DuMoulin LLP, a prominent Bay Street law firm where her practice focused on the life sciences industry, advising on intellectual property matters, regulated products under the
Food and Drugs Act
and general corporate commercial matters. She received her LL.B./B.C.L. from McGill University and holds a Ph.D. in clinical pharmacology and toxicology from the University of Toronto. She is called in the province of Quebec and Ontario and is currently the Chair of the Canadian Association of Professionals in Regulatory Affairs.
Gary Leong
Chief Scientific Officer
Mr. Leong, Aphria’s Chief Scientific Officer has a personal background in quality assurance, quality control, quality system audits, international and domestic regulatory affairs and product research and development. Gary’s commitment to research and scientific knowledge of the medical marijuana industry allows us here at Aphria to produce a cost effective and quality product. Prior to joining Aphria full time, Gary was the president of Neautrical Solutions Inc. located in Surrey, British Columbia. Prior to that, he was the Chief Scientific Officer at Jamieson Laboratories Limited. He began at Jamieson in the year 2000 as the Vice President of Scientific and Technical Affairs. He also held the position of Quality Control Manager at Boehringer Ingelheim Consumer Products: Quest Vitamins and Development Officer at Atomic Energy of
50
Canada: Radiochemical Company. Gary’s educational background began with a Bachelors of Science in Chemistry and has taken him most recently to an MBA in Quality Management from City University of Bellevue Washington. Gary is currently affiliated with The Life Sciences Working Team of Windsor-Essex Economic Development Corporation. In the past, he was a member of the Natural Health Products Directorate Program Advisory Committee and a board member of the Ontario Ginseng Innovation and Research Consortium.
Dennis Staudt
Director
Dennis Staudt, Director, has over 35 years’ experience providing business advice to private companies in Southwestern Ontario, having spent most of his career with PricewaterhouseCoopers LLP (“PwC”), including 22 years as a partner in the Audit and Assurance Group. Prior to being admitted to partnership, Mr. Staudt spent almost two years with PwC Germany in their Düsseldorf office. Following his retirement from PwC in 2012, Mr. Staudt continues to provide business advisory services to a number of private companies, primarily in the manufacturing and greenhouse sectors. He is also Vice-President of Staudt Farms Limited, a family owned farming operation in Leamington, Ontario. Mr. Staudt graduated from the University of Windsor in 1977 with a Bachelor of Commerce Degree. He obtained his Chartered Accountant (Ontario) designation in 1979 and his Certified Public Accountant (Illinois) designation in 1999. Mr. Staudt is also Advisory Board Member at the University of Windsor Centre for Executive and Professional Education. Mr. Staudt is Past Chair of the Leamington District Memorial Hospital Foundation, the Art Gallery of Windsor and the Art Gallery of Windsor Foundation. He also previously served on the Board of Governors of the University of Windsor and taught as a Sessional Lecturer in Accounting.
Dr. Philip Waddington
Director
Dr. Philip Waddington, Director, a trained naturopathic physician, has experience in regulating natural health products. From January 2000 to August 2008 Dr. Waddington served as the inaugural Director General of the Natural Health Products Directorate (NHPD) of Health Canada. Under his leadership, a new regulatory framework was defined, developed and implemented in Canada. Dr. Waddington received his training from the Canadian College of Naturopathic Medicine. He holds an MBA from the Richard Ivey School of Business at the University of Western Ontario and a B.Sc. Hon. in Biology from Queen’s University. He currently works as a consultant; helping companies deal with any regulatory, NHPD or government strategy issues.
Rena Persofsky
Director
Ms. Persofsky is an executive consultant in the Innovation Group at CIBC. She is a widely respected entrepreneur and strategist with a successful track record of creating 27 start-up companies and a rich history of investing in early stage companies. Ms. Persofsky serves as Board Chair for mobile on demand senior care and child care start-up BookJane, advises award winning payment card and platform technology firm Dynamics Inc. and is a board member for retail/QSR automation software specialty firm MeazureUp Inc.
51
Shawn Dym
Director
Mr. Dym is a managing director at York Plains Investment Corp., a private investment vehicle focused on maximizing absolute returns by investing in a wide array of asset classes, including successful cannabis related investments. He currently serves on the board of advisors for Green Acre Capital, Canada’s first private investment fund focused on the cannabis industry, as well as the board of directors at Wellpoint Health and Totally Green.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of Aphria, no director or executive officer of Aphria, or shareholder holding a sufficient number of securities of Aphria to affect materially the control of the Company:
(a)
is, as at the date hereof, or has been, within the ten (10) years before the date hereof, a director or executive officer of any corporation that, while that person was acting in such capacity:
(i)
was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than thirty (30) consecutive days, that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or
(ii)
was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than thirty (30) consecutive days, that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or
(iii)
within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold its assets.
(b)
has, within the ten (10) years before the date hereof, become bankrupt, made a proposal under any legislation relating to the bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, officer or shareholder.
To the knowledge of Aphria, no director or executive officer of Aphria, or a shareholder holding sufficient number of securities of Aphria to affect materially the control of Aphria, has been subject to:
(a)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or
(b)
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
52
Conflicts of Interest
We may from time to time become involved in transactions which conflict with the interests of our directors and the officers. The interests of these persons could conflict with those of the Company. 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 conflict of interest arises at a meeting of our 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.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Aphria is not currently a party to any legal proceedings, nor is Aphria currently contemplating any legal proceedings, which are material to its business. Aphria is currently not aware of any existing or contemplated legal proceedings to which it is or was a party to, or to which any of its properties is or was the subject of. Aphria is not aware of any settlement agreements, penalties or sanctions that it has entered into before a court relating to securities legislation or with a securities regulatory authority or that would be material to a reasonable investor in making an investment decision.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Prior to June 30, 2016, Aphria leased its greenhouse facilities from CF Greenhouses. CF Greenhouses is a greenhouse growing company controlled in part by Cole Cacciavillani, Director and Chief Operating Officer of Aphria. On June 30, 2016, Aphria acquired 360,000 square feet of production space, located on 36 acres of land from CF Greenhouses for total consideration of $6.1 million. The $6.1 million purchase price was satisfied by a $3.25 million cash payment and CF Greenhouses assuming a vendor take back mortgage, in the amount of $2.85 million, with a 5-year amortization period and bearing interest at 6.75%.
TRANFER AGENT AND REGISTAR
The transfer agent and registrar of Aphria is Computershare Trust Company of Canada at its offices in Toronto, Ontario.
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the only contracts entered into by the Company during the twelve month period ending May 31, 2018 which are material or entered into before the twelve month period ending May 31, 2018 but are still in effect are:
(a)
the Licence;
(b)
the warrant indenture dated July 31, 2014 between Aphria, Black Sparrow and Valiant Trust Company (the “
Warrant Indenture
”) for the issue of an aggregate of 12,302,268 common share purchase share warrants entitling the holders thereof to purchase an aggregate of 12,302,268 Common Shares at a price of $1.50 per Common Share for a period of five years following the satisfaction of the Escrow release Conditions (as defined in the Warrant Indenture);
(c)
the warrant indenture dated December 11, 2016 between Aphria and Computershare Trust Company of Canada for the issue of an aggregate of 4,688,576 common share
53
purchase share warrants entitling the holders thereof to purchase an aggregate of 4,688,576 Common Shares at a price of $1.75 per Common Share prior to December 11, 2018; and
(d)
a purchase and sale agreement to sell 26, 716,025 of the Company’s shares in Liberty at a price of $1.25 per share, at a discount of 12%, on February 5, 2018 , in exchange for short term notes for $33,395,031. This sale represents all of the Company’s shares in Liberty that are not subject to CSE escrow requirements. Each of Michael Surruya, Simon Serruya and Jack Serruya will purchase 80% of all transferred shares from Aphria individual or through an affiliate. The remaining 20% are being purchased by an affiliate of Delvaco Capital, namely Rockstar Kids Ltd. And NG Bahamas Ltd. The transaction also includes a call/put option for the remainder of the Company’s shares, which are currently subject to the CSE mandatory escrow requirements. Each purchase also signed a promissory note together with a guarantee of the purchaser’s obligations under their promissory note and the obligation s of such purchaser upon the exercise of the applicable call or put option, as applicable. Following the transaction, the Company retains an ownership position of 28/1% of the issued and outstanding shares of Liberty. The transaction include an opt-out to the Company’s benefit, in the event the TSX amends their regulations such that it permits U.S. based cannabis investments, resulting in the Option agreement automatically terminating, in which case, the Company will pay a pro-rate termination fee of $2.5 million dollars.
AUDIT COMMITTEE INFORMATION
As of May 31, 2018 the Audit Committee (the “
Committee
”) consists of Dennis Staudt, Renah Persofsky and Shawn Dym, all of whom are “independent” and “financially literate” within the meaning of National Instrument 52-110 — Audit Committees. Each of the Audit Committee members has an understanding of the accounting principles used to prepare Aphria’s financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of Aphria’s financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring Aphria’s compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of Aphria’s internal auditors. The Audit Committee has specific responsibilities relating to Aphria’s financial reports; the external auditor; the internal audit function; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on Aphria; and Aphria’s whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in “
Directors and Officers
” above. The full text of the Audit Committee’s charter is disclosed in Schedule “A”.
Pre-Approval Policies and Procedures
The Committee will pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate
54
to one or more of its members the authority to pre-approve non-audit services but preapproval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
External Auditor Service Fees
The following table sets forth, by category, the fees for all services rendered by the Company’s external auditors, PricewaterhouseCoopers LLP for the financial year ended May 31, 2018, are as set out below (including estimates).
|
|
|
May 2017
|
|
May 2018
|
|
|
Audit Fees
(1)
|
|
$
|
99,000
|
|
$
|
285,000
|
|
|
Audit Related Fees
(2)
|
|
$
|
61,200
|
|
$
|
179,872
|
|
|
Tax Fees
(3)
|
|
—
|
|
|
|
|
All Other Fees
|
|
$
|
107,500
|
|
$
|
464,872
|
|
Notes:
(1)
Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
(2)
Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
(3)
Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
INTERESTS OF EXPERTS
PricewaterhouseCoopers LLP was appointed as the auditor of the Company on October 27, 2016. PricewaterhouseCoopers LLP is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com.
55
Schedule A — Audit Committee Charter
This charter (the “
Charter
”) sets forth the purpose, composition, responsibilities and authority of the Audit Committee (the “
Committee
”) of the Board of Directors (the “
Board
”) of Aphria Inc. (“
Aphria
”).
Purpose
The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities with respect to:
·
financial reporting and disclosure requirements;
·
ensuring that an effective risk management and financial control framework has been implemented and tested by management of Aphria; and
·
external and internal audit processes.
Composition and Membership
(a)
The Board will appoint the members (“
Members
”) of the Committee. The Members will be appointed to hold office until the next annual general meeting of shareholders of Aphria or until their successors are appointed. The Board may remove a Member at any time and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will automatically cease to be a Member upon ceasing to be a director.
(b)
The Committee will consist of at least three directors. Each Member will meet the criteria for financial literacy established by applicable laws and the rules of any stock exchanges upon which Aphria’s securities are listed, including National Instrument 52-110 — Audit Committees. All Members will meet the criteria for independence established by the aforementioned laws and rules. In addition, each director will be free of any relationship which could, in the view of the Board, reasonably interfere with the exercise of a Member’s independent judgment.
(c)
The Board will appoint one of the Members to act as the chairman of the Committee (the “
Chairman
”). The Executive Administrator of Aphria (the “
secretary
”) will be the secretary of all meetings and will maintain minutes of all meetings and deliberations of the Committee. If the secretary is not in attendance at any meeting, the Committee will appoint another person who may, but need not, be a Member to act as the secretary of that meeting.
Meetings
(a)
Meetings of the Committee will be held at such times and places as the Chairman may determine, but in any event not less than four (4) times per year. Twenty-four (24) hours advance notice of each meeting will be given to each Member orally, by telephone, by facsimile or email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by telephone.
A -
1
(b)
At the request of the external auditors of Aphria, the Chief Executive Officer or the Chief Financial Officer of Aphria or any Member, the Chairman will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.
(c)
The Chairman, if present, will act as the chairman of meetings of the Committee. If the Chairman is not present at a meeting of the Committee the Members in attendance may select one of the members to act as chairman of the meeting.
(d)
A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority. The Chairman will not have a deciding or casting vote in the case of an equality of votes. Powers of the Committee may also be exercised by written resolutions signed by all Members.
(e)
The Committee may invite from time to time such persons as it sees fit to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee. The Committee may meet in camera without members of management in attendance for a portion of each meeting of the Committee, as the Committee deems appropriate.
(f)
In advance of every regular meeting of the Committee, the Chairman, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chairman, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Aphria to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.
Duties and Responsibilities
The duties and responsibilities of the Committee as they relate to the following matters, are as follows:
With respect to Financial Reporting and Disclosure
(a)
review and recommend to the Board for approval, the audited annual financial statements, including the auditors’ report thereon, the quarterly financial statements, management discussion and analysis, financial reports, and any guidance with respect to earnings per share to be given, prior to the public disclosure of such information, with such documents to indicate whether such information has been reviewed by the Board or the Committee;
(b)
review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual report to shareholders, management proxy circular, material change disclosures of a financial nature and similar disclosure documents prior to the public disclosure of such information;
A -
2
(c)
review with management of Aphria, and with external auditors, significant accounting principles and disclosure issues and alternative treatments under International Financial Reporting Standards (“
IFRS
”), with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Aphria’s financial position and the results of its operations in accordance with IFRS, as applicable;
(d)
seek to ensure that adequate procedures are in place for the review of Aphria’s public disclosure of financial information extracted or derived from Aphria’s financial statements, periodically assess the adequacy of those procedures and recommend any proposed changes to the Board for consideration;
(e)
review the minutes from each meeting of the Responsible Parties, established pursuant to Aphria’s corporate disclosure policy, since the last meeting of the Committee;
With respect to Internal Controls and Audit
(a)
review the adequacy and effectiveness of Aphria’s system of internal control and management information systems through discussions with management and the external auditor to ensure that Aphria maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Aphria’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statement and for detecting control weaknesses or fraud. From time to time the Committee shall assess whether it is necessary or desirable to establish a formal internal audit department having regard to the size and stage of development of Aphria at any particular time;
(b)
satisfy itself that management has established adequate procedures for the review of Aphria’s disclosure of financial information extracted or derived directly from Aphria’s financial statements;
(c)
satisfy itself, through discussions with management, that the adequacy of internal controls, systems and procedures has been periodically assessed in order to ensure compliance with regulatory requirements and recommendations;
(d)
review and discuss Aphria’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities;
(e)
review, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Aphria’s risk management policies and procedures with regard to identification of Aphria’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Aphria; and,
(f)
as applicable recommend the appointment, or if necessary, the dismissal of the head of Aphria’s internal audit process;
A -
3
With respect to External Audit
(a)
recommend to the Board a firm of external auditors to be nominated for appointment as the external auditor of Aphria;
(b)
ensure the external auditors report directly to the Committee on a regular basis;
(c)
review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;
(d)
review and recommend to the Board the fee, scope and timing of the audit and other related services rendered by the external auditors;
(e)
review the audit plan of the external auditors prior to the commencement of the audit;
(f)
establish and maintain a direct line of communication with Aphria’s external and internal auditors;
(g)
meet in camera with only the auditors, with only management, and with only the members of the Committee at every Committee meeting where, and to the extent that, such parties are present and the Committee deems appropriate;
(h)
oversee the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors’ team;
(i)
oversee the work of the external auditors appointed by the shareholders of Aphria with respect to preparing and issuing an audit report or performing other audit, review or attest services for Aphria, including the resolution of issues between management of Aphria and the external auditors regarding financial disclosure;
(j)
review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used, any alternative treatments of financial information that have been discussed with management of Aphria, the ramifications of their use as well as any other material changes. Review a report describing all material written communication between management and the auditors such as management letters and schedule of unadjusted differences;
(k)
discuss with the external auditors their perception of Aphria’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;
(l)
discuss with the external auditors their perception of Aphria’s identification and management of risks, including the adequacy or effectiveness of policies and procedures implemented to mitigate such risks;
(m)
review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the
A -
4
change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board;
(n)
review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues;
With Respect to Additional Responsibilities
(a)
review and approve Aphria’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of Aphria; and
With Respect to Non-Audit Services
(a)
pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but pre-approval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
Oversight Function
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that Aphria’s financial statements are complete and accurate or comply with IFRS and other applicable requirements. These are the responsibilities of Management and the external auditors. The Committee, the Chairman and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Aphria, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Aphria’s financial information or public disclosure.
Reporting
The Chairman will report to the Board at each Board meeting on the Committee’s activities since the last Board meeting. The Committee will annually review and approve the Committee’s report for inclusion in the Annual Information Form. The minutes of each meeting of the Committee will be available to the members of the Board, at their request.
A -
5
Access to Information and Authority
The Committee will be granted unrestricted access to all information regarding Aphria that is necessary or desirable to fulfill its duties and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Aphria’s expense, independent legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities, including sole authority to retain and to approve any such firm’s fees and other retention terms without prior approval of the Board. The Committee also has the authority to communicate directly with internal and external auditors.
Review of Charter
The Committee will annually review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.
A -
6
Exhibit 99.10
Aphria Inc.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MAY 31, 2017 AND MAY 31, 2016
(Expressed in Canadian Dollars, unless otherwise noted)
APHRIA INC.
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements and other financial information in this annual report were prepared by management of Aphria Inc., reviewed by the Audit Committee and approved by the Board of Directors.
Management is responsible for the consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.
To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.
These financial statements have been audited by the shareholders’ auditors, PwC LLP, and their report is presented herein.
|
“Vic Neufeld”
|
“Carl A. Merton”, CPA, CA, FCBV
|
|
Chief Executive Officer
|
Chief Financial Officer
|
July 11, 2017
July 11, 2017
Independent Auditor’s Report
To the Shareholders of
Aphria Inc.
We have audited the accompanying consolidated financial statements of Aphria Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at May 31, 2017 and the consolidated statements of earnings, comprehensive earnings, changes in equity (deficiency) and cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers LLP
245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4
T: +1 519 985 8900, F: +1 519 258 5457
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aphria Inc. and its subsidiaries as at May 31, 2017 and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Other matter
The financial statements of Aphria Inc. for the year ended May 31, 2016 were audited by another auditor who expressed an unmodified opinion on those financial statements on July 7, 2016.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Windsor, Ontario, Canada
APHRIA INC.
Independent Auditors’ Repor
t
To the Shareholders of Aphria Inc.:
We have audited the accompanying consolidated financial statements of Aphria Inc., which comprise the consolidated statements of financial position as at May 31, 2016 and May 31, 2015, and the consolidated statements of income (loss) and comprehensive income (loss), changes in equity (deficiency) and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aphria Inc. as at May 31, 2016 and May 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
|
Toronto, Ontario
July 7, 2016
|
|
|
|
|
|
|
Chartered Professional Accountants
|
|
|
Licensed Public Accountants
|
|
|
|
|
|
|
Aphria Inc.
Consolidated Statements of Financial Position
|
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
79,910,415
|
|
$
|
16,472,664
|
|
|
Marketable securities
|
|
7
|
|
87,346,787
|
|
—
|
|
|
Accounts receivable
|
|
|
|
825,511
|
|
1,778,679
|
|
|
Other receivables
|
|
8
|
|
4,511,639
|
|
126,952
|
|
|
Inventory
|
|
9
|
|
3,886,607
|
|
2,088,850
|
|
|
Biological assets
|
|
10
|
|
1,362,749
|
|
697,997
|
|
|
Prepaid assets
|
|
|
|
1,059,624
|
|
160,156
|
|
|
Due from DFMMJ Investments, Ltd.
|
|
11
|
|
463,916
|
|
—
|
|
|
Promissory notes receivable
|
|
12
|
|
—
|
|
567,588
|
|
|
|
|
|
|
179,367,248
|
|
21,892,886
|
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
13
|
|
72,500,148
|
|
7,309,220
|
|
|
Intangible assets
|
|
4,14
|
|
1,891,237
|
|
4,317,680
|
|
|
Convertible note receivable
|
|
15
|
|
1,360,548
|
|
—
|
|
|
Embedded derivative
|
|
15
|
|
173,000
|
|
—
|
|
|
Interest in equity accounted investee
|
|
16
|
|
28,376,092
|
|
—
|
|
|
Long-term investments
|
|
17
|
|
27,787,578
|
|
1,560,200
|
|
|
Deferred tax asset
|
|
6
|
|
3,314,570
|
|
—
|
|
|
Goodwill
|
|
4
|
|
1,200,000
|
|
1,200,000
|
|
|
|
|
|
|
$
|
315,970,421
|
|
$
|
36,279,986
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
5,872,962
|
|
$
|
1,266,492
|
|
|
Deferred gain from equity accounted investee
|
|
16
|
|
2,800,000
|
|
—
|
|
|
Current portion of promissory note payable
|
|
19
|
|
877,500
|
|
—
|
|
|
Current portion of long-term debt
|
|
20
|
|
765,224
|
|
—
|
|
|
|
|
|
|
10,315,686
|
|
1,266,492
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
19
|
|
365,625
|
|
—
|
|
|
Long-term debt
|
|
20
|
|
31,420,230
|
|
—
|
|
|
|
|
|
|
42,101,541
|
|
1,266,492
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
21
|
|
274,316,548
|
|
40,916,880
|
|
|
Warrants
|
|
22
|
|
444,912
|
|
693,675
|
|
|
Share-based payment reserve
|
|
23
|
|
3,229,929
|
|
1,723,903
|
|
|
Deficit
|
|
|
|
(4,122,509
|
)
|
(8,320,964
|
)
|
|
|
|
|
|
273,868,880
|
|
35,013,494
|
|
|
|
|
|
|
$
|
315,970,421
|
|
$
|
36,279,986
|
|
Nature of operations (Note 1)
Commitments (Note 32)
Subsequent events (Note 33)
Approved on behalf of the Board:
|
“John Cervini”
|
|
“Cole Cacciavillani”
|
|
Signed: Director
|
|
Signed: Director
|
The accompanying notes are an integral part of these consolidated financial statements
5
Aphria Inc.
Consolidated Statements of Income and Comprehensive Income
|
|
|
|
|
For the year ended
May 31
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
Revenue
|
|
|
|
$
|
20,438,483
|
|
$
|
8,433,929
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Cost of goods sold, net
|
|
10
|
|
3,599,342
|
|
1,861,440
|
|
|
Amortization
|
|
13,14
|
|
985,533
|
|
590,415
|
|
|
Net effect of changes in fair value of biological assets and inventory
|
|
10
|
|
(1,443,925
|
)
|
4,646
|
|
|
|
|
|
|
3,140,950
|
|
2,456,501
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
17,297,533
|
|
5,977,428
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
25
|
|
4,678,054
|
|
2,425,123
|
|
|
Share-based compensation
|
|
26
|
|
2,399,111
|
|
462,314
|
|
|
Selling, marketing and promotion
|
|
|
|
6,663,862
|
|
3,598,481
|
|
|
Amortization
|
|
13,14
|
|
956,043
|
|
361,763
|
|
|
Research and development
|
|
|
|
492,425
|
|
220,408
|
|
|
Impairment of intangible asset
|
|
14
|
|
3,500,000
|
|
—
|
|
|
|
|
|
|
18,689,495
|
|
7,068,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,391,962
|
)
|
(1,090,661
|
)
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
19
|
|
511,875
|
|
—
|
|
|
Foreign exchange gain
|
|
|
|
482,596
|
|
—
|
|
|
Gain on marketable securities
|
|
7
|
|
208,563
|
|
—
|
|
|
Gain on sale of capital assets
|
|
13
|
|
11,367
|
|
7,125
|
|
|
Profit from equity accounted investee
|
|
16
|
|
210,400
|
|
—
|
|
|
Finance income, net
|
|
27
|
|
728,249
|
|
281,497
|
|
|
Gain on long-term investments
|
|
28
|
|
3,571,129
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
4,332,217
|
|
(802,039
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (recovery)
|
|
6
|
|
133,762
|
|
(1,200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income and comprehensive income
|
|
|
|
$
|
4,198,455
|
|
$
|
397,961
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares — basic
|
|
|
|
104,341,319
|
|
58,442,827
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
—
diluted
|
|
|
|
111,427,893
|
|
58,442,827
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic
|
|
29
|
|
$
|
0.04
|
|
$
|
0.01
|
|
|
Earnings per share — diluted
|
|
29
|
|
$
|
0.04
|
|
$
|
0.01
|
|
The accompanying notes are an integral part of these consolidated financial statements
6
Aphria Inc.
Consolidated Statements of Changes in Equity (Deficiency)
|
|
|
|
|
|
|
|
|
Share-based
|
|
|
|
|
|
|
|
|
Number of common
|
|
Share capital
|
|
Warrants
|
|
payment reserve
|
|
|
|
|
|
|
|
|
shares
|
|
(Note 21)
|
|
(Note 22)
|
|
(Note 23)
|
|
Deficit
|
|
Total
|
|
|
Balance at May 31, 2015
|
|
52,479,587
|
|
$
|
20,246,095
|
|
$
|
556,589
|
|
$
|
1,261,589
|
|
$
|
(8,718,925
|
)
|
$
|
13,345,348
|
|
|
Warrants exercised
|
|
5,127,976
|
|
6,191,892
|
|
(126,748
|
)
|
—
|
|
—
|
|
6,065,144
|
|
|
Share issued on Bought Deal
|
|
8,846,370
|
|
10,136,277
|
|
263,834
|
|
—
|
|
—
|
|
10,400,111
|
|
|
Share issued on CannWay Purchase
|
|
3,600,000
|
|
4,342,616
|
|
—
|
|
—
|
|
—
|
|
4,342,616
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
462,314
|
|
—
|
|
462,314
|
|
|
Net income for the year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
397,961
|
|
397,961
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,916,880
|
|
$
|
693,675
|
|
$
|
1,723,903
|
|
$
|
(8,320,964
|
)
|
$
|
35,013,494
|
|
|
|
|
|
|
|
|
|
|
Share-based
|
|
|
|
|
|
|
|
|
Number of common
|
|
Share capital
|
|
Warrants
|
|
payment reserve
|
|
|
|
|
|
|
|
|
shares
|
|
(Note 21)
|
|
(Note 22)
|
|
(Note 23)
|
|
Deficit
|
|
Total
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,916,880
|
|
$
|
693,675
|
|
$
|
1,723,903
|
|
$
|
(8,320,964
|
)
|
$
|
35,013,494
|
|
|
Share issuance — August 2016 bought deal
|
|
17,250,000
|
|
31,959,093
|
|
—
|
|
—
|
|
—
|
|
31,959,093
|
|
|
Share issuance — November 2016 bought deal
|
|
10,062,500
|
|
37,263,475
|
|
—
|
|
—
|
|
—
|
|
37,263,475
|
|
|
Share issuance — February 2017 bought deal
|
|
11,500,000
|
|
53,869,357
|
|
—
|
|
—
|
|
—
|
|
53,869,357
|
|
|
Share issuance — May 2017 bought deal
|
|
13,269,252
|
|
81,322,498
|
|
—
|
|
—
|
|
—
|
|
81,322,498
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,448,332
|
|
—
|
|
—
|
|
—
|
|
3,448,332
|
|
|
Share and warrant issuance — intangible asset acquisition
|
|
38,759
|
|
100,000
|
|
359,480
|
|
—
|
|
—
|
|
459,480
|
|
|
Share issuance — warrants exercised
|
|
15,251,165
|
|
23,646,825
|
|
(608,243
|
)
|
—
|
|
—
|
|
23,038,582
|
|
|
Share issuance — options exercised
|
|
1,053,095
|
|
1,533,513
|
|
—
|
|
(558,183
|
)
|
—
|
|
975,330
|
|
|
Share-based payments
|
|
100,000
|
|
256,575
|
|
—
|
|
2,064,209
|
|
—
|
|
2,320,784
|
|
|
Shares held in escrow for services not yet earned
|
|
50,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net income for the year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,198,455
|
|
4,198,455
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,316,548
|
|
$
|
444,912
|
|
$
|
3,229,929
|
|
$
|
(4,122,509
|
)
|
$
|
273,868,880
|
|
The accompanying notes are an integral part of these consolidated financial statements
7
Aphria Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
Year ended
|
|
Year ended
|
|
|
|
|
|
|
May 31,
|
|
May 31
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
$
|
4,198,455
|
|
$
|
397,961
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Income tax expense (recovery)
|
|
6
|
|
133,762
|
|
(1,200,000
|
)
|
|
Net effect of change in fair value of biological assets
|
|
10
|
|
(5,004,615
|
)
|
4,646
|
|
|
Amortization
|
|
13,14
|
|
1,941,576
|
|
952,178
|
|
|
Gain on sale of capital assets
|
|
13
|
|
(11,367
|
)
|
(7,125
|
)
|
|
Disposition and usage of bearer plants
|
|
13
|
|
66,613
|
|
—
|
|
|
Impairment of intangible assets
|
|
14
|
|
3,500,000
|
|
—
|
|
|
Accrued interest on convertible note advanced to debtors
|
|
15
|
|
(33,548
|
)
|
—
|
|
|
Profit from equity accounted investee
|
|
16
|
|
(210,400
|
)
|
—
|
|
|
Amortization of finance fees on long-term debt
|
|
20
|
|
4,583
|
|
—
|
|
|
Gain on marketable securities
|
|
|
|
(208,563
|
)
|
—
|
|
|
Share-based compensation
|
|
26
|
|
2,399,111
|
|
462,314
|
|
|
Unrealized gain on long-term investments
|
|
28
|
|
(6,311,979
|
)
|
—
|
|
|
Realized loss on long-term investments
|
|
28
|
|
2,740,850
|
|
—
|
|
|
Consulting revenue
|
|
19
|
|
(511,875
|
)
|
—
|
|
|
Change in non-cash working capital
|
|
30
|
|
2,632,962
|
|
(1,598,108
|
)
|
|
|
|
|
|
5,325,565
|
|
(988,134
|
)
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
204,408,498
|
|
10,314,727
|
|
|
Share capital issued on warrants exercised
|
|
|
|
23,038,582
|
|
6,065,144
|
|
|
Share capital issued on stock options exercised
|
|
|
|
975,330
|
|
—
|
|
|
Advances from related parties
|
|
11
|
|
387,892
|
|
1,139,788
|
|
|
Repayment of amounts due to related parties
|
|
11
|
|
(851,808
|
)
|
(1,139,788
|
)
|
|
Proceeds from long-term debt, net of finance fees
|
|
20
|
|
32,825,000
|
|
—
|
|
|
Repayment of long-term debt
|
|
20
|
|
(644,129
|
)
|
—
|
|
|
|
|
|
|
260,139,365
|
|
16,379,871
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Issuance of promissory notes receivable
|
|
12
|
|
—
|
|
(200,000
|
)
|
|
Repayment of promissory notes receivable
|
|
12
|
|
567,588
|
|
232,412
|
|
|
Investment in capital assets
|
|
13
|
|
(66,416,305
|
)
|
(4,426,059
|
)
|
|
Proceeds from disposal of capital assets
|
|
13
|
|
32,823
|
|
36,570
|
|
|
Investment in intangible assets, net of shares issued
|
|
14
|
|
(1,306,120
|
)
|
(53,705
|
)
|
|
Convertible note advanced to debtors
|
|
15
|
|
(1,500,000
|
)
|
—
|
|
|
Purchase of equity investments
|
|
16
|
|
(25,365,692
|
)
|
—
|
|
|
Investment in marketable securities
|
|
|
|
(109,268,749
|
)
|
—
|
|
|
Proceeds from disposal of marketable securities
|
|
|
|
22,130,525
|
|
—
|
|
|
Investment in long-term investments
|
|
17
|
|
(28,097,293
|
)
|
(1,560,200
|
)
|
|
Proceeds from divestiture of long-term investments
|
|
28
|
|
7,196,044
|
|
—
|
|
|
|
|
|
|
(202,027,179
|
)
|
(5,970,982
|
)
|
|
Increase in cash and cash equivalents
|
|
|
|
63,437,751
|
|
9,420,755
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
16,472,664
|
|
7,051,909
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year:
|
|
|
|
$
|
79,910,415
|
|
$
|
16,472,664
|
|
The accompanying notes are an integral part of these consolidated financial statements
8
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). The registered office is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These consolidated financial statements were approved by the Company’s Board of Directors on July 11, 2017.
2.
Basis of preparation
(a)
Statement of compliance
The policies applied in this consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”).
(b)
Basis of measurement
These financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management, is Canadian dollars. These consolidated financial statements are presented in Canadian dollars.
(d)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
|
Wholly owned subsidiaries
|
|
Jurisdiction of incorporation
|
|
Pure Natures Wellness Inc.
|
|
Ontario
|
|
Aphria (Arizona) Inc.
|
|
Arizona
|
|
CannWay Pharmaceuticals Ltd
|
|
Ontario
|
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity. Unrealized losses are eliminated to the extent of the gains, but only to the extent that there is no evidence of impairment.
9
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
(e)
Foreign currency translation
All figures presented in the consolidated financial statements are reflected in Canadian dollars, which is the functional currency of the Company.
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the statement of financial position date are translated to Canadian dollars at the foreign exchange rate applicable as at that date. Realized and unrealized exchange gains and losses are recognized through profit or loss.
The assets and liabilities of foreign operations, including marketable securities, long-term investments and promissory note payable, are translated in Canadian dollars at year-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognised in other comprehensive income and accumulated in equity.
(f)
Interest in equity-accounted investees
The Company’s interest in equity accounted investees is comprised of its interest in associates.
|
Equity accounted investee
|
|
Jurisdiction of incorporation
|
|
DFMMJ Investments, Ltd.
|
|
British Columbia
|
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity accounted investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in Note 3(i).
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
10
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
3.
Significant accounting policies
The significant accounting policies used by the Company are as follows:
a.
Revenue
Revenue is recognized at the fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all the following conditions have been satisfied, which are generally met once the products are shipped to customers.
·
The Company has transferred the significant risks and rewards of ownership of the goods to the purchaser;
·
The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
·
The amount of revenue can be measured reliably;
·
It is probable that the economic benefits associated with the transaction will flow to the entity; and
·
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
The Company recognized revenue from consulting services on a straight-line basis over the term of its consulting agreement with a third party as the services are provided.
Amounts disclosed as revenue are net of allowances, discounts and rebates.
b.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.
c.
Marketable securities
Marketable securities are comprised of liquid investments in federal, provincial and/or corporate bonds with maturities less than 3.5 years. Marketable securities are recognized initially at fair value and subsequently adjusted to fair value through profit or loss (“FVTPL”).
d.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories of harvested cannabis are transferred from biological assets into inventory at their fair value at harvest less costs to sell, which is deemed to be their cost. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost.
11
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
e.
Biological assets
The Company’s biological assets consist of medical cannabis plants which are not yet harvested. These biological assets are measured at fair value less costs to sell and costs to complete. At the point of harvest, the biological assets are transferred to inventory at fair value less costs to sell and costs to complete.
Gains or losses arising from changes in fair value less cost to sell are included in the results of operations of the related period.
f.
Capital assets
Capital assets are stated at cost, net of accumulated amortization and accumulated impairment losses, if any.
Amortization is calculated using the following terms and methods:
|
Land
|
|
Not amortized
|
|
No term
|
|
Greenhouse infrastructure
|
|
Straight-line
|
|
20 years
|
|
Bearer plants
|
|
Unit of Production
|
|
Number of units
|
|
Production equipment
|
|
Straight-line
|
|
5
–
10 years
|
|
Office equipment
|
|
Straight-line
|
|
3 – 5 years
|
|
Automotive equipment
|
|
Straight-line
|
|
10 years
|
|
Leasehold improvements
|
|
Straight-line
|
|
over lease term
|
|
Construction in progress
|
|
Not amortized
|
|
no term
|
An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated statements of income and comprehensive income in the year the asset is derecognized.
The assets’ residual values, useful lives and methods of amortization are reviewed at each financial year end, and adjusted prospectively if appropriate.
g.
Intangible assets
Intangible assets are comprised of an e-commerce platform, a purchased private label brand, licenses and permits as well as a licensing agreement with a third party. All are recorded at cost less accumulated amortization. Amortization of the e-commerce platform is recorded on a straight-line basis over the estimated useful life of 2 years. Amortization of the private label brand is recorded on a straight-line basis over the remaining useful life of 15 months. Amortization for the licenses and permits is recorded on a straight-line basis over the estimated useful life of 90 months. Amortization of the licensing agreement is recorded on a straight-line basis over the estimated useful life of 60 months.
h.
Goodwill
Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net tangible and intangible assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.
12
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
i.
Impairment of non-financial assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
For the purpose of testing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit, or “CGU”). An impairment loss is recognized for the amount, if any, by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and the value in use (being the present value of expected future cash flows of the asset or CGU). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized.
j.
Income taxes
Income tax expense consisting of current and deferred tax expense is recognized in the consolidated statements of income and comprehensive income. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.
A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
k.
Earnings per share
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. The dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the year. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.
l.
Share-based compensation
The Company has a stock option plan in place. The Company measures equity settled share-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Company’s estimate of equity instruments that will eventually vest. Fair
13
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
value is measured using the Black-Scholes option pricing model. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. Any revisions are recognized in the consolidated statements of income and comprehensive income such that the cumulative expense reflects the revised estimate.
m.
Research and development
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures that do not meet the above criteria are recognized in the consolidated statements of income and comprehensive income as incurred.
n.
Financial instruments
Financial assets and other financial liabilities are classified into one of four categories:
·
FVTPL;
·
held-to-maturity (“HTM”);
·
available for sale (“AFS”); and
·
loans and receivables.
(i)
FVTPL financial assets
Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of income and comprehensive income. Transaction costs are expensed as incurred.
(ii)
HTM investments
HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction costs and subsequently at amortized cost.
(iii)
AFS financial assets
AFS financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other categories. Gains and losses arising from changes in fair value are recognized in other comprehensive income.
(iv)
Loans and receivables
Loans and receivables are financial assets having fixed or determinable payments that are not quoted in an active market. They are initially recognized at the transaction value and subsequently carried at amortized cost less, when material, a discount to reduce the loans and receivables to fair value.
(v)
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a
14
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
The carrying amount of all financial assets, excluding trade receivables, is directly reduced by the impairment loss. The carrying amount of trade receivables is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated statements of income and comprehensive income. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease relates to an event occurring after the impairment was recognized; the previously recognized impairment loss is reversed through the consolidated statements of income and comprehensive income.
(vi)
Financial liabilities and other financial liabilities
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with changes being recognized through the consolidated statements of income and comprehensive income. Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.
(vii)
Embedded derivatives
The Company has convertible loans receivables whereby balances can be converted into equity. Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in profit or loss.
(viii) Classification of financial instruments
Cash and cash equivalents — FVTPL
Marketable securities — FVTPL
Accounts receivables — loans and receivables
Other receivables
—
loans and receivables
Promissory notes receivable
—
loans and receivables
Convertible note receivable — AFS
Embedded derivative — embedded derivatives
Long-term investments — FVTPL
Accounts payable and accrued liabilities — other financial liabilities
Promissory note payable
—
other financial liabilities
Long-term debt — other financial liabilities
(ix)
Determination on fair value of long-term investments
All long-term investments (other than Level 3 warrants) are initially recorded at the transaction price, being the fair value at the time of acquisition. Thereafter, at each reporting period, the fair value of an investment may be adjusted using one or more of the valuation indicators described
15
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
below. These are included in Level 3 in Note 17. Warrants of private companies are carried at their intrinsic value.
o.
Critical accounting estimates and judgments
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.
The determination of fair value of the Company’s long-term investments at other than initial cost are subject to certain limitations. Financial information for private companies in which the Company has investments may not be available and, even if available, that information may be limited and/or unreliable.
Use of the valuation approach described below may involve uncertainties and determinations based on the Company’s judgment and any value estimated from these techniques may not be realized or realizable.
Company-specific information is considered when determining whether the fair value of a long-term investment should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will take into account trends in general market conditions and the share performance of comparable publicly-traded companies when valuing long-term investments.
The fair value of long-term investments may be adjusted if:
·
There has been a significant subsequent equity financing provided by outside investors at a valuation different than the current value of the investee company, in which case the fair value of the investment is set to the value at which that financing took place;
·
There have been significant corporate, political, or operating events affecting the investee company that, in management’s opinion, have a material impact on the investee company’s prospects and therefore its fair value. In these circumstances, the adjustment to the fair value of the investment will be based on management’s judgment and any value estimated may not be realized or realizable;
·
The investee company is placed into receivership or bankruptcy;
·
Based on financial information received from the investee company, it is apparent to the Company that the investee company is unlikely to be able to continue as a going concern;
·
Important positive/negative management changes by the investee company that the Company’s management believes will have a positive/negative impact on the investee company’s ability to achieve its objectives and build value for shareholders.
Adjustment to the fair value of a long-term investment will be based upon management’s judgment and any value estimated may not be realized or realizable. The resulting values for non-publicly traded investments may differ from values that would be realized if a ready market existed.
16
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
Biological assets and inventory
Management is required to make a number of estimates in calculating the fair value less costs to sell of biological assets and harvested cannabis inventory. These estimates include a number of assumptions such as estimating the stage of growth of the cannabis, harvesting costs, sales price, and expected yields.
Estimated useful lives, impairment considerations and amortization of capital and intangible assets
Amortization of capital and intangible assets is dependent upon estimates of useful lives based on management’s judgment.
Goodwill and indefinite life intangible asset impairment testing requires management to make critical estimates in the impairment testing model. On an annual basis, the Company tests whether goodwill and indefinite life intangible assets are impaired.
Impairment of definite long-lived assets is influenced by judgment in defining a CGU and determining the indicators of impairment, and estimates used to measure impairment losses
The recoverable value of goodwill, indefinite and definite long-lived assets is determined using discounted future cash flow models, which incorporate assumptions regarding future events, specifically future cash flows, growth rates and discount rates.
Share-based compensation
The fair value of share-based compensation expenses are estimated using the Black-Scholes option pricing model and rely on a number of estimates, such as the expected life of the option, the volatility of the underlying share price, the risk free rate of return, and the estimated rate of forfeiture of options granted.
p.
New standards and interpretations issued but not yet adopted
A number of new standards, amendments to standards and interpretations are not yet effective for the year ended May 31, 2017 and have not been applied in preparing these consolidated financial statements:
IFRS 9 - Financial Instruments: Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS9 on its consolidated financial statements based on its positions at May 31, 2017, which are discussed below.
Classification and measurement
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS9 largely retains the existing requirements in IAS39 for the classification of financial liabilities. Based on its preliminary assessment, the Company does not believe that the new classification requirements will have a significant impact on its consolidated financial statements.
Impairment
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortized cost or those
17
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
measured at fair value through other comprehensive income, except for investments in equity instruments, and to contract assets. The Company is currently assessing the impact of this change on its consolidated financial statements and is continuing to assess the impact of the ECL model on its other financial assets.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.
The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.
IFRS 15 - Revenue from Contracts with Customers, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard on its investees with a focus on consulting contracts and royalty fees.
The Company is still considering the impact on its customer loyalty programme, which is currently under consideration. The new standard will require that the total consideration received be allocated to the points and goods based on relative stand-alone selling prices rather than based on the residual method.
The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.
IFRS 16 — Leases, in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of income and comprehensive income to improve clarity.
4.
Disclosure of business transaction
Effective January 13, 2016, Aphria acquired 100% of the issued and outstanding shares of CannWay Pharmaceuticals Inc. (“CannWay”). CannWay provides support services to veteran and first responders in the form of medical consultations, group therapy, and rehabilitation.
Pursuant to the acquisition, Aphria issued 3,600,000 common shares at $1.23 per share to the former shareholders of CannWay, of which 1,800,000 shares are being held in escrow and will be either (i) released to
18
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
the former shareholders of CannWay, based on the achievement of certain operating metrics or (ii) released to the Company for cancellation, if the operating metrics are not achieved by December 31, 2018.
The shares held in escrow are recorded as equity and will be continuously evaluated and adjusted based on the probability of the operating metrics being achieved, as of May 31, 2017 management expects 0% of the remaining milestones to be achieved by December 31, 2018.
Purchase price allocation was as follows:
|
Net tangible assets acquired
|
|
$
|
—
|
|
|
Intangible asset — CannWay brand
|
|
4,428,000
|
|
|
Goodwill
|
|
1,200,000
|
|
|
Deferred tax liability
|
|
(1,200,000
|
)
|
|
Total purchase price recorded
|
|
$
|
4,428,000
|
|
|
|
|
|
|
|
|
Net tangible assets acquired included the following:
|
Cash held in trust to fund liabilities outstanding at closing
|
|
$
|
269,717
|
|
|
Accounts receivable
|
|
91,872
|
|
|
Accounts payable
|
|
(219,505
|
)
|
|
HST payable
|
|
(58,107
|
)
|
|
Income taxes payable
|
|
(83,977
|
)
|
|
Net tangible assets acquired
|
|
$
|
—
|
|
The CannWay brand was originally being amortized, beginning January 2016, over 10 years on a straight-line basis. Subsequent to an impairment adjustment applied in February 2017, management revised its estimate for the remaining useful life and is amortizing the brand over 15 months from date of impairment on a straight-line basis.
Goodwill arose in the acquisition of the CannWay brand because the cost of the acquisition reflected revenue growth and the future market development of the brand. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill arising on the acquisition is expected to be deductible for tax purposes.
Acquisition costs of $10,375 have been expensed in the prior year under General and administrative. Costs of issuing equity of $85,384 were applied against the fair value of the equity issued at the time of the acquisition.
5.
Reverse acquisition
In December 2015, the Company completed its proposed transaction between Black Sparrow and PNW as previously disclosed in July 2015. PNW amalgamated with a new and direct wholly-owned subsidiary of Black Sparrow to become a direct, wholly-owned subsidiary of Black Sparrow. Black Sparrow changed its name to Aphria Inc. and remained as the resulting issuer. The transaction constituted the qualifying transaction of Black Sparrow under the policies of the TSX-V.
Immediately prior to the completion of the transaction, Black Sparrow consolidated its issued and outstanding common shares on the basis of one post-consolidation common share for each ten pre-consolidation common shares held. By way of a three-cornered amalgamation, Black Sparrow acquired all of the issued and outstanding shares of PNW by issuing one post-consolidation share for each PNW common share held. Each of the stock options and warrants to purchase common shares of PNW thereafter was exercisable for one post-consolidation common share of Aphria Inc.
19
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
This transaction has been accounted for as a reverse acquisition that does not constitute a business combination. For accounting purposes, the legal subsidiary, PNW, has been treated as the acquirer and Black Sparrow, the legal parent, has been treated as the acquiree.
|
Consideration Transferred (2,300,000 shares at a price of $1.10 per share)
|
|
$
|
2,530,000
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,188
|
|
|
Other receivables
|
|
16,358
|
|
|
Accounts payable and accrued liabilities
|
|
(33,566
|
)
|
|
|
|
61,980
|
|
|
Excess attributed to cost of listing
|
|
2,468,020
|
|
|
|
|
$
|
2,530,000
|
|
|
|
|
|
|
|
Listing cost:
|
|
|
|
|
Excess attributed to cost of listing
|
|
$
|
2,468,020
|
|
|
Legal
|
|
570,034
|
|
|
Professional, consulting and other fees
|
|
240,014
|
|
|
|
|
$
|
3,278,068
|
|
|
|
|
|
|
|
|
For accounting purposes, these consolidated financial statements reflect a continuation of the financial position, operating results and cash flows of the Company’s legal subsidiary, PNW.
6. Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the twelve months ended May 31
|
|
|
|
|
2017
|
|
2016
|
|
|
Income (loss) before income taxes
|
|
$
|
4,332,217
|
|
$
|
(802,039
|
)
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Expected income tax expense (recovery) at combined basic federal and provincial tax rate
|
|
1,148,037
|
|
(212,540
|
)
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Permanent differences
|
|
—
|
|
(101,560
|
)
|
|
Business combination
|
|
—
|
|
1,200,000
|
|
|
Non-deductible share-based compensation and other expenses
|
|
658,759
|
|
—
|
|
|
Non-taxable portion of gains
|
|
(533,658
|
)
|
—
|
|
|
Utilization of tax attributes not previously recognized
|
|
(876,608
|
)
|
(1,331,062
|
)
|
|
Deductible share issuance costs
|
|
(285,953
|
)
|
—
|
|
|
Other
|
|
22,916
|
|
—
|
|
|
Tax assets not recognized
|
|
269
|
|
(754,838
|
)
|
|
|
|
$
|
133,762
|
|
$
|
(1,200,000
|
)
|
20
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
Deferred income tax assets and liabilities have not been recognized in respect of the following deductible temporary differences:
|
|
|
For the year ended May 31
|
|
|
|
|
2017
|
|
2016
|
|
|
Non-capital loss carry forward
|
|
$
|
—
|
|
$
|
785,964
|
|
|
Undepreciated capital cost in excess of net book value
|
|
—
|
|
183,157
|
|
|
Cumulative eligible capital
|
|
—
|
|
695,356
|
|
|
Deductible share issuance costs to be claimed
|
|
$
|
—
|
|
$
|
1,968,361
|
|
The following table summarizes the components of deferred tax:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
1,312,849
|
|
$
|
1,171,189
|
|
|
Capital loss carryforward
|
|
380,362
|
|
—
|
|
|
Share issuance and financing fees
|
|
3,448,332
|
|
—
|
|
|
Undepreciated capital cost in excess of net book value
|
|
—
|
|
159,873
|
|
|
Other
|
|
34,138
|
|
—
|
|
|
Deferred tax liabilities
|
|
|
|
—
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(164,027
|
)
|
—
|
|
|
Intangible assets in excess of tax costs
|
|
(193,890
|
)
|
(1,124,528
|
)
|
|
Unrealized gain
|
|
(914,019
|
)
|
—
|
|
|
Biological assets and inventory in excess of tax costs
|
|
(589,175
|
)
|
(206,534
|
)
|
|
Net deferred tax assets
|
|
$
|
3,314,570
|
|
$
|
—
|
|
Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset. Movement in net deferred tax assets (liabilities) during the year:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Balance at beginning of year
|
|
$
|
—
|
|
$
|
—
|
|
|
Recognized in net income
|
|
(133,762
|
)
|
1,200,000
|
|
|
Recognized in goodwill
|
|
—
|
|
(1,200,000
|
)
|
|
Recognized in equity
|
|
3,448,332
|
|
—
|
|
|
Other
|
|
—
|
|
—
|
|
|
Balance at end of year
|
|
$
|
3,314,570
|
|
$
|
—
|
|
The Company has non-capital losses available for deduction against taxable income that expire as follows:
|
|
|
Fiscal year ending May 31,
|
|
|
2031
|
|
$
|
1,284
|
|
|
2032
|
|
74,702
|
|
|
2033
|
|
67,880
|
|
|
2034
|
|
81,588
|
|
|
2035
|
|
399,860
|
|
|
2036
|
|
793,742
|
|
|
2037
|
|
3,535,092
|
|
|
|
|
$
|
4,954,148
|
|
21
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
7.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating
|
|
|
|
|
|
|
|
|
|
|
|
|
at
|
|
Effective
|
|
Maturity
|
|
May 31,
|
|
May 31,
|
|
|
|
|
purchase
|
|
interest rate
|
|
date
|
|
2017
|
|
2016
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.320
|
%
|
12/19/17
|
|
1,988,184
|
|
—
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
08/02/18
|
|
1,036,613
|
|
—
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
06/14/19
|
|
5,206,828
|
|
—
|
|
|
Goldman Sachs
|
|
A
|
|
3.375
|
%
|
02/01/18
|
|
5,078,194
|
|
—
|
|
|
Canadian Western Bank
|
|
A-
|
|
2.531
|
%
|
03/22/18
|
|
3,038,997
|
|
—
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
2.770
|
%
|
12/11/18
|
|
5,179,711
|
|
—
|
|
|
Sobeys Inc.
|
|
BBB-
|
|
3.520
|
%
|
08/08/18
|
|
3,078,141
|
|
—
|
|
|
Molson Coors Brewing Company
|
|
BBB-
|
|
3.950
|
%
|
10/06/17
|
|
1,116,524
|
|
—
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
01/14/19
|
|
1,534,717
|
|
—
|
|
|
Sunlife Financial
|
|
A-
|
|
2.770
|
%
|
05/13/19
|
|
3,063,816
|
|
—
|
|
|
Canadian Natural Resources Limited
|
|
BBB+
|
|
3.050
|
%
|
06/19/19
|
|
2,053,607
|
|
—
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,027,752
|
|
—
|
|
|
Laurentian Bank
|
|
BBB
|
|
2.500
|
%
|
01/23/20
|
|
6,098,888
|
|
—
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
02/03/20
|
|
4,007,550
|
|
—
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
03/09/20
|
|
5,394,630
|
|
—
|
|
|
Central 1 Credit Union
|
|
A+
|
|
1.870
|
%
|
03/16/20
|
|
5,020,565
|
|
—
|
|
|
Choice Property REIT
|
|
BBB
|
|
3.600
|
%
|
04/20/20
|
|
5,236,870
|
|
—
|
|
|
Penske Truck Leasing Co., L.P.
|
|
BBB
|
|
2.950
|
%
|
06/12/20
|
|
5,145,483
|
|
—
|
|
|
Westcoast Energy Inc.
|
|
BBB
|
|
4.570
|
%
|
07/02/20
|
|
5,429,820
|
|
—
|
|
|
The Manufacturer’s Life Insurance Company
|
|
AA-
|
|
2.819
|
%
|
02/26/18
|
|
1,471,818
|
|
—
|
|
|
Bank of Montreal (USD)
|
|
A+
|
|
1.400
|
%
|
04/10/18
|
|
4,051,775
|
|
—
|
|
|
Citigroup Inc. (USD)
|
|
BBB
|
|
2.050
|
%
|
12/17/18
|
|
4,081,546
|
|
—
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
04/15/19
|
|
4,039,998
|
|
—
|
|
|
Wells Fargo & Company (USD)
|
|
A
|
|
2.150
|
%
|
01/30/17
|
|
3,964,760
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
87,346,787
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of marketable securities as at May 31, 2017 was $87,138,224 (2016
—
$nil). During the year, the company divested of $22,130,525 (2016 - $nil) of marketable securities in its Canadian portfolio, converted the proceeds to United States dollars and then re-invested the United States dollars in its U.S. portfolio.
8.
Other receivables
Other receivables are comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
HST receivable (payable)
|
|
$
|
3,675,188
|
|
$
|
(35,909
|
)
|
|
Accrued interest
|
|
700,827
|
|
98,197
|
|
|
Credit card receivable
|
|
103,004
|
|
64,621
|
|
|
Other
|
|
32,620
|
|
43
|
|
|
|
|
$
|
4,511,639
|
|
$
|
126,952
|
|
22
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
9.
Inventory
Inventory is comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Harvested cannabis
|
|
$
|
2,506,963
|
|
$
|
1,714,897
|
|
|
Harvested trim
|
|
420,322
|
|
—
|
|
|
Cannabis oil
|
|
682,056
|
|
165,060
|
|
|
Packaging and supplies
|
|
277,266
|
|
208,893
|
|
|
|
|
$
|
3,886,607
|
|
$
|
2,088,850
|
|
Cost of inventory is recognized as an expense and included in cost of sales. Included in costs of sales for the year ended May 31, 2017 is $99,252 of cannabis oil conversion costs and $58,176 related to the cost of accessories.
The Company holds 668.5 kilograms of harvested cannabis (2016
—
457.3 kgs), 140.1 kilograms of harvested trim (2016
—
nil kgs) and 1,091.3 litres of cannabis oils or 181.9 kilograms equivalent (2016
—
264.1 litres or 44.1 kilograms equivalent), at May 31, 2017.
10.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance as at May 31, 2016
|
|
$
|
697,997
|
|
|
Cost incurred until harvest
|
|
4,188,319
|
|
|
Effect of unrealized changes in fair value of biological assets
|
|
5,004,615
|
|
|
Transferred to inventory upon harvest
|
|
(8,415,957
|
)
|
|
Transferred to capital assets
|
|
(112,225
|
)
|
|
Balance as at May 31, 2017
|
|
$
|
1,362,749
|
|
Net effect of changes in fair value of biological assets and inventory include:
|
|
|
Amount
|
|
|
Unrealized change in fair value of biological assets
|
|
$
|
(5,004,615
|
)
|
|
Realized fair value increments on inventory sold in the year
|
|
3,560,690
|
|
|
|
|
$
|
(1,443,925
|
)
|
The Company values medical cannabis plants at cost from the date of initial clipping from mother plants until the end of the twelfth week of its growing cycle. Measurement of the biological asset at fair value less costs to sell and costs to complete begins at the thirteenth week until harvest. The Company has determined the fair value less costs to sell of harvested cannabis to be $3.75 a gram. The Company has determined the fair value less costs to sell of its collected trim to be $3.00 a gram, upon harvest.
The net effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of inventory of $1,443,925 during the year ended May 31, 2017 (2016
—
decrease of $4,646). In determining the fair value of biological assets, management is required to make several estimates, including: the expected cost required to grow the cannabis up to the point of harvest; harvesting costs; selling costs; sales price; and, expected yields for the cannabis plant. All of which represent Level 3 on the fair value hierarchy. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
23
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
11.
Related party transactions
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. The balance owing to related parties as at May 31, 2017 was $nil (May 31, 2016 - $nil). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the twelve months ended May 31, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totalling $387,892 (2016 - $1,139,788). Included in this amount was rent of $49,389 charged during the twelve months ended May 31, 2017 (2016 - $193,593).
The Company funded the start-up costs and operations of DFMMJ Investments, Ltd., a related party through an equity investment. The balance owing from the related party as at May 31, 2017 was $463,916 (May 31, 2016 — $nil).
|
|
|
Amount
|
|
|
Balance as at May 31, 2016
|
|
$
|
—
|
|
|
Related party charges in year
|
|
387,892
|
|
|
Payments to related parties in year
|
|
(387,892
|
)
|
|
Payments made on behalf of related parties in year
|
|
(463,916
|
)
|
|
Balance due to (from) related parties as at May 31, 2017
|
|
$
|
(463,916
|
)
|
During the year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6.1 million. The purchase price was allocated as follows: (i) $1.3 million to land; (ii) $3.55 million to greenhouse infrastructure; and, (iii) $1.25 million to licenses and permits
—
intangible assets.
Key management personnel compensation was comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Salaries
|
|
$
|
828,924
|
|
$
|
752,337
|
|
|
Short-term employment benefits (included in office and general)
|
|
84,176
|
|
31,846
|
|
|
Share-based compensation
|
|
594,400
|
|
247,574
|
|
|
|
|
$
|
1,507,500
|
|
$
|
1,031,757
|
|
Directors and officers of the Company control 13.7% or 19,017,866 of the voting shares of the Company.
24
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
12.
Promissory notes receivable
|
|
|
May 31, 2016
|
|
Additions
|
|
Payments
|
|
May 31, 2017
|
|
|
Note receivable - $100,000, bearing interest at prime + 3%, one-year term, collected during the year
|
|
$
|
93,039
|
|
$
|
—
|
|
$
|
93,039
|
|
$
|
—
|
|
|
Note receivable - $500,000, bearing interest at 3%, repayable in 24 equal blended monthly instalments, collected during the Year
|
|
274,549
|
|
—
|
|
274,549
|
|
—
|
|
|
Note receivable - $100,000, non-interest bearing, one-year term, collected during the Year
|
|
100,000
|
|
—
|
|
100,000
|
|
—
|
|
|
Note receivable - $100,000, non-interest, one-year term, collected during the year
|
|
100,000
|
|
—
|
|
100,000
|
|
—
|
|
|
|
|
$
|
567,588
|
|
$
|
—
|
|
$
|
567,588
|
|
$
|
—
|
|
13.
Capital assets
|
|
|
|
|
Greenhouse
|
|
Bearer
|
|
|
|
Leasehold
|
|
Construction
|
|
Total capital
|
|
|
|
|
Land
|
|
infrastructure
|
|
plants
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,450,011
|
|
$
|
2,231,612
|
|
$
|
304,701
|
|
$
|
3,986,324
|
|
|
Additions
|
|
—
|
|
—
|
|
—
|
|
1,051,980
|
|
221,204
|
|
3,152,875
|
|
4,426,059
|
|
|
Transfers
|
|
—
|
|
—
|
|
—
|
|
1,033,433
|
|
2,359,337
|
|
(3,392,770
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(35,896
|
)
|
—
|
|
—
|
|
(35,896
|
)
|
|
At May 31, 2016
|
|
—
|
|
—
|
|
—
|
|
3,499,528
|
|
4,812,153
|
|
64,806
|
|
8,376,487
|
|
|
Additions
|
|
10,724,551
|
|
4,018,080
|
|
112,225
|
|
1,699,989
|
|
16,129
|
|
49,957,556
|
|
66,528,530
|
|
|
Transfers
|
|
104,283
|
|
12,151,836
|
|
—
|
|
173,834
|
|
(4,565,987
|
)
|
(7,863,966
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(66,613
|
)
|
(32,823
|
)
|
—
|
|
—
|
|
(99,436
|
)
|
|
At May 31, 2017
|
|
$
|
10,828,834
|
|
$
|
16,169,916
|
|
$
|
45,612
|
|
$
|
5,340,528
|
|
$
|
262,295
|
|
$
|
42,158,396
|
|
$
|
74,805,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
172,860
|
|
$
|
187,303
|
|
—
|
|
$
|
360,163
|
|
|
Amortization
|
|
—
|
|
—
|
|
—
|
|
387,992
|
|
325,563
|
|
—
|
|
713,555
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(6,451
|
)
|
|
|
—
|
|
(6,451
|
)
|
|
At May 31, 2016
|
|
—
|
|
—
|
|
—
|
|
554,401
|
|
512,866
|
|
—
|
|
1,067,267
|
|
|
Amortization
|
|
—
|
|
457,891
|
|
—
|
|
717,207
|
|
74,435
|
|
—
|
|
1,249,533
|
|
|
Transfers
|
|
—
|
|
524,749
|
|
—
|
|
—
|
|
(524,749
|
)
|
—
|
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(11,367
|
)
|
—
|
|
—
|
|
(11,367
|
)
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
982,640
|
|
$
|
—
|
|
$
|
1,260,241
|
|
$
|
62,552
|
|
$
|
—
|
|
$
|
2,305,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
—
|
|
—
|
|
—
|
|
$
|
1,277,151
|
|
$
|
2,044,309
|
|
$
|
304,701
|
|
$
|
3,626,161
|
|
|
At May 31, 2016
|
|
—
|
|
—
|
|
—
|
|
$
|
2,945,127
|
|
$
|
4,299,287
|
|
$
|
64,806
|
|
$
|
7,309,220
|
|
|
At May 31, 2017
|
|
$
|
10,828,834
|
|
$
|
15,187,276
|
|
$
|
45,612
|
|
$
|
4,080,287
|
|
$
|
199,743
|
|
$
|
42,158,396
|
|
$
|
72,500,148
|
|
Included in cost of goods sold is $66,613 of expense related to the disposition and usage of bearer plants.
During the year, the Company disposed of capital assets with a net book value of $21,456 for proceeds of $32,823.
25
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
14.
Intangible assets
|
|
|
|
|
|
|
Tokyo Smoke
|
|
|
|
Total
|
|
|
|
|
Corporate
|
|
Licenses &
|
|
licensing
|
|
CannWay
|
|
intangible
|
|
|
|
|
Website
|
|
permits
|
|
agreement
|
|
brand
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
$
|
107,995
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
107,995
|
|
|
Additions
|
|
53,705
|
|
—
|
|
—
|
|
4,428,000
|
|
4,481,705
|
|
|
At May 31, 2016
|
|
161,700
|
|
—
|
|
—
|
|
4,428,000
|
|
4,589,700
|
|
|
Additions
|
|
56,120
|
|
1,250,000
|
|
459,480
|
|
—
|
|
1,765,600
|
|
|
At May 31, 2017
|
|
$
|
217,820
|
|
$
|
1,250,000
|
|
$
|
459,480
|
|
$
|
4,428,000
|
|
$
|
6,355,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
$
|
33,397
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33,397
|
|
|
Additions
|
|
54,123
|
|
—
|
|
—
|
|
184,500
|
|
238,623
|
|
|
At May 31, 2016
|
|
87,520
|
|
—
|
|
—
|
|
184,500
|
|
272,020
|
|
|
Additions
|
|
67,845
|
|
152,879
|
|
56,939
|
|
414,380
|
|
692,043
|
|
|
Impairment
|
|
—
|
|
—
|
|
—
|
|
3,500,000
|
|
3,500,000
|
|
|
At May 31, 2017
|
|
$
|
155,365
|
|
$
|
152,879
|
|
$
|
56,939
|
|
$
|
4,098,880
|
|
$
|
4,464,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2015
|
|
$
|
74,598
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
74,598
|
|
|
At May 31, 2016
|
|
$
|
74,180
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,243,500
|
|
$
|
4,317,680
|
|
|
At May 31, 2017
|
|
$
|
62,455
|
|
$
|
1,097,121
|
|
$
|
402,541
|
|
$
|
329,120
|
|
$
|
1,891,237
|
|
The Company valued the purchase price for the Tokyo Smoke license agreement based on the fair value of the shares (note 21) and warrants (note 22) issued as part of the transaction.
In February 2017, the Company recorded an impairment of its intangible asset for the CannWay brand following the changes to reimbursement allowances for veterans, as announced by Veterans Affairs Canada (“VAC”). The changes announced by VAC lowered the reimbursement amount to $8.50 per gram and effective May 26, 2017, limited individual patients usage to 3.0 grams per day. Subsequent to its impairment test management concluded a write-down of $3,500,000 be applied to the value of the CannWay brand, and has reflected this on the statement of income and comprehensive income. In quantifying the impairment, the Company compared the carrying value as at the measurement date to its recoverable amount. The Company calculated its recoverable amount using the discounted cash flow technique, forecasting future sales attributable to the CannWay patient base over the remaining useful life based on the revised cap on VAC reimbursement policies combined with our current cost structure, net present valuing the result using a 15% discount rate.
15.
Convertible note receivable
|
|
|
Notes receivable
|
|
Embedded derivative
|
|
|
|
|
May 31, 2017
|
|
May 31, 2016
|
|
May 31, 2017
|
|
May 31, 2016
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,360,548
|
|
$
|
—
|
|
$
|
173,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
On October 19, 2016, Aphria loaned $1,500,000 to CannaRoyalty Corp. (“CR”) as a convertible debenture. The convertible debenture bears interest at 5%, paid annually, matures in three years and includes the right to convert the debenture into common shares of CR at $2.00 per common share at any time before maturity. CR maintains the option of forced conversion of the convertible debenture if the common shares of CR trade on a stock exchange at a value of $4.00 or more.
26
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. This derivative asset is initially recognized by comparing a similar instrument without the conversion option and discounting the fair value of the host contract with the non-convertible instrument interest rate. The fair value of the derivative asset related to the convertible note is $173,000 at May 31, 2017.
As at May 31, 2017, the convertible note receivable totalled $1,533,548.
16.
Interest in equity accounted investee
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Associated company
|
|
|
|
|
|
|
DFMMJ Investments, Ltd.
|
|
$
|
28,376,092
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
DFMMJ Investments, Ltd.
On April 5, 2017 Aphria announced a strategic investment in DFMMJ Investments, Ltd. (“DFMMJ”), where DFMMJ, through a subsidiary, acquired all or substantially all of the assets of Chestnut Hill Tree Farm LLC (“Chestnut”) and will subsequently amalgamate into a subsidiary of SecureCom Mobile Inc., as part of a business combination. As part of the steps involved in the business combination, Aphria first exchanged rights to use its intellectual property, Aphria’s Know-How System (“System”) to DFMMJ as part of a licensing agreement in exchange for common shares, where through an arm’s length negotiation, the parties determined a value of $5,000,000 for the licensed use of the System. As a result of this in-kind transaction Aphria was issued 192,400,000 common shares in DFMMJ. Aphria is deemed to have significant influence over DFMMJ due to its resulting equity interest (44.2%), whereby the investment is valued under the equity method. For accounting purposes, the Company recorded the transaction at $2,800,000, representing its non-owned interest in the equity accounted investee.
DFMMJ and its board of directors elected to use April 30
th
as its year-end date. for the reporting period ended April 30, 2017 DFMMJ reported net earnings of $478,200 for its fiscal period. In accordance with the equity method, Aphria recorded income of $210,400 from its investee relative to its ownership of the outstanding common shares at the time. As of April 30, 2017, DFMMJ has incurred no major capital spending, has no contingent liabilities and has yet to begin commercial activity. On May 24, 2017, DFMMJ completed its proposed transaction with Chestnut at a cost of $40,000,000 USD ($54,168,620 Cdn).
The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements. The table also reconciles the summarized financial information to the carrying amount of the Company’s interest as at May 31, 2017:
|
|
|
April 30,
|
|
April 30,
|
|
|
|
|
2017
|
|
2016
|
|
|
Current assets
|
|
$
|
5,723,960
|
|
$
|
—
|
|
|
Non-current assets
|
|
5,000,000
|
|
—
|
|
|
Net assets
|
|
10,723,960
|
|
—
|
|
|
|
|
|
|
|
|
|
|
27
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Reconciliation to carrying amount
|
|
|
|
|
|
|
Opening net assets June 1, 2016
|
|
—
|
|
—
|
|
|
Intangible asset contributed
|
|
5,000,000
|
|
—
|
|
|
Cash contributions
|
|
792,600
|
|
—
|
|
|
Cash contributions on May 24, 2017
|
|
50,167,600
|
|
—
|
|
|
Profit for the period ended April 30
th
|
|
478,200
|
|
—
|
|
|
Closing net assets
|
|
56,438,400
|
|
—
|
|
|
|
|
|
|
|
|
|
Company’s share in
%
|
|
46.1
|
%
|
|
|
|
Company’s share of net assets
|
|
$
|
26,018,102
|
|
$
|
—
|
|
|
Fair value adjustment due to profit elimination
|
|
(2,200,000
|
)
|
—
|
|
|
Goodwill
|
|
4,557,990
|
|
—
|
|
|
Carrying amount of interest in associate
|
|
$
|
28,376,092
|
|
$
|
—
|
|
On May 24, 2017, the Company released $25,311,794, comprised of $625,000 Cdn and $18,340,857 USD, which itself was comprised of $24,375,000 Cdn converted into USD in March 2017 as required in the business combination agreement ($24,686,794 Cdn), from escrow to DFMMJ, after satisfaction of the escrow release conditions. In addition, the Company incurred $53,898 of transaction fees related to the investment. In exchange, the Company received 120,192,308 common shares of DFMMJ. Concurrently, DFMMJ issued a further 120,192,308 common shares to third parties in exchange for $25,000,000 Cdn in cash. As a result of these transactions, the Company owns 312,592,308 common shares in DFMMJ, representing approximately 46.1% of DFMMJ’s issued and outstanding common shares.
Based on the most recent financing transaction share price, the DFMMJ shares held by Aphria have a fair value of approximately $65,000,000.
17. Long-term investments
|
|
|
Cost and
fair value
May 31,
2016
|
|
Investment
|
|
Divestiture
(cost)
|
|
|
Cost
May 31, 2017
|
|
Cumulative
change in fair
value
|
|
Fair value
May 31, 2017
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,510,200
|
|
$
|
1,625,000
|
|
$
|
(1,755,712
|
)
|
|
$
|
1,379,488
|
|
$
|
413,512
|
|
$
|
1,793,000
|
|
|
Kalytera Therapeutics, Inc.
|
|
—
|
|
3,014,320
|
|
—
|
|
|
3,014,320
|
|
(1,903,360
|
)
|
1,110,960
|
|
|
MassRoots, Inc.
|
|
—
|
|
945,000
|
|
(436,575
|
)
|
|
508,425
|
|
53,850
|
|
562,275
|
|
|
SecureCom Mobile Inc.
|
|
—
|
|
520,000
|
|
—
|
|
|
520,000
|
|
1,144,000
|
|
1,664,000
|
|
|
Tetra Bio-Pharma Inc.
|
|
—
|
|
2,300,000
|
|
—
|
|
|
2,300,000
|
|
7,200,000
|
|
9,500,000
|
|
|
Canabo Medical Inc.
|
|
—
|
|
8,854,033
|
|
(7,694,607
|
)
|
|
1,159,426
|
|
(843,426
|
)
|
316,000
|
|
|
|
|
$
|
1,510,200
|
|
$
|
17,258,353
|
|
$
|
(9,886,894
|
)
|
|
$
|
8,881,659
|
|
$
|
6,064,576
|
|
$
|
14,946,235
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ample Organics Inc.
|
|
$
|
50,000
|
|
$
|
—
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Copperstate Farms, LLC
|
|
—
|
|
1,755,000
|
|
—
|
|
|
1,755,000
|
|
—
|
|
1,755,000
|
|
|
Copperstate Farm Investors, LLC
|
|
—
|
|
7,538,940
|
|
—
|
|
|
7,538,940
|
|
21,060
|
|
7,560,000
|
|
|
Resolve Digital Health Inc.
|
|
—
|
|
718,000
|
|
—
|
|
|
718,000
|
|
282,012
|
|
1,000,012
|
|
|
Resolve Digital Health Inc.
|
|
—
|
|
282,000
|
|
—
|
|
|
282,000
|
|
(40,000
|
)
|
242,000
|
|
|
Green Acre Capital Fund
|
|
—
|
|
300,000
|
|
—
|
|
|
300,000
|
|
(15,669
|
)
|
284,331
|
|
|
Scythian Biosciences Inc.
|
|
—
|
|
2,000,000
|
|
—
|
|
|
2,000,000
|
|
—
|
|
2,000,000
|
|
|
|
|
$
|
50,000
|
|
$
|
12,593,940
|
|
$
|
(50,000
|
)
|
|
$
|
12,593,940
|
|
$
|
247,403
|
|
$
|
12,841,343
|
|
|
|
|
$
|
1,560,200
|
|
$
|
29,852,293
|
|
$
|
(9,936,894
|
)
|
|
$
|
21,475,599
|
|
$
|
6,311,979
|
|
$
|
27,787,578
|
|
28
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
At year end, the Company has concluded that the fair value and carrying value of the Level 3 investments are equal to the most recent financing transactions, which represent the best proxy for fair value. The fair value attached to warrants in both Level 1 and Level 3 were determined using the Black-Scholes option pricing model.
CannaRoyalty Corp.
On September 9, 2016, Aphria exercised 750,000 warrants, issued by CR to acquire 750,000 common shares of CR for $1,125,000 and subsequently purchased an additional 250,000 common shares of CR for $500,000 on September 27, 2016. In addition, CR licenced, for a five-year period, its Canadian portfolio of cannabis products in exchange for a 5% royalty fee paid by Aphria. In December 2016, Aphria sold 1,300,000 shares for total proceeds of $3,539,050, through three separate transactions, realizing a gain of $1,908,746 on disposal. On May 17, 2017, Aphria sold 100,000 shares for total proceeds of $198,000, realizing a gain of $72,592 on disposal. In summary, during the year the Company sold 1,400,000 common shares for proceeds of $3,737,050, realizing a gain of $1,981,338 on disposal. On May 31, 2017, CR shares closed trading at $1.63. As a result of these transactions, the Company holds 1,100,000 common shares at a cost of $1,379,488, with a fair value of $1,793,000.
Kalytera Therapeutics, Inc.
On November 7, 2016, Aphria entered into a subscription agreement with Kalytera Therapuetics, Inc. (“Kalytera”). The Company purchased 2,500,000 subscription receipts at a price of $0.40 per receipt for a total of $1,000,000. On December 30, 2016, the Company’s subscription receipts converted into common shares of Kalytera on a one-for-one basis. On January 31, 2017, Aphria subscribed for an additional 2,222,000 common shares of Kalytera for a purchase price of $999,900 pursuant to a private placement which closed on February 7, 2017. On February 22, 2017, the Company purchased an additional 1,450,000 common shares of Kalytera in the secondary market at a price of $0.70 per share for a total of $1,014,420. On May 31, 2017, Kalytera shares closed trading at $0.18 per share. As a result of these transactions, the Company owns 6,172,000 common shares in Kalytera for aggregate costs of $3,014,320 and a fair value of $1,110,960.
MassRoots, Inc.
On October 18, 2016, Aphria purchased 500,000 common shares of MassRoots, Inc. (“MassRoots”) for an aggregate purchase price of $250,000 USD ($337,500 Cdn) and received warrants to purchase an additional 500,000 common shares at $0.90 USD per common share, expiring October 17, 2019. Subsequent to October 18, 2016, Aphria divested itself of its 500,000 common shares of MassRoots for total proceeds of $600,599, realizing a gain of $263,099 on disposal. On March 30, 2017, the Company exercised its 500,000 warrants held in MassRoots for the aggregate price of $450,000 USD ($607,500 Cdn) and received an additional 500,000 common shares, subject to a six-month hold under MassRoots long-term incentive plan. During April and May, the Company sold 150,000 common shares for total proceeds of $123,395, realizing a gain of $24,320. In summary, during the year the Company sold 650,000 common shares for proceeds of $723,994, recognizing a gain of $287,419. On May 31, 2017, MassRoots shares closed trading at $0.49 USD ($0.66 Cdn). As a result of these transactions, the Company holds 850,000 shares at a cost of $508,425 with a fair value of $562,275.
SecureCom Mobile Inc.
On November 23, 2016, Aphria invested $200,000 in SecureCom Mobile Inc. (“SecureCom”) via an unsecured convertible debenture. The debenture bore interest at 12% and was convertible into equity at $0.05 per share, and included the right to a warrant for each share of equity on conversion, priced at $0.08. The warrant expired on December 1, 2019 and the conversion right expired November 20, 2018. On March 31, 2017, the Company exercised its conversion rights under the debenture and received 4,000,000 shares and 4,000,000 warrants priced at $0.08. Concurrently, the Company exercised its warrants at a cost of $320,000 and received an additional 4,000,000 shares. On May 31, 2017, SecureCom shares last traded at $0.46, however they were considered to have a fair value of $0.208 per share based on the DFMMJ and SecureCom business combination agreement.
29
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
As a result of these transactions, Aphria owns 8,000,000 shares in SecureCom at a cost of $520,000 with a fair value of $1,664,000.
Tetra Bio-Pharma Inc.
On December 6, 2016, Aphria purchased 5,000,000 common shares of Tetra Bio-Pharma Inc. (“TBP”) at a price of $0.20 per share for an aggregate purchase price of $1,000,000, pursuant to a private placement. As part of the transaction, Aphria also received 5,000,000 warrants, each for conversion into one common share, at a price of $0.26 per warrant for a period of three years. The warrants were subject to an accelerated expiry if TBP’s shares traded above $0.45 for 30 consecutive trading days at which time the warrants became subject to a 30-day expiry period if not exercised. On March 20, 2017, the Company exercised its 5,000,000 warrants held in TBP for the aggregate price of $1,300,000. On May 31, 2017, TBP shares closed trading at $0.95 per share. As a result of these transactions, the Company owns 10,000,000 common shares at a cost of $2,300,000, with a fair value of $9,500,000.
Canabo Medical Inc.
On December 23, 2016, Aphria purchased 6,000,000 common shares of Canabo Medical Inc. at a price of $1.40 per common share for an aggregate price of $8,483,333, including issuance costs, pursuant to a private placement. On March 9, 2017, the Company sold 500,000 shares held in Canabo Medical Inc. for net proceeds of approximately $340,000, realizing a loss of $360,000, which were subject to a mandatory 4-month holding period, expiring April 23, 2017. The Company purchased 500,000 shares on March 13, 2017 for an aggregate purchase price of $370,700. In May 2017, the Company sold 5,200,000 shares held in Canabo Medical Inc. for net proceeds of approximately $2,345,000, realizing a loss of $4,649,607 on disposal. On May 31, 2017, Canabo Medical Inc. closed trading at $0.40 per share. As a result of these transactions, the Company owns 800,000 common shares with a cost of $1,159,426 and a fair value of $316,000.
Ample Organics Inc.
On May 31, 2017, Aphria received proceeds of $50,000 from Ample Organics Inc., the same amount as its initial investment.
Copperstate Farms
On October 27, 2016, Aphria entered into an intellectual property (“IP”) transfer agreement with Copperstate Farms, LLC (“Copperstate”). Under the terms of the agreement, Aphria licensed its IP to Copperstate in exchange for 5,000 membership units in Copperstate through a consulting agreement which will be used to forgive payments otherwise owing on a $1,300,000 USD ($1,755,000 Cdn) promissory note in eight equal quarterly installments beginning in February 2017. On the same date, Aphria made a direct cash contribution of $1,300,000 UDS ($1,755,000 Cdn) to Copperstate Farms Investors, LLC, the parent company of Copperstate, in return for 2,600 membership units. On December 20, 2016, Aphria made a further investment of $1,300,000 USD ($1,733,940 Cdn) in Copperstate Farms Investors, LLC for 2,600 membership units. On March 27, 2017, the Company purchased an additional 6,000 additional membership units for $3,000,000 USD ($4,050,000 Cdn). The Company has determined that due to a current open membership unit offering at the same price, the Company’s carrying value and fair value are equal. As a result of these transactions, the Company owns 5,000 membership units in Copperstate for total cost of $1,300,000 USD ($1,755,000 Cdn), with a fair value of $1,755,000 and owns 11,200 membership units in Copperstate Farms Investors, LLC for a total cost of $5,600,000 USD ($7,538,940 Cdn) with a fair value of $7,560,000.
30
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
Resolve Digital Health Inc.
On December 1, 2016, Aphria purchased 10,432 common shares of Resolve Digital Health Inc. (“Resolve”) and an equivalent number of common share purchase warrants for gross proceeds of $1,000,000. Following a stock split in January 2017, Aphria now owns 2,000,024 common shares and 2,000,024 common share purchase warrants of Resolve, exercisable at $0.65 per warrant at any time for a period expiring five years from the date of issuance. The warrants contain a forced conversion provision if Resolve trades on a public stock exchange at a price of more than $1.30 for a period of at least 30 days. The Company has determined that due to a recent financing at the same price, the Company’s carrying value of the shares is equal to its fair value. The fair value of the warrants have been valued using the Black Scholes model. As a result of these transactions, the Company owns 2,000,024 common shares and 2,000,024 warrants at a total cost of $1,000,000, with a fair value of $1,242,012.
Green Acre Capital Fund
On January 23, 2017, Aphria agreed to invest in Green Acre Capital Fund. In relation to its participation, the Company committed $2,000,000 to the expected $30,000,000 fund and as of the balance sheet date has invested $300,000. At May 31, 2017, the Company determined that the fair value of its investment was $284,331.
Scythian Biosciences Inc.
On March 17, 2017, the Company entered into a subscription agreement with Scythian Biosciences Inc. The Company purchased 5,000,000 subscription receipts at a price of $0.40 per receipt for a total of $2,000,000. At May 31, 2017, the subscription receipts have yet to converted into common shares.
18.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the end of the year, the Company has not drawn on the line of credit. The operating line of credit is secured by first charge on 265 Talbot St West, Leamington, Ontario, and a first ranking position on a general security agreement.
19.
Promissory note payable
|
|
|
May 31, 2016
|
|
Additions
|
|
Reduction
|
|
May 31, 2017
|
|
|
Note payable to Copperstate Farms, LLC - $1,300,000 USD ($1,755,000), bearing nominal interest, two-year term, repayable in eight quarterly instalments of $162,500 USD in exchange for the provision of consulting services
|
|
$
|
—
|
|
$
|
1,755,000
|
|
$
|
511,875
|
|
$
|
1,243,125
|
|
|
Deduct — principal portion included in current liabilities
|
|
—
|
|
—
|
|
—
|
|
(877,500
|
)
|
|
|
|
$
|
—
|
|
$
|
1,755,000
|
|
$
|
511,875
|
|
$
|
365,625
|
|
31
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
20.
Long-term debt
|
|
|
May 31, 2017
|
|
May 31, 2016
|
|
|
Term loan
—
$25,000,000
—
3.95%, compounded monthly, 15-year amortization due in April 2022.
|
|
$
|
25,000,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Term loan
—
$1,250,000
—
3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $12,630 including interest, due in July 2021.
|
|
1,163,971
|
|
—
|
|
|
|
|
|
|
|
|
|
Mortgage payable
—
$3,750,000
—
3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $22,562 including interest, due in July 2021.
|
|
3,645,240
|
|
—
|
|
|
|
|
|
|
|
|
|
Vendor take-back mortgage owed to related party
—
$2,850,000
—
6.75%, 5-year term, repayable in equal monthly instalments of $56,097 including interest, due in June 2021
|
|
2,396,660
|
|
—
|
|
|
|
|
$
|
32,205,871
|
|
$
|
—
|
|
|
Deduct
—
unamortized finance fees
|
|
(20,417
|
)
|
—
|
|
|
—
principal portion included in current liabilities
|
|
(765,224
|
)
|
—
|
|
|
|
|
$
|
31,420,230
|
|
$
|
—
|
|
Total long-term debt repayments are as follows:
|
|
|
Year ending May 31,
|
|
|
Next 12 months
|
|
$
|
765,224
|
|
|
2 years
|
|
811,480
|
|
|
3 years
|
|
860,675
|
|
|
4 years
|
|
913,003
|
|
|
5 years
|
|
28,855,489
|
|
|
Balance of obligation
|
|
$
|
32,205,871
|
|
The term loan of $25,000,000 was entered into on May 9, 2017 and is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, certain cash security and an assignment of fire insurance to the lender.
The mortgage payable of $3,645,240 and term loan of $1,163,971 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot St West and a first position on a general security agreement.
The vendor take-back mortgage payable of $2,396,660, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St West. The mortgage is secured by a second charge on the property at 265 Talbot St West.
32
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
21.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at May 31, 2017, the Company has issued 138,628,704 shares, of which 675,000 shares were held and subject to various escrow agreements.
|
Common Shares
|
|
Number of Shares
|
|
Amount
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,916,880
|
|
|
Bought deals, net of issuance
|
|
52,081,752
|
|
204,414,423
|
|
|
Warrants exercised
|
|
15,251,165
|
|
23,646,825
|
|
|
Options exercised
|
|
1,053,095
|
|
1,533,513
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,448,332
|
|
|
Share issuance in exchange for intangible asset
|
|
38,759
|
|
100,000
|
|
|
Shares earned in exchange for services
|
|
100,000
|
|
256,575
|
|
|
Shares held in escrow for services not yet earned
|
|
50,000
|
|
—
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,316,548
|
|
a)
In August 2016, the Company closed a bought deal financing in which it issued 17,250,000 common shares at a purchase price of $2.00 per share for $31,959,093, net of cash issuance costs and taxes.
b)
In November 2016, the Company closed a bought deal financing in which it issued 10,062,500 common shares at a purchase price of $4.00 per share for $37,263,475, net of cash issuance costs and taxes.
c)
In February 2017, the Company closed a bought deal financing in which it issued 11,500,000 common shares at a purchase price of $5.00 per share for $53,869,357, net of cash issuance costs and taxes.
d)
In May 2017, the Company closed a bought deal financing in which it issued 13,269,252 common shares at a purchase price of $6.50 per share for $81,322,498, net of cash issuance costs and taxes.
e)
Throughout the year, 15,251,165 warrants with exercise prices ranging from $0.60 to $1.75 were exercised for $23,646,825.
f)
Throughout the year, 1,053,095 stock options with exercise prices ranging from $0.60 to $3.90 were exercised for $1,533,513.
g)
In September 2016, the Company issued 38,759 common shares pursuant to execution of an exclusive supply and licensing agreement.
h)
In January 2017, the Company issued 150,000 common shares in escrow pursuant to a third party consulting agreement for greenhouse related services, net of cash issuance costs. These shares are earned straight-line over 12 months and released to the third party on a quarterly basis. At May 31, 2017, 100,000 common shares of the total shares in escrow have been released.
The following table presents the maximum number of shares that would be outstanding if all the dilutive “in the money” instruments outstanding as at May 31, 2017 were exercised:
|
Common shares outstanding at May 31, 2017
|
|
138,628,704
|
|
|
Warrants outstanding and “in the money”
|
|
3,885,908
|
|
|
Options outstanding and “in the money”
|
|
5,341,001
|
|
|
Fully diluted balance at May 31, 2017
|
|
147,855,613
|
|
33
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
22.
Warrants
The warrant details of the Company are as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Number of
|
|
average
|
|
|
|
|
Type of warrant
|
|
Expiry date
|
|
warrants
|
|
price
|
|
Amount
|
|
|
Compensation warrant / option
|
|
December 10, 2018
|
|
106,157
|
|
$
|
1.75
|
|
$
|
85,432
|
|
|
Warrant
|
|
December 11, 2018
|
|
327,923
|
|
$
|
1.75
|
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
3,251,828
|
|
$
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
$
|
3.14
|
|
359,480
|
|
|
Balance at May 31, 2017
|
|
|
|
3,885,908
|
|
$
|
1.61
|
|
$
|
444,912
|
|
|
|
|
May 31, 2017
|
|
May 31, 2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
|
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
|
Outstanding, beginning of the year
|
|
18,721,987
|
|
$
|
1.51
|
|
18,093,728
|
|
1.37
|
|
|
Expired during the year
|
|
(50,305
|
)
|
1.20
|
|
—
|
|
—
|
|
|
Issued during the year
|
|
465,391
|
|
2.35
|
|
5,756,235
|
|
1.67
|
|
|
Exercised during the year
|
|
(15,251,165
|
)
|
1.51
|
|
(5,127,976
|
)
|
1.18
|
|
|
Cancelled during the year
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Outstanding, end of year
|
|
3,885,908
|
|
$
|
1.61
|
|
18,721,987
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company used the Black Scholes option pricing model to determine the fair value of warrants granted using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life of 3 and 5 years; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective warrant.
23.
Share-based payment reserve
Share-based payment reserve is comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Balance, beginning of year
|
|
$
|
1,723,903
|
|
$
|
1,261,589
|
|
|
Amounts deducted from share-based payment reserve in respect of stock options exercised during the year
|
|
(558,183
|
)
|
—
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
2,064,209
|
|
462,314
|
|
|
Balance, end of year
|
|
$
|
3,229,929
|
|
$
|
1,723,903
|
|
34
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
24.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that may be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option may not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $2,399,111 during the year ended May 31, 2017 (2016 - $462,314). The total fair value of options granted during the year was $4,221,974 (2016 - $320,500).
|
|
|
May 31, 2017
|
|
May 31, 2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
|
Outstanding, beginning of the year
|
|
4,975,000
|
|
$
|
0.84
|
|
4,520,000
|
|
$
|
0.81
|
|
|
Exercised during the year
|
|
(1,121,999
|
)
|
1.05
|
|
—
|
|
—
|
|
|
Issued during the year
|
|
2,253,000
|
|
3.99
|
|
565,000
|
|
1.13
|
|
|
Cancelled during the year
|
|
(180,000
|
)
|
1.09
|
|
(110,000
|
)
|
1.08
|
|
|
Outstanding, end of year
|
|
5,926,001
|
|
$
|
1.99
|
|
4,975,000
|
|
$
|
0.84
|
|
|
Exercisable, end of year
|
|
3,919,542
|
|
$
|
1.36
|
|
3,906,454
|
|
$
|
0.76
|
|
In June 2016, the Company issued 283,000 stock options at an exercise price of $1.40 per share, exercisable for 5 years to employees and officers. Of the options issued, 94,329 vest immediately and 188,671 vest over 2 years.
In June 2016, the Company issued 30,000 stock options at an exercise price of $1.48 per share, exercisable for 5 years to a consultant of the Company. Of the options issued, 15,000 vest immediately and 15,000 vest in 1 year.
In July 2016, the Company issued 110,000 stock options at an exercise price of $1.64 per share, exercisable for 5 years to an employee. Of the options issued, 50,000 vest immediately and 60,000 vest over three years.
In September 2016, the Company issued 75,000 stock options at an exercise price of $3.00 per share, exercisable for 3 years to consultants and employees of the company. 25,000 vest immediately and 50,000 vest based on certain performance metrics attainable over the three-year period.
In October 2016, the Company issued 20,000 stock options at an exercise price of $3.49 per share, exercisable for 3 years to an employee of the company. 6,666 vest immediately and 13,334 vest over two years.
In October 2016, the Company issued 50,000 stock options at an exercise price of $ 3.70 per share, exercisable for 3 years to a director of the company. All 50,000 vest immediately.
In November 2016, the Company issued 1,000,000 stock options at an exercise price of $3.90 per share, exercisable for 3 years to directors, officers, consultants and employees of the company. 333,333 vest immediately and 666,667 vest over 2 years.
35
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
In December 2016, the Company issued 500,000 stock options at an exercise price of $5.25 per share, exercisable for 3 years to consultants of the company. All 500,000 vest based on certain performance metrics attainable over the three-year period.
In January 2017, the Company issued 45,000 stock options at an exercise price of $5.72 per share, exercisable for 3 years to employees of the company. 5,000 vest immediately and the remainder vest over 2 years.
In April 2017, the Company issued 140,000 stock options at an exercise price of $7.92 per share, exercisable for 3 years to employees and consultants of the company. 44,999 vest immediately and the remainder vest over 2 years.
The option details of the Company are as follows:
|
|
|
|
|
|
|
Vested and
|
|
|
Expiry date
|
|
Exercise price
|
|
Number of options
|
|
exercisable
|
|
|
November 2017
|
|
$1.10
|
|
35,000
|
|
35,000
|
|
|
December 2017
|
|
$1.10
|
|
650,000
|
|
95,760
|
|
|
March 2018
|
|
$0.90
|
|
20,000
|
|
20,000
|
|
|
October 2018
|
|
$1.17
|
|
20,000
|
|
13,333
|
|
|
November 2018
|
|
$1.49
|
|
20,000
|
|
20,000
|
|
|
December 2018
|
|
$1.30
|
|
170,000
|
|
170,000
|
|
|
April 2019
|
|
$1.67
|
|
33,500
|
|
33,500
|
|
|
June 2019
|
|
$0.60
|
|
2,500,000
|
|
2,500,000
|
|
|
September 2019
|
|
$3.00
|
|
75,000
|
|
31,635
|
|
|
October 2019
|
|
$3.49 – 3.70
|
|
70,000
|
|
56,666
|
|
|
November 2019
|
|
$3.90
|
|
996,167
|
|
329,323
|
|
|
December 2019
|
|
$5.25
|
|
500,000
|
|
166,665
|
|
|
January 2020
|
|
$5.72
|
|
45,000
|
|
14,998
|
|
|
April 2020
|
|
$7.92
|
|
140,000
|
|
44,999
|
|
|
September 2020
|
|
$0.85
|
|
185,000
|
|
185,000
|
|
|
November 2020
|
|
$1.19
|
|
50,000
|
|
50,000
|
|
|
June 2021
|
|
$1.40
|
|
276,334
|
|
87,663
|
|
|
June 2021
|
|
$1.48
|
|
30,000
|
|
15,000
|
|
|
July 2021
|
|
$1.64
|
|
110,000
|
|
50,000
|
|
|
Balance at May 31, 2017
|
|
$1.99
|
|
5,926,001
|
|
3,919,542
|
|
The Company used the Black Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life of 3 and 5 years; volatility of 62-70% based on comparable companies; forfeiture rate of 5%; dividend yield of nil; and, the exercise price of the respective option.
25.
General and administrative expenses
|
|
|
For the twelve months ended May 31
|
|
|
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
828,924
|
|
$
|
752,337
|
|
|
Consulting fees
|
|
219,619
|
|
39,723
|
|
|
Office and general
|
|
1,336,508
|
|
591,555
|
|
|
Professional fees
|
|
607,846
|
|
359,580
|
|
|
Salaries and wages
|
|
1,141,873
|
|
394,627
|
|
|
Travel and accommodation
|
|
463,914
|
|
242,237
|
|
|
Rent
|
|
79,370
|
|
45,064
|
|
|
|
|
$
|
4,678,054
|
|
$
|
2,425,123
|
|
36
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
26.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
$
|
2,064,209
|
|
$
|
462,314
|
|
|
Accrued share-based compensation
|
|
44,000
|
|
—
|
|
|
Shares for services compensation
|
|
262,500
|
|
—
|
|
|
Deferred share units expensed in the year
|
|
28,402
|
|
—
|
|
|
Total share-based compensation
|
|
$
|
2,399,111
|
|
$
|
462,314
|
|
During the year, the Company issued 5,240 deferred share units to certain directors of the Company, under the terms of the Company’s Deferred Share Unit Plan.
27.
Finance income, net
Finance income, net is comprised of:
|
|
|
May 31
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Interest income
|
|
$
|
1,115,348
|
|
$
|
281,497
|
|
|
Interest expense
|
|
(387,099
|
)
|
—
|
|
|
|
|
$
|
728,249
|
|
$
|
281,497
|
|
28.
Gain on long-term investments
Gain on long-term investments for the year ended May 31, 2017 is comprised of:
|
|
|
|
|
|
|
|
Realized gain
|
|
Change in fair
|
|
|
|
|
|
Investment
|
|
Proceeds
|
|
Cost
|
|
|
(loss) on disposal
|
|
value
|
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp
|
|
$
|
3,737,050
|
|
$
|
1,755,712
|
|
|
$
|
1,981,338
|
|
$
|
—
|
|
|
$
|
1,981,338
|
|
|
MassRoots Inc.
|
|
723,994
|
|
436,575
|
|
|
287,419
|
|
—
|
|
|
287,419
|
|
|
Canabo Medical Inc.
|
|
2,685,000
|
|
7,694,607
|
|
|
(5,009,607
|
)
|
—
|
|
|
(5,009,607
|
)
|
|
Ample Organics Inc.
|
|
50,000
|
|
50,000
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Long-term investments (Note 17)
|
|
—
|
|
—
|
|
|
—
|
|
6,311,979
|
|
|
6,311,979
|
|
|
Year ended May 31, 2017
|
|
$
|
7,196,044
|
|
$
|
9,936,894
|
|
|
$
|
(2,740,850
|
)
|
$
|
6,311,979
|
|
|
$
|
3,571,129
|
|
29.
Earnings per share
The calculation of earnings per share for the year ended May 31, 2017 was based on the net income attributable to common shareholders of $4,198,455 (2016
—
$397,961) and a weighted average number of common shares outstanding of 104,341,319 (2016
—
58,442,827) calculated as follows:
|
|
|
2017
|
|
2016
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the year
|
|
$
|
4,198,455
|
|
$
|
397,961
|
|
|
Average number of common shares outstanding during the year
|
|
104,341,319
|
|
58,442,827
|
|
|
Earnings per share
|
|
$
|
0.04
|
|
$
|
0.01
|
|
37
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
|
|
|
2017
|
|
2016
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the year
|
|
$
|
4,198,455
|
|
$
|
397,961
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the year
|
|
104,341,319
|
|
58,442,827
|
|
|
“in the money” warrants outstanding during the year
|
|
2,697,681
|
|
—
|
|
|
“in the money” options outstanding during the year
|
|
4,388,893
|
|
—
|
|
|
|
|
111,427,893
|
|
58,442,827
|
|
|
Earnings per share
|
|
$
|
0.04
|
|
$
|
0.01
|
|
30.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
May 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
953,168
|
|
$
|
(1,778,679
|
)
|
|
(Increase) decrease in other receivables
|
|
(4,384,687
|
)
|
632,576
|
|
|
Change in inventory
|
|
6,618,200
|
|
(369,249
|
)
|
|
Change in biological assets (note 10)
|
|
(4,188,319
|
)
|
(409,139
|
)
|
|
(Increase) decrease in prepaid assets
|
|
(899,468
|
)
|
7,114
|
|
|
Increase in accounts payable and accrued liabilities
|
|
4,534,068
|
|
319,269
|
|
|
|
|
$
|
2,632,962
|
|
$
|
(1,598,108
|
)
|
31.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities and long-term investments, with the exception of the debenture in CannaRoyalty Corp., as fair value through profit or loss, accounts receivable and other receivables and promissory notes receivable as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term debt as other financial liabilities. The debentures in CannaRoyalty Corp. are accounted for on at fair value with changes in fair value of the debt instrument recorded through other comprehensive income and changes in the fair value of the embedded derivative recorded in the statement of operations. There was no change in the fair value of the debt instrument in the period.
The carrying values of other receivables, promissory notes receivable, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $32,185,454 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at May 31, 2017 was $32,154,410.
38
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
|
Level 1
|
quoted prices (unadjusted) in active markets for identical assets and liabilities
|
|
Level 2
|
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
|
|
Level 3
|
inputs for assets and liabilities not based upon observable market data
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,910,415
|
|
$
|
—
|
|
$
|
—
|
|
79,910,415
|
|
|
Marketable securities
|
|
87,346,787
|
|
—
|
|
—
|
|
87,346,787
|
|
|
Embedded derivative
|
|
—
|
|
—
|
|
173,000
|
|
173,000
|
|
|
Long-term investments
|
|
14,946,235
|
|
—
|
|
12,841,343
|
|
27,787,578
|
|
|
|
|
$
|
182,203,437
|
|
$
|
—
|
|
$
|
13,014,343
|
|
$
|
195,217,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2016
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,472,664
|
|
$
|
—
|
|
$
|
—
|
|
16,472,664
|
|
|
Long-term investments
|
|
—
|
|
—
|
|
1,560,200
|
|
1,560,200
|
|
|
|
|
$
|
16,472,664
|
|
$
|
—
|
|
$
|
1,560,200
|
|
$
|
18,032,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the changes in level 3 items for the periods ended May 31, 2017 and May 31, 2016:
|
|
|
Unlisted equity
|
|
Contingent
|
|
Trading
|
|
|
|
|
|
|
securities
|
|
consideration
|
|
derivatives
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance June 1, 2015
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Acquisitions
|
|
1,560,200
|
|
—
|
|
—
|
|
1,560,200
|
|
|
Closing balance May 31, 2016
|
|
$
|
1,560,200
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,560,200
|
|
|
Acquisitions
|
|
12,766,940
|
|
—
|
|
—
|
|
12,766,940
|
|
|
Disposals
|
|
(50,000
|
)
|
—
|
|
—
|
|
(50,000
|
)
|
|
Reclassification to Level 1
|
|
(1,510,200
|
)
|
—
|
|
—
|
|
(1,510,200
|
)
|
|
Unrealized gain on fair value
|
|
247,403
|
|
—
|
|
—
|
|
247,403
|
|
|
Closing balance May 31, 2017
|
|
$
|
13,014,343
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,014,343
|
|
Investments in CannaRoyalty originally classified as a level 3 investments were reclassified subsequent to the investee going public, where the Company could value its investment based on the share price quoted in active markets.
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit risk; liquidity; currency rate; and, interest rate price risk.
39
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
(a)
Credit risk
The maximum credit exposure at May 31, 2017 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other receivables and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
60-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
825,511
|
|
$
|
658,675
|
|
$
|
29,598
|
|
$
|
29,523
|
|
$
|
107,715
|
|
|
|
|
|
|
80
|
%
|
4
|
%
|
4
|
%
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at May 31, 2017, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at May 31, 2017, management regards liquidity risk to be low.
(c)
Currency rate risk
As at May 31, 2017, a portion of the Company’s financial assets and liabilities held in USD consist of marketable securities, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as Management has determined that this risk is not significant at this point in time.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
40
Aphria Inc.
Notes to the Consolidated Financial Statements
For the years ended May 31, 2017 and May 31, 2016
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.
32.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. In July of 2016, the Company terminated its lease of greenhouse and warehouse property in conjunction with the acquisition of the 265 Talbot Street West property. The Company has a lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9,313 and $19,599, respectively, annually and leased office space in Toronto for $4,500 per month until September 2017. In April of 2017, the Company indemnified the landlord of the office space leased by DFMMJ Investments, Ltd. at 35 McCaul Street, Toronto. As discussed in note 17, the Company has agreed to contribute an additional $1,700,000 to Green Acre Capital Fund. Minimum payments payable over the next five years are as follows:
|
|
|
Fiscal year ending May 31,
|
|
|
2018
|
|
$
|
8,884,858
|
|
|
2019
|
|
13,341,325
|
|
|
2020
|
|
21,927
|
|
|
2021
|
|
3,267
|
|
|
2022
|
|
—
|
|
|
|
|
$
|
22,251,377
|
|
The Company has purchase orders outstanding at May 31, 2017 related to capital asset expansion of $20,398,567.
33.
Subsequent events
On June 1, 2017, the Company’s subsidiary, CannWay was amalgamated with Pure Natures Wellness Inc. (o/a Aphria).
On June 22, 2017, the Company purchased land and buildings from a third party for approximately $500,000.
On June 28, 2017, the Company entered into a subscription agreement with Tokyo Smoke for the purchase of 140,845 common shares, for a total cost of $1,000,000.
41
Exhibit 99.11
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the three and twelve months ended May 31, 2017. It is supplemental to, and should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes for year ended May 31, 2017, as well as the financial statements and MD&A for the year ended May 31, 2016. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to “all-in” cost of sales, cash costs to produce, adjusted gross profit, adjusted gross margin and EBITDA, which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“All-in” cost of sales of dried cannabis per gram is equal to cost of sales of dried cannabis less the non-cash increase (plus the non-cash decrease) in the fair value (“FV”) of biological assets, if any, of dried cannabis plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less the non-cash increase (plus the non-cash decrease) in the FV of biological assets, if any, amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Adjusted gross profit is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the FV of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is adjusted gross profit divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
EBITDA is net income(loss), plus (minus) income tax expense (recovery) plus (minus) finance expense (income), plus amortization, plus share-based compensation, plus (minus) non-cash FV adjustments related to biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity accounted investee, plus (minus) EBITDA profit (loss) from equity accounted investee, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in Canadian dollars and where otherwise indicated.
This MD&A is prepared as of July 11, 2017.
COMPANY OVERVIEW
Aphria Inc. is continued in Ontario, the Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Pure Natures Wellness (PNW), a wholly-owned subsidiary of the Company, is licenced to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). PNW received its licence to produce and sell medical marijuana on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. PNW’s operations are based in Leamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be a scalable low cost producer of medical marijuana.
The Company is focused on producing and selling medical marijuana and its derivatives through a two-pronged growth strategy, including both retail sales and wholesale channels. Retail sales are primarily sold through Aphria’s online store as well as telephone orders. Wholesale shipments are sold to other ACMPR Licenced Producers.
1
INVESTOR HIGHLIGHTS
|
|
|
Q4-2017
|
|
Q3-2017
|
|
|
Revenue
|
|
$
|
5,717,866
|
|
$
|
5,118,516
|
|
|
Kilograms equivalents sold
|
|
738.3
|
|
652.7
|
|
|
Cash cost to produce dried cannabis / gram
—
Aphria’s definition
|
|
$
|
1.11
|
|
$
|
1.73
|
|
|
Cash cost to produce dried cannabis / gram
—
Using competitors’ definition
|
|
$
|
0.79
|
|
$
|
1.42
|
|
|
“All-in” cost of sales of dried cannabis / gram
|
|
$
|
1.67
|
|
$
|
2.23
|
|
|
Adjusted gross margin
|
|
85.7
|
%
|
70.0
|
%
|
|
EBITDA
|
|
$
|
2,826,667
|
|
$
|
1,005,073
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
167,257,202
|
|
$
|
122,029,195
|
|
|
Working capital
|
|
$
|
169,051,562
|
|
$
|
123,144,983
|
|
|
Capital and intangible asset expenditures
|
|
$
|
31,955,214
|
|
$
|
23,419,877
|
|
·
Retail & wholesale platforms
·
Upgraded to 9,000 kgs (annualized) production capability with first sale expected in late August 2017
·
Short-term capacity upgrade to 30,000 kgs (annualized) production capability expected in next year
·
Mid-term capacity upgrade to 100,000 kgs (annualized) production capability expected in 18 months
·
Long-term capacity available via additional 200-acre property in Leamington, Ontario
·
No crop failures since inception
·
Seven consecutive quarters of EBITDA
·
Four bought deals closed during the year, raising over $204,000,000 in share capital
·
Strong executive team
·
20+ years of Pharma experience
·
35+ years of greenhouse growing experience
QUARTERLY HIGHLIGHTS
Increase in capacity expectations
The Company continues to refine and improve its industry leading greenhouse agricultural growing practices, combined with unique engineering changes embedded in both fully funded Part III and Part IV expansions, presently underway. Management believes that once full crop rotation has been attained after Part IV expansion is complete, annualized capacity will exceed 100,000 kilograms. Supporting management’s revised capacity projections are recent yield improvements resulting from the introduction of new lighting strategies, growing techniques and leveraging other “unique to greenhouse” strengths.
As a result of the above, the Company amended its previously reported capacity expectations for its expansion projects. The Company believes that the capacity after full crop rotation in Part II will increase from 8,000 kgs to 9,000 kgs annualized, in Part III it will increase from 22,000 kgs to 30,000 kgs annualized and in Part IV it will increase from 75,000 kgs to 100,000 kgs annualized.
Health Canada Approval Received for Part II Expansion
On May 15, 2017, the Company announced that Health Canada approved a license amendment that provides Aphria with additional production space of 57,000 square feet, as part of its Part II expansion at its facility in Leamington, Ontario. The announcement indicated that this would more than triple Aphria’s production capacity of medical cannabis from 2,600 kgs annually to 8,000 kgs annually. The 8,000 kgs annual capacity was subsequent increased to 9,000 kgs annually as discussed in the preceding paragraph. The first crop cultivated and produced at the Part II expansion will be available for sale in the middle of August.
2
Aphria reports seventh consecutive quarter of positive EBITDA
The Company reported EBITDA of $2,826,667 for the quarter and $6,082,546 for the year.
Improvement in cash cost to produce and “all-in” cost of sales of dried cannabis per gram
During the quarter, our “all-in” costs of dried cannabis per gram decreased from $2.23 in the prior quarter to $1.67 in the current quarter, representing a $0.56 decrease or a 25.1% decrease, and cash cost to produce per gram decreased from $1.73 to $1.11, representing a decrease of $0.62 or a 35.8% decrease. The decrease related to improved growing techniques and better cooperation from Mother Nature.
Investment in SecureCom Mobile Inc.
On November 23, 2016, Aphria invested $200,000 in SecureCom Mobile Inc. (“SecureCom”) via an unsecured convertible debenture. The debenture bore interest at 12% and was convertible into equity at $0.05 per share, and included the right to a warrant for each share of equity on conversion, priced at $0.08. On March 31, 2017, the Company exercised its conversion rights under the debenture and received 4,000,000 shares and 4,000,000 warrants priced at $0.08. Concurrently, the Company exercised its warrants at a cost of $320,000 and received an additional 4,000,000 shares. As a result of these transactions, Aphria owns 8,000,000 shares in SecureCom at a cost of $520,000.
Investment in DFMMJ Investments, Ltd.
On April 5, 2017, the Company announced it would invest $25 million into DFMMJ Investments, Ltd. (“DFMMJ”), which would acquire all or substantially all of the assets of Chestnut Hill Tree Farm LLC, through its subsidiary DFMMJ Investments, LLC, and subsequently amalgamate into a subsidiary of SecureCom Mobile Inc., a public company listed on the Canadian Securities Exchange, as part of a business combination (the “Business Combination”). As part of the series of transactions, Aphria agreed to license its Aphria Know-How System to DFMMJ. The funds, when combined with an additional $35 million raised in a brokered private placement led by Clarus Securities Inc., would be used for the launch of its US expansion strategy in an entity to be renamed Liberty Health Sciences Inc. (“Liberty”) that will operate in the United States under the brand “Aphria USA”. Also as part of the transaction, Aphria has agreed, to license its medical brand to DFMMJ, in exchange for a perpetual 3% royalty on all sales of cannabis and related products. Once the business combination is completed in July, the Company will own approximately 37.6% of the issued and outstanding common shares of Liberty.
Closing of May bought deal and debt financings
On May 9, 2017, the Company closed a bought deal financing and a separate debt financing, raising in excess of $105,000,000. The bought deal financing resulted in the Company issuing 13,269,252 common shares at a purchase price of $6.50 per share for $81,322,498, net of cash issuance costs. The debt financing raised $25,000,000 in a five-year term loan, with a 15-year amortization, bearing interest at 3.95%. The debt financing is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, certain cash security and an assignment of fire insurance to the lender. As a result of the financings, the Company’s Part IV expansion project is now fully funded. In addition, the Company raised funds to support its working capital needs after completion of the expansion project and raised funds for possible strategic investment.
3
ANNUAL HIGHLIGHTS
Acquisition of Cacciavillani and F.M. Farms Ltd Property
On June 30, 2016, the Company closed the Purchase Agreement to acquire 9 acres of greenhouses, situated on 36 acres of property, known as 265 Talbot Street West, in Leamington, Ontario. The purchase price for the land and greenhouses was $6,100,000 and was considered a non-arm’s length transaction because the vendor is a director and officer of the Company. $3,250,000 of the purchase price was payable in cash on closing, and the remainder will be paid as a vendor take-back mortgage, bearing interest at 6.75% per annum, with a 5-year term and amortization. The Company maintains a right of first refusal to acquire an additional acre of property, known as 243 Talbot Street West, in Leamington, Ontario. The vendor maintains a put option on the same property valued at $1,000,000, subject to annual inflationary adjustments equal to the increases in the Consumer Price Index, which put option can only be exercised upon certain operating metrics being achieved.
Closing of August bought deal financing
On August 18, 2016, the Company announced the closing of its bought deal financing. Under the bought deal, the Company raised gross proceeds of $34,500,000, and net proceeds of approximately $32,000,000 after accounting for underwriting, legal and other costs and issued 17,250,000 common shares. The Company plans to use the proceeds primarily to fund future expansion.
Approval of Supplemental Oil Sales License
On August 17, 2016, the Company received an amendment to its licence to produce and sell medical cannabis. At the time, the Company currently had capacity to produce approximately 12,000 60 mL bottles of cannabis oil per month. Each 60 mL bottle of oil contains the equivalent of 10 grams of dried cannabis.
Announcement of purchase agreement for DiNiro Farms Inc.
On August 19, 2016, the Company entered into an agreement to purchase 11 acres of additional greenhouse property adjacent to its existing campus for a $2,100,000 cash payment. The property consists of 345,000 square feet of existing greenhouse, which was subsequently demolished. Concurrent with the transaction, the abutting property was merged into Aphria’s existing municipal address, thereby avoiding the need to apply for a new Health Canada site licence.
Announcement of Medlab Supply Agreement
On August 22, 2016, the Company announced that it entered into a supply agreement with Medlab Clinical Limited. Medlab is an Australian based biotechnology company that develops and sells nutraceuticals in the US and Australia to support drug discovery and development of new medicines.
Commencement of Part II Expansion
During the quarter ended August 31, 2016, the Company received board approval and began construction on a fully funded $10,000,000 capital expansion project. The project, referred to as “Part II Expansion”, increased the Company’s greenhouse production space from approximately 43,000 to 100,000 square feet. The capital project includes 57,000 square feet of ACMPR greenhouse space, an 8,000 square foot corporate office, a 2,400 square foot Level 10 vault, and electrical and sewer upgrades necessary of the operation of Aphria’s current and future greenhouse space. At the time, the capital project was expected to increase the Company’s annual growing capacity from 2,500 kgs to 6,000 kgs. This figure was subsequently increased to 9,000 kgs.
4
Announcement of Tokyo Smoke Licensing Deal
On September 7, 2016, the Company announced a ground-breaking licensing deal with Tokyo Smoke, a premium cannabis-oriented lifestyle brand. The transaction will be the first-of-its-kind in Canada as it combines a premium consumer lifestyle brand and a licensed producer and seeks to pave the way for how future cannabis brands operate in Canada. The deal will allow Aphria to ship Tokyo Smoke branded cannabis in Canada to registered patients through the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) system.
Board Approval Received for Part
III
Expansion
On September 16, 2016, the Company announced that its Board of Directors approved a fully funded $24.5 million capital project internally identified as Part III expansion. The project will increase Aphria’s capacity under the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) from 100,000 square feet to 300,000 square feet and, at the time, was expected to increase the Company’s ACMPR compliant growing capabilities from 7,500 kgs annually to 21,000 kgs annually. This figure was subsequently adjusted to 30,000 kgs. The project includes 200,000 square feet of state-of-the-art Dutch style greenhouses, 21,000 square feet of infrastructure, including four Level 9 vaults, automation for both the greenhouses and processing areas and security consistent with ACMPR standards. Aphria anticipates completion of this phase of the project within 12 months of the announcement, Health Canada approvals within 4 months of completing the expansion and reaching full crop rotation within 4 months after Health Canada approval.
IP Transfer Agreement with Copperstate Farms LLC in Arizona
On October 27, 2016, the Company agreed to license its greenhouse growing intellectual property to Copperstate Farms LLC (“CSF”) in exchange for 5,000 membership units of CSF (representing a 5% membership interest at the time). At the same time, the Company, through its subsidiary Aphria (Arizona) Inc., paid $1.3 million (USD) for 2,600 membership units (representing a 5% membership interest at the time) in Copperstate Farms Investors LLC (“CSFI”), the parent company of Copperstate Farms LLC.
On December 19, 2016, the Company paid an additional $1.3 Million USD for an additional 2,600 membership units (representing a 5% membership interest at the time) in CSFI.
On March 24, 2017, the Company paid an additional $3 million USD for an additional 6,000 membership units in CSFI.
Closing of November bought deal financing
On November 30, 2016, the Company announced the closing of its bought deal financing. Under the bought deal, the Company raised gross proceeds of $40,250,000, and net proceeds of $37,263,475 after accounting for underwriting, legal and other costs and issued 10,062,500 common shares. The Company plans to use the proceeds primarily to fund future expansion.
Investment in Resolve Digital Health Inc.
On December 1, 2016, Aphria purchased 10,432 common shares of Resolve Digital Health Inc. (“Resolve”), a private company in the process of developing a delivery system for medical marijuana, and an equivalent number of common share purchase warrants for gross proceeds of $1,000,000. Following a stock split in January 2017, Aphria now owns 2,000,024 common shares and 2,000,024 common share purchase warrants of Resolve, exercisable at $0.65 per warrant at any time for a period expiring five years from the date of issuance.
5
Investment in Tetra Bio-Pharma Inc.
On December 6, 2016, Aphria purchased 5,000,000 common shares of Tetra Bio-Pharma Inc. (“TBP”), a company engaged in pain management research, at a price of $0.20 per share for an aggregate purchase price of $1,000,000, pursuant to a private placement. As part of the transaction, Aphria received 5,000,000 warrants, each for conversion into one common share, at a price of $0.26 per warrant for a period of three years. The warrants are subject to an accelerated expiry if TBP’s shares trade above $0.45 for 30 consecutive trading days at which time the warrants will become subject to a 30-day expiry period if not exercised. The Company subsequently exercised the warrants at a cost of $1,300,000.
Task Force on Cannabis Legalization and Regulation issues report to Federal Government
On December 13, 2016, the Task Force on Cannabis Legalization and Regulation (the “Task Force”), which was established by the Canadian Federal Government to seek input on the design of a new system to legalize, strictly regulate and restrict access to marijuana, completed its review and published its report outlining its recommendations. It is expected that the Canadian Federal Government will introduce for consideration legislation for the legalization of marijuana in the spring of 2017.
Aphria secures secondary site with 200-acre property acquisition
On December 14, 2016, Aphria entered into a purchase and sale agreement to acquire 200 acres of fully serviced vacant land for $6.24 million. As the land acquired is not adjacent to the Company’s existing operations, the Company will require a new site license from Health Canada for the property. The transaction closed on January 31, 2017.
Investment in Canabo Medical Inc.
On December 23, 2016, Aphria purchased 6,000,000 common shares of Canabo Medical Inc. (“Canabo”), the owner and operator of Cannabinoid Medical Clinics, or CMClinics, Canada’s largest referral-only clinics for medical cannabis, at a price of $1.40 per common share for an aggregate price of $8,483,333, including issuance costs, pursuant to a private placement subject to a mandatory four-month holding period. Following the financing, Aphria owned approximately 16.6% of the total issued and outstanding common shares of Canabo. On March 9, 2017, the Company sold 500,000 common shares held in Canabo for net proceeds of approximately $340,000, which were subject to a mandatory 4-month holding period, expiring on April 23, 2017. The Company purchased 500,000 shares on March 13, 2017 for $370,700. In May 2017, the Company sold 5,200,000 shares for net proceeds of $2,345,000.
Board Approval Received for Part IV Expansion
On January 16, 2017, the Company announced that its Board of Directors (“the Board”) approved a $137 million capital project internally identified as Part IV expansion. The project will increase Aphria’s capacity under the ACMPR from 300,000 square feet to 1,000,000 square feet and is expected to increase the Company’s ACMPR compliant growing capabilities, at the time, from 21,000 kgs annually to 70,000 kgs annually. This figure was subsequently amended to 100,000 kgs. The project includes 700,000 square feet of state-of-the-art Dutch style greenhouses, 200,000+ square feet of infrastructure, including four Level 9 vaults, automation for both the greenhouses and processing areas and security consistent with ACMPR standards. Aphria anticipates completion of this phase of the project within 18 months of the announcement, Health Canada approvals within 4 months of completing the expansion and reaching full crop rotation within 4 months after Health Canada approval.
6
Investment in Green Acres Capital Fund
On January 23, 2017, Aphria agreed to invest in Green Acres Capital Fund, a Canadian investment fund seeking investments in the legal marijuana sector in Canada, the United States and internationally. In relation to its participation, Aphria committed $2,000,000 to the expected $30,000,000 fund and as of the date of this MD&A, has invested $300,000.
Additional investments in Kalytera Therapeutics, Inc.
On January 31, 2017, Aphria subscribed for an additional 2,222,000 common shares of Kalytera for a purchase price of $999,900 pursuant to a private placement which closed on February 7, 2017, subject to final approval of the TSXV. On February 22, 2017, Aphria purchased an additional 1,450,000 common shares of Kalytera Therapeutics, Inc. in the secondary market for a purchase price of $1,014,420.
Closing of February bought deal financing
On February 24, 2017, the Company announced the closing of its bought deal financing. Under the bought deal, the Company raised gross proceeds of $57,500,000, and net proceeds of $53,869,357 after accounting for underwriting, legal and other costs and issued 11,500,000 common shares. The Company plans to use 80% of the proceeds primarily to fund its Part IV expansion and reserve the remainder for strategic investments.
Approval received to graduate to Toronto Stock Exchange
On February 6, 2017, Aphria received conditional approval from the TSX to graduate from the TSX Venture Exchange and to list its common shares on the TSX. On March 21, 2017, the Company announced that its common shares began trading on the TSX as of the open of the market on March 22, 2017. The common shares continue to trade under the symbol “APH”. In conjunction with listing on the TSX, the common shares were voluntarily delisted from the TSX Venture Exchange prior to the commencement of trading on March 22, 2017.
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation to recognize the eventual fair value of the plant. At the time of harvest, the accumulated cost of each plant is based on the number of grams harvested and the Company increases the cost value to its full fair value less costs to sell.
7
As at May 31, 2017, the Company’s harvested cannabis and cannabis oil, as detailed in Note 9, and biological assets, as detailed in Note 10 of its financial statements, are as follows:
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
|
Harvested cannabis — at cost
|
|
$
|
1,076,818
|
|
$
|
801,639
|
|
|
Harvested cannabis — fair value increment
|
|
1,430,145
|
|
924,068
|
|
|
Harvested cannabis trim — at cost
|
|
152,081
|
|
—
|
|
|
Harvested cannabis trim — fair value increment
|
|
268,241
|
|
—
|
|
|
Cannabis oil — at cost
|
|
316,412
|
|
387,845
|
|
|
Cannabis oil —fair value increment
|
|
365,644
|
|
298,090
|
|
|
Biological assets — at cost
|
|
1,203,479
|
|
574,256
|
|
|
Biological assets — fair value increment
|
|
159,270
|
|
77,791
|
|
|
Cannabis products — at fair value
|
|
$
|
4,972,090
|
|
$
|
3,063,689
|
|
In an effort to increase transparency, the Company’s biological assets are carried at fair value increments of $0.54, $1.08, $1.62 and $2.14 per gram for weeks 13, 14, 15 and 16, respectively. Harvested cannabis, harvest cannabis trim and cannabis oil are carried at fair values of $3.75 per gram, $3.00 per gram and $0.625 per mL, respectively. The individual components of fair values are as follows:
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
|
Harvested cannabis — at cost — per gram
|
|
$
|
1.61
|
|
$
|
1.74
|
|
|
Harvested cannabis — fair value increment — per gram
|
|
2.14
|
|
2.01
|
|
|
Harvested cannabis trim — at cost — per gram
|
|
1.09
|
|
—
|
|
|
Harvested cannabis trim — fair value increment — per gram
|
|
1.91
|
|
—
|
|
|
Cannabis oil — at cost — per mL
|
|
0.35
|
|
0.35
|
|
|
Cannabis oil — fair value increment — per mL
|
|
0.28
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
May 31,
|
|
February 28,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Cost of sales for the quarter including IFRS adjustments
|
|
$
|
(108,445
|
)
|
$
|
1,550,447
|
|
|
Add (Less): Cost of accessories
|
|
(31,398
|
)
|
(26,778
|
)
|
|
Cannabis oil conversion costs
|
|
(27,857
|
)
|
(50,468
|
)
|
|
Increase in plant inventory
|
|
480,000
|
|
—
|
|
|
Net effect of FV change in biological assets
|
|
923,351
|
|
(14,243
|
)
|
|
Cost of sales of dried cannabis excluding IFRS adjustments
|
|
$
|
1,235,651
|
|
$
|
1,458,958
|
|
|
|
|
|
|
|
|
|
Grams equivalents sold during the quarter
|
|
738,299
|
|
652,472
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
1.67
|
|
$
|
2.23
|
|
8
In the current quarter, the Company included a new reconciling item in its calculation of “All-in” costs to produce dried cannabis per gram, increase (decrease) in plant inventory. As part of its Part II expansion, the number of plants the Company is growing increased. This increase attributed a portion of the production expenses normally incurred by the Company in the quarter to biological assets, as opposed to inventory and/or unasborbed overhead, which is a period expense. To maintain comparability of this figure from quarter to quarter, the Company determined it was appropriate to normalize this item as part of the above calculation. In the future, the Company anticipates that it will have further increases in the number of plants it is growing, with such increases tied to the start of production in each future expansion project.
Calculation of cash costs to produce dried cannabis per gram — Aphria’s definition
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
May 31,
|
|
February 28,
|
|
|
Cash costs to produce dried cannabis per gram — Aphria’s definition
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Cost of sales of dried cannabis excluding IFRS adjustments
|
|
$
|
1,235,651
|
|
$
|
1,458,958
|
|
|
Amortization
|
|
(267,826
|
)
|
(236,175
|
)
|
|
Packaging costs
|
|
(150,695
|
)
|
(91,411
|
)
|
|
Cash costs to produce dried cannabis — Aphria’s definition
|
|
$
|
817,130
|
|
$
|
1,131,372
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold in the quarter
|
|
738,299
|
|
652,742
|
|
|
Cash costs to produce per gram — Aphria’s definition
|
|
$
|
1.11
|
|
$
|
1.73
|
|
Calculation of cash costs to produce dried cannabis per gram — Using competitors’ definition
While the Company believes strongly in its definition of cash costs to produce dried cannabis per gram, certain of its publicly traded competitors are disclosing a similar metric but for which they are using a different definition of cash costs. The primary differences between Aphria’s definition and certain competitors’ definition is that Aphria’s definition includes the costs related to indirect labour expenses and quality control costs. Aphria believes that both of these expenses should be included in any cash cost calculation. However, for the sole purpose of presenting a figure which is comparable to this other definition, we re-calculated our cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
Cash costs to produce dried cannabis per gram- Using
|
|
May 31,
|
|
February 28,
|
|
|
competitors’ definition
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Cash costs to produce dried cannabis
|
|
$
|
817,130
|
|
$
|
1,131,372
|
|
|
Post production costs
|
|
(230,902
|
)
|
(206,803
|
)
|
|
Cash costs to produce dried cannabis
—
Using competitors’ definition
|
|
$
|
586,228
|
|
$
|
924,569
|
|
|
Gram equivalents sold in the quarter
|
|
738,299
|
|
652,742
|
|
|
Cash costs to produce per gram- Using competitors’ definition
|
|
$
|
0.79
|
|
$
|
1.42
|
|
9
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties. The economic, industry and risk factors discussed in our Annual Report, each in respect of the year ended May 31, 2016 and in our Short Form Prospectus, dated November 24, 2016 and February 17, 2017, remain substantially unchanged in respect of the year ended May 31, 2017. However, certain additional risks are outlined below, and the most significant risks from our previous disclosure are reported for reference purposes.
Recent Announcements in the United States
On March 27, 2017, the Company announced that it had made an additional investment of $3 million USD in Copperstate. The investment increased Aphria’s equity ownership in Copperstate from 10% to 18.5% on a non-diluted basis. As previously disclosed, Copperstate’s wholly-owned subsidiary, Copperstate Farms, LLC, is a US-based licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act.
On April 4, 2017, the Company announced the launch of its US expansion strategy through a strategic lead investment in an entity to be renamed Liberty Health Sciences Inc. (“Liberty”) that will operate in the United States under the brand “Aphria USA”. In connection with the investment, Liberty will acquire all or substantially all of the assets of Chestnut Hill Tree Farm LLC, a licensed holder and authorized dispensing organization of low-THC medical cannabis to patients in need in the State of Florida. While the initial investment relates to the State of Florida, the intention of Aphria’s US expansion strategy is to target key states that have approved the medical use of marijuana and meet the Company’s stringent investment criteria.
In light of these recent announcements, the Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of certain investments in entities involved with medical marijuana in the United States. Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
While marijuana is legal in many US state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical marijuana under the
Access to Cannabis for Medical Purposes Regulations,
investors are cautioned that in the United States, marijuana is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 28 states, plus the District of Columbia, that have legalized marijuana in some form, including Arizona and Florida as noted above in connection with the investments in Copperstate and Liberty. Notwithstanding the permissive regulatory environment of medical marijuana at the state level, marijuana continues to be categorized as a controlled substance under the
Controlled Substances Act
(the “CSA”) in the United States and as such, may be in violation of federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of marijuana offenses of individuals who are in compliance with state medical marijuana laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business—even those that have fully complied with state law—could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
10
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical marijuana licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of marijuana laws may be subject to change or may not proceed as previously outlined
As a result of the conflicting views between state legislatures and the federal government regarding marijuana, investments in marijuana businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of marijuana as a controlled substance at the federal level in the United States, several US states have enacted laws relating to marijuana for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of marijuana offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to marijuana. States where medical marijuana had been legalized were not characterized as a high priority. In March of this year, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, however, he disagreed that it had been implemented effectively and has not committed to utilizing the Cole Memorandum framework going forward.
The Board has informed its decision to authorize and approve the investments in Copperstate and Liberty based on the guidelines outlined in the Cole Memorandum and believes that the risk of federal prosecution and enforcement is currently unlikely. However, unless and until the Cole Memorandum is memorialized in federal legislation, there can be no assurance that the federal government will not seek to prosecute cases involving medical marijuana businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the
Currency and Foreign Transactions Reporting Act of 1970
(commonly known as the
Bank Secrecy Act),
as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act),
11
the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada),
as amended, and the rules and regulations thereunder, the
Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued a memorandum providing instructions to banks seeking to provide services to marijuana-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to marijuana-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on marijuana-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
In the event that any of the Company’s investments, or any proceeds thereof, or any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, affect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the investments in Copperstate or Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
As of the date hereof, following discussions with its legal counsel, the Company is not aware of any violation of the above noted statutes as a result of its investments in Copperstate and Liberty and has no reason to believe that such investments may be constituted as, whether directly or indirectly, money laundering or proceeds of crime. However, any future exposure to money laundering or proceeds of crime could subject the Company to financial losses, business disruption and damage to the Company’s reputation. In addition, there is a risk that the Company may be subject to investigation and sanctions by a regulator and/or to civil and criminal liability if the Company has failed to comply with the Company’s legal obligations relating to the reporting of money laundering or other offences.
The Company’s investments in the United States may be subject to heightened scrutiny
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction.
Government policy changes or public opinion may also result in a significant influence over the regulation of the marijuana industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical marijuana in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical marijuana, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
12
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by Aphria or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risk Factors Related to Dilution
The Company may issue additional Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical marijuana, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production
Environmental Regulations and Risks
Aphria’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect Aphria’s operations. Government approvals and permits are currently, and may in the future be required in connection with Aphria’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent
13
implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Reliance on a Single Facility
To date, Aphria’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party transportation services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Reliance on Key Personnel
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management (collectively, “Key Personnel”). Aphria’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of a Key Person, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Aphria’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Further, as a Licensed Producer, each Key Person is 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 Person 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 Person 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. While employment agreements are customarily used as a primary method of retaining the services of Key Personnel, these agreements cannot assure the continued services of such employees.
Limited Operating History
Aphria, while incorporated in 1994, began carrying on business in 2012 and did not generate revenue from the sale of products until late 2014. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
14
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential 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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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 management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Results of Future 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 (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although Aphria believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of Offered Shares should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to medical cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition and results of operations.
15
Insurance Coverage
The Company has insurance to protect its assets, operations, directors 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 Aphria 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, there could be a material adverse effect on the Company’s business, financial condition and results of operations.
Negative Consumer Perception
The Company believes the medical cannabis industry is highly dependent upon consumer perception regarding the medical benefits, safety, efficacy and quality of the cannabis distributed for medical purposes to such consumers. Consumer perception of Aphria’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements both in Canada and in other countries, media attention and other publicity (whether or not accurate or with merit) regarding the consumption of cannabis products for medical purposes, including unexpected safety or efficacy concerns arising with respect to the products of the Company or its competitors. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable 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 favorable 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 and financial condition 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 an adverse effect on any demand for Aphria’s products which could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis for medical purposes in general, or the Company’s products specifically, or associating the consumption of 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 such products resulted from consumers’ failure to consume such products legally, appropriately or as directed.
Securing Adequate Financing to Fund Operations and Meet Expected Consumer Demand
There is no guarantee that the Company will be able to achieve its business objectives. The continued development of Aphria may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company ceasing to carry on business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. In addition, from time to time, Aphria may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may increase the Company’s debt levels above industry standards. 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. Debt financings may also contain provisions which, if breached, may entitle lenders or their agents to accelerate repayment of loans and/or realize upon security over the assets of the Company, and there is no assurance that the Company would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to such debt financing.
16
Identify and Execute Future Acquisitions or Dispositions, or to Successfully Manage the Impact of Such Transactions on its Operations
Although there is no present intention to undertake any of the following transactions, material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) Aphria may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations, and (vi) loss or reduction of control over certain of the Company’s assets.
The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the results of operations, business prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
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 Company’s ability to continue operating and the value of the Common Shares and could use significant resources. Even if Aphria is involved in litigation and wins, litigation can redirect significant Company resources, including the time and attention of management and available working capital. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as Aphria may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the business, financial condition and results of operations of the Company.
17
In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, Aphria may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.
Constraints on Marketing Products
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 Aphria 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.
Fraudulent or Illegal activity by its employees, contractors and consultants
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Aphria, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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
18
additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
Breaches of security at its facilities, or in respect of electronic documents and data storage and may face risks related to breaches of applicable privacy laws
Given the nature of the Company’s product and its lack of legal availability 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 one of the Company’s facilities could expose Aphria to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.
In addition, Aphria collects and stores personal information about its 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, particularly patient lists and preferences, 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 Aphria was found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of 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.
Expansion of Facilities
Certain contemplated capital expenditures previously publicly disclosed by the Company, including, without limitation, Part III Expansion and Part IV Expansion, will require Health Canada approval. There is no guarantee that Health Canada will approve the contemplated expansions in a timely fashion, nor is there any guarantee that the expansion will be completed in its currently proposed form, if at all. The failure of the Company to successfully execute its expansion strategy (including receiving the expected Health Canada approvals in a timely fashion) could adversely affect the business, financial condition and results of operations of the Company.
Reliance on the Licence
Aphria’s ability to grow, store and sell medical marijuana in Canada is dependent on maintaining its licence with Health Canada. Failure to comply with the requirements of the licence or any failure to maintain its licence would have a material adverse impact on the business, financial condition and operating results of Aphria. Although Aphria believes it will meet the requirements of the ACMPR for extension of the licence, there can be no guarantee that Health Canada will extend or renew the licence or, if it is extended or renewed, that it will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the licence or should it renew the licence on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected.
19
Legislative or Regulatory Reform
The commercial medical marijuana industry is a new industry and the Company anticipates that such regulations will be subject to change as the Federal Government monitors Licenced Producers in action. Aphria’s operations are subject to a variety of laws, regulations, guidelines and policies relating to the manufacture, import, export, management, packaging/labelling, advertising, sale, transportation, storage and disposal of medical marijuana but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management, Aphria is currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the control of Aphria may cause adverse effects to its operations.
History of Losses
The Company incurred losses in prior periods. Aphria may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, Aphria expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If Aphria’s revenues do not increase to offset these expected increases in costs and operating expenses, Aphria will not be profitable.
Changes to Reimbursement Allowances for Veterans
On November 22, 2016, the Minister of Veterans Affairs announced that Veterans Affairs Canada (“VAC”) will issue new rules related to the reimbursement of medical cannabis for veterans. The new rules limit the amount of reimbursement to veterans in two ways. First, the amount of medical marijuana that can be reimbursed is expected to be limited to 3.0 grams per day (per veteran), such change to be effective as of May 21, 2017. Second, effective November 22, 2016, the price per gram reimbursement was limited to $8.50 per gram. The Company understands that the new rules may allow individual veterans to receive reimbursement for more than 3.0 grams a day, on a case by case basis, subject to specific conditions, which as of the date hereof have yet to be fully delineated. Accordingly, the Company has not yet been able to fully model the impact that the proposed VAC changes may have on the Company’s revenue stream. It is also unclear how many veteran patients of Aphria, if any, may meet the case by case exemption referenced herein. Investors are cautioned that the VAC changes may have a material effect on Aphria’s business in the event that the Company is unable to secure offsetting revenue streams, its veteran patients do not qualify for an exemption or if further amendments to the VAC changes are announced.
Competition
On October 19, 2015, the Liberal Party of Canada (“Party”) obtained a majority government in Canada. The Party has committed to the legalization of recreational cannabis in Canada. See Risk Factors - Changes in Laws, Regulations and Guidelines for more information on Bill C-45, which proposes the enactment of the Cannabis Act, to regulate the production, distribution and sale of cannabis for unqualified adult use, with a target implementation date of no later than July 1, 2018. However, it is unknown if this regulatory change will be implemented at all. The introduction of a recreational model for cannabis production and distribution may impact the medical marijuana 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 licenses, under the ACMPR, to produce and sell medical marijuana. 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. According to Health Canada there
20
are currently 51 Licensed Producers. If the number of users of medical marijuana 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 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.
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended May 31, 2017 was $5,717,866 versus $2,776,316 in the same period of 2016 and $5,118,516 in the third quarter of fiscal 2017.
The increase in revenue from the same period in the prior year was largely related to the continued growth of patients offset by a decrease in the average selling price per gram equivalent from $8.16 to $7.67.
The increase in revenue during the quarter from the prior quarter was largely related to:
·
Continued acceleration of patient onboarding, including sales of 146,430 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 581,800 gram equivalents to patients on-boarded prior to the quarter;
·
Wholesale orders to other Licensed Producers of 10,069 grams; and,
·
An increase in the percentage of cannabis oil sold, at a higher average price than dried cannabis, to 31.7% of sales from 25.6% in the prior quarter.
These factors were partially offset by a decrease in the average selling price per gram equivalent from $7.85 to $7.67.
Revenue for the year ended May 31, 2017 was $20,438,483 versus $8,433,929 in the same period of 2016. The reason for the increase in sales in the twelve-month period is consistent with the reasons for the increase in sales in the three-month period of the prior year above, being continued acceleration of patient onboarding, continued growth of sales to existing patients, introduction for sale of cannabis oils, offset by lower average pricing per gram to veterans during the last two quarters of the fiscal year and patient churn.
Gross profit and gross margin
The gross profit for the three months ended May 31, 2017 was $5,826,311, compared to $2,106,394 in the same period in the prior year. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year offset, decreased production costs per gram equivalent and the increase in the fair value adjustment for biological assets against the decrease in average selling price per gram equivalent.
The gross profit for the year ended May 31, 2017 was $17,297,533, compared to a gross profit of $5,977,428 in the same period of the prior year.
Due to the rapid volume of growth in the Company over the past 12 months, as a result of continued patient acquisitions, management believes more appropriate comparisons of gross profit and gross margin are between the three months ended May 31, 2017 and the three months ended February 28, 2017.
21
The gross profit for the three months ended May 31, 2017 increased to $5,826,311, compared to $3,568,069 in the prior quarter, as shown below:
|
|
|
Three months ended
|
|
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
|
Revenue
|
|
$
|
5,717,866
|
|
$
|
5,118,516
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
Cost of goods sold
|
|
547,080
|
|
1,300,029
|
|
|
Amortization
|
|
267,826
|
|
236,175
|
|
|
Net effect of FV change in biological assets
|
|
(923,351
|
)
|
14,243
|
|
|
|
|
(108,445
|
)
|
1,550,447
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
5,826,311
|
|
$
|
3,568,069
|
|
|
Gross margin
|
|
101.9
|
%
|
69.7
|
%
|
Cost of sales currently consist of three main categories: (i) cost of goods sold; (ii) amortization and, (iii) net effect of FV change in biological assets.
(i) Cost of goods sold include the direct cost of materials and labour related to the medical cannabis sold. This would include growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging and labelling. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii) Amortization includes amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis.
(iii) Net effect of FV change in biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the net effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced and sold in the period. In an effort to increase transparency, management deems it necessary to disclose that inventory of Harvested cannabis (Note 9
—
Consolidated financial statements for the year ended May 31, 2017) consists of dried flower, dried trim and cannabis oil, of which dried flower is carried at a value of $3.75 per gram, dried trim is carried at $3.00 a gram and cannabis oil is carried at $0.625/mL (6mL of cannabis oil is equivalent to 1 gram of dried product).
The decrease in cost of goods sold is primarily attributable to increased over-absorption of overhead costs in the quarter, which represent period costs as described above. The incremental over-absorption of overhead costs was primarily a function of increased production yields in the greenhouse versus our standard costs.
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of an adjusted gross profit and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Adjusted gross profit and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
22
The following is the Company’s adjusted gross profit and adjusted gross margin as compared to IFRS for the quarter:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
|
May 31, 2017
|
|
|
|
May 31, 2017
|
|
|
|
|
IFRS
|
|
Adjustments
|
|
Adjusted
|
|
|
Revenue
|
|
$
|
5,717,866
|
|
$
|
—
|
|
$
|
5,717,866
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
547,080
|
|
—
|
|
547,080
|
|
|
Amortization
|
|
267,826
|
|
—
|
|
267,826
|
|
|
Net effect of FV change in biological assets
|
|
(923,351
|
)
|
923,351
|
|
—
|
|
|
|
|
(108,445
|
)
|
923,351
|
|
814,906
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
5,826,311
|
|
(923,351
|
)
|
$
|
4,902,960
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
101.9
|
%
|
|
|
85.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is the Company’s adjusted gross profit and adjusted gross margin as compared to IFRS for the year ended May 31, 2017:
|
|
|
Year ended
|
|
|
|
Year ended
|
|
|
|
|
May 31, 2017
|
|
|
|
May 31, 2017
|
|
|
|
|
IFRS
|
|
Adjustments
|
|
Adjusted
|
|
|
Revenue
|
|
$
|
20,438,483
|
|
$
|
—
|
|
$
|
20,438,483
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
3,599,342
|
|
—
|
|
3,599,342
|
|
|
Amortization
|
|
985,533
|
|
—
|
|
985,533
|
|
|
Net effect of FV change in biological assets
|
|
(1,443,925
|
)
|
1,443,925
|
|
—
|
|
|
|
|
3,140,950
|
|
1,443,925
|
|
4,584,875
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
17,297,533
|
|
(1,443,925
|
)
|
$
|
15,853,608
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
84.6
|
%
|
|
|
77.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development and impairment of intangible asset. These costs increased by $1,746,404 to $3,860,184 from $2,113,780 in the same quarter in the prior year and increased $11,621,406 to $18,689,495 from $7,068,089 in the twelve-month period of the prior year.
Selling, general and administrative costs
|
|
|
Three months ended May,
|
|
Year ended May,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
General and administrative
|
|
$
|
1,263,118
|
|
$
|
783,136
|
|
$
|
4,678,054
|
|
$
|
2,425,123
|
|
|
Share-based compensation
|
|
688,546
|
|
57,235
|
|
2,399,111
|
|
462,314
|
|
|
Selling, marketing and promotion
|
|
1,609,445
|
|
1,109,944
|
|
6,663,862
|
|
3,598,481
|
|
|
Amortization
|
|
240,748
|
|
163,463
|
|
956,043
|
|
361,763
|
|
|
Research and development
|
|
58,327
|
|
2
|
|
492,425
|
|
220,408
|
|
|
Impairment of intangible asset
|
|
—
|
|
—
|
|
3,500,000
|
|
—
|
|
|
|
|
$
|
3,860,184
|
|
$
|
2,113,780
|
|
$
|
18,689,495
|
|
$
|
7,068,089
|
|
23
General and administrative costs
|
|
|
Three months ended May,
|
|
Year ended May,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
209,169
|
|
$
|
296,208
|
|
$
|
828,924
|
|
$
|
752,337
|
|
|
Consulting fees
|
|
87,308
|
|
5,410
|
|
219,619
|
|
39,723
|
|
|
Office and general
|
|
230,655
|
|
165,312
|
|
1,336,508
|
|
591,555
|
|
|
Professional fees
|
|
216,812
|
|
95,422
|
|
607,846
|
|
359,580
|
|
|
Salaries and wages
|
|
353,193
|
|
125,048
|
|
1,141,873
|
|
394,627
|
|
|
Travel and accommodation
|
|
143,960
|
|
83,033
|
|
463,914
|
|
242,237
|
|
|
Rent
|
|
22,021
|
|
12,703
|
|
79,370
|
|
45,064
|
|
|
|
|
$
|
1,263,118
|
|
$
|
783,136
|
|
$
|
4,678,054
|
|
$
|
2,425,123
|
|
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Salaries and wages and office and general as a result of increased activity within the business over the same period in the prior year;
·
Consulting fees, predominantly associated with various negotiations, investor relations and reviews of current and potential business relationships necessary to sustain growth of the Company, and
·
Professional fees, predominantly comprised of legal costs, associated with various negotiations and reviews of current and potential business relationships necessary to sustain growth of the Company, including our recent listing on the TSX.
The increase in general and administrative costs during the twelve-month period was largely related to the same factors as in the three-month period.
Share-based compensation
The Company recognized share-based compensation expense of $688,546 for the three months ended May 31, 2017 compared to $57,235 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is consistent with the increase in stock options issued during the respective period, 140,000 in the current period compared to 50,000 in the same period of the prior year. Of the stock options granted in the quarter, 44,999 vested in the quarter. In addition to stock options, during the quarter, the Company issued 112,500 common shares, priced at $4.96 per share to a third-party consultant of the Company in exchange for services to be provided.
For the year ended May 31, 2017, the Company incurred share-based compensation of $2,399,111 as opposed to $462,314 in the prior year, including the expenses related to the shares for services described in the three-month period. 2,253,000 options were granted during the twelve-month period ended May 31, 2017, as opposed to 565,000 options in the comparable period of the prior year. Of the options granted in the twelve-month period ended May 31, 2017, only 807,448 vested in that twelve-month period.
Selling, marketing and promotion costs
For the three months ended May 31, 2017, the Company incurred selling, marketing and promotion costs of $1,609,445, or 28.1% of revenue versus $1,109,944 or 40.0% of revenue in the comparable prior period. These costs related to patient acquisition and ongoing patient maintenance, the Company’s call centre operations, shipping costs, marketing department, as well as the development of promotional and information materials. The increase is directly correlated with the increase in patient and sales volumes over the comparable period.
24
For the year ended May 31, 2017, the Company incurred selling, marketing and promotion costs of $6,663,862 or 32.6% of revenue, as opposed to $3,598,481 or 42.7% of revenue, in the comparable prior period. The increase in costs in the twelve-month period is consistent with the increase in the three-month period.
Amortization
The Company incurred non-production related amortization charges of $240,748 for the three months ended May 31, 2017 compared to $163,463 for the same period in the prior year. The increase in amortization charges are a result of the capital expenditures made during the prior and current year, the largest of which relates to the acquisitions of CannWay Pharmaceuticals Ltd. and land and greenhouses purchased from Cacciavillani and F.M. Farms Ltd.
The Company incurred non-production related amortization charges of $956,043 for the year ended May 31, 2017 compared to $361,763 for the same period in the previous year. The increase for the twelve-month period is consistent with the increase for the three-month period.
Research and development
Research and development costs of $58,327 were expensed during the three months ended May 31, 2017 compared to $2 in same period last year. These relate to costs associated with process validation of the Company’s internal chemistry and micro biology labs, as well as researching different aspects of genetics. The Company is also experimenting with different growing methods and methods of extraction of cannabis oils and related derivatives for future commercialization.
For the year ended May 31, 2017, the Company incurred research and development costs of $492,425 as opposed to $220,408 in the comparable prior period. The increase in costs primarily relates to:
·
Validation of laboratory
·
Development of processes and methods associated with extraction
·
Phenotyping of genetics
Impairment of Intangible Assets
The Company incurred a non-cash expense of $3,500,000 relating to the impairment of its CannWay brand intangible asset. The Company recorded the impairment for the CannWay brand following the changes to reimbursement allowances for veterans, including an $8.50 per gram cap on reimbursement, effective November 24, 2016 and a limit to individual patient usage of 3.0 grams per day, effective May 24, 2017. In quantifying the impairment, the Company compared the carrying value as at the measurement date to its recoverable amount. The Company calculated its recoverable amount using the discounted cash flow technique, forecasting future sales attributable to the CannWay patient base over the remaining useful life based on the revised cap on VAC reimbursement policies combined with our current cost structure, net present valuing the result using a 15% discount rate.
Non-operating items
During the three months ended May 31, 2017, the Company incurred a non-operating loss of $4,425,107 consisting of a loss on its long-term investment portfolio of $5,572,278 (of which $4,649,596 represented a realized loss and $922,682 represented a loss of fair value), offset by consulting revenue of $295,208, $417,165 foreign exchange gain, $29,765 of finance income, net, $194,633 of gain on marketable securities and $210,400 of profit from its equity accounted investee, all compared to non-operating income of $109,550 in the prior year.
25
For the year ended May 31, 2017, the Company earned non-operating income of $5,724,179 consisting of gain on its investment portfolio of $3,571,129 (of which $6,311,979 represents fair value gains and realized gains of $2,268,757 offset by a realized loss of $5,009,607), $511,875 of consulting revenue, $482,596 of foreign exchange gains, $728,249 of finance income, net, $208,563 of gain on marketable securities and $210,400 of profit from its equity accounted investee and $11,367 related to a gain on the sale of capital assets, all compared to non-operating income of $288,622 in the prior year.
Net income (loss)
The Company incurred a loss for the three months ended May 31, 2017 of $2,592,742 or $(0.02) per share as opposed to net income of $1,302,164 or $0.02 per share in the same period of the prior year. The primary reason for the loss in the quarter was the $5,572,278 loss on the Company’s long-term investment portfolio.
The net income for the year ended May 31, 2017 was $4,198,455 or $0.04 per share as opposed to $397,961 or $0.01 per share in the same period of the prior year.
EBITDA
EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates EBITDA as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance income, net plus amortization, plus impairment of intangible asset, plus share-based compensation, plus (minus) non-cash fair value (“FV”) adjustments related to biological assets, plus amortization of non-capital assets, plus (minus) loss (gain) on sale of capital assets, plus allowance for bad debts, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity accounted investee, plus (minus) EBITDA profit (loss) from equity accounted investee plus (minus) loss (gain) on long-term investments all as follows:
|
|
|
Three months ended May
|
|
Year ended May
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Net income (loss)
|
|
$
|
(2,592,742
|
)
|
$
|
1,302,164
|
|
$
|
4,198,455
|
|
$
|
397,961
|
|
|
Income tax expense (recovery)
|
|
133,762
|
|
(1,200,000
|
)
|
133,762
|
|
(1,200,000
|
)
|
|
Finance income, net
|
|
(29,765
|
)
|
(109,550
|
)
|
(728,249
|
)
|
(281,497
|
)
|
|
Amortization
|
|
508,574
|
|
410,973
|
|
1,941,576
|
|
952,178
|
|
|
Impairment of intangible asset
|
|
—
|
|
—
|
|
3,500,000
|
|
—
|
|
|
Share-based compensation
|
|
688,546
|
|
57,235
|
|
2,399,111
|
|
462,314
|
|
|
Non-cash FV adjustments in biological assets
|
|
(923,351
|
)
|
(37,387
|
)
|
(1,443,925
|
)
|
4,646
|
|
|
Amortization of non-capital assets
|
|
3,112
|
|
58,254
|
|
66,613
|
|
193,009
|
|
|
Allowance for bad debts
|
|
(84,714
|
)
|
38,996
|
|
60,662
|
|
51,402
|
|
|
Profit from equity accounted investee
|
|
(210,400
|
)
|
—
|
|
(210,400
|
)
|
—
|
|
|
EBITDA loss from equity accounted investee
|
|
(44,000
|
)
|
—
|
|
(44,000
|
)
|
—
|
|
|
Gain on sale of capital assets
|
|
—
|
|
—
|
|
(11,367
|
)
|
(7,125
|
)
|
|
Gain on marketable securities
|
|
(194,633
|
)
|
—
|
|
(208,563
|
)
|
—
|
|
|
Loss (gain) on long-term investments
|
|
5,572,278
|
|
—
|
|
(3,571,129
|
)
|
—
|
|
|
EBITDA
|
|
$
|
2,826,667
|
|
$
|
520,685
|
|
$
|
6,082,546
|
|
$
|
572,888
|
|
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations for the year improved by $6,313,699 from cash flow used in operations of $988,134 in the twelve-month period of the prior year to cash flow generated from operations of $5,325,565 in the current twelve-month period. The improvement in cash flow generated from operations is primarily a result of:
·
Increased profitability for the period stemming from increased sales volume; and,
·
Increased accounts payable and accrued liabilities, which primarily related to unpaid capital expenditures at the end of the period.
26
These factors were partially offset by:
·
Increased inventory, where the increase is primarily made up of an increase in the amount of cannabis oil in storage; and,
·
Increase in other receivables, where the increase is primarily made up of an increase in expected government remittances receivable related to our capital expansions.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at May 31, 2017, Aphria maintained $79,910,415 of cash and cash equivalents on hand plus $87,346,787 in liquid marketable securities, compared to $16,472,664 in cash and cash equivalents at May 31, 2016 and $84,351,132 in cash and cash equivalents plus $37,678,063 in liquid marketable securities at February 28, 2017. Liquid sources of cash increased $150,784,538 in the twelve-month period and increased $45,228,007 in the quarter.
Working capital provides funds for the Company to meet its operational and capital requirements. As at May 31, 2017, the Company maintained working capital of $169,051,562. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 24 months.
Capital and intangible asset expenditures
For the three months ended May 31, 2017, the Company invested $31,955,214 in capital and intangible assets, of which $233,820 are considered maintenance CAPEX and the remainder $31,721,394 growth CAPEX, related to the property acquisitions, the Company’s Part II, Part III and Part IV Expansions.
For the year ended May 31, 2017, the Company invested $67,834,650 in capital and intangible assets, of which $781,664 are considered maintenance CAPEX and the remainder, $67,052,986 growth CAPEX, related to the Company’s Part II Expansion and Part III Expansion.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its equity accounted investee, DFMMJ Investments, Ltd., subsequently to be renamed Liberty Health Sciences Inc. after completion of a reverse takeover transaction.
During the year, the Company terminated its lease commitment for rental of greenhouse and warehouse space in conjunction with the purchase of the 265 Talbot St. West property. The Company continues to lease office space from a related party, the lease commitment ends December 31, 2018 with the option to renew for two additional five year terms, and the Company continues to lease office space in Toronto for $4,500 per month until September 2017. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty Health Sciences Inc. at 35 McFaul Street, Toronto. As discussed above, the Company has agreed to contribute an additional $1,700,000 to Green Acre Capital Fund. The Company has a lease commitments until September 2019 and August 2020 for motor vehicles.
27
Minimum payments payable over the next five years are as follows:
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Total
|
|
Less than 1 year
|
|
1 – 3 years
|
|
4 – 5 years
|
|
After 5 years
|
|
|
Outstanding capital
|
|
|
|
|
|
|
|
|
|
|
|
|
related commitments
|
|
$
|
22,098,567
|
|
$
|
8,805,235
|
|
$
|
13,293,332
|
|
$
|
—
|
|
$
|
—
|
|
|
Operating leases
|
|
69,794
|
|
50,712
|
|
19,082
|
|
—
|
|
—
|
|
|
Motor vehicle leases
|
|
83,016
|
|
28,911
|
|
50,838
|
|
3,267
|
|
—
|
|
|
Long-term debt
|
|
32,205,871
|
|
765,224
|
|
1,672,155
|
|
29,768,492
|
|
—
|
|
|
Total
|
|
$
|
54,457,248
|
|
$
|
9,650,082
|
|
$
|
15,035,407
|
|
$
|
29,771,759
|
|
$
|
—
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the year.
Share capital
Aphria has the following securities issued and outstanding, as at July 11, 2017:
|
|
|
Presently
|
|
|
|
Exercisable &
|
|
Fully
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
in-the-money*
|
|
diluted
|
|
|
Common stock
|
|
138,819,504
|
|
|
|
|
|
138,819,504
|
|
|
Warrants
|
|
—
|
|
3,703,408
|
|
3,703,408
|
|
3,703,408
|
|
|
Stock options
|
|
—
|
|
3,911,242
|
|
3,684,580
|
|
5,917,701
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
148,440,613
|
|
* Based on closing price on July 11, 2017
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the fourth quarter of fiscal 2017, ended May 31, 2017. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2017 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
|
|
|
Aug/16
|
|
Nov/16
|
|
Feb/17
|
|
May/17
|
|
|
Revenue
|
|
$
|
4,375,512
|
|
$
|
5,226,589
|
|
$
|
5,118,516
|
|
$
|
5,717,866
|
|
|
Net income (loss)
|
|
895,269
|
|
945,678
|
|
4,950,250
|
|
(2,592,742
|
)
|
|
Income per share - basic
|
|
0.01
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
|
Income per share
—
fully diluted
|
|
0.01
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug/15
|
|
Nov/15
|
|
Feb/16
|
|
May/16
|
|
|
Revenue
|
|
$
|
950,740
|
|
$
|
2,026,975
|
|
$
|
2,679,898
|
|
$
|
2,776,316
|
|
|
Net income (loss)
|
|
(476,825
|
)
|
(431,098
|
)
|
3,720
|
|
1,302,164
|
|
|
Loss per share - basic
|
|
(0.01
|
)
|
(0.00
|
)
|
0.00
|
|
0.02
|
|
|
Loss per share
—
fully diluted
|
|
(0.01
|
)
|
(0.00
|
)
|
0.00
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
RELATED PARTY BALANCES AND TRANSACTIONS
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. Through these related parties, Aphria can leverage the purchasing power for growing related commodities and labour, which provides the Company with better rates than if Aphria was sourcing these on its own. These transactions are measured at their exchange amounts. The Company owed $nil to related parties as at May 31, 2017 (2016 - $nil). These amounts were due upon demand and are non-interest bearing. These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani and Mr. John Cervini).
During the twelve months ended May 31, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $387,892 (2016 - $1,139,788). Included in this amount was rent of $49,389 charged during the twelve months ended May 31, 2017 (2016 - $193,593).
The Company funded the start-up costs and operations of DFMMJ Investments, Ltd. The balance owing from the related party as at May 31, 2017 was $463,916 (May 31, 2016 - $nil).
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2017, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) are effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
Under the supervision of the CEO and CFO, the Company has designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
The CEO and CFO have caused an evaluation of the effectiveness of the Company’s internal controls over financial reporting as of May 31, 2017. This evaluation included documentation activities, management inquiries, tests of controls and other reviews as deemed appropriate by management in consideration of the size and nature of the Company’s business including those matters described above. Based on that evaluation, the CEO and the CFO concluded that the design and operating effectiveness of internal controls over financial reporting was effective as at May 31, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal
29
control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the year ended May 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
SUBSEQUENT EVENTS
On June 1, 2017, the Company’s subsidiary, CannWay was amalgamated with Pure Natures Wellness Inc. (o/a Aphria).
On June 22, 2017, the Company purchased land and buildings from a third party for approximately $500,000.
On June 30, 2017, the Company entered into a subscription agreement with Tokyo Smoke for the purchase of 140,845 common shares, for a total cost of $1,000,000.
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to processing cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical marijuana and marijuana-related offenses in the United States.
30
Exhibit 99.12
APHRIA INC.
ANNUAL INFORMATION FORM
For the fiscal year ended May 31, 2017
DATED: July 12, 2017
TABLE OF CONTENTS
|
ANNUAL INFORMATION FORM
|
3
|
|
FORWARD-LOOKING STATEMENTS
|
3
|
|
CORPORATE STRUCTURE
|
4
|
|
GENERAL DEVELOPMENT OF THE BUSINESS
|
5
|
|
Qualifying Transaction
|
5
|
|
Licenses
|
5
|
|
Expansion and Property Acquisitions
|
6
|
|
Regulatory Developments
|
7
|
|
Recent Business
|
8
|
|
DESCRIPTION OF THE BUSINESS
|
9
|
|
Company Overview
|
9
|
|
License and Regulations
|
9
|
|
Reporting Requirements under the ACMPR
|
11
|
|
Principal Products
|
14
|
|
Distribution
|
14
|
|
Operations
|
15
|
|
Storage and Security
|
15
|
|
Specialized Skill and Knowledge
|
15
|
|
Competitive Conditions
|
16
|
|
Employees
|
16
|
|
RISK FACTORS
|
17
|
|
DIVIDENDS
|
28
|
|
CAPITAL STRUCTURE
|
28
|
|
MARKET FOR SECURITIES
|
28
|
|
PRIOR SALES
|
29
|
|
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
|
29
|
|
DIRECTORS AND OFFICERS
|
30
|
|
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
|
34
|
|
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
|
34
|
|
TRANFER AGENT AND REGISTAR
|
34
|
|
MATERIAL CONTRACTS
|
35
|
|
AUDIT COMMITTEE INFORMATION
|
35
|
|
INTERESTS OF EXPERTS
|
36
|
|
ADDITIONAL INFORMATION
|
36
|
ANNUAL INFORMATION FORM
In this annual information form (“
Annual Information Form
”), unless otherwise noted or the context indicates otherwise, the “
Company
”, “Aphria”, “we”, “us” and “our” refer to Aphria Inc. and its principal wholly-owned subsidiary, Pure Natures Wellness Inc. d/b/a Aphria and the term “
marijuana
” has the meaning given to the term “marihuana” in the
Access to Cannabis for Medical Purposes Regulations
(“
ACMPR
”). All financial information in this Annual Information Form is prepared in Canadian dollars and using International Financial Reporting Standards as issued by the International Accounting Standards Board. The information contained herein is dated as of May 31, 2017 unless otherwise stated.
FORWARD-LOOKING STATEMENTS
This Annual Information Form contains certain information that may constitute “forward-looking information” and “forward-looking statements” (collectively, “
forward-looking statements
”) which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as “expect,” “likely”, “may,” “will,” “should,” “intend,” or “anticipate”, “potential”, “proposed”, “estimate” and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. The forward-looking statements included in this Annual Information Form are made only as of the date of this Annual Information Form. Forward-looking statements in this Annual Information Form include, but are not limited to, statements with respect to:
·
the performance of the Company’s business and operations;
·
the intention to grow the business and operations of the Company;
·
the Company’s intentions to complete Part III Expansion (as defined herein) and the Company’s intention to proceed with Part IV Expansion (as defined herein), the respective costs and anticipated timing associated therewith, and receipt of approval from Health Canada in relation to such expansions;
·
the anticipated timing to complete construction in connection with Part III Expansion and Part IV Expansion;
·
underlying market conditions continuing to demonstrate a reasonable basis to execute on Part III Expansion and Part IV Expansion;
·
the expected growth in the amount of medical marijuana sold by the Company;
·
the expected growth in the Company’s growing capacity;
·
expectations with respect to future production costs;
·
expectations with respect to the renewal and/or extension of the Company’s licenses;
·
the number of grams of medical marijuana used by each patient;
·
the methods used by the Company to deliver medical marijuana;
·
the competitive conditions of the industry;
3
·
any commentary related to the legalization of marijuana and the timing related thereto;
·
the applicable laws, regulations and any amendments thereof;
·
the competitive and business strategies of the Company;
·
the Company’s investments in the United States, the characterization and consequences of those investments under federal law, and the framework for the enforcement of medical marijuana and marijuana-related offenses in the United States;
·
the grant and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof; and
·
the anticipated future gross margins of the Company’s operations.
Certain of the forward-looking statements and forward-looking information and other information contained herein concerning the medical marijuana industry and the general expectations of Aphria concerning the medical marijuana industry are based on estimates prepared by Aphria using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which Aphria believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While Aphria is not aware of any misstatement regarding any industry or government data presented herein, the medical marijuana industry involves risks and uncertainties that are subject to change based on various factors.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement. In particular, but without limiting the foregoing, disclosure in this Annual Information Form under “
Description of the Business
” as well as statements regarding the Company’s objectives, plans and goals, including future operating results, economic performance and patient acquisition efforts may make reference to or involve forward-looking statements. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. You should not place undue reliance on forward-looking statements contained in this Annual Information Form. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
CORPORATE STRUCTURE
Aphria Inc. was incorporated under the Business Corporations Act (Alberta) on June 22, 2011 as Black Sparrow Capital Corp. (“
Black Sparrow
”, a capital pool company listed on the TSX Venture Exchange (the “
TSXV
”)). 2427745 Ontario Inc. (“
Subco
”), a wholly-owned subsidiary of Black Sparrow, was incorporated on July 24, 2014 in order to effect a business combination with Pure Natures Wellness Inc. d/b/a Aphria (“
Pure Natures
”) whereby Black Sparrow would acquire all of the issued and outstanding shares of Pure Natures pursuant to a court-approved plan of arrangement. Pure Natures amalgamated with Subco under the
Ontario Business Corporations Act
(“
OBCA
”) to form a wholly owned subsidiary of Black Sparrow, and together with Black Sparrow, was continued in Ontario on December 1, 2014 as “Aphria Inc.” under the OBCA. On March 22, 2017, Aphria graduated from the TSXV to the Toronto Stock Exchange (“
TSX
”). The Company’s common shares (the “
Common Shares
”) are listed under the symbol “APH” on the TSX and under the symbol “APHQF” on the OTCQB.
The following chart (as of this date) illustrates the Company’s corporate structure, together with the place of incorporation/governing law of each principal subsidiary and the percentage of voting securities beneficially owned by the Company.
4
The Company is licensed to produce and sell medical marijuana as a Licensed Producer under the provisions of the ACMPR. The Company received its initial license to produce and sell medical marijuana on November 26, 2014. For a further description of the Company’s licenses, see
General Development of the Business — Licenses
and
Description of the Business — License and Regulations
.
Aphria’s operations are based in Leamington, Ontario. Our head office is located at 245 Talbot St W, Suite 103, Leamington, ON N8H 1N8 and our registered office is located at c/o 5300 Commerce Court West, 199 Bay Street, Toronto, ON, M5L 1B9. Our telephone number is (844) 427-4742 and our corporate website is www.aphria.com.
GENERAL DEVELOPMENT OF THE BUSINESS
Qualifying Transaction
On July 31, 2014, Black Sparrow and Pure Natures entered into a business combination agreement pursuant to which Black Sparrow agreed, among other things, to change its name to “Aphria Inc.”, to continue under the OBCA and to effect a consolidation of the outstanding Black Sparrow common shares on a 10 to 1 basis. Under the agreement, Black Sparrow acquired all of the outstanding shares of Pure Natures by way of a three-cornered amalgamation pursuant to which Black Sparrow was continued in Ontario on December 1, 2014 under the OBCA and on December 2, 2014, Black Sparrow completed its Qualifying Transaction, as defined under the policies of the TSXV, with Pure Natures.
Licenses
Aphria’s application to become a Licensed Producer under the Marihuana for Medical Purposes Regulations (the “
MMPR
”) was submitted to Health Canada on August 6, 2013. On March 22, 2014 a license to acquire, produce and destroy medical marijuana was obtained, and on August 8, 2014, Aphria received its license to harvest medical marijuana. On November 26, 2014, Aphria received its license from Health Canada to cultivate and sell marijuana under the MMPR. Prior to receiving its final license to distribute medical marijuana, Aphria was operating under a partial license at its facility in Leamington. In February 2015, the Company successfully amended its license with Health Canada to allow for wholesale shipping within Canada of medical marijuana plant cuttings. In March 2015, the Company amended its license to allow for wholesale shipping of medical marijuana in dried bud form. In December 2015, Health Canada amended the Company’s license to produce and sell medical marijuana, increasing the Company’s production and selling limits during the license term. In February 2016, Health Canada amended the Company’s license to produce medical marijuana by approving the Company’s Part I Expansion (defined below) for growing medical marijuana. In May 2017, Health Canada amended the Company’s license in connection with the approval of the Part II Expansion (as defined below).
On August 26, 2015, the Company received from Health Canada a license to produce (and only produce) cannabis oil extracts under the section 56 exemption the (the “
Section 56 Exemption
”) of the Controlled Drugs and Substances Act (the “
CDSA
”). On August 17, 2016, Aphria announce that Health Canada amended the Company’s license to allow it to sell cannabis oil extracts.
Aphria’s license currently does not contain a cap on production or sales but is based on the Company storing no more than 6,875 kilograms and/or the kilogram equivalent of cannabis oil in its vaults at any given time (the
5
“
License
”). The License has a current term that ends on September 25, 2019. It is anticipated that Health Canada will extend or renew the License at the end of its current term. See
Risk Factors — Reliance on License
. Medical marijuana cultivated by Aphria is processed for sale or wholesale distribution to other Licensed Producers. Aphria may sell medical marijuana to patients who have obtained a valid prescription from a doctor or authorized health care professional or to other Licensed Producers.
Expansion and Property Acquisitions
In March 2015, Aphria’s board of directors (the “
Board
”) approved a two-part expansion. The first part of the Company’s greenhouse expansion (“
Part I Expansion
”) involved the retrofit of three existing greenhouses adjacent to the current facilities for an additional 20,700 square feet, for a total annual growing capacity of approximately 2,500 kilograms, and also involved Aphria building a research & development laboratory and investing in related advanced equipment at its Leamington, Ontario facility. Part I Expansion was completed in October 2015. Subsequently, on February 7, 2016, Health Canada amended the Company’s License to approve the use of Part I Expansion for the purposes of growing medical marijuana.
The second part (the “
Part II Expansion
”) was approved by the Board on June 2, 2016 and the Company began construction of the $10 million fully-funded capital project on July 1, 2016. On May 15, 2017 Health Canada approved the greenhouse portion of the Part II Expansion, which added an incremental 57,000 square feet of greenhouse capacity and a “level nine” vault. Part II Expansion increased the Company’s production capacity for medical marijuana to approximately 8,000 kilograms on an annualized basis. The Part II Expansion also includes 8,000 square feet of corporate office space and electrical and sewer upgrades necessary for the operation of the Company’s current and future greenhouse space. Part II Expansion, with respect to the corporate office space, has recently begun with the hiring of an architect to design the space. The Company currently anticipates commencing the office space portion of Part II Expansion in September 2017. Part II Expansion, with respect to the electrical and sewer upgrades, is currently on hold as a result of Hydro One indicating that the earliest they can complete the upgrades is March 2018. The Company continues to explore alternative sources of power including a larger co-generation project as part of the Part IV Expansion (as defined below).
On June 30, 2016, Aphria acquired the greenhouse facilities it previously leased from Cacciavillani and F.M. Farms Ltd. operating as CF Greenhouses (“
CF Greenhouses
”) and terminated the existing lease agreement for total consideration of $6.1 million. CF Greenhouses is a greenhouse growing company controlled in part by Cole Cacciavillani, Director and Chief Operating Officer of Aphria. As a result of the acquisition, Aphria now owns a total of 360,000 square feet of production space located on 36 acres of land (the “
Greenhouse Property
”). The $6.1 million purchase price was satisfied by a $3.25 million cash payment and CF Greenhouses assuming a vendor take back mortgage, in the amount of $2.85 million, with a 5-year amortization period and bearing interest at 6.75%.
On July 22, 2016, Aphria closed a financing comprised of three separate facilities (a mortgage, a term loan and an operating line of credit) totaling $6,000,000 with WFCU Credit Union (the “
WFCU Facility
”). The mortgage facility is for $3,750,000, bearing interest at 3.95%, with a 20-year amortization and a 5-year term (the “
Mortgage Facility
”). The term loan is for $1,250,000 bearing interest at 3.99%, with a 10-year amortization and a 5-year term (the “
Term Loan
”). The operating line of credit is for $1,000,000, bearing interest at WFCU’s prime lending rate plus 75 basis points and revolves annually (the “
Line of Credit
”). Aphria used $3.25 million of the WFCU Facility to fund the acquisition of the Greenhouse Property (as defined above) and has allocated the remaining $1.75 million of the drawn portion of the WFCU Facility towards capital projects in 2017 unrelated to Part II Expansion, Part III Expansion or Part IV Expansion. The Line of Credit remains undrawn and available to the Company for future use.
On August 19, 2016, Aphria entered into an agreement to purchase 11 acres of additional greenhouse property adjacent to its existing campus from DiNiro Farms Inc. for a $2,100,000 cash payment. The property consists of 345,000 square feet of existing greenhouse space which the Company demolished as part of Part IV Expansion. Concurrently with the closing of this transaction, the abutting property was merged into Aphria’s existing municipal address, thereby avoiding the need to apply for a new Health Canada site license.
6
On September 16, 2016, the Board approved the commencement of a fully-funded $24.5 million capital project (“
Part III Expansion
”), which the Company anticipates will increase its capacity under the ACMPR from 100,000 square feet to 300,000 square feet and its growing capabilities from 8,000 kilograms (following Part II Expansion) to 22,000 kilograms annually. The project includes (1) 200,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouse operations in Leamington, (2) 21,000 square feet of infrastructure, (3) an additional four “Level 9” vaults, (4) automation for both the greenhouses and processing areas, and (5) security consistent with ACMPR standards. Part III Expansion remains on schedule and on budget, with expected completion in late October 2017, with Health Canada approval to follow thereafter. The Company expects the first sale of product grown in the Part III Expansion to occur in late May 2018.
On December 14, 2016, Aphria entered into a purchase and sale agreement to acquire 200 acres of fully serviced vacant land for $6.24 million. As the land acquired is not adjacent to the Company’s existing operations, the Company will require a new site license from Health Canada for the property. The purchase and sale closed on January 31, 2017.
On January 16, 2017, the Board approved the commencement of a $137 million capital project (“
Part IV Expansion
”). It was originally anticipated that Part IV Expansion would include approximately 350,000 square feet of state-of-the-art greenhouses, approximately 160,000 square feet of infrastructure, and the purchase and development of additional land, with a total cost between $70 million to $90 million; however, following further internal review and consultation, the Company has since increased the scope of the expansion to meet anticipated demand. Part IV Expansion is now fully-funded and anticipated to include (1) 700,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouses operations in Leamington, for total greenhouse growing space of 1,000,000 square feet, (2) 230,000 square feet of infrastructure, including a 15 MW power co-generation facility designed to provide supplemental power to the Greenhouse Property to support existing operations and potential future operations currently contemplated on the existing Greenhouse Property, (3) 10 additional “Level 9” vaults, (4) additional automation of greenhouses and warehouse facilities, and (5) security consistent with ACMPR standards. Part IV Expansion is expected to be completed within 15 months and is expected to provide an additional 53,000 kilograms of annual production capacity, subject to the receipt of necessary Health Canada approvals to increase Aphria’s capacity under its Licence. The Company expects the first sale of product grown in the Part III Expansion to occur in late January 2019.
Although it is premature at this time for Aphria to apply to increase its License capacity in connection with Part III Expansion or Part IV Expansion, Aphria will make such applications to Health Canada on an incremental basis in due course as each part nears completion. In respect of such applications, Aphria anticipates Health Canada approvals to follow within four months of the completion of such part of expansion.
The Company continues to refine and improve its industry leading greenhouse agricultural growing practices, combined with unique engineering changes embedded in both fully funded Part III and Part IV expansions, presently underway. Management believes that once full crop rotation has been attained after Part IV expansion is complete, annualized capacity will exceed 100,000 kilograms. Supporting management’s revised capacity projections are recent yield improvements resulting from the introduction of new lighting strategies, growing techniques and leveraging other “unique to greenhouse” strengths.
As a result of the above, the Company amended its previously reported capacity expectations for its expansion projects. The Company believes that the capacity after full crop rotation in Part II Expansion will increase from 8,000 kilograms to 9,000 kilograms annualized, in Part III Expansion it will increase from 22,000 kilograms to 30,000 kilograms annualized and in Part IV Expansion it will increase from 75,000 kilograms to 100,000 kilograms annualized.
Regulatory Developments
On August 24, 2016, the ACMPR replaced the MMPR as the governing regulations in respect of the production, sale and distribution of medical cannabis and related oil extracts. The replacement regulations were implemented as a
7
result of the ruling by the Federal Court of Canada in the case of
Allard v Canada
(the “
Allard Decision
”) which found the MMPR unconstitutional in violation of the plaintiffs’ rights under section 7 of the Charter of Rights and Freedoms due to the restrictions placed on a patient’s ability to reasonably access medical cannabis.
The ACMPR effectively combines the regulations and requirements of the MMPR, the
Marihuana Medical Access Regulations
(“
MMAR
”) and the Section 56 Exemptions relating to cannabis oil under the CDSA into one set of regulations. In addition, among other things, the ACMPR sets out the process patients are required to follow to obtain authorization from Health Canada to grow cannabis and to acquire seeds or plants from Licensed Producers to grow their own cannabis. Under the ACMPR, patients have three options for obtaining cannabis:
(a)
they can continue to access quality-controlled cannabis by registering with Licensed Producers;
(b)
they can register with Health Canada to produce a limited amount of cannabis for their own medical purposes; or
(c)
they can designate someone else to produce it for them.
With respect to (b) and (c), starting materials, such as plants or seeds, must be obtained from Licensed Producers. It is possible that (b) and (c) could significantly reduce the addressable market for the Company’s products and could materially and adversely affect the business, financial condition and results of operations of the Company. That said, management of the Company believes that many patients may be deterred from opting to proceed with options (b) or (c) since such steps require applying for and obtaining registration from Health Canada to grow cannabis, as well as the up-front costs of obtaining equipment and materials to produce such cannabis. Further details on the ACMPR are found below under
Description of the Business — License and Regulation
.
On December 13, 2016, the Task Force on Cannabis Legalization and Regulation (the “
Task Force
”), which was established by the Canadian Federal Government to seek input on the design of a new system to legalize, strictly regulate and restrict access to marijuana, completed its review and published its report outlining its recommendations. On April 13, 2017, the Canadian Federal Government released Bill C-45, which proposes the enactment of the Cannabis Act, to regulate the production, distribution and sale of cannabis for unqualified adult use, with a target implementation date of no later than July 1, 2018. The impact of such regulatory changes on Aphria’s business is unknown, and the proposed regulatory changes may not be implemented at all. See
Risk Factors - Changes in Laws, Regulations and Guidelines
.
Recent Business
On October 27, 2016, Aphria entered into an intellectual property transfer agreement with Copperstate Farms, LLC (“
Copperstate
”), a licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act
. Copperstate maintains a 40-acre, high-tech, Dutch-style greenhouse facility in Snowflake, Arizona. Under the terms of the agreement, Aphria licensed certain of its intellectual property to Copperstate in exchange for a 5,000 membership units in Copperstate. In addition, Aphria made a direct cash contribution of US$1,300,000 to the parent company of Copperstate in return for a 2,600 membership units in the parent company. The transaction received final approval from the TSXV on December 21, 2016. Prior to receiving such final approval, Aphria acquired an additional 2,600 membership units in the parent company, increasing its ownership in the parent company 5,200 membership units. On March 27, 2017, Aphria made an additional investment of US$3 million in the parent company, for an additional 6,000 membership units in the parent company.
On April 4, 2017, Aphria announced the launch of its US expansion strategy through a strategic lead investment in an entity to be renamed Liberty Health Sciences Inc. (“
Liberty
”) that will operate in the United States under the brand “Aphria USA”. While the initial investment relates to the State of Florida, the intention of the US expansion strategy is to target key states that have approved medical use of marijuana and meet the Company’s stringent investment criteria. Aphria has subsequently invested $25 million into DFMMJ Investment Ltd. (“
DFMMJ
”), a new special purpose private company which has acquired all or substantially all of the assets of Chestnut Hill Tree Farm
8
LLC (“
Chestnut
”). It is expected that DFMMJ will amalgamate into a subsidiary of SecureCom Mobile Inc. (“
SecureCom
”), a public company listed on the Canadian Securities Exchange, as part of the previously announced business combination (the “
Business Combination
”). The funds, when combined with an additional $35 million that was raised from third parties in a brokered private placement led by Clarus will allow Liberty, on completion of the Business Combination, to indirectly hold and operate the assets of Chestnut. Chestnut is a licensed holder in the state as an authorized dispensing organization of low-THC medical cannabis to patients in need in the State of Florida.
As part of the transaction, upon completion of the Business Combination, Aphria has agreed to (a) licence its Aphria medical brand to Liberty, in exchange for a perpetual 3% royalty on all sales of marijuana and related products, and (b) licence its greenhouse growing “know how” system to Liberty in exchange for additional common shares in Liberty. As part of the investment in Liberty and the Business Combination, Aphria will be entitled, among other customary rights, to appoint two nominees as board members to Liberty’s proposed five-person board. It is the intention of the Company to appoint Vic Neufeld and John Cervini as nominees to Liberty’s board of directors. It is also expected that they will be joined by Aaron Serruya of Serruya Private Equity, effective upon the completion of the Business Combination, subject to all board nominees being approved by the Canadian Stock Exchange and the Florida Department of Health. Once the Business Combination is completed, Aphria will own approximately 37.6% of the issued and outstanding common shares of Liberty. Upon completion of the Business Combination, SecureCom, renamed Liberty, will remain a reporting issuer with its common shares listed on the Canadian Securities Exchange.
On May 9, 2017, Aphria entered into 5-year, $25 million term loan with WFCU Credit Union bearing interest at 3.95% and a 15-year amortization (the “
New WFCU Facility
”). The New WFCU Facility is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, certain cash security and an assignment of fire insurance to the lender.
DESCRIPTION OF THE BUSINESS
Company Overview
The Company is licensed to produce and sell medical marijuana, including dried cannabis and cannabis oil, as a Licensed Producer under the provisions of the ACMPR. The Company received its initial license to produce and sell medical marijuana on November 26, 2014. For a further description of the Company’s License, see
General Developments of the Business — Licenses
.
The License grants Aphria the authority to produce, sell, possess, ship, transport, deliver and destroy dried marijuana and marijuana plants (including live plants, clippings and seeds), as well as cannabis oil extracts. The License is issued to Aphria for use at its facility in Leamington, Ontario at 265 Talbot Street West and applies only to such facility. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical marijuana, its business, financial condition and prospects. See
Risk Factors — Reliance on a Single Facility
.
License and Regulations
Pursuant to its License, Aphria may:
(a)
possess, produce, sell, provide, ship, deliver, transport and destroy marijuana or cannabis oil;
(b)
possess and produce cannabis in its natural form, other than marijuana or cannabis oil, for the purpose of producing cannabis oil, and sell, provide, ship, deliver, transport and destroy that cannabis if it was obtained or produced for that purpose; and
(c)
possess and produce cannabis, other than marihuana or cannabis oil, for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marihuana
9
or cannabis oil, and sell, provide, ship, deliver, transport and destroy that cannabis if it was obtained or produced for that purpose.
Aphria may sell or provide:
(a)
marijuana, cannabis oil, cannabis in its natural form, other than marihuana or cannabis oil, that was obtained or produced for the purpose of producing cannabis oil and cannabis, other than marihuana or cannabis oil, that was obtained or produced for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marihuana or cannabis oil (each a “
substance
”) to:
(i)
another Licensed Producer;
(ii)
a licensed dealer (as defined in the ACMPR);
(iii)
the Minister of Health (the “
Minister
”); or
(iv)
a person to whom an exemption relating to the substance has been granted under section 56 of the CDSA; and
(b)
dried marijuana or cannabis oil to
(i)
a client or an individual who is responsible for the client;
(ii)
a hospital employee, if the possession of the dried marijuana or cannabis oil is for the purposes of and in connection with their employment; or
(iii)
a person to whom an exemption relating to the dried marijuana or cannabis oil has been granted under section 56 of the CDSA.
Aphria may also (i) ship dried marijuana or cannabis oil to a health care practitioner (as defined in the ACMPR) in the case referred to in subparagraph 130(1)(f)(iii) of the ACMPR; (ii) import marijuana or a substance if done in accordance with an import permit issued under section 95 of the ACMPR; and (iii) possess marijuana or a substance for the purpose of export and export it if done in accordance with an export permit issued under section 103 of the ACMPR.
Before the end of the term of the License, Aphria must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. The ACMPR requires that the Minister of Health, after examining the application and any supplementary information requested, issue a renewed License, unless:
(a)
the applicant is not an adult who ordinarily resides in Canada or a corporation that has its head office in Canada or operates a branch office in Canada and whose officers and directors are all adults;
(b)
the requirements regarding notification of local authorities pursuant to the ACMPR have not been met (such notifications would only be required in connection with a renewal if there are changes to the information since the original application);
(c)
an inspector, who has requested an inspection, has not been given the opportunity by the applicant to conduct an inspection;
(d)
the Minister has reasonable grounds to believe that false or misleading information or false or falsified documents were submitted in or with the application;
10
(e)
information received from a peace officer, a competent authority or the United Nations raises reasonable grounds to believe that the applicant has been involved in the diversion of a controlled substance or precursor to an illicit market or use;
(f)
the applicant does not have in place the security measures set out in the Security Directive and Subdivision C of the ACMPR in respect of an activity for which the licence is sought;
(g) the applicant is in contravention of or has contravened in the past 10 years:
i. a provision of the CDSA or its regulations or the Food and Drugs Act, or
ii. a term or condition of another licence or a permit issued to it under any of those regulations,
(h)
the renewal of the licence would likely create a risk to public health, safety or security, including the risk of cannabis being diverted to an illicit market or use;
(i) any of the following persons does not hold a security clearance:
i. the senior person in charge,
ii. the responsible person in charge,
iii. if applicable, the alternate responsible person in charge,
iv. if the applicant is an individual, that individual, and
v. if the applicant is a corporation, any of its officers or directors;
(j) the proposed method of record keeping does not meet the requirements of the ACMPR; or
(k)
if applicable, any supplemental information requested has not been provided or is insufficient to process the application.
There can be no guarantee that Health Canada will extend or renew the License as necessary or, if it extended or renewed, that the License will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the License, or should it renew the License on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected. See
Risk Factors — Reliance on License
.
Medical marijuana cultivated by Aphria is processed for sale or wholesale distribution to other Licensed Producers. Aphria may sell medical marijuana to patients who have obtained a valid medical document from a doctor or authorized health care professional or to other Licensed Producers.
Reporting Requirements under the ACMPR
As described under the ACMPR (see Part 1, Division 5 of the ACMPR), Licensed Producers are required to keep records of, among other things, their activities with cannabis, including all transactions (sale, exportation, and importation), all fresh or dried marihuana or cannabis oils returned from clients, and an inventory of cannabis (e.g. seeds, fresh harvested marihuana, dried marihuana, packaged marihuana, packaged marijuana seeds, cannabis oil, marijuana plants destined to be sold or provided). All records have to be kept for a period of at least two years, in a format that will be easily auditable, and will have to be made available to Health Canada upon request. All communications regarding reports for healthcare licensing authorities, including both those sent and received, are also subject to this two year requirement.
11
A Licensed Producer must provide Health Canada with a case report for each serious adverse reaction to fresh or dried marihuana or cannabis oil within 15 days of the Licensed Producer becoming aware of the reaction. A Licensed Producer must annually prepare and maintain a summary report that contains a concise and critical analysis of all adverse reactions to have occurred during the previous 12 months (the serious adverse reaction reports and the summary reports must be retained by the Licensed Producer for a period of 25 years after the day on which they were made).
Health Canada released an Information Bulletin titled, “Licensed Producers’ Reporting Requirements” to provide an overview of the information licensed producers must provide to Health Canada on a monthly basis. Licensed Producers must provide the following information to the Office of Controlled Substances for the previous month on or before the 15th day of each month:
(a)
With respect to fresh and dried marijuana, cannabis oil, cannabis seeds and marijuana plants, licensed producers must report the amounts produced, as well as the amounts received from another licensed producer as follows:
i. total amount produced in the reporting period;
ii. amount released for sale in the reporting period;
iii. amount of fresh and dried marijuana produced in the reporting period and intended for extraction activities; and
iv. amount received from other licensed producers during the reporting period;
(b)
With respect to fresh and dried marijuana, cannabis oil, cannabis seeds and marijuana plants, licensed producers must report the total amount sold or transferred to the following during the reporting period:
i. registered clients;
ii. other licensed producers; and
iii. licensed dealers;
(c)
Number of clients registered;
(d)
Number of clients registered by province or territory of residence;
(e) Number of refused registrations and refusals to fill order;
(f)
With respect to fresh and dried marijuana and cannabis oil, licensed producers must report as of the final day of the reporting period the amounts held in inventory as follows:
i. total amount held in inventory;
ii. amount intended for sale but not yet approved held in inventory;
iii. amount approved for sale held in inventory;
iv. amount of samples in inventory; and
v. amount of fresh and dried marijuana intended for extraction activities held in inventory;
12
(g)
With respect to cannabis seeds and marijuana plants, licensed producers must report:
i. the total number of plants held in inventory;
ii. the number of plants destined to be sold as starting material held in inventory;
iii. the total weight of seeds held in inventory; and
iv. the number and weight of seeds destined to be sold as starting material held in inventory;
(h)
Licensed producers must also include in their report the total amounts ready to be destroyed, but still held in inventory on the final day of the reporting period;
(i)
Total amount of cannabis imported during the reporting period;
(j)
Total amount of cannabis exported during the reporting period;
(k)
Total amount of cannabis lost or stolen during the reporting period;
(l)
With respect to fresh and dried marijuana, cannabis oil, cannabis seeds and marijuana plants, licensed producers must report the total amount:
i. that was destroyed during the reporting period; and
ii. of waste (e.g., plants, leaves, twigs) destroyed during the reporting period;
(m)
With respect to fresh and dried marijuana, cannabis oil, cannabis seeds and marijuana plants, licensed producers must report the total amount returned from clients during the reporting period;
(n)
Licensed producers must report the total number of shipments sent to the following during the reporting period:
i. registered clients;
ii. registered clients for interim supply;
iii. other licensed producers; and
iv. licensed dealers;
(o)
Licensed producers must report the total number of shipments sent to the following in each province and territory:
i. registered clients;
ii. registered clients for interim supply; other licensed producers; and
iii. licensed dealers;
(p)
Average daily amount of marihuana for medical purposes authorized;
(q)
Median daily amount of marihuana for medical purposes authorized;
13
(r)
Average shipment size sent to registered clients during the reporting period;
(s)
Median shipment size sent to registered clients during the reporting period;
(t)
List of ten highest unique daily authorized amounts and the frequency with which they occur;
(u)
List of daily authorized amounts in specified increments:
i. 0 to 1 grams;
ii. 1.1 to 2 grams;
iii. 2.1 to 3 grams;
iv. 3.1 to 4 grams;
v. 4.1 to 5 grams;
vi. 5 to 10 grams;
vii. 10 to 15 grams; and
viii. > 15 grams;
(v)
Total number of shipments to registered clients per each 10 gram interval between 0 and 150 grams;
(w)
List of all health care practitioners who have completed medical documents for cannabis for medical purposes for registered clients and their location;
(x)
List of all nurse practitioners who have completed medical documents for cannabis for medical purposes for registered clients and their location;
(y) Cannabis with which they are conducting research and development activities; and
(z) Activities with respect to cannabis products, other than marijuana or cannabis oil (e.g. cannabis resin).
Principal Products
Medical marijuana can be ingested in a variety of ways, including smoking, vaporizing, consumption in the form of oil, or edibles. Unlike the pharmaceutical options, individual elements within medical marijuana have not been isolated, concentrated and synthetically manipulated to deliver a specific therapeutic effect. Instead medical marijuana addresses ailments holistically through the synergistic action of naturally occurring phytochemicals.
Sativa and Indica are the two main types of cannabis plants, and hybrids can be created when the genetics of each of the two plants are crossed. Within these different types of cannabis plants there are many different varieties. Within each variety of medical cannabis there are many different cannabinoids, with the most common being THC and CBD, which is responsible for many of the non-psychoactive effects from medical marijuana. Aphria has access to over 40 strain varieties and will continue to establish a variety of strains to best suit patient needs.
Distribution
Medical marijuana patients order from the Company primarily through Aphria’s online store or through the phone. Medical marijuana is and will continue to be delivered by secured courier or other methods permitted by the
14
ACMPR. Aphria’s prices vary based on growth time, strain yield and market prices. Aphria may from time to time offer volume discount or promotional pricing.
The Company is also authorized for wholesale shipping of medical marijuana plant cuttings and dried bud to other Licensed Producers. Aphria has already completed several sales through its wholesale strategy and based on current costs, management expects the wholesale shipment strategy to continue. This sales channel requires minimal selling, general and administrative costs over and above the cost to produce plant cuttings and dried bud.
Operations
Aphria has assembled a management team with almost 90 years of combined experience in agriculture and agribusiness and over 40 years of combined experience in the pharmaceutical industry. Coupled with operational experience, Aphria expects to be a low-cost producer of medical marijuana, owing to various cost-saving attributes of its operations, such as: (i) lower electrical costs as a result of its greenhouse facilities and the ability to leverage the advantages of passive cooling methods; and, (ii) lower fertilization costs attributable to the fact that Aphria mixes its own fertilizer. Aphria is currently growing in its 100,000 sq. feet of greenhouse space across 10 light and computer controlled glass greenhouses located in Leamington, Ontario. See
General Development of the Business — Expansion and Greenhouse Acquisition
.
Substantially all of the Company’s revenue is derived from the sale of medical cannabis and marijuana plant material produced, cultivated and/or processed by Aphria at its greenhouse facilities in Leamington, Ontario. Aphria grows cannabis at its greenhouse for the purposes of sale and distribution of finished products in accordance with the MMPR. Aphria’s current plants are at various stages of growth.
Storage and Security
The MMPR require production sites to be located indoors, and not in a private dwelling. Subdivision C of the ACMPR set out physical security requirements that are necessary to secure sites where Licensed Producers conduct activities with medical marijuana other than storage. As per Health Canada’s regulations, Aphria’s facilities contain two vaults, deemed to be “security level eight” and “security level nine” respectively, and a “security level nine” safe, as determined by the construction of the vaults and Aphria’s proximity to a major city (Windsor). This allows Aphria to store up to 6,875 kilograms of dried marijuana and/or the kilogram equivalent of cannabis oil on site at any given time.
The vaults are equipped with security cameras, motion sensors, finger print, code locked doors and seismic sensors that set alarms off when vibrations are detected. These security measures ensure Aphria is compliant with all of Health Canada’s necessary security requirements. The vaults can only be accessed by a “Responsible Person in Charge” (as defined under the ACMPR) and at least one Responsible Person in Charge must be present in the vault at all times if the doors are opened.
Health Canada conducts ad hoc, unscheduled site inspections of Licensed Producers. Aphria has experienced these inspections numerous times, previously on a monthly basis but now on a bi-monthly basis. Aphria has responded to and complied with all requests from Health Canada within the time frames indicated in such requests. As of the date hereof, there are no outstanding inspection issues with Health Canada beyond day-to-day adjustments that may occur in order to ensure ongoing compliance. Aphria has not been required to recall distributed product or otherwise been formally reprimanded.
Specialized Skill and Knowledge
Knowledge with respect to cultivating and growing medical marijuana is important to the medical marijuana industry. The nature of growing marijuana is not substantially different from the nature of growing other greenhouse products. The Company’s Chief Scientific Officer, Gary Leong has a personal background in quality assurance, quality control, quality system audits, international and domestic regulatory affairs and product research and development. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are
15
meticulously defined and controlled to produce consistent product and to avoid contamination. The product is cut, sorted and dried under defined conditions that are establish to protect the activity and purity of the product. Once processing is complete, each and every processing batch is subjected to full testing against stringent quality specifications set for activity and purity.
John Cervini, Aphria’s Vice-President — Infrastructure and Technology, has significant experience in greenhouse growing technology and has also overseen greenhouse expansion in California and Mexico. Mr. Cervini’s focus on improved efficiencies, healthier quality and research studies have helped him create food safety programs and skills transferable to the medical marijuana industry.
Competitive Conditions
On October 19, 2015, the Liberal Party of Canada (“
Party
”) obtained a majority government in Canada. The Party has committed to the legalization of recreational cannabis in Canada. See
Risk Factors - Changes in Laws, Regulations and Guidelines
for more information on Bill C-45, which proposes the enactment of the Cannabis Act, to regulate the production, distribution and sale of cannabis for unqualified adult use, with a target implementation date of no later than July 1, 2018. However, it is unknown if this regulatory change will be implemented at all. The introduction of a recreational model for cannabis production and distribution may impact the medical marijuana 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 licenses, under the ACMPR, to produce and sell medical marijuana. 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. According to Health Canada there are currently 51 Licensed Producers. If the number of users of medical marijuana 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 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.
The principal aspects of competition between Aphria and its competitors will be the price and quality of medical marijuana and client service provided to patients. While Aphria will price its medical marijuana according to market demands, it anticipates a lower cost of production compared to its competitors. This is expected to provide Aphria with pricing flexibility while maintaining healthy margins relative to its competitors. Additionally, Aphria will strive to have better and faster service by having more on hand trained staff than other Licensed Producers. Aphria also plans to maintain a minimum level of inventory to ensure that we can continue to provide our customers with unmatched quality on a consistent basis while also acquiring new customers without supply interruptions.
Employees
As of May 31, 2017 Aphria employed approximately 150 full-time employees.
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RISK FACTORS
There are a number of risk factors that could cause future results to differ materially from those described herein. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of the following risks actually occur, the Company’s business may be harmed and its financial condition and results of operations may suffer significantly.
Reliance on License
Aphria’s ability to grow, store and sell medical marijuana and cannabis oil in Canada is dependent on maintaining its License with Health Canada. Failure to comply with the requirements of the License or any failure to maintain its License would have a material adverse impact on the business, financial condition and operating results of Aphria. There can be no guarantees that Health Canada will extend or renew the License as necessary or, if it extended or renewed, that it the License will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the License or should it renew the License on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected.
Expansion of Facilities
There is no guarantee that Health Canada will approve the contemplated expansions in a timely fashion, nor is there any guarantee that the expansion will be completed in its currently proposed form, if at all. The failure of the Company to successfully execute its expansion strategy (including receiving the expected Health Canada approvals in a timely fashion) could adversely affect the business, financial condition and results of operations of the Company and may result in Aphria not meeting anticipated or future demand when it arises.
Changes in Laws, Regulations and Guidelines
On June 30, 2016, the Canadian Federal Government established the Task Force to seek input on the design of a new system to legalize, strictly regulate and restrict access to marijuana. On December 13, 2016, the Task Force completed its review and published a report outlining its recommendations. On April 13, 2017, the Canadian Federal Government released Bill C-45, which proposes the enactment of the Cannabis Act, to regulate the production, distribution and sale of cannabis for unqualified adult use, with a target implementation date of no later than July 1, 2018. However, it is unknown if this regulatory change will be implemented at all. Several recommendations from the Task Force reflected in the Cannabis Act including, but not limited to, permitting home cultivation, potentially easing barriers to entry into a Canadian recreational marijuana market and restrictions on advertising and branding, could materially and adversely affect the business, financial condition and results of operations of the Company. Their advice will be considered by the Government of Canada as a new framework for recreational marijuana is developed and it is possible that such developments could significantly adversely affect the business, financial condition and results of operations of the Company.
Risk Factors Related to the United States
On March 27, 2017, Aphria made an additional investment of US$3 million in the parent company of Copperstate, which is is a US-based licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act
. On April 4, 2017, the Company announced the launch of its US expansion strategy through a strategic lead investment in Liberty. See
General Development of the Business — Recent Business
for further details concerning Liberty and Copperstate.
In light of these recent announcements, the Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of current and future investments in entities involved with medical cannabis in the United States, including Liberty and Copperstate. Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks
17
will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
While cannabis is legal in many US state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
.
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the
Access to Cannabis for Medical Purposes Regulations
, investors are cautioned that in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 28 states, plus the District of Columbia, that have legalized cannabis in some form, including Arizona and Florida as noted above in connection with the investments in Copperstate and Liberty. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a controlled substance under the
Controlled Substances Act
(the “
CSA
”) in the United States and as such, may be in violation of federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business—even those that have fully complied with state law—could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined
.
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “
Cole Memorandum
”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never
18
provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March of this year, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, although he disagreed that it had been implemented effectively and has not committed to utilizing the Cole Memorandum framework going forward.
The Board has informed its decision to authorize and approve the investments in Copperstate and Liberty based on the guidelines outlined in the Cole Memorandum and believes that the risk of federal prosecution and enforcement is currently unlikely. However, unless and until the Cole Memorandum is memorialized in federal legislation, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
.
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the
Currency and Foreign Transactions Reporting Act of 1970
(commonly known as the
Bank Secrecy Act
), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada)
, as amended and the rules and regulations thereunder, the
Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“
FCEN
”) of the Treasury Department issued a memorandum providing instructions to banks seeking to provide services to cannabis-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
In the event that any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the investments in Copperstate or Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
19
The Company’s investments in the United States may be subject to heightened scrutiny
.
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction. The TSX has advised the Company that it reserves the right to enforce its rules and policies against the Company in the manner the TSX deems appropriate. Further, the TSX reserved the right to set whatever requirements it deems appropriate as conditions to its acceptance of notice of any proposed future issuance of Common Shares of the Company.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Legislative or Regulatory Reform and Compliance
The commercial medical marijuana industry is a new industry and the Company anticipates that such regulations will be subject to change as the Federal Government monitors Licensed Producers in action. Aphria’s operations are subject to a variety of laws, regulations, guidelines and policies relating to the manufacture, import, export, management, packaging/labelling, advertising, sale, transportation, storage and disposal of medical marijuana but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management, Aphria is currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the control of Aphria may cause adverse effects to its operations.
Environmental Regulations and Risks
Aphria’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect Aphria’s operations.
Government approvals and permits are currently, and may in the future be required in connection with Aphria’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the company and cause increases in
20
expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by Aphria or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risks Related to Dilutions
The Company may issue additional Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical marijuana, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.
Reliance on a Single Location
To date, Aphria’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility and location could have a material and adverse effect on Aphria’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party transportation services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation services may adversely affect Aphria’s financial performance.
21
Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Reliance on Key Personnel
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management (collectively, “
Key Personnel
”). Aphria’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of a Key Person, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Aphria’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Further, as a Licensed Producer, each Key Person is 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 Person 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 Person 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. While employment agreements are customarily used as a primary method of retaining the services of Key Personnel, these agreements cannot assure the continued services of such employees.
Limited Operating History
Aphria, while incorporated in 1994, began carrying on business in 2012 and did not generate revenue from the sale of products until late 2014. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential products.
22
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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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 management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Results of Future 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 (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although Aphria believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of Offered Shares should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to medical cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition and results of operations.
Insurance Coverage
The Company has insurance to protect its assets, operations, directors 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 Aphria 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, there could be a material adverse effect on the Company’s business, financial condition and results of operation.
Negative Consumer Perception
The Company believes the medical cannabis industry is highly dependent upon consumer perception regarding the medical benefits, safety, efficacy and quality of the cannabis distributed for medical purposes to such consumers. Consumer perception of Aphria’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements both in Canada and in other countries, media attention and other publicity (whether or not accurate or with merit) regarding the consumption of cannabis products for medical purposes, including unexpected safety or efficacy concerns arising with respect to the products of the Company or
23
its competitors. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable 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 favorable 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 and financial condition 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 an adverse effect on any demand for Aphria’s products which could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis for medical purposes in general, or the Company’s products specifically, or associating the consumption of 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 such products resulted from consumers’ failure to consume such products legally, appropriately or as directed.
Securing Adequate Financing to Fund Operations and Meet Expected Consumer Demand
There is no guarantee that the Company will be able to achieve its business objectives. The continued development of Aphria may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company ceasing to carry on business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. In addition, from time to time, Aphria may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may increase the Company’s debt levels above industry standards. 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. Debt financings may also contain provisions which, if breached, may entitle lenders or their agents to accelerate repayment of loans and/or realize upon security over the assets of the Company, and there is no assurance that the Company would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to such debt financing.
Identify and Execute Future Acquisitions or Dispositions, or to Successfully Manage the Impact of Such Transactions on its Operations
Although there is no present intention to undertake any of the following transactions, material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) Aphria may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations, and (vi) loss or reduction of control over certain of the Company’s assets.
The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the results of operations, business prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to
24
damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
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 Company’s ability to continue operating and the value of the Common Shares and could use significant resources. Even if Aphria is involved in litigation and wins, litigation can redirect significant Company resources, including the time and attention of management and available working capital. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as Aphria may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the business, financial condition and results of operations of the Company.
In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, Aphria may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.
Constraints on Marketing Products
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 Aphria 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.
25
Fraudulent or Illegal activity by its employees, contractors and consultants
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Aphria, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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.
Breaches of security at its facilities, or in respect of electronic documents and data storage and may face risks related to breaches of applicable privacy laws
Given the nature of the Company’s product and its lack of legal availability 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 one of the Company’s facilities could expose Aphria to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.
In addition, Aphria collects and stores personal information about its 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, particularly
26
patient lists and preferences, 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 Aphria was found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of 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.
History of Losses
The Company incurred losses in prior periods. Aphria may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, Aphria expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If Aphria’s revenues do not increase to offset these expected increases in costs and operating expenses, Aphria will not be profitable.
Changes to Reimbursement Allowances for Veterans
On November 22, 2016, the Minister of Veterans Affairs announced that Veterans Affairs Canada (“
VAC
”) will issue new rules related to the reimbursement of medical cannabis for veterans. It is expected that the new rules will limit the amount of reimbursement to veterans in two ways. First, the amount of medical marijuana that can be reimbursed is expected to be limited to 3.0 grams per day (per veteran), such change to be effective as of May 21, 2017. Second, effective November 22, 2016, the price per gram reimbursement has been limited to $8.50 per gram. The Company understands that the new rules may allow individual veterans to receive reimbursement for more than 3.0 grams a day, on a case by case basis, subject to specific conditions, which as of the date hereof have yet to be fully delineated. Accordingly, the Company has not yet been able to fully model the impact that the proposed VAC changes may have on the Company’s revenue stream. It is also unclear how many veteran patients of Aphria, if any, may meet the case by case exemption referenced herein. Investors are cautioned that the VAC changes may have a material effect on Aphria’s business in the event that the Company is unable to secure offsetting revenue streams, its veteran patients do not qualify for an exemption or if further amendments to the VAC changes are announced.
Competition
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 licenses, under the ACMPR, to produce and sell medical marijuana. 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. According to Health Canada there were 50 Licensed Producers as of May 31, 2017. If the number of users of medical marijuana 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 level of investment in research and development, marketing,
27
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.
DIVIDENDS
As of the date of this Annual Information Form, Aphria has no current intention to declare dividends on its Common Shares in the foreseeable future. Any decision to pay dividends on its Common Shares in the future will be at the discretion of Aphria’s board of directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the board of directors may deem relevant.
CAPITAL STRUCTURE
The company is authorized to issue an unlimited number of Common Shares. As of May 31, 2017, there were 138,628,704 Common Shares issued and outstanding. The holders of the Common Shares are entitled to one vote per share at all meetings of the shareholders of the Company. The holders of Common Shares are also entitled to dividends, if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company.
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees, and consultants enabling them to acquire Common Shares of the Company. The maximum number of Common Shares reserved for issuance of stock options that may be granted under the plan is 10% of the issued and outstanding Common Shares of the Company. The options granted can be exercised for a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option may not be less than the market price of the Common Shares on the date of grant. As of May 31, 2017, there are 5,926,001 options outstanding to purchase Common Shares.
In addition, the Company has warrants outstanding to purchase up to an aggregate of 3,885,908 Common Shares.
MARKET FOR SECURITIES
Common Shares
Common Shares are listed and traded on the TSX under the trading symbol “APH” and under the symbol “APHQF” on the OTCQB. Prior to March 22, 2017, the Common Shares were traded on the TSXV, and not the TSX. The following table sets forth the reported intraday high and low prices and monthly trading volumes of the Common Shares for the 12-month period prior June 1, 2016 and May 31, 2017:
|
Period
|
|
High Trading Price
|
|
Low Trading Price
|
|
Volume (#)
|
|
|
May 2017
|
|
$
|
6.81
|
|
$
|
5.18
|
|
28,969,226
|
|
|
April 2017
|
|
$
|
8.77
|
|
$
|
5.85
|
|
86,861,758
|
|
|
March 2017
|
|
$
|
6.99
|
|
$
|
6.01
|
|
49,493,151
|
|
|
February 2017
|
|
$
|
6.72
|
|
$
|
5.10
|
|
20,186,915
|
|
|
January 2017
|
|
$
|
5.73
|
|
$
|
5.02
|
|
15,450,042
|
|
|
December 2016
|
|
$
|
5.75
|
|
$
|
4.06
|
|
28,868,414
|
|
|
November 2016
|
|
$
|
7.79
|
|
$
|
3.65
|
|
89,367,449
|
|
|
October 2016
|
|
$
|
4.04
|
|
$
|
3.26
|
|
41,537,147
|
|
|
September 2016
|
|
$
|
3.51
|
|
$
|
2.56
|
|
22,600,079
|
|
|
August 2016
|
|
$
|
2.85
|
|
$
|
2.21
|
|
21,222,123
|
|
28
|
Period
|
|
High Trading Price
|
|
Low Trading Price
|
|
Volume (#)
|
|
|
July 2016
|
|
$
|
2.59
|
|
$
|
1.57
|
|
18,590,000
|
|
|
June 2016
|
|
$
|
1.60
|
|
$
|
1.37
|
|
6,120,000
|
|
PRIOR SALES
The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued by Aphria during the twelve month period between June 1, 2016 and May 31, 2017:
|
|
|
|
|
Issuance/Exercise price
|
|
|
|
|
Date of issuance
|
|
Security
|
|
per security
|
|
Number of securities
|
|
|
April 12, 2017
|
|
Stock options
|
|
$
|
7.92
|
|
140,000
|
|
|
January 12, 2017
|
|
Stock Options
|
|
$
|
5.72
|
|
45,000
|
|
|
December 12, 2016
|
|
Stock Options
|
|
$
|
5.25
|
|
500,000
|
|
|
November 21, 2016
|
|
Warrants
|
|
$
|
1.75
|
|
159,234
|
|
|
November 1, 2016
|
|
Stock options
|
|
$
|
3.90
|
|
1,000,000
|
|
|
October 28, 2016
|
|
Stock options
|
|
$
|
3.70
|
|
50,000
|
|
|
October 6, 2016
|
|
Stock options
|
|
$
|
3.47
|
|
20,000
|
|
|
September 26, 2016
|
|
Warrants
|
|
$
|
3.14
|
|
200,000
|
|
|
September 9, 2016
|
|
Stock options
|
|
$
|
3.00
|
|
75,000
|
|
|
July 13, 2016
|
|
Stock options
|
|
$
|
1.64
|
|
110,000
|
|
|
June 10, 2016
|
|
Stock options
|
|
$
|
1.48
|
|
30,000
|
|
|
June 2, 2016
|
|
Stock options
|
|
$
|
1.40
|
|
283,000
|
|
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
The following table summarizes details of the Company’s securities of each class held, to the Company’s knowledge, in escrow or that are subject to a contractual restriction on transfer as of the date of this Annual Information Form:
|
|
|
Number of securities held in escrow or
|
|
|
|
|
|
|
that are subject to a contractual
|
|
|
|
|
Designation of Class
|
|
restriction on transfer escrow
|
|
Percentage of class
|
|
|
Common Shares
|
|
675,000
|
|
0.5
|
%(1)
|
Notes:
(1) Based on 138,628,704 Common Shares outstanding.
29
DIRECTORS AND OFFICERS
Name, Occupation and Security Holding
Below are the names, province or state and country of residence, principal occupation and periods of service of the directors and executive officers of the Company.
|
|
|
|
|
|
|
|
|
Number of Common Shares
|
|
Name and
|
|
|
|
Director
|
|
|
|
Beneficially Owned,
|
|
Municipality
|
|
Principal Occupations
|
|
of Aphria
|
|
|
|
Controlled or Directed,
|
|
Residence
|
|
For Last Five Years
|
|
Since
|
|
Position with Aphria
|
|
Directly or Indirectly
(4)
|
|
Vic Neufeld Lakeshore, ON
|
|
Chief Executive Officer of Aphria
|
|
December 1, 2014
(1)
|
|
President, Chief Executive Officer and Director
|
|
811,514
(0.59%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer of Jamieson Laboratories Ltd.
|
|
|
|
|
|
|
Cole Cacciavillani Leamington, ON
|
|
Vice-President — Growing Operations of Aphria
|
|
December 1, 2014
(1)
|
|
Vice-President — Growing Operations and Director
|
|
8,494,444
(2)
(6.13%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer of Aphria
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secretary-Treasurer of CF Greenhouses
|
|
|
|
|
|
|
|
John Cervini Leamington, ON
|
|
Vice-President — Infrastructure and Technology of Aphria
|
|
December 1, 2014
(1)
|
|
Vice-President — Infrastructure and Technology and Director
|
|
9,500,001
(3)
(6.85%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Agronomist Officer of Aphria
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President of Cervini Farms California
|
|
|
|
|
|
|
|
Carl Merton Belle River, ON
|
|
Chief Financial Officer of Aphria
|
|
N/A
|
|
Chief Financial Officer
|
|
57,000
(0.04%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer of Reko International Group
|
|
|
|
|
|
|
|
Dennis Staudt
(5)(6)
Kingsville, ON
|
|
Retired Partner at PricewaterhouseCoopers LLP
|
|
December 1, 2014
(1)
|
|
Director
|
|
60,000
(0.04%)
|
|
Philip Waddington
(6)
Chelsea, QC
|
|
Consultant
|
|
December 1, 2014
(1)
|
|
Director
|
|
32,007
(0.02%)
|
|
Robert Kozlov
(5)(6)
Toronto, ON
|
|
Partner at Norton Rose Fulbright Canada LLP
|
|
October 27, 2015
|
|
Director
|
|
43,500
(0.03%)
|
|
Arlene Dickinson
(5)(6)
Calgary, AB
|
|
Owner and CEO of Venture Communications
|
|
October 27, 2016
|
|
Director
|
|
11,400
(0.01%)
|
30
Notes
:
(1) Mr. Cacciavillani was a director of the predecessor corporation to Aphria, Pure Natures Wellness Inc. (“
PNW
”) from its incorporation on June 3, 1994. Mr. Neufeld became a director and officer of PNW on June 3, 2014. Mr. Cervini became a director of PNW on July 17, 2013. Mr. Staudt became a director of PNW on July 1, 2014. Mr. Waddington became a director of PNW on August 14, 2014
(2) Mr. Cacciavillani owns 6,716,667 Common Shares directly and exercises control over an additional 1,777,777 Common Shares held by the Cacciavillani Family Trust
(3) Mr. Cervini owns 9,500,001 Common Shares indirectly through Fulfill Holdings Inc., a company which he is the President and sole shareholder of.
(4) Based on 138,628,704 Common Shares outstanding as of May 31, 2017.
(5) Member of the Audit Committee.
(6) Member of the Compensation & Nominating Committee.
The term of each director of Aphria will expire on the date of the next annual meeting of shareholders of Aphria.
The following is a summary biography of each of the directors and executive officers of Aphria:
Vic Neufeld
President, Chief Executive Officer and Director
Vic Neufeld is the President and Chief Executive Officer of Aphria. Mr. Neufeld is the former CEO of Jamieson Laboratories (“Jamieson”) Canada’s largest manufacturer and distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. Mr. Neufeld brings 15 years of experience as a chartered accountant and partner with Ernst & Young and 21 years as CEO of Jamieson. During his tenure with Jamieson, the company went from $20 million in annual sales to over $250 million and expanded the company’s distribution network to over 40 countries, building Jamieson to a globally recognized brand name. Mr. Neufeld, a native of Leamington, Ontario, earned a Bachelor’s degree in Economics from Western University, Honours degree in business from the University of Windsor and an MBA from the University of Windsor. Mr. Neufeld is also a CPA.
Cole Cacciavillani
Co-Founder, Vice President-Growing Operations and Director
Cole Cacciavillani, Aphria’s co-founder, is an industrial engineer with 35 years of experience in the agricultural and greenhouse industry. Cole has accumulated expertise of how to best utilize nature’s light and proprietary growing techniques and technologies to create competitive, safe and cost effective products. Mr. Cacciavillani sits on a number of charitable and associative boards including serving as: past Chairman of the Board for Leamington Memorial District Hospital as well as serving on the Hospital’s Foundation Board. Cole was a founding chair of The Ontario Greenhouse Alliance; serves on the board of The Agricultural Institute of Ontario, Police Services Board, F.V. Energy Co-op, and the Leamington Economic Development Committee. Currently he serves as Co-Chair of Fundraising for the Erie Shores Campus Hospice. Mr. Cacciavillani’s dedication to his community has received much recognition, including: the Queen Elizabeth II Diamond Jubilee Medal, which is awarded to honour significant contributions and achievements by Canadians. Ontario’s greenhouse industry recognized Mr. Cacciavillani’s leadership and vision as the founding Chair of the industry organization with its first service award. Recently, Mr. Cacciavillani was awarded the St. Clair alumni distinction award based on the success he pursued within the community.
31
John Cervini
Co-Founder, Vice President-Infrastructure and Technology and Director
John Cervini, Aphria’s co-founder, comes from fourth generation growers in southwestern Ontario with hydroponic agricultural experience. Together with his father and brother, Mr. Cervini helped established Lakeside Produce, a of North America sales and marketing companies selling fresh produce from Canada to multinational retailers throughout North America. Mr. Cervini has significant experience in greenhouse growing technology and has also overseen greenhouse expansions to California and Mexico. Mr. Cervini’s focus on improved efficiencies, healthier quality and the latest research studies helped him create an industry leading food safety program. Mr. Cervini understands the need and importance of product safety, product traceability and standardized industry procedures. Mr. Cervini is the founding chair of the Ontario Greenhouse Marketing Association remains involved in the industry as part of the Ontario Greenhouse Vegetable Growers Association.
Carl Merton
Chief Financial Officer
Carl Merton, Chief Financial Officer, has over 20 years of financial and business experience, having spent almost 12 years combined with Ernst & Young LLP and KPMG LLP prior to serving as Vice-President, Special Projects at Atlas Tube Canada ULC, Chief Financial Officer of Reko International Group Inc. (TSXV: REK) and Chief Financial Officer of Aphria Inc. Mr. Merton is a Chartered Professional Accountant, Chartered Accountant and is a Fellow of the Canadian Institute of Chartered Business Valuators (the “CICBV”). As the Chief Financial Officer of Aphria, Mr. Merton is responsible for leading strategic discussions, acquisitions and divestitures, budgeting, financing, financial reporting and internal controls. Mr. Merton holds an Honours Bachelor of Commerce in Sports Administration from Laurentian University. In addition Mr. Merton, is currently a member of the Board of Directors of Motor City Community Credit Union, is the Chair of their Audit Committee, serves as an external member of the Audit Committee of the Greater Windsor & Essex County District School Board and has served as a past Chair of both the CICBV and the International Association of Professional Business Valuators.
Dennis Staudt
Director
Dennis Staudt, Director, has over 35 years’ experience providing business advice to private companies in Southwestern Ontario, having spent most of his career with PricewaterhouseCoopers LLP (“PwC”), including 22 years as a partner in the Audit and Assurance Group. Prior to being admitted to partnership, Mr. Staudt spent almost two years with PwC Germany in their Düsseldorf office. Following his retirement from PwC in 2012, Mr. Staudt continues to provide business advisory services to a number of private companies, primarily in the manufacturing and greenhouse sectors. He is also Vice-President of Staudt Farms Limited, a family owned farming operation in Leamington, Ontario. Mr. Staudt graduated from the University of Windsor in 1977 with a Bachelor of Commerce Degree. He obtained his Chartered Accountant (Ontario) designation in 1979 and his Certified Public Accountant (Illinois) designation in 1999. Mr. Staudt is also Advisory Board Member at the University of Windsor Centre for Executive and Professional Education. Mr. Staudt is Past Chair of the Leamington District Memorial Hospital Foundation, the Art Gallery of Windsor and the Art Gallery of Windsor Foundation. He also previously served on the Board of Governors of the University of Windsor and taught as a Sessional Lecturer in Accounting.
Dr. Philip Waddington
Director
Dr. Philip Waddington, Director, a trained naturopathic physician, has experience in regulating natural health products. From January 2000 to August 2008 Dr. Waddington served as the inaugural Director General of the Natural Health Products Directorate (NHPD) of Health Canada. Under his leadership, a new regulatory framework was defined, developed and implemented in Canada. Dr. Waddington received his training from the Canadian College of Naturopathic Medicine. He holds an MBA from the Richard Ivey School of Business at the University of
32
Western Ontario and a B.Sc. Hon. in Biology from Queen’s University. He currently works as a consultant; helping companies deal with any regulatory, NHPD or government strategy issues.
Robert Kozlov
Director
Robert Kozlov, Director, is a senior partner at the law firm Norton Rose Fulbright Canada LLP where he practises corporate - commercial law, with a particular focus on private mergers and acquisitions, strategic alliances, and major commercial contracts, including those involving the supply, distribution and franchising of products and services, and the protection and licensing of intellectual property rights. He has experience advising clients on a wide array of commercial arrangements, including the drafting and negotiation of licensing, distribution, supply, franchise and development, joint-venture, sponsorship, co-promotion, advertising and marketing (including promotional contests), and services agreements for Canadian-based clients respecting their local operations, including in regard to their dealings with the Ministry of Health (Ontario), as well as their international expansion and distribution of products in multiple foreign jurisdictions. He also advises foreign companies in regard to their business operations in Canada, from initial set-up to compliance with local registration and regulatory requirements. As a registered trade-mark agent, Mr. Kozlov has acted for Canadian and foreign companies in protecting and enforcing their intellectual property rights, including providing validity opinions and pursuing action against infringers. Mr. Kozlov obtained an honours B. A. from McGill University in 1977 and was called to the Bar of Ontario in 1984, after having obtained LL.B and B.C.L. law degrees from McGill in 1982. As well, Mr. Kozlov has been a member of the Board and executive, as corporate secretary, of ProAction Cops & Kids, a charitable organization dedicated to helping kids at risk, since 1997.
Arlene Dickinson
Director
Arlene Dickinson, Director, is the owner and CEO of Venture Communications, a company she grew from a small, local firm to one of the largest independent agencies in Canada, is also the CEO of District Ventures and Youinc.com, companies all aimed at helping market, fund and grow entrepreneurs and entrepreneurial companies. She is a two time best-selling author, accomplished speaker, and is best known for her role as a Dragon for 8 seasons on the award-winning CBC series Dragons Den. Ms. Dickinson’s leadership has been recognized many times, including Canada’s Most Powerful Women Top 100, the Pinnacle Award for Entrepreneurial Excellence, as well as PROFIT and Chatelaine’s Top 100 Women Business Owners. She is also a Marketing Hall of Legends inductee
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of Aphria, no director or executive officer of Aphria, or shareholder holding a sufficient number of securities of Aphria to affect materially the control of the Company:
(a)
is, as at the date hereof, or has been, within the ten (10) years before the date hereof, a director or executive officer of any corporation that, while that person was acting in such capacity:
(i)
was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than thirty (30) consecutive days, that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or
(ii)
was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than thirty (30) consecutive days, that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or
33
(iii)
within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold its assets.
(b)
has, within the ten (10) years before the date hereof, become bankrupt, made a proposal under any legislation relating to the bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, officer or shareholder.
To the knowledge of Aphria, no director or executive officer of Aphria, or a shareholder holding sufficient number of securities of Aphria to affect materially the control of Aphria, has been subject to:
(a)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or
(b)
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
Conflicts of Interest
We may from time to time become involved in transactions which conflict with the interests of our directors and the officers. The interests of these persons could conflict with those of the Company. 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 conflict of interest arises at a meeting of our 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.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Aphria is not currently a party to any legal proceedings, nor is Aphria currently contemplating any legal proceedings, which are material to its business. Aphria is currently not aware of any existing or contemplated legal proceedings to which it is or was a party to, or to which any of its properties is or was the subject of. Aphria is not aware of any settlement agreements, penalties or sanctions that Company has entered into before a court relating to securities legislation or with a securities regulatory authority or that would be material to a reasonable investor in making an investment decision.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Prior to June 30, 2016, Aphria leased its greenhouse facilities from CF Greenhouses. CF Greenhouses is a greenhouse growing company controlled in part by Cole Cacciavillani, Director and Chief Operating Officer of Aphria. On June 30, 2016, Aphria acquired 360,000 square feet of production space, located on 36 acres of land from CF Greenhouses for total consideration of $6.1 million. The $6.1 million purchase price was satisfied by a $3.25 million cash payment and CF Greenhouses assuming a vendor take back mortgage, in the amount of $2.85 million, with a 5-year amortization period and bearing interest at 6.75%.
TRANFER AGENT AND REGISTAR
The transfer agent and registrar of Aphria is Computershare Trust Company of Canada at its offices in Toronto, Ontario.
34
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the only contracts entered into by the Company during the twelve month period ending May 31, 2017 which are material or entered into before the twelve month period ending May 31, 2017 but are still in effect are:
(c)
the License;
(d)
the warrant indenture dated July 31, 2014 between Aphria, Black Sparrow and Valiant Trust Company (the “
Warrant Indenture
”) for the issue of an aggregate of 12,302,268 common share purchase share warrants entitling the holders thereof to purchase an aggregate of 12,302,268 Common Shares at a price of $1.50 per Common Share for a period of five years following the satisfaction of the Escrow release Conditions (as defined in the Warrant Indenture); and
(e)
the warrant indenture dated December 11, 2016 between Aphria and Computershare Trust Company of Canada for the issue of an aggregate of 4,688,576 common share purchase share warrants entitling the holders thereof to purchase an aggregate of 4,688,576 Common Shares at a price of $1.75 per Common Share prior to December 11, 2018.
AUDIT COMMITTEE INFORMATION
As of May 31, 2017 the Audit Committee (the “
Committee
”) consists of Dennis Staudt, Arlene Dickinson and Robert Kozlov, all of whom are “independent” and “financially literate” within the meaning of National Instrument 52-110 — Audit Committees. Each of the Audit Committee members has an understanding of the accounting principles used to prepare Aphria’s financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of Aphria’s financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring Aphria’s compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of Aphria’s internal auditors. The Audit Committee has specific responsibilities relating to Aphria’s financial reports; the external auditor; the internal audit function; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on Aphria; and Aphria’s whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in “
Directors and Officers
” above. The full text of the Audit Committee’s charter is disclosed in Schedule “A”.
Pre-Approval Policies and Procedures
The Committee will pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but preapproval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
External Auditor Service Fees
The following table sets forth, by category, the fees for all services rendered by the Company’s external auditors, MNP LLP, for the financial year ended May 31, 2016 and PricewaterhouseCoopers LLP for the financial year ended May 31, 2017, are as set out below (including estimates).
35
|
|
|
May 2016
|
|
May 2017
|
|
|
Audit Fees
(1)
|
|
$
|
60,000
|
|
$
|
99,000
|
|
|
Audit Related Fees
(2)
|
|
$
|
20,000
|
|
$
|
61,200
|
|
|
Tax Fees
(3)
|
|
—
|
|
—
|
|
|
All Other Fees
|
|
—
|
|
$
|
107,500
|
|
Notes
:
(1) Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
(2) Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
(3) Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
INTERESTS OF EXPERTS
PricewaterhouseCoopers LLP was appointed as the auditor of the Company on October 27, 2016. PricewaterhouseCoopers LLP is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
MNP LLP was the independent auditor of the Company for the year ended May 31, 2016. MNP LLP is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com.
36
Schedule A — Audit Committee Charter
This charter (the “
Charter”)
sets forth the purpose, composition, responsibilities and authority of the Audit Committee (the “
Committee”)
of the Board of Directors (the “
Board”)
of Aphria Inc.
(
“
Aphria”).
1.0
Purpose
The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities with respect to:
·
financial reporting and disclosure requirements;
·
ensuring that an effective risk management and financial control framework has been implemented and tested by management of Aphria; and
·
external and internal audit processes.
2.0
Composition and Membership
(a)
The Board will appoint the members
(
“
Members”)
of the Committee. The Members will be appointed to hold office until the next annual general meeting of shareholders of Aphria or until their successors are appointed. The Board may remove a Member at any time and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will automatically cease to be a Member upon ceasing to be a director.
(b)
The Committee will consist of at least three directors. Each Member will meet the criteria for financial literacy established by applicable laws and the rules of any stock exchanges upon which Aphria’s securities are listed, including National Instrument 52-110 — Audit Committees. All Members will meet the criteria for independence established by the aforementioned laws and rules. In addition, each director will be free of any relationship which could, in the view of the Board, reasonably interfere with the exercise of a Member’s independent judgment.
(c)
The Board will appoint one of the Members to act as the chairman of the Committee (the “
Chairman
”). The secretary of Aphria (the “
Secretary
”) will be the secretary of all meetings and will maintain minutes of all meetings and deliberations of the Committee. If the Secretary is not in attendance at any meeting, the Committee will appoint another person who may, but need not, be a Member to act as the secretary of that meeting.
3.0
Meetings
(a)
Meetings of the Committee will be held at such times and places as the Chairman may determine, but in any event not less than four (4) times per year. Twenty-four (24) hours advance notice of each meeting will be given to each Member orally, by telephone, by facsimile or email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by telephone.
(b)
At the request of the external auditors of Aphria, the Chief Executive Officer or the Chief Financial Officer of Aphria or any Member, the Chairman will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.
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1
(c)
The Chairman, if present, will act as the chairman of meetings of the Committee. If the Chairman is not present at a meeting of the Committee the Members in attendance may select one of the members to act as chairman of the meeting.
(d)
A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority. The Chairman will not have a deciding or casting vote in the case of an equality of votes. Powers of the Committee may also be exercised by written resolutions signed by all Members.
(e)
The Committee may invite from time to time such persons as it sees fit to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee. The Committee may meet in camera without members of management in attendance for a portion of each meeting of the Committee, as the Committee deems appropriate.
(f)
In advance of every regular meeting of the Committee, the Chairman, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chairman, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Aphria to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.
4.0
Duties and Responsibilities
The duties and responsibilities of the Committee as they relate to the following matters, are as follows:
4.1
Financial Reporting and Disclosure
(a)
review and recommend to the Board for approval, the audited annual financial statements, including the auditors’ report thereon, the quarterly financial statements, management discussion and analysis, financial reports, and any guidance with respect to earnings per share to be given, prior to the public disclosure of such information, with such documents to indicate whether such information has been reviewed by the Board or the Committee;
(b)
review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual report to shareholders, management proxy circular, material change disclosures of a financial nature and similar disclosure documents prior to the public disclosure of such information;
(c)
review with management of Aphria, and with external auditors, significant accounting principles and disclosure issues and alternative treatments under International Financial Reporting Standards
(
“
IFRS”),
with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Aphria’s financial position and the results of its operations in accordance with IFRS, as applicable;
(d)
seek to ensure that adequate procedures are in place for the review of Aphria’s public disclosure of financial information extracted or derived from Aphria’s financial statements, periodically assess the adequacy of those procedures and recommend any proposed changes to the Board for consideration;
(e)
review the minutes from each meeting of the Responsible Parties, established pursuant to Aphria’s corporate disclosure policy, since the last meeting of the Committee;
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2
4.2
Internal Controls and Audit
(a)
review the adequacy and effectiveness of Aphria’s system of internal control and management information systems through discussions with management and the external auditor to ensure that Aphria maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Aphria’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statement and for detecting control weaknesses or fraud. From time to time the Committee shall assess whether it is necessary or desirable to establish a formal internal audit department having regard to the size and stage of development of Aphria at any particular time;
(b)
satisfy itself that management has established adequate procedures for the review of Aphria’s disclosure of financial information extracted or derived directly from Aphria’s financial statements;
(c)
satisfy itself, through discussions with management, that the adequacy of internal controls, systems and procedures has been periodically assessed in order to ensure compliance with regulatory requirements and recommendations;
(d)
review and discuss Aphria’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities;
(e)
review, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Aphria’s risk management policies and procedures with regard to identification of Aphria’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Aphria;
(f)
recommend the appointment, or if necessary, the dismissal of the head of Aphria’s internal audit process;
4.3
External Audit
(a)
recommend to the Board a firm of external auditors to be nominated for appointment as the external auditor of Aphria;
(b)
ensure the external auditors report directly to the Committee on a regular basis;
(c)
review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;
(d)
review and recommend to the Board the fee, scope and timing of the audit and other related services rendered by the external auditors;
(e)
review the audit plan of the external auditors prior to the commencement of the audit;
(f)
establish and maintain a direct line of communication with Aphria’s external and internal auditors;
(g)
meet in camera with only the auditors, with only management, and with only the members of the Committee at every Committee meeting where, and to the extent that, such parties are present, as the Committee deems appropriate;
(h)
oversee the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors’ team;
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3
(i)
oversee the work of the external auditors appointed by the shareholders of Aphria with respect to preparing and issuing an audit report or performing other audit, review or attest services for Aphria, including the resolution of issues between management of Aphria and the external auditors regarding financial disclosure;
(j)
review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used, any alternative treatments of financial information that have been discussed with management of Aphria, the ramifications of their use as well as any other material changes. Review a report describing
all
material written communication between management and the auditors such as management letters and schedule of unadjusted differences;
(k)
discuss with the external auditors their perception of Aphria’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;
(l)
discuss with the external auditors their perception of Aphria’s identification and management of risks, including the adequacy or effectiveness of policies and procedures implemented to mitigate such risks;
(m)
review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board;
(n)
review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues;
4.4
Associated Responsibilities
(a)
review and approve Aphria’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of Aphria.
4.5
Non-Audit Services
(a)
pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but pre-approval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
5.0
Oversight Function
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that Aphria’s financial statements are complete and accurate or comply with IFRS and other applicable requirements. These are the responsibilities of Management and the external auditors. The Committee, the Chairman and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Aphria, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is based on that individual’s education and experience, which that
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4
individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Aphria’s financial information or public disclosure.
6.0
Reporting
The Chairman will report to the Board at each Board meeting on the Committee’s activities since the last Board meeting. The Committee will annually review and approve the Committee’s report for inclusion in the Annual Information Form. The minutes of each meeting of the Committee will be available to the members of the Board, at their request.
7.0
Access to Information and Authority
The Committee will be granted unrestricted access to all information regarding Aphria that is necessary or desirable to fulfill its duties and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Aphria’s expense, independent legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities, including sole authority to retain and to approve any such firm’s fees and other retention terms without prior approval of the Board. The Committee also has the authority to communicate directly with internal and external auditors.
8.0
Review of Charter
The Committee will annually review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.
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5
Exhibit 99.23
NOTICE OF MEETING
AND
MANAGEMENT INFORMATION CIRCULAR
FOR THE
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
to be held on October 25, 2017
September 11, 2017
APHRIA INC.
NOTICE OF ANNUAL AND SPECIAL SHAREHOLDER MEETING
NOTICE AND ACCESS
NOTICE IS HEREBY GIVEN that an annual and special meeting (the “
Meeting
”) of shareholders of Aphria Inc. (“
Aphria
” or the “
Company
”) will be held on Wednesday, October 25, 2017 at 10:00 a.m. (Eastern Daylight Time) at 245 Talbot Street West, Unit 103, Leamington, Ontario for the following purposes:
1.
to receive the annual audited financial statements of the Company for the financial year ended May 31, 2017, together with the report of the auditor thereon;
2.
to elect directors of the Company to hold office until the close of the next annual meeting of the shareholders of the Company or until their successors shall be elected or appointed;
3.
to appoint the auditor of the Company, to hold office until the close of the next annual meeting of the shareholders of the Company or until a successor is appointed, and to authorize the directors of the Company to fix the remuneration of the auditor;
4.
to consider and, if thought fit, approve the stock option plan for the Company;
5.
to consider and, if thought fit, approve the deferred share unit plan for the Company; and
6.
considering other business that may properly come before the Meeting or any adjournment thereof.
As a shareholder of Aphria, it is very important that you read this material carefully and then vote your common shares, either by proxy or in person at the Meeting. The voting procedure is explained in detail in the accompanying management’s information circular in respect of the Meeting to be held on October 25, 2017 (the “
Circular
”).
This Notice of Meeting, the Circular and the annual financial statements for the year ended May 31, 2017, along with the related management discussion and analysis (the “
Financial Statements and MD&A
”) have been posted on the Company’s website at https://aphria.com/investors/documents and on Aphria’s profile on www.SEDAR.com.
In lieu of mailing the Notice of Meeting and Circular and our Financial Statements and MD&A, we are using the notice-and-access mechanism under National Instrument 54-101 —
Communications with Beneficial Owners of Securities of a Reporting Issuer
(“
NI 54-101
”) to provide access to an electronic copy of these documents to registered holders and beneficial owners of Aphria’s common shares by posting them on the websites noted above. Notice-and-access allows issuers to post electronic versions of proxy-related materials (such as proxy circulars and annual financial statements) on-line, via the System for Electronic Data Analysis and Retrieval (“
SEDAR
”) and one other website, rather than mailing paper copies of such materials to shareholders. Shareholders who have previously provided standing instructions will receive a paper copy of these documents.
Shareholders with questions about notice-and-access can call the Company’s transfer agent Computershare Investor Services Inc. (“
Computershare
”) toll free at 1-866-962-0498. Shareholders may also obtain paper copies of this Circular, the Financial Statements and MD&A free of charge by contacting Computershare at the same toll-free number or upon request to the Corporate Secretary of the Company. A request for paper copies which are required in advance of the Meeting should be sent so that they are received by Computershare or the Company, as applicable, by Friday October 13, 2017, in order to allow sufficient time for Shareholders to receive their paper copies and to return a) their form of proxy to Computershare or the Company, or b) their voting instruction form to their intermediaries by its due date.
The record date for determining the shareholders entitled to receive notice of and vote at the Meeting, is the close of business (5:00 p.m. (EDT)) on August 29, 2017 (the “
Record Date
”). Only shareholders whose names have been entered in the register of Aphria shareholders as of close of business on the Record Date are entitled to receive notice of and vote at the Meeting.
Registered Shareholders may attend the Meeting in person or may be represented by proxy. Shareholders who are unable to attend the Meeting, or any adjournment or postponement thereof, in person are requested to date, sign and return the accompanying form of proxy for use at the Meeting or any adjournment or postponement thereof. To be effective, the form of proxy must be received by Computershare at its offices at 100 University Avenue, 8
th
Floor, North Tower, Toronto, ON, M5J 2Y1 (according to the instructions on the proxy), not less than forty-eight (48) hours (other than a Saturday, Sunday or holiday) immediately preceding the date of the Meeting (as it may be adjourned or postponed from time to time).
If you are a nonregistered holder of common shares and have received these materials through your broker or through another intermediary, please follow the instructions set out in the voting instruction form or other instructions received from the financial intermediary to ensure that your common shares will be voted at the Meeting.
|
Dated this 11
th
day of September 2017.
|
|
|
|
|
|
|
BY ORDER OF THE BOARD OF DIRECTORS
|
|
|
|
|
|
“Vic Neufeld”
|
|
|
Vic Neufeld
|
|
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Chief Executive Officer and Chair of the Board of Directors
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TABLE OF CONTENTS
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MANAGEMENT INFORMATION CIRCULAR
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3
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Record Date and Quorum
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3
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PROXY RELATED MATTERS
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3
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Solicitation of Proxies
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3
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Appointment of Proxies
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3
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Revocation of Proxy
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4
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Persons Making the Solicitation
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4
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Voting of Proxies
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4
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Advice to Nonregistered Shareholders
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4
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Notice-and-Access
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5
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NON-IFRS MEASURES
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5
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
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6
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BUSINESS OF THE MEETING
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6
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Receipt of Financial Statements and Auditors Report
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6
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Election of Directors
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6
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Appointing Auditors
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7
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Approval of an Amended and Restated Stock Option Plan
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8
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Approval of an Amended and Restated Deferred Share Unit Plan
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10
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Director Nominees
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13
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COMPENSATION DISCUSSION AND ANALYSIS
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21
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Overview
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21
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Objectives of Compensation Program
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21
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Compensation, Nominating & Governance Committee
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22
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Executive Compensation Components
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23
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Employment Agreements
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26
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Option-based Awards and Share-based Awards
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30
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Summary Compensation Table
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32
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Outstanding Share-Based Awards and Option-Based Awards Table
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33
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Incentive Plan Awards — Value Vested or Earned During the Year — NEOs
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34
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Exercise of Stock Options by NEOs
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34
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NEO Share Ownership
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35
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Employment Agreements, Termination, and Change of Control Benefits
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35
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Summary of Termination Benefits
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37
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COMPENSATION OF DIRECTORS
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37
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Director Compensation Table
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39
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Outstanding Share-Based Awards and Option-Based Awards Table
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39
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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
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41
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STATEMENT OF CORPORATE GOVERNANCE PRACTICES
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41
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General
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41
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Board of Directors
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41
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Chairman of the Board
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42
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Other Public Company Directorships Held
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43
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Position Descriptions
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44
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Orientation and Continuing Education
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44
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Nomination of Directors
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44
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Board Committees
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45
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1
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INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
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46
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INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
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46
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INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE ACTED UPON
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46
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ADDITIONAL INFORMATION
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46
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APPROVAL
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46
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Exhibit “A”
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A-1
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Exhibit “B”
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B-1
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Exhibit “C”
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C-1
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Exhibit “D”
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D-1
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2
MANAGEMENT INFORMATION CIRCULAR
In this document, “
you
” and “
your
” refer to the shareholder. “
We
”, “
us
”, “
our
”, the “
Company
” and “
Aphria
” refer to Aphria Inc. The information in this document is presented at September 11, 2017, unless otherwise indicated.
This management information circular (this “
Circular
”) is for the annual and special meeting (the “
Meeting
”) of shareholders of Aphria (“
Shareholders
”) to be held on Wednesday, October 25, 2017 at 10:00 am (EDT) at 245 Talbot Street West, Unit 103, Leamington, Ontario. Provided you are a Shareholder as of the Record Date (defined below) you have the right to vote the common shares of the Company (the “
Common Shares
”) for the approval of the Company’s annual consolidated financial statements, appointment of auditors, election of directors, the approval of the stock option plan of Aphria, the approval of a deferred share units plan of Aphria and any other items that may properly come before the Meeting or any adjournment of the Meeting.
To help you make an informed decision, please read this Circular and our financial statement and management’s discussion & analysis for the year ended May 31, 2017. This Circular gives you valuable information about the Company and the matters to be dealt with at the Meeting. Financial information is provided in our comparative annual financial statements and related management’s discussions and analysis for the financial year ended May 31, 2017. All currency amounts referred to in this Circular are expressed in Canadian dollars, unless stated otherwise.
Record Date and Quorum
The record date for determining the shareholders entitled to receive notice of and vote at the Meeting is the close of business (5:00 p.m. (EDT)) on August 29, 2017 (the “
Record Date
”). If you held Common Shares as of the close of business on the Record Date, you have the right to cast one vote per Common Share on any resolution to be voted upon at the Meeting.
Pursuant to the by-laws of Aphria, subject to the OBCA in respect of a majority shareholder, a quorum for the transaction of business at any meeting of Shareholders is two persons present in person or representing by proxy, at least 10% of the issued and outstanding Common Shares entitled to vote at the Meeting.
PROXY RELATED MATTERS
Solicitation of Proxies
This Circular is provided in connection with the solicitation of proxies by the management of Aphria for use at the Meeting for the purposes set forth in the accompanying Notice of Meeting and the associated costs will be borne by the Company. The solicitation of proxies will be conducted primarily by mail. However, directors, officers and regular employees of Aphria may also solicit proxies by telephone, facsimile, e-mail or in person without special compensation.
Appointment of Proxies
Shareholders who are unable to attend the Meeting and vote in person may still vote by appointing a proxyholder. The enclosed form of proxy names Vic Neufeld, Chief Executive Officer of the Company and Cole Cacciavillani, Co-Founder and Vice-President — Growing Operations of the Company.
A Shareholder has the right to appoint a person or company (who need not be a Shareholder) other than the persons designated in the form of proxy provided by Aphria to represent the Shareholder at the Meeting. To exercise this right, the Shareholder should strike out the names of management designees in the enclosed form of proxy and insert the name of the desired representative in the blank space provided in the form of proxy or submit another appropriate form of proxy. Make sure that the person you appoint is aware that he or she has been appointed and attends the meeting. In order to be effective, Shareholders must send their proxy to Aphria’s registrar and transfer agent, Computershare Investor Services Inc. (“
Computershare
”) at its offices at 100 University Avenue, 8
th
Floor, Toronto, ON, M5J 2Y1 or by telephone at 1-866-732-8683 (according to the instructions on the proxy), not less than forty-eight (48) hours (excluding Saturdays, Sundays and holidays) before the time fixed for the Meeting, being Wednesday October 25, 2017 (subject to any adjournment or postponement). The chair of the Meeting may waive this cut-off at his discretion without notice but proxies will not be accepted by the chair at the Meeting. The proxy shall be in writing and executed by the respective Shareholder or such Shareholder’s attorney authorized in writing, or if such Shareholder is a Company, under its corporate seal or by a duly authorized officer or attorney.
3
Revocation of Proxy
A registered Shareholder who has submitted a proxy may revoke it at any time prior to the exercise thereof. If a registered Shareholder who has given a proxy attends the meeting in person at which such proxy is to be voted, such person may revoke the proxy and vote in person. In addition to revocation in any other manner permitted by law, a proxy may be revoked by instrument in writing executed by the registered Shareholder or his attorney authorized in writing or, if the registered Shareholder is a Company, under its corporate seal or by an officer or attorney thereof duly authorized and deposited either at the head office of the Company at any time up to and including the last business day preceding the day of the meeting, or any adjournment thereof, at which the proxy is to be used, or with the Chairman of the meeting on the day of the meeting, or any adjournment thereof, and upon either of such deposits, the proxy is revoked.
If you are a beneficial Shareholder, please contact your intermediary for instructions on how to revoke your voting instructions.
Persons Making the Solicitation
The solicitation is made on behalf of management of the Company. The costs incurred in the preparation and mailing of the proxy-related materials for the meeting will be borne by the Company. In addition to solicitation by mail, proxies may be solicited by personal interviews, telephone or other means of communication and by officers and employees of the Company, who will not be specifically remunerated therefor.
Voting of Proxies
The Common Shares represented by an effective proxy will be voted or withheld from voting in accordance with the instructions specified therein on any ballot that may be called.
Where no choice is specified, the Common Shares will be voted in favour of the matters set forth therein.
The enclosed form of proxy confers discretionary authority in respect of amendments or variations to matters identified in the Notice of Meeting and with respect to other matters which may properly come before the Meeting, or any adjournment or postponement thereof. As at the date of this Circular, management is not aware of any amendments, variations, or other matters which may be brought before the Meeting. If such should occur, the persons designated by management will vote in accordance with their best judgment, exercising discretionary authority.
Advice to Nonregistered Shareholders
You are a “
nonregistered Shareholder
” if your shares are registered in the name of a nominee, such as a brokerage firm, through which you purchased the shares; a bank, trust company, trustee or administrator of self-administered RRSP’s, RRIF’s, RESP’s and similar plans. In Canada, the vast majority of such shares held by nonregistered Shareholders are registered under the name of CDS & Co., the registration name for The Canadian Depository for Securities Inc., which company acts as a nominee of many Canadian brokerage firms. Shares held by brokers or their nominees can only be voted for or against resolutions upon the instructions of the nonregistered Shareholder. Without specific instructions, brokers/nominees are prohibited from voting shares for their clients. The directors and officers of Aphria do not know for whose benefit the Common Shares registered in the name of CDS & Co. are held.
Applicable regulatory policy requires intermediaries/brokers to seek voting instructions from nonregistered Shareholders in advance of shareholders’ meetings. Every intermediary/broker has its own mailing procedures and provides its own return instructions, which should be carefully followed by nonregistered Shareholders in order to ensure that their shares are voted at the Meeting. Often the form of proxy supplied to a nonregistered Shareholder by its broker is identical to the form of proxy provided by Aphria to the registered Shareholders. However, its purpose is limited to instructing the registered Shareholder how to vote on behalf of the nonregistered Shareholder. The majority of brokers now delegate responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. (“
Broadridge
”). Broadridge typically mails the voting instruction forms or proxy forms to the nonregistered Shareholders and asks the nonregistered shareholders to return the proxy of voting instruction forms to Broadridge. Broadridge then tabulates the results of all instructions received and provides appropriate instructions respecting the voting of shares to be represented at the Meeting. A nonregistered Shareholder receiving a proxy or voting instruction form from Broadridge cannot use that proxy to vote shares directly at the Meeting — the proxy must be returned to Broadridge well in advance of the Meeting in order to have the shares voted.
4
If you are a nonregistered Shareholder and wish to vote in person at the Meeting, please contact your broker or agent well in advance of the Meeting to determine how you can do so.
Notice-and-Access
The use of the notice-and-access provisions reduces paper waste and mailing costs to the Company. In order for the Company to utilize the notice-and-access provisions to deliver proxy-related materials by posting the Circular electronically on a website that is not SEDAR, the Company must send a notice to shareholders, including nonregistered Shareholders, indicating that the Circular has been posted and explaining how a shareholder can access it or obtain a paper copy of the Circular from the Company. This Circular has been posted in full on the Company’s website at https://aphria.com/investors/documents and under the Company’s SEDAR profile at www.sedar.com.
The Company has determined that those registered and beneficial Shareholders with existing instructions on their account to receive printed materials will receive a printed copy of the Circular together with the Notice of Meeting and form of proxy or voting instruction form.
The Company will deliver copies of the applicable proxy-related materials directly to registered Shareholders and non-objecting beneficial owners, through the services of its registrar and transfer agent, Computershare. The Company does not intend to pay for the intermediaries to deliver these materials to objecting beneficial owners.
Any registered Shareholder who wishes to receive a paper copy of the Circular must contact the Company’s transfer agent, Computershare, toll-free, within North America — 1-866-962-0498 or direct, from outside of North America — (514) 982-8716 and entering your 15-digit control number as indicated on your voting instruction form or proxy. Any beneficial Shareholder who wishes to receive a paper copy of the Circular must contact Broadridge, toll-free, within North America — 1-877-907-7643 or direct, from outside of North America — (905) 507-5450 and entering your 16-digit control number as indicated on your voting instruction form. In order to ensure that a paper copy of the Circular can be delivered to a requesting shareholder in time for such shareholder to review the Circular and return a proxy or voting instruction form prior to the deadline to receive proxies, it is strongly suggested that a shareholder ensure their request is received no later than September 29, 2017.
NON-IFRS MEASURES
In this Circular reference is made to adjusted gross profit and EBITDA, neither of which are measure of financial performance under IFRS. The Company calculates each as follows:
·
Adjusted gross profit is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
EBITDA is net income (loss), plus (minus) income tax expense (recovery) plus (minus) finance expense (income), plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments related to biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity accounted investee, plus (minus) EBITDA profit (loss) from equity accounted investee, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
Further information on the Company’s reconciliation of these non-IFRS measures are included in its management’s discussion and analysis for the fiscal year ended May 31, 2017 available on SEDAR.
5
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Company consists of an unlimited number of Common Shares. There were 138,888,590 Common Shares of the Company outstanding as of the Record Date, each Common Share carrying the right to one vote. Each Shareholder of record at the close of business on the Record Date is entitled to vote at the Meeting the Common Shares registered in his or her name on that date.
The Company is not aware of any persons who, to the knowledge of the directors or officers, directly or indirectly, had beneficial ownership or control over, as of the Record Date, more than 10% of the Common Shares.
BUSINESS OF THE MEETING
Receipt of Financial Statements and Auditors Report
The audited consolidated financial statements of the Aphria for the financial year ended May 31, 2017 and the report of the auditors thereon will be placed before the Meeting. Approval of the Shareholders is not required in relation to the financial statements.
Election of Directors
The articles of the Company provide that the board of directors (the “
Board
”) shall consist of a minimum of 3 directors and a maximum of 15, with the actual number to be determined from time to time by the Board. The Board has determined that, at the present time, there will be 7 directors.
Directors appointed at the Meeting will serve, subject to the by-laws of the Company and applicable corporate law, until the end of the next annual Shareholder meeting or until their successor is elected or appointed, unless their office is earlier vacated. All the individuals who have been nominated as directors are currently members of the board and were elected as part of the business combination between Pure Natures Wellness Inc. o/a Aphria and Black Sparrow Capital Corp., as described in the joint management information circular dated October 28, 2014, except for Mr. Dym and Ms. Persofsky who are new nominees in fiscal 2018 as Ms. Dickinson and Mr. Kozlov will not be standing for re-election at the Meeting. The Company wishes to thank each of Ms. Dickinson and Mr. Kozlov for their contributions to the Company and the Board.
The Board recommends that Shareholders vote
FOR
the election of the nominees whose names are set forth below.
If you do not specify how you want your shares voted, the directors named as proxyholders in the enclosed proxy form intend to cast the votes represented by proxy at the Meeting FOR the election as directors of the nominee directors in this circular.
Management does not anticipate that any of the nominees for election as a director will be unable to serve as a director, but if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy reserve the right to vote for another nominee in their discretion.
This Circular sets forth certain information regarding the nominees, including a brief biography, their position with the Company, their principal occupation or employment during the last five years, date first elected or appointed as a director of the Company, Board and committee attendance, Board compensation for the previous fiscal year, the number of Common Shares and other Aphria securities beneficially owned, controlled or directed, indirectly or directly by each nominee, the total value of the securities as at the Company’s year-end date and whether or not they met the requirements of the Company’s minimum stock ownership guidelines. Please refer to pages 12 to 19 of this Circular for additional information on the proposed nominees.
If, for any reason, any of the proposed nominees does not stand for election or is unable to serve as such, the management designees named in the form of proxy reserve the right to vote for any other nominee in their sole discretion unless the shareholder has specified therein that its Common Shares are to be withheld from voting on the election of directors.
As part of its ongoing review of corporate governance practices and in accordance with the provisions of the TSX Company Manual (the “
Manual
”), the Board has adopted a majority voting policy providing that in an uncontested election of directors, any nominee who receives a greater number of votes “withheld” than votes “for” shall tender his or her resignation to the Chair of the Board promptly following the Shareholders’ meeting. The Compensation, Nominating and Governance Committee (the “
CNG Committee
”) will consider the offer of resignation and will make a recommendation to the Board on whether to accept such offer. In considering whether or not to accept the
6
resignation, the CNG Committee will consider all factors deemed relevant by the members of the CNG Committee. The CNG Committee will be expected to recommend acceptance of the resignation except in situations where “exceptional circumstances” (as provided in the Manual and issued by the Toronto Stock Exchange (the “
TSX
”)) would warrant the applicable director continuing to serve on the Board. The Board will make the final decision as to whether or not to accept the recommendation and announce it in a press release, a copy of which shall be concurrently delivered to the TSX, within ninety (90) days following the date of the Shareholders’ meeting. Should the Board decline to accept the resignation, such press release will state the reasons for the Board’s decision. The resignation of a director will be effective when accepted by the Board. A director who tenders his or her resignation pursuant to this policy will not participate in any meeting of the Board or the CNG Committee at which his or her resignation is considered.
Notwithstanding a director’s election at the Meeting, the election of any director is subject to regulatory approval. Any director that does not obtain the necessary regulatory approval shall tender his or her resignation to the Chair of the Board.
The Board unanimously recommends that the shareholders vote
FOR
the election of each of the director nominees and unless instructed otherwise, the persons named in the form of proxy will vote
FOR
the election of each of the director nominees.
Each nominee has confirmed his or her eligibility and willingness to serve as a Director if elected and, in the opinion of the Board and management of Aphria, the proposed nominees are qualified to act as directors of the Company.
Appointing Auditors
The Board, on the advice of the audit committee, recommends that the Shareholders vote FOR PricewaterhouseCoopers LLP to be appointed as auditors of Aphria until the next annual meeting of Shareholders. PricewaterhouseCoopers LLP have been the auditors of Aphria since October 27, 2016.
The persons named in the enclosed form of proxy intend to cast the votes to which the shares represented by such proxy are entitled
FOR
the appointment of PricewaterhouseCoopers LLP as auditors of Aphria for the term expiring with the next annual meeting of Shareholders, and to authorize the Board to fix their remuneration.
Unless specifically instructed to vote against the approval of the auditors, the persons named in the form of proxy accompanying the Notice of Meeting intend to vote
FOR
the approval of the auditors. In order to be effected, this ordinary resolution must be approved by a majority of the votes cast in respect thereof.
The following table sets forth, by category, the fees for all services rendered by the Company’s previous external auditors, MNP LLP, for the financial year ended May 31, 2016 and PricewaterhouseCoopers LLP for the financial year ended May 31, 2017, are as set out below (including estimates).
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May 2017
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May 2016
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Audit Fees
(1)
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$
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99,000
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$
|
60,000
|
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|
Audit Related Fees
(2)
|
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61,200
|
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19,000
|
|
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Tax Fees
(3)
|
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—
|
|
—
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All Other Fees
|
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—
|
|
—
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Total
|
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$
|
160,200
|
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$
|
79,000
|
|
Notes:
(1)
Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
(2)
Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
(3)
Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
7
Approval of an Amended and Restated Stock Option Plan
At the Meeting, Shareholders will be asked to consider and if thought fit, approve a resolution in the form attached as Exhibit “A” hereto, approving an amended and restated incentive stock option plan (the “
Option Plan
”). A copy of the Option Plan, which has been conditionally approved by the TSX, subject to the receipt of customary documentation, is attached hereto as Schedule “A-1” to Exhibit “A”. The Option Plan was previously approved by the Board, in connection with the Company’s graduation from the TSX Venture Exchange to the TSX on March 22, 2017. The changes to the Company’s prior option plan are those required by the TSX in order to ensure that the Option Plan meets the guidelines set out in the Manual, each as further discussed below. Capitalized terms used herein in this section and not otherwise defined shall have the meanings given to them in the Option Plan.
The Option Plan
The purpose of the Option Plan continues to be:
|
(i)
|
providing directors, officers, consultants and key employees of the Company (“
Eligible Persons
”) with additional incentives;
|
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(ii)
|
encouraging stock ownership by such Eligible Persons;
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(iii)
|
increasing the proprietary interest of Eligible Persons in the success of the Company;
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(iv)
|
encouraging Eligible Persons to remain with Aphria or its subsidiaries; and
|
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(v)
|
attracting new directors, employees and officers.
|
The Option Plan requires the approval of Shareholders in accordance with the Section 613 of the Manual.
The Option Plan continues to be a “rolling plan” with the Company authorized to issue such number of options which is 10% of the issued and outstanding share capital at the date of grant, less the aggregate number of Common Shares reserved for issuance or issuable under any Share Compensation Arrangement. As a result, any increase in the issued and outstanding Common Shares will result in an increase in the number of Common Shares available for issuance under the Option Plan. The maximum number of Common Shares issued to Insiders under the Option Plan, or when combined with any other previously established or proposed share compensation arrangements, within any one-year period, may not exceed 10% of the outstanding value and the maximum number of Common Shares issuable to Insiders under the Option Plan, or when combined with any other previously established or proposed share compensation arrangements, at any time, may not exceed 10% of the outstanding issue. Furthermore, the maximum number of Common Shares that may be issued to any Consultant or all Persons conducting Investor Relations Activities for the Company within any one year period pursuant to the exercise of Options granted under the Stock Option Plan shall not exceed 2% of the Common Shares outstanding (calculated on a non-diluted basis).
As of the date hereof, there are an aggregate of 7,155,869 Options outstanding and unexercised under the Option Plan, representing 5.2% of the issued and outstanding Common Shares. As of the date of this Circular, 1,157,131 Common Shares have been issued from exercised Options under the Option Plan, representing 0.8% of the issued and outstanding Common Shares and 290,000 Options have been forfeited. If the Option Plan and the DSU Plan (collectively, the “
Plans
”) are approved at the Meeting, 13,888,859 Shares in the capital of Aphria will be reserved for issuance under the Plans, representing 10% of the total outstanding Common Shares. As a result of the previously issued and unexercised Options and DSUs, a total of 6,727,570 Common Shares, representing 4.8% of the total outstanding Common Shares will be reserved for issuance under the Plans.
In connection with certain change of control transactions, including a take-over bid, merger or other structured acquisition, the Board may accelerate the vesting date of all unvested options such that all optionees will be entitled to exercise their full allocation of Options and in certain circumstances where such optionees’ employment is terminated in connection with such transactions, such accelerated vesting will be automatic.
Options granted under the Option Plan will have an Exercise Price that shall be fixed by the Board at the time that the Option is granted, but in no event shall it be less than the Market Price. The term of the Options and the vesting schedule shall be determined by the Board at the time of grant, but in no case shall an Option be exercisable for a period exceeding ten (10) years.
8
The Company does not provide financial assistance to Option holders in connection with their participation in the Option Plan.
Options shall not be transferable or assignable by the Participant otherwise than by will or the laws of descent and distribution, and shall be exercisable during the lifetime of a Participant only by the Participant and after death only by the Participant’s legal representative. As a general matter and subject to Board discretion and certain specified exceptions, if the Board service, employment or consulting relationship of a participant terminates, then vested Options held by the participant will cease to be exercisable on the earlier of the original expiry date of the Option and six (6) months after the applicable termination date and all unvested Options will terminate.
Notwithstanding any other provision of the Stock Option Plan, if the expiry date of any vested Option ceases falls on, or within nine business days immediately following, a date upon which the participant is prohibited from exercising the Option due to a black-out period or other trading restriction imposed by the Company, then the expiry date of the Option shall be automatically extended to the tenth business day following the date the relevant black-out period or other trading restriction imposed by the Company is lifted, terminated or removed.
A Participant may, in lieu of exercising an Option for cash, elect to receive, instead of the Common Shares issuable upon exercise of the Option, such number of Common Shares (rounded down to the nearest whole number) equal to the value (as determined below) of such Option by surrendering the Option at the principal office of the Company together with a properly endorsed notice of exercise and a notice of cashless exercise, in which event the Company shall issue to the Participant, upon exercise, that number of Common Shares calculated using the following formula:
X = (Y(A – B)/A)
Where:
X = the number of Common Shares to be issued to the Participant upon such cashless exercise
Y = the number of Common Shares issuable upon the exercise of the Options being exercised
A = the Market Price of the Common Shares as at the date of such cashless exercise
B = the Exercise Price
Amending the Option Plan
As part of the Company’s graduation to the TSX, there were significant revisions to the amendment provisions of the Company’s prior option plan, each as described further below.
Subject to the applicable rules of the TSX, the Board may hereafter from time to time, in its absolute discretion and
without
the approval of Shareholders, make the following amendments to the Option Plan or any Option:
·
amend the vesting provisions of the Option Plan and any Certificate;
·
amend the Option Plan or an Option as necessary to comply with applicable law or the requirements of the TSX or any other regulatory body having authority over the Company, the Option Plan or the Shareholders;
·
any amendment of a “housekeeping” nature, including, without limitation, to clarify the meaning of an existing provision of the Option Plan, correct or supplement any provision of the Option Plan that is inconsistent with any other provision of the Option Plan, correct any grammatical or typographical errors or amend the definitions in the Option Plan regarding administration of the Option Plan;
·
any amendment respecting the administration of the Option Plan; and
·
any other amendment that does not require the approval of Shareholders under Section 1.6(d) of the Option Plan.
Subject to the applicable rules of the TSX, Shareholder approval is required for the following amendments to the Option Plan:
·
any increase in the maximum number of Common Shares that may be issuable pursuant to Options granted under the Option Plan;
9
·
any reduction in the Exercise Price of an Option, cancellation and reissue of Options, extension of the Expiry Date of an Option or a substitution of Options with cash or other awards on terms that are more favourable to the Participant;
·
any amendment to the Insider participation limit;
·
any amendment to Section 1.6(c) and (d) of the Option Plan;
·
any extension of the Expiry Date of an Option held by an Insider; and
·
any change that would materially modify the eligibility requirements for participation in the Option Plan.
Disinterested Shareholder approval, meaning the approval of a majority of Shareholders voting at a duly called and held meeting of such Shareholders, excluding votes of Insiders to whom options may be granted under the Option Plan, is required for the following amendments to the Option Plan:
·
any individual stock option grant that would result in any of the limitations set forth in Section 1.4(c) of the Option Plan being exceeded; and
·
any individual stock option grant that would result in the grant to Insiders (as a group), within a twelve (12) month period, of an aggregate number of Options exceeding ten percent (10%) of the issued Common Shares, calculated on the date an Option is granted to any Insider;
·
any individual stock option grant that would result in the number of Common Shares issued to any individual in any twelve (12) month period under the Option Plan exceeding five percent (5%) of the issued Common Shares of the Company, less the aggregate number of shares reserved for issuance or issuable under any other Share Compensation Arrangement of the Company;
·
any amendment to Options held by Insiders that would have the effect of decreasing the exercise price of the Options; and
·
any individual stock option grant requiring Shareholder approval pursuant to the TSX Manual.
As at the date hereof, current directors, officers, key employees and consultants of the Company hold Options to acquire an aggregate of 7,155,869 Common Shares.
Vote Required
At the Meeting, Shareholders of the Company will be asked to consider, and if thought fit, approve a motion to approve the Option Plan. The resolution (the “
Option Plan Resolution
”) which will be put forward to the Shareholders of the Company for approval at the Meeting is attached hereto as Exhibit “A”.
The Board recommends that Shareholders vote
FOR
the Option Plan Resolution, as set out in Exhibit “A”.
Unless specifically instructed to vote against the Option Plan Resolution, the persons named in the form of proxy accompanying the Notice of Meeting intend to vote
FOR
the approval of the Option Plan. In order to be effected, this ordinary resolution must be approved by a majority of the votes cast in respect thereof.
Approval of an Amended and Restated Deferred Share Unit Plan
At the Meeting, Shareholders will be asked to consider and if thought fit, approve a resolution in the form attached as Exhibit “B” hereto, approving an amended and restated deferred share unit plan (the “
DSU Plan
”). A copy of the DSU Plan, which has been conditionally approved by the TSX subject to the receipt of customary documentation, is attached hereto as Schedule “B-1” to Exhibit “B”. The DSU Plan was previously approved by the Board, in connection with the Company’s graduation from the TSX Venture Exchange to the TSX on March 22, 2017. The changes to the Company’s prior deferred share unit plan are those required by the TSX in order to ensure that the DSU Plan meets the guidelines set out in the Manual, each as further discussed below. Capitalized terms used herein in this section and not otherwise defined shall have the meanings given to them in the DSU Plan.
10
The DSU Plan
The DSU Plan will continue to promote the interests of the Company by attracting and retaining qualified persons to serve on the Board and to service the Company and to afford such participants in the DSU Plan an opportunity to receive a portion of their compensation for serving as a director or officer of the Company in the form of securities of the Company. The DSU Plan continues to be a “rolling plan” with the Company authorized to issue such number of deferred share units “
DSUs
”, each a “
DSU
” which is 10% of the issued and outstanding share capital at the date of grant, less the aggregate number of Common Shares reserved for issuance or issuable under any Share Compensation Arrangement.
The CNG Committee of the Board will continue to administer the DSU Plan and determine which members of the Board and officers of the Company are eligible to participate (the “
Participants
”) and to whom awards of DSUs will be made. Each existing or new member of the Board or certain officers may elect in writing, once each year, to be paid a percentage of his or her cash annual retainer or annual bonus, as applicable, in the form of DSUs, with the balance being paid in cash. If no election is made in respect of a particular fiscal year, the Participant will receive the cash annual retainer or annual bonus, as applicable, in cash.
The number of DSUs granted at any particular time pursuant to the DSU Plan will be calculated by: (a) in the case of an elected amount, by dividing (i) the dollar amount of the elected amount allocated to the participant by (ii) the Share Price of a Common Share on the applicable award date; or (b) in the case of a grant of Deferred Share Units by dividing (i) the dollar amount of such grant by (ii) the Share Price of a Common Share on the applicable grant date. “
Share Price
” at any date in respect of the Common Shares means the volume weighted average trading price of the Common Shares on the TSX for the five (5) trading days immediately preceding the applicable date.
Unless otherwise stated in an applicable Grant Agreement, all DSUs recorded in a Participant’s DSU notional account shall vest on the day of grant.
Dividend equivalents are awarded in respect of DSUs in a Participant’s account on the same basis as if the Participant was a Shareholder on the relevant record date, and the dividend equivalents are credited to the Participant’s account as additional DSUs (or fractions thereof).
The maximum number of Common Share issuable under the DSU Plan shall not exceed 10% of the then issued and outstanding Common Shares pursuant to the DSU Plan (together with any other share-based compensation arrangement of the Company, including the Option Plan), and the aggregate value of DSUs awarded to non-executive directors within any one-year period under the DSU Plan together with all other security based compensation arrangements of the Company shall not exceed $150,000 in value of equity per Participant. The maximum number of Common Shares issued to Insiders under the DSU Plan, or when combined with any other previously established or proposed share compensation arrangements, within any one-year period, may not exceed 10% of the outstanding value and the maximum number of Common Shares issuable to Insiders under the DSU Plan, or when combined with any other previously established or proposed share compensation arrangements, at any time, may not exceed 10% of the outstanding issue.
As of the date hereof, there are an aggregate of 5,420 DSUs outstanding and unexercised under the DSU Plan representing 0.004% of the issued and outstanding Common Shares. If the Plans are approved at the Meeting, 13,888,859 Shares in the capital of Aphria will be reserved for issuance under the Plans, representing 10% of the total outstanding Common Shares. As a result of the previously issued and unexercised Options and DSUs, a total of 6,727,570 Common Shares, representing 4.8% of the total outstanding Common Shares will be reserved for issuance under the Plans.
Upon a Participant ceasing to be a member of the Board or officer of the Company, he or she may by the 90th day following the date on which the Participant ceases to hold any position as a director of the Company or ceases to be an officer and employee of the Company (the “
Termination Date
”), elect to receive net of any applicable withholding taxes: (i) a cash payment equal to the number of DSUs credited to the Participant’s account as of the Termination Date, multiplied by the Share Price of the Common Shares; (ii) Common Shares purchased on the Participant’s behalf on the open market by a broker; or (iii) a combination thereof.
Notwithstanding the foregoing, the Company has the absolute discretion, subject to any necessary Shareholder and regulatory approvals, to issue to the Participant such number of Common Shares from treasury as equal the number of
11
DSUs, net of the number of DSUs that would equal the applicable withholding taxes recorded in the Participant’s account on the Termination Date. In the absence of the giving of a notice of redemption, the Participant will be deemed to have elected a cash payment. In the event of death of a Participant, no notice of redemption shall be required and the Company shall within one (1) calendar year in the case of a Participant, make a lump sum cash payment for the benefit of the trustee, administrator or other legal representative of the individual. The lump sum cash payment would be equivalent to the cash payment on the Termination Date.
Under no circumstances shall DSUs be considered Common Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of common shares of the Company nor shall any Participant be considered a Shareholder by virtue of the award of DSUs.
The rights or interests of a Participant under the DSU Plan are not assignable or transferable, otherwise than by will or the laws governing the devolution of property in the event of death. Further, such rights or interests are not to be encumbered.
Amending the DSU Plan
As part of the Company’s graduation to the TSX, there were significant revisions to the amendment provisions of the Company’s prior deferred share unit plan, each as described further below.
The Board may at any time, and from time to time, and
without
Shareholder approval, amend any provision of the DSU Plan, subject to any regulatory or stock exchange requirement at the time of such amendment, including, without limitation:
·
amendments to the termination provisions the DSU Plan;
·
amendments necessary or advisable because of any change in application of securities laws;
·
amendments to Section 4 relating to the administration of the DSU Plan; and
·
any other amendment, fundamental or otherwise, not requiring shareholder approval under applicable laws or the rules of the TSX, including amendments of a “housekeeping” nature.
Notwithstanding the foregoing, none of the following amendments shall be made to the DSU Plan without approval by Shareholders or disinterested Shareholders (as applicable) by ordinary resolution:
·
amendments to the DSU Plan which would increase the number of securities issuable under this Plan, otherwise than in accordance with the terms of the DSU Plan which permit the Board to make equitable adjustments in the event of transactions affecting the Company or its capital;
·
amendments to the DSU Plan which would increase the number of securities issuable to Insiders, otherwise than in accordance with the terms of the DSU Plan;
·
amendments permitting awards other than DSUs to be made under the DSU Plan;
·
an amendment that would permit DSUs to be granted to persons other than Eligible Participants on a discretionary basis; and
·
amendments deleting or reducing the range of amendments which require shareholders’ approval under the DSU Plan.
Any amendment shall not alter the terms or conditions of any DSU or impair any right of any holder of Deferred Share Units pursuant to any DSU granted prior to such amendment.
No amendment shall be made which prevents the DSU Plan from continuously meeting the requirements of paragraph 6801(d) of the Income Tax Regulations (Canada) or any successor provision thereto.
Vote Required
At the Meeting, Shareholders of the Company will be asked to consider, and if thought fit, approve a motion to approve the DSU Plan. The resolution (the “
DSU Plan Resolution
”) which will be put forward to the Shareholders of the Company for approval at the Meeting is attached hereto as Exhibit “B”.
12
The Board recommends that Shareholders vote
FOR
the DSU Plan Resolution, as set out in Exhibit “B”.
Unless specifically instructed to vote against the DSU Plan Resolution, the persons named in the form of proxy accompanying the Notice of Meeting intend to vote
FOR
the approval of the DSU Plan. In order to be effected, this ordinary resolution must be approved by a majority of the votes cast in respect thereof.
Director Nominees
The following pages set out the director nominees, including a brief summary of their experience and qualifications together with their age, place of primary residence, principal occupation, year first elected or appointed as a director, membership on committees of the Board as at the Record Date, attendance at Board and committee meetings during fiscal 2017, as well as past and current directorships of other public and private entities. Also indicated for each director nominee is the number of Common Shares and other securities beneficially owned, or controlled or directed, directly or indirectly, on the Record Date, and, as at such date, the value of such Common Shares.
The Board has determined that the following director nominees are independent within the meaning of National Instrument 52-110 —
Audit Committees
(“
NI 52-110
”) — Dennis Staudt, Phil Waddington, Shawn Dym and Renah Persofsky. In addition, the Board has determined that the following director nominees are non-independent within the meaning of NI 52-110 — Vic Neufeld, Cole Cacciavillani and John Cervini.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of the Company, none of the nominees for election as director of the Company is as at the date hereof, or within 10 years before the date hereof:
·
is, or has been a director, CEO or chief financial officer (“
CFO
”) of any company (including the Company) that was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant company access to any exemption under applicable securities legislation, that was in effect for a period of more than 30 consecutive days (an “
Order
”), which Order was issued while the director executive officer was acting in the capacity as director, CEO or CFO;
·
was subject to an Order that was issued after the director executive officer ceased to be a director, CEO or CFO and which resulted from an event that occurred while that person was acting in the capacity as director, CEO or CFO;
·
is, or has been a director or executive officer of any company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
·
has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
Furthermore, to the knowledge of the Company, no nominee has been subject to (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; and (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for a nominee.
13
VIC NEUFELD
|
|
|
Chair of the Board and Chief Executive Officer (“CEO”) of Aphria
Age: 63
Lakeshore, Ontario
Director since 2014
Independent Director: NO
|
|
Mr. Neufeld is the Chief Executive Officer and Chair of the Board of Aphria Inc. Mr. Neufeld was formerly a Partner with Ernst & Young LLP, formerly the CEO of Jamieson Laboratories, Canada’s largest manufacturer and distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. He currently sits as the Chair of Enwin Utilities Ltd., a local energy provider and sits on the board of WFCU Credit Union.
Strategic qualifications:
·
20+ years as CEO of Canada’s largest neutraceutical player
·
20+ years building and developing brands
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
10 of 10
|
|
|
Annual General Meeting
|
1 of 1
|
|
|
Organizational Board Meeting
|
1 of 1
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
Enwin Utilities Ltd.
|
|
|
|
WFCU Credit Union
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
949,695
|
$5,166,341
(1)
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
14.0 x
|
TARGET MET
|
14
COLE CACCIAVILLANI
|
|
|
Co-Founder and Vice-President — Growing Operations
Age: 62
Leamington, Ontario
Director since 2014
Independent Director: NO
|
|
Mr. Cacciavillani, a Co-Founder, is Vice-President — Growing Operations and a director of Aphria Inc. Mr. Cacciavillani is an industrial engineer with 35 years of experience in the agricultural and greenhouse industry. Mr. Cacciavillani is the Secretary/Treasurer of Cacciavillani and F.M Farms Ltd. and the Chief Executive Officer of CF Industrial Inc. Mr. Cacciavillani is the Co-Chair of Fundraising for the Erie Shores Campus Hospice and he is a recipient of the Queen Elizabeth II Diamond Jubilee Medal.
Strategic qualifications:
·
35+ years experience in commercial agricultural space, specializing in greenhouses
·
Founding vision of Aphria
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
10 of 10
|
|
|
Annual General Meeting
|
1 of 1
|
|
|
Organizational Board Meeting
|
1 of 1
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
Erie Shores Campus Hospice
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
8,494,444
|
$46,209,775
(1)
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
220.0 x
|
TARGET MET
|
15
JOHN CERVINI
|
|
|
Co-Founder and Vice-President — Infrastructure & Technology
Age: 47
Leamington, Ontario
Director since 2014
Independent Director: NO
|
|
Mr. Cervini, a Co-Founder, is Vice-President — Infrastructure & technology and a director of Aphria. Mr. Cervini is a fourth-generation greenhouse grower with hydroponic agricultural experience. Together with his father and brother, John helped established Lakeside Produce, one of North America’s leading sales and marketing companies selling fresh produce from Canada to multinational retailers throughout North America. John is a leading innovator in greenhouse growing technology and has also overseen greenhouse expansion to Carpentaria, California and Guadalajara, Mexico.
Strategic qualifications:
·
20+ years of commercial agricultural experience, specializing in greenhouse growing technology
·
Founding vision of Aphria
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
10 of 10
|
|
|
Annual General Meeting
|
1 of 1
|
|
|
Organizational Board Meeting
|
1 of 1
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
None
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
9,500,001
|
$51,680,005
(1)
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
246.0 x
|
TARGET MET
|
16
DENNIS STAUDT, CPA, CA
|
|
|
Lead Director Chair of the Audit Committee Member, Compensation, Nominating & Governance Committee
Age: 63
Kingsville, Ontario
Director since 2014
Independent Director: YES
|
|
Mr. Staudt is the Lead Director of Aphria, in addition to being the Chair of the Audit Committee. Mr. Staudt is a retired Partner from PricewaterhouseCoopers LLP. Mr. Staudt continues to provide business advisory services to a number of private companies, primarily in the manufacturing and greenhouse sectors. He is also Vice-President of Staudt Farms Limited, a family-owned farming operation in Leamington, Ontario.
Strategic qualifications:
·
Significant financial literacy tied to Big Four experience
·
3 years as a member of Board of Directors
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
10 of 10
|
|
|
Audit
|
4 of 4
|
|
|
Compensation, Nominating &
|
7 of 7
|
|
|
Governance
|
|
|
|
Annual General Meeting
|
1 of 1
|
|
|
Organizational Board Meeting
|
1 of 1
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
None
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
60,000
|
$314,400
(1)
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
15.7 x
|
TARGET MET
|
17
DR. PHIL WADDINGTON
|
|
|
Member, Compensation, Nominating & Governance Committee
Age: 54
Gatineau, QC
Director since 2014
Independent Director: YES
|
|
Dr. Waddington is a director of Aphria Inc. Dr. Waddington, a trained naturopathic physician, is a leader in the field of regulating natural health products. From January 2000 to August 2008, Dr. Waddington served as the inaugural Director General of the Natural Health Products Directorate (NHPD) of Health Canada. He is also the Executive Director of the Canadian Homeopathic Pharmaceutical Association (CHPA).
Strategic qualifications:
·
Significant experience inside Health Canada and more specifically Natural Health Products Directorate
·
3 years as a member of Board of Directors
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
9 of 10
|
|
|
Compensation, Nominating &
|
7 of 7
|
|
|
Governance
|
|
|
|
Annual General Meeting
|
1 of 1
|
|
|
Organizational Board Meeting
|
1 of 1
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
None
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
32,007
|
$167,717
(1)
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
8.4 x
|
TARGET MET
|
18
RENAH PERSOFSKY — NEW NOMINEE
|
|
|
New Nominee
Age: 58
Toronto, ON
Director since: N/A
Independent Director: YES
|
|
Ms. Persofsky is a widely-respected entrepreneur, strategist, innovator and change agent with a distinguished track record of success in creating 27 start-up companies.
She has a rich history of investing in early stage companies where she helps mentor CEOs in the art of bringing MVP products to market, and growing their business exponentially. She serves as Board Chair for mobile on-demand senior care and child care start-up BookJane, advises award winning payment card and platform technology firm Dynamics Inc., and is a board member for retail/QSR automation software specialty firm MeazureUp Inc. She is presently an executive consultant in the Innovation Group at CIBC.
Strategic qualifications:
·
Strategic vision and entrepreneur expertise
·
Capital markets and Schedule I banking experience
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
N/A
|
|
|
Audit
|
N/A
|
|
|
Compensation, Nominating &
|
N/A
|
|
|
Governance
|
|
|
|
Annual General Meeting
|
N/A
|
|
|
Organizational Board Meeting
|
N/A
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
BookJAne
|
|
|
|
MeazureUP Inc.
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
Nil
|
$ Nil
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
0.0%
|
October 2022
|
19
SHAWN DYM — NEW NOMINEE
|
|
|
New Nominee
Age: 37
Toronto, ON
Director since: N/A
Independent Director: YES
|
|
Mr. Dym is a managing director at York Plains Investment Corp. a private investment vehicle focused on maximizing absolute returns by investing in a wide array of asset classes, including successful cannabis related investments. He currently serves on the board of advisors for Green Acre Capital, Canada’s first private investment fund focused on the cannabis industry.
He has extensive experience managing companies with high growth both at York Plains and as an entrepreneur. Since 2014 he has been president of Eddy Smart Home Solutions Inc. a leading smart home water monitoring venture based out of Toronto.
Mr. Dym has more than a decade of experience in the energy industry, most recently co-founding National Home Services (NHS) and serving as its chief operating officer from 2008 to 2011. He currently serves on the board of directors at Wellpoint Health and Totally Green. He graduated from York University and holds an MBA from Harvard Business School.
Strategic qualifications:
·
Extensive capital market expertise
·
Early cannabis investor with strong overview of the industry
|
|
Board Committee Membership
|
Membership
|
Meeting Attendance
|
|
|
Board
|
N/A
|
|
|
Audit
|
N/A
|
|
|
Compensation, Nominating &
|
N/A
|
|
|
Governance
|
|
|
|
Annual General Meeting
|
N/A
|
|
|
Organizational Board Meeting
|
N/A
|
|
Current Board Directorships
|
Public Boards
|
Private Boards
|
|
|
None
|
Wellpoint Health
|
|
|
|
Totally Green
|
|
Common Shares (# & $)
|
Number
|
Value
|
|
|
Nil
|
$ Nil
|
|
Shareholding Requirements
|
% of Shareholding Requirements
(2)
|
Target Date to Meet Requirement
|
|
|
0.0 x
|
October 2022
|
Notes:
(1)
As at May 31, 2017.
(2)
The percentage of shareholding requirements are in accordance with the Company’s Minimum Share Ownership Policy as further discussed below under the heading “Compensation Discussion and Analysis — Minimum Share Ownership Policy”.
20
COMPENSATION DISCUSSION AND ANALYSIS
Overview
The purpose of this Compensation Discussion and Analysis is to provide information about the Company’s executive compensation philosophy, objectives, and processes and to discuss compensation decisions relating to the Company’s executive officers, in particular, the five identified named executive officers (collectively, the “
NEOs
” and each an “
NEO
”), namely, Vic Neufeld, Chief Executive Officer (“
CEO
”), Carl Merton, Chief Financial Officer (“
CFO
”), Cole Cacciavillani, Co-Founder and Vice-President — Growing Operations, John Cervini, Co-Founder and Vice President — Infrastructure & Technology and Megan McCrae, Director of Marketing, for the fiscal year ended May 31, 2017.
The CNG Committee, in consultation with the CEO, is responsible for reviewing, establishing and overseeing the compensation policies of the Company and compensation of the NEOs. Historically, the CEO has made recommendations to the CNG Committee with respect to the compensation of the NEOs, and the CNG Committee reviews such recommendations with a view to determining whether to recommend to the Board any changes to the compensation for such senior executives. Moreover, the CNG Committee reviews, on an annual basis, the compensation of the CEO and makes recommendations to the Board in respect thereto.
Objectives of Compensation Program
The Company’s executive compensation practices are based on a pay-for-performance philosophy that is designed to attract, motivate and retain high performing senior executives, encourage and reward superior performance, and align our executives’ interests with those of the Company’s shareholders by:
·
Providing the opportunity for total direct compensation (base salary plus short-term target annual incentive plus target annual long-term equity-based incentive) that is competitive with the compensation received by senior executives employed at a reference group of comparable publicly-traded companies (the “
Reference Group
)”;
·
Ensuring that a significant proportion of executive compensation is linked to the Company’s financial and operational performance through the Company’s variable compensation plan as well as effective risk management;
·
Providing senior executives with long-term equity-based incentive plans, such as stock options, which also help to ensure that senior executives meet or exceed minimum share ownership requirements; and
·
Exercising informed judgement in regard to the nature and criticality of the senior executive’s role, as well as applying performance and market context to the comparator peer group data with input from the CEO to ensure the entirety of a senior executive’s contribution is recognized.
In order to implement our compensation philosophy and achieve our objectives, we have adopted a number of governing compensation practices, including:
Key Features of our Compensation Program
·
Annual incentive awards subject to achievement of pre-established performance goals tied to financial objectives
·
Significant proportion of senior executives’ total annual target compensation is considered to be “at-risk”
·
Significant proportion of senior executives’ total annual target compensation is in the form of stock options as part of the long-term incentive plan (LTIP)
·
Engaged an independent consultant Hugessen Consulting Inc. (“
Hugessen
”) to assist with the assessment and determination of appropriate senior executive compensation for fiscal 2018
·
Implementation of a SuperCharger bonus to reward extraordinary results for fiscal 2018 which would be a fixed percentage of the Fiscal 2018 target bonus under the STIP
21
Compensation, Nominating & Governance Committee
In order to assist the Board in fulfilling its oversight responsibilities with respect to compensation and governance matters, the Board has established the CNG Committee. For more information on the CNG Committee see “Statement of Corporate Governance — Board Committees — CNG Committee” on page 45 of this Circular.
The primary role of the CNG Committee is to carry out the Board’s overall responsibility for executive compensation at the Company. Under its mandate, the CNG Committee is responsible for monitoring senior executives’ performance assessment, succession planning and overall compensation. The CNG Committee is consulted in regard to the appointment of senior executives, including the terms and conditions of their appointment and termination, and reviews the evaluation of the performance of the Company’s senior executives, and may make recommendations in respect thereto including recommending their compensation. The CNG Committee also oversees the existence of appropriate policies and compensation structures so that the Company can attract, motivate and retain senior executives who exhibit high standards of integrity, competence and performance. Finally, the CNG Committee is responsible for developing a compensation philosophy and objectives that reward the creation of shareholder value while reflecting an appropriate balance between the short-term and longer-term performance of the Company.
Aphria’s compensation practices are designed to attract, motivate and retain high performing senior executives, encourage and reward superior performance and align our senior executives’ interests with those of the Company’s Shareholders. We believe that the actual compensation our executives receive should have a direct connection to their contribution to the Company’s financial performance and overall long-term success. Accordingly, our compensation program strongly links executive compensation to the actual performance of the company and aligns compensation with shareholder value by combining short and long-term cash and equity incentives. It also seeks to reward the achievement of corporate and individual performance objectives, and to align senior executives’ incentives with shareholder value creation by having a significant proportion of each senior executive’s total annual target compensation is considered to be “at-risk”. Our senior executives’ short-term incentive plan (“
Short-Term Incentive Plan
” or “
STIP
”) payout is conditional upon the attainment of or exceeding certain Company financial metrics, in particular annual targets related to gross sales, EBITDA and gross profit as set forth in the budget. The Board seeks to tie individual goals to the area of the executive officer’s primary responsibility, primarily through the use of a SuperCharger bonus. These goals may include the achievement of specific financial or business development goals. The Board also seeks to set company performance goals that reach across all business areas and include achievements in finance/business development and corporate development.
At the end of the most recently completed fiscal year, May 31, 2017, the CNG Committee was comprised of four directors, namely Robert Kozlov (Chair), Arlene Dickinson, Dennis Staudt and Philip Waddington, (the “
Independent Directors
”) all of whom are independent within the meaning of NI 52-110. The CNG Committee members have all had executive or senior roles in corporations or professional firms and/or board positions where they were required to make or were involved in decisions and determinations related to executive compensation, and the Board believes that the CNG Committee collectively has the knowledge, experience and background required to fulfill its mandate. For more detail please refer to their respective biographies under “Business of the Meeting — Election of Directors” in this Circular.
Minimum Share Ownership Policy
The Board believes that it is in the best interests of the Company and its shareholders to align the economic interests of the Company’s senior executives and Independent Directors with those of the Company’s Shareholders. To achieve this, the CNG Committee has recommended and the Board has adopted the following Minimum Share Ownership Policy.
The Policy is applicable to all of the senior executives and the Independent Directors of the Company pursuant to which each senior executive and the Independent Directors is expected to establish over a period of five (5) years, ownership of a prescribed number of Common Shares and/or DSUs which have a value which is equivalent to the following multiples of the senior executive’s base salary or, in the case of an Independent Director, the base annual cash retainer
22
paid to such Independent Director by the Company (based on the market value of the Common Shares on the TSX) and subsequently maintain such minimum ownership position for the duration of his or her tenure:
|
Position
|
|
Share Ownership Guideline
|
|
Chief Executive Officer
|
|
3 × base salary
|
|
Independent Directors
|
|
2 × base annual cash retainer
|
|
Chief Financial Officer
|
|
1 × base salary
|
|
Other Officers
|
|
0.5 × base salary
|
The following may be used in determining share ownership:
1. Shares owned directly (including through open market purchases);
2. Shares owned jointly or separately by the individual’s spouse;
3.
Shares held in trust for the benefit of the officer or director, their spouse and/or children residing at the same residence; and
4. Vested DSUs.
Unexercised stock options (whether vested or not vested), convertible debt and warrants do not count toward meeting these guidelines until they have been converted or exercised into Common Shares.
The value of the ownership requirement is based upon the senior executive’s then current base salary or Independent Director’s base annual cash retainer at the end of May of each year and will be based on the average closing price of the Company’s Common Shares on the TSX on May 31 of the prior fiscal year.
In fiscal 2016, the Board approved the Minimum Share Ownership Policy. However, during the current year, the Board tasked the CNG Committee with reconsideration of the Policy based on the growth of the per share cost of the Company’s Common Shares. As at the Record Date, the Board has not approved a revised policy but has temporarily suspended the initial ownership requirements while the Policy is reconsidered.
While the applicable level of ownership is expected to be satisfied by each officer or director within five (5) years after first becoming subject to these guidelines, the original policy required officers of the Company to purchase a minimum of 25,000 Common Shares within the first year of their hire and each director was to possess a minimum of 25,000 Common Shares prior to the record date of the annual general meeting in which he/she is to be first elected. Once the officer’s or director’s level of ownership satisfies the applicable guideline, such ownership levels are expected to be maintained for as long as the officer or director remains in their role with the Company. In the event of an increase in an officer’s base salary or a director’s base annual cash retainer, such individual will have five (5) years from the time of the increase to acquire any additional Common Shares required to meet these guidelines if necessary. Until such time that each individual officer meets the level of ownership of the guideline, that officer shall be awarded one-half (½) of their annual bonus in DSUs.
Executive Compensation Components
The Company’s executive compensation program is comprised of fixed and variable components. The variable components include equity and non-equity incentive plans. Each compensation component has a different function, but all elements are designed to work in concert to maximize Company and individual performance and provide financial incentives to senior executives based on the level of achievement of specific operational and financial objectives.
The compensation of the NEOs includes three major elements: (a) base salary, (b) short-term incentive plan consisting of an annual, discretionary cash bonus, and for fiscal 2018, the introduction of the SuperCharger bonus, and (c) long-term equity incentives, consisting of stock options granted under the Option Plan and any other equity plan that may be approved by the Board, including the DSU Plan. These three principal elements of compensation are described in more detail below
23
The following table summarizes the compensation components of the Company’s executive compensation program, including the objectives of each component and the criteria impacting each component’s value:
|
Component
|
|
Key Feature
|
|
Form
|
|
Criteria
|
|
Objectives
|
|
Performance Link
|
|
Base Salary
|
|
·
Fixed Pay Rate
·
Individual salary recommendations based on competitive assessment and economic outlook, leadership, retention and succession candidates
|
|
·
Cash
|
|
·
Reference Group data
·
Individual contribution and performance
|
|
·
Attract and retain top talent
·
Recognize level of responsibilities, individual experience and contribution to the Company's performance
|
|
·
None
|
|
|
|
·
Performance period: 1 year
|
|
|
|
|
|
|
|
|
|
Short-Term Incentive (STIP)
|
|
·
Annual award based on achievement of pre-determined corporate annual targets
·
Performance period: 1 year
|
|
·
Cash
|
|
·
Gross sales performance
·
EBITDA performance
·
Gross profit performance
|
|
·
Motivate executives to attain and exceed the Company’s annual goals and financial targets
|
|
·
Payout conditional upon achievement of pre-determined financial metrics
|
|
|
|
·
Annual SuperCharger bonus, beginning in fiscal 2018
|
|
·
Cash
|
|
·
Executive specific financial metric
|
|
·
In concert with Strategic Plan
|
|
·
Payout conditional on achievement of pre-determined financial metric
|
|
Long-Term Incentives (LTIP)
|
|
·
Stock options
·
Vesting over variable time horizons up to 5 years
|
|
·
Stock options
|
|
·
Time-based
·
Share price
|
|
·
Align executives with shareholder value creation
·
Support retention with vesting conditions
|
|
·
Requires shareholder value creation to generate compensation value
|
Base Salary
Base salaries are intended to provide an appropriate level of fixed compensation that will assist in employee retention and recruitment. Base salaries will be determined on an individual basis, taking into consideration the past, current and potential contribution to our success, the position and responsibilities of the NEOs and competitive industry benchmarks for other medical marijuana companies of comparable size and other companies of similar size in comparable industries. Base salaries are set and adjusted to reflect the scope of an executive’s responsibility and prior experience.
Short-Term Incentive Plan (STIP)
The Company’s Short-Term Incentive Plan aims to enhance the link between pay and performance by:
·
Aligning the financial interests and motivations of the Company’s senior executives and employees with the annual financial performance and returns of the Company;
·
Motivating senior executives and employees to work towards common annual performance objectives; and
·
Providing total cash compensation that is at or higher than the median of the Reference Group in cases where superior financial performance and returns in excess of target objectives are attained;
24
The following table shows the percentage breakdown of STIPs for the fiscal year ended May 31, 2017:
|
Name
|
|
Position
|
|
Maximum
annual
bonus
(1)
|
|
Target #1, meet
or exceed 2017
budgeted sales
level
(1)
|
|
Target #2, meet
or exceed 2017
budgeted gross
profit level
(1)
|
|
Target #3, meet
or exceed 2017
budgeted EBITDA
level
(1)
|
|
Discretionary
bonus
(2)
|
|
|
Vic Neufeld
|
|
Chief Executive Officer
|
|
45
|
%
(3)
|
15
|
%
|
15
|
%
|
15
|
%
|
N/A
|
|
|
Carl Merton
|
|
Chief Financial Officer
|
|
30
|
%
|
10
|
%
|
10
|
%
|
10
|
%
|
N/A
|
|
|
Cole Cacciavillani
|
|
Co-Founder and Vice-President — Growing Operations
|
|
30
|
%
|
10
|
%
|
10
|
%
|
10
|
%
|
N/A
|
|
|
John Cervini
|
|
Co-Founder and Vice-President — Infrastructure & Technology
|
|
30
|
%
|
10
|
%
|
10
|
%
|
10
|
%
|
N/A
|
|
|
Megan McCrae
|
|
Director of Marketing
|
|
20
|
%
|
5
|
%
|
5
|
%
|
5
|
%
|
5
|
%
|
(1)
As a percentage of base salary. Maximum annual bonuses for the NEOs were revised for fiscal 2018. For further disclosure see “Changes to Compensation for fiscal 2018.”
(2)
At the discretion of the CEO, based on Ms. McCrae achieving personal performance objectives as established by the CEO.
(3)
Mr. Neufeld’s bonus was increased for fiscal 2018 to a maximum annual bonus of 50%, with 16 2/3% of such bonus payable with each of the three targets referenced in the table above for Mr. Neufeld.
Performance Measures and Targets
Performance measures, targets, and payout levels for STIP are reviewed and approved annually by the Board on the recommendation of the CNG Committee. For fiscal 2017, the Board approved the following as the financial measures to be achieved (for Mr. Neufeld, Merton, Cacciavillani and Cervini, as to 1/3 of the total targeted STIP in each case and for Ms. McCrae, as to 1/4 of the total targeted STIP):
·
Annual gross sales (“
AGS
”) measured against budgeted AGS target;
·
EBITDA measured against budgeted the EBITDA target; and
·
Annual gross profits (“
AGP
”) as measured against budgeted AGP target.
The CNG Committee recommended AGS, EBITDA and AGP as the financial measures to be achieved in Fiscal 2017 to ensure that senior executives’ incentive-based compensation reflects:
·
Success in achieving the Company’s targets for profitability; and
·
Effectiveness in managing the return on assets, including the level of investment required to generate earnings.
For each of the financial measures, the percentage portion represented by such measure is the maximum that may be received.
In consideration of this year’s achievements, our NEOs all received annual incentive payout at 100% of targets, as the Company’s fiscal 2017 gross sales targets as set forth in the operating budget (“
Budget
”) for the immediately preceding fiscal year prior to the determination of the LTIP bonus, and its annual EBITDA with reference to targets, as set forth in the Budget and its annual targets for gross profit as set for in the Budget, all met or exceeded their respective target ranges, except for Ms. McCrae who received approximately 70% of her discretionary bonus. We believe that these performance measures, which are based on internal budgets, continue to be appropriate as they ensure that goals are sufficiently challenging but attainable without encouraging short-term risk-taking at the expense of long-term results.
Long-Term Incentive Plan (LTIP)
The purpose of the equity incentive component of the Company’s executive compensation program, namely the long-term incentive plan (the “
Long-Term Incentive Plan
” or “
LTIP
”), is to assist and encourage senior executives and key employees of the Company and its subsidiaries to work towards and participate in the growth and development of
25
the Company and to assist the Company in attracting, retaining and motivating its senior executives and key employees. The LTIP is designed to:
·
Recognize and reward the impact of longer-term strategic actions undertaken by senior executives and key employees;
·
Align the interests of the Company’s senior executives and key employees with its shareholders;
·
Focus senior executives and key employees on developing and successfully implementing the continuing growth strategy of the Company;
·
Foster the retention of senior executives and key management personnel; and
·
Attract talented individuals to the Company.
Types of Equity Incentives Awarded
The LTIP allows the Board to grant to senior executives DSUs or stock options of the Company.
Performance Measures and Weightings
The LTIP awards help to achieve the Company’s compensation objectives by bringing the total compensation received by the Company’s senior executives to the median to 75
th
percentile of the Reference Group if the Company achieves its goals. Through the use of time vesting for long-term compensation, the LTIP awards help to achieve the Company’s objective of ensuring the retention of senior executives.
To encourage a long-term view of performance and to align the interests of senior executives with the interests of shareholders, options granted to senior executives have different terms of years and variable time horizon vesting periods. The Board also has the ability to award DSUs under the DSU Plan to NEOs at its discretion.
The Company does not have any equity compensation plans, under which equity securities are authorized for issuance, not previously approved by shareholders.
Pension Benefits and Nonqualified Deferred Compensation
The NEOs do not benefit from pension plan participation as the Company does not currently have a company-sponsored pension plan. Moreover, none of its NEOs participate in a nonqualified deferred compensation plan. The Company does not have any equity compensation plans, under which equity securities are authorized for issuance, not previously approved by shareholders.
Other Perquisites and Benefits
While the senior executives receive a car allowance and some of the NEOs receive a gas allowance, perquisite and personal benefits are not a significant element of the compensation of the NEOs.
Employment Agreements
Aphria currently has employment agreements in place with each of its NEOs, each of which is discussed further below under the heading “Employment Agreements, Termination, and Change of Control Benefits”. As noted below under the heading “Termination and Change of Control Benefits” there are certain circumstances that trigger payments or the provision of other benefits to an NEO upon termination and change of control.
Competitive Compensation Review
The CNG Committee reviews the individual salaries of the senior executives and makes adjustments when required to ensure that compensation remains market competitive and reflects individual performance, competencies, responsibilities and experience. The Committee also takes into account the senior executive’s value to the Company and retention risk. Any increases in base salary for the NEOs, with the exception of Ms. McCrae, are at the sole discretion of the Board, with significant input from the CNG Committee. Historically, Aphria had not engaged
26
compensation consultants for the purposes of performing benchmarking with reference being had to other comparable businesses, including other small capitalization public Canadian medical marijuana companies.
In May 2017, the Committee engaged Hugessen to conduct a compensation review of the salaries and total direct compensation for the purposes of setting the future compensation of the NEOs for fiscal year 2018 and developing appropriate benchmarking which together with the implementation of a formalized compensation philosophy will provide a framework for compensation decisions going forward.
Benchmarking Practices
To meet the Company’s objectives of providing market competitive compensation opportunities, the Company’s senior executive compensation plans are benchmarked against market compensation data gathered from organizations of comparable size, complexity and geographical scope, as well as other companies with which the Company competes for executive talent.
As part of this benchmarking process, the CNG Committee reviews compensation data gathered from proxy circulars of the Reference Group. This involved the determination of an appropriate market compensation group composed of 12 companies, including appropriate benchmarking with reference to a relevant range of revenue, market cap and total enterprise value, and analysis of the senior executives’ total compensation, including an analysis of the Company’s short-term and long-term incentive plans, and an overview of current and emerging governance and executive compensation trends. Hugessen also provided analytical and advisory support on other matters related to executive compensation.
In addition, the CNG Committee considers information gathered from annual compensation planning surveys from outside consulting firms related to determining annual salary increases for senior executives. As provided in its mandate, the CNG Committee has the authority to retain and obtain advice from independent compensation consultants in regard to executive compensation and approve their fees. Following the graduation of the Company to the TSX on March 22, 2017, and as the Company has continued to grow rapidly in size and complexity, it was thought appropriate to engage an outside independent compensation consultant to assist with the assessment of and compilation of appropriate benchmarking data in connection with the establishment of appropriate compensation for the senior executives for fiscal 2018 and thereafter.
The Chair of the CNG Committee, in consultation with the CFO, identified the following companies as being part of the Reference Group:
|
Company
|
|
HQ
|
|
Industry
|
|
Corcept Therapeutics Incorporated
|
|
Menlo Park, CA
|
|
Pharmaceuticals
|
|
Canopy Growth Corporation
|
|
Smith Falls, ON
|
|
Medical Marijuana
|
|
MGP Ingredients, Inc.
|
|
Atchison, KS
|
|
Distillers and Vintners
|
|
MedReleaf Corp
.
|
|
Markham, ON
|
|
Pharmaceuticals (MMJ)
|
|
Amplify Snack Brands, Inc.
|
|
Austin, TX
|
|
Packaged Foods and Meats
|
|
Clearwater Seafoods Incorporated
|
|
Bedford, NS
|
|
Packaged Foods and Meats
|
|
Corby Spirit and Wine Limited
|
|
Toronto, ON
|
|
Distillers and Vintners
|
|
Andrew Peller Limited
|
|
Grimsby, ON
|
|
Distillers and Vintners
|
|
Merus Labs International Inc.
|
|
Toronto, ON
|
|
Pharmaceuticals
|
|
Cipher Pharmaceuticals Inc.
|
|
Mississauga, ON
|
|
Pharmaceuticals
|
|
Village Farms International, Inc.
|
|
Delta, BC
|
|
Agricultural Products
|
|
Ten Peaks Coffee Company Inc.
|
|
Burnaby, BC
|
|
Packaged Foods and Meats
|
The industry sector is considered relevant in the selection of companies comprising the Reference Group, as the Company may be in competition with these organizations for customers, revenue, executive talent and capital. Market cap and revenue size, which are used as a proxy for the level of complexity, job scope and responsibility associated with
27
senior executive positions, are also considered relevant in selecting the companies in the Reference Group given the correlation between pay level and company size.
As part of the assessment of the Reference Group by the Company, the following criteria were considered by Hugessen:
·
In recognition of the lack of publicly traded, revenue-generating and profit generating medical marijuana companies, the Reference Group also included companies that are in related, but not directly comparable, industries (e.g., pharmaceuticals, distillers and vintners, packaged foods).
·
The region where the Company primarily conducts business and competes for talent is in Canada, such that the companies comprising the Reference Group were headquartered primarily in Canada and listed on a Canadian stock exchange, however, a few examples of U.S.-listed companies were included to provide balance to the group from a company size perspective, with the goal of having the Company’s size positioned near median relative to the Reference Group.
·
The main factors that were assessed in arriving at an appropriate mix of companies were revenue, ability (or lack thereof) to generate profit, market capitalization and enterprise value, generally in range of 50% to 200% of the Company’s, which in the case of revenue was estimated on a proforma basis as at fiscal year 2019 to recognize the significant expected growth in the medical marijuana industry in the coming years.
·
Companies with comparable compensation structures vis-à-vis the compensation elements that make up total compensation.
Risk Management Principles of Compensation Programs
In terms of assessing and managing risk the role of the CNG Committee includes reviewing each of the components of an executive’s compensation to ensure there is an overall balance among long-term and short-term incentives commensurate with Aphria’s corporate strategy and goals. The mandate of the CNG Committee includes an annual review of Aphria’s compensation policies and practices to confirm that they are designed to align with Aphria’s risk management principles and to ensure that they do not encourage inappropriate or excessive risk. Aphria’s compensation policies and practices incorporate features, including significant weighting on long-term incentives that seek to mitigate risk related to encouraging the achievement of short-term goals, at the potential expense of long-term sustainability and shareholder value, without diminishing the incentive nature of the compensation, and to encourage and reward prudent business judgment and appropriate risk-taking over the long term to increase shareholder value. The variable elements of the compensation program (short-term and long-term incentives) represent a significant proportion of overall compensation that is sufficient to motivate senior executives to produce superior short-term and long-term corporate results, while the fixed compensation element (base salary) is high enough to discourage senior executives from taking unnecessary or excessive risks. The Long-Term Incentive Plan’s vesting conditions are designed to encourage a long-term view of performance and to align the interests of senior executives with shareholder interests, by being valuable only if the Company’s stock price increases over time. The vesting of stock options over various time horizons mitigates against taking short-term risks and aligns senior executives with longer-term shareholder interests.
The CNG Committee may adjust the relevant weighting of various components of an executive’s compensation based on its review, and, if required, amend or supplement specific components as appropriate. Finally, the Chairs of the Audit Committee and the CNG Committee each is a member of the other’s committee to ensure the alignment of policies for the assessment of risks.
28
Performance Graph
The graph below compares the performance of Aphria since inception in 2014 (with all dividends and distributions reinvested) to the S&P/TSX Composite Index, each starting with an investment of $100 at the beginning of fiscal 2014:
The Company’s total shareholder return since inception has shown a significant upward trend. However, for the fiscal year ended May 31, 2017, based on the market data reviewed by Hugessen, the target total cash compensation for the senior executives was in the bottom quartile which was a reflection of the desire on the part of the Company to base more of the compensation of the senior executives on long-term performance to align their interests with those of the shareholders. However, even when considering STIP and LTIP, the target total direct compensation (“
TDC
”) (base salary, STIP and LTIP) was still between the bottom quartile and median, and thus based on the market data reviewed by Hugessen, it was recommended that the CNG Committee could consider providing increases to the compensation of the senior executives in order to bring the TDC in line with the market median.
In this regard the CNG Committee is in the process of implementing a formalized compensation philosophy to provide a framework around compensation decisions. Such executive compensation policy is contemplated to have reference to the market median with the potential of higher total compensation when individual and Company performance are also at comparable higher levels. The CNG Committee will continue to use discretion and judgement when determining actual compensation levels. In this regard, individual compensation may be positioned at, above or below median, based on individual experience and performance or other criteria deemed important by the CNG Committee. Relative to the Reference Group, for fiscal 2018 the Company’s senior executives’ total direct compensation opportunity was positioned to be at or above the market median.
Total compensation may fluctuate year over year, not always following the trend in total shareholder returns, due to the following factors:
·
Senior executives’ base salary adjustments are generally made to remain competitive with the Reference Group and to reflect any changes in the scope of the executives’ responsibilities;
·
Short-term incentive payouts are not directly linked to total shareholder return but rather they are based on underlying financial measures (i.e. AGS targets, annual EBITDA targets, AGP targets); and,
·
While long-term incentive grants are typically made at market-competitive target levels, occasional one-time stock option grants may cause significant year-over-year fluctuations in total compensation. That said, the value ultimately realized from the long-term incentive awards depends on share price performance.
29
Option-based Awards and Share-based Awards
The Option Plan
The Option Plan is intended to provide executives with the promise of longer term rewards which appreciate in value with the favourable future performance of the Company. The Board believes that the Option Plan provides a method of retention and motivation for the senior executives of the Company and also aligns senior management’s objectives with long-term stock price appreciation.
For more information on the Option Plan see “Business of the Meeting — Approval of an Amended and Restated Stock Option Plan”.
Compensation Consultant
In May 2017, the CNG Committee retained Hugessen, a company specialized in compensation matters, among other things, to assist the CNG Committee in matters related to executive compensation, performance assessment and appropriate governance related thereto for fiscal 2018. Hugessen assisted the CNG Committee in determining and benchmarking compensation for the Company’s senior executives including assisting with the establishment of the Reference Group and reviewing and providing advice in regard to the existing STIP and LTIP, with a view to ensuring that the various elements of the compensation package orient senior executives’ efforts and behaviours towards the goals that have been set, as well as to ensure that their total compensation is market competitive. While Hugessen was retained at the end of fiscal 2017, no changes to executive or director compensation were implemented until fiscal 2018, as further disclosed under the heading “Employment Agreements, Termination, and Change of Control Benefits” on page 35 of this Circular.
In connection with such retainer, Hugessen researched and benchmarked the Company’s total direct compensation for the four most senior executives in the Company notably the CEO, CFO and the two Co-Founders.
There are no other relationships between Hugessen and the Company which would compromise the objectivity of Hugessen, including the following:
·
The CNG Committee had the sole authority to retain and terminate Hugessen including the individual consultants who worked on the mandate;
·
The individual consultants had direct access to the CNG Committee without management intervention;
·
The CNG Committee has the sole discretion to decide if and when the individual consultants advice and recommendations can be shared with management.
While the CNG Committee may rely on external information and advice, all of the decisions with respect to executive compensation are made by the CNG Committee and may reflect factors and considerations other than, or that may differ from, the information and recommendations provide by Hugessen.
An overview of the characteristics of the Reference Group which was used for the benchmarking and establishment of compensation for fiscal 2018 is provided in the table above under “Benchmarking Practices — Reference Group”.
Executive Compensation — Related Fees
The fixed fees paid to Hugessen for their services, which also included an analysis of the compensation paid to directors and recommendations in respect thereto, was $27,000 plus HST which were incurred in fiscal 2018.
30
Changes to Compensation for Fiscal 2018
Effective June 1, 2017, the following adjustments to executive compensation were made:
|
NEO
|
|
Base salary
|
|
STIP — Base
|
|
STIP — SuperCharger
|
|
Vic Neufeld
CEO and Director
|
|
Base salary increased to $360,000
|
|
Target bonus increased to 50%
|
|
50% of base bonus, upon meet or exceed of EBITDA financial metric
|
|
Carl Merton
CFO
|
|
Base salary increased to $230,000
|
|
No change
|
|
50% of base bonus, upon meet or exceed of EBITDA financial metric
|
|
Cole Cacciavillani
Co-Founder & VP — Growing Operations and Director
|
|
Base salary increased to $210,000
|
|
No change
|
|
50% of base bonus upon meeting or exceeding a yield metric combined without increasing the budgeted “all-in” cost per gram
|
|
John Cervini
Co-Founder & VP — Infrastructure & Technology and Director
|
|
Base salary increased to $210,000
|
|
No change
|
|
50% of base bonus upon meeting or exceeding a yield metric combined without increasing the budgeted “all-in” cost per gram
|
|
Megan. McCrae
Director of Marketing
|
|
Base salary increased to $143,000
|
|
No change
|
|
No change
|
Commitment to Competitive Compensation
Looking ahead to fiscal 2018, we plan to continue to build on our strong foundation of sound and effective practices in executive compensation. We will continue to conduct periodic compensation analyses and monitor the evolution of best practices, and implement those which enable and encourage superior performance. We will continue to benchmark our executive compensation program against our peers in the Reference Group and elsewhere to ensure that we provide competitive compensation to our senior executives.
31
Summary Compensation Table
The following table provides a summary of the compensation earned by the NEOs and directors for services rendered in all capacities during the three most recent fiscal years.
|
|
|
|
|
Salary,
consulting
|
|
|
|
|
|
Non-equity incentive
plan compensation
|
|
|
|
|
|
|
Name and principal position
|
|
Fiscal
year
|
|
fee,
retainer or
commission
|
|
Share-
based
awards
|
|
Option-based
awards
(11)
|
|
Annual
Incentive
Plan
(12)
|
|
Long-Term
Incentive
Plans
(13)
|
|
All other
compensation
|
|
Total
compensation
|
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
(1)
|
|
2017
|
|
235,385
|
|
—
|
|
1,895,000
|
|
108,000
|
|
—
|
|
84,500
|
(14)
|
2,322,884
|
|
|
CEO and Director
|
|
2016
|
|
174,415
|
(6)
|
—
|
|
65,000
|
|
26,462
|
|
—
|
|
18,768
|
(15)
|
284,645
|
|
|
|
|
2015
|
|
120,000
|
|
—
|
|
831,000
|
|
—
|
|
—
|
|
185,000
|
(16)
|
1,136,000
|
|
|
CARL MERTON
(2)
|
|
2017
|
|
210,000
|
|
—
|
|
265,000
|
|
63,000
|
|
—
|
|
5,125
|
|
543,125
|
|
|
CFO
|
|
2016
|
|
120,048
|
(7)
|
—
|
|
170,000
|
|
11,359
|
|
—
|
|
—
|
|
301,407
|
|
|
|
|
2015
|
|
3,000
|
(8)
|
—
|
|
55,000
|
|
—
|
|
—
|
|
—
|
|
58,000
|
|
|
COLE CACCIAVILLANI
(3)
|
|
2017
|
|
139,231
|
|
—
|
|
265,000
|
|
42,000
|
|
—
|
|
14,500
|
(17)
|
460,731
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
2016
|
|
139,115
|
(9)
|
—
|
|
26,000
|
|
13,912
|
|
—
|
|
—
|
|
179,027
|
|
|
|
2015
|
|
120,000
|
|
—
|
|
300,000
|
|
—
|
|
—
|
|
—
|
|
420,000
|
|
|
JOHN CERVINI
(4)
|
|
2017
|
|
139,231
|
|
—
|
|
265,000
|
|
42,000
|
|
—
|
|
14,500
|
(17)
|
460,731
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
2016
|
|
139,115
|
(9)
|
—
|
|
26,000
|
|
13,912
|
|
—
|
|
—
|
|
179,027
|
|
|
|
2015
|
|
120,000
|
|
—
|
|
300,000
|
|
—
|
|
—
|
|
—
|
|
420,000
|
|
|
MEGAN MCCRAE
(5)
|
|
2017
|
|
107,692
|
(10)
|
—
|
|
219,400
|
|
20,073
|
|
—
|
|
—
|
|
347,165
|
|
|
Director of Marketing
|
|
2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
2015
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Notes:
(1)
Mr. Neufeld was appointed President and CEO on June 3, 2014. Mr. Neufeld did not receive any compensation in his role as a director. The Board approved an increase to Mr. Neufeld’s compensation for fiscal 2018 consisting of an annual salary of $360,000 and an annual bonus under the STIP of up to 50% of his base salary.
(2)
Mr. Merton was elected as a Director on December 2, 2014. Mr. Merton resigned as a Director on December 15, 2015. Mr. Merton was appointed Chief Financial Officer on December 15, 2015. The Board approved an increase to Mr. Merton’s base salary for fiscal 2018 to $230,000 per annum.
(3)
Mr. Cacciavillani did not receive any compensation in his role as a director. The Board approved an increase to Mr. Cacciavillani’s base salary for fiscal 2018 to $210,000 per annum.
(4)
Mr. Cervini did not receive any compensation in his role as a director. The Board approved an increase to Mr. Cervini’s base salary for fiscal 2018 to $210,000 per annum.
(5)
Ms. McCrae commenced her employment with the Company on August 15, 2016. The CEO approved an increase to Ms. McCrae’s base salary for fiscal 2018 to $143,000 per annum.
(6)
Includes a $1,000 signing bonus for executing employment agreement. Mr. Neufeld’s annual salary as at June 1, 2016 was $240,000 per annum. Mr. Neufeld did not receive any compensation related to his position as a director of the Company.
(7)
Mr. Merton received $6,462 as director fees prior to resigning as a director. Mr. Merton received $113,586 as CFO, including a $1,000 signing bonus for executing employment agreement. Mr. Merton’s annual salary as at June 1, 2016 was $210,000.
(8)
Mr. Merton’s compensation in fiscal 2015 was only in his capacity as a director of the Company.
(9)
Includes a $1,000 signing bonus for executing employment agreement. Mr. Cacciavillani and Mr. Cervini’s annual salary as at June 1, 2016 is $140,000 per annum. Neither Mr. Cacciavillani nor Mr. Cervini received any compensation related to their positions as directors of the Company.
(10)
Includes a $5,000 signing bonus for executing employment agreement and pro-rated for starting her employment with the Company on August 15, 2016.
(11)
The Company values Options using Black-Scholes option pricing method as described in the Company’s audited financial statements for the year ended May 31, 2017. These amounts represent the fair value of the Options at the grant date.
(12)
All annual incentive amounts related to any fiscal year will be paid in the following fiscal year.
(13)
All LTIP awards to our NEOs were in the form of stock options and disclosed under the column “Option-based awards”.
(14)
Represents cash cost to Company of Mr. Neufeld’s leased corporate vehicle and insurance and $50,000 retroactive payment for wages received in fiscal 2017 that related to fiscal 2016.
(15)
Represents cash cost to Company of Mr. Neufeld’s leased corporate vehicle and insurance.
(16)
Includes compensation for consulting services provided prior to going public.
(17)
Represents cash cost to Company of Mr. Cacciavillani and Mr. Cervini’s retroactive wages paid in fiscal 2017 that relates to fiscal 2016.
32
Outstanding Share-Based Awards and Option-Based Awards Table
The following table discloses the particulars of the option-based awards granted to NEOs of the Company during the fiscal year-ended May 31, 2017.
|
|
|
Option Based Awards
|
|
Share-based Awards
(2)
|
|
|
Name and position
|
|
Date of
issue or
grant
|
|
Number of
securities
underlying
unexercised
options and
percentage
of class
|
|
Option
exercise
price
|
|
Option
expiration
date
|
|
Value of
Unexercised
In-The-
Money
Options
(1)
|
|
Number of
shares or
units of
shares that
have not
vested
|
|
Market or
payout value
of share-
based awards
that
have not
vested
|
|
Market or
payout value
of vested
share-based
awards not
paid out or
distributed
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
($)
|
|
(#)
|
|
|
|
($)
|
|
|
VIC NEUFELD
|
|
6/2/2016
|
|
100,000
|
|
1.40
|
|
6/2/2021
|
|
384,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
CEO and Director
|
|
11/1/2016
|
|
450,000
|
|
3.90
|
|
11/1/2019
|
|
603,000
|
|
|
|
|
|
|
|
|
CARL MERTON
|
|
6/2/2016
|
|
50,000
|
|
1.40
|
|
6/2/2021
|
|
192,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
CFO
|
|
11/1/2016
|
|
50,000
|
|
3.90
|
|
11/1/2019
|
|
67,000
|
|
|
|
|
|
|
|
|
COLE CACCIAVILLANI
|
|
6/2/2016
|
|
50,000
|
|
1.40
|
|
6/2/2021
|
|
192,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
11/1/2016
|
|
50,000
|
|
3.90
|
|
11/1/2019
|
|
67,000
|
|
|
|
|
|
|
|
|
JOHN CERVINI
|
|
6/2/2016
|
|
50,000
|
|
1.40
|
|
6/2/2021
|
|
192,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
11/1/2016
|
|
50,000
|
|
3.90
|
|
11/1/2019
|
|
67,000
|
|
|
|
|
|
|
|
|
MEGAN MCCRAE
|
|
8/15/2016
|
|
110,000
|
|
1.64
|
|
9/1/2019
|
|
396,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Director of Marketing
|
|
11/1/2016
|
|
10,000
|
|
3.90
|
|
11/1/2019
|
|
13,400
|
|
|
|
|
|
|
|
Notes:
(1)
Based on the closing price for the Common Shares on the TSX Venture Exchange of $5.24 on May 31, 2017.
(2)
All LTIP awards to our NEOs were in the form of stock options and disclosed under the column “Option-based awards”.
33
Incentive Plan Awards — Value Vested or Earned During the Year — NEOs
|
Name and position
|
|
Option-based awards
Value vested during the year
(1)
|
|
Share-based awards
Value vested during the year
|
|
Non-equity incentive plan
compensation — Value earned
during the year
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
|
|
|
|
|
|
|
|
|
CEO and Director
|
|
245,700
|
|
—
|
|
—
|
|
|
CARL MERTON
|
|
|
|
|
|
|
|
|
CFO
|
|
—
|
|
—
|
|
—
|
|
|
COLE CACCIAVILLANI
|
|
|
|
|
|
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
—
|
|
—
|
|
—
|
|
|
JOHN CERVINI
|
|
|
|
|
|
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
—
|
|
—
|
|
—
|
|
|
MEGAN MCCRAE
|
|
|
|
|
|
|
|
|
Director of Marketing
|
|
32,500
|
|
—
|
|
—
|
|
Notes:
(1)
Represents the sum of the value of the Options that vested during the year. The value of the Options that vested during the year was calculated by subtracting the fair market value on the applicable vesting date from the fair market value of the Common Shares on the vesting date and multiplying the difference by the number of Options that vested.
Exercise of Stock Options by NEOs
During the year, the NEOs exercised the following vested options:
EXERCISE OF COMPENSATION SECURITIES BY NEOS
|
Name and position
|
|
Number of
underlying securities issued
upon exercise of
outstanding
options
|
|
Exercise price
|
|
Date of
exercise
|
|
Closing price on date of exercise
|
|
Difference
between exercise
price and closing
price on date of
exercise
|
|
Total value on
exercise date
|
|
|
|
|
(#)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
|
VIC NEUFELD
|
|
210,000
|
|
1.10
|
|
3/1/2017
|
|
6.61
|
|
5.51
|
|
1,157,100
|
|
|
CEO and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARL MERTON
|
|
50,000
|
|
1.10
|
|
3/1/2017
|
|
6.61
|
|
5.51
|
|
275,500
|
|
|
CFO
|
|
15,000
|
|
0.85
|
|
8/31/2016
|
|
2.58
|
|
1.73
|
|
25,950
|
|
|
COLE CACCIAVILLANI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
JOHN CERVINI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
MEGAN MCCRAE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director of Marketing
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
34
NEO Share Ownership
The table below summarizes the NEO’s share ownership levels as at May 31, 2017, based on fiscal 2018 compensation. All of the NEOs are currently in compliance with the ownership requirement of the Minimum Share Ownership Policy described in this Circular on page 22:
|
|
|
Annual Base
|
|
Actual Ownership
($/#)
|
|
Total
Ownership
|
|
|
|
|
|
|
Name
|
|
Salary
($)
|
|
Common Shares
Beneficially Owned
|
|
Total Ownership
|
|
as a Multiple
Base Salary
|
|
Ownership
Requirements
|
|
Meets
Requirement
|
|
|
VIC NEUFELD
|
|
|
|
5,166,341/
949,695
|
|
5,166,341/
949,695
|
|
|
|
|
|
|
|
|
CEO and Director
|
|
360,000
|
|
|
|
14.4 x
|
|
3 x
|
|
Yes
|
|
|
CARL MERTON
|
|
|
|
310,080/
|
|
310,080/
|
|
|
|
|
|
|
|
|
CFO
|
|
230,000
|
|
57,000
|
|
57,000
|
|
1.3 x
|
|
1.0 x
|
|
Yes
|
|
|
COLE CACCIAVILLANI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP — Growing Operations and Director
|
|
210,000
|
|
46,209,775/
8,494,444
|
|
46,209,775/
8,494,444
|
|
220.0 x
|
|
0.5 x
|
|
Yes
|
|
|
JOHN CERVINI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP — Infrastructure & Technology and Director
|
|
210,000
|
|
51,680,005/
9,500,001
|
|
51,680,005/
9,500,001
|
|
246.0 x
|
|
0.5 x
|
|
Yes
|
|
|
MEGAN MCCRAE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director of Marketing
|
|
143,000
|
|
Nil
|
|
Nil
|
|
0 x
|
|
N/A
|
|
N/A
|
|
NEOs subject to the Minimum Share Ownership Policy are expected to not sell Common Shares acquired under the Company’s Long-Term Incentive Plan until the share ownership requirement is achieved, except as required to cover the tax liability associated with the exercise of Options.
Employment Agreements, Termination, and Change of Control Benefits
Aphria currently has employment agreements in place with each of its NEOs.
Mr. Neufeld — Chief Executive Officer
On June 1, 2016 the Company entered into a new employment agreement with Mr. Neufeld for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $240,000 per annum, a monthly car allowance of $750, a monthly gas allowance of up to $250, annual bonus of up to 45% of his base salary, to be approved by the Board, and stock options pursuant to the Option Plan or any other equity plan as may be approved by the Board. Mr. Neufeld’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Neufeld is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Neufeld is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2017, the Board approved an increase in base salary to $360,000 per annum and an increase in bonus to 50% of his base salary for fiscal 2018. Further, the Board approved a SuperCharger bonus equal to 50% of the CEO’s bonus otherwise payable, if the Company achieves a minimum EBITDA equal to 5% more than the Company’s board approved Budgeted EBITDA for 2018.
Mr. Merton — Chief Financial Officer
On June 1, 2016 the Company entered into a new employment agreement with Mr. Merton for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $210,000 per annum, a monthly car allowance of $750, a monthly gas allowance of up to $500, annual bonus of up to 30% of his base salary, to be approved by the Board, and stock options pursuant to the Option Plan or any other equity plan as may be approved by the Board. Mr. Merton’s employment agreement also includes, among other things, provisions
35
regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Merton is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Merton is terminated without cause within two years following a Change of Control (as defined in his employment agreement), or one year following a change in the position of the CEO, he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2017, the Board approved an increase in base salary to $230,000 per annum for fiscal 2018. Further, the Board approved a SuperCharger bonus equal to 50% of the CFO’s bonus otherwise payable, if the Company achieves a minimum EBITDA equal to 5% more than the Company’s board approved Budgeted EBITDA for 2018.
Mr. Cacciavillani — Co-Founder and Vice-President — Growing Operations
On June 1, 2016 the Company entered into a new employment agreement with Mr. Cacciavillani for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $140,000 per annum, a monthly car allowance of $750, annual bonus of up to 30% of his base salary, to be approved by the Board, and stock options pursuant to the Option Plan or any other equity plan as may be approved by the Board. Mr. Cacciavillani’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Cacciavillani is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Cacciavillani is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2017, the Board approved an increase in base salary to $210,000 per annum for fiscal 2018. Further, the Board approved a SuperCharger bonus equal to 50% of the Co-Founder’s bonus otherwise payable, if the Company achieves a minimum yield equal to 5% more than the Company’s board approved budgeted yield for 2018 without increasing the Company’s “all-in” cost per gram from budgeted amounts.
Mr. Cervini — Co-Founder and Vice-President — Infrastructure & Technology
On June 1, 2016 the Company entered into a new employment agreement with Mr. Cervini for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $140,000 per annum, a monthly car allowance of $750, annual bonus of up to 30% of his base salary, to be approved by the Board, and stock options pursuant to the Option Plan or any other equity plan as may be approved by the Board. Mr. Cervini’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Cervini is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Cervini is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2017, the Board approved an increase in base salary to 210,000 per annum for fiscal 2018. Further, the Board approved a SuperCharger bonus equal to 50% of the Co-Founder’s bonus otherwise payable, if the Company achieves a minimum yield equal to 5% more than the Company’s board approved budgeted yield for 2018 without increasing the Company’s “all-in” cost per gram from budgeted amounts.
Ms. McCrae — Director of Marketing
On August 1, 2016, the Company entered into an employment agreement with Ms. McCrae for an indefinite term setting forth the terms and conditions of her employment, which provides for her base salary in the amount of $140,000 per annum, a monthly car allowance of $500, annual bonus of up to 20% of her base salary, to be approved by the Company. Ms. McCrae’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition, and non-solicitation as well as eligibility for the Company’s benefit plans. In the event
36
Ms. McCrae is terminated without cause, she will be entitled to a payment equal to six months’ notice, using a combination of Base Salary and average bonus earnings based on a three year average. Ms. McCrae is not entitled to any additional compensation in the event of a change of control. The CEO approved an increase in base salary to 143,000 per annum for fiscal 2018. Ms. McCrae’s employment already contained a SuperCharger bonus.
Summary of Termination Benefits
The following table provides details regarding the estimated incremental payments from the Company to each of the NEOs in the event of a change of control, termination without cause and assuming the event took place as of the date hereof:
|
Name
|
|
Triggering Event
|
|
Base Salary
(1)
|
|
Bonus
|
|
Total
|
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
|
|
Termination without cause
|
|
390,000
|
|
126,000
|
|
516,000
|
|
|
CEO and Director
|
|
Termination following a Change of Control
|
|
780,000
|
|
252,000
|
|
1,032,000
|
|
|
CARL MERTON
|
|
Termination without cause
|
|
220,000
|
|
57,750
|
|
277,750
|
|
|
CFO
|
|
Termination following a Change of Control
|
|
440,000
|
|
114,500
|
|
554,500
|
|
|
|
|
Termination without cause (new CEO)
|
|
440,000
|
|
114,500
|
|
554,500
|
|
|
|
|
COLE CACCIAVILLANI
|
|
Termination without cause
|
|
245,000
|
|
49,000
|
|
294,000
|
|
|
VP — Growing Operations and Director
|
|
Termination following a Change of Control
|
|
490,000
|
|
98,000
|
|
588,000
|
|
|
JOHN CERVINI
|
|
Termination without cause
|
|
245,000
|
|
49,000
|
|
294,000
|
|
|
VP — Infrastructure & Technology and Director
|
|
Termination following a Change of Control
|
|
490,000
|
|
98,000
|
|
588,000
|
|
|
MEGAN MCCRAE Director of Marketing
|
|
Termination without cause
|
|
83,500
|
|
15,500
|
|
99,000
|
|
(1) Calculation of Termination Benefits are based on the base salaries, annual bonuses and years of service for fiscal 2018.
COMPENSATION OF DIRECTORS
The Company’s director compensation program is designed (i) to attract and retain highly qualified individuals to serve on the Board and its committees, (ii) to align the interests of the directors with the long-term interests of the Company’s shareholders, and (iii) to provide appropriate compensation having regard to the risks and responsibilities related to being an effective director.
The compensation of the directors, which is only paid to Independent Directors, includes three elements: (a) annual retainer and committee fees, as applicable; (b) long-term equity incentives, consisting of DSUs issued under the DSU Plan; and, (c) a one-time grant of stock options upon election to the Board of Directors, granted under the Option Plan, currently set at 50,000 options and any other equity plan that may be approved by the Board. These principal elements of compensation are described below.
Annual Retainer
The Board, with assistance from the CNG Committee, reviews Aphria’s approach to director compensation. The CNG Committee considers many factors, including whether compensation fairly reflects the responsibilities and risks involved. The review of Aphria’s director compensation includes benchmarking against other medical marijuana companies in Canada and other similar or comparable companies with respect to total enterprise value (TEV), market capitalization and revenue. Annual retainers have been intended to provide an appropriate level of fixed compensation
37
that will assist in director retention and recruitment. The CNG Committee may retain an independent external consultant to provide data and advice to the CNG Committee in regard to the appropriateness of its director compensation policy as well as the different levels of compensation, particularly in light of the number of meetings and the amount of time required to be spent by the directors to fulfill their board and committee obligations. While no such independent consultant had been engaged in connection with the determination of directors’ compensation for the fiscal year ended May 31, 2017, as noted elsewhere herein, the CNG Committee engaged Hugessen to advise in regard to the directors’ compensation for fiscal 2018 and the Board has approved increased compensation for Directors in fiscal 2018 and fiscal 2019 as further described below.
Annual retainers were paid in fiscal 2017 to the Independent Directors on the following basis:
|
Type of Compensation
|
|
Annual Compensation
|
|
|
Board Retainer
|
|
20,000
|
(1)(2)
|
|
Deferred share units
|
|
16,000
|
(3)
|
|
Audit Committee Chair Retainer
|
|
6,000
|
|
|
CNG Committee Chair Retainer
|
|
2,000
|
|
|
Member of Audit Committee
|
|
4,000
|
|
(1)
No meeting fees are paid to Independent Directors.
(2)
Annual cash retainers were effective June 1, 2017.
(3)
Effective the first quarter after approval of the DSU plan by shareholders, at the rate of $4,000 per quarter.
Independent Directors are reimbursed for travel and other out-of-pocket expenses incurred in attending Board or committee meetings as well as annual shareholders’ meetings.
Currently, no meeting fees are paid to the Independent Directors. Moreover, the Directors do not benefit from pension plan participation. Perquisites and personal benefits are not available to the Directors. The CNG Committee, in conjunction with the Board, upon the recommendation of Hugessen, has established an appropriate comparator group for purposes of setting the future compensation of the Directors.
Changes to Director Compensation for Fiscal 2018 and 2019
Effective June 1, 2017 and June 1, 2018 respectively the following adjustments to director compensation have been approved by the Board:
|
Type of Compensation
|
|
Fiscal Year 2018
|
|
Fiscal Year 2019
|
|
|
Board Retainer
|
|
35,000
|
(1)
|
40,000
|
(1)
|
|
Deferred share units
|
|
28,000
|
|
32,000
|
|
|
Lead Director
|
|
15,000
|
|
15,000
|
|
|
Audit Committee Chair Retainer
|
|
15,000
|
|
15,000
|
|
|
CNG Committee Chair Retainer
|
|
15,000
|
|
15,000
|
|
|
Member of any 2 Board Committees
|
|
7,500
|
|
7,500
|
|
(1)
No meeting fees are paid to Independent Directors.
Deferred Share Unit Plan
A full copy of the DSU Plan is attached to this Circular as Exhibit “B”.
38
Minimum Share Ownership Requirements
The Independent Directors are also subject to the Minimum Share Ownership Policy as further discussed above on page 22 of this Circular.
Director Compensation Table
The following table provides information regarding compensation earned by the Company’s Independent Directors for the fiscal year ended May 31, 2017.
|
|
|
|
|
Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Committee
|
|
Share
|
|
Option-
|
|
Non-equity
|
|
|
|
|
|
|
|
|
Annual Base
|
|
Chair Cash
|
|
Based
|
|
based
|
|
incentive plan
|
|
All other
|
|
Total
|
|
|
Name and principal position
|
|
Cash Retainer
(1)
|
|
Retainer
(2)
|
|
Awards
|
|
awards
|
|
compensation
|
|
compensation
|
|
compensation
(3)
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
DENNIS STAUDT
|
|
20,000
|
|
6,000
|
|
8,000
|
|
54,033
|
|
—
|
|
—
|
|
88,033
|
|
|
PHILIP WADDINGTON
|
|
20,000
|
|
—
|
|
8,000
|
|
54,033
|
|
—
|
|
—
|
|
82,033
|
|
|
ROB KOZLOV
(4)
|
|
20,000
|
|
6,000
|
|
8,000
|
|
54,033
|
|
—
|
|
—
|
|
88,033
|
|
|
ARLENE DICKINSON
(3)(4)
|
|
15,000
|
|
4,000
|
|
8,000
|
|
85,150
|
|
—
|
|
—
|
|
112,150
|
|
Notes:
(1)
The Board set the annual retainer for Independent Directors at $20,000 per year.
(2)
The Board set the annual retainer for the Chair of the Audit Committee at $6,000 per year, the Chair of the CNG Committee at $2,000 per year and added a $4,000 fee for a member of the Audit Committee.
(3)
Ms. Dickinson joined the Board on October 27, 2016 and her compensation is pro-rated for the year from her start date.
(4)
Mr. Kozlov and Ms. Dickinson will not stand for re-election at the Meeting and each of their terms as a Director will expire immediately after the close of the Meeting.
Outstanding Share-Based Awards and Option-Based Awards Table
The following table discloses the particulars of the option-based awards granted to the Independent Directors of the Company during the fiscal year-ended May 31, 2017.
|
|
|
Option Based Awards
|
|
Share-based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
payout value
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Value of
|
|
shares or
|
|
payout value
|
|
of vested
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
Unexercised
|
|
units of
|
|
of share-based
|
|
share-based
|
|
|
|
|
Date of
|
|
underlying
|
|
Option
|
|
Option
|
|
In-The-
|
|
shares that
|
|
awards that
|
|
awards not
|
|
|
|
|
issue or
|
|
unexercised
|
|
exercise
|
|
expiration
|
|
Money
|
|
have not
|
|
have not
|
|
paid out or
|
|
|
Name and position
|
|
grant
|
|
options
|
|
price
|
|
date
|
|
Options
(1)
|
|
vested
|
|
vested
|
|
distributed
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
($)
|
|
(#)
|
|
|
|
($)
|
|
|
DENNIS STAUDT
|
|
Nov. 1, 2016
|
|
30,000
|
|
3.90
|
|
Nov. 1, 2019
|
|
13,400
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
PHILIP WADDINGTON
|
|
Nov. 1, 2016
|
|
30,000
|
|
3.90
|
|
Nov. 1, 2019
|
|
13,400
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
ROB KOZLOV
(1)
|
|
Nov. 1, 2016
|
|
30,000
|
|
3.90
|
|
Nov. 1, 2019
|
|
13,400
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
ARLENE DICKINSON
(1)
|
|
Oct. 27, 2016
|
|
50,000
|
|
3.70
|
|
Oct. 27, 2021
|
|
77,000
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Notes:
(1)
Mr. Kozlov and Ms. Dickinson will not stand for re-election at the Meeting and each of their terms as a Director will expire immediately after the close of the Meeting.
Exercise of Stock Options by Independent Directors
The following tables sets forth information concerning the exercise of vested options by the Independent Directors during the fiscal year-ended May 31, 2017, including:
·
The number of securities to be issued upon the exercise of outstanding options, warrants and rights;
·
The weighted-average exercise price of such outstanding options, warrants and rights; and,
·
The number of securities remaining available for future issuance under the applicable plan, other than securities to be issued upon the exercise of such outstanding options, warrants and rights.
39
EXERCISE OF COMPENSATION SECURITIES BY INDEPENDENT DIRECTORS
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
|
|
|
|
|
Difference
|
|
|
|
|
|
|
issued upon
|
|
|
|
|
|
|
|
between exercise
|
|
|
|
|
|
|
exercise of
|
|
Exercise
|
|
|
|
|
|
price and closing
|
|
Total value on
|
|
|
|
|
outstanding
|
|
price
|
|
Date of
|
|
Closing price date
|
|
price on date of
|
|
exercise date
|
|
|
Name and position
|
|
options (#)
|
|
($)
|
|
exercise
|
|
of exercise ($)
|
|
exercise ($)
|
|
($)
|
|
|
DENNIS STAUDT
Director
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
PHILIP WADDINGTON
(1)
|
|
50,000
|
|
1.10
|
|
JULY 15, 2016
|
|
1.77
|
|
0.67
|
|
33,500
|
|
|
Director
|
|
10,000
|
|
1.30
|
|
JULY 15, 2016
|
|
1.77
|
|
0.47
|
|
4,700
|
|
|
ROBERT KOZLOV
(2)
Director
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
ARLENE DICKINSON
(2)
Director
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Notes:
(1)
Elected to use cashless option exercise process. Exercised 60,000 options and received 21,807 Common Shares.
(2)
Mr. Kozlov and Ms. Dickinson will not stand for re-election at the Meeting and each of their terms as a Director will expire immediately after the close of the Meeting.
Directors’ and Officers’ Liability Insurance
The Company maintains directors’ and officers’ liability insurance (“
D&O Insurance
”) for its directors and officers. The D&O Insurance insures the Company and its directors and officers against liability arising from wrongful acts of the Company’s directors and officers in their capacity as directors and officers of the Company, subject to limitations, if any, contained in the
Business Corporations Act
(Ontario), and has an aggregate policy limit of $25,000,000. No portion of the D&O Insurance is directly paid by any director or officer of the Company.
Indebtedness of Directors and Officers
No individual who is, or at any time during the most recently completed fiscal year of the Company was, a director or executive officer of the Company, nor any proposed nominee for election as a director of the Company, nor any associate of any of the foregoing is, or at any time since the beginning of the most recently completed fiscal year of the Company has been, indebted to the Company or any of its subsidiaries (other than in respect of amounts which would constitute routine indebtedness) or was indebted to another entity, which such indebtedness is, or was at any time since the beginning of the most recently completed fiscal year of the Company, the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of its subsidiaries.
40
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following sets forth information in respect of securities authorized for issuance under the Company’s equity compensation plan as at the Record Date:
|
|
|
Number of securities to
|
|
Weighted-average
|
|
Number of securities
|
|
|
|
|
be issued upon exercise
|
|
exercise price of
|
|
remaining available for
|
|
|
|
|
of outstanding options,
|
|
outstanding options,
|
|
future issuance under
|
|
|
Plan Category
|
|
warrants and rights
|
|
warrants and rights
|
|
equity compensation plans
|
|
|
Equity compensation plans approved by Shareholders
|
|
5,931,421
|
|
1.99
|
|
7,950,529
|
|
|
Equity compensation plans not approved by Shareholders
|
|
—
|
|
—
|
|
—
|
|
|
Total
|
|
5,931,421
|
|
1.99
|
|
7,950,529
|
|
Please refer to the section above entitled “Business of the Meeting — approval of an Amended and Restated Stock Option Plan” for a description of the Option Plan and its significant terms and Business of the Meeting — Approval of an Amended and Restated Deferred Share Unit Plan” for a description of the DSU Plan and its significant terms.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
General
The Board and management believe that sound and effective corporate governance is essential to Aphria’s performance. Aphria has adopted certain practices and procedures to ensure that effective corporate governance practices are followed and that the Board functions independently of management. In addition, the CNG Committee reviews the Company’s corporate governance practices and procedures on a regular basis to ensure that they address significant issues of corporate governance. To comply with these various standards and achieve best practices, we have adopted comprehensive corporate governance policies and procedures. Our key policies and documents include the following:
·
Mandate of the Board
·
Charters of the Board Committees
·
Audit Committee
·
CNG Committee
·
Code of Conduct and Ethics
·
Whistleblower Policy
·
Corporate Disclosure Policy
·
Insider Trading Policy
·
Delegation of Authority Policy
The following sections set out a description of Aphria corporate governance practices as approved by the Board and in accordance with the requirements set forth in National Instrument 58-101 —
Disclosure of Corporate Governance Practices
. A copy of our Board Mandate is attached to this Circular as Exhibit “C”.
Board of Directors
Independence
The Board is currently comprised of 7 directors, 4 of whom are independent. Independence is determined in accordance with NI 52-110. The Board has determined that Dennis Staudt and Phil Waddington are independent within the meaning of NI 52-110 as well as Shawn Dym and Renah Persofsky, who are new nominees for fiscal 2018. In addition, the Board has determined that the following director nominees are non-independent — Vic Neufeld, Cole Cacciavillani and John Cervini as a result of their senior management positions with the Company.
41
Common Board Memberships
The board has not adopted a policy limiting the number of directors who sit on the board of another public company but believes disclosure of common board memberships is important, See: “Statement of Corporate Governance Practices — Other Public Company Directorships Held”.
Meetings of Independent Directors
Our Board believes that given its size and structure, it is able to facilitate independent judgment in carrying out its responsibilities. However, to further enhance such independent judgment, the Independent Directors may meet in the absence of senior executive officers or any non-independent directors. Dennis Staudt was appointed on March 22, 2017 as lead director by our Board and is responsible for ensuring that the directors who are independent of management have opportunities to meet without management present, as required.
During the fiscal year ended May 31, 2017, the Board and the committees met as follows:
|
|
|
Meetings
|
|
|
|
|
held
|
|
|
Board
|
|
10
|
|
|
Audit Committee
|
|
4
|
|
|
CNG Committee
|
|
7
|
|
Attendance
The attendance record of each director is set out below for the fiscal year ended May 31, 2017:
|
|
|
|
|
Audit
|
|
CNG
|
|
Annual
|
|
|
|
|
|
|
Board
|
|
committee
|
|
committee
|
|
General and
|
|
|
|
|
|
|
meetings
|
|
meetings
|
|
meetings
|
|
Special
|
|
Organizational
|
|
|
Director
|
|
attended
|
|
attended
|
|
attended
|
|
Meeting
|
|
Meeting
|
|
|
Vic Neufeld
(1)
|
|
10
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
|
Cole Cacciavillani
|
|
10
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
|
John Cervini
|
|
10
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
|
Dennis Staudt
(2)
|
|
10
|
|
4
|
|
7
|
|
1
|
|
1
|
|
|
Philip Waddington
|
|
9
|
|
N/A
|
|
7
|
|
1
|
|
1
|
|
|
Arlene Dickinson
(3)(4)
|
|
6
|
|
2
|
|
5
|
|
0
|
|
0
|
|
|
Rob Kozlov
(4)(5)
|
|
10
|
|
4
|
|
7
|
|
1
|
|
1
|
|
Notes:
(1)
Chair of the Board.
(2)
Lead Director and Chair of the Audit Committee.
(3)
Ms. Dickinson participated in 6 of 6 Board meetings, 2 of 2 Audit Committee meetings, 5 of 5 CNG meetings but did not participate in either the Annual General and Special Meeting nor the Organizational Meeting after her election to the Board on October 27, 2016.
(4)
Mr. Kozlov and Ms. Dickinson will not stand for re-election at the Meeting and each of their terms as a Director will expire immediately after the close of the Meeting.
(5)
Chair of the CNG Committee.
Chairman of the Board
Mr. Neufeld, serve as Chairman of the Board (the “
Chairman
”), and is not considered independent due to his position as CEO. The primary functions of the Chairman are to facilitate the operations and deliberations of the Board and the satisfaction of the Board’s responsibilities under its mandate. The Chair’s key responsibilities include duties relating to setting Board meeting agendas, chairing Board and Shareholder meetings, director development, providing input on potential director candidates and communicating with Shareholders and regulators.
42
Other Public Company Directorships Held
The following table sets out the directors and officers of the Company that are, or have been within the last five years, directors, officers or promoters of other reporting issuers:
|
|
|
Name and
|
|
|
|
|
|
|
|
|
Name of director,
|
|
jurisdiction of
|
|
Name of
|
|
|
|
|
|
|
officer or promoter
|
|
reporting issuer
|
|
exchange
|
|
Position
|
|
Period
|
|
|
Vic Neufeld
|
|
Reko International Group Inc.
|
|
TSX-V
|
|
Director
|
|
December 2004 – December 2016
|
|
|
|
|
Neptune Technologies & Bioresources Inc.
|
|
TSX
|
|
Director
|
|
July 12, 2016 – August 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Merton
|
|
Reko International Group Inc.
|
|
TSX-V
|
|
Chief Financial Officer
|
|
October 2007 – November 2015
|
|
|
|
|
Tetra Bio-Pharma Inc.
|
|
TSX-V
|
|
Director
|
|
July 2017 – Present
|
|
Board Tenure
Aphria has not adopted a policy which imposes term limits for directors. We believe that it is crucial that directors understand our industry and our business and this requires a certain length of tenure on the Board. Long-term directors accumulate extensive company knowledge while new directors bring new experience and perspectives to the Board. It is important to achieve an appropriate balance of both to ensure an effective Board.
Board and Executive Management Diversity
Aphria recognizes the importance and benefit of having a Board and senior management comprised of individuals who are highly qualified based on their talents and experience, and embrace the benefits of diversity in perspective and background that enhance our Board’s and Aphria’s performance. Aphria does not differentiate by race, colour, ethnicity, religion, gender, sexual orientation, or any other aspect.
While the primary objectives of the CNG Committee are to ensure consideration of individuals who are highly qualified, based on their talents, experience, functional expertise, as well as personal skills, character, and qualities, the CNG Committee will follow a balanced approach in identifying the factors to be considered as new members are added to the team. In particular, the CNG Committee shall consider the level of representation of women and other diverse candidates on the Board when making recommendations for nominees to the Board and monitor the level of female representation on our Board and in senior management positions, with a view to continuing to broaden recruiting efforts to attract and interview qualified female candidates, and committing to retention and training to ensure that our most talented employees are promoted from within our organization.
Currently, Aphria has one woman on the Board, representing approximately 14% of its seven members, with the same number and percentage proposed for election. Also, while neither of our senior executive officers are women, our full senior management team comprises one-third female representation. As the Company has been successful in recruiting and retaining qualified female senior management members under its existing policies and processes, Aphria has not adopted any specific targets, but will promote its objectives through the initiatives set out in this policy with a view to identifying and fostering the development of a suitable pool of candidates for nomination or appointment over time. The Company shall select candidates that represent a diversity of business understanding, personal attributes, abilities and experience. The CNG Committee will also engage in periodic evaluation of individual Board members to identify strengths and areas for improvements, take measures to ensure that the nominee recruitment and identification process fosters progression of diverse candidates, and make recommendations in respect of diverse representation on the Board.
Assessments
The Board is in the process of developing a peer assessment process for its individual board members. This is an initiative of the CNG Committee for the upcoming year.
43
Mandate of the Board of Directors
The Board is responsible for supervising the management of Aphria business and affairs and has adopted the written mandate set forth in Exhibit “C”. The Board’s principal responsibilities relate to the stewardship of management and are summarized below:
·
Strategic planning
— the Board reviews and approves Aphria’s strategic planning process and annual strategic plan in light of Management’s assessment of emerging trends, the competitive environment, risk issues and significant business practices and products;
·
Risk management
— the Board reviews management reports on material risks associated with our businesses and operations, the implementation by Management of systems to manage these risks and material deficiencies in the operation of these systems;
·
Human resources management
— the Board with assistance from the CNG Committee reviews Aphria’s approach to human resource management and executive compensation, the extent to which senior management fosters a culture of integrity and succession planning for the Chief Executive Officer and key senior management positions;
·
Financial corporate governance
— the Board with assistance from the CNG Committee reviews Aphria’s approach to corporate governance, director independence, Aphria’s code of ethics and conduct, and policies relating to reputation and legal risk;
·
Financial information
— the Board with assistance from the Audit Committee reviews Aphria’s internal controls relating to financial information, management reports on material deficiencies relating to those controls and the integrity of Aphria’s financial information and systems;
·
Communications
— the Board reviews Aphria’s overall communications strategy, measures for receiving shareholder feedback and compliance with Aphria’s disclosure policy;
·
Board Committees
— the Board establishes committees and their mandates and requires committee chairs to present a report to the board on material matters considered by the committee at the next board meeting;
The mandate of the Board is reviewed and considered by the Board for approval each year.
Position Descriptions
Our Board has adopted a written position description for the Chairman, which sets out the Chair of the Board’s key responsibilities, including, among others, duties relating to setting Board meeting agendas, chairing Board and shareholder meetings, director development and communicating with shareholders and regulators.
Our Board has also adopted a written position description for our lead director. See “Meetings of Independent Directors” above. Our Board has adopted a written position description for the chair of the CNG Committee and the chair of the Audit Committee, each which sets such chair’s key responsibilities, including, among others, duties relating to setting committee meeting agendas, chairing committee meetings and working with the respective committee and management to ensure, to the greatest extent possible, the effective functioning of the committee.
The primary functions of the CEO are to lead the management of Aphria’s business and affairs and lead the implementation of the resolutions and policies of the Board, which include strategic planning, the operational direction of the Company and communicating with Shareholders. Our Board is in the process of developing a written position description for the CEO. This is an initiative of the Board for the upcoming year.
Orientation and Continuing Education
Aphria does not currently have an orientation or continuing education program for new directors but shall provide an orientation and education program to new Board members and continuing education as necessary.
Nomination of Directors
Aphria has a standing CNG Committee which oversees the nomination of directors. Each of the four directors who comprise the CNG Committee in the prior year were independent within the meaning of NI 52-110.
44
Board Committees
The Board has two committees, Audit Committee and the CNG Committee (each alternatively a “
Committee
” and collectively, the “
Committees
”).
The CNG Committee shall review with the Board on an annual basis the current composition of the Board with a view to ensuring that the members of the Board have the independence, expertise, experience, personal qualities and ability to make the necessary time commitment to Aphria in light of the opportunities and risks facing Aphria.
The CNG Committee shall propose to the Board nominees they believe to be qualified to be directors and, in doing so, shall consider both the opportunities and risks facing Aphria and the independence, expertise, experience, personal qualities and ability to make the necessary time commitment of a proposed nominee in order to add value to Aphria.
Audit Committee
The Audit Committee in fiscal 2017 consisted of Dennis Staudt, Arlene Dickinson and Rob Kozlov, all of whom were considered “independent”, and all of whom are “financially literate” within the meaning of NI 52-110. Each of the Audit Committee members has an understanding of the accounting principles used to prepare Aphria’s financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting.
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of Aphria’s financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring Aphria’s compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of Aphria’s internal auditors, if any. The Audit Committee has specific responsibilities relating to Aphria’s financial reports; the external auditor; the internal audit function, if any; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on Aphria; and Aphria’s whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in “Business of the Meeting — Election of Directors” in the prior year’s Management Information Circular. The full text of the Audit Committee’s charter is disclosed in Exhibit “D”.
CNG Committee
The fiscal 2017 CNG Committee consisted of Dennis Staudt, Philip Waddington, Arlene Dickinson and Rob Kozlov, all of whom were consider “independent” within the meaning of NI 52-110. The CNG Committee is charged with reviewing, overseeing and evaluating the governance and nominating policies and the compensation policies of Aphria. In addition, the CNG Committee is responsible for: (i) assessing the effectiveness of the Board, each of its committees and individual directors; (ii) overseeing the recruitment and selection of candidates as directors of the Company; (iii) organizing orientation and education programs for new directors and coordinating continuing director development programs; (iv) considering and approving proposals by the directors to engage outside advisers on behalf of the Board as a whole or on behalf of the independent directors; (v) reviewing and making recommendations to the Board concerning any change in the number of directors composing the Board; (vi) administering any stock option or purchase plan of the Company or any other compensation incentive programs; (vii) assessing the performance of the officers and other members of the executive management team of the Company; and (viii) reviewing and making recommendations to the Board concerning the level and nature of the compensation payable, if any, to the directors and officers of the Company. The Board intends to nominate a new director as Chair of the CNG Committee following the election of directors.
Ethical Business Conduct
The Board has adopted a written Code of Conduct and Ethics applicable to all members of the Company, including directors, officers, employees, consultants and contractors, which has been filed with the Canadian securities regulatory authorities under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website under
45
the Investors — Corporate Governance section. Each director, officer, employee, consultant and contractor of the Company must provide an annual certification of compliance with the Code of Conduct and Ethics, confirming compliance with all laws, rules and regulations of the jurisdictions where they carry out their duties and where the Company is conducting its business activities, as well as compliance with all Company policies.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
There is not, and has not been any indebtedness outstanding from directors or senior officers of the Company to the Company in fiscal 2017.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
There were no other material interests, direct or indirect, of directors or senior officers of the Company, nominees for director of the Company, any Shareholder who owns more than ten per cent of the Common Shares of the Company (or any director or executive officer of any such Shareholder), or any known associate or affiliate of such persons, in any transaction during fiscal 2017 or in any proposed transaction which has materially affected or would materially affect the Company or any of their subsidiaries other than as disclosed herein.
INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE ACTED UPON
Management of the Company is not aware of any material interest of any director, senior officer, or nominee for director of the Company, or of any associate or affiliate of any of the foregoing, in respect of any matter to be acted on at the Meeting except as disclosed herein.
ADDITIONAL INFORMATION
The Company will provide to any person or Company, upon request, one copy of any of the following documents: (i) this Circular; (ii) the Company’s most recently filed consolidated annual financial statements, together with the accompanying report of the auditor; and (iii) any interim financial statements of the Company that have been filed for any period after the end of the Company’s most recently completed financial year.
Copies of the above documents will be provided, upon request, by the corporate secretary or investor relations at 245 Talbot St W, Suite 103, Leamington, ON N8H 1N8. Copies of these documents and other information relating to the Company are available on SEDAR at www.sedar.com and on the Company’s website at www.aphria.com. All of our news releases are also available on our website.
APPROVAL
The contents and delivery of this Circular has been approved by the Board and a copy has been sent to each Shareholder who is eligible to receive notice of and vote his or her Common Shares at the Meeting, as well as to each director and to the auditors.
|
|
On behalf of the Board,
|
|
|
|
|
|
“Vic Neufeld”
|
|
|
|
|
|
Vic Neufeld
|
|
|
Chair of the Board of Directors and Chief Executive Officer
|
46
Exhibit “A”
Option Plan Resolution
RESOLUTION APPROVING
THE AMENDED AND RESTATED STOCK OPTION PLAN
OF THE COMPANY
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
the Amended and Restated Stock Option Plan of the Company (the “
Option Plan
”) as set out in Schedule “A-1” to Exhibit “A” of the management information circular of the Company dated September 11, 2017 prepared for the purpose of the annual and special meeting of shareholders held on October 25, 2017, be and is hereby approved, ratified, sanctioned and confirmed;
2.
the total number of Common Shares issuable pursuant to the Option Plan, together with all other share based compensation of the Company shall be fixed at 10% of the issued shares outstanding at the time of any option grant, subject to adjustment as set forth in the Option Plan, and further subject to the applicable rules and regulations of all regulatory authorities to which the Company is subject, including the Toronto Stock Exchange;
3.
the provisions governing amendments to the Option Plan specifying when security holder approval of amendments is required to be adopted;
4.
the Company be authorized to grant stock options pursuant to and subject to the terms and conditions of the Option Plan;
5.
any officer or director of the Company be, and each is hereby, authorized and directed, for and on behalf of the Company, to sign and execute all documents, to conclude any agreements and to do and perform all acts and things deemed necessary or advisable in order to give effect to this resolution; and
6.
the Board of Directors of the Company be, and it is hereby, authorized to cause all measures to be taken, such further agreements to be entered into and such further documents to be executed as may be deemed necessary or advisable to give effect to and fully carry out the intent of this resolution.
A-
1
Exhibit “A”
Schedule “A-1”
Amended and Restated Incentive Stock Option Plan
See attached.
A-
2
APHRIA INC.
INCENTIVE STOCK OPTION PLAN
Section 1
General Provisions
1.1
Interpretation
For the purposes of this Plan, the following terms shall have the following meanings:
(a)
“
Applicable Withholdings and Deductions
” has the meaning given to that term in Section 1.10;
(b)
“
Associate
” has the meaning ascribed to that term in the TSX Manual;
(c)
“
Associated Companies
”, “
Affiliated Companies
”, “
Controlled Companies
” and “
Subsidiary Companies
” have the meanings ascribed to those terms under Section 1(1) of the
Securities Act
(Ontario);
(d)
“
Board
” has the meaning given to that term in Section 1.3(c);
(e)
“
Business Day
” means any day other than a Saturday, Sunday or a statutory or civic holiday in Ontario;
(f)
“
Cause
” means (i) if the Participant has a written employment agreement with the Corporation or a Subsidiary Company of the Corporation in which “cause” is defined, “cause” as defined therein; or otherwise (ii) (A) the inability of the Participant to perform his or her duties due to a legal impediment such as an injunction, restraining order or other type of judicial judgment, decree or order entered against the Participant; (B) the failure of the Participant to follow the Corporation’s reasonable instructions with respect to the performance of his or her duties; (C) any material breach by the Participant of his or her obligations under any code of ethics, any other code of business conduct or any lawful policies or procedures of the Corporation; (D) excessive absenteeism, flagrant neglect of duties, serious misconduct, or conviction of crime or fraud; and (E) any other act or omission of the Participant which would in law permit an employer to, without notice or payment in lieu of notice, terminate the employment of an employee;
(g)
“
Certificate
” has the meaning given to that term in Section 1.3(d);
(h)
“
Change of Control Event
” means:
(i)
The sale by the Corporation of all or substantially all of its assets;
(ii)
The acceptance by the Shareholders, representing in the aggregate fifty percent (50%) or more of all of the issued Common Shares, of any offer, whether by way of a takeover bid or otherwise, for all or any of the outstanding Common Shares; provided that no change of control event shall be deemed to have occurred if upon completion of any such transaction individuals who were members of the Board immediately prior to the effective date of such transaction constitute a majority of the board of directors of the resulting corporation following such effective date;
(iii)
The acquisition, by whatever means, by a person (or two or more persons who, in such acquisition, have acted jointly or in concert or intend to exercise jointly or in concert any voting rights attaching to the Common Shares acquired), directly or indirectly, of beneficial ownership of such number of Common Shares or rights to Common Shares, which together with such person’s then-owned Common Shares and rights to Common Shares, if any, represent (assuming the full exercise of such rights) fifty percent (50%) or more of the combined voting rights attached to the then-outstanding Common Shares;
(iv)
The entering into of any agreement by the Corporation to merge, consolidate, restructure, amalgamate, initiate an arrangement or be absorbed by, into or with another corporation; provided that no change of control event shall be deemed to have occurred if upon completion of any such transaction individuals who were members of the Board immediately prior to the effective date of such transaction constitute a majority of the board of directors of the resulting corporation following such effective date;
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3
(v)
The passing of a resolution by the Board or Shareholders to substantially liquidate the assets of the Corporation or wind up the Corporation’s business or significantly rearrange its affairs in one or more transactions or series of transactions or the commencement of proceedings for such a liquidation, winding-up or re-arrangement (except where such re-arrangement is part of a bona fide reorganization of the Corporation in circumstances where the business of the Corporation is continued and the shareholdings remain substantially the same following the re-arrangement); or
(vi)
The circumstance in which individuals who were members of the Board immediately prior to a meeting of the Shareholders involving a contest for the election of directors no longer constitute a majority of the Board following such election;
(i)
“
Code
” has the meaning given to that term in Section 3.1;
(j)
“
Common Shares
” means the common shares in the capital of the Corporation;
(k)
“
Company
” means a corporation, incorporated association or organization, body corporate, partnership, trust, association or other entity other than an individual;
(l)
“
Corporation
” means Aphria Inc.;
(m)
“
Consultant
” means, in relation to the Corporation, an individual (other than an employee or a director of the Corporation) or Company that:
(i)
is engaged to provide on an ongoing bona fide basis, consulting, technical, management or other services to the Corporation or to an Affiliated Company, other than services provided in relation to a distribution;
(ii)
provides the services under a written contract between the Corporation or the Affiliated Company and the individual or the Corporation, as the case may be;
(iii)
in the reasonable opinion of the Corporation, spends or will spend a significant amount of time and attention on the affairs and business of the Corporation or an Affiliated Company of the Corporation; and
(iv)
has a relationship with the Corporation or an Affiliated Company of the Corporation that enables the individual to be knowledgeable about the business and affairs of the Corporation;
(n)
“
Consultant Company
” means a Consultant that is a Company;
(o)
“
Disinterested Shareholder Approval
” means the approval of a majority of shareholders of the Corporation voting at a duly called and held meeting of such shareholders, excluding votes of Insiders to whom options may be granted under the Plan;
(p)
“
Eligible Person
” means:
(i)
any director, officer, employee or Consultant of the Corporation or any of its Subsidiary Companies; and
(ii)
any Personal Holding Company;
(q)
“
Eligible U.S. Participants
” has the meaning given to that term in Section 3.1;
(r)
“
Exercise Price
” has the meaning given to that term in Section 2.2;
(s)
“
Expiry Date
” has the meaning given to that term in Section 2.3(b);
(t)
“
Good Reason
” means, in respect of an officer of the Corporation who has been granted Options under this Plan, solely one of the following events, without such officer’s written consent:
(i)
a material diminution in such officer’s position, duties or authorities;
(ii)
the assignment of any duties that are materially inconsistent with the officer’s role as a senior executive; or
A-
4
(iii)
a material reduction in the officer’s compensation, other than an across the board reduction of not more than 5% that is generally applicable to all executives.
(u)
“
Insider
” means a “reporting insider” as defined in National Instrument 55-10
- Insider Reporting Requirements and Exemptions;
(v)
“
Investor Relations Activities
” means any activities, by or on behalf of the Corporation or Shareholders of the Corporation, that promote or reasonably could be expected to promote the purchase or sale of securities of the Corporation, but does not include:
(i)
The dissemination of information provided, or records prepared, in the ordinary course of business of the Corporation (a) to promote the sale of products or services of the Corporation or (b) to raise public awareness of the Corporation, that cannot reasonably be considered to promote the purchase or sale of securities of the Corporation;
(ii)
Activities or communications necessary to comply with the requirements of (a) applicable Securities Laws or (b) Stock Exchange Requirements or the by-laws, rules or other regulatory instruments of any other self-regulatory body or exchange having jurisdiction over the Corporation;
(iii)
Communications by a publisher of, or writer for, a newspaper, magazine or business or financial publication, that is of general and regular paid circulation, distributed only to subscribers to it for value or to purchasers of it, if (a) the communication is only through the newspaper, magazine or publication, and (b) the publisher or writer receives no commission or other consideration other than for acting in the capacity of publisher or writer; or
(iv)
Activities or communications that may be otherwise specified by the Stock Exchange;
(w)
“
Market Price
” means:
(i)
prior to an initial public offering of the Common Shares, such price as is determined by the Board to constitute their fair market value, using such reasonable valuation mechanism as it selects; and
(ii)
after an initial public offering of the Common Shares, the volume weighted average trading price of the Common Shares as reported on the TSX for the five (5) trading days immediately preceding the day on which the Option is granted; provided, however, that the Exercise Price of an Option shall not be less than the minimum Exercise Price required by the applicable rules of the TSX;
(x)
“
Option
” means an option to purchase Common Shares granted to an Eligible Person pursuant to the terms of the Plan;
(y)
“
Option Period
” has the meaning given to that term in Section 2.3(a);
(z)
“
Participant
” means an Eligible Person to whom Options have been granted;
(aa)
“
Personal Holding Company
” means a personal holding corporation that is either wholly owned, or controlled by, the Participant, and the shares of which are held directly or indirectly by any of the Participant or the Participant’s spouse, minor children and/or minor grandchildren;
(bb)
“
Plan
” means this Incentive Stock Option Plan of the Corporation;
(cc)
“
Regulation Services Provider
” has the meaning ascribed in National Instruments 21-101
Marketplace Operation
and refers to the Investment Industry Regulatory Organization of Canada or any successor retained by the Stock Exchange;
(dd)
“
Securities Laws
” means securities legislation, securities regulation and securities rules, as amended, and the policies, notices, instruments and blanket orders in force from time to time that are applicable to the Corporation;
A-
5
(ee)
“
Share Compensation Arrangement
” means any stock option, stock option plan, employee stock purchase plan or any other compensation or incentive mechanism of the Corporation involving the issuance or potential issuance of Common Shares, including a share purchase from treasury which is financially assisted by the Corporation by way of a loan, guarantee or otherwise;
(ff)
“
Shareholders
” means holders of Common Shares;
(gg)
“
Stock Exchange
” means the TSX, and any other stock exchange on which the Common Shares are listed or traded;
(hh)
“
Stock Exchange Requirements
” means and includes the Articles, by-laws, policies, circulars, rules, guidelines, orders, notices, rulings, forms, decisions and regulations of the Stock Exchange as from time to time enacted, any instructions, decisions and directions of a Regulation Services Provider or the Stock Exchange (including those of any committee of the Stock Exchange as appointed from time to time), the
Securities Act
(Alberta) and rules and regulations required thereunder as amended, the
Securities Act
(British Columbia) and rules and regulations thereunder as amended and any policies, rules, orders, rulings, forms or regulations from time to time enacted by the Alberta Securities Commission or British Columbia Securities Commission and all applicable provisions of the Securities Laws of any other jurisdiction;
(ii)
“
Termination Date
” means the date on which a Participant ceases to be an Eligible Person;
(jj)
“
TSX
” means The Toronto Stock Exchange; and
(kk)
“
TSX Manual
” means the TSX Company Manual.
Words importing the singular number only shall include the plural and vice versa and words importing the masculine shall include the feminine.
This Plan and all matters to which reference is made herein shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
1.2
Purpose
The purpose of the Plan is to advance the interests of the Corporation by: (i) providing Eligible Persons with additional incentive; (ii) encouraging stock ownership by such Eligible Persons; (iii) increasing the proprietary interest of Eligible Persons in the success of the Corporation; (iv) encouraging Eligible Persons to remain with the Corporation or its Subsidiary Companies; and (v) attracting new directors, employees and officers.
1.3
Administration
(a)
This Plan shall be administered by the Board.
(b)
Subject to the terms and conditions set forth herein, the Board is authorized to provide for the granting, exercise and method of exercise of Options, all on such terms (which may vary between Options granted from time to time) as it shall determine. In addition, the Board shall have the authority to (i) construe and interpret this Plan and all agreements entered into hereunder; (ii) prescribe, amend and rescind rules and regulations relating to this Plan; and (iii) make all other determinations necessary or advisable for the administration of this Plan. All determinations and interpretations made by the Board shall be binding on all Participants (as hereinafter defined) and on their legal, personal representatives and beneficiaries.
(c)
The Board shall be permitted, through the establishment of appropriate procedures, to monitor the trading of Common Shares by persons who are performing Investor Relations Activities for the Corporation and who have been granted Options pursuant to this Plan.
(d)
Notwithstanding the foregoing or any other provision contained herein, the Board shall have the right to delegate the administration and operation of this Plan, in whole or in part, to a committee of the Board and/or to any member of the Board. Whenever used herein, the term “
Board
” means the board of directors of the Corporation, and shall be deemed to include any committee or director to which the
A-
6
Board has, fully or partially, delegated the administration and operation of this Plan pursuant to this Section 1.3.
(e)
An Option shall be evidenced by an incentive stock option agreement certificate (“
Certificate
”), signed on behalf of the Corporation, which Certificate shall be in substantially in the form of Schedule 1.3(e) or in any other form as the Board shall approve from time to time.
(f)
No member of the Board shall be liable for any action or determination taken or made in good faith in the administration, interpretation, construction or application of the Plan or any Options granted under it.
1.4
Shares Reserved
(a)
Subject to Section 1.4(d), the securities that may be acquired by Participants under this Plan shall consist of authorized but unissued Common Shares.
(b)
The Corporation shall at all times during the term of this Plan ensure that the number of Common Shares it is authorized to issue shall be sufficient to satisfy the requirements of this Plan.
(c)
At such time as the Common Shares are listed on the TSX, the aggregate number of Common Shares issuable under this Plan, and under all other Share Compensation Arrangements, shall not exceed 10% of the total number of Common Shares issued and outstanding from time to time. Any Common Shares subject to an Option which for any reason is cancelled or terminated without having been exercised shall again be available for grants under the Plan, and under all other Share Compensation Arrangements. Any Common Shares subject to an Option which has been exercised by a Participant, shall again be available for grants under the Plan, and under all other Share Compensation Arrangements. Fractional shares will not be issued and will be treated as specified in Section 1.11(d).
(d)
If there is a change in the outstanding Common Shares by reason of any stock dividend or split, recapitalization, amalgamation, consolidation, combination or exchange of shares, or other corporate change, the Board shall make, subject where required to the prior approval of the Stock Exchange, appropriate substitution or adjustment in:
(i)
the number or kind of Common Shares or other securities reserved for issuance pursuant to the Plan, and
(ii)
the number and kind of Common Shares or other securities subject to unexercised Options theretofore granted and in the Exercise Price of such securities;
without any change in the total price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each Common Share covered by the Option; provided, however, that no substitution or adjustment shall obligate the Corporation to issue or sell fractional shares. If the Corporation is reorganized, amalgamated with another corporation or consolidated, the Board shall make such provisions for the protection of the rights of Participants as the Board in its discretion deems appropriate.
1.5
Limits with Respect to Certain Persons
(a)
The maximum number of Common Shares which may be issued to:
(i)
Eligible Persons who are Insiders under the Plan at any time pursuant to the exercise of Options granted under this Plan, must not exceed 10% of the Common Shares issued and outstanding from time to time (calculated on a non-diluted basis);
(ii)
Eligible Persons who are Insiders under the Plan within any one year period pursuant to the exercise of Options granted under this Plan, must not exceed 10% of the Common Shares issued and outstanding from time to time (calculated on a non-diluted basis);
(iii)
any Consultant in any twelve (12) month period under this Plan may be no more than two percent (2%) of the outstanding Common Shares of the Corporation; and
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(iv)
all Persons conducting Investor Relations Activities for the Corporation in any twelve (12) month period may be, in aggregate, no more than two percent (2%) of the outstanding Common Shares of the Corporation,
less the aggregate number of shares reserved for issuance or issuable under any other Share Compensation Arrangement of the Corporation.
(b)
Options granted to Consultants conducting Investor Relations Activities for the Corporation shall vest over a period of not less than twelve (12) months with no more than twenty-five percent (25%) of the options vesting in any three (3) month period.
1.6
Amendment and Termination
(a)
The Board may from time to time, suspend, terminate or discontinue the Plan at any time, or amend or revise the terms of the Plan or of any Option granted under the Plan and any Certificate relating thereto, provided that no such suspension, termination, amendment or revision will be made:
(i)
except in compliance with applicable law and with the prior approval, if required, of the Stock Exchange or any other regulatory body having authority over the Corporation, the Plan or the Shareholders; and
(ii)
in the case of an amendment or revision, if it materially adversely affects the rights of any Participant, without the consent of the Participant.
(b)
If the Plan is terminated, the provisions of the Plan and any administrative guidelines and other rules and regulations adopted by the Board and in force on the date of termination will continue in effect as long as any Option or any rights pursuant thereto remain outstanding and, notwithstanding the termination of the Plan, the Board will remain able to make such amendments to the Plan or the Options as they would have been entitled to make if the Plan were still in effect.
(c)
Subject to any applicable rules of the Stock Exchange, the Board may from time to time, in its absolute discretion and without the approval of Shareholders, make the following amendments to the Plan or any Option:
(i)
amend the vesting provisions of the Plan and any Certificate;
(ii)
amend the Plan or an Option as necessary to comply with applicable law or the requirements of the Stock Exchange or any other regulatory body having authority over the Corporation, the Plan or the Shareholders;
(iii)
any amendment of a “housekeeping” nature, including, without limitation, to clarify the meaning of an existing provision of the Plan, correct or supplement any provision of the Plan that is inconsistent with any other provision of the Plan, correct any grammatical or typographical errors or amend the definitions in the Plan regarding administration of the Plan; and
(iv)
any amendment respecting the administration of the Plan; and
(v)
any other amendment that does not require the approval of Shareholders under Section 1.6(d).
(d)
Shareholder approval is required for the following amendments to the Plan:
(i)
any increase in the maximum number of Common Shares that may be issuable pursuant to Options granted under this Plan as set out in Section 1.4(c);
(ii)
any reduction in the Exercise Price of an Option, cancellation and reissue of Options, extension of the Expiry Date of an Option or a substitution of Options with cash or other awards on terms that are more favourable to the Participant;
(iii)
any amendment to the Insider participation limit set out in Section 1.5(a)(i) and (ii);
(iv)
any amendment to Section 1.6(c) and (d);
(v)
any extension of the Expiry Date of an Option held by an Insider; and
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(vi)
any change that would materially modify the eligibility requirements for participation in the Plan.
(e)
Disinterested Shareholder Approval is required for the following amendments to the Plan:
(i)
any individual stock option grant that would result in any of the limitations set forth in Section 1.4(c) of this Plan being exceeded; and
(ii)
any individual stock option grant that would result in the grant to Insiders (as a group), within a twelve (12) month period, of an aggregate number of Options exceeding ten percent (10%) of the issued Common Shares, calculated on the date an Option is granted to any Insider; and
(iii)
any individual stock option grant that would result in the number of Common Shares issued to any individual in any twelve (12) month period under this Plan exceeding five percent (5%) of the issued Common Shares of the Corporation, less the aggregate number of shares reserved for issuance or issuable under any other Share Compensation Arrangement of the Corporation; and
(iv)
any amendment to Options held by Insiders that would have the effect of decreasing the exercise price of the Options; and
(v)
any individual stock option grant requiring Shareholder approval pursuant to the TSX Manual.
For the purposes of the limitations set forth in items (ii) and (iv), Options held by an Insider at any point in time that were granted to such Participant prior to it becoming an Insider shall be considered Options granted to an Insider irrespective of the fact that the Participant was not an Insider at the time of grant.
1.7
Compliance with Legislation
(a)
The Plan (including an amendment to the Plan), the terms of the issue or grant of any Option under the Plan, the grant and exercise of Options hereunder, and the Corporation’s obligation to sell and deliver Common Shares upon the exercise of Options, shall be subject to all applicable federal, provincial and foreign laws, rules and regulations, the rules and regulations of the Stock Exchange and to such approvals by any regulatory or governmental agency as may, in the opinion of counsel to the Corporation, be required. The Corporation shall not be obliged by any provision of the Plan or the grant of any Option hereunder to issue or sell Common Shares in violation of such laws, rules and regulations or any condition of such approvals.
(b)
No Option shall be granted, and no Common Shares issued hereunder, where such grant, issue or sale would require registration of the Plan or of Common Shares under the securities laws of any foreign jurisdiction, and any purported grant of any Option or purported issue of Common Shares hereunder in violation of this provision shall be void.
(c)
The Corporation shall have no obligation to issue any Common Shares pursuant to the Plan unless such Common Shares shall have been duly listed, upon official notice of issuance, with the Stock Exchange. Common Shares issued and sold to Participants pursuant to the exercise of Options may be subject to limitations on sale or resale under applicable securities laws.
(d)
If Common Shares cannot be issued to a Participant upon the exercise of an Option due to legal or regulatory restrictions, the obligation of the Corporation to issue such Common Shares shall terminate and any funds paid to the Corporation in connection with the exercise of such Option will be returned to the applicable Participant as soon as practicable.
1.8
Effective Date
(a)
Prior to an initial public offering (or similar transaction) where the Common Shares are not listed on any Stock Exchange, the Plan shall be effective upon the approval of the Plan by the Board.
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(b)
As a condition of any initial public offering (or similar transaction) pursuant to which the Common Shares will be listed on a Stock Exchange, the Plan shall be effective upon the approval of the Plan by:
(i)
The Stock Exchange and any other exchange upon which the Common Shares of the Corporation may be posted or listed for trading, and shall comply with the requirements from time to time of the Stock Exchange; and
(ii)
the Shareholders, by written resolution signed by all Shareholders or given by the affirmative vote of a majority of the votes attached to the Common Shares entitled to vote and be represented and voted at an annual or special meeting of Shareholders held, among other things, to consider and approve the Plan.
1.9
Proceeds from Exercise of Options
The proceeds from any sale of Common Shares issued upon the exercise of Options shall be added to the general funds of the Corporation and shall thereafter be used from time to time for such corporate purposes as the Board may determine.
1.10
Tax Withholdings
Notwithstanding any other provision contained herein, in connection with the exercise of an Option by a Participant from time to time, as a condition to such exercise (i) the Corporation shall require such Participant to pay to the Corporation or the relevant Subsidiary Company an amount as necessary so as to ensure that the Corporation or such Subsidiary Company, as applicable, is in compliance with the applicable provisions of any federal, provincial or local law relating to the withholding of tax or other required deductions (the “
Applicable Withholdings and Deductions
”) relating to the exercise of such Options; or (ii) in the event a Participant does not pay the amount specified in (i), the Corporation shall be permitted to engage a broker or other agent, at the risk and expense of the Participant, to sell an amount of underlying Common Shares issuable on the exercise of such Option through the facilities of the Stock Exchange, and to apply the cash received on the sale of such underlying Common Shares as necessary so as to ensure that the Corporation or the relevant Subsidiary Company, as applicable, is in compliance with the Applicable Withholdings and Deductions relating to the exercise of such Options. In addition, the Corporation or the relevant Subsidiary Company, as applicable, shall be entitled to withhold from any amount payable to a Participant, either under this Plan or otherwise, such amount as may be necessary so as to ensure that the Corporation or the relevant Subsidiary Company is in compliance with Applicable Withholdings and Deductions relating to the exercise of such Options.
1.11
Miscellaneous
(a)
Nothing contained herein shall prevent the Board from adopting other or additional Share Compensation Arrangements or compensation arrangements, subject to any required approval.
(b)
The Corporation may only grant options pursuant to resolutions of the Board.
(c)
In determining options to be granted to Participants, the Board shall give due consideration to the value of each such Participant’s present and potential contribution to the success of the Corporation.
(d)
Nothing contained in the Plan nor in any Option granted thereunder shall be deemed to give any Participant any interest or title in or to any Common Shares or any rights as a Shareholder or any other legal or equitable right against the Corporation or any of its Subsidiary Companies whatsoever other than as set forth in the Plan and pursuant to the exercise of any Option.
(e)
The Plan does not give any Participant or any employee of the Corporation or any of its Associated Companies, Affiliated Companies, Subsidiary Companies or Controlled Companies the right or obligation to or to continue to serve as a Consultant, director, officer or employee, as the case may be, to or of the Corporation or any of its Associated Companies, Affiliated Companies, Subsidiary Companies or Controlled Companies. The awarding of Options to any Eligible Person is a matter to be determined solely in the discretion of the Board. The Plan shall not in any way fetter, limit, obligate, restrict or constrain the Board with regard to the allotment or issue of any Common Shares or any other securities
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in the capital of the Corporation other than as specifically provided for in the Plan. The grant of an Option to, or the exercise of an Option by, a Participant under the Plan does not create the right for such Participant to receive additional grants of Options hereunder.
(f)
No fractional Common Shares shall be issued upon the exercise of options granted under the Plan and, accordingly, if a Participant would become entitled to a fractional Common Share upon the exercise of an Option, or from an adjustment pursuant to Section 1.4(d) such Participant shall only have the right to purchase the next lowest whole number of Common Shares, and no payment or other adjustment will be made with respect to the fractional interest so disregarded.
(g)
The Corporation makes no representation or warranty as to the future market value of the Common Shares or with respect to any income tax matters affecting the Participant resulting from the grant or exercise of an Option and/or transactions in the Common Shares. Neither the Corporation, nor any of its directors, officers, employees, shareholders or agents shall be liable for anything done or omitted to be done by such person or any other person with respect to the price, time, quantity or other conditions and circumstances of the issuance of Common Shares hereunder, with respect to any fluctuations in the market price of Common Shares or in any other manner related to the Plan.
(h)
This Plan shall be construed in accordance with and be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(i)
If any provision of this Plan shall be determined by any court of competent jurisdiction to be illegal, invalid or unenforceable, that provision shall be severed from this Plan and the remaining provisions shall continue in full force and effect.
(j)
This Plan constitutes the entire stock option plan for the Corporation and its Participants and supersedes any prior stock option plans for such persons.
Section 2
Options
2.1
Grants
(a)
Subject to the provisions of the Plan, the Board shall have the authority to determine the limitations, restrictions and conditions, if any, in addition to those set forth in Section 1.3(b) and Section 2.3 hereof, applicable to the exercise of an Option. An Eligible Person may receive Options on more than one occasion under the Plan and may receive separate Options on any one occasion.
(b)
The Board may, in its discretion, select any directors, officers, employees or Consultants of or to the Corporation or Subsidiary Companies of the Corporation to participate in this Plan.
(c)
For Options granted to employees of the Company, Consultants or individuals employed by a company or individual providing management services to the Company, the Company and the Participant are responsible for ensuring and confirming that the Participant is a bona fide employee of the Company, Consultant or individual employed by a company or individual providing management services to the Company, as the case may be.
(d)
The Board may from time to time, in its discretion, grant Options to any Participant upon the terms, conditions and limitations set forth herein and such other terms, conditions and limitations permitted by and not inconsistent with this Plan as the Board may determine, provided that Options granted to any Participant shall be approved by the Shareholders if the rules of the Stock Exchange require such approval.
2.2
Exercise Price
(a)
An Option may be exercised at a price (the “
Exercise Price
”) that shall be fixed by the Board at the time that the Option is granted, but in no event shall it be less than the Market Price. The Exercise Price shall be subject to adjustment in accordance with the provisions of Section 1.4(d) hereof.
(b)
if Options are granted within ninety (90) days of a distribution (the “
Distribution Period
”) by the Corporation by prospectus, the minimum exercise price per Common Share of those options will be the
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greater of the Market Price and the price per Common Share paid by the public investors for Common Shares acquired pursuant to such distribution. The Distribution Period shall begin:
(i)
on the date the final receipt is issued for the final prospectus in respect of such distribution; and
(ii)
in the case of a prospectus that qualifies special warrants, on the closing date of the private placement in respect of such special warrants.
2.3
Exercise of Options
(a)
The period during which an Option may be exercised (the “
Option Period
”) shall be determined by the Board at the time the Option is granted, subject to any vesting limitations that may be imposed by the Board in its sole and unfettered discretion at the time such Option is granted, provided that:
(i)
no Option shall be exercisable for a period exceeding ten (10) years from the date the Option is granted;
(ii)
the Option Period shall be automatically reduced in accordance with Section 2.3(f) below upon the occurrence of any of the events referred to therein; and
(iii)
no Option in respect of which Shareholder approval is required under the rules of the Stock Exchange shall be exercisable until such time as such Option has been approved by the Shareholders.
(b)
Notwithstanding any other provision of the Plan, if the date that any vested Option ceases to be exercisable (the “
Expiry Date
”) falls on, or within nine (9) Business Days immediately following, a date upon which such Participant is prohibited from exercising such Option due to a black-out period or other trading restriction imposed by the Corporation, then the Expiry Date of such Option shall be automatically extended to the tenth (10
th
) Business Day following the date the relevant black-out period or other trading restriction imposed by the Corporation is lifted, terminated or removed.
(c)
Notwithstanding any other provision of this Plan, in the event of an actual or potential Change of Control Event, the Board may, in its discretion, without the necessity or requirement for the agreement of any Participant: (i) accelerate, conditionally or otherwise, on such terms as it sees fit, the vesting date of any Option; (ii) permit the conditional exercise of any Option, on such terms as it sees fit; (iii) otherwise amend or modify the terms of the Option, including for greater certainty permitting Participants to exercise any Option, to assist the Participants to tender the underlying Common Shares to, or participate in, the actual or potential Change of Control Event or to obtain the advantage of holding the underlying Common Shares during such Change of Control Event; and (iv) terminate, following the successful completion of such Change of Control Event, on such terms as it sees fit, the Options not exercised prior to the successful completion of such Change of Control Event. The determination of the Board in respect of any such Change of Control Event shall for the purposes of this Plan be final, conclusive and binding.
(d)
Notwithstanding any other provision of this Plan, in the event that:
(i)
an actual or potential Change of Control Event is not completed within the time specified therein; or
(ii)
all of the Common Shares subject to an Option that were tendered by a Participant in connection with an actual or potential Change of Control Event are not taken up or paid for by the offeror in respect thereof,
then the Board may, in its discretion, without the necessity or requirement for the agreement of any Participant, permit the Common Shares received upon such exercise, or in the case of Subsection (ii) above the Common Shares that are not taken up and paid for, to be returned by the Participant to the Corporation and reinstated as authorized but unissued Common Shares and, with respect to such returned Common Shares, the related Options may be reinstated as if they had not been exercised and the terms for such Options becoming vested will be reinstated pursuant to this Section 2.3. If any Common Shares are returned to the Corporation under this Section 2.3, the Corporation will immediately refund the Exercise Price to the Participants for such Common Shares.
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(e)
Options shall not be transferable or assignable by the Participant otherwise than by will or the laws of descent and distribution, and shall be exercisable during the lifetime of a Participant only by the Participant and after death only by the Participant’s legal representative.
(f)
Provided that the Common Shares are listed on the TSX, if the Participant is a company, including a Consultant Company, the company shall not be permitted to effect or permit any transfer of ownership or option of shares of the company nor to issue further shares of any class of the company to any individual or entity as long as the options remain outstanding, except where the written consent of the TSX has been obtained.
(g)
Subject to Section 2.3(a) and except as otherwise determined by the Board:
(i)
if a Participant who is a non-executive director of the Corporation ceases to be an Eligible Person as a result of his or her retirement from the Board other than for Cause, each unvested Option held by such Participant shall automatically vest on the date of his or her retirement from the Board, and thereafter each vested Option held by such Participant will cease to be exercisable on the earlier of the original Expiry Date of the Option and six (6) months after the date of his or her retirement from the Board;
(ii)
if the Board service, consulting relationship, or employment of a Participant with the Corporation or a Subsidiary Company is terminated for Cause, each vested and unvested Option held by the Participant will automatically terminate and become void on the Termination Date;
(iii)
if a Participant dies, the legal representative of the Participant may exercise the Participant’s vested Options for a period until the earlier of the original Expiry Date of the Option and 12 months after the date of the Participant’s death, but only to the extent the Options were by their terms exercisable on the date of death. For greater certainty, all unvested Options held by a Participant who dies shall terminate and become void on the date of death of such Participant;
(iv)
if a Participant ceases to be an Eligible Person for any reason whatsoever other than in (i) to (iii) above, each vested Option held by the Participant will cease to be exercisable on the earlier of the original Expiry Date of the Option and six (6) months after the Termination Date; provided that all unvested Options held by such Participant shall automatically terminate and become void on the Termination Date of such Participant. Without limitation, and for greater certainty only, this provision will apply regardless of whether the Participant received compensation in respect of dismissal or was entitled to a period of notice of termination which would otherwise have permitted a greater portion of the Option to vest with the Participant; and
(v)
notwithstanding any provision in this Section 2.3(g) to the contrary, if a Participant who is an officer of the Corporation ceases to be an Eligible Person as a result of such officer’s termination without Cause or resignation for Good Reason, any unvested Options as of the date of termination will be accelerated and become immediately fully vested as of such date. Such options will be exercisable by the officer for a period of up to one year following the date of termination.
(h)
Subject to Section 2.3(i), the Exercise Price of each Common Share purchased under an Option shall be paid in full in cash or by bank draft or certified cheque at the time of such exercise, and upon receipt of payment in full, the number of Common Shares in respect of which the Option is exercised shall be duly issued as fully paid and non-assessable.
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(i)
A Participant may, in lieu of exercising an Option for cash in accordance with 2.3(h), elect to receive, instead of the Common Shares issuable upon exercise of the Option, such number of Common Shares (rounded down to the nearest whole number) equal to the value (as determined below) of such Option by surrendering the Option at the principal office of the Corporation together with a properly endorsed notice of exercise in the form of Schedule “A” and a notice of cashless exercise in the form of Schedule 2.3(i), in which event the Corporation shall issue to the Participant, upon exercise, that number of Common Shares calculated using the following formula:
X = (Y(A
–
B)/A)
Where:
X = the number of Common Shares to be issued to the Participant upon such cashless exercise
Y = the number of Common Shares issuable upon the exercise of the Options being exercised
A = the Market Price of the Common Shares as at the date of such cashless exercise
B = the Exercise Price
(j)
Upon the exercise of Options pursuant to this section, the Corporation shall forthwith deliver, or cause the registrar and transfer agent of the Common Shares to deliver, to the relevant Participant (or his or her legal or personal representative) or to the order thereof, a certificate representing the number of Common Shares with respect to which Options have been exercised.
(k)
Subject to the other provisions of this Plan and any vesting limitations imposed by the Board at the time of grant, Options may be exercised, in whole or in part, at any time or from time to time, by a Participant by written notice given to the Corporation as required by the Board from time to time.
2.4
Notice
Any notice required to be given by this Plan shall be in writing and shall be given by registered mail, postage prepaid, or delivered by courier or by facsimile transmission addressed, if to the Corporation, to the office of the Corporation in Toronto, Ontario, Attention: Vic Neufeld, Chief Executive Officer; or if to a Participant, to such Participant at his address as it appears on the books of the Corporation or in the event of the address of any such Participant not so appearing, then to the last known address of such Participant; or if to any other person, to the last known address of such person.
2.5
Rights of Participants
No person entitled to exercise any Option granted under this Plan shall have any of the rights or privileges of a Shareholder in respect of any underlying Common Shares issuable upon exercise of such Option, including without limitation, the right to participate in any new issue of Common Shares to existing holders of Common Shares, until such Option has been exercised and such underlying Common Shares have been paid for in full and issued to such person.
2.6
Right to Issue Other Shares
The Corporation shall not by virtue of this Plan be in any way restricted from declaring and paying stock dividends, issuing further Common Shares, varying or amending its share capital or corporate structure.
2.7
Quotation of Common Shares
So long as the Common Shares are listed on the TSX, the Corporation must apply to the TSX for the listing or quotation of the Common Shares issued upon the exercise of all Options granted under the Plan, however, the Corporation cannot guarantee that such Common Shares will be listed or quoted on the TSX.
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Section 3
Special Rules for U.S. Eligible Persons
3.1
Section 409A Compliance
Notwithstanding any other provision of this Plan, the following special rules will apply to all Eligible Persons (“
Eligible U.S. Participants
”) who are subject to U.S. income tax with respect to Options issued under the Plan to them:
(a)
All Options granted under this Plan to Eligible U.S. Participants are intended to be exempt from Section 409A of the United States Internal Revenue Code of 1986, as amended (the “
Code
”) and will be construed accordingly. However, the Corporation will not be liable to any Eligible U.S. Participant or beneficiary with respect to any adverse tax consequences arising under Section 409A or other provision of the Code; and
(b)
The Exercise Price for all Options granted to Eligible U.S. Participants shall in no event be less than the greater of (i) the Market Price; and (ii) the closing price of the Common Shares as reported on the TSX on the business day immediately preceding the day on which the Option is granted.
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SCHEDULE 1.3(e)
STOCK OPTION AGREEMENT
This Stock Option Agreement is dated this
·
day of
·
, 20
·
between Aphria Inc. (“
Aphria
”) and
[Name]
(the“
Optionee
”).
WHEREAS
the Optionee has been granted certain options (“
Options
”) to acquire common shares in the capital of Aphria (“
Common Shares
”) under the Aphria Incentive Stock Option Plan (the “
Option Plan
”), a copy of which has been provided to the Eligible Optionee;
AND WHEREAS
capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Option Plan;
NOW THEREFORE
for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1.
Aphria confirms that the Optionee has been granted Options under the Option Plan on the following basis, subject to, the terms and conditions of the Option Plan:
|
|
|
NUMBER OF
|
|
EXERCISE PRICE
|
|
VESTING
|
|
|
|
DATE OF GRANT
|
|
OPTIONS
|
|
(CDN$)
|
|
SCHEDULE
|
|
EXPIRY DATE
|
|
·
|
|
·
|
|
·
|
|
·
|
|
·
|
2.
Attached to this Agreement as Schedule “A” is a form of notice that the Optionee may use to exercise any of his or her Options in accordance with Section 2.3 of the Option Plan at any time and from time to time prior the Expiry Date of such Options. The Optionee may also elect for the cashless exercise of any of his or her Options pursuant to Section 2.3(i) of the Option Plan.
3.
By signing this Stock Option Agreement, the Optionee acknowledges that he or she has read and understands the Option Plan and agrees to the terms and conditions thereof and of this Stock Option Agreement.
4.
This Agreement shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein. Time shall be of the essence of this Agreement. This Agreement shall enure to the benefit of and shall be binding upon the parties and their heirs, attorneys, guardians, estate trustees, executors, trustees and administrators and the successors of Aphria.
IN WITNESS WHEREOF
the parties hereto have executed this Agreement.
|
|
|
APHRIA INC.
|
|
|
|
|
|
|
|
|
|
Name of Optionee:
|
|
Authorized Signing Officer
|
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Schedule “A”
ELECTION TO EXERCISE STOCK OPTIONS
TO:
APHRIA INC. (“APHRIA”)
The undersigned option holder hereby irrevocably elects to exercise options (“
Options
”) granted by Aphria to the undersigned pursuant to a Stock Option Agreement dated
·
, 20
·
for the number of common shares in the capital of Aphria (“
Common Shares
”) as set forth below:
|
Number of Common Shares to be Acquired:
|
|
|
|
|
|
|
|
Option Exercise Price (per Common Share):
|
|
$
|
|
|
|
|
|
Aggregate Purchase Price:
|
|
$
|
|
|
|
|
|
Amount enclosed that is payable on account of withholding of tax or other required deductions relating to the exercise of the Options (contact Aphria for details of such amount) (the “
Applicable Withholdings and Deductions
”):
|
|
$
|
|
|
|
|
|
o
Or check here if alternative arrangements have been made with Aphria with respect to the payment of Applicable Withholdings and Deductions;
|
|
|
and hereby tenders a certified cheque or bank draft for such Aggregate Purchase Price, and, if applicable, Applicable Withholdings and Deductions, and directs such Common Shares to be registered and a certificate therefore to be issued in the name of .
|
DATED
this day of , .
|
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
|
|
|
|
|
Name
|
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Schedule 2.3(i)
FORM OF CASHLESS EXERCISE NOTICE
TO:
APHRIA INC. (“Aphria”)
Pursuant to the Aphria Incentive Stock Option Plan (the “
Option Plan
”) adopted as of
·
, 2014 as amended, restated or otherwise modified from time to time, the undersigned option holder hereby irrevocably elects to exercise, on a cashless basis, options (the “
Options
”) granted by Aphria to the undersigned pursuant to a Stock Option Agreement dated
·
, 20
·
.
The number of common shares in the capital of Aphria (“
Common Shares
”) to be issued and registered in accordance with the instructions of the undersigned below shall be calculated based on the formula set out in Section 2.3(i) of the Plan.
The undersigned directs that the Common Shares be to be registered and a certificate therefore be issued in his, her or its name as follows in accordance with the terms of the Option Plan:
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(Print name as name is to appear)
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DATED
this day of , .
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Signature
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Name
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18
Exhibit “B”
DSU Plan Resolution
RESOLUTION APPROVING
THE AMENDED AND RESTATED DEFERRED SHARE UNIT PLAN
OF THE COMPANY
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
the Deferred Share Unit Plan of the Company (the “
DSU Plan
”) as set out in Schedule “B-1” to Exhibit “B” of the management information circular of the Company dated September 11, 2017 prepared for the purpose of the annual and special meeting of shareholders held on October 25, 2017, be and is hereby approved, ratified, sanctioned and confirmed;
2.
the total number of deferred share units issuable pursuant to the DSU Plan, together with all other share based compensation of the Company shall be fixed at 10% of the issued shares outstanding at the time of any option or deferred share unit grant, subject to adjustment as set forth in either plan, and further subject to the applicable rules and regulations of all regulatory authorities to which the Company is subject, including the Toronto Stock Exchange;
3.
the provisions governing amendments to the DSU Plan specifying when security holder approval of amendments is required to be adopted;
4.
the Company be authorized to grant deferred share units pursuant to and subject to the terms and conditions of the DSU Plan;
5.
any officer or director of the Company be, and each is hereby, authorized and directed, for and on behalf of the Company, to sign and execute all documents, to conclude any agreements and to do and perform all acts and things deemed necessary or advisable in order to give effect to this resolution; and
6.
the Board of Directors of the Company be, and it is hereby, authorized to cause all measures to be taken, such further agreements to be entered into and such further documents to be executed as may be deemed necessary or advisable to give effect to and fully carry out the intent of this resolution.
B-
1
Exhibit “B”
Schedule “B-1”
Amended and Restated DSU Plan
See attached.
B-
2
APHRIA INC.
DEFERRED SHARE UNIT PLAN
Section 1
Purpose of the Plan.
The purpose of the Plan is to advance the interests of the Corporation by: (i) providing eligible persons with additional incentive; (ii) encouraging stock ownership by such eligible persons; (iii) increasing the proprietary interest of eligible persons in the success of the Corporation; (iv) encouraging eligible persons to remain with the Corporation; and (v) attracting new directors, employees and officers.
Section 2
Definitions.
As used in the Plan, the following terms have the following respective meanings:
“
Account
” means an account maintained for each Participant on the books of the Corporation which will be credited with Deferred Share Units and Dividend Equivalents, in accordance with the terms of the Plan.
“
Affiliate
” has the meaning ascribed to that term under section 1(2) of the
Securities Act
(Ontario), as now in effect, or such other meaning, and shall include such other entities, as may be determined by the Board.
“
Annual Board Retainer
” means the annual retainer paid by the Corporation to a director in a fiscal year for service on the Board, together with Board committee fees, attendance fees and additional fees and retainers to committee chairs.
“
Annual Bonus
” means the discretionary annual bonus paid by the Corporation to an officer in a fiscal year for service to the Corporation.
“
Board
” means the Board of Directors of the Corporation.
“
Broker
” means a broker independent from the Corporation or any of its subsidiaries (pursuant to the test for independence as set out in Section 629(j) of the TSX Company Manual) who has been designated by the Corporation as the broker that will purchase Common Shares pursuant to the Plan and who is a member of the principal Canadian stock exchange or other public exchange on which the Common Shares are listed.
“
Committee
” means the Compensation, Nominating and Governance Committee of the Board.
“
Common Shares
” means the common shares of the Corporation.
“
Corporation
” means Aphria Inc.
“
Deferred Share Unit
” means a bookkeeping entry equivalent in value to a Common Share credited to a Participant’s Account in accordance with the terms of the Plan.
“
Dividend Equivalent
” means a bookkeeping entry equivalent in value to a dividend paid on a Common Share credited to a Participant’s Account in accordance with Section 11 of the Plan.
“
Final Payment
” has the meaning ascribed to that term in Section 10 of the Plan.
“
Grant Agreement
” means an agreement between the Corporation and a Participant under which a Deferred Share Unit is granted, substantially in the form attached hereto as Schedule “A”, as each may be amended from time to time;
“
Insider
” means a “reporting insider” as defined in National Instrument 55-104 —
Insider Reporting Requirements and Exemptions;
“
Non-Executive Director
” means a member of the Board who is not an officer or employee of the Corporation or of any of its Affiliates.
“
Notice of Redemption
” means written notice, substantially in the form attached hereto as Schedule “D”, by the Participant, or the administrator or liquidator of the estate of the Participant, to the Corporation of the Participant’s wish to redeem his Deferred Share Units for cash or Common Shares of the Corporation.
“
Participant
” means a director or officer of the Corporation who is designated by the Committee as eligible to participate in the Plan.
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3
“
Plan
” means this Aphria Inc. Deferred Share Unit Plan as set forth herein and as may be amended from time to time.
“
Share Price
” means the volume weighted average trading price of the Common Shares on the TSX for the five (5) consecutive trading days immediately preceding the applicable date.
“
Termination Date
” means the date upon which a Participant ceases to be a director, officer, and, if applicable, an employee of the Corporation and all Affiliates, for any reason including, without limiting the generality of the foregoing, as a result of retirement, death, voluntary or involuntary termination without cause, or permanent disability.
“
TSX
” means The Toronto Stock Exchange.
Words importing the singular number only shall include the plural and vice versa and words importing the masculine shall include the feminine.
Section 3
Deferred Share Units Subject to the Plan.
(1)
At such time as the Common Shares are listed on the TSX, the aggregate number of Common Shares issuable under this Plan, and under all other security based compensation arrangements of the Corporation, shall not exceed 10% of the total number of Common Shares issued and outstanding from time to time. Any Common Share subject to a Deferred Share Unit which for any reason is cancelled or terminated without having been redeemed shall again be available for grants under the Plan, and under all other security based compensation arrangements.
(2)
The aggregate value of Deferred Share Units awarded to Non-Executive Directors within any one-year period under the Plan together with all other security based compensation arrangements of the Corporation, if any, shall not exceed $150,000 in value of equity per Participant.
(3)
The maximum number of Common Shares issued to Insiders under the Plan, or when combined with any other previously established or proposed share compensation arrangements, within any one-year period, may not exceed 10% of the outstanding issue.
(4)
The maximum number of Common Shares issuable to Insiders under the Plan, or when combined with any other previously established or proposed share compensation arrangements, at any time, may not exceed 10% of the outstanding issue.
(5)
The maximum number of common shares issued to any individual in any twelve (12) month period under this Plan exceeding five percent (5%) of the issued Common Shares of the Corporation.
Section 4
Administration of Plan.
The Committee shall have the power, where consistent with the general purpose and intent of the Plan and subject to the specific provisions of the Plan:
(a)
to establish policies and to adopt rules and regulations for carrying out the purposes, provisions and administration of the Plan and to amend and rescind such rules and regulations from time to time;
(b)
to interpret and construe the Plan and to determine all questions arising out of the Plan, and any such interpretation, construction or determination made by the Committee shall be final, binding and conclusive for all purposes;
(c)
to prescribe the form of the instruments used in conjunction with the Plan; and
(d)
to determine which members of the Board or officers of the Corporation are eligible to participate in the Plan.
Section 5
Awards of Deferred Share Units.
(1)
Subject to this Section 5(1) and such other terms and conditions as the Board or the Committee may prescribe, the Committee may recommend the award of, and the Board may, acting on such recommendation, from time to time award, Deferred Share Units to a Participant at such time, in such number and effective as of such date as the Board may determine. The Board shall base its decision to award Deferred Share Units to Participants on
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4
such criteria as the Board or Committee may determine, provided that such criteria and the award shall, in any event, relate to services performed or to be performed by the Participant as a director or officer of the Corporation.
(2)
The number of Deferred Share Units that a Participant is entitled to receive at a particular time shall be evidenced by a Grant Agreement, signed on behalf of the Corporation. Certificates representing Deferred Share Units shall not be issued by the Corporation. Fractional Deferred Share Units will not be issued under the Plan and any fractional entitlements will be rounded down to the nearest whole number.
Section 6
Election Notice; Elected Amount
(1)
Subject to Board approval, a Participant may elect by filing an election notice in the form of Schedule “B” attached hereto (the “
Election Notice
”), once each fiscal year, to be paid up to one hundred percent (100%) of his Annual Board Retainer or Annual Bonus, as applicable, in the form of Deferred Share Units (the “
Elected Amount
”), with the balance being paid in cash in accordance with the Corporation’s regular practices of paying such cash compensation. In the case of an existing Participant, the election must be completed, signed and delivered to the Corporation by the end of the fiscal year preceding the fiscal year to which such election is to apply. In the case of a new Participant, the election must be completed, signed and delivered to the Corporation as soon as possible, and, in any event, no later than 30 days, after the director’s appointment, with such election to be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporation’s receipt of the election until the final day of such fiscal year. For the first year of the Plan, Participants must make such election as soon as possible, and, in any event, no later than 30 days after adoption of the Plan and the election shall be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporation’s receipt of the election until the final day of such fiscal year. If no election is made in respect of a particular fiscal year, the new or existing Participant will be paid in cash in accordance with the Corporation’s regular practices of paying such cash compensation.
(2)
The Election Notice shall, subject to any minimum amount that may be required by the Board, from time to time, designate the percentage of the Annual Board Retainer or Annual Bonus, as applicable, for the applicable fiscal year that is to be deferred into Deferred Share Units, with the remaining percentage to be paid in cash in accordance with the Corporation’s regular practices of paying such cash compensation.
(3)
In the absence of a designation to the contrary (including delivery of an Election Notice by a Participant requesting that a greater or lesser percentage of his Annual Board Retainer or Annual Bonus, as applicable be payable in the form of Deferred Share Units relative to the percentage previously elected by such Participant), the Participant’s Election Notice shall remain in effect unless otherwise terminated.
(4)
Each Participant is entitled to terminate his participation in the Plan by filing with the Corporation, a notice electing to terminate the receipt of additional Deferred Share Units in the form of Schedule “C” attached hereto (“
Termination Notice
”).
(5)
Such Termination Notice shall be effective as of the date received by the Corporation.
(6)
Thereafter, any portion of such Participant’s Annual Board Retainer or Annual Bonus, as applicable and all subsequent Annual Board Retainers or Annual Bonuses, as applicable, shall be paid in cash in accordance with the Corporation’s regular practices of paying such cash compensation.
(7)
For greater certainty, to the extent a Participant terminates his participation in the Plan, he shall not be entitled to become a Participant again until the fiscal year following the fiscal year in which the Termination Notice becomes effective.
Section 7
Calculation
(1)
The number of Deferred Share Units granted at any particular time pursuant to this Plan will be calculated by:
(a)
In the case of an Elected Amount, by dividing (i) the dollar amount of the Elected Amount allocated to the Participant by (ii) the Share Price of the Common Shares on the award date; or
(b)
In the case of a grant of Deferred Share Units pursuant to Section 5, by dividing (i) the dollar amount of such grant by (ii) the Share Price of the Common Shares on the date of grant.
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5
Section 8
Vesting.
(a)
Unless otherwise stated in an applicable Grant Agreement, all Deferred Share Units recorded in a Participant’s Deferred Share Unit notional account shall vest on the date of grant.
(b)
Notwithstanding that a Deferred Share Unit may have vested, Participants will not have any right to receive any benefit under the Plan in respect of a Deferred Share Unit until the Termination Date.
Section 9
Taxes and Other Source Deductions.
(1)
The Corporation or an Affiliate may withhold from any amount payable to a Participant, either under the Plan or otherwise, such amounts as are required by law to be withheld, deducted or remitted by the Corporation or an Affiliate as a consequence of his participation in this Plan (“
Withholding Amount
”). In the event that a Participant does not deliver to the Corporation or an Affiliate upon the settlement of a Deferred Share Unit a cash payment in an amount equal to the Withholding Amount, the Participant shall be deemed to have elected that the Corporation shall have the right, in its discretion, to satisfy any Withholding Amount by:
(a)
selling or causing to be sold by the Corporation or by a broker or otherwise, on behalf of any Participant, such number of Common Shares issued to the Participant, as applicable, on the settlement of Deferred Share Units as is sufficient to fund the Withholding Amount and to apply the cash received on such sale of underlying Common Shares to fund the Withholding Amount;
(b)
retaining the amount necessary to satisfy the Withholding Amount from any cash amount which would otherwise be delivered, provided or paid to the Participant by the Corporation or an Affiliate, whether under this Plan or otherwise;
(c)
requiring the Participant, as a condition of redemption to reimburse the Corporation or an Affiliate for any such Withholding Amount; and/or
(d)
making such other arrangements as the Corporation may reasonably require.
(2)
The sale of Common Shares, by the Corporation, or by a Broker will be made on the exchange on which the Common Shares are then listed for trading
Section 10
Redemption of Deferred Share Units.
(1)
Each Participant shall be entitled to redeem his Deferred Share Units during the period commencing on the business day immediately following the Termination Date and ending on the 90
th
day following the Termination Date by providing a written Notice of Redemption to the Corporation in the form of Schedule “D” attached hereto. In the event of the death of a Participant, the Notice of Redemption shall be filed by the administrator or liquidator of the estate of the Participant. The Notice of Redemption must specify an election to receive the following:
(a)
a cash payment equal to the number of Deferred Share Units credited to Participant’s Account as of the Termination Date multiplied by the Share Price on the Termination Date;
(b)
Common Shares purchased on the Participant’s behalf on the open market by a Broker; or
(c)
a percentage of the number of Deferred Share Units paid out in cash and the remaining percentage of the Deferred Share Units paid out as Common Shares or purchased on the Participant’s behalf on the open market by a Broker.
In the event a Notice of Redemption is not provided by a Eligible Participant, such Participant will be deemed to have elected to receive a cash payment as provided for in Section 10(1)(a).
(2)
Where Common Shares are purchased on the open market on the Participant’s behalf, the Corporation will remit all or a portion of the final payment to the Broker, and the Broker will be required to (within ten (10) business days) use such payment to purchase Common Shares in the open market on the TSX or any other public exchange on which the Common Shares are traded. The number of Common Shares to be purchased will be computed by taking the number of Deferred Share Units that the Participant elected to receive in Common Shares, net of the number of Deferred Share Units that would equal the Withholding Amount. Any Common Shares acquired by the Broker from all or a portion of the final payment and any cash remaining therefrom shall
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6
be delivered directly to the Participant forthwith as soon as practicable upon completion of such purchases. The Corporation will pay all brokerage fees arising in connection with the purchase of Common Shares by the Broker in accordance with the Plan.
(3)
Notwithstanding the foregoing, the Corporation may, in its absolute discretion and subject to the receipt of any necessary shareholder and regulatory approvals, issue to the Participant such number of Common Shares from treasury that equals the number of Deferred Share Units, net of the number of Deferred Share Units that would equal the Withholding Amount, recorded in the Participant’s Account on the Termination Date. If the Corporation issues Common Shares as aforesaid, such Common Shares will be issued in consideration for the past services of the Participant to the Corporation and the entitlement of the Participant under this Plan shall be satisfied in full by such issuance of Common Shares. The Corporation will also make a cash payment, less any Withholding Amount, to the Participant with respect to the number of fractional Deferred Share Units standing to the Participant’s credit after the maximum whole Common Shares have been issued by the Corporation as described above.
(4)
The Corporation will make all of the payments described in this Section 10 (referred to hereinafter as the “
Final Payment
”) to the Participant or the Broker within 120 days of the Termination Date. Upon making such payment to the Participant or the Broker, the Deferred Share Units upon which such payment was based shall be cancelled and no further payments shall be made from the Plan in relation to such Deferred Share Units.
(5)
In the event of the death of a Participant, provided that a Notice of Redemption is not filed with the Corporation as described in this Section 10, the Corporation shall, within one calendar year of the Participant’s death, make a lump sum cash payment in each case to or for the benefit of the administrator or liquidator of the estate of the Participant. In any event, the payment date will be no later than the end of the first calendar year commencing after the Participant’s death. The lump sum cash payment shall be equal to the number of Deferred Share Units credited to the Participant’s Account on the date of death multiplied by the Share Price as of the Termination Date, net of any Withholding Amount. If permitted by applicable law, the Participant may appoint a beneficiary of his rights under the Plan. For this purpose, the beneficiary must be a dependent, a relation of the Participant, or the legal representative of the Participant.
Section 11
Award of Dividend Equivalents.
Dividend Equivalents will be awarded in respect of vested Deferred Share Units in a Participant’s Account on the same basis as dividends declared and paid on Common Shares as if the Participant was a shareholder of record of Common Shares on the relevant record date. These Dividend Equivalents will be credited to the Participant’s Account as additional Deferred Share Units (or fractions thereof), with the number of additional Deferred Share Units equal to (a) the actual amount of dividends that would have been paid if the Participant had held Common Shares under the Plan on the applicable record date divided by (b) the closing price for Common Shares on the TSX on the date on which the dividends on Common Shares are payable. For greater certainty, no Deferred Share Units representing Dividend Equivalents will be credited to a Participant’s Account in relation to Deferred Share Units that have been previously cancelled or paid out of the Plan.
Section 12
Adjustments and Reorganizations.
In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Corporation assets to shareholders, or any other change affecting shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change, shall be made with respect to the number of Deferred Share Units outstanding under the Plan.
Section 13
Unfunded Plan.
The Plan shall be unfunded. To the extent any Participant or his estate holds any rights by virtue of a grant of Deferred Share Units under the Plan, such rights shall be no greater than the rights of an unsecured creditor of the Corporation.
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Section 14
Plan Amendment.
(1)
The Board may at any time, and from time to time, and without shareholder approval, amend any provision of the Plan, subject to any regulatory or stock exchange requirement at the time of such amendment, including, without limitation:
(a)
amendments to the termination provisions of Section 15;
(b)
amendments necessary or advisable because of any change in application securities laws;
(c)
amendments to Section 4 relating to the administration of the Plan;
(d)
any other amendment, fundamental or otherwise, not requiring shareholder approval under applicable laws or the rules of the TSX, including amendments of a “housekeeping” nature.
(2)
Notwithstanding Section 14(1), none of the following amendments shall be made to this Plan without approval by shareholders or disinterested shareholders (as applicable) by ordinary resolution:
(a)
amendments to this Plan which would increase the number of securities issuable under this Plan, otherwise than in accordance with the terms of this Plan which permit the Board to make equitable adjustments in the event of transactions affecting the Corporation or its capital;
(b)
amendments to this Plan which would increase the number of securities issuable to Insiders, otherwise than in accordance with the terms of this Plan;
(c)
amendments permitting awards other than DSUs to be made under this Plan;
(d)
an amendment that would permit DSUs to be granted to persons other than Eligible Participants on a discretionary basis; and
(e)
amendments deleting or reducing the range of amendments which require shareholders’ approval under this Section 14 (2).
(3)
Any amendment shall not alter the terms or conditions of any Deferred Share Unit or impair any right of any holder of Deferred Share Units pursuant to any Deferred Share Unit granted prior to such amendment.
(4)
No amendment shall be made which prevents the Plan from continuously meeting the requirements of paragraph 6801(d) of the
Income Tax Regulations
(Canada) or any successor provision thereto.
Section 15
Plan Termination.
The Committee may decide to discontinue granting awards under the Plan at any time in which case no further Deferred Share Units shall be awarded or credited under Section 5 of the Plan. Any Deferred Share Units which remain outstanding in a Participant’s Account at that time shall continue to be dealt with according to the terms of the Plan. For greater certainty, Dividend Equivalents shall continue to be awarded, as appropriate, in respect of such outstanding Deferred Share Units pursuant to Section 11 of the Plan. The Plan shall terminate when all payments owing pursuant to Section 6 of the Plan have been made and all Deferred Share Units have been cancelled in all Participants’ Accounts.
Section 16
Final Determination.
Any determination or decision by or opinion of the Committee made or held pursuant to the terms of the Plan shall be final, conclusive and binding on all parties concerned. All rights, entitlements and obligations of Participants under the Plan are set forth in the terms of the Plan and cannot be modified by any other documents, statements or communications, except by Plan amendments referred to in Section 14 of the Plan.
Section 17
No Right to Continued Service.
Participation in the Plan shall not be construed to give any Participant a right to be retained as a director or officer of the Corporation.
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Section 18
No Other Benefit.
No amount will be paid to, or in respect of, a Participant under the Plan to compensate for a downward fluctuation in the price of Common Shares nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.
Section 19
No Shareholder Rights.
Under no circumstances shall Deferred Share Units be considered Common Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Common Shares nor shall any Participant be considered the owner of Common Shares by virtue of the award of Deferred Share Units.
Section 20
Reorganization of the Corporation.
The existence of any Deferred Share Units shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation’s capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
Section 21
Successors and Assigns.
The Plan shall be binding on all successors and assigns of the Corporation.
Section 22
General Restrictions and Assignment.
Except as required by law, the rights of a Participant under the Plan are not capable of being anticipated, assigned, transferred, alienated, sold, encumbered, pledged, mortgaged or charged and are not capable of being subject to attachment or legal process for the payment of any debts or obligations of the Participant.
Section 23
Governing Law.
The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.
Section 24
Currency.
All amounts paid or values to be determined under the Plan shall be in Canadian dollars.
Section 25
Severability.
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan and any invalid or unenforceable provision shall be severed from the Plan.
Section 26
Notice.
Any notice, direction, payment or other communication required, permitted or contemplated by the Plan shall be in writing and shall be sufficiently given if mailed by prepaid registered mail or delivered to the Corporation at its head office (and to the Participant at his address as shown on the books and records of the Corporation. Any such notice or other communication, if mailed, shall be deemed to have been given on the fifth day (including Saturdays, Sundays and statutory holidays) after the date of mailing and, if delivered, at the time of delivery, as the case may be. Any party may, at any time or from time to time by notice given as aforesaid to the parties, change its address for such notice or other communication.
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SCHEDULE “A”
APHRIA INC. DEFERRED SHARE UNIT GRANT AGREEMENT
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Name:
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[name of Participant]
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Award Date
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[insert date]
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Aphria Inc. (the “
Corporation
”) has adopted the Deferred Share Unit Plan (the “
Plan
”). Your award is governed in all respects by the terms of the Plan, and the provisions of the Plan are hereby incorporated by reference. Capitalized terms used and not otherwise defined in this Grant Agreement shall have the meanings set forth in the Plan. If there is a conflict between the terms of this Grant Agreement and the Plan, the terms of the Plan shall govern.
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Your Award
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The Corporation hereby grants to you
[
·
]
Deferred Share Units, which shall be payable on the Termination Date.
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PLEASE SIGN AND RETURN A COPY OF THIS GRANT AGREEMENT TO THE CORPORATION.
By your signature below, you acknowledge that you have received a copy of the Plan and have reviewed, considered and agreed to the terms of this Grant Agreement and the Plan.
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Signature:
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Date:
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On behalf of the Corporation:
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Name:
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Title:
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SCHEDULE “B”
APHRIA INC. (THE “COMPANY”)
DSU ELECTION NOTICE
All capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Plan.
Pursuant to the Deferred Share Unit Plan (the “
Plan
”), I hereby elect to receive % of my (
Annual Board Retainer or Annual Bonus)
in the form of Deferred Share Units in lieu of cash.
I confirm that:
(a)
I have received and reviewed a copy of the terms of the Plan and have reviewed, considered and agreed to be bound by the terms of this Election Notice and the Plan.
(b)
I have requested and am satisfied that the Plan and the foregoing be drawn up in the English language.
Le soussigné reconnaît qu’il a exigé que le Régime et ce qui précède soient rédigés et exécutés en anglais et s’en déclare satisfait.
(c)
I recognize that when Deferred Share Units are redeemed in accordance with the terms of the Plan, income tax and other withholdings as required will arise at that time. Upon redemption of the Deferred Share Units, the Company will make or arrange with me to make all appropriate withholdings as required by law at that time.
(d)
The value of Deferred Share Units is based on the value of the Common Shares of the Company and therefore is not guaranteed.
The foregoing is only a brief outline of certain key provisions of the Plan. For more complete information, reference should be made to the Plan.
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Date:
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(Name of Participant)
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(Signature of Participant)
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SCHEDULE “C”
APHRIA INC.
ELECTION TO TERMINATE RECEIPT OF ADDITIONAL DEFERRED SHARE UNITS
All capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Plan.
Notwithstanding my previous election in the form of Schedule “B” to the Plan, I hereby elect to terminate my participation in the Plan effective as of the date this Termination Notice is received by Aphria Inc.
I understand that the Deferred Share Units already granted under the Plan cannot be redeemed until the Termination Date.
I confirm that I have received and reviewed a copy of the terms of the Plan and agree to continue to be bound by the Plan.
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Date:
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(Name of Participant)
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(Signature of Participant)
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SCHEDULE “D”
APHRIA INC. (THE “CORPORATION”)
NOTICE OF REDEMPTION
I, , in respect of the Deferred Share Units that were
(print name)
granted to me as a director or officer of the Corporation, hereby elect to redeem Deferred Share Units and to receive (check one):
o
(i)
Cash;
o
(ii)
Common Shares; or
o
(iii)
a combination of Cash and Common Shares as follows .
If I elect to receive cash or a portion of my Deferred Share Units in cash, I acknowledge that the Corporation will deduct applicable withholding taxes in accordance with the Deferred Share Unit Plan.
If I elect to receive only Common Shares, or insufficient cash to pay applicable withholding taxes, I (check one):
o
(i)
enclose cash, a certified cheque, bank draft or money order payable to the Corporation in the amount of $ as full payment for the applicable withholding taxes;
o
(ii)
undertake to direct that such number of Common Shares are to be sold, and the proceeds of such Common Shares delivered to the Corporation, as is necessary to put the Company in funds equal to the amount that would have otherwise been required in (i) above; or
o
(iii)
elect to redeem for cash such number of Deferred Share Units as is necessary raise funds sufficient to cover such withholding taxes with such amount being withheld by the Company.
|
Date:
|
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|
|
|
|
(Name of Participant)
|
|
|
|
|
|
|
|
|
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(Signature of Participant)
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B-
13
Exhibit “C”
Board Mandate
1.0
Introduction
The board of directors (the “
Board
”) of Aphria Inc. (“
Aphria
”) is elected by the shareholders of Aphria and is responsible for the stewardship of Aphria. The purpose of this mandate is to describe the principal duties and responsibilities of the Board, as well as some of the policies and procedures that apply to the Board in discharging its duties and responsibilities.
2.0
Chairman of the Board
The Chairman of the Board (“
Chairman
”) will be appointed by the Board, after considering the recommendation of the Board, for such term as the Board may determine.
3.0
Independence
The Board will be comprised of at least an equal number of independent directors as non-independent directors.
4.0
Role and Responsibilities of the Board
The role of the Board is to represent the shareholders of Aphria, enhance and maximize shareholder value and conduct the business and affairs of Aphria ethically and in accordance with the highest standards of corporate governance. The Board is ultimately accountable and responsible for providing independent, effective leadership in supervising the management of the business and affairs of Aphria. The responsibilities of the Board include:
·
adopting a strategic planning process;
·
review and approve annual operating plans and budgets;
·
corporate social responsibility, ethics and integrity;
·
succession planning, including the appointment, training and supervision of management;
·
delegations and general approval guidelines for management;
·
monitoring financial reporting and management;
·
monitoring internal control and management information systems;
·
corporate disclosure and communications;
·
adopting measures for receiving feedback from stakeholders; and
·
adopting key corporate policies designed to ensure that Aphria, its directors, officers and employees comply with all applicable laws, rules and regulations and conduct their business ethically and with honesty and integrity.
Meetings of the Board will be held at least quarterly, with additional meetings to be held depending on the state of Aphria’s affairs and in light of opportunities or risks which Aphria faces. In addition, separate, regularly scheduled meetings of the independent directors of the Board may be held at which members of management are not present.
The Board will delegate responsibility for the day-to-day management of Aphria’s business and affairs to Aphria’s senior officers and will supervise such senior officers appropriately.
The Board may delegate certain matters it is responsible for to Board committees, presently consisting of the Audit Committee and the Compensation, Nominating and Governance Committee. The Board will, however, retain its oversight function and ultimate responsibility for these matters and all delegated responsibilities.
5.0
Strategic Planning Process and Risk Management
The Board will adopt a strategic planning process to establish objectives and goals for Aphria’s business and will review, approve and modify as appropriate the strategies proposed by senior management to achieve such objectives and
C-
1
goals. The Board will review and approve, at least on an annual basis, a strategic plan which takes into account, among other things, the opportunities and risks of Aphria’s business and affairs.
The Board, in conjunction with management, will identify the principal risks of Aphria’s business and oversee management’s implementation of appropriate systems to effectively monitor, manage, and mitigate the impact of such risks.
6.0
Corporate Social Responsibility, Ethics and Integrity
The Board will provide leadership to Aphria in support of its commitment to Corporate Social Responsibility, set the ethical tone for Aphria and its management and foster ethical and responsible decision making by management. The Board will take all reasonable steps to satisfy itself of the integrity of the Chief Executive Officer and management and satisfy itself that the Chief Executive Officer and management create a culture of integrity throughout the organization.
7.0
Succession Planning, Appointment and Supervision of Management
The Board will approve the succession plan for Aphria, including the selection, appointment, supervision and evaluation of the Chief Executive Officer and the other senior officers of Aphria, and will also approve the compensation of the Chief Executive Officer and the other senior officers of Aphria.
8.0
Delegations and Approval Authorities
The Board will delegate to the Chief Executive Officer and senior management authority over the day-to-day management of the business and affairs of Aphria. This delegation of authority will be subject to specified financial limits and any transactions or arrangements in excess of general authority guidelines will be reviewed by and subject to the prior approval of the Board.
9.0
Monitoring of Financial Reporting and Management
The Board will approve all regulatory filings, including the annual audited financial statements, interim financial statements, the notes and management discussion and analysis accompanying such financial statements, quarterly and annual reports, management proxy circulars, annual information forms, prospectuses, and all capital investments as deemed necessary, equity financings, borrowings, and all annual operating plans and budgets.
The Board will adopt procedures that seek to: ensure the integrity of internal controls and management information systems; ensure compliance with all applicable laws, rules and regulations; and prevent violations of applicable laws, rules and regulations relating to financial reporting and disclosure, violation of Aphria’s code of business conduct and ethics and fraud against shareholders.
10.0 Corporate Disclosure and Communications
The Board will seek to ensure that all corporate disclosure complies with all applicable laws, rules and regulations and the rules and regulations of the stock exchanges upon which Aphria’s securities are listed. In addition, the Board will adopt procedures that seek to ensure the Board receives feedback from security holders on material issues.
11.0 Corporate Policies
The Board will adopt and annually review policies and procedures designed to ensure that Aphria, its directors, officers and employees comply with all applicable laws, rules and regulations, and conduct Aphria’s business ethically and with honesty and integrity. Principal policies consist of:
i.
Compensation, Nominating, and Governance Committee Charter;
ii.
Audit Committee Charter;
iii.
Corporate Disclosure Policy;
iv.
Board Mandate;
v.
Insider Trading Policy;
C-
2
vi.
Mandate for the Chair of the Audit Committee; and
vii.
Mandate for the Chair of the Board of Directors
12.0 Review of Mandate
The Board will annually review and assess the adequacy of this mandate and recommend any proposed changes to the Board for consideration.
|
Dated:
|
July 11, 2017
|
|
Approved by:
|
Board of Directors
|
C-
3
Exhibit “D”
Audit Committee Charter
This charter (the “
Charter
”) sets forth the purpose, composition, responsibilities and authority of the Audit Committee (the “
Committee
”) of the Board of Directors (the “
Board
”) of Aphria Inc. (“
Aphria
”).
1.0
Purpose
The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities with respect to:
·
financial reporting and disclosure requirements;
·
ensuring that an effective risk management and financial control framework has been implemented and tested by management of Aphria; and
·
external and internal audit processes.
2.0
Composition and Membership
(a)
The Board will appoint the members (“
Members
”) of the Committee. The Members will be appointed to hold office until the next annual general meeting of shareholders of Aphria or until their successors are appointed. The Board may remove a Member at any time and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will automatically cease to be a Member upon ceasing to be a director.
(b)
The Committee will consist of at least three directors. Each Member will meet the criteria for financial literacy established by applicable laws and the rules of any stock exchanges upon which Aphria’s securities are listed, including National Instrument 52-110 —
Audit Committees
. The majority of Members will meet the criteria for independence established by the aforementioned laws and rules. In addition, each director will be free of any relationship which could, in the view of the Board, reasonably interfere with the exercise of a Member’s independent judgment.
(c)
The Board will appoint one of the Members to act as the chairman of the Committee (the “
Chairman
”). The secretary of Aphria (the “
Secretary
”) will be the secretary of all meetings and will maintain minutes of all meetings and deliberations of the Committee. If the Secretary is not in attendance at any meeting, the Committee will appoint another person who may, but need not, be a Member to act as the secretary of that meeting.
3.0
Meetings
(a)
Meetings of the Committee will be held at such times and places as the Chairman may determine, but in any event not less than four (4) times per year. Twenty-four (24) hours advance notice of each meeting will be given to each Member orally, by telephone, by facsimile or email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by telephone.
(b)
At the request of the external auditors of Aphria, the Chief Executive Officer, or the Chief Financial Officer of Aphria or any Member, the Chairman will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.
(c)
The Chairman, if present, will act as the chairman of meetings of the Committee. If the Chairman is not present at a meeting of the Committee the Members in attendance may select one of the members to act as chairman of the meeting.
(d)
A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority. The Chairman will not have a deciding or casting vote in the case of an equality of votes. Powers of the Committee may also be exercised by written resolutions signed by all Members.
D-
1
(e)
The Committee may invite from time to time such persons as it sees fit to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee. The Committee may meet in camera without members of management in attendance for a portion of each meeting of the Committee, as the Committee deems appropriate.
(f)
In advance of every regular meeting of the Committee, the Chairman, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chairman, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Aphria to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.
4.0
Duties and Responsibilities
The duties and responsibilities of the Committee as they relate to the following matters, are as follows:
4.1
Financial Reporting and Disclosure
(a)
review and recommend to the Board for approval, the audited annual financial statements, including the auditors’ report thereon, the quarterly financial statements, management discussion and analysis, financial reports, and any guidance with respect to earnings per share to be given, prior to the public disclosure of such information, with such documents to indicate whether such information has been reviewed by the Board or the Committee;
(b)
review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual report to shareholders, management proxy circular, material change disclosures of a financial nature, and similar disclosure documents prior to the public disclosure of such information;
(c)
review with management of Aphria, and with external auditors, significant accounting principles and disclosure issues and alternative treatments under International Financial Reporting Standards (“IFRS”), with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Aphria’s financial position, and the results of its operations in accordance with IFRS, as applicable;
(d)
seek to ensure that adequate procedures are in place for the review of Aphria’s public disclosure of financial information extracted or derived from Aphria’s financial statements, periodically assess the adequacy of those procedures and recommend any proposed changes to the Board for consideration;
(e)
review the minutes from each meeting of the Responsible Parties, established pursuant to Aphria’s corporate disclosure policy, since the last meeting of the Committee;
4.2
Internal Controls and Audit
(a)
review the adequacy and effectiveness of Aphria’s system of internal control and management information systems through discussions with management and the external auditor to ensure that Aphria maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Aphria’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statement and for detecting control weaknesses or fraud. From time to time the Committee shall assess whether it is necessary or desirable to establish a formal internal audit department having regard to the size and stage of development of Aphria at any particular time;
(b)
satisfy itself that management has established adequate procedures for the review of Aphria’s disclosure of financial information extracted or derived directly from Aphria’s financial statements;
(c)
satisfy itself, through discussions with management, that the adequacy of internal controls, systems and procedures has been periodically assessed in order to ensure compliance with regulatory requirements and recommendations;
(d)
review and discuss Aphria’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities;
D-
2
(e)
review, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Aphria’s risk management policies and procedures with regard to identification of Aphria’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Aphria;
(f)
recommend the appointment, or if necessary, the dismissal of the head of Aphria’s internal audit process;
4.3
External Audit
(a)
recommend to the Board a firm of external auditors to be nominated for appointment as the external auditor of Aphria;
(b)
ensure the external auditors report directly to the Committee on a regular basis;
(c)
review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;
(d)
review and recommend to the Board the fee, scope and timing of the audit and other related services rendered by the external auditors;
(e)
review the audit plan of the external auditors prior to the commencement of the audit;
(f)
establish and maintain a direct line of communication with Aphria’s external and internal auditors;
(g)
meet in camera with only the auditors, with only management, and with only the members of the Committee at every Committee meeting where, and to the extent that, such parties are present and the Committee deems appropriate;
(h)
oversee the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors’ team;
(i)
oversee the work of the external auditors appointed by the shareholders of Aphria with respect to preparing and issuing an audit report or performing other audit, review or attest services for Aphria, including the resolution of issues between management of Aphria and the external auditors regarding financial disclosure;
(j)
review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used, any alternative treatments of financial information that have been discussed with management of Aphria, the ramifications of their use as well as any other material changes. Review a report describing all material written communication between management and the auditors such as management letters and schedule of unadjusted differences;
(k)
discuss with the external auditors their perception of Aphria’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;
(l)
discuss with the external auditors their perception of Aphria’s identification and management of risks, including the adequacy or effectiveness of policies and procedures implemented to mitigate such risks;
(m)
review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board;
(n)
review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues;
D-
3
4.4 Associated Responsibilities
(a)
review and approve Aphria’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of Aphria; and
4.5
Non-Audit Services
(a)
pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but pre-approval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
5.0
Oversight Function
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that Aphria’s financial statements are complete and accurate or comply with IFRS and other applicable requirements. These are the responsibilities of Management and the external auditors. The Committee, the Chairman and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Aphria, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Aphria’s financial information or public disclosure.
6.0
Reporting
The Chairman will report to the Board at each Board meeting on the Committee’s activities since the last Board meeting. The Committee will annually review and approve the Committee’s report for inclusion in the Annual Information Form. The minutes of each meeting of the Committee will be available to the members of the Board, at their request.
7.0
Access to Information and Authority
The Committee will be granted unrestricted access to all information regarding Aphria that is necessary or desirable to fulfill its duties and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Aphria’s expense, independent legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities, including sole authority to retain and to approve any such firm’s fees and other retention terms without prior approval of the Board. The Committee also has the authority to communicate directly with internal and external auditors.
8.0
Review of Charter
The Committee will annually review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.
|
Dated:
|
July 11, 2017
|
|
Approved by:
|
Audit Committee
|
|
|
Board of Directors
|
D-
4
Exhibit 99.27
Aphria Inc.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AND AUGUST 31, 2016
(Unaudited, expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited)
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
Note
|
|
2017
|
|
2017
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
38,229,855
|
|
$
|
79,910,415
|
|
|
Marketable securities
|
|
5
|
|
80,501,420
|
|
87,346,787
|
|
|
Accounts receivable
|
|
|
|
1,261,775
|
|
825,511
|
|
|
Other receivables
|
|
6
|
|
6,200,506
|
|
4,511,639
|
|
|
Inventory
|
|
7
|
|
5,968,503
|
|
3,886,607
|
|
|
Biological assets
|
|
8
|
|
3,434,505
|
|
1,362,749
|
|
|
Prepaid assets
|
|
|
|
2,198,743
|
|
1,059,624
|
|
|
Due from related parties
|
|
9
|
|
—
|
|
463,916
|
|
|
Note receivable
|
|
10
|
|
834,898
|
|
—
|
|
|
Land available for sale
|
|
11
|
|
3,160,426
|
|
—
|
|
|
Current portion of convertible notes receivable
|
|
13
|
|
2,507,200
|
|
—
|
|
|
|
|
|
|
144,297,831
|
|
179,367,248
|
|
|
Capital assets
|
|
11
|
|
92,358,204
|
|
72,500,148
|
|
|
Intangible assets
|
|
12
|
|
1,739,451
|
|
1,891,237
|
|
|
Convertible notes receivable
|
|
13
|
|
8,424,974
|
|
1,360,548
|
|
|
Embedded derivatives
|
|
13
|
|
5,155,750
|
|
173,000
|
|
|
Interest in equity accounted investee
|
|
14
|
|
27,430,588
|
|
28,376,092
|
|
|
Long-term investments
|
|
15
|
|
50,502,630
|
|
27,787,578
|
|
|
Deferred tax asset
|
|
4
|
|
—
|
|
3,314,570
|
|
|
Goodwill
|
|
|
|
1,200,000
|
|
1,200,000
|
|
|
|
|
|
|
331,109,428
|
|
315,970,421
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
4,647,009
|
|
$
|
5,872,962
|
|
|
Income taxes payable
|
|
4
|
|
365,148
|
|
—
|
|
|
Deferred gain on sale of intellectual property
|
|
|
|
2,566,667
|
|
2,800,000
|
|
|
Current portion of promissory note payable
|
|
17
|
|
814,840
|
|
877,500
|
|
|
Current portion of long-term debt
|
|
18
|
|
776,523
|
|
765,224
|
|
|
|
|
|
|
9,170,187
|
|
10,315,686
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
17
|
|
135,807
|
|
365,625
|
|
|
Long-term debt
|
|
18
|
|
31,223,545
|
|
31,420,230
|
|
|
Deferred tax liability
|
|
4
|
|
86,634
|
|
—
|
|
|
|
|
|
|
40,616,173
|
|
42,101,541
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
19
|
|
274,800,753
|
|
274,316,548
|
|
|
Warrants
|
|
20
|
|
444,912
|
|
444,912
|
|
|
Share-based payment reserve
|
|
21
|
|
5,650,329
|
|
3,229,929
|
|
|
Accumulated other comprehensive loss
|
|
|
|
(1,320,398
|
)
|
—
|
|
|
Retained earnings (deficit)
|
|
|
|
10,917,659
|
|
(4,122,509
|
)
|
|
|
|
|
|
290,493,255
|
|
273,868,880
|
|
|
|
|
|
|
$
|
331,109,428
|
|
$
|
315,970,421
|
|
Nature of operations (Note 1)
Commitments (Note 30)
Subsequent events (Note 31)
Approved on behalf of the Board:
|
“John Cervini”
|
|
“Cole Cacciavillani”
|
|
Signed: Director
|
|
Signed: Director
|
The accompanying notes are an integral part of these consolidated financial statements
2
Aphria Inc.
Condensed Interim Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
|
|
|
|
|
For the three months ended
|
|
|
|
|
|
|
August 31
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
Revenue
|
|
|
|
$
|
6,120,359
|
|
$
|
4,375,512
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
7
|
|
1,346,162
|
|
1,053,916
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
|
|
4,774,197
|
|
3,321,596
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
7
|
|
1,135,535
|
|
1,339,538
|
|
|
Fair value adjustment on growth of biological assets
|
|
8
|
|
(4,265,779
|
)
|
(1,800,087
|
)
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
7,904,441
|
|
3,782,145
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
23
|
|
1,735,217
|
|
959,592
|
|
|
Share-based compensation
|
|
24
|
|
2,508,901
|
|
203,095
|
|
|
Selling, marketing and promotion
|
|
|
|
1,947,586
|
|
1,380,647
|
|
|
Amortization
|
|
|
|
238,648
|
|
201,670
|
|
|
Research and development
|
|
|
|
90,367
|
|
249,313
|
|
|
|
|
|
|
6,520,719
|
|
2,994,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,383,722
|
|
787,828
|
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
|
|
292,478
|
|
—
|
|
|
Foreign exchange loss
|
|
|
|
(150,702
|
)
|
—
|
|
|
Loss on marketable securities
|
|
5
|
|
(1,746,367
|
)
|
—
|
|
|
(Loss) gain on sale of capital assets
|
|
11
|
|
(7,260
|
)
|
11,367
|
|
|
Gain on dilution of ownership in equity accounted investee
|
|
14
|
|
7,551,158
|
|
—
|
|
|
Loss from equity accounted investee
|
|
14
|
|
(8,840,264
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
14
|
|
233,333
|
|
—
|
|
|
Finance income, net
|
|
25
|
|
479,719
|
|
96,074
|
|
|
Unrealized gain on embedded derivatives
|
|
13
|
|
532,750
|
|
—
|
|
|
Unrealized gain on long-term investments
|
|
26
|
|
19,081,556
|
|
—
|
|
|
|
|
|
|
17,426,401
|
|
107,441
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
18,810,123
|
|
895,269
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
4
|
|
3,769,955
|
|
—
|
|
|
Net income
|
|
|
|
15,040,168
|
|
895,269
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Other comprehensive loss from equity accounted investee
|
|
14
|
|
(1,320,398
|
)
|
—
|
|
|
Net comprehensive income
|
|
|
|
$
|
13,719,770
|
|
$
|
895,269
|
|
|
Weighted average number of common shares
—
basic
|
|
|
|
138,711,674
|
|
73,784,801
|
|
|
Weighted average number of common shares
—
diluted
|
|
|
|
145,731,500
|
|
82,075,224
|
|
|
Earnings per share — basic
|
|
27
|
|
$
|
0.11
|
|
$
|
0.01
|
|
|
Earnings per share — diluted
|
|
27
|
|
$
|
0.10
|
|
$
|
0.01
|
|
The accompanying notes are an integral part of these consolidated financial statements
3
Aphria Inc.
Condensed Interim Consolidated Statements of Changes in Equity (Deficiency)
(Unaudited)
|
|
|
|
|
|
|
|
|
Share-based
|
|
Accumulated other
|
|
Retained
|
|
|
|
|
|
|
Number of common
|
|
Share capital
|
|
Warrants
|
|
payment reserve
|
|
comprehensive
|
|
earnings
|
|
|
|
|
|
|
shares
|
|
(Note 19)
|
|
(Note 20)
|
|
(Note 21)
|
|
income (loss)
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,916,880
|
|
$
|
693,675
|
|
$
|
1,723,903
|
|
$
|
—
|
|
$
|
(8,320,964
|
)
|
$
|
35,013,494
|
|
|
Share issuance
—
August 2016 bought deal
|
|
17,250,000
|
|
31,968,824
|
|
—
|
|
—
|
|
—
|
|
—
|
|
31,968,824
|
|
|
Share issuance
—
warrants exercised
|
|
2,626,253
|
|
3,874,568
|
|
(105,534
|
)
|
—
|
|
—
|
|
—
|
|
3,769,034
|
|
|
Share issuance
—
options exercised
|
|
266,353
|
|
289,872
|
|
—
|
|
(69,571
|
)
|
—
|
|
—
|
|
220,301
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
203,095
|
|
—
|
|
—
|
|
203,095
|
|
|
Net income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
895,269
|
|
895,269
|
|
|
Balance at August 31, 2016
|
|
90,196,539
|
|
$
|
77,050,144
|
|
$
|
588,141
|
|
$
|
1,857,427
|
|
$
|
—
|
|
$
|
(7,425,695
|
)
|
$
|
72,070,017
|
|
|
|
|
|
|
|
|
|
|
Share-based
|
|
Accumulated other
|
|
Retained
|
|
|
|
|
|
|
Number of common
|
|
Share capital
|
|
Warrants
|
|
payment reserve
|
|
comprehensive
|
|
earnings
|
|
|
|
|
|
|
shares
|
|
(Note 19)
|
|
(Note 20)
|
|
(Note 21)
|
|
loss
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,316,548
|
|
$
|
444,912
|
|
$
|
3,229,929
|
|
$
|
—
|
|
$
|
(4,122,509
|
)
|
$
|
273,868,880
|
|
|
Share issuance —
warrants exercised
|
|
228,467
|
|
343,951
|
|
—
|
|
—
|
|
—
|
|
—
|
|
343,951
|
|
|
Share issuance —
options exercised
|
|
31,419
|
|
37,747
|
|
—
|
|
(19,712
|
)
|
—
|
|
—
|
|
18,035
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
2,440,112
|
|
—
|
|
—
|
|
2,440,112
|
|
|
Share issuance costs incurred
|
|
—
|
|
(13,596
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(13,596
|
)
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,603
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,603
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
112,500
|
|
—
|
|
—
|
|
—
|
|
—
|
|
112,500
|
|
|
Net income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,320,398
|
)
|
15,040,168
|
|
13,719,770
|
|
|
Balance at August 31, 2017
|
|
138,888,590
|
|
$
|
274,800,753
|
|
$
|
444,912
|
|
$
|
5,650,329
|
|
$
|
(1,320,398
|
)
|
$
|
10,917,659
|
|
$
|
290,493,255
|
|
The accompanying notes are an integral part of these consolidated financial statements
4
Aphria Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
|
|
$
|
15,040,168
|
|
$
|
895,269
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
4
|
|
3,769,955
|
|
—
|
|
|
Fair value adjustment on sale of inventory
|
|
7
|
|
1,135,535
|
|
1,339,538
|
|
|
Fair value adjustment on growth of biological assets
|
|
8
|
|
(4,265,779
|
)
|
(1,800,087
|
)
|
|
Loss on sale of marketable securities
|
|
5
|
|
131,000
|
|
—
|
|
|
Unrealized loss on marketable securities
|
|
5
|
|
1,615,367
|
|
—
|
|
|
Unrealized foreign exchange gain on notes receivable
|
|
|
|
(2,064
|
)
|
—
|
|
|
Unrealized foreign exchange gain on convertible notes receivable
|
|
13
|
|
(6,200
|
)
|
—
|
|
|
Amortization
|
|
11,12
|
|
627,771
|
|
454,878
|
|
|
Loss (gain) on sale of capital assets
|
|
11
|
|
7,260
|
|
(11,367
|
)
|
|
Disposition and usage of bearer plants
|
|
11
|
|
2,761
|
|
—
|
|
|
Accrued interest on convertible note receivable
|
|
13
|
|
(14,426
|
)
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
13
|
|
(532,750
|
)
|
—
|
|
|
Loss from equity accounted investee
|
|
14
|
|
8,840,264
|
|
—
|
|
|
Gain on dilution of ownership in equity accounted investee
|
|
14
|
|
(7,551,158
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
14
|
|
(233,333
|
)
|
—
|
|
|
Consulting revenue
|
|
17
|
|
(292,478
|
)
|
—
|
|
|
Amortization of finance fees on long-term debt
|
|
|
|
1,250
|
|
833
|
|
|
Share-based compensation
|
|
24
|
|
2,508,901
|
|
203,095
|
|
|
Unrealized gain on long-term investments
|
|
26
|
|
(19,081,556
|
)
|
—
|
|
|
Change in non-cash working capital
|
|
28
|
|
(5,501,608
|
)
|
444,544
|
|
|
|
|
|
|
(3,801,120
|
)
|
1,526,703
|
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
(13,596
|
)
|
31,968,824
|
|
|
Share capital issued on warrants exercised
|
|
|
|
343,951
|
|
3,769,034
|
|
|
Share capital issued on stock options exercised
|
|
|
|
18,035
|
|
220,301
|
|
|
Advances from related parties
|
|
9
|
|
1,583,079
|
|
195,368
|
|
|
Repayment of amounts due to related parties
|
|
9
|
|
(1,087,455
|
)
|
(195,368
|
)
|
|
Proceeds from long-term debt
|
|
18
|
|
—
|
|
7,825,000
|
|
|
Repayment of long-term debt
|
|
18
|
|
(186,636
|
)
|
(98,837
|
)
|
|
|
|
|
|
657,378
|
|
43,684,322
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Repayment of promissory notes receivable
|
|
|
|
—
|
|
376,569
|
|
|
Investment in capital assets
|
|
11
|
|
(23,694,817
|
)
|
(6,230,625
|
)
|
|
Proceeds from disposal of capital assets
|
|
11
|
|
199,650
|
|
32,823
|
|
|
Investment in intangible assets, net of shares issued
|
|
12
|
|
(9,321
|
)
|
(1,285,042
|
)
|
|
Notes advanced
|
|
10
|
|
(832,834
|
)
|
—
|
|
|
Convertible notes advanced
|
|
13
|
|
(14,001,000
|
)
|
—
|
|
|
Investment in marketable securities
|
|
5
|
|
(5,000,000
|
)
|
—
|
|
|
Proceeds from disposal of marketable securities
|
|
5
|
|
10,099,000
|
|
—
|
|
|
Investment in long-term investments
|
|
15
|
|
(5,297,496
|
)
|
(1,125,000
|
)
|
|
|
|
|
|
(38,536,818
|
)
|
(8,231,275
|
)
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
|
(41,680,560
|
)
|
36,979,750
|
|
|
Cash and cash equivalents, beginning of the period
|
|
|
|
79,910,415
|
|
16,472,664
|
|
|
Cash and cash equivalents, end of the period:
|
|
|
|
$
|
38,229,855
|
|
$
|
53,452,414
|
|
The accompanying notes are an integral part of these consolidated financial statements
5
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). The registered office is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These consolidated financial statements were approved by the Company’s Board of Directors on October 12, 2017.
2.
Basis of preparation
(a)
Statement of compliance
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.
(b)
Basis of measurement
These financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management is Canadian dollars. These consolidated financial statements are presented in Canadian dollars.
(d)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
|
Wholly owned subsidiaries
|
Jurisdiction of incorporation
|
|
Pure Natures Wellness Inc. (o/a Aphria)
|
Ontario
|
|
Aphria (Arizona) Inc.
|
Arizona
|
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the
6
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
entity. Unrealized losses are eliminated to the extent of the gains, but only to the extent that there is no evidence of impairment.
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
(e)
Amalgamation
Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
(f)
Interest in equity-accounted investees
The Company’s interest in equity accounted investees is comprised of its interest in associates.
|
Equity accounted investee
|
Jurisdiction of incorporation
|
|
Liberty Health Sciences Inc.
|
British Columbia
|
|
(formerly DFMMJ Investments, Ltd.)
|
|
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity accounted investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in the annual audited financial statements.
3.
Significant accounting policies
These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2017.
7
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
New standards applicable during the reporting period
IFRS 5
—
Non-current Assets Held for Sale; Assets and liabilities held for disposal are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.
New standards and interpretations issued but not yet adopted:
IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company is assessing the impact of the standard on its convertible notes receivable and its investments where it holds less than significant influence. The Company has determined that there will no impact on cash and cash equivalents, marketable securities, accounts receivable, other receivables, promissory notes receivable, accounts payable and accrued liabilities and promissory notes payable. Convertible notes receivable are currently recorded as available for sale. Investments are currently recorded at fair value. Upon implementation of IFRS 9, these investments will need to be recorded at fair value and the Company is currently assessing available information and methods to determine their fair value. Based on investments already reflected at fair value, no significant impact is anticipated from the new standard.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the period of the adoption of the new standard.
The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.
IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard on its investees with a focus on consulting contracts and royalty fees.
The Company is still considering the impact on its customer loyalty programme, which is currently under reconsideration. The new standard will require that the total consideration received be allocated to the points and goods based on relative stand-alone selling prices rather than based on the residual method.
The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.
IFRS 16
—
Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening
8
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of income and comprehensive income to improve clarity.
4.
Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Income before income taxes
|
|
$
|
18,810,123
|
|
$
|
895,269
|
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Expected income tax recovery at combined basic federal and provincial tax rate
|
|
4,984,683
|
|
237,246
|
|
|
|
|
|
|
|
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Non-deductible share-based compensation and other expenses
|
|
(1,194,497
|
)
|
59,929
|
|
|
Utilization of tax attributes not previously recognized
|
|
—
|
|
(978,718
|
)
|
|
Other
|
|
(20,231
|
)
|
(80,651
|
)
|
|
Tax assets not recognized
|
|
—
|
|
762,194
|
|
|
|
|
$
|
3,769,955
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Income tax expense is comprised of:
|
|
|
|
|
|
|
Current
|
|
$
|
365,148
|
|
$
|
—
|
|
|
Future
|
|
3,404,807
|
|
—
|
|
|
|
|
$
|
3,769,955
|
|
$
|
—
|
|
The following table summarizes the components of deferred tax:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
1,361,332
|
|
$
|
1,312,849
|
|
|
Capital loss carry forward
|
|
397,719
|
|
380,362
|
|
|
Share issuance and financing fees
|
|
3,254,859
|
|
3,448,332
|
|
|
Other
|
|
50,058
|
|
34,138
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(178,040
|
)
|
(164,027
|
)
|
|
Intangible assets in excess of tax costs
|
|
(165,998
|
)
|
(193,890
|
)
|
|
Unrealized gain
|
|
(3,387,875
|
)
|
(914,019
|
)
|
|
Biological assets and inventory in excess of tax costs
|
|
(1,418,689
|
)
|
(589,175
|
)
|
|
Net deferred tax (liabilities) assets
|
|
$
|
(86,634
|
)
|
$
|
3,314,570
|
|
9
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
5.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating
|
|
|
|
Maturity
|
|
August 31,
|
|
May 31,
|
|
|
|
|
at purchase
|
|
Interest rate
|
|
date
|
|
2017
|
|
2017
|
|
|
Guaranteed Investment Certificate (GIC):
|
|
|
|
|
|
|
|
|
|
|
|
|
Vancouver City Savings Credit Union
|
|
|
|
1.150
|
%
|
06/08/18
|
|
$
|
5,013,233
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Molson Coors Brewing Company
|
|
BBB-
|
|
3.950
|
%
|
10/06/17
|
|
1,119,919
|
|
1,116,524
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.320
|
%
|
12/19/17
|
|
2,023,830
|
|
1,988,184
|
|
|
Goldman Sachs & Co. LLC
|
|
A+
|
|
3.375
|
%
|
02/01/18
|
|
—
|
|
5,078,194
|
|
|
The Manufacturer’s Life Insurance Company
|
|
AA-
|
|
2.819
|
%
|
02/26/18
|
|
1,458,832
|
|
1,471,818
|
|
|
Canadian Western Bank
|
|
A-
|
|
2.531
|
%
|
03/22/18
|
|
3,047,200
|
|
3,038,997
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
08/02/18
|
|
1,018,702
|
|
1,036,613
|
|
|
Sobeys Inc.
|
|
BB+
|
|
3.520
|
%
|
08/08/18
|
|
3,030,672
|
|
3,078,141
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
2.770
|
%
|
12/11/18
|
|
—
|
|
5,179,711
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
01/14/19
|
|
1,525,639
|
|
1,534,717
|
|
|
Sun Life Financial Inc.
|
|
A
|
|
2.770
|
%
|
05/13/19
|
|
3,053,076
|
|
3,063,816
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
06/14/19
|
|
5,111,921
|
|
5,206,828
|
|
|
Canadian Natural Resources Ltd.
|
|
BBB+
|
|
3.050
|
%
|
06/19/19
|
|
2,041,744
|
|
2,053,607
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,020,254
|
|
1,027,752
|
|
|
Laurentian Bank of Canada
|
|
BBB
|
|
2.500
|
%
|
01/23/20
|
|
6,032,347
|
|
6,098,888
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
02/03/20
|
|
3,973,131
|
|
4,007,550
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
03/09/20
|
|
5,352,461
|
|
5,394,630
|
|
|
Central 1 Credit Union
|
|
A
|
|
1.870
|
%
|
03/16/20
|
|
4,997,072
|
|
5,020,565
|
|
|
Choice Properties REIT
|
|
BBB
|
|
3.600
|
%
|
04/20/20
|
|
5,202,690
|
|
5,236,870
|
|
|
Penske Truck Leasing Co., L.P.
|
|
BBB
|
|
2.950
|
%
|
06/12/20
|
|
5,111,419
|
|
5,145,483
|
|
|
Westcoast Energy Inc.
|
|
BBB+
|
|
4.570
|
%
|
07/02/20
|
|
5,342,167
|
|
5,429,820
|
|
|
Bank of Montreal (USD)
|
|
A+
|
|
1.400
|
%
|
04/10/18
|
|
3,780,666
|
|
4,051,775
|
|
|
Citigroup Inc. (USD)
|
|
BBB+
|
|
2.050
|
%
|
12/17/18
|
|
3,790,925
|
|
4,081,546
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
04/15/19
|
|
3,775,989
|
|
4,039,998
|
|
|
Wells Fargo & Company (USD)
|
|
A
|
|
2.150
|
%
|
01/30/20
|
|
3,677,531
|
|
3,964,760
|
|
|
|
|
|
|
|
|
|
|
$
|
80,501,420
|
|
$
|
87,346,787
|
|
The cost of marketable securities as at August 31, 2017 was $ 78,064,435 (May 31, 2017 — $87,138,224). During the period, the company divested of certain marketable securities in its Canadian portfolio for proceeds of $10,099,000, resulting in a loss of $131,000 on disposal (2016 - $nil), and re-invested $ 5,000,000 in a short-term GIC. During the period, the Company recognized a loss of $1,746,367 on its marketable securities portfolio, of which $1,615,367 (2016 - $nil) represented unrealized fair value adjustments.
6.
Other receivables
Other receivables are comprised of:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
HST receivable
|
|
$
|
5,361,703
|
|
$
|
3,675,188
|
|
|
Accrued interest
|
|
493,063
|
|
700,827
|
|
|
Credit card receivable
|
|
123,923
|
|
103,004
|
|
|
Other
|
|
221,817
|
|
32,620
|
|
|
|
|
$
|
6,200,506
|
|
$
|
4,511,639
|
|
10
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
7.
Inventory
Inventory is comprised of:
|
|
|
Capitalized
|
|
Fair value
|
|
August 31,
|
|
May 31,
|
|
|
|
|
Cost
|
|
adjustment
|
|
2017
|
|
2017
|
|
|
Harvested cannabis
|
|
$
|
943,904
|
|
$
|
1,761,552
|
|
|
$
|
2,705,456
|
|
$
|
2,506,963
|
|
|
Harvested cannabis trim
|
|
394,434
|
|
849,624
|
|
|
1,244,058
|
|
420,322
|
|
|
Cannabis oil
|
|
586,192
|
|
987,327
|
|
|
1,573,519
|
|
682,056
|
|
|
Packaging and supplies
|
|
445,470
|
|
—
|
|
|
445,470
|
|
277,266
|
|
|
|
|
$
|
2,370,000
|
|
$
|
3,598,503
|
|
|
$
|
5,968,503
|
|
$
|
3,886,607
|
|
During the period, the Company recorded $1,346,162 (2016 - $1,053,916) related to production costs. Included in production costs for the period ended August 31, 2017 is $40,915 of cannabis oil conversion costs (2016 - $14,940) and $36,966 related to the cost of accessories (2016 - $nil). Included in cost of sales is amortization of $389,123 (2016 - $253,208) related to capital assets utilized in production. During the period, the Company expensed $1,135,535 (2016
—
$1,339,538) of fair value adjustments on the sale of its biological assets included in inventory.
The Company holds 721.5 kilograms of harvested cannabis (May 31, 2017
—
668.5 kgs), 414.7 kilograms of harvested cannabis trim (May 31, 2017
—
140.1 kgs) and 2,517.6 litres of cannabis oils or 419.1 kilograms equivalent (May 31, 2017
—
1,091.3 litres or 181.9 kilograms equivalent) at August 31, 2017.
8.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance as at May 31, 2017
|
|
$
|
1,362,749
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
4,265,779
|
|
|
Production costs capitalized
|
|
1,434,869
|
|
|
Transferred to inventory upon harvest
|
|
(3,610,566
|
)
|
|
Transferred to capital assets
|
|
(18,326
|
)
|
|
Balance as at August 31, 2017
|
|
$
|
3,434,505
|
|
The Company values medical cannabis plants at cost from the date of initial clipping from mother plants until the end of the twelfth week of its growing cycle. Measurement of the biological asset at fair value less costs to sell and costs to complete begins at the thirteenth week until harvest. The Company has determined the fair value less costs to sell of harvested cannabis to be $3.75 per gram. The Company has determined the fair value less costs to sell of its harvested cannabis trim to be $3.00 per gram, upon harvest.
The net effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $4,265,779 during the three months ended August 31, 2017 (2016
—
increase of $1,800,087). In determining the fair value of biological assets, management is required to make several estimates, including: the expected cost required to grow the cannabis up to the point of harvest; harvesting costs; selling costs; sales price; and, expected yields for the cannabis plant. All of which represent Level 3 on the fair value hierarchy. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
11
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
9.
Related party transactions
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its operating expenditures. The balance owing from related parties as at August 31, 2017 was $nil (May 31, 2017 - $463,916). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the three months ended August 31, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $38,595 (2016 - $195,368). Included in this amount was rent of $8,178 charged during the three months ended August 31, 2017 (2016 - $24,855).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.), a related party through an equity investment.
|
|
|
Amount
|
|
|
Balance due to (from) related parties as at May 31, 2017
|
|
$
|
(463,916
|
)
|
|
Related party charges in the period
|
|
38,595
|
|
|
Payments to related parties in the period
|
|
(38,595
|
)
|
|
Non-cash payments made on behalf of a related party in the period
|
|
(31,708
|
)
|
|
Payments made on behalf of related parties in the period
|
|
(1,048,860
|
)
|
|
Repayments made by related parties in the period
|
|
1,544,484
|
|
|
Balance due to (from) related parties as at August 31, 2017
|
|
$
|
—
|
|
During the prior year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6.1 million. The purchase price was allocated as follows: (i) $1.3 million to land; (ii) $3.55 million to greenhouse infrastructure; and, (iii) $1.25 million to licenses and permits
—
intangible assets.
Key management personnel compensation was comprised of:
|
|
|
For the three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Salaries
|
|
$
|
306,030
|
|
$
|
212,309
|
|
|
Short-term employment benefits (included in office and general)
|
|
18,105
|
|
11,015
|
|
|
Share-based compensation
|
|
1,758,422
|
|
95,979
|
|
|
|
|
$
|
2,082,557
|
|
$
|
319,303
|
|
Directors and officers of the Company control 12.8% or 17,832,066 of the voting shares of the Company.
12
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
10.
Note receivable
|
|
|
May 31,
|
|
|
|
|
|
August 31,
|
|
|
|
|
2017
|
|
Additions
|
|
Payments
|
|
2017
|
|
|
Copperstate Farms Investors, LLC - $666,000 USD ($832,834), non-interest bearing, no set terms of repayment
|
|
$
|
—
|
|
$
|
834,898
|
|
$
|
—
|
|
$
|
834,898
|
|
|
|
|
$
|
—
|
|
$
|
834,898
|
|
$
|
—
|
|
$
|
834,898
|
|
11.
Capital assets
|
|
|
|
|
Greenhouse
|
|
Bearer
|
|
|
|
Leasehold
|
|
Construction
|
|
Total capital
|
|
|
|
|
Land
|
|
infrastructure
|
|
plants
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,499,528
|
|
$
|
4,812,153
|
|
$
|
64,806
|
|
$
|
8,376,487
|
|
|
Additions
|
|
10,724,551
|
|
4,018,080
|
|
112,225
|
|
1,699,989
|
|
16,129
|
|
49,957,556
|
|
66,528,530
|
|
|
Transfers
|
|
104,283
|
|
12,151,836
|
|
—
|
|
173,834
|
|
(4,565,987
|
)
|
(7,863,966
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(66,613
|
)
|
(32,823
|
)
|
—
|
|
—
|
|
(99,436
|
)
|
|
At May 31, 2017
|
|
10,828,834
|
|
16,169,916
|
|
45,612
|
|
5,340,528
|
|
262,295
|
|
42,158,396
|
|
74,805,581
|
|
|
Additions
|
|
1,548,713
|
|
—
|
|
18,326
|
|
624,654
|
|
—
|
|
21,503,124
|
|
23,694,817
|
|
|
Transfers
|
|
(3,160,426
|
)
|
169,362
|
|
—
|
|
—
|
|
—
|
|
(169,362
|
)
|
(3,160,426
|
)
|
|
Disposals
|
|
—
|
|
(206,910
|
)
|
(2,761
|
)
|
—
|
|
—
|
|
—
|
|
(209,671
|
)
|
|
At Aug 31, 2017
|
|
$
|
9,217,121
|
|
$
|
16,132,368
|
|
$
|
61,177
|
|
$
|
5,965,182
|
|
$
|
262,295
|
|
$
|
63,492,158
|
|
$
|
95,130,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
554,401
|
|
$
|
512,866
|
|
|
|
$
|
1,067,267
|
|
|
Amortization
|
|
—
|
|
457,891
|
|
—
|
|
717,207
|
|
74,435
|
|
—
|
|
1,249,533
|
|
|
Transfers
|
|
—
|
|
524,749
|
|
—
|
|
—
|
|
(524,749
|
)
|
—
|
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(11,367
|
)
|
—
|
|
—
|
|
(11,367
|
)
|
|
At May 31, 2017
|
|
—
|
|
982,640
|
|
—
|
|
1,260,241
|
|
62,552
|
|
—
|
|
2,305,433
|
|
|
Amortization
|
|
—
|
|
206,791
|
|
—
|
|
252,345
|
|
7,528
|
|
—
|
|
466,664
|
|
|
At Aug 31, 2017
|
|
$
|
—
|
|
$
|
1,189,431
|
|
$
|
—
|
|
$
|
1,512,586
|
|
$
|
70,080
|
|
$
|
—
|
|
$
|
2,772,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,945,127
|
|
$
|
4,299,287
|
|
$
|
64,806
|
|
$
|
7,309,220
|
|
|
At May 31, 2017
|
|
$
|
10,828,834
|
|
$
|
15,187,276
|
|
$
|
45,612
|
|
$
|
4,080,287
|
|
$
|
199,743
|
|
$
|
42,158,396
|
|
$
|
72,500,148
|
|
|
At Aug 31, 2017
|
|
$
|
9,217,122
|
|
$
|
14,942,937
|
|
$
|
61,177
|
|
$
|
4,452,596
|
|
$
|
192,215
|
|
$
|
63,492,158
|
|
$
|
92,358,204
|
|
During the period, the Company sold assets that were not yet in use prior to disposal with a cost of $206,910 and a net book value of $206,910, for proceeds of $199,650, resulting in a loss on sale of capital assets of $7,260.
On August 9, 2017, the Company entered into a series of agreements with Nuuvera Corp. (“Nuuvera”). Under the terms of one of the agreements, the Company agreed to sell 100 acres of land owned on Mersea Road 8 Leamington, Ontario in exchange for $4,000,000. The agreement is subject to standard closing conditions, including the severance of the 100 acres from the overall site owned by the Company on Mersea Road 8, Leamington, Ontario. The Company expects the transaction to close before the fiscal year-end. As a result of the agreement, the Company reclassified $3,160,426 of cost included in land to assets available for sale.
13
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
12.
Intangible assets
|
|
|
|
|
|
|
|
|
Tokyo Smoke
|
|
|
|
Total
|
|
|
|
|
Corporate
|
|
Licenses &
|
|
Patents &
|
|
licensing
|
|
CannWay
|
|
intangible
|
|
|
|
|
website
|
|
permits
|
|
trademarks
|
|
agreement
|
|
brand
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
161,700
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,428,000
|
|
$
|
4,589,700
|
|
|
Additions
|
|
56,120
|
|
1,250,000
|
|
—
|
|
459,480
|
|
—
|
|
1,765,600
|
|
|
At May 31, 2017
|
|
217,820
|
|
1,250,000
|
|
—
|
|
459,480
|
|
4,428,000
|
|
6,355,300
|
|
|
Additions
|
|
—
|
|
—
|
|
9,321
|
|
—
|
|
—
|
|
9,321
|
|
|
At August 31, 2017
|
|
$
|
217,820
|
|
$
|
1,250,000
|
|
$
|
9,321
|
|
$
|
459,480
|
|
$
|
4,428,000
|
|
$
|
6,364,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
87,520
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
184,500
|
|
$
|
272,020
|
|
|
Amortization
|
|
67,845
|
|
152,879
|
|
—
|
|
56,939
|
|
414,380
|
|
692,043
|
|
|
Impairment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500,000
|
|
3,500,000
|
|
|
At May 31, 2017
|
|
155,365
|
|
152,879
|
|
—
|
|
56,939
|
|
4,098,880
|
|
4,464,063
|
|
|
Amortization
|
|
13,803
|
|
41,894
|
|
156
|
|
22,974
|
|
82,280
|
|
161,107
|
|
|
At August 31, 2017
|
|
$
|
169,168
|
|
$
|
194,773
|
|
$
|
156
|
|
$
|
79,913
|
|
$
|
4,181,160
|
|
$
|
4,625,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
74,180
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,243,500
|
|
$
|
4,317,680
|
|
|
At May 31, 2017
|
|
$
|
62,455
|
|
$
|
1,097,121
|
|
$
|
—
|
|
$
|
402,541
|
|
$
|
329,120
|
|
$
|
1,891,237
|
|
|
At August 31, 2017
|
|
$
|
48,652
|
|
$
|
1,055,227
|
|
$
|
9,165
|
|
$
|
379,567
|
|
$
|
246,840
|
|
$
|
1,739,451
|
|
13.
Convertible notes receivable
|
|
|
Notes receivable
|
|
Embedded derivatives
|
|
|
|
|
August 31,
|
|
May 31,
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,374,974
|
|
$
|
1,360,548
|
|
$
|
705,750
|
|
$
|
173,000
|
|
|
Copperstate Farms Investors, LLC
|
|
2,507,200
|
|
—
|
|
—
|
|
—
|
|
|
HydRx Farms Ltd. (d/b/a Scientus Pharma)
|
|
7,050,000
|
|
—
|
|
4,450,000
|
|
—
|
|
|
|
|
10,932,174
|
|
1,360,548
|
|
5,155,750
|
|
173,000
|
|
|
Deduct
—
principal portion included in current assets
|
|
(2,507,200
|
)
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
8,424,974
|
|
$
|
1,360,548
|
|
$
|
5,155,750
|
|
$
|
173,000
|
|
CannaRoyalty Corp.
On October 19, 2016, Aphria loaned $1,500,000 to CannaRoyalty Corp. (“CR”) as a convertible debenture. The convertible debenture bears interest at 5%, paid annually, matures in three years and includes the right to convert the debenture into common shares of CR at $2.00 per common share at any time before maturity. CR maintains the option of forced conversion of the convertible debenture if the common shares of CR trade on a stock exchange at a value of $4.00 or more.
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. The fair value of the derivative asset related to the convertible note is $705,750 at August 31, 2017.
During the period, the Company’s note receivable from CR increased by $14,426 representing the recognition of accrued interest on the note and the embedded derivative, representing the fair value of the conversion feature on the note, increased by $532,750.
As at August 31, 2017, the convertible note receivable totalled $2,080,724.
14
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
Copperstate Farms Investors, LLC
Effective August 31, 2017, the Company lent Copperstate Farms Investors, LLC (“CSF”) $2,000,000 USD ($2,501,000 CAD) in exchange for a senior secured convertible loan. The convertible debenture bears interest at 9%, is due on May 15, 2018 (“Maturity Date”). The loan is pre-payable at any time by CSF, however no principal payments are due prior to the Maturity Date. If at least $500,000 USD of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for $500,000 USD plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at $500 USD per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at $500 USD per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. Since the option to settle payments in membership units is solely at the discretion of CSF, no embedded derivative has been recognized.
As at August 31, 2017, the convertible note receivable totalled $2,507,200.
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria lent $11,500,000 to Scientus Pharma (“SP”) as a convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days.
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. The fair value of the derivative asset related to the convertible note is $4,450,000 at August 31, 2017.
As at August 31, 2017, the convertible note receivable totalled $11,500,000.
The fair value for the embedded derivatives was determined using the Black Scholes option pricing model using the following assumptions: the risk-free rate of 1.12-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
14.
Interest in equity accounted investee
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
Associated company
|
|
|
|
|
|
|
Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.)
|
|
$
|
27,430,588
|
|
$
|
28,376,092
|
|
|
|
|
|
|
|
|
|
|
Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.)
On April 5, 2017 Aphria announced a strategic investment in DFMMJ Investments, Ltd. (“DFMMJ”), where DFMMJ, through a subsidiary, acquired all or substantially all of the assets of Chestnut Hill Tree Farm LLC (“Chestnut”) and would subsequently amalgamate into a subsidiary of SecureCom Mobile Inc. (“SecureCom”), as part of a business combination. As part of the steps involved in the business combination, Aphria first exchanged rights to use its intellectual property, Aphria’s Know-How-System, to DFMMJ as part of a licensing agreement in exchange for common shares, which through an arm’s length negotiation, was determined to have a fair value of $5,000,000. As a result of this in-kind transaction, Aphria was issued 192,400,000 common shares in DFMMJ. Aphria is
15
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
deemed to have significant influence over DFMMJ due to its resulting equity interest (44.0%, at April 5, 2017), whereby the investment is valued under the equity method. For accounting purposes, the Company recorded the transaction as deferred revenue of $2,800,000, representing its non-owned interest in the equity accounted investee. Management determined that the intellectual property would have a useful life of 3 years and therefore the deferred income will be recognized straight-line over its remaining useful life. For the reporting period ended August 31, 2017, the Company recognized $233,333 of the deferred income.
On May 24, 2017, the Company released $25,311,794, comprised of $625,000 CAD and $18,340,857 USD, which itself was comprised of $24,375,000 CAD converted into USD in March 2017 as required in the business combination agreement ($24,686,794 CAD), from escrow to DFMMJ, after satisfaction of the escrow release conditions. In addition, the Company incurred $53,898 of transaction fees related to the investment. In exchange, the Company received 120,192,308 common shares of DFMMJ. Concurrently, DFMMJ issued a further 120,192,308 common shares to third parties in exchange for $25,000,000 CAD in cash. As a result of these transactions, the Company owned 312,592,308 common shares in DFMMJ, representing approximately 46.1% of DFMMJ’s issued and outstanding common shares, at May 31, 2017.
On July 20, 2017, as part of the business combination DFMMJ received an investment from a third party of $9,149,997 for 43,990,370 subscription shares at $ 0.208 per share. As a result, the Company’s interest in DFMMJ was diluted from 46.1% to 43.3%, with the Company realizing a dilution gain of $1,961,383 from the change in equity interest.
Further on July 20 2017, DFMMJ completed its business combination with SecureCom. After amalgamation, SecureCom changed its name to Liberty Health Sciences Inc. (“LHS”) and remained the resulting issuer. Management determined the Company should account for its investment in the newly consolidated LHS using the equity method as a continuation of the treatment previously applied to its investment in DFMMJ. Prior to the transaction, the Company held 8,000,000 shares directly in SecureCom, which have been historically treated as a Level 1 Long-Term Investment. As a result of the business combination, the 130,044,447 total outstanding common shares of SecureCom were added to the share base of LHS, and the fair value of the Company’s investment in SecureCom ($1,664,000) was added to the carrying value of its interest in the equity accounted investee. Upon completion of the business combination, all 852,063,664 outstanding shares were consolidated for Consideration Shares in LHS. As a result, the Company held 320,592,308 (37.6%) of the total outstanding shares of LHS. Due to the dilution of ownership in the combined entity, the Company recognized a further unrealized gain on dilution with respect to the outstanding shares owned by third parties of $5,589,775 and a corresponding increase to the cost base of its investment by the same value.
For the three months ended August 31, 2017, the Company reported a total gain on dilution of ownership in equity accounted investee of $7,551,158 (2016 - $nil). Upon the completion of the transaction, LHS consolidated its issued and outstanding common shares, broker warrants and existing stock options on the basis of three pre-consolidation common shares held for one post-consolidation common share. As a result of the three-for-one exchange, Aphria now holds 106,864,102 common shares of LHS, representing a 37.6% ownership, where no new shares were issued and there was no further dilution of ownership.
For the four months ended August 31, 2017 for the investee, LHS reported a net loss of $23,492,596 and a net comprehensive loss of $27,001,494 on its financial statements. In accordance with the equity method, Aphria recorded a loss of $8,840,264 and an other comprehensive loss of $1,320,398 from its investee relative to its ownership of the outstanding common shares at the time.
16
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements. The table also reconciles the summarized financial information to the carrying amount of the Company’s interest as at August 31, 2017:
|
|
|
August 31,
|
|
April 30,
|
|
|
|
|
2017
|
|
2017
|
|
|
Current assets
|
|
$
|
12,994,492
|
|
$
|
5,723,960
|
|
|
Non-current assets
|
|
50,612,784
|
|
5,000,000
|
|
|
Current liabilities
|
|
(433,115
|
)
|
—
|
|
|
Non-current liabilities
|
|
(20,457
|
)
|
—
|
|
|
Net assets
|
|
63,153,704
|
|
10,723,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening net assets
|
|
56,438,400
|
|
—
|
|
|
Intangible asset contributed
|
|
—
|
|
5,000,000
|
|
|
Cash contributions, net of share issuance costs
|
|
5,987,404
|
|
50,960,200
|
|
|
Share-based payments
|
|
663,242
|
|
—
|
|
|
Contributions on business combination
|
|
27,066,152
|
|
—
|
|
|
Net comprehensive (loss) income for the reporting period
|
|
(27,001,494
|
)
|
478,200
|
|
|
Closing net assets
|
|
63,153,704
|
|
56,438,400
|
|
|
|
|
|
|
|
|
|
Company’s share in %
|
|
37.6
|
%
|
46.1
|
%
|
|
Company’s share of net assets
|
|
$
|
23,764,739
|
|
$
|
26,018,102
|
|
|
Fair value adjustment due to profit elimination
|
|
—
|
|
(2,200,000
|
)
|
|
Goodwill
|
|
3,665,849
|
|
4,557,990
|
|
|
Carrying amount of interest in associate
|
|
$
|
27,430,588
|
|
$
|
28,376,092
|
|
Based on its closing share price of $0.85 as at August 31, 2017, the LHS shares held by Aphria have a fair value of approximately $90,834,487.
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
28,376,092
|
|
$
|
—
|
|
|
Investment
|
|
—
|
|
28,165,692
|
|
|
Transfer of fair value of SecureCom shares on reverse takeover
|
|
1,664,000
|
|
—
|
|
|
Gain on account of dilution of ownership
|
|
7,551,158
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(8,840,264
|
)
|
210,400
|
|
|
Share of reported comprehensive loss
|
|
(1,320,398
|
)
|
—
|
|
|
Closing balance
|
|
$
|
27,430,588
|
|
$
|
28,376,092
|
|
17
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
15.
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
Fair value
|
|
|
|
|
Cost
|
|
|
Fair value
|
|
|
|
Divestiture/
|
|
|
August 31,
|
|
Change in fair
|
|
August 31,
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2017
|
|
Investment
|
|
Transfer
|
|
|
2017
|
|
value
|
|
2017
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,379,488
|
|
|
$
|
1,793,000
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
1,793,000
|
|
$
|
671,000
|
|
$
|
2,464,000
|
|
|
Kalytera Therapeutics, Inc.
|
|
3,014,320
|
|
|
1,110,960
|
|
—
|
|
—
|
|
|
1,110,960
|
|
(339,460
|
)
|
771,500
|
|
|
MassRoots, Inc.
|
|
508,425
|
|
|
562,275
|
|
—
|
|
—
|
|
|
562,275
|
|
(114,867
|
)
|
447,408
|
|
|
SecureCom Mobile Inc.
|
|
520,000
|
|
|
1,664,000
|
|
—
|
|
(1,664,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Tetra Bio-Pharma Inc.
|
|
2,300,000
|
|
|
9,500,000
|
|
—
|
|
—
|
|
|
9,500,000
|
|
(2,500,000
|
)
|
7,000,000
|
|
|
Canabo Medical Inc.
|
|
1,159,426
|
|
|
316,000
|
|
—
|
|
—
|
|
|
316,000
|
|
(16,000
|
)
|
300,000
|
|
|
Scythian Biosciences Inc.
|
|
—
|
|
|
—
|
|
—
|
|
2,000,000
|
|
|
2,000,000
|
|
(527,500
|
)
|
1,472,500
|
|
|
|
|
8,881,659
|
|
|
14,946,235
|
|
—
|
|
336,000
|
|
|
15,282,235
|
|
(2,826,827
|
)
|
12,455,408
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC
|
|
1,755,000
|
|
|
1,755,000
|
|
—
|
|
—
|
|
|
1,755,000
|
|
5,488,018
|
|
7,243,018
|
|
|
Copperstate Farm Investors, LLC
|
|
7,538,940
|
|
|
7,560,000
|
|
1,868,167
|
|
—
|
|
|
9,428,167
|
|
16,700,304
|
|
26,128,471
|
|
|
Resolve Digital Health Inc.
|
|
718,000
|
|
|
1,000,012
|
|
—
|
|
—
|
|
|
1,000,012
|
|
(282,012
|
)
|
718,000
|
|
|
Resolve Digital Health Inc.
|
|
282,000
|
|
|
242,000
|
|
—
|
|
—
|
|
|
242,000
|
|
(22,000
|
)
|
220,000
|
|
|
Green Acre Capital Fund
|
|
300,000
|
|
|
284,331
|
|
400,000
|
|
—
|
|
|
684,331
|
|
24,073
|
|
708,404
|
|
|
Scythian Biosciences Inc.
|
|
2,000,000
|
|
|
2,000,000
|
|
—
|
|
(2,000,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
TS BrandCo Holdings Inc.
|
|
—
|
|
|
—
|
|
1,000,000
|
|
—
|
|
|
1,000,000
|
|
—
|
|
1,000,000
|
|
|
Nuuvera Corp.
|
|
—
|
|
|
—
|
|
2,029,329
|
|
—
|
|
|
2,029,329
|
|
—
|
|
2,029,329
|
|
|
|
|
12,593,940
|
|
|
12,841,343
|
|
5,297,496
|
|
(2,000,000
|
)
|
|
16,038,839
|
|
21,908,383
|
|
38,047,222
|
|
|
|
|
$
|
21,475,599
|
|
|
$
|
27,787,578
|
|
$
|
5,297,496
|
|
$
|
(1,664,000
|
)
|
|
$
|
31,321,074
|
|
$
|
19,081,556
|
|
$
|
50,502,630
|
|
The fair value attached to warrants in both Level 1 and Level 3 were determined using the Black-Scholes option pricing model.
CannaRoyalty Corp.
As of June 1, 2016 the Company had 1,500,000 shares and 750,000 warrants with a cost basis $1,510,200. On September 9, 2016, the Company exercised 750,000 warrants, issued by CR to acquire 750,000 common shares of CR for $1,125,000 and subsequently purchased an additional 250,000 common shares of CR for $500,000 on September 27, 2016. In December 2016, the Company sold 1,300,000 shares for total proceeds of $3,539,050, through three separate transactions, realizing a gain of $1,908,746 on disposal. On May 17, 2017, Aphria sold 100,000 shares for total proceeds of $198,000, realizing a gain of $72,592 on disposal. On August 31, 2017, CR shares closed trading at $2.24. As a result of these transactions, the Company holds 1,100,000 common shares at a cost of $1,379,488, with a fair value of $2,464,000 as at August 31, 2017.
Kalytera Therapeutics, Inc.
On November 7, 2016, Aphria entered into a subscription agreement with Kalytera Therapeutics, Inc. (“Kalytera”). The Company purchased 2,500,000 subscription receipts at a price of $0.40 per receipt for a total of $1,000,000. On December 30, 2016, the Company’s subscription receipts converted into common shares of Kalytera on a one-for-one basis. On January 31, 2017, Aphria subscribed for an additional 2,222,000 common shares of Kalytera for a purchase price of $999,900 pursuant to a private placement which closed on February 7, 2017. On February 22, 2017, the Company purchased an additional 1,450,000 common shares of Kalytera in the secondary market at a price of $0.70 per share for a total of $1,014,420. On August 31, 2017, Kalytera shares closed trading at $0.13 per share. As a result of these transactions, the Company owns 6,172,000 common shares in Kalytera for aggregate costs of $3,014,320 and a fair value of $771,500 as at August 31, 2017.
MassRoots, Inc.
On October 18, 2016, Aphria purchased 500,000 common shares of MassRoots, Inc. (“MassRoots”) for an aggregate purchase price of $250,000 USD ($337,500 CAD) and received warrants to purchase an additional 500,000 common shares at $0.90 USD per common share, expiring October 17, 2019. Subsequent to October 18, 2016, Aphria divested itself of its 500,000 common shares of MassRoots for total proceeds of $600,599,
18
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
realizing a gain of $263,099 on disposal. On March 30, 2017, the Company exercised its 500,000 warrants held in MassRoots for the aggregate price of $450,000 USD ($607,500 CAD) and received an additional 500,000 common shares, subject to a six-month hold under MassRoots long-term incentive plan. During April and May, the Company sold 150,000 common shares for total proceeds of $123,395, realizing a gain of $24,320. On August 31, 2017, MassRoots shares closed trading at $0.42 USD ($0.53 CAD). As a result of these transactions, the Company holds 850,000 shares at a cost of $508,425, with a fair value of $447,408 as at August 31, 2017.
SecureCom Mobile Inc.
On November 23, 2016, Aphria invested $200,000 in SecureCom Mobile Inc. (“SecureCom”) via an unsecured convertible debenture. The debenture bore interest at 12% and was convertible into equity at $0.05 per share, and included the right to a warrant for each share of equity on conversion, priced at $0.08. The warrant expired on December 1, 2019 and the conversion right expired November 20, 2018. On March 31, 2017, the Company exercised its conversion rights under the debenture and received 4,000,000 shares and 4,000,000 warrants priced at $0.08. Concurrently, the Company exercised its warrants at a cost of $320,000 and received an additional 4,000,000 shares.
On July 20, 2017, SecureCom amalgamated with DFMMJ and was re-named LHS. As a result, the Company transferred the fair value of its investment in SecureCom into its investment in LHS recognized as Interest in equity accounted investee (note 14).
Tetra Bio-Pharma Inc.
On December 6, 2016, Aphria purchased 5,000,000 common shares of Tetra Bio-Pharma Inc. (“TBP”) at a price of $0.20 per share for an aggregate purchase price of $1,000,000, pursuant to a private placement. As part of the transaction, Aphria also received 5,000,000 warrants, each for conversion into one common share, at a price of $0.26 per warrant for a period of three years. The warrants were subject to an accelerated expiry if TBP’s shares traded above $0.45 for 30 consecutive trading days at which time the warrants became subject to a 30-day expiry period if not exercised. On March 20, 2017, the Company exercised its 5,000,000 warrants held in TBP for the aggregate price of $1,300,000. On August 31, 2017, TBP shares closed trading at $0.70 per share. As a result of these transactions, the Company owns 10,000,000 common shares at a cost of $2,300,000, with a fair value of $7,000,000 as at August 31, 2017.
Canabo Medical Inc.
On December 23, 2016, Aphria purchased 6,000,000 common shares of Canabo Medical Inc. at a price of $1.40 per common share for an aggregate price of $8,483,333, including issuance costs, pursuant to a private placement. On March 9, 2017, the Company sold 500,000 shares held in Canabo Medical Inc. for net proceeds of approximately $340,000, realizing a loss of $360,000, which were subject to a mandatory 4-month holding period, expiring April 23, 2017. The Company purchased 500,000 shares on March 13, 2017 for an aggregate purchase price of $370,700. In May 2017, the Company sold 5,200,000 shares held in Canabo Medical Inc. for net proceeds of approximately $2,345,000, realizing a loss of $4,649,607 on disposal. On August 31, 2017, Canabo Medical Inc. closed trading at $0.38 per share. As a result of these transactions, the Company owns 800,000 common shares with a cost of $1,159,426 and a fair value of $300,000 as at August 31, 2017.
Scythian Biosciences Inc.
On March 17, 2017, the Company entered into a subscription agreement with Scythian Biosciences Inc. (“Scythian”). The Company purchased 5,000,000 subscription receipts at a price of $0.40 per receipt for $2,000,000. On August 2, 2017, the Company’s subscription receipts converted to common shares. As part of the conversion, Scythian consolidated its shares on a 20:1 basis. On August 8, 2017, Scythian began trading on the TSX-Venture Exchange. On August 31, 2017, Scythian closed trading at $5.89 per share. As a result of these transactions, the Company owns 250,000 common shares at a total cost of $2,000,000, with a fair value of $1,472,500 as at August 31, 2017.
19
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
Copperstate Farms
On October 27, 2016, Aphria entered into an intellectual property (“IP”) transfer agreement with Copperstate Farms, LLC (“Copperstate”). Under the terms of the agreement, Aphria licensed its IP to Copperstate in exchange for 5,000 membership units in Copperstate through a consulting agreement which will be used to forgive payments otherwise owing on a $1,300,000 USD ($1,755,000 CAD) promissory note in eight equal quarterly installments beginning in February 2017 (note 17). On the same date, Aphria made a direct cash contribution of $1,300,000 USD ($1,755,000 CAD) to Copperstate Farms Investors, LLC (“CSF”), the parent company of Copperstate, in return for 2,600 membership units. On December 20, 2016, Aphria made a further investment of $1,300,000 USD ($1,733,940 CAD) in CSF for 2,600 membership units. On March 27, 2017, the Company purchased an additional 6,000 additional membership units for $3,000,000 USD ($4,050,000 CAD). On July 26, 2017, the Company purchased an additional 2,668 additional membership units for $1,334,000 USD ($1,668,167 CAD). The Company contracted an independent third party to perform a formal valuation of both Copperstate and CSF as at August 31, 2017 to determine the fair value of its investment in both entities. As a result of these transactions, the Company owns 5,000 membership units in Copperstate for total cost of $1,300,000 USD ($1,755,000 CAD), with a fair value of $7,243,018 and owns 13,868 membership units in CSF for a total cost of $7,093,936 USD ($9,407,107 CAD) with a fair value of $26,128,471 as at August 31, 2017.
Resolve Digital Health Inc.
On December 1, 2016, Aphria purchased 10,432 common shares of Resolve Digital Health Inc. (“Resolve”) and an equivalent number of common share purchase warrants for gross proceeds of $1,000,000. Following a stock split in January 2017, Aphria now owns 2,000,024 common shares and 2,000,024 common share purchase warrants of Resolve, exercisable at $0.65 per warrant at any time for a period expiring five years from the date of issuance. The warrants contain a forced conversion provision if Resolve trades on a public stock exchange at a price of more than $1.30 for a period of at least 30 days. The Company has determined that due to recent financing at the same price and Resolve still being pre-revenue, the Company’s carrying value of the shares is equal to its fair value. The fair value of the warrants have been valued using the Black Scholes model. As a result of these transactions, the Company owns 2,000,024 common shares and 2,000,024 warrants at a total cost of $1,000,000, with a fair value of $938,000 as at August 31, 2017.
Green Acre Capital Fund
On January 23, 2017, Aphria agreed to invest in Green Acre Capital Fund. In relation to its participation, the Company committed $2,000,000 to the expected $30,000,000 fund and as of the balance sheet date has funded $700,000. At August 31, 2017, the Company determined that the fair value of its investment, based on its proportionate share of net assets, was $708,404 as at August 31, 2017.
TS BrandCo Holdings Inc.
On June 28, 2017, the Company entered into a subscription agreement with TS BrandCo Holdings Inc. (“Tokyo Smoke”) for the purchase of 140,845 common shares, for a total cost of $1,000,000. The Company has determined that, due to the recent equity financing with third parties at the same price, the Company’s carrying value approximates its fair value as at August 31, 2017.
Nuuvera Corp.
On August 9 2017, the Company entered into a subscription agreement with Nuuvera Corp. for the purchase of 2,000,000 common shares, for a total cost of $ 2,029,329. The Company has determined that, due to recent financing at the same price, the Company’s carrying value approximates its fair value as at August 31, 2017.
20
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
16.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the end of the year, the Company has not drawn on the line of credit. The operating line of credit is secured by first charge on 265 Talbot St. West, Leamington, Ontario, and a first ranking position on a general security agreement.
17.
Promissory note payable
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
Note payable to Copperstate Farms, LLC - $1,300,000 USD ($1,755,000), opening balance. bearing nominal interest, two-year term, forgivable in eight quarterly instalments of $162,500 USD
|
|
$
|
1,243,125
|
|
$
|
1,538,333
|
|
|
|
|
|
|
|
|
|
Reduction of Promissory note payable balance with respect to consulting services provided
|
|
(292,478
|
)
|
(295,208
|
)
|
|
|
|
|
|
|
|
|
Balance remaining
|
|
950,647
|
|
1,243,125
|
|
|
|
|
|
|
|
|
|
Deduct — principal portion included in current liabilities
|
|
(814,840
|
)
|
(877,500
|
)
|
|
|
|
$
|
135,807
|
|
$
|
365,625
|
|
18.
Long-term debt
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
Term loan — $25,000,000 — 3.95%, compounded monthly, 15-year amortization, due in April 2022.
|
|
$
|
25,000,000
|
|
$
|
25,000,000
|
|
|
|
|
|
|
|
|
|
Term loan — $1,250,000 — 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $12,630 including interest, due in July 2021.
|
|
1,137,698
|
|
1,163,971
|
|
|
|
|
|
|
|
|
|
Mortgage payable — $3,750,000 — 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $22,562 including interest, due in July 2021.
|
|
3,613,447
|
|
3,645,240
|
|
|
|
|
|
|
|
|
|
Vendor take-back mortgage owed to related party — $2,850,000 — 6.75%, 5-year term, repayable in equal monthly instalments of $56,097 including interest, due in June 2021
|
|
2,268,090
|
|
2,396,660
|
|
|
|
|
$
|
32,019,235
|
|
$
|
32,205,871
|
|
|
|
|
|
|
|
|
|
Deduct
—
unamortized finance fees
|
|
(19,167
|
)
|
(20,417
|
)
|
|
—
principal portion included in current liabilities
|
|
(776,523
|
)
|
(765,224
|
)
|
|
|
|
$
|
31,223,545
|
|
$
|
31,420,230
|
|
Total long-term debt repayments are as follows:
|
|
|
Year ending August 31,
|
|
|
Next 12 months
|
|
$
|
776,523
|
|
|
2 years
|
|
823,496
|
|
|
3 years
|
|
873,456
|
|
|
4 years
|
|
4,545,760
|
|
|
5 years
|
|
25,000,000
|
|
|
Balance of obligation
|
|
$
|
32,019,235
|
|
21
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
The term loan of $25,000,000 was entered into on May 9, 2017 and is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, certain cash security and an assignment of fire insurance to the lender.
The mortgage payable of $3,613,447 and term loan of $1,137,698 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of $2,268,090, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St. West. The mortgage is secured by a second charge on the property at 265 Talbot St. West.
19.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at August 31, 2017, the Company has issued 138,888,590 shares, of which 600,000 shares were held and subject to various escrow agreements.
|
Common Shares
|
|
Number of Shares
|
|
Amount
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,316,548
|
|
|
Warrants exercised
|
|
228,467
|
|
343,951
|
|
|
Options exercised
|
|
31,419
|
|
37,747
|
|
|
Additional share issuance costs incurred
|
|
—
|
|
(13,596
|
)
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,603
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
112,500
|
|
|
Balance at August 31, 2017
|
|
138,888,590
|
|
$
|
274,800,753
|
|
a)
Throughout the period, 228,467 warrants with exercise prices ranging from $ 1.50 to $ 1.75 were exercised for $343,951.
b)
Throughout the period, 31,419 stock options with exercise prices ranging from $ 0.90 to $ 3.90 were exercised for $37,747.
c)
In January 2017, the Company issued 150,000 common shares in escrow pursuant to a third party consulting agreement for greenhouse related services, net of cash issuance costs. These shares are earned straight-line over 12 months and released to the third party on a quarterly basis. At August 31, 2017, 137,500 common shares of the total shares in escrow have been released.
The following table presents the maximum number of shares that would be outstanding if all the dilutive “in the money” instruments outstanding as at August 31, 2017 were exercised:
|
Common shares outstanding at August 31, 2017
|
|
138,888,590
|
|
|
Warrants outstanding and “in the money”
|
|
3,657,441
|
|
|
Options outstanding and “in the money”
|
|
7,015,869
|
|
|
Fully diluted balance at August 31, 2017
|
|
149,561,900
|
|
22
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
20.
Warrants
The warrant details of the Company are as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Number of
|
|
average
|
|
|
|
|
Type of warrant
|
|
Expiry date
|
|
warrants
|
|
price
|
|
Amount
|
|
|
Compensation warrant / option
|
|
December 10, 2018
|
|
106,157
|
|
$
|
1.75
|
|
$
|
85,432
|
|
|
Warrant
|
|
December 11, 2018
|
|
322,923
|
|
$
|
1.75
|
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
3,028,361
|
|
$
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
$
|
3.14
|
|
359,480
|
|
|
Balance at August 31, 2017
|
|
|
|
3,657,441
|
|
$
|
1.62
|
|
$
|
444,912
|
|
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
|
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
|
Outstanding, beginning of the period
|
|
3,885,908
|
|
$
|
1.61
|
|
18,721,987
|
|
$
|
1.51
|
|
|
Expired during the period
|
|
—
|
|
—
|
|
(50,305
|
)
|
1.20
|
|
|
Issued during the period
|
|
—
|
|
—
|
|
465,391
|
|
2.35
|
|
|
Exercised during the period
|
|
(228,467
|
)
|
1.51
|
|
(15,251,165
|
)
|
1.51
|
|
|
Outstanding, end of period
|
|
3,657,441
|
|
$
|
1.62
|
|
3,885,908
|
|
$
|
1.61
|
|
The Company used the Black Scholes option pricing model to determine the fair value of warrants granted using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life of 3 and 5 years; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective warrant.
21.
Share-based payment reserve
Share-based payment reserve is comprised of:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
Balance, beginning of period
|
|
$
|
3,229,929
|
|
$
|
1,723,903
|
|
|
Amounts deducted from share-based payment reserve in respect of stock options exercised during the period
|
|
(19,712
|
)
|
(558,183
|
)
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
2,440,112
|
|
2,064,209
|
|
|
Balance, end of the period
|
|
$
|
5,650,329
|
|
$
|
3,229,929
|
|
22.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that August be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a
23
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option August not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $ 2,440,112 during the three months ended August 31, 2017 (2016 - $ 203,095). The total fair value of options granted during the period was $ 3,103,674 (2016 - $ 354,669).
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
|
Outstanding, beginning of the period
|
|
5,926,001
|
|
$
|
1.99
|
|
4,975,000
|
|
$
|
0.84
|
|
|
Exercised during the period
|
|
(31,419
|
)
|
1.20
|
|
(1,121,999
|
)
|
1.05
|
|
|
Issued during the period
|
|
1,265,000
|
|
5.28
|
|
2,253,000
|
|
3.99
|
|
|
Cancelled during the period
|
|
(3,713
|
)
|
1.09
|
|
(180,000
|
)
|
1.09
|
|
|
Outstanding, end of the period
|
|
7,155,869
|
|
$
|
2.58
|
|
5,926,001
|
|
$
|
1.99
|
|
|
Exercisable, end of the period
|
|
4,806,029
|
|
$
|
2.00
|
|
3,919,542
|
|
$
|
1.36
|
|
In June 2017, the Company issued 250,000 stock options at an exercise price of $ 5.44 per share, exercisable for 5 years to officers of the company. 83,333 vest immediately and the remainder vest over 2 years.
In July 2017, the Company issued 1,015,000 stock options at an exercise price of $ 5.24 per share, exercisable for 3 years to employees, officers and consultants of the company. 688,333 vest immediately and the remainder vest over 2 years.
The outstanding option details of the Company are as follows:
|
Expiry date
|
|
Exercise price
|
|
Number of options
|
|
Vested and exercisable
|
|
|
November 2017
|
|
$ 1.10
|
|
30,000
|
|
30,000
|
|
|
December 2017
|
|
$ 1.10
|
|
650,000
|
|
114,240
|
|
|
October 2018
|
|
$ 1.17
|
|
20,000
|
|
13,333
|
|
|
November 2018
|
|
$ 1.49
|
|
20,000
|
|
20,000
|
|
|
December 2018
|
|
$ 1.30
|
|
170,000
|
|
170,000
|
|
|
April 2019
|
|
$ 1.67
|
|
30,000
|
|
30,000
|
|
|
June 2019
|
|
$ 0.60
|
|
2,500,000
|
|
2,500,000
|
|
|
September 2019
|
|
$ 3.00
|
|
75,000
|
|
36,465
|
|
|
October 2019
|
|
$ 3.49 – 3.70
|
|
70,000
|
|
56,666
|
|
|
November 2019
|
|
$ 3.90
|
|
994,867
|
|
328,023
|
|
|
December 2019
|
|
$ 5.25
|
|
500,000
|
|
166,665
|
|
|
January 2020
|
|
$ 5.72
|
|
45,000
|
|
14,998
|
|
|
April 2020
|
|
$ 7.92
|
|
140,000
|
|
44,999
|
|
|
July 2020
|
|
$ 5.24
|
|
1,015,000
|
|
705,642
|
|
|
September 2020
|
|
$ 0.85
|
|
185,000
|
|
185,000
|
|
|
November 2020
|
|
$ 1.19
|
|
50,000
|
|
50,000
|
|
|
June 2021
|
|
$ 1.40
|
|
271,002
|
|
176,665
|
|
|
June 2021
|
|
$ 1.48
|
|
30,000
|
|
30,000
|
|
|
June 2022
|
|
$ 5.44
|
|
250,000
|
|
83,333
|
|
|
July 2021
|
|
$ 1.64
|
|
110,000
|
|
50,000
|
|
|
Balance at August 31, 2017
|
|
$ 2.57
|
|
7,155,869
|
|
4,806,029
|
|
24
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
The Company used the Black Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.44-1.56% on the date of grant; expected life of 3 and 5 years; volatility of 62-70% based on comparable companies; forfeiture rate of 5%; dividend yield of nil; and, the exercise price of the respective option.
23.
General and administrative expenses
|
|
|
For the three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
306,030
|
|
$
|
212,309
|
|
|
Consulting fees
|
|
94,421
|
|
44,765
|
|
|
Office and general
|
|
553,523
|
|
291,144
|
|
|
Professional fees
|
|
216,641
|
|
106,007
|
|
|
Salaries and wages
|
|
407,731
|
|
224,648
|
|
|
Travel and accommodation
|
|
136,393
|
|
72,566
|
|
|
Rent
|
|
20,478
|
|
8,153
|
|
|
|
|
$
|
1,735,217
|
|
$
|
959,592
|
|
24.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
For the three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Amounts charged to share-based payment reserve in respect of
|
|
|
|
|
|
|
share-based compensation
|
|
$
|
2,440,112
|
|
$
|
203,095
|
|
|
Share-based compensation accrued in the prior period
|
|
(44,000
|
)
|
—
|
|
|
Share-based compensation issued on behalf of a related party
|
|
(31,708
|
)
|
—
|
|
|
Shares for services compensation
|
|
112,500
|
|
—
|
|
|
Deferred share units expensed in the period
|
|
31,997
|
|
—
|
|
|
Total share-based compensation
|
|
$
|
2,508,901
|
|
$
|
203,095
|
|
During the period, the Company issued 4,860 deferred share units to certain directors of the company, under the terms of the Company’s Deferred Share Unit Plan.
25.
Finance income, net
Finance income, net, is comprised of:
|
|
|
For the three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Interest income
|
|
$
|
815,871
|
|
$
|
144,626
|
|
|
Interest expense
|
|
(336,152
|
)
|
(48,552
|
)
|
|
|
|
$
|
479,719
|
|
$
|
96,074
|
|
25
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
26.
Unrealized gain on long-term investments
Unrealized gain on long-term investments for the three months ended August 31, 2017 is comprised of:
|
|
|
|
|
|
|
|
Realized gain
|
|
Change in fair
|
|
|
|
|
|
Investment
|
|
Proceeds
|
|
Cost
|
|
|
(loss) on disposal
|
|
value
|
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain — sale of shares
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term investments (Note 15)
|
|
—
|
|
—
|
|
|
—
|
|
19,081,556
|
|
|
19,081,556
|
|
|
Three months ended August 31, 2017
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
19,081,556
|
|
|
$
|
19,081,556
|
|
27.
Earnings per share
The calculation of earnings per share for the three months ended August 31, 2017 was based on the net income attributable to common shareholders of $15,040,168 (2016 — $ 895,269) and a weighted average number of common shares outstanding of 138,711,674 (2016 — 73,784,801) calculated as follows:
|
|
|
2017
|
|
2016
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
15,040,168
|
|
$
|
895,269
|
|
|
Average number of common shares outstanding during the period
|
|
138,711,674
|
|
73,784,801
|
|
|
Earnings per share
|
|
$
|
0.11
|
|
$
|
0.01
|
|
|
|
|
2017
|
|
2016
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the year
|
|
$
|
15,040,168
|
|
$
|
895,269
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
138,711,674
|
|
73,784,801
|
|
|
“In the money” warrants outstanding during the period
|
|
2,552,470
|
|
5,133,469
|
|
|
“In the money” options outstanding during the period
|
|
4,467,356
|
|
3,156,954
|
|
|
|
|
145,731,500
|
|
82,075,224
|
|
|
Earnings per share
|
|
$
|
0.10
|
|
$
|
0.01
|
|
28.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
(436,264
|
)
|
$
|
(760,831
|
)
|
|
Increase in other receivables
|
|
(1,688,867
|
)
|
(66,099
|
)
|
|
Decrease (increase) in inventory, net of fair value adjustment
|
|
(3,217,431
|
)
|
(180,300
|
)
|
|
Decrease (increase) in biological assets, net of fair value adjustment
|
|
2,194,023
|
|
195,143
|
|
|
Increase in prepaid assets
|
|
(1,139,119
|
)
|
(156,724
|
)
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
(1,213,950
|
)
|
1,413,355
|
|
|
|
|
$
|
(5,501,608
|
)
|
$
|
444,544
|
|
26
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
29.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities and long-term investments, with the exception of the debentures in CannaRoyalty Corp., Copperstate Farms Investors, LLC and HydRx Ltd. (d/b/a Scientus Pharma) and embedded derivatives as fair value through profit or loss, accounts receivable and other receivables as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term debt as other financial liabilities. The debentures in CannaRoyalty Corp., Copperstate Farms Investors, LLC and HydRx Ltd. (d/b/a Scientus Pharma) are accounted for on an amortized cost basis.
The carrying values of accounts receivable and other receivables, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $32,019,235 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at August 31, 2017 was $31,863,057.
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
|
Level 1
|
|
quoted prices (unadjusted) in active markets for identical assets and liabilities
|
|
Level 2
|
|
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
|
|
Level 3
|
|
inputs for assets and liabilities not based upon observable market data
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
August 31, 2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,229,855
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38,229,855
|
|
|
Marketable securities
|
|
80,501,420
|
|
—
|
|
—
|
|
80,501,420
|
|
|
Embedded derivatives
|
|
—
|
|
—
|
|
5,155,750
|
|
5,155,750
|
|
|
Long-term investments
|
|
12,455,408
|
|
—
|
|
38,047,222
|
|
50,502,630
|
|
|
|
|
$
|
131,186,683
|
|
$
|
—
|
|
$
|
43,202,972
|
|
$
|
174,389,655
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,910,415
|
|
$
|
—
|
|
$
|
—
|
|
$
|
79,910,415
|
|
|
Marketable securities
|
|
87,346,787
|
|
—
|
|
—
|
|
87,346,787
|
|
|
Embedded derivative
|
|
—
|
|
—
|
|
173,000
|
|
173,000
|
|
|
Long-term investments
|
|
14,946,235
|
|
—
|
|
12,841,343
|
|
27,787,578
|
|
|
|
|
$
|
182,203,437
|
|
$
|
—
|
|
$
|
13,014,343
|
|
$
|
195,217,780
|
|
27
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
The following table presents the changes in level 3 items for the periods ended August 31, 2017 and August 31, 2016:
|
|
|
Unlisted equity
|
|
Trading
|
|
|
|
|
|
|
securities
|
|
derivatives
|
|
Total
|
|
|
Opening balance August 31, 2016
|
|
$
|
1,560,200
|
|
$
|
—
|
|
$
|
1,560,200
|
|
|
Acquisitions
|
|
12,593,940
|
|
173,000
|
|
12,766,940
|
|
|
Disposals
|
|
(50,000
|
)
|
—
|
|
(50,000
|
)
|
|
Reclassification to Level 1
|
|
(1,510,200
|
)
|
—
|
|
(1,510,200
|
)
|
|
Unrealized gain on fair value
|
|
247,403
|
|
—
|
|
247,403
|
|
|
Closing balance May 31, 2017
|
|
$
|
12,841,343
|
|
$
|
173,000
|
|
$
|
13,014,343
|
|
|
Acquisitions
|
|
5,297,496
|
|
4,450,000
|
|
10,215,996
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
|
Reclassification to Level 1
|
|
(2,000,000
|
)
|
—
|
|
(2,000,000
|
)
|
|
Unrealized gain on fair value
|
|
21,908,383
|
|
532,750
|
|
22,441,133
|
|
|
Closing balance August 31, 2017
|
|
$
|
38,047,222
|
|
$
|
5,155,750
|
|
$
|
43,671,472
|
|
Investments in Scythian Biosciences Inc. originally classified as a level 3 investments were reclassified subsequent to the investee going public.
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit risk; liquidity; currency rate; and, interest rate price risk.
(a)
Credit risk
The maximum credit exposure at August 31, 2017 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other receivables and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
60-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
1,261,775
|
|
$
|
915,757
|
|
$
|
233,625
|
|
$
|
6,531
|
|
$
|
105,862
|
|
|
|
|
|
|
73
|
%
|
18
|
%
|
1
|
%
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at August 31, 2017, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at August 31, 2017, management regards liquidity risk to be low.
28
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
(c)
Currency rate risk
As at August 31, 2017, a portion of the Company’s financial assets and liabilities held in USD consist of marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as Management has determined that this risk is not significant at this point in time.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents and marketable securities as capital.
30.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. In July of 2016, the Company terminated its lease of greenhouse and warehouse property in conjunction with the acquisition of the 265 Talbot Street West property. The Company has a lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $ 9,313 and $ 19,599, respectively, annually and leased office space in Toronto for $ 4,500 per month until September 2017. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.). As disclosed in note 15, the Company has agreed to contribute an additional $ 1,300,000 to Green Acre Capital Fund. The Company has committed purchase orders outstanding at August 31, 2017 related to capital asset expansion of $42,449,735, of which $38,382,048 are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:
|
|
|
Periods ending August 31,
|
|
|
2018
|
|
$
|
38,748,171
|
|
|
2019
|
|
5,107,502
|
|
|
2020
|
|
17,966
|
|
|
2021
|
|
—
|
|
|
2022
|
|
—
|
|
|
|
|
$
|
43,873,639
|
|
29
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2017 and August 31, 2016
(Unaudited)
31.
Subsequent events
On September 28, 2017 the Company received full repayment on the outstanding note receivable (note 10).
On September 29, 2017 the Company received approval for its recently completed four Level 9 vaults, each with a maximum allowable storage capacity of 3,125 kgs.
On October 6, 2017, Nuuvera Corp., a Level 3 fair value hierarchy investee, announced its plan to complete a reverse takeover (“RTO”) with Mira IX Acquisition Corp.
30
Exhibit 99.28
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the three months ended August 31, 2017. It is supplemental to, and should be read in conjunction with the Company’s unaudited consolidated financial statements and the accompanying notes for the period ended August 31, 2017, as well as the financial statements and MD&A for the year ended May 31, 2017. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to “all-in” cost of sales, cash costs to produce, gross profit before fair value adjustments (previously referred to as adjusted gross profit), adjusted gross margin and EBITDA, which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“All-in” cost of sales of dried cannabis per gram is equal to cost of sales of dried cannabis plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the FV on growth and on sale, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is gross profit before fair value adjustments divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
EBITDA from operations is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash FV adjustments on growth and on sale, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) bad debts (recovery), plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity accounted investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity accounted investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) unrealized loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations exclusive of its equity accounted investee.
·
EBITDA is EBITDA from operations plus (minus) EBITDA (loss) from equity accounted investee. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
·
EBITDA (loss) from equity accounted investee is calculated based on the same approach as outlined above for EBITDA from operations, based on the operations of its equity accounted investee and pro-rated based on the Company’s percentage of ownership. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated from its equity accounted investee’s operations.
·
Strategic investments are the total cash flows used in investing activities relating to investment in long-term investments and equity accounted investments as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in Canadian dollars and where otherwise indicated.
This MD&A is prepared as of October 12, 2017.
COMPANY OVERVIEW
Aphria Inc. is continued in Ontario, the Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licenced to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). PNW received its licence to produce and sell medical marijuana on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. PNW’s operations are based in Leamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be a scalable low cost producer of medical marijuana.
1
The Company is focused on producing and selling medical marijuana and its derivatives through a two-pronged growth strategy, including both retail sales and wholesale channels. Retail sales are primarily sold through Aphria’s online store as well as telephone orders. Wholesale shipments are sold to other ACMPR Licenced Producers.
INVESTOR HIGHLIGHTS
|
|
|
Q1-2018
|
|
Q4-2017
|
|
|
Revenue
|
|
$
|
6,120,359
|
|
$
|
5,717,866
|
|
|
Kilograms equivalents sold
|
|
852.0
|
|
738.3
|
|
|
Cash cost to produce dried cannabis / gram
|
|
$
|
0.95
|
|
$
|
1.11
|
|
|
“All-in” cost of sales of dried cannabis / gram
|
|
$
|
1.61
|
|
$
|
1.67
|
|
|
Adjusted gross margin
|
|
78.0
|
%
|
85.7
|
%
|
|
EBITDA from operations
|
|
$
|
1,548,149
|
|
$
|
2,870,667
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
118,731,275
|
|
$
|
167,257,202
|
|
|
Working capital
|
|
$
|
135,127,644
|
|
$
|
169,051,562
|
|
|
Capital and intangible asset expenditures
|
|
$
|
23,704,138
|
|
$
|
31,955,214
|
|
|
Strategic investments
|
|
$
|
20,131,330
|
|
$
|
33,561,864
|
|
·
Retail & wholesale platforms
·
Current production capacity equal to 9,000 kgs (annualized) production capability
·
Short-term capacity upgrade to 30,000 kgs (annualized) production capability expected in next year
·
Mid-term capacity upgrade to 100,000 kgs (annualized) production capability expected in 15 months
·
Long-term capacity available via additional 100-acre property in Leamington, Ontario
·
No crop failures since inception
·
Eight consecutive quarters of EBITDA
·
Strong executive team
·
20+ years of Pharma experience
·
35+ years of greenhouse growing experience
QUARTERLY HIGHLIGHTS
Operational highlights — Continued progress on expansion projects
The Company continues to work towards the completion of its Part III and Part IV fully capitalized expansion projects. The construction of both the 200,000 and 700,000 sq. ft. state-of-the-art greenhouse facilities are progressing as scheduled with the first harvest expected in April 2018 from Part III and December 2018 from Part IV. Upon completion of both projects, at 1,000,000 sq. ft. of cumulative greenhouse growing space the Company anticipates 100,000 kgs in annualized production capacity. Further, on September 29, 2017, the Company received approval for its recently completed four Level 9 vaults, each with a maximum allowable storage capacity of 3,125 kgs. The economies of scale achieved as a result of the completion of these expansion projects as well as the approval of the additional vault space will further promote Aphria’s commitment to being a low-cost producer in the industry.
Aphria reports eighth consecutive quarter of positive EBITDA
The Company reported EBITDA, as defined above, of $872,657 for the quarter. This marks the eighth consecutive quarter where the Company has reported positive EBITDA. The Company has recorded total EBITDA of $5,903,017 for the trailing twelve-month period.
Aphria reports retained earnings in the current quarter
As a result of its cumulative net earnings to date exceeding its historical losses, Aphria reported retained earnings of $10,917,659 as at August 31. 2017 and is no longer in a deficit position. The Company is one of less than a handful of publicly-traded licenced producers to achieve this milestone.
2
Improvement in “all-in” cost of sales of dried cannabis and cash cost to produce per gram
During the quarter, our “all-in” costs of dried cannabis per gram decreased from $1.67 in the prior quarter to $1.61 in the current quarter, representing a $0.06 decrease or a 3.6% decrease, and cash cost to produce per gram decreased from $1.11 to $0.95, representing a decrease of $0.16 or a 14.4% decrease. The decrease related to increased harvests associated with added growing space during the quarter (Part II expansion).
Additional investment in Green Acre Capital Fund
On January 23, 2017, Aphria agreed to invest in Green Acre Capital Fund. In relation to its participation, the Company committed $2,000,000 to the expected $30,000,000 fund and as of the balance sheet date has invested $700,000, of which $400,000 was contributed during the current reporting period.
Investment in TS BrandCo Holdings Inc.
On June 28, 2017, the Company entered into a subscription agreement with TS BrandCo Holdings Inc. (“Tokyo Smoke”) for the purchase of 140,845 common shares, for a total cost of $1,000,000.
Completion of Part II Expansion
On July 10, 2017, the company harvested its first plants from the area referred to as Part II expansion. In August 2017, the company recorded its first sale of product grown, flowered and harvested exclusively from its Part II expansion.
Investment in Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.) — Completed business combination and began public trading
On July 20 2017, DFMMJ Investments, Ltd. (“DFMMJ”) completed its business combination with SecureCom Mobile Inc. (“SecureCom”) through a reverse takeover acquisition. After amalgamation, SecureCom changed its name to Liberty Health Sciences Inc. (“Liberty”) and remained the resulting issuer.
Upon the completion of the transaction, Liberty consolidated its issued and outstanding common shares, broker warrants and existing stock options on the basis of three pre-consolidation common shares held for one post-consolidation common share. As a result of the three-for-one exchange, Aphria now holds 106,864,102 common shares of Liberty, representing a 37.6% ownership.
During the quarter, the Company recorded a gain on dilution of ownership in equity accounted investee of $7,551,158, a deferred gain on sale of intellectual property recognized of $233,333, a loss from equity accounted investee of $8,840,264 and an other comprehensive loss from equity accounted investee of $1,320,398.
Additional investment in Copperstate Farms Investors, LLC in Arizona
On July 26, 2017, the Company purchased an additional 2,668 additional membership units for $1,334,000 USD ($1,668,167 CAD). Further, the Company lent Copperstate Farms Investors, LLC (“CSF”) $2,000,000 USD ($2,501,000 CAD) in exchange for a senior secured convertible loan as well as an additional $666,000 USD ($834,898 CAD) as a note payable with no set terms of repayment. The convertible debenture bears interest at 9%, is due on May 15, 2018, and includes the right to convert the debenture into membership units at $500 USD per unit. The loan is pre-payable at any time by CSF, no principal payments are due prior to the Maturity Date. If at least $500,000 USD of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for $500,000 USD plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at $500 USD per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at $500 USD per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. The note payable is expected to be repaid before the company’s next reporting date.
3
Global Partnership with Nuuvera Corp.
On August 9, 2017, the Company announced that it entered into a global strategic partnership with Nuuvera Corp. (“Nuuvera”), a Canadian-based global cannabis business. Initially focused on the Canadian market, the partnership includes joint relationships with Nuuvera to expand production across the globe, including Europe, Israel and Latin America. As part of the partnership, the parties entered into five separate and distinct commercial transactions, whereby:
·
Aphria invested $2 million in a Nuuvera common share offering;
·
Aphria entered into a supply agreement with Nuuvera to supply annual requirements of 1,500 kgs, growing to 17,000 kgs when Aphria completes its four-part expansion plan in 2018;
·
Aphria will sell 100 of the 200 acres of land the Company owns on Mersea Road 8 (“Mersea Property”) in Leamington to Nuuvera, in exchange for a cash payment of $4 million (“Land Acquisition”);
·
Aphria will provide consulting services to Nuuvera on the design and build of a 1 million square foot state-of-the-art greenhouse on the Mersea Property, in exchange for a fee equal to 8% of Nuuvera’s cost to build the facility, exclusive of the Land Acquisition; and,
·
Aphria entered into an operational services agreement with Nuuvera to operate the Mersea Property in exchange for a fee of $0.10 per gram of cannabis harvested in the facility (“Operational Services”). Based on Aphria’s current expected yield from its 1 million square feet of greenhouse, it is anticipated that the operational services agreement will yield an annual payment of more than $10 million per year to Aphria, once Nuuvera’s greenhouse is fully built out.
Convertible Note issued by HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria lent $11,500,000 to Scientus Pharma (“SP”) as a convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days.
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation to recognize the eventual fair value of the plant. At the time of harvest, the accumulated cost of each plant is based on the number of grams harvested and the Company increases the cost value to its full fair value less costs to sell.
As at August 31, 2017, the Company’s harvested cannabis and cannabis oil, as detailed in Note 7, and biological assets, as detailed in Note 8 of its financial statements, are as follows:
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
Harvested cannabis — at cost
|
|
$
|
943,904
|
|
$
|
1,076,818
|
|
|
Harvested cannabis — fair value increment
|
|
1,761,552
|
|
1,430,145
|
|
|
Harvested cannabis trim — at cost
|
|
394,434
|
|
152,081
|
|
|
Harvested cannabis trim — fair value increment
|
|
849,624
|
|
268,241
|
|
|
Cannabis oil — at cost
|
|
586,192
|
|
316,412
|
|
|
Cannabis oil — fair value increment
|
|
987,327
|
|
365,644
|
|
|
Biological assets — at cost
|
|
1,679,464
|
|
1,203,479
|
|
|
Biological assets — fair value increment
|
|
1,755,041
|
|
159,270
|
|
|
Cannabis products — at fair value
|
|
$
|
8,957,538
|
|
$
|
4,972,090
|
|
4
In an effort to increase transparency, the Company’s biological assets are carried at fair value increments of $0.65, $1.29, $1.94 and $2.58 per gram for weeks 13, 14, 15 and 16, respectively. Harvested cannabis, harvested cannabis trim and cannabis oil are carried at fair values of $3.75 per gram, $3.00 per gram and $0.625 per mL, respectively. The individual components of fair values are as follows:
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
Harvested cannabis — at cost — per gram
|
|
$
|
1.17
|
|
$
|
1.61
|
|
|
Harvested cannabis —fair value increment — per gram
|
|
2.58
|
|
2.14
|
|
|
Harvested cannabis trim — at cost — per gram
|
|
0.94
|
|
1.09
|
|
|
Harvested cannabis trim — fair value increment — per gram
|
|
2.06
|
|
1.91
|
|
|
Cannabis oil — at cost — per mL
|
|
0.23
|
|
0.35
|
|
|
Cannabis oil — fair value increment — per mL
|
|
0.40
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2017
|
|
2017
|
|
|
Production costs
|
|
$
|
1,346,162
|
|
$
|
814,906
|
|
|
Add (less):
|
|
|
|
|
|
|
Cost of accessories
|
|
(36,966
|
)
|
(31,398
|
)
|
|
Cannabis oil conversion costs
|
|
(40,915
|
)
|
(27,857
|
)
|
|
Increase in plant inventory
|
|
100,000
|
|
480,000
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
1,368,281
|
|
$
|
1,235,651
|
|
|
Grams equivalents sold during the quarter
|
|
851,999
|
|
738,299
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
1.61
|
|
$
|
1.67
|
|
Calculation of cash costs to produce dried cannabis per gram
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
Cash costs to produce dried cannabis per gram
|
|
2017
|
|
2017
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
1,368,281
|
|
$
|
1,235,651
|
|
|
Less:
|
|
|
|
|
|
|
Amortization
|
|
(389,123
|
)
|
(267,826
|
)
|
|
Packaging costs
|
|
(170,400
|
)
|
(150,695
|
)
|
|
Cash costs to produce dried cannabis
|
|
$
|
808,758
|
|
$
|
817,130
|
|
|
Gram equivalents sold in the quarter
|
|
851,999
|
|
738,299
|
|
|
Cash costs to produce per gram
|
|
$
|
0.95
|
|
$
|
1.11
|
|
5
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties. The economic, industry and risk factors discussed in our Annual Report, each in respect of the year ended May 31, 2017 and in our Short Form Prospectus, dated February 17, 2017, remain substantially unchanged in respect of the three months ended August 31, 2017. The more significant of which are reported below.
Recent Announcements in the United States
The Company maintains multiple investments in U.S.-based entities who participate at multiple levels in the U.S. marijuana industry. The Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of certain investments in entities involved with medical marijuana in the United States. Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
While marijuana is legal in many US state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical marijuana under the
Access to Cannabis for Medical Purposes Regulations,
investors are cautioned that in the United States, marijuana is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 28 states, plus the District of Columbia, that have legalized marijuana in some form, including Arizona and Florida as noted above in connection with the investments in both Copperstate Farms LLC, and Copperstate Farms Investors, LLC (together referred to as “Copperstate”) and Liberty. Notwithstanding the permissive regulatory environment of medical marijuana at the state level, marijuana continues to be categorized as a controlled substance under the
Controlled Substances Act
(the “CSA”) in the United States and as such, may be in violation of federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of marijuana offenses of individuals who are in compliance with state medical marijuana laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business—even those that have fully complied with state law—could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical marijuana licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
6
The approach to the enforcement of marijuana laws may be subject to change or may not proceed as previously outlined
As a result of the conflicting views between state legislatures and the federal government regarding marijuana, investments in marijuana businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of marijuana as a controlled substance at the federal level in the United States, several US states have enacted laws relating to marijuana for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of marijuana offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to marijuana. States where medical marijuana had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, however, he disagreed that it had been implemented effectively and has not committed to utilizing the Cole Memorandum framework going forward.
The Board has informed its decision to authorize and approve the investments in Copperstate and Liberty based on the guidelines outlined in the Cole Memorandum and believes that the risk of federal prosecution and enforcement is currently unlikely. However, unless and until the Cole Memorandum is memorialized in federal legislation, there can be no assurance that the federal government will not seek to prosecute cases involving medical marijuana businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the
Currency and Foreign Transactions Reporting Act of 1970
(commonly known as the
Bank Secrecy Act
), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada),
as amended, and the rules and regulations thereunder, the
Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued a memorandum providing instructions to banks seeking to provide services to marijuana-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to marijuana-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money
7
laundering offenses predicated on marijuana-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.
In the event that any of the Company’s investments, or any proceeds thereof, or any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, affect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the investments in Copperstate or Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
As of the date hereof, following discussions with its legal counsel, the Company is not aware of any violation of the above noted statutes as a result of its investments in Copperstate and Liberty and has no reason to believe that such investments may be constituted as, whether directly or indirectly, money laundering or proceeds of crime. However, any future exposure to money laundering or proceeds of crime could subject the Company to financial losses, business disruption and damage to the Company’s reputation. In addition, there is a risk that the Company may be subject to investigation and sanctions by a regulator and/or to civil and criminal liability if the Company has failed to comply with the Company’s legal obligations relating to the reporting of money laundering or other offences.
The Company’s investments in the United States may be subject to heightened scrutiny
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction.
Government policy changes or public opinion may also result in a significant influence over the regulation of the marijuana industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical marijuana in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical marijuana, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by Aphria or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that
8
continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical marijuana, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production
Reliance on a Single Facility
To date, Aphria’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party mail and courier services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation and/or rising costs associated with these services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential 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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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
9
product recall may require significant management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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.
Reliance on the Licence
Aphria’s ability to grow, store and sell medical marijuana in Canada is dependent on maintaining its licence with Health Canada. Failure to comply with the requirements of the licence or any failure to maintain its licence would have a material adverse impact on the business, financial condition and operating results of Aphria. Although Aphria believes it will meet the requirements of the ACMPR for extension of the licence, there can be no guarantee that Health Canada will extend or renew the licence or, if it is extended or renewed, that it will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the licence or should it renew the licence on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected.
10
Reliance on Veterans Affairs Canada (“VAC”) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a 3 gram per day limit, subject to certain exceptions, and a $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed elsewhere in this MD&A, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, if and when adult recreational use of cannabis is implemented by the Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult recreational use of cannabis, the Company may be materially adversely affected.
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended August 31, 2017 was $6,120,359 versus $4,375,512 in the same period of 2016 and $5,717,866 in the fourth quarter of fiscal 2017.
The increase in revenue from the same period in the prior year was largely related to the continued growth of both wholesale shipments and onboarded patients offset by an increase in grams sold through wholesale channels at a lower average selling price per gram equivalent. The increased grams sold through wholesale channels were available because of the reduction in retail purchases (on a per gram basis) by veterans, as a result of the previously announced changes to VAC’s reimbursement policies (“VAC Policy”) for veterans.
The increase in revenue during the quarter from the prior quarter was largely related to:
·
Continued acceleration of patient onboarding, including sales of 142,440 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 518,595 gram equivalents to patients on-boarded prior to the quarter;
·
Wholesale orders to other Licensed Producers of 190,964 grams;
·
Maintained the percentage of cannabis oil sold, at a higher average price than dried cannabis, at 31.9%; and,
·
Increased average retail selling price (excluding wholesale) during the period from $7.67 to $7.91.
These factors were partially offset by an increase in grams sold through wholesale channels at a lower average selling price per gram. The additional grams sold through wholesale were made available for wholesale shipment largely due to the decrease in demand from the Company’s veteran patients resulting from changes to the VAC Policy, as discussed above. As a result of the changes to the VAC Policy, the Company recorded sales of approximately $1.7 million to veterans in the quarter. This was a decrease of approximately $1 million from the previous three months, versus an increase of approximately $0.9 million in the prior year for the same comparative periods.
Gross profit and gross margin
The gross profit for the three months ended August 31, 2017 was $7,904,441, compared to $3,782,145 in the same quarter in the prior year and $5,826,311 in the fourth quarter of fiscal 2017. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year offset, decreased production costs per gram equivalent and the increase in the fair value adjustment for biological assets against the decrease in average selling price per gram equivalent.
11
The gross profit for the three months ended August 31, 2017 increased to $7,904,441, compared to $5,826,311 in the prior quarter, as shown below:
|
|
|
Three months ended
|
|
|
|
|
August 31, 2017
|
|
May 31, 2017
|
|
|
Revenue
|
|
$
|
6,120,359
|
|
$
|
5,717,866
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
1,346,162
|
|
814,906
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
4,774,197
|
|
4,902,960
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
1,135,535
|
|
1,409,505
|
|
|
Fair value adjustment on growth of biological assets
|
|
(4,265,779
|
)
|
(2,332,856
|
)
|
|
|
|
(3,130,244
|
)
|
(923,351
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
7,904,441
|
|
$
|
5,826,311
|
|
|
Gross margin
|
|
129.1
|
%
|
101.9
|
%
|
Cost of sales currently consist of three main categories: (i) production costs (formerly defined as cost of goods sold) and, (ii) fair value adjustment on sale of inventory and (iii) fair value adjustment on growth of biological assets.
(i) Production costs include the direct cost of materials and labour related to the medical cannabis sold. This would include growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the net effect of the non-cash fair value adjustment of inventory sold in the period.
(iii) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the net effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced and sold in the period. In an effort to increase transparency, management deems it necessary to disclose that inventory of harvested cannabis (Note 7
—
Consolidated financial statements for the three months ended August 31, 2017) consists of harvested cannabis, harvested cannabis trim and cannabis oil, of which harvested cannabis is carried at a value of $3.75 per gram, harvested cannabis trim is carried at $3.00 per gram and cannabis oil is carried at $0.625 per mL (6mL of cannabis oil is equivalent to 1 gram of dried product).
The increase in production costs is primarily attributable to decreased over-absorption of overhead costs in the quarter, which represent period costs as described above. The reduction to incremental over-absorption of overhead costs was primarily a function of increased production yields.
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of an gross profit before fair value adjustments and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Gross profit before fair value adjustments and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
12
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the quarter:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
|
August 31, 2017
|
|
|
|
August 31, 2017
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
Revenue
|
|
$
|
6,120,359
|
|
$
|
—
|
|
$
|
6,120,359
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
1,346,162
|
|
—
|
|
1,346,162
|
|
|
Fair value adjustment on sale of inventory
|
|
1,135,535
|
|
(1,135,535
|
)
|
—
|
|
|
Fair value adjustment on growth of biological assets
|
|
(4,265,779
|
)
|
4,265,779
|
|
—
|
|
|
|
|
(1,784,082
|
)
|
3,130,244
|
|
1,346,162
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
7,904,441
|
|
$
|
3,130,244
|
|
$
|
4,774,197
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
129.1
|
%
|
|
|
78.0
|
%
|
Selling, general and administrative
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development and impairment of intangible asset. These costs increased by $3,526,402 to $6,520,719 from $2,994,317 in the same quarter in the prior year.
Selling, general and administrative costs
|
|
|
Three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
General and administrative
|
|
$
|
1,735,217
|
|
$
|
959,592
|
|
|
Share-based compensation
|
|
2,508,901
|
|
203,095
|
|
|
Selling, marketing and promotion
|
|
1,947,586
|
|
1,380,647
|
|
|
Amortization
|
|
238,648
|
|
201,670
|
|
|
Research and development
|
|
90,367
|
|
249,313
|
|
|
|
|
$
|
6,520,719
|
|
$
|
2,994,317
|
|
General and administrative costs
|
|
|
Three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
306,030
|
|
$
|
212,309
|
|
|
Consulting fees
|
|
94,421
|
|
44,765
|
|
|
Office and general
|
|
553,523
|
|
291,144
|
|
|
Professional fees
|
|
216,641
|
|
106,007
|
|
|
Salaries and wages
|
|
407,731
|
|
224,648
|
|
|
Travel and accommodation
|
|
136,393
|
|
72,566
|
|
|
Rent
|
|
20,478
|
|
8,153
|
|
|
|
|
$
|
1,735,217
|
|
$
|
959,592
|
|
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Executive and director compensation as a result of changes in our executive and director compensation as described in our Management Information Circular dated September 11, 2017;
·
Salaries and wages and office and general as a result of increased activity within the business over the same period in the prior year;
·
Office and general, predominantly associated with increased property taxes, investor relations and public company expenses; and,
13
·
Professional fees, predominantly comprised of legal costs, associated with various negotiations and reviews of current and potential business relationships necessary to sustain growth of the Company, including recurring costs related to our listing on the TSX.
Share-based compensation
The Company recognized share-based compensation expense of $2,508,901 for the three months ended August 31, 2017 compared to $203,095 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is consistent with the increase in stock options issued during the respective period, 1,265,000 in the current period compared to 423,000 in the same period of the prior year. Of the stock options granted in the quarter, 771,666 vested in the quarter.
Selling, marketing and promotion costs
For the three months ended August 31, 2017, the Company incurred selling, marketing and promotion costs of $1,947,586, or 31.8% of revenue versus $1,380,647 or 31.6% of revenue in the comparable prior period. These costs related to patient acquisition and ongoing patient maintenance, the Company’s call centre operations, shipping costs, marketing department, as well as the development of promotional and information materials. Patient acquisition and ongoing patient maintenance costs include payments to individual clinics to perform medical studies as well as reimbursement of operating costs incurred by clinics on the Company’s behalf. The increase in selling, marketing and promotion cost is directly correlated with the increase in patient and sales volumes over the comparable period.
Amortization
The Company incurred amortization charges of $238,648 for the three months ended August 31, 2017 compared to $201,670 for the same period in the prior year. The increase in amortization charges are a result of the capital expenditures made during the prior fiscal year and being put in to use during the current fiscal year.
Research and development
Research and development costs of $90,367 were expensed during the three months ended August 31, 2017 compared to $249,313 in same period last year. These relate to costs associated with process validation of the Company’s internal chemistry and micro biology labs, as well as researching different aspects of genetics. The Company also has continued experimenting with different growing methods and methods of extraction of cannabis oils and related derivatives for future commercialization.
Non-operating items
|
|
|
Three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Consulting revenue
|
|
$
|
292,478
|
|
$
|
—
|
|
|
Foreign exchange loss
|
|
(150,702
|
)
|
—
|
|
|
Loss on marketable securities
|
|
(1,746,367
|
)
|
—
|
|
|
(Loss) gain on sale of capital assets
|
|
(7,260
|
)
|
11,367
|
|
|
Gain on dilution of ownership in equity accounted investee
|
|
7,551,158
|
|
—
|
|
|
Loss from equity accounted investee
|
|
(8,840,264
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
233,333
|
|
—
|
|
|
Finance income, net
|
|
479,719
|
|
96,074
|
|
|
Unrealized gain on embedded derivatives
|
|
532,750
|
|
—
|
|
|
Unrealized gain on long-term investments
|
|
19,081,556
|
|
—
|
|
|
|
|
$
|
17,426,401
|
|
$
|
107,441
|
|
14
During the quarter, the Company performed a valuation of its investments in Copperstate Farms, LLC and Copperstate Farms Investors, LLC after the operating company recorded its first commercial sales. As a result of the valuation, the Company increased the fair value of its investments in Copperstate by approximately $22.2M.
Net income (loss)
The Company recorded net income for the three months ended August 31, 2017 of $15,040,168 or $0.11 per share as opposed to net income of $895,269 or $0.01 per share in the same period of the prior year.
EBITDA
EBITDA from operations is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates EBITDA from operations as net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash FV adjustments on growth and on sale, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) bad debts (recovery), plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity accounted investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity accounted investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) unrealized loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management, all as follows:
|
|
|
Three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Net income
|
|
$
|
15,040,168
|
|
$
|
895,269
|
|
|
Income taxes
|
|
3,769,955
|
|
—
|
|
|
Finance income, net
|
|
(479,719
|
)
|
(96,074
|
)
|
|
Amortization
|
|
627,771
|
|
454,878
|
|
|
Share-based compensation
|
|
2,508,901
|
|
203,095
|
|
|
Fair value adjustment on sale of inventory
|
|
1,135,535
|
|
1,339,538
|
|
|
Fair value adjustment on growth of biological assets
|
|
(4,265,779
|
)
|
(1,800,087
|
)
|
|
Amortization of non-capital assets
|
|
2,761
|
|
14,854
|
|
|
Allowance for bad debts
|
|
13,462
|
|
54,163
|
|
|
Loss from equity accounted investee
|
|
8,840,264
|
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
(233,333
|
)
|
—
|
|
|
Gain on dilution of ownership in equity accounted investee
|
|
(7,551,158
|
)
|
—
|
|
|
Loss (gain) on sale of capital assets
|
|
7,260
|
|
(11,367
|
)
|
|
Loss on marketable securities
|
|
1,746,367
|
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
(532,750
|
)
|
—
|
|
|
Unrealized gain on long-term investments
|
|
(19,081,556
|
)
|
—
|
|
|
EBITDA from operations
|
|
$
|
1,548,149
|
|
$
|
1,054,269
|
|
|
|
|
Three months ended August 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
EBITDA from operations
|
|
$
|
1,548,149
|
|
$
|
1,054,269
|
|
|
EBITDA loss from equity accounted investee
|
|
(675,492
|
)
|
—
|
|
|
EBITDA
|
|
$
|
872,657
|
|
$
|
1,054,269
|
|
15
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations for the period decreased by $5,327,823 from cash flow generated in operations of $1,526,703 in the three-month period of the prior year to cash flow used in operations of $3,801,120 in the current three-month period. The decrease in cash flow generated from operations is primarily a result of:
·
Increase in non-cash working capital of approximately $5,500,000, comprised primarily of increased HST receivable, inventory and prepaid assets and decreased accounts payable and accrued liabilities.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at August 31, 2017, Aphria maintained $38,229,855 of cash and cash equivalents on hand plus $80,501,420 in liquid marketable securities, compared to $53,452,414 in cash and cash equivalents at August 31, 2016 and $79,910,415 in cash and cash equivalents plus $87,346,787 in liquid marketable securities at May 31, 2017. Liquid sources of cash increased $65,278,861 in the twelve-month period and decreased $48,525,927 in the quarter.
Working capital provides funds for the Company to meet its operational and capital requirements. As at August 31, 2017, the Company maintained working capital of $135,127,644. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 24 months.
Capital and intangible asset expenditures
For the three months ended August 31, 2017, the Company invested $23,704,138 in capital and intangible assets, of which $107,041 are considered maintenance CAPEX and the remainder $23,597,097 growth CAPEX, related to the property acquisitions and the Company’s Part III and Part IV Expansions.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its equity accounted investee, Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.).
During the previous fiscal year, the Company terminated its lease commitment for rental of greenhouse and warehouse space in conjunction with the purchase of the 265 Talbot St. West property. The Company continues to lease office space from a related party, the lease commitment ends December 31, 2018 with the option to renew for two additional five year terms, and the Company continues to lease office space in Toronto for $4,500 per month until September 2017. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.). As disclosed above, the Company has agreed to contribute an additional $1,300,000 to Green Acre Capital Fund. The Company has a lease commitments until September 2019 and August 2020 for the use of two motor vehicles.
16
Minimum payments payable over the next five years are as follows:
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
Less than 1 year
|
|
1 – 3 years
|
|
4 – 5 years
|
|
After 5 years
|
|
|
Outstanding capital related commitments
|
|
$
|
43,749,735
|
|
$
|
38,682,048
|
|
$
|
5,067,687
|
|
$
|
—
|
|
$
|
—
|
|
|
Operating leases
|
|
48,116
|
|
37,212
|
|
10,904
|
|
—
|
|
—
|
|
|
Motor vehicle leases
|
|
75,788
|
|
28,911
|
|
46,877
|
|
—
|
|
—
|
|
|
Long-term debt
|
|
32,019,235
|
|
776,523
|
|
1,696,952
|
|
1,094,991
|
|
28,450,769
|
|
|
Total
|
|
$
|
75,892,874
|
|
$
|
39,524,694
|
|
$
|
6,822,420
|
|
$
|
1,094,991
|
|
$
|
28,450,769
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the period.
Share capital
Aphria has the following securities issued and outstanding, as at October 12, 2017:
|
|
|
Presently
|
|
|
|
Exercisable &
|
|
Fully
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
in-the-money*
|
|
diluted
|
|
|
Common stock
|
|
138,888,590
|
|
|
|
|
|
138,888,590
|
|
|
Warrants
|
|
3,657,441
|
|
3,657,441
|
|
3,657,441
|
|
3,657,441
|
|
|
Stock options
|
|
7,155,869
|
|
4,806,029
|
|
4,761,030
|
|
4,761,030
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
147,307,061
|
|
* Based on closing price on October 12, 2017
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2018, ended August 31, 2017. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2017 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
|
|
|
Nov/16
|
|
Feb/17
|
|
May/17
|
|
Aug/17
|
|
|
Revenue
|
|
$
|
5,226,589
|
|
$
|
5,118,516
|
|
$
|
5,717,866
|
|
$
|
6,120,359
|
|
|
Net income (loss)
|
|
945,678
|
|
4,950,250
|
|
(2,592,742
|
)
|
15,040,168
|
|
|
Income per share - basic
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
0.11
|
|
|
Income per share — fully diluted
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov/15
|
|
Feb/16
|
|
May/16
|
|
Aug/16
|
|
|
Revenue
|
|
$
|
2,026,975
|
|
$
|
2,679,898
|
|
$
|
2,776,316
|
|
$
|
4,375,512
|
|
|
Net income (loss)
|
|
(431,098
|
)
|
3,720
|
|
1,302,164
|
|
895,269
|
|
|
Loss per share - basic
|
|
(0.00
|
)
|
0.00
|
|
0.02
|
|
0.01
|
|
|
Loss per share
—
fully diluted
|
|
(0.00
|
)
|
0.00
|
|
0.02
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
RELATED PARTY BALANCES AND TRANSACTIONS
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. Through these related parties, Aphria can leverage the purchasing power for growing related commodities and labour, which provides the Company with better rates than if Aphria was sourcing these on its own. These transactions are measured at their exchange amounts. The balance owing from related parties as at August 31, 2017 was $nil (May 31, 2017 - $463,916). These amounts were due upon demand and are non-interest bearing. These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani and Mr. John Cervini).
During the three months ended August 31, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $38,595 (2016 - $195,368). Included in this amount was rent of $8,178 charged during the three months ended August 31, 2017 (2016 - $24,855).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.), a related party through an equity investment.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2017, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the three months ended August 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
18
SUBSEQUENT EVENTS
On September 28, 2017, the Company received full repayment on the outstanding note receivable.
On September 29, 2017, the Company received approval for its recently completed four Level 9 vaults, each with a maximum allowable storage capacity of 3,125 kgs.
On October 6, 2017, Nuuvera Corp., a level 3 fair value hierarchy investee, announced its plan to complete a reverse takeover (“RTO”) with Mira IX Acquisition Corp.
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to processing cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical marijuana and marijuana-related offenses in the United States.
19
Exhibit 99.34
EXECUTION VERSION
UNDERWRITING AGREEMENT
October 20, 2017
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention: Vic Neufeld, President & Chief Executive Officer
Dear Mesdames/Sirs:
Clarus Securities Inc. (“
Clarus
”), as lead underwriter, Cormark Securities Inc., Cannaccord Genuity Corp. and PI Financial Corp. (collectively, the “
Underwriters
” and each individually, an “
Underwriter
”) hereby severally, and not jointly, nor jointly and severally, in their respective percentages set out in Section 18 below, offer to purchase from Aphria Inc. (the “
Corporation
”) and the Corporation hereby agrees to issue and sell to the Underwriters, 11,034,500 Common Shares of the Corporation (the “
Purchased Shares
”), on an underwritten basis, at the purchase price of $7.25 per Purchased Share (the “
Offering Price
”), for aggregate gross proceeds of $80,000,125.
The Underwriters may arrange for substituted purchasers (the “
Substituted Purchasers
”) for the Offered Shares (as defined below), where such Substituted Purchasers are resident in the Selling Jurisdictions (as defined below). Each Substituted Purchaser shall purchase the Offered Shares at the Offering Price, and to the extent that Substituted Purchasers purchase Offered Shares, the obligations of the Underwriters to do so will be reduced by the number of Offered Shares purchased by the Substituted Purchasers from the Corporation.
The Underwriters propose to distribute the Offered Shares in Canada pursuant to the Final Prospectus (as defined below) and may also distribute the Offered Shares to, or for the account or benefit of, persons in the United States (as defined below) in transactions that are exempt from the registration requirements of the U.S. Securities Act (as defined below) pursuant to the U.S. Private Placement Memorandum (as defined below), all in the manner contemplated by this Agreement.
Subject to applicable law, including applicable Securities Laws (as defined below) and the terms of this Agreement, the Offered Shares may also be distributed outside of Canada and the United States, in each jurisdiction as mutually agreed to by the Corporation and the Underwriters where they may be lawfully sold by the Underwriters without: (i) giving rise to any requirement under the laws of such jurisdiction to prepare and/or file a prospectus or document having similar effect; or (ii) creating any ongoing compliance or continuous disclosure obligations for the Corporation pursuant to the laws of such jurisdiction.
The Corporation hereby grants to the Underwriters an option (the “
Over-Allotment Option
”) to purchase up to an additional 1,655,175 Common Shares (the “
Over-Allotment Shares
”) at the Offering Price for additional gross proceeds of up to $12,000,019, upon the terms and conditions set forth herein for the purpose of covering over-allotments made in connection
with the Offering (as defined below) and for market stabilization purposes, if any. The Over-Allotment Option shall be exercisable, in whole or in part, and from time to time, by the Underwriters, for a period of 30 days from and including the Closing Date by giving written notice to the Corporation, as more particularly described in Section 12 hereof. Pursuant to such notice, the Underwriters shall purchase in their respective percentages set out in Section 18 below, and the Corporation shall deliver and sell, the number of Over-Allotment Shares indicated in such notice, in accordance with this Agreement.
The Purchased Shares and the Over-Allotment Shares are collectively referred to herein as the “
Offered Shares
” and the offering of the Offered Shares by the Corporation is hereinafter referred to as the “
Offering
”. The price of any Offered Shares sold under this Agreement shall be the Offering Price.
The Underwriters shall be entitled to appoint a selling group consisting of other registered dealers in accordance with applicable Securities Laws for the purposes of arranging for purchasers of the Offered Shares. Any investment dealer who is a member of any selling group formed by the Underwriters pursuant to the provisions of this Agreement or with whom any Underwriter has a contractual relationship with respect to the Offering, if any, shall agree with such Underwriter to comply with the covenants and obligations given by the Underwriters herein. The fee payable to any such investment dealer who is a member of any selling group shall be for the account of the Underwriters.
The Underwriters may offer the Offered Shares at a price less than the Offering Price as described in further detail in Section 18 below, in compliance with Canadian Securities Laws and, specifically, the requirements of NI 44-101 (as defined below) and the disclosure concerning the same contained in the Prospectus.
In consideration of the services to be rendered by the Underwriters in connection with the Offering, the Corporation agrees to pay to the Underwriters the Commission (as defined below) at the Closing Time (as defined below).
TERMS AND CONDITIONS
The following are additional terms and conditions of this Agreement between the Corporation and the Underwriters:
Section 1
Definitions and Interpretation
(1)
Where used in this Agreement or in any amendment hereto, the following terms have the following meanings, respectively:
“
ACMPR
” means the
Access to Cannabis for Medical Purposes Regulations
in effect since August 2016;
“
Agreement
” means this underwriting agreement, as it may be amended from time to time;
2
“
Applicable Laws
” means all applicable laws, rules, regulations, policies, statutes, ordinances, codes, orders, consents, decrees, judgments, decisions, rulings, awards, or guidelines, the terms and conditions of any Permits, including any judicial or administrative interpretation thereof, of any Governmental Authority, including without limitation the ACMPR;
“
associate
”, “
affiliate
”, “
insider
” and “
person
” have the respective meanings given to them in the Securities Act;
“
Authorizations
” means any regulatory licences, approvals, permits, approvals, consents, certificates, registrations, filings or other authorizations of or issued by any Governmental Authority under Applicable Laws including the Licence;
“
Business
” means the business of growing, cultivating, harvesting, storing, packaging, labelling, marketing, supplying, selling, shipping and disposing of, prescription medical marijuana;
“
Business Assets
” means all tangible and intangible property and assets owned (either directly or indirectly), leased, licensed, loaned, operated or used, including all real property, fixed assets, facilities, equipment, inventories and accounts receivable, by the Corporation and the Subsidiary in connection with the Business;
“
Business Day
” means a day, other than a Saturday, a Sunday or statutory or civic holiday in the City of Toronto, Ontario;
“
Canadian Securities Laws
” means, collectively, all applicable securities laws of each of the Qualifying Jurisdictions and the respective rules and regulations under such laws together with applicable published instruments, notices and orders of the securities regulatory authorities in the Qualifying Jurisdictions, including the rules and policies of the TSX;
“
Claims
” has the meaning ascribed thereto in Section 13 of this Agreement
“
Clarus
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Closing
” means the completion of the sale of the Offered Shares and the purchase by the Underwriters of the Offered Shares pursuant to this Agreement;
“
Closing Date
” means November 7, 2017 or such earlier or later date as may be agreed to in writing by the Corporation and the Underwriters, each acting reasonably;
“
Closing Time
” means 8:00 a.m. (Toronto time) on the Closing Date, or such other time on the Closing Date as may be agreed to by the Corporation and the Underwriters;
“
Commission
” has the meaning ascribed thereto in Section 14 of this Agreement;
“
Common Shares
” means the common shares in the capital of the Corporation;
3
“
Corporation
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Debt Instrument
” means any and all loans, bonds, notes, debentures, indentures, promissory notes, mortgages, guarantees or other instruments evidencing indebtedness (demand or otherwise) for borrowed money or other liability to which the Corporation or its Subsidiary are a party or to which their property or assets are otherwise bound;
“
distribution
” means distribution or distribution to the public, as the case may be, for the purposes of Canadian Securities Laws or any of them;
“
Documents Incorporated by Reference
” means all financial statements, related management’s discussion and analysis, management information circulars, joint information circulars, annual information forms, material change reports or other documents filed by the Corporation, whether before or after the date of this Agreement, that are required to be incorporated by reference into the Prospectus;
“
Employee Plans
” has the meaning ascribed thereto in Section 7(pp) of this Agreement;
“
Environmental Laws
” means all Applicable Laws relating to the environment or environmental issues (including air, surface, water and stratospheric matters), pollution or protection of human health and safety, including without limitation relating to the release, threatened release, manufacture, processing, blending, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials;
“
Final Prospectus
” means the (final) short form prospectus of the Corporation relating to the Offering, including all of the Documents Incorporated by Reference and any Supplementary Material thereto, prepared and to be filed by the Corporation with the Securities Commissions in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Final Receipt has been issued;
“
Final Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Final Prospectus in each of the Qualifying Jurisdictions;
“
Financial Statements
” means the audited consolidated financial statements for the twelve months ended May 31, 2017 and May 31, 2016, together with the notes thereto and the auditors’ report thereon and the condensed interim consolidated financial statements for the three months ended August 31, 2017 and August 31, 2016, together with the notes thereto;
“
Government Official
” means (a) any official, officer, employee, or representative of, or any person acting in an official capacity for or on behalf of, any Governmental Authority, (b) any salaried political party official, elected member of political office or candidate for political office, or (c) any company, business, enterprise or other entity owned or controlled by any person described in the foregoing clauses;
4
“
Governmental Authority
” means and includes, without limitation, any national or federal government, province, state, municipality or other political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing, including Health Canada;
“
Hazardous Materials
” means chemicals, fluids, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products;
“
IFRS
” means International Financial Reporting Standards as issued by the International Accounting Standards Board;
“
including
” means including but not limited to;
“
Indemnified Party
” or “
Indemnified Parties
” have the meanings ascribed thereto in Section 13 of this Agreement;
“
Indemnitor
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
Licence
” means Licence No. 10-MM0065/2017 issued by Health Canada pursuant to Section 35 of the ACMPR and its regulations, with an effective date of September 29, 2017 and expiry date of September 25, 2019, granting the Corporation the authority to produce, sell, possess, ship, transport, deliver and destroy dried marihuana, marihuana (including live plants, clippings and seed) and cannabis oil;
“
Liens
” means any encumbrance or title defect of whatever kind or nature, regardless of form, whether or not registered or registrable and whether or not consensual or arising by law (statutory or otherwise), including any mortgage, lien, charge, pledge or security interest, whether fixed or floating, or any assignment, lease, option, right of pre-emption, privilege, encumbrance, easement, servitude, right of way, restrictive covenant, right of use or any other right or claim of any kind or nature whatever which affects ownership or possession of, or title to, any interest in, or right to use or occupy such property or assets;
“
Losses
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
marketing materials
” has the meaning ascribed thereto in NI 41-101;
“
Marketing Material
” means the term sheet for the Offering dated October 17, 2017 as agreed to between the Corporation and Clarus;
“
Material Adverse Effect
” means any event, change, fact, or state of being which could reasonably be expected to have a significant and adverse effect on the business, affairs, capital, operation, properties, permits, assets, liabilities (absolute, accrued, contingent or otherwise) or condition (financial or otherwise) of the Corporation and its Subsidiary considered on a consolidated basis;
5
“
Material Agreement
” means any and all contracts, commitments, agreements (written or oral), instruments, leases or other documents, including licences, sub-licenses, supply agreements, manufacturing agreements, distribution agreements, sales agreements, or any other similar type agreements, to which the Corporation or the Subsidiary is a party or to which their Business Assets are otherwise bound, and which is material to the Corporation and the Subsidiary on a consolidated basis;
“
material change
”, “
material fact
” and “
misrepresentation
” have the respective meanings ascribed thereto in the Securities Act;
“
MI 11-102
” means Multilateral Instrument 11-102 —
Passport System;
“
NP 11-202
” means National Policy 11-202 —
Process for Prospectus Reviews in Multiple Jurisdictions
;
“
NI 41-101
” means National Instrument 41-101 —
General Prospectus Requirements
;
“
NI 44-101
” means National Instrument 44-101 -
Short Form Prospectus Distributions
;
“
NI 51-102
” means National Instrument 51-102 —
Continuous Disclosure Obligations
;
“
NI 52-109
” means National Instrument 52-109 —
Certification of Disclosure in Issuers’ Annual and Interim Filings
;
“
Offered Shares
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering Documents
” means the Preliminary Prospectus, the Final Prospectus, any Supplementary Material and, if applicable, the U.S. Private Placement Memorandum;
“
Offering Price
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Over-Allotment Option
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
“
Over-Allotment Shares
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
“
Passport System
” means the system for review of prospectus filings set out in MI 11-102 and NP 11-202;
“
person
” shall be broadly interpreted and shall include any individual, corporation, partnership, joint venture, association, trust or other legal entity;
“
Preliminary Prospectus
” means the preliminary short form prospectus of the Corporation dated October 20, 2017, including all of the Documents Incorporated by
6
Reference and any Supplementary Material thereto, prepared and filed by the Corporation in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Preliminary Receipt will be issued no later than 5:00 p.m. (Toronto time) on October 23, 2017;
“
Preliminary Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Preliminary Prospectus in each of the Qualifying Jurisdictions;
“
Principal Regulator
” means the Ontario Securities Commission;
“
Prospectus
” means, collectively, the Preliminary Prospectus and the Final Prospectus;
“
provide
” in the context of sending or making available marketing materials to a potential investor of Offered Shares has the meaning ascribed thereto under Canadian Securities Laws, whether in the context of a “road show” (as defined in NI 41-101) or otherwise;
“
Public Disclosure Record
” means collectively, all of the documents which have been filed on www.sedar.com since June 1, 2017 by or on behalf of the Corporation with the Securities Commissions pursuant to the requirements of Canadian Securities Laws;
“
Purchased Shares
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Purchasers
” means, collectively, each of the purchasers of Offered Shares arranged by the Underwriters, including the Substituted Purchasers, in connection with the Offering, including, if applicable, the Underwriters;
“
Qualified Institutional Buyers
” means “qualified institutional buyers” as such term is defined in Rule 144A(a)(1) of the U.S. Securities Act;
“
Qualifying Jurisdictions
” means all of the provinces of Canada, except for Québec;
“
Regulation D
” means Regulation D adopted by the SEC under the U.S. Securities Act;
“
Regulation S
” means Regulation S adopted by the SEC under the U.S. Securities Act;
“
Repayment Event
” means any event or condition which gives the holder of any Debt Instrument (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a material portion of such indebtedness by the Corporation or its subsidiaries;
“
Rule 144A
” means Rule 144A under the U.S. Securities Act;
“
SEC
” means the United States Securities and Exchange Commission;
“
Securities Act
” means the
Securities Act
(Ontario);
7
“
Securities Commissions
” means the securities regulatory authority in each of the Qualifying Jurisdictions;
“
Securities Laws
” means collectively, Canadian Securities Laws, U.S. Securities Laws and all applicable securities laws, rules, regulations, policies and other instruments promulgated by the Securities Regulators in any of the other Selling Jurisdictions;
“
Securities Regulators
” means collectively, the securities regulators or other securities regulatory authorities in the Selling Jurisdictions;
“
SEDAR
” means the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators;
“
Selling Jurisdictions
” means, collectively, each of the Qualifying Jurisdictions and may also include, the United States and any other jurisdictions outside of Canada and the United States as mutually agreed to by the Corporation and the Underwriters;
“
subsidiary
” or “
subsidiaries
” has the meaning ascribed thereto in the Securities Act;
“
Subsidiary
” means Pure Natures Wellness Inc., a corporation existing under the laws of Ontario;
“
Substituted Purchasers
” has the meaning ascribed thereto in the second paragraph of this Agreement;
“
Supplementary Material
” means, collectively, any amendment to the Preliminary Prospectus or the Final Prospectus, and any amendment or supplemental prospectus or ancillary materials that may be filed by or on behalf of the Corporation under Canadian Securities Laws relating to the distribution of the Offered Shares;
“
template version
” has the meaning ascribed thereto under NI 41-101 and includes any revised template version of marketing materials as contemplated by NI 41-101;
“
TSX
” means the Toronto Stock Exchange;
“
Underwriters
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
United States
” means the United States of America, its territories and possessions, any state of the United States and the District of Columbia;
“
U.S. Accredited Investor
” means an “accredited investor”, as such term is defined in Rule 501(a) of Regulation D;
“
U.S. Affiliates
” means the Underwriters’ respective United States registered broker dealer affiliates;
8
“
U.S. Private Placement Memorandum
” means the private placement offering memorandum in the event of an offering of the Offered Shares in the United States, which will include and supplement the Prospectus;
“
U.S. Exchange Act
” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations made under the United States Securities Exchange Act of 1934, as amended;
“
U.S. Securities Act
” means the United States Securities Act of 1933, as amended, and the rules and regulations made under the United States Securities Act of 1933, as amended; and
“
U.S. Securities Laws
” means all applicable securities legislation in the United States, including, without limitation, the U.S. Exchange Act and U.S. Securities Act;
(2)
Any reference in this Agreement to a section or subsection shall refer to a section or subsection of this Agreement.
(3)
All words and personal pronouns relating thereto shall be read and construed as the number and gender of the party or parties referred to in each case required and the verb shall be construed as agreeing with the required word and/or pronoun.
(4)
Any reference in this Agreement to $ or to “dollars” shall refer to the lawful currency of Canada, unless otherwise specified.
(5)
The following are the schedules to this Agreement, which schedules are deemed to be a part hereof and are hereby incorporated by reference herein:
Schedule “A” Subsidiary
Schedule “B” Existing Rights
Schedule “C” Compliance with United States Securities Laws (if applicable)
Section 2
Attributes of the Offered Shares.
The Offered Shares to be sold by the Corporation hereunder shall have the rights, privileges, restrictions and conditions that conform in all material respects to the rights, privileges, restrictions and conditions set forth in the Offering Documents.
The Underwriters severally agree not to offer or sell the Offered Shares in such a manner as to require registration of any of them or the filing of a prospectus or any similar document under the laws of any jurisdiction outside the Qualifying Jurisdictions and to distribute or offer the Offered Shares only in the Qualifying Jurisdictions and in accordance with all applicable laws. However, the Corporation and each Underwriter acknowledge that, in the event of any U.S. sales, the U.S. Affiliates of the Underwriters may (i) offer and resell the Offered Shares to, or for the account or benefit of, persons within the United States to Qualified Institutional Buyers pursuant to Rule 144A, and (ii) offer the Offered Shares for sale by the Corporation to, or for the account or benefit of, persons in the United States to Substituted Purchasers who are U.S. Accredited Investors pursuant to Rule 506(b) of Regulation D, all in accordance with
9
Schedule “C”, provided that no such action on the part of the Underwriters or their U.S. Affiliates shall in any way oblige the Corporation to register any Offered Shares under the U.S. Securities Act or the securities laws of any state of the United States.
Any agreements between the Underwriters and the members of any selling group will contain restrictions which are substantially the same as those contained in this Section 2.
Notwithstanding the foregoing, an Underwriter will not be liable to the Corporation under this section or Schedule “C” with respect to a violation by another Underwriter or its U.S. Affiliate(s) of the provisions of this section or Schedule “C” if the former Underwriter or its U.S. Affiliate, as applicable, is not itself also in violation.
Section 3
Filing of Prospectus.
(1)
The Corporation shall:
(a)
not later than 11:59 p.m. (Toronto time) on the date hereof, have filed the Preliminary Prospectus pursuant to the Passport System with the Securities Commissions;
(b)
promptly (i) use commercially reasonable efforts to resolve all comments made and deficiencies raised in respect of the Preliminary Prospectus by the Principal Regulator, and (ii) file the Final Prospectus and obtain a Final Receipt not later than 5:00 p.m. (Toronto time) on November 1, 2017, and otherwise fulfill all legal requirements to qualify the Offered Shares for distribution to the public in the Qualifying Jurisdictions through the Underwriters or any other investment dealer or broker registered to transact such business in the applicable Qualifying Jurisdictions contracting with the Underwriters, and to qualify the grant of the Over-Allotment Option; and
(c)
until the date on which the distribution of the Offered Shares is completed, promptly take, or cause to be taken, all additional steps and proceedings that may from time to time be required under Canadian Securities Laws to continue to qualify the distribution of the Offered Shares for sale to the public and the grant of the Over-Allotment Option to the Underwriters or, in the event that the Offered Shares or the Over-Allotment Option have, for any reason, ceased to so qualify, to again so qualify the Offered Shares and the Over-Allotment Option.
(2)
Prior to the filing of the Offering Documents and thereafter, during the period of distribution of the Offered Shares, the Corporation shall have allowed the Underwriters to participate fully in the preparation of, and to approve the form and content of, such documents and shall have allowed the Underwriters to conduct all due diligence investigations (which shall include the attendance of management of the Corporation and the current auditors of the Corporation at one or more due diligence sessions to be held) which they may reasonably require in order to fulfill their obligations as underwriters and in order to enable them to responsibly execute the certificate required to be executed by them at the end of the Prospectus.
10
(3)
It shall be a condition precedent to (i) the Underwriters’ execution of any certificate in any Prospectus, that the Underwriters be satisfied as to the form and substance of the document, and (ii) the delivery of each U.S. Private Placement Memorandum (if applicable) to any purchaser or prospective purchaser, that the Underwriters and their U.S. Affiliates be satisfied as to the form and substance of such document.
Section 4
Deliveries on Filing and Related Matters.
(1)
The Corporation shall deliver to each of the Underwriters:
(a)
prior to the time of each filing thereof, a copy of the Preliminary Prospectus and the Final Prospectus each manually signed on behalf of the Corporation, by the persons and in the form signed and certified as required by Canadian Securities Laws;
(b)
a copy of the preliminary U.S. Private Placement Memorandum or the final U.S. Private Placement Memorandum, if and as applicable;
(c)
prior to the time of filing thereof, a copy of any Supplementary Material, or other document required to be filed with or delivered to, the Securities Commissions by the Corporation under Canadian Securities Laws in connection with the Offering, including any document incorporated by reference in the Final Prospectus (other than documents already filed publicly with a Securities Commission);
(d)
concurrently with the filing of the Final Prospectus with the Securities Commissions, a “long-form” comfort letter of PricewaterhouseCoopers LLP dated the date of the Final Prospectus (with the requisite procedures to be completed by such auditor within two (2) Business Days of the date of such letter), in form and substance satisfactory to the Underwriters, acting reasonably, addressed to the Underwriters, the Corporation and the board of directors of the Corporation, with respect to the verification of financial and accounting information and other numerical data of a financial nature contained in the Final Prospectus (including all Documents Incorporated by Reference) and matters involving changes or developments since the respective dates as of which specific financial information is given therein which letter shall be in addition to the auditors’ consent letter and comfort letter (if any) addressed to the Securities Commissions; and
(e)
prior to the filing of the Final Prospectus with the Securities Commissions, a copy of the TSX conditional approval letter indicating that the application for the listing and posting for trading on the TSX of the Offered Shares has been approved, subject only to satisfaction by the Corporation of the customary post-closing conditions as specified by the TSX.
Unless otherwise advised in writing, such deliveries shall also constitute the Corporation’s consent to the Underwriters’ use of the Offering Documents in connection with the distribution of the Offered Shares in compliance with this Agreement and Securities Laws.
11
(2)
The Corporation represents and warrants to the Underwriters with respect to the Offering Documents that as at their respective dates of delivery to the Underwriters as set out in Section 4(1) above:
(a)
all information and statements in such documents (including information and statements incorporated by reference to the extent they have not been superseded by the information and statements in the Offering Documents) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) are true and correct, in all material respects, and contain no misrepresentation and constitute full, true and plain disclosure of all material facts relating to the Corporation, the Offering and the Offered Shares, as required by Canadian Securities Laws;
(b)
no material fact or information in such documents (including information and statements incorporated by reference) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) has been omitted therefrom which is required to be stated in such disclosure or is necessary to make the statements or information contained in such disclosure not misleading in light of the circumstances under which they were made;
(c)
except with respect to information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus, the Prospectus and any Supplementary Material comply fully with the requirements of the Canadian Securities Laws.
(3)
The Corporation shall cause commercial copies of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum, as the case may be, to be delivered to the Underwriters without charge, in such quantities and in such cities as the Underwriters may reasonably request by written instructions to the printer of such documents as soon as possible after obtaining the Preliminary Receipt or the Final Receipt, as the case may be, but, in any event on or before noon (Toronto time) on the next Business Day (or for delivery locations outside of Toronto, on the second Business Day). Such deliveries shall constitute the consent of the Corporation to the Underwriters’ use of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum for the distribution of the Offered Shares in the Qualifying Jurisdictions in compliance with the provisions of this Agreement and Canadian Securities Laws and the offer and sale of the Offered Shares to, or for the account or benefit of, persons in the United States in compliance with the provisions of this Agreement (including, without limitation, Schedule “C” hereto) and U.S. Securities Laws. The Corporation shall similarly cause to be delivered commercial copies of any Supplementary Material and hereby similarly consents to the Underwriters’ use thereof. The Corporation shall cause to be provided to the Underwriters, without cost, such number of copies of any Documents Incorporated by Reference as the Underwriters may reasonably request for use in connection with the distribution of the Offered Shares.
12
(4)
Each of the Corporation and the Underwriters have approved the Marketing Material, including any template version thereof which the Corporation has filed with the Securities Commissions and which is and will be incorporated by reference into the Prospectus, as the case may be. The Corporation and the Underwriters each covenant and agree that during the distribution of the Offered Shares, it will not provide any potential investor of Offered Shares with any marketing materials except for marketing materials that comply with, and have been approved in accordance with, NI 44-101. If requested by the Underwriter, in addition to the Marketing Materials, the Corporation will cooperate, acting reasonably, with the Underwriter in approving any other marketing materials to be used in connection with the Offering.
(5)
Subject to compliance with Securities Laws, during the period commencing on the date hereof and until completion of the distribution of the Offered Shares, the Corporation will promptly provide to the Underwriters drafts of any press releases of the Corporation for review by the Underwriters prior to issuance and shall obtain the prior approval of the Underwriters as to the content and form of any press release relating to the Offering prior to issuance, such approval not to be unreasonably withheld or delayed. If required by Securities Laws, any press release announcing or otherwise referring to the Offering disseminated in the United States shall comply with the requirements of Rule 135c under the U.S. Securities Act and any press release announcing or otherwise referring to the Offering disseminated outside the United States shall include an appropriate notation on each page as follows: “
Not for distribution to the U.S. news wire services, or dissemination in the United States
”.
(6)
Notwithstanding any provision hereof, nothing in this Agreement will create any obligation of the Corporation to file a registration statement or otherwise register or qualify the Offered Shares for sale or distribution outside of Canada.
Section 5
Material Change.
(1)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation covenants and agrees with the Underwriters that it shall promptly notify the Underwriters in writing with full particulars of:
(a)
any material change (actual, anticipated, contemplated or threatened) in respect of the Corporation and the Subsidiary considered on a consolidated basis;
(b)
any material fact in respect of the Corporation which has arisen or has been discovered and would have been required to have been stated in any of the Offering Documents had the fact arisen or been discovered on, or prior to, the date of such document; and
(c)
any change in any material fact (which for the purposes of this Agreement shall be deemed to include the disclosure of any previously undisclosed material fact) contained in the Offering Documents which fact or change is, or may be, of such a nature as to render any statement in such Offering Document misleading or untrue in any material respect or which would result in a misrepresentation in the
13
Offering Document or which would result in any of the Offering Documents not complying (to the extent that such compliance is required) with Securities Laws.
The Corporation shall promptly, and in any event within any applicable time limitation, comply, to the satisfaction of the Underwriters, acting reasonably, with all applicable filings and other requirements under Canadian Securities Laws and U.S. Securities Laws as a result of such fact or change; provided that the Corporation shall not file any Supplementary Material or other document without first providing the Underwriters with a copy of such Supplementary Material or other document and consulting with the Underwriters with respect to the form and content thereof. The Corporation shall in good faith discuss with the Underwriters any fact or change in circumstances (actual, anticipated, contemplated or threatened, financial or otherwise) which is of such a nature that there is or could be reasonable doubt whether written notice need be given under this Section 5.
(2)
If during the period of distribution of the Offered Shares there shall be any change in Canadian Securities Laws or other laws which results in any requirement to file Supplementary Material, the Corporation will promptly prepare and file such Supplementary Material with the appropriate Securities Commissions where such filing is required, provided that the Corporation shall have allowed the Underwriters and its counsel to participate in the preparation and review of any Supplementary Material.
(3)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation will notify the Underwriters promptly:
(a)
when any supplement to any of the Offering Documents or any Supplementary Material shall have been filed;
(b)
of any request by any Securities Commission to amend or supplement the Prospectus or for additional information;
(c)
of the suspension of the qualification of the Offered Shares or the Over-Allotment Option for offering, sale, issuance, or grant, as applicable, in any jurisdiction, or of any order suspending or preventing the use of the Offering Documents (or any Supplementary Material) or of the institution or, to the knowledge of the Corporation, threatening of any proceedings for any such purpose; and
(d)
of the issuance by any Securities Commission or any stock exchange of any order having the effect of ceasing or suspending the distribution of the Offered Shares or the trading in any securities of the Corporation, or of the institution or, to the knowledge of the Corporation, threatening of any proceeding for any such purpose. The Corporation will use its reasonable best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use or such order ceasing or suspending the distribution of the Offered Shares or the trading in the shares of the Corporation and, if any such order is issued, to obtain the lifting thereof at the earliest possible time.
14
Section 6
Regulatory Approvals.
The Corporation will make all necessary filings, obtain all necessary consents and approvals (if any) and pay all filing fees required to be paid in connection with the transactions contemplated by this Agreement. The Corporation will cooperate with the Underwriters in connection with the qualification of the Offered Shares for offer and sale and the grant of the Over-Allotment Option, under the Canadian Securities Laws and in maintaining such qualifications in effect for so long as required for the distribution of the Offered Shares.
Section 7
Representations and Warranties of the Corporation.
The Corporation represents and warrants to each of the Underwriters, and acknowledges that each of them is relying upon such representations and warranties in connection with the purchase of the Offered Shares, that:
(a)
Good Standing of the Corporation.
The Corporation (i) is a corporation existing under the laws of Ontario and is and will at the Closing Time be current and up-to-date with all material filings required to be made and in good standing under the
Business Corporations Act
(Ontario), (ii) has all requisite corporate power and capacity to own, lease and operate its properties and assets, including its Business Assets, and to conduct its business as now carried on by it or proposed to be carried on by it as described in the Offering Documents, and (iii) has all requisite corporate power and authority to create, issue and sell the Offered Shares and to grant the Over-Allotment Option and to execute, deliver and perform its obligations under this Agreement.
(b)
Good Standing of Subsidiary.
The Corporation’s only principal wholly-owned Canadian subsidiary is listed in Schedule “A” which schedule is true, complete and accurate in all respects. The Subsidiary is a corporation incorporated, organized and existing under the laws of the jurisdiction of incorporation set out in Schedule “A”, is current and up-to-date with all material filings required to be made and has all requisite corporate power and capacity to own, lease and operate its properties and assets, including their Business Assets, and to conduct its business as is now carried on by it or proposed to be carried on by it as described in the Offering Documents, and it duly qualified to transact business and it in good standing in each jurisdiction in which such qualification is required. All of the issued and outstanding shares in the capital of the Subsidiary have been duly authorized and validly issued, are fully paid and are directly or indirectly beneficially owned by the Corporation, free and clear of any Liens, and none of the outstanding securities of the Subsidiary were issued in violation of the pre-emptive or similar rights of any security holder of the Subsidiary. There exist no options, warrants, purchase rights, or other contracts or commitments that could require the Corporation to sell, transfer or otherwise dispose of any securities of the Subsidiary.
15
(c)
No Proceedings for Dissolution
. No act or proceeding has been taken by or against the Corporation or the Subsidiary in connection with their liquidation, winding-up or bankruptcy, or to their knowledge are pending.
(d)
Share Capital of the Corporation
. The authorized and issued share capital of the Corporation consists of an unlimited number of Common Shares of which 138,901,336 Common Shares were issued and outstanding as at the close of business on October 19, 2017. The description of the attributes of the authorized and issued share capital of the Corporation as set out under the heading “Description of Securities Being Distributed” in the Prospectus is true and correct. Neither the Corporation nor the Subsidiary are party to any agreement, nor is the Corporation aware of any agreement, which in any manner affects the voting control of any securities of the Corporation or its Subsidiary.
(e)
Share Capital of Subsidiary
. The authorized and issued share capital of the Subsidiary as set forth in Schedule “A” hereto is true and correct.
(f)
Form of Share Certificates
. The form of certificate respecting the Common Shares has been approved and adopted by the board of directors of the Corporation and does not conflict with any applicable laws and complies with the rules and regulations of the TSX.
(g)
Common Shares are Listed.
The Common Shares are listed and posted for trading on the TSX, and neither the Corporation nor the Subsidiary has taken any action which would reasonably be expected to result in the delisting or suspension of the Common Shares on or from the TSX.
(h)
TSX Compliance.
Except as disclosed to the Underwriters, the Corporation is, and will at the Closing Time be, in compliance in all material respects with the by-laws, policies, rules and regulations of the TSX existing on the date hereof.
(i)
No Cease Trade Orders.
No order ceasing or suspending trading in the securities of the Corporation or prohibiting the sale of securities by the Corporation has been issued by an exchange or securities regulatory authority, and no proceedings for this purpose have been instituted, or are, to the Corporation’s knowledge, pending, contemplated or threatened.
(j)
Reporting Issuer Status.
The Corporation is a “reporting issuer” in each of the provinces of Canada, other than Quebec, and is not currently in default of any requirement of the Canadian Securities Laws of such jurisdictions and the Corporation is not included on a list of defaulting reporting issuers maintained by any of the Securities Commissions.
(k)
Offered Shares Validly Issued.
The Offered Shares have been, or prior to the Closing Time will be, duly and validly authorized for issuance and sale pursuant to this Agreement and when issued and delivered by the Corporation pursuant to this Agreement, against payment of the consideration therefor, will be validly issued as fully paid and non-assessable Common Shares.
16
(l)
Qualified Investments
. Subject to the qualifications and limitations described under “Eligibility for Investment” in the Final Prospectus, the Offered Shares will be qualified investments under the Income Tax Act (Canada) and the regulations thereunder for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans, a registered disability savings plan and tax free savings accounts.
(m)
Transfer Agent
. Computershare Investor Services Inc. at its offices in Toronto, Ontario has been duly appointed as the transfer agent and registrar for the Common Shares.
(n)
Absence of Rights
. As of October 19, 2017 no person has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other security convertible into or exchangeable for any such shares or to require the Corporation to purchase, redeem or otherwise acquire any of the issued and outstanding shares of the Corporation except for the Existing Rights set out in Schedule “B” to this Agreement and as otherwise disclosed to the Underwriters. The Offered Shares, upon issuance, will not be issued in violation of or subject to any pre-emptive rights or contractual rights to purchase securities issued by the Corporation.
(o)
Corporate Actions
. The Corporation has taken, or will have taken prior to the Closing Time, all necessary corporate action, (i) to authorize the execution, delivery and performance of this Agreement, (ii) to authorize the execution and filing, as applicable, of the Offering Documents, (iii) to validly issue and sell the Offered Shares as fully paid and non-assessable Common Shares, (iv) grant the Over-Allotment Option; and (v) issue the Over-Allotment Shares upon exercise of the Over-Allotment Option.
(p)
Valid and Binding Documents
. This Agreement has been duly authorized, executed and delivered by the Corporation and will constitute a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms, provided that enforcement thereof may be limited by laws affecting creditors’ rights generally, that specific performance and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction, and that the provisions relating to indemnity, contribution and waiver of contribution may be unenforceable and that enforceability is subject to the provisions of the
Limitation Act
(Ontario).
(q)
No Consents, Approvals etc.
The execution and delivery of this Agreement and the fulfilment of the terms hereof by the Corporation and the issuance, sale and delivery of the Offered Shares to be issued and sold by the Corporation and the grant of the Over-Allotment Option do not and will not require the consent, approval, authorization, registration or qualification of or with any Governmental Authority, stock exchange or other third party (including under the terms of any
17
Material Agreement or Debt Instrument), except: (i) those which have been obtained or those which may be required and shall be obtained prior to the Closing Time under the Securities Laws or the rules of the TSX, including in compliance with the Securities Laws regarding the distribution of the Offered Shares and the Over-Allotment Option in the Qualifying Jurisdictions, and (ii) such customary post-closing notices or filings required to be submitted within the applicable time frame pursuant to Securities Laws, as may be required in connection with the Offering.
(r)
Continuous Disclosure
. The Corporation is in compliance in all material respects with its timely and continuous disclosure obligations under Canadian Securities Laws, including insider reporting obligations, and, without limiting the generality of the foregoing, there has been no material fact or material change relating to the Corporation which has not been publicly disclosed and the information and statements in the Public Disclosure Record were true and correct as of the respective dates of such information and statements and at the time such documents were filed on SEDAR, do not contain any misrepresentations and no material facts have been omitted therefrom which would make such information materially misleading, and the Corporation has not filed any confidential material change reports which remain confidential as at the date hereof. There are no circumstances presently existing under which liability is or would reasonably be expected to be incurred under Part XXIII.1 —
Civil Liability for Secondary Market Disclosure
of the Securities Act and analogous provisions under Securities Laws in the other Qualifying Jurisdictions.
(s)
Forward-Looking Information
. With respect to forward-looking information contained in the Corporation’s public disclosure documents, including for certainty the Documents Incorporated by Reference:
(i)
the Corporation has a reasonable basis for the forward-looking information; and
(ii)
all material forward-looking information is identified as such, and all such documents cautions users of forward-looking information that actual results may vary from the forward-looking information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information; and accurately states the material factors or assumptions used to develop forward-looking information.
(t)
Financial Statements
. The Financial Statements;
(i)
present fairly, in all material respects, the financial position of the Corporation on a consolidated basis and the statements of operations, retained earnings, cash flow from operations and changes in financial information of the Corporation on a consolidated basis for the periods specified in such Financial Statements;
18
(ii)
have been prepared in accordance with IFRS, applied on a consistent basis throughout the periods involved; and
(iii)
do not contain any misrepresentations, with respect to the period covered by the Financial Statements.
(u)
Off-Balance Sheet Transactions
. There are no off-balance sheet transactions, arrangements, obligations or liabilities of the Corporation or its Subsidiary whether direct, indirect, absolute, contingent or otherwise.
(v)
Accounting Policies
. There has been no change in accounting policies or practices of the Corporation or its Subsidiary since May 31, 2017, other than as disclosed in the Financial Statements.
(w)
Liabilities
. Neither the Corporation nor the Subsidiary has any liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, which are not disclosed or referred to in the Financial Statements, other than liabilities, obligations, or indebtedness or commitments: (i) incurred in the normal course of business; or (ii) which would not, individually or in the aggregate, have a Material Adverse Effect.
(x)
Independent Auditors
. The auditors who reported on and certified the Financial Statements for the fiscal year ended May 31, 2017 were independent and the Corporation’s current auditors are independent with respect to the Corporation within the meaning of the rules of professional conduct applicable to auditors in Canada and there has never been a “reportable event” (within the meaning of National Instrument 51-102) with the current, or to the best knowledge of the Corporation any predecessor, auditors of the Corporation during the last three years.
(y)
Accounting Controls
. The Corporation maintains, and will maintain, a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain asset accountability, (iii) access to monies and investments is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(z)
Purchases and Sales
. Neither the Corporation nor the Subsidiary has approved, has entered into any agreement in respect of, or has any knowledge, as the case may be, of:
(i)
the purchase of any Business Assets or any interest therein, or the sale, transfer or other disposition of any Business Assets or any interest therein currently owned, directly or indirectly, by the Corporation or the Subsidiary whether by asset sale, transfer of shares, or otherwise;
19
(ii)
a transaction which would result in the change of control (by sale or transfer of Common Shares or sale of all or substantially all of the assets of the Corporation or the Subsidiary or otherwise) of the Corporation or the Subsidiary; or
(iii)
a proposed or planned disposition of Common Shares by any shareholder who owns, directly or indirectly, 10% or more of the outstanding Common Shares or common shares of the Subsidiary.
(aa)
Title to Business Assets
. The Corporation and the Subsidiary have good, valid and marketable title to and have all necessary rights in respect of all of their Business Assets as owned, leased, licensed, loaned, operated or used by them or over which they have rights, free and clear of Liens, and no other rights or Business Assets are necessary for the conduct of the Business as currently conducted or as proposed to be conducted. The Corporation knows of no claim or basis for any claim that might or could have a Material Adverse Effect on the rights of the Corporation or the Subsidiary to use, transfer, lease, license, operate, sell or otherwise exploit such Business Assets and neither the Corporation nor the Subsidiary has any obligation to pay any commission, license fee or similar payment to any person in respect thereof, other than as disclosed in the Offering Documents and there are no outstanding rights of first refusal or other pre-emptive rights of purchase which entitle any person to acquire any of the rights, title or interests in the Business Assets.
(bb)
Compliance with Laws, Regulatory Approvals and Authorizations
. Pure Natures Wellness Inc. is an approved licensed producer in the medical cannabis industry and all operations of the Corporation and the Subsidiary in respect of or in connection with the Business Assets have been and continue to be conducted in accordance with best industry practices and, to the knowledge of the Corporation, in material compliance with all Applicable Laws. The Corporation and the Subsidiary have obtained and are in compliance with all Authorizations to permit them to conduct their Business as currently conducted or proposed to be conducted. All of the Authorizations issued to date are valid and in full force and effect and neither the Corporation nor the Subsidiary have received any correspondence or notice from any Governmental Authority alleging or asserting material non-compliance with any Applicable Laws or Authorizations. Neither the Corporation nor the Subsidiary have received any notice of proceedings or actions relating to the revocation, suspension, limitation or modification of any Authorizations or any notice advising of the refusal to grant any Authorization that has been applied for or is in process of being granted and has no knowledge or reason to believe that any such Governmental Authority is considering taking or would have reasonable ground to take any such action.
(cc)
Research and Development
. All product research and development activities, including quality assurance, quality control, testing, and research and analysis activities, conducted by the Corporation and the Subsidiary in connection with their business is being conducted in compliance, in all material respects, with all
20
industry, laboratory safety, management and training standards applicable to the Business and all such processes, procedures and practices required in connection with such activities are in place as necessary and are being complied with in all material respects.
(dd)
Business Relationships
. All agreements with third parties in connection with the Business have been entered into and are being performed by the Corporation and the Subsidiary and, to the knowledge of the Corporation, by all other third parties thereto, in compliance with their terms. There exists no actual or, to the knowledge of the Corporation, threatened termination, cancellation or limitation of, or any material adverse modification or material change in, the business relationship of the Corporation or the Subsidiary, with any supplier or customer, or any group of suppliers or customers whose business with or whose purchases or inventories/components provided to the business of the Corporation or the Subsidiary are individually or in the aggregate material to the assets, business, properties, operations or financial condition of the Corporation or the Subsidiary. All such business relationships are intact and mutually cooperative, and there exists no condition or state of fact or circumstances that would prevent the Corporation or the Subsidiary from conducting such business with any such third parties in the same manner in all material respects as currently conducted or proposed to be conducted.
(ee)
Privacy Protection
. Each of the Corporation and the Subsidiary has security measures and safeguards in place to protect personal information it collects from registered patients and customers and other parties from illegal or unauthorized access or use by its personnel or third parties or access or use by its personnel or third parties in a manner that violates the privacy rights of third parties. The Corporation and the Subsidiary have complied, in all material respects, with all applicable privacy and consumer protection legislation and neither has collected, received, stored, disclosed, transferred, used, misused or permitted unauthorized access to any information protected by privacy laws, whether collected directly or from third parties, in an unlawful manner. The Corporation and the Subsidiary have taken all reasonable steps to protect personal information against loss or theft and against unauthorized access, copying, use, modification, disclosure or other misuse.
(ff)
Intellectual Property
. The Corporation and the Subsidiary own or possess the right to use all material patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of their respective businesses, and the Corporation is not aware of any bona fide claim to the contrary or any challenge by any other person to the rights of the Corporation and the Subsidiary with respect to the foregoing. To the knowledge of the Corporation, the Corporation’s business, including that of the Subsidiary, as now conducted does not, and as currently proposed to be conducted will not, infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right
21
of any person. No bona fide claim has been made against the Corporation or the Subsidiary alleging the infringement by the Corporation or the Subsidiary of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person.
(gg)
Environmental and Workplace Laws
. Each of the Corporation and the Subsidiary is currently in compliance, in all material respects, with all Environmental Laws, including all reporting and monitoring requirements thereunder, and there are no pending or, to the knowledge of the Corporation, any threatened, administrative, regulatory or judicial actions, suits, demands, claims, liens, notices of non-compliance or violation, investigation or proceedings relating to any Environmental Laws. Neither the Corporation nor the Subsidiary have ever received any notice of any non-compliance in respect of Environmental Laws, there are no events or circumstances that might reasonably be expected to form the basis of an order for clean up or remediation under Environmental Laws or relating to any Hazardous Materials and there are no permits required under Environmental Laws for the conduct of the Business. The facilities and operations of the Corporation and the Subsidiary are currently being conducted, and to the knowledge of the Corporation have been conducted, in all material respects in accordance with all applicable workers’ compensation and health and safety and workplace laws, regulations and policies.
(hh)
Insurance
. The Corporation and the Subsidiary maintain insurance by insurers of recognized financial responsibility, against such losses, risks and damages to their Business Assets in such amounts that are customary for the business in which they are engaged and on a basis consistent with reasonably prudent persons in comparable businesses, and all of the policies in respect of such insurance coverage, fidelity or surety bonds insuring the Corporation, the Subsidiary, and their respective directors, officers and employees, and the Business Assets, are in good standing and in full force and effect in all respects, and not in default. Each of the Corporation and the Subsidiary is in compliance with the terms of such policies and instruments in all material respects and there are no material claims by the Corporation or the Subsidiary under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; the Corporation has no reason to believe that it will not be able to renew such existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue the Business at a cost that would not have a Material Adverse Effect, and neither the Corporation nor the Subsidiary has failed to promptly give any notice of any material claim thereunder.
(ii)
Material Agreements and Debt Instruments
. All Material Agreements and Debt Instruments have been described or disclosed in the Offering Documents and each Material Agreement and Debt Instrument is valid, subsisting, in good standing and in full force and effect, enforceable in accordance with the terms thereof. The Corporation and the Subsidiary have, in all material respects, performed all obligations in a timely manner under, and are in compliance, in all material
22
respects, with all terms and conditions (including any financial covenants) contained in each Material Agreement and Debt Instrument. Neither the Corporation nor the Subsidiary are in material breach, violation or default nor has it received any notification from any party claiming that the Corporation or such Subsidiary is in material breach, violation or default under any Material Agreement or Debt Instrument and no other party, to the knowledge of the Corporation, is in material breach, violation or default of any term under any Material Agreement or Debt Instrument.
(jj)
No Material Changes
. Since May 31, 2017, other than as disclosed in the Prospectus (a) there has been no material change in the assets, liabilities, obligations (absolute, accrued, contingent or otherwise) business, condition (financial or otherwise), properties, capital or results of operations of the Corporation and the Subsidiary considered as one enterprise, and (b) there have been no transactions entered into by the Corporation or the Subsidiary, other than those in the ordinary course of business, which are material with respect to the Corporation and the Subsidiary considered as one enterprise.
(kk)
Absence of Proceedings
. There is no action, suit, proceeding, inquiry or investigation before or brought by any Governmental Authority, domestic or foreign, now pending or, to the knowledge of the Corporation, threatened against or affecting the Corporation, any subsidiary or the Business Assets (including in respect of any product liability claims) which is required to be disclosed in the Offering Documents, and which if not so disclosed, or which if determined adversely, would have a Material Adverse Effect, or would materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Corporation of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Corporation or the Subsidiary is a party or of which any of their respective property or assets is subject, which are not described in the Offering Documents would not reasonably be expected to result in a Material Adverse Effect.
(ll)
Absence of Defaults and Conflicts
. Neither the Corporation nor the Subsidiary is in material violation, default or breach of, and the execution, delivery and performance of this Agreement, the Offering Documents and the consummation of the transactions and compliance by the Corporation with its obligations hereunder and thereunder, the sale of the Offered Shares and the grant of the Over-Allotment Option do not and will not, whether with or without the giving of notice or passage of time or both, result in a material violation, default or breach of, or conflict with, or result in a Repayment Event or the creation or imposition of any Lien upon any property or assets of the Corporation, including the Business Assets, or the Subsidiary under the terms or provisions of (i) any Material Agreements or Debt Instruments, (ii) the articles or by-laws or other constating documents or resolutions of the directors or shareholders of the Corporation or the Subsidiary, (iii) any existing Applicable Laws, including Securities Laws, (iv) any judgment, order, writ or decree of any government,
23
government instrumentality or court, domestic or foreign, having jurisdiction over the Corporation, or the Subsidiary or any of their assets, properties or operations.
(mm)
Labour Matters
. No material work stoppage, strike, lock-out, labour disruption, dispute grievance, arbitration, proceeding or other conflict with the employees of the Corporation or the Subsidiary currently exists or, to the knowledge of the Corporation, is imminent or pending and the Corporation and its Subsidiary are in material compliance with all provisions of all federal, national, regional, provincial and local laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours.
(nn)
Employment Standards
. There are no material complaints against the Corporation or the Subsidiary before any employment standards branch or tribunal or human rights tribunal, nor any complaints or any occurrence which would reasonably be expected to lead to a complaint under any human rights legislation or employment standards legislation that would be material to the Corporation. There are no outstanding decisions or settlements or pending settlements under applicable employment standards legislation which place any material obligation upon the Corporation or the Subsidiary to do or refrain from doing any act. The Corporation and Subsidiary are currently in material compliance with all workers’ compensation, occupational health and safety and similar legislation, including payment in full of all amounts owing thereunder, and there are no pending claims or outstanding orders of a material nature against either of them under applicable workers’ compensation legislation, occupational health and safety or similar legislation nor has any event occurred which may give rise to any such material claim.
(oo)
Collective Bargaining Agreements
. Neither the Corporation nor the Subsidiary is party to any collective bargaining agreements with unionized employees. To the knowledge of the Corporation, no action has been taken or is being contemplated to organize or unionize any other employees of the Corporation or the Subsidiary that would have a Material Adverse Effect.
(pp)
Employee Plans
. The Offering Documents disclose, to the extent required by applicable Canadian Securities Laws, each material plan for retirement, bonus, stock purchase, profit sharing, stock option, deferred compensation, severance or termination pay, insurance, medical, hospital, dental, vision care, drug, sick leave, disability, salary continuation, legal benefits, unemployment benefits, vacation, incentive or otherwise contributed to, or required to be contributed to, by the Corporation for the benefit of any current or former director, officer, employee or consultant of the Corporation (the “
Employee Plans
”), each of which has been maintained in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Employee Plans.
(qq)
Taxes
. All tax returns, reports, elections, remittances and payments of the Corporation and the Subsidiary required by applicable law to have been filed or
24
made in any applicable jurisdiction, have been filed or made (as the case may be) and are true, complete and correct except where the failure to make such filing, election, or remittance and payment would not constitute a Material Adverse Effect, and all taxes of the Corporation and of the Subsidiary have been paid or accrued in the Financial Statements (except as any extension may have been requested or granted and in any case in which the failure to file, pay or accrue such taxes would not result in a Material Adverse Effect). There are no examinations of any tax return of the Corporation or the Subsidiary currently in progress and there are no issues or disputes outstanding with any governmental authority respecting any taxes that have been paid, or may be payable, by the Corporation or the Subsidiary.
(rr)
Anti-Bribery Laws
. Neither the Corporation nor the Subsidiary nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of the foregoing, has (i) violated any anti-bribery or anti-corruption laws applicable to the Corporation and the Subsidiary, including
Canada’s Corruption of Foreign Public Officials Act
, or (ii) offered, paid, promised to pay, or authorized the payment of any money, or offered, given, promised to give, or authorized the giving of anything of value, that goes beyond what is reasonable and customary and/or of modest value: (X) to any Government Official, whether directly or through any other person, for the purpose of influencing any act or decision of a Government Official in his or her official capacity; inducing a Government Official to do or omit to do any act in violation of his or her lawful duties; securing any improper advantage; inducing a Government Official to influence or affect any act or decision of any Governmental Authority; or assisting any representative of the Corporation or the Subsidiary in obtaining or retaining business for or with, or directing business to, any person; or (Y) to any person in a manner which would constitute or have the purpose or effect of public or commercial bribery, or the acceptance of or acquiescence in extortion, kickbacks, or other unlawful or improper means of obtaining business or any improper advantage. Neither the Corporation nor the Subsidiary nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of foregoing, has (i) conducted or initiated any review, audit, or internal investigation that concluded the Corporation, a subsidiary or any director, officer, employee, consultant, representative or agent of the foregoing violated such laws or committed any material wrongdoing, or (ii) made a voluntary, directed, or involuntary disclosure to any Governmental Authority responsible for enforcing anti-bribery or anti-corruption laws, in each case with respect to any alleged act or omission arising under or relating to non-compliance with any such laws, or received any notice, request, or citation from any person alleging non-compliance with any such laws.
(ss)
No Significant Acquisitions
. The Corporation has not completed any “significant acquisition” (within the meaning of such term under NI 51-102) nor is it proposing any “probable acquisitions” (within the meaning of such term under NI 44-101F1) that would require the inclusion or incorporation by reference of
25
any additional financial statements or pro forma financial statements in the Prospectus or the filing of a Business Acquisition Report pursuant to Canadian Securities Laws.
(tt)
Corporation Short Form Eligible
. The Corporation is eligible to file a short form prospectus in each of the Qualifying Jurisdictions pursuant to applicable Canadian Securities Laws and on the date of and upon filing of the Final Prospectus there will be no documents required to be filed under the Canadian Securities Laws in connection with the distribution of the Offered Shares that will not have been filed as required.
(uu)
Compliance with Laws
. The Corporation has complied, or will have complied, in all material respects with all relevant statutory and regulatory requirements required to be complied with prior to the Closing Time in connection with the Offering. Neither the Corporation nor the Subsidiary is aware of any legislation or proposed legislation, which they anticipate will have a Material Adverse Effect.
(vv)
No Loans
. Except as disclosed in the Financial Statements, neither the Corporation nor the Subsidiary has made any material loans to or guaranteed the material obligations of any person.
(ww)
Directors and Officers
. None of the directors or officers of the Corporation are now, or have ever been, subject to an order or ruling of any securities regulatory authority or stock exchange prohibiting such individual from acting as a director or officer of a public company or of a company listed on a particular stock exchange.
(xx)
Minute Books and Records
. The minute books and records of the Corporation and the Subsidiary made available to counsel for the Underwriters in connection with their due diligence investigation of the Corporation for the periods requested to the date hereof are all of the minute books and material records of the Corporation and the Subsidiary and contain copies of all material proceedings (or certified copies thereof or drafts thereof pending approval) of the shareholders, the directors and all committees of directors of the Corporation and the Subsidiary, as the case may be, to the date of review of such corporate records and minute books and there have been no other meetings, resolutions or proceedings of the shareholders, directors or any committees of the directors of the Corporation and the Subsidiary to the date hereof not reflected in such minute books and other records, other than those which have been disclosed to the Underwriters or which are not material in the context of the Corporation and the Subsidiary.
(yy)
No Dividends
. During the previous 12 months, the Corporation has not, directly or indirectly, declared or paid any dividend or declared or made any other distribution on any of its shares or securities of any class, or, directly or indirectly, redeemed, purchased or otherwise acquired any of its Common Shares or securities or agreed to do any of the foregoing. There are no restrictions upon or impediment to, the declaration or payment of dividends by the directors of the
26
Corporation or the payment of dividends by the Corporation in the constating documents or in any Material Agreements or Debt Instruments.
(zz)
Fees and Commissions
. Other than the Underwriters (and their selling group members) pursuant to this Agreement, there is no other person acting at the request of the Corporation, or to the knowledge of the Corporation, purporting to act who is entitled to any brokerage, agency or other fiscal advisory or similar fee in connection with the Offering or transactions contemplated herein.
(aaa)
Entitlement to Proceeds
. Other than the Corporation, there is no person that is or will be entitled to demand any of the net proceeds of the Offering.
(bbb)
Related Parties
. Except as described or disclosed in the Offering Documents, none of the directors, officers or employees of the Corporation, any known holder of more than 10% of any class of securities of the Corporation or securities of any person exchangeable for more than 10% of any class of securities of the Corporation, or any known associate or affiliate of any of the foregoing persons or companies (as such terms are defined in the Securities Act), has had any material interest, direct or indirect, in any material transaction within the previous two years or any proposed material transaction which, as the case may be, materially affected or is reasonably expected to materially affect the Corporation and the Subsidiary, on a consolidated basis. Neither the Corporation nor the Subsidiary has any material loans or other indebtedness outstanding which has been made to any of its shareholders, officers, directors or employees, past or present, or any person not dealing at “arm’s length” (within the meaning of the Income Tax Act (Canada)) with them.
(ccc)
Sales by Insiders
. To the knowledge of the Corporation, no insider of the Corporation has a present intention to sell any securities of the Corporation held by it other than has been disclosed to the Underwriters.
Section 8
Covenants of the Corporation
The Corporation covenants and agrees with the Underwriters, and acknowledges that each of them is relying on such covenants in connection with the purchase of the Offered Shares, as follows:
(1)
Notification of Filings
. The Corporation will advise the Underwriters, promptly after receiving notice thereof, of the time when the Offering Documents have been filed and receipts, as applicable, therefor have been obtained and will provide evidence reasonably satisfactory to the Underwriters of each such filing and copies of such receipts.
(2)
Standstill
. The Corporation will not directly or indirectly, for a period commencing on the date of this Agreement and ending 90 days after the Closing Date, without the prior written consent of Clarus, on behalf of the Underwriters, such consent not to be unreasonably withheld or delayed, authorize, sell or issue or announce its intention to authorize, sell or issue, or negotiate or enter into an agreement to sell or issue, any securities of the Corporation (including those that are convertible or exchangeable into
27
securities of the Corporation) other than (i) pursuant to the Offering; (ii) the issuance of non-convertible debt securities; (iii) upon the exercise of convertible securities, options or warrants of the Corporation outstanding as of the date hereof; (iv) pursuant to the Corporation’s stock option plan or any other share compensation arrangement of the Company; (v) pursuant to any acquisition of shares or assets of arm’s length persons, or (vi) in connection with any strategic transactions, investments or supply agreements between the Corporation and a third party, including any stock options that may be issued to any arm’s length persons in connection with such strategic transactions, investments or supply agreements.
(3)
Lock-Up Agreements
. The Corporation will cause each of the directors and officers of the Corporation who are directors or officers effective as of the Closing Date, to enter into lock-up agreements in a form satisfactory to the Corporation and Clarus, on behalf of the Underwriters, each acting reasonably pursuant to which each such person agrees, for a period of 90 days after the Closing Date, not to directly or indirectly, offer, sell, contract to sell, grant any option to purchase, make any short sale, or otherwise dispose of, or transfer, or announce any intention to do so, any Common Shares, whether now owned directly or indirectly, or under their control or direction, or with respect to which each has beneficial ownership, or enter into any transaction or arrangement that has the effect of transferring, in whole or in part, any of the economic consequences of ownership of Common Shares, whether such transaction is settled by the delivery of Common Shares, other securities, cash or otherwise other than pursuant to a take-over bid or any other similar transaction made generally to all of the shareholders of the Corporation.
(4)
Maintain Reporting Issuer Status
. The Corporation will use its commercially reasonable best efforts to maintain its status as a “reporting issuer” (or the equivalent thereof) not in default of the requirements of the Canadian Securities Laws in each of the provinces of Canada other than Quebec, and following the filing of the Final Prospectus in each of the Qualifying Jurisdictions, to the date that is at least 24 months following the Closing Date, provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(5)
Maintain Stock Exchange Listing
. The Corporation will use its commercially reasonable best efforts to maintain the listing of the Common Shares (including those issuable pursuant to the Offering) on the TSX or such other recognized stock exchange or quotation system as the Underwriters may approve, acting reasonably, for a period of at least 24 months following the Closing Date, provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(6)
Validly Issued Securities
. The Corporation will, provided it receives payment therefor, ensure that at the Closing Time the Offered Shares have been duly and validly issued as fully paid and non-assessable Common Shares.
(7)
Use of Proceeds
. The Corporation will use the proceeds of the Offering in the manner specified in the Prospectus under the heading “Use of Proceeds”.
28
(8)
Consents and Approvals
. The Corporation will have made or obtained, as applicable, using commercially reasonable best efforts at or prior to the Closing Time, all consents, approvals, permits, authorizations or filings as may be required by the Corporation under Securities Laws necessary for the consummation of the transactions contemplated herein, other than customary post-closing filings required to be submitted within the applicable time frame pursuant to Securities Laws and the rules of the TSX.
(9)
Closing Conditions
. The Corporation will have, at or prior to the Closing Time, fulfilled or caused to be fulfilled, each of the conditions set out in Section 10 hereof.
Section 9
Representations, Warranties and Covenants of the Underwriters
(1)
Each Underwriter hereby severally, and not jointly, nor jointly and severally, represents and warrants to the Corporation, the following:
(a)
Registration
. The Underwriters are, and will remain so, until the completion of the Offering, appropriately registered under applicable Canadian Securities Laws so as to permit it to lawfully fulfill its obligations hereunder;
(b)
Authority
. The Underwriters have good and sufficient right and authority to enter into this Agreement and complete the transactions contemplated under this Agreement on the terms and conditions set forth herein.
(c)
Marketing Materials
. Other than the Marketing Material, the Underwriters have not provided any marketing materials to any potential investors in connection with the Offering.
(2)
The Underwriters hereby severally, and not jointly, nor jointly and severally, covenant and agree with the Corporation, the following:
(a)
Jurisdictions and Offering Price
. During the period of distribution of the Offered Shares by or through the Underwriters, the Underwriters will offer and sell Offered Shares to the public only in the Selling Jurisdictions where they may lawfully be offered for sale upon the terms and conditions set forth in the Prospectus and this Agreement either directly or through other registered investment dealers and brokers. The Underwriters shall be entitled to assume that the Offered Shares are qualified for distribution in any Qualifying Jurisdiction where the Final Receipt shall have been obtained following the filing of the Prospectus.
(b)
Compliance with Securities Laws
. The Underwriters will comply with applicable Securities Laws in connection with the offer and sale and distribution of the Offered Shares.
(c)
U.S. Sales
. The Underwriters will not directly or indirectly, solicit offers to purchase or sell the Offered Shares or deliver any Offering Document to purchasers so as to require registration of the Offered Shares or the filing of a prospectus or registration statement with respect to the Offered Shares under the
29
Laws of any jurisdiction other than the Qualifying Jurisdictions, including without limitation, the United States.
(d)
Completion of Distribution
. The Underwriters will use their commercially reasonable best efforts to complete the distribution of the Offered Shares as promptly as possible after the Closing Time. Clarus will notify the Corporation when the Underwriters have ceased the distribution of the Offered Shares, and, within thirty (30) days after the Closing Date, will provide the Corporation, in writing, with a breakdown of the number of Offered Shares distributed (i) in each of the Qualifying Jurisdictions, and (ii) in any other Selling Jurisdictions.
(e)
Liability on Default
. No Underwriter shall be liable to the Corporation under this Section with respect to a breach or default by the other Underwriter.
Section 10
Conditions of Closing
The Underwriters’ obligation to purchase the Offered Shares pursuant to this Agreement (including the obligation to complete the purchase of the Purchased Shares and the Over-Allotment Shares, as the case may be) shall be subject to the following conditions having been met at the Closing Time:
(1)
the Underwriters receiving favourable legal opinions from Stikeman Elliott LLP, counsel to the Corporation (who may rely, to the extent appropriate in the circumstances, on the opinions of local counsel acceptable to counsel to the Underwriters as to the qualification of the Offered Shares for sale to the public and as to other matters governed by the laws of jurisdictions in Canada other than the provinces in which they are qualified to practice and may rely, to the extent appropriate in the circumstances, as to matters of fact on certificates of officers, public and exchange officials or of the auditor or transfer agent of the Corporation), substantially to the effect set forth below, subject to customary assumptions, qualifications and limitations:
(a)
the Corporation is a corporation validly incorporated and existing under the
Business Corporations Act
(Ontario) and has all requisite corporate power and capacity to carry on business, to own and lease properties and assets;
(b)
the Corporation has all necessary corporate power and authority to (i) execute, deliver and perform its obligations under this Agreement, (ii) to create, issue and sell the Offered Shares, and (iii) to grant the Over-Allotment Option;
(c)
the authorized and issued capital of the Corporation;
(d)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder and this Agreement has been duly executed and delivered by the Corporation and constitutes a legal, valid and binding obligation of the Corporation enforceable against it in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting the rights of creditors generally and subject to such other standard assumptions and qualifications including the
30
qualifications that equitable remedies may be granted in the discretion of a court of competent jurisdiction and that enforcement of rights to indemnity, contribution and waiver of contribution set out in this Agreement may be limited by applicable law;
(e)
the execution and delivery of this Agreement and the fulfilment of the terms of this Agreement by the Corporation and the issuance, sale and delivery of the Offered Shares and the grant of the Over-Allotment Option, do not and will not result in a breach of or default under, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach of or default under, and do not and will not conflict with the articles and by-laws of the Corporation, any resolutions of the shareholders or directors of the Corporation, or any applicable corporate law or Securities Laws;
(f)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of each of the Preliminary Prospectus and the Final Prospectus (and any Supplementary Material) and the filing thereof with the Securities Commissions in the Qualifying Jurisdictions;
(g)
the Offered Shares have been validly issued as fully paid and non-assessable shares in the capital of the Corporation;
(h)
all necessary documents have been filed, all necessary proceedings have been taken and all necessary authorizations, approvals, permits, consents and orders have been obtained under Canadian Securities Laws to qualify the distribution to the public of the Offered Shares in the Qualifying Jurisdictions by or through persons who are duly registered under the applicable Canadian Securities Laws and who have complied with the relevant provisions of such applicable Canadian Securities Laws and to qualify the grant of the Over-Allotment Option;
(i)
subject to the qualifications and assumptions set out therein, the statements set forth in the Preliminary Prospectus and the Final Prospectus under the caption “Eligibility for Investment” and “Canadian Federal Income Tax Considerations”, insofar as they purport to describe the provisions of the laws referred to therein, are fair summaries of the matters discussed therein;
(j)
subject only to the standard listing conditions, the Offered Shares have been conditionally listed or approved for listing on the TSX; and
(k)
to such other matters as may reasonably be requested by the Underwriters no less than 48 hours prior to the Closing Time;
in form and substance acceptable to the Underwriters and their counsel, acting reasonably.
(2)
the Underwriters receiving favourable legal opinions from counsel to the Subsidiary in form and substance acceptable to the Underwriters and their counsel, acting reasonably, substantially to the effect set out below:
31
(a)
the Subsidiary having been incorporated and existing under the
Business Corporations Act
(Ontario);
(b)
the Subsidiary having the corporate capacity and power to own and lease its properties and assets and to conduct its business as described in the Prospectus; and
(c)
as to the authorized and issued share capital of the Subsidiary and to the ownership thereof;
(3)
if the Offered Shares are sold in the United States, the Underwriters receiving a favourable legal opinion dated the Closing Date from Dorsey & Whitney LLP, addressed to the Underwriters, to the effect that no registration is required under the U.S. Securities Act, in connection with the offer, sale and delivery of the Offered Shares to, or for the account or benefit of, persons in the United States;
(4)
the Underwriters having received certificates dated the Closing Date and signed by two senior officers of the Corporation as may be acceptable to the Underwriters, acting reasonably, in form and substance satisfactory to the Underwriters, acting reasonably, with respect to:
(a)
the constating documents of the Corporation;
(b)
the resolutions of the directors of the Corporation relevant to the Offering Documents, the sale of the Offered Shares, the grant of the Over-Allotment Option, and the authorization of this Agreement and the transactions contemplated herein; and
(c)
the incumbency and signatures of signing officers for the Corporation;
(5)
the Underwriters receiving certificates of status and/or compliance, where issuable under applicable law, for the Corporation and the Subsidiary, each dated within one Business Day prior to the Closing Date;
(6)
the Underwriters receiving an auditors “bring down” comfort letter dated the Closing Date from PricewaterhouseCoopers LLP, in form and substance satisfactory to the Underwriters, acting reasonably, bringing forward to a date not more than two Business Days prior to the Closing Date the information contained in the comfort letter referred to in Section 4(1)(d) hereof;
(7)
the Underwriters receiving a certificate dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer or such other senior officer(s) of the Corporation as may be acceptable to the Underwriters, certifying for and on behalf of the Corporation and without personal liability, after having made due enquiries, that:
(a)
the representations and warranties of the Corporation contained in this Agreement, and in any certificates of the Corporation delivered pursuant to or in connection with this Agreement, are true and correct in all material respects as of
32
the Closing Time as if such representations and warranties were made as at the Closing Time, after giving effect to the transactions contemplated hereby;
(b)
the Corporation has complied in all material respects with all the covenants and satisfied in all material respects all the terms and conditions of this Agreement on its part to be complied with and satisfied at or prior to the Closing Time;
(c)
no order, ruling or determination having the effect of suspending the sale or ceasing the trading or prohibiting the sale of the Offered Shares or any other securities of the Corporation (including the Common Shares) has been issued by any regulatory authority and is continuing in effect and no proceedings for that purpose have been instituted or are pending or, to the knowledge of such officers, contemplated or threatened by any regulatory authority;
(d)
since the respective dates as of which information is given in the Final Prospectus (A) there has been no material change (actual, anticipated, contemplated or threatened, whether financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise), prospects or capital of the Corporation on a consolidated basis, and (B) no transaction has been entered into by the Corporation or the Subsidiary which is material to the Corporation on a consolidated basis, other than as disclosed in the Final Prospectus or the Supplementary Material, as the case may be; and
(e)
there has been no change in any material fact (which includes the disclosure of any previously undisclosed material fact) contained in the Final Prospectus which fact or change is, or may be, of such a nature as to render any statement in the Final Prospectus misleading or untrue in any material respect or which would result in a misrepresentation in the Final Prospectus or which would result in the Final Prospectus not complying with applicable Canadian Securities Laws;
(8)
the Underwriters receiving the executed lock-up agreements from each director and executive officer of the Corporation (other than as contemplated by Section 8(3)) in favour of the Underwriters in a form satisfactory to the Underwriters as required pursuant to Section 8(3) of this Agreement;
(9)
the Underwriters receiving a certificate from Computershare Investor Services Inc. as to the number of Common Shares issued and outstanding as at the end of business day on the date prior to the Closing Date;
(10)
no order, ruling or determination having the effect of ceasing or suspending trading in any securities of the Corporation or prohibiting the sale of the Offered Shares or any of the Corporation’s issued securities being issued and no proceeding for such purpose being pending or, to the knowledge of the Corporation, threatened by any securities regulatory authority or the TSX;
(11)
the Corporation having delivered to the Underwriters evidence of the approval (or conditional approval) of the listing and posting for trading of the Offered Shares on the TSX, subject only to satisfaction by the Corporation of standard listing conditions;
33
(12)
the Corporation complying with all of its covenants and obligations under this Agreement required to be satisfied at or prior to the Closing Time;
(13)
the Underwriters not having exercised any rights of termination set forth herein; and
(14)
the Underwriters having received such further certificates, opinions of counsel and other documentation from the Corporation contemplated herein, provided, however, that the Underwriters or their counsel shall request any such certificate or document within a reasonable period prior to the Closing Time that is sufficient for the Corporation to obtain and deliver such certificate, opinion or document.
Section 11
Closing
(1)
Location of Closing
. The Offering will be completed at the offices of Stikeman Elliott LLP in Toronto, Ontario at the Closing Time.
(2)
Securities
. At the Closing Time, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters in Toronto, Ontario, the Offered Shares in electronic or certificated form against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Offered Shares being issued and sold hereunder to purchasers that are not President’s List purchasers by wire transfer or certified cheque, net of the Commission and expenses of the Underwriters payable by the Corporation as set out in this Agreement.
Section 12
Closing of the Over-Allotment Option
(1)
Written Notice of Exercise
. The Over-Allotment Option may be exercised for a period of 30 days from and including the Closing Date. Clarus, on behalf of the Underwriters, shall provide written notice to the Corporation of its election to exercise the Over-Allotment Option, which notice will set forth: (i) the aggregate number of Over-Allotment Shares to be purchased; and (ii) the closing date for the Over-Allotment Shares, provided that such closing date shall not be less than two Business Days and no more than seven Business Days following the date of such notice, and in any event not later than the 30
th
day following the Closing Date.
(2)
Closing
. The purchase and sale of the Over-Allotment Shares, if required, shall be completed at such time and place as the Underwriters and the Corporation may agree, and in accordance with Section 12(1) above.
(3)
Securities
. At the closing of the Over-Allotment Option, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters the Over-Allotment Shares, in electronic or certificated form, registered as directed by the Underwriters, against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Over-Allotment Shares being issued and sold by wire transfer or certified cheque, net of the Commission and any expenses of the Underwriters payable by the Corporation as set out in this Agreement.
34
(4)
Deliveries
. The applicable terms, conditions and provisions of this Agreement (including the provisions of Section 10 relating to closing deliveries) shall apply
mutatis mutandis
to the Closing of the issuance of any Over-Allotment Shares pursuant to any exercise of the Over-Allotment Option.
(5)
Adjustments
. In the event that the Corporation shall subdivide, consolidate, reclassify or otherwise change its Common Shares during the period in which the Over-Allotment Option is exercisable, appropriate adjustments will be made to the Offering Price and to the number of Over-Allotment Shares issuable on exercise thereof such that the Underwriters are entitled to arrange for the sale of the same number and type of securities that the Underwriters would have otherwise arranged for had they exercised such Over-Allotment Option immediately prior to such subdivision, consolidation, reclassification or change.
Section 13
Indemnification and Contribution
(1)
The Corporation and the Subsidiary, as the case may be (collectively, the “
Indemnitor
”) hereby agrees to indemnify and hold each of the Underwriters, and/or any of their respective affiliates and each of their respective directors, officers, employees, partners, agents, shareholders, each other person, if any, controlling the Underwriters or any of their subsidiaries (collectively, the “
Indemnified Parties
” and individually an “
Indemnified Party
”) harmless from and against any and all losses, claims (including shareholder actions, derivative or otherwise), actions, suits, proceedings, damages, liabilities or expenses of whatever nature or kind, joint or several, including the aggregate amount paid in reasonable settlement of any actions, suits, proceedings, investigations or claims, and the reasonable fees, expenses and taxes of one counsel to the Indemnified Parties taken as a whole (collectively, the “
Losses
”) that may be incurred in investigating or advising with respect to and/or defending or settling any action, suit, proceeding, investigation or claim that may be made or threatened against any Indemnified Party or in enforcing this indemnity (collectively, the “
Claims
”) or to which the Indemnified Parties may become subject or otherwise involved in any capacity insofar as such Claims relate to, are caused by, result from, arise out of or are based, directly or indirectly, upon the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder or otherwise in connection with the matters referred to in this Agreement, and to reimburse each Indemnified Party forthwith, upon demand, for any legal or other expenses reasonably incurred by such Indemnified Party in connection with any Claim. This indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses were solely caused by the gross negligence, wilful misconduct or fraud of the Indemnified Party.
(2)
If for any reason (other than a determination as to any of the events referred to above) the foregoing indemnity is unavailable to an Indemnified Party, or is insufficient to hold them harmless, then the Indemnitor shall contribute to the Losses paid or payable by such Indemnified Party as a result of such Claim in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnitor or its shareholders on the one hand and the Indemnified Party on the other hand but also the relative fault of the
35
Indemnitor and the Indemnified Party as well as any relevant equitable considerations, provided that the Indemnitor shall in any event contribute to the Losses paid or payable by the Indemnified Party as a result of such Claim, in such amount that is in excess of the amount of the Commission actually received by the Underwriters pursuant to this Agreement. In the event that the Indemnitor may be entitled to contribution from the Indemnified Parties under the provisions of any statute or law, the Indemnitor shall be limited to contribution in any amount not exceeding the lesser of the portion of the Losses giving rise to such contribution for which the Underwriters are responsible and the amount of the Commission received by the Underwriters. However, no party shall be entitled to contribution under this subsection to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses for which contribution is being sought hereunder, were solely caused by the gross negligence, wilful misconduct or fraud of such party.
(3)
Promptly after receipt of notice of the commencement of any Claim against an Indemnified Party or after receipt of notice of the commencement of any investigation, which is based, directly or indirectly, upon any matter in respect of which indemnification may be sought from the Indemnitor hereunder, the Underwriters will notify the Corporation in writing of the commencement thereof and the Indemnitor will undertake the investigation and defence thereof on behalf of the Indemnified Parties, including the prompt employment of counsel of good standing acceptable to the Indemnified Parties, acting reasonably, and the payment of all expenses, reasonably incurred. The omission to so notify the Indemnitor shall not relieve the Indemnitor of any liability which the Indemnitor may have to an Indemnified Party except only to the extent that any such delay in giving or failure to give notice as herein required results in the forfeiture by the Indemnitor of substantive rights or defences. The Indemnitor shall throughout the course thereof provide copies of all relevant documentation to the Indemnified Party and will keep the Indemnified Party advised of all discussions and significant actions proposed in respect thereof.
(4)
Notwithstanding the foregoing paragraph, any Indemnified Party shall also have the right to employ separate counsel in any such Claim and participate in the defence thereof, and the fees and expenses of such counsel shall be borne by the Indemnified Party unless:
(a)
the employment of separate counsel has been authorized in writing by the Corporation;
(b)
the Corporation has not assumed the defence of the Claim within a reasonable period of time after receiving notice of the Claim;
(c)
the named parties to any such Claim include both the Indemnitor and the Indemnified Parties and the Indemnified Parties have been advised by their counsel that representation of both parties by the same counsel would be inappropriate due to an actual or a potential conflict of interest; or
36
(d)
there are one or more defences available to the Indemnified Parties which are different from or in addition to those available to the Indemnitor such that there may be a conflict of interest between the parties;
in which case such fees and expenses of such counsel to the Indemnified Parties shall be for the Indemnitor’s account.
(5)
The Indemnitor agrees that if any Claim shall be brought or commenced against the Indemnitor and/or any Indemnified Party and the personnel of such Indemnified Party shall be required to testify in connection therewith or shall be required to participate or respond to procedures designed to discover information regarding, in connection with, or by reason of the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder, the Indemnified Party shall have the right to employ its own counsel in connection therewith, and the reasonable fees and expenses of such counsel as well as the reasonable costs (including an amount to reimburse the Indemnified Party monthly for time spent by its personnel in connection therewith at their normal per diem rates together with such disbursements and reasonable out-of-pocket expenses incurred by the personnel of the Indemnified Party in connection therewith) shall be paid by the Corporation as they occur.
(6)
A party hereunder shall not, without the other party’s prior written consent, such consent not to be unreasonably withheld, conditioned or delayed, settle, compromise, consent to the entry of any judgment, or make an admission of liability with respect to any Claims or seek to terminate any Claims in respect of which indemnification may be sought hereunder.
(7)
The rights accorded to the Indemnified Parties hereunder shall be in addition to any rights an Indemnified Party may have at common law or otherwise.
(8)
The Indemnitor agrees to waive any right the Indemnitor may have of first requiring the Indemnified Party to proceed against or enforce any right, power, remedy, security or claim payment from any other person before claiming under this indemnity. The Indemnitor hereby acknowledges that the Underwriters are acting as trustees for each of the other Indemnified Parties of the Indemnitor’s covenants under this indemnity and the Underwriters agree to accept such trust and to hold and enforce such covenants on behalf of such persons.
(9)
The indemnity and contribution obligations of the Indemnitor shall be in addition to any liability which the Indemnitor may otherwise have, shall extend upon the same terms and conditions to the Indemnified Parties who are not signatories hereto and shall be binding upon and enure to the benefit of any successors, assigns, heirs and personal representatives of the Corporation and the Indemnified Parties.
Section 14
Compensation of the Underwriters
At the Closing Time, the Corporation shall pay to Clarus, on behalf of the Underwriters, a cash fee (the “
Commission
”) equal to 5.0% of the aggregate gross proceeds received from the sale of the Offered Shares (including for certainty on any exercise of the Over-Allotment Option)
37
in consideration of the services to be rendered by the Underwriters in connection with the Offering. The Commission will be netted out of the gross proceeds of the Offering.
Section 15
Expenses
Whether or not the purchase and sale of the Offered Shares shall be completed, all costs and expenses of or incidental to the sale and delivery of the Offered Shares and of or incidental to all matters in connection with the transactions herein shall be borne by the Corporation, including, without limitation, all expenses of or incidental to the issue, sale or distribution of the Offered Shares, the fees and expenses of the Corporation’s counsel, auditors and independent experts, all costs incurred in connection with the preparation of documents relating to the Offering, and the reasonable expenses and fees incurred by the Underwriters which shall include the reasonable fees (to a maximum of $75,000 exclusive of disbursements and taxes, such amount not to be exceeded without the written approval of the Corporation, such approval not to be unreasonably withheld) and disbursements of the Underwriters’ counsel and applicable taxes thereon. The Underwriters’ expenses will be netted out of the gross proceeds of the Offering. With the exception of legal expenses, the reimbursement by the Company of all other out-of-pocket expenses incurred by the Underwriters shall not exceed $25,000 in the aggregate.
Section 16
All Terms to be Conditions
The Corporation agrees that the conditions contained in this Agreement will be complied with insofar as the same relate to acts to be performed or caused to be performed by the Corporation and each of the Corporation and the Underwriters will use its respective commercially reasonable efforts to cause all such conditions to be complied with. It is understood that the Underwriters may waive, in whole or in part, or extend the time for compliance with, any of such terms and conditions without prejudice to the rights of the Underwriters in respect of any such terms and conditions or any other or subsequent breach or non-compliance, provided that to be binding on the Underwriters any such waiver or extension must be in writing.
Section 17
Termination by Underwriters in Certain Events
(1)
Each Underwriter shall also be entitled to terminate its obligation to purchase the Offered Shares by written notice to that effect given to the Corporation at or prior to the Closing Time if:
(a)
Material Change Out
- there shall be any material change or change in a material fact, or there should be discovered any previously undisclosed material fact required to be disclosed in the Preliminary Prospectus, the Final Prospectus or any amendment thereto, in each case which, in the reasonable opinion of the Underwriters (or any of them), has or would be expected to have a significant adverse effect on the market price or value of the Common Shares, or any other securities of the Corporation;
(b)
Disaster Out
- there should develop, occur or come into effect or existence any event, action, state, condition (including without limitation, terrorism or accident) or major financial occurrence of national or international consequence or a new or
38
change in any law or regulation which in the sole opinion of the Underwriters, or any one of them, seriously adversely affects or involves or may seriously adversely affect or involve the financial markets or the business, operations or affairs of the Corporation and its subsidiaries taken as a whole or the market price or value of the securities of the Corporation;
(c)
Regulatory Out
— there shall be (i) any inquiry, action, suit, proceeding or investigation (whether formal or informal) is commenced, announced or threatened in relation to the Corporation or any one of the officers or directors of the Corporation or any of its principal shareholders where wrong-doing is alleged or any order is made by any federal, provincial, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality including without limitation the TSX or Securities Commissions which involves a finding of wrong-doing; or (ii) any order, action or proceeding which cease trades or otherwise operates to prevent or restrict the trading of the Common Shares or any other securities of the Corporation is made or threatened by a securities regulatory authority; or
(d)
Breach Out
- the Corporation is in breach of any material term, condition or covenant of this Agreement or any material representation or warranty given by the Corporation in this Agreement becomes or is false.
(2)
If this Agreement is terminated by any of the Underwriters pursuant to Section 17(1), there shall be no further liability on the part of such Underwriter or of the Corporation to such Underwriter, except in respect of any liability which may have arisen or may thereafter arise under Section 13 and Section 15.
(3)
The right of the Underwriters or any of them to terminate their respective obligations under this Agreement is in addition to such other remedies as they may have in respect of any default, act or failure to act of the Corporation in respect of any of the matters contemplated by this Agreement. A notice of termination given by one Underwriter under this Section 17 shall not be binding upon the other Underwriter.
Section 18
Obligations of the Underwriters to be Several
(1)
Subject to the terms and conditions hereof, the obligation of the Underwriters to purchase the Offered Shares shall be several and not joint. The percentage of the Offered Shares to be severally purchased and paid for by each of the Underwriters shall be as follows:
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Clarus Securities Inc.
|
|
70
|
%
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|
|
|
|
|
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Cormark Securities Inc.
|
|
18
|
%
|
|
|
|
|
|
|
Canaccord Genuity Corp.
|
|
6
|
%
|
|
|
|
|
|
|
PI Financial Corp.
|
|
6
|
%
|
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(2)
If an Underwriter shall not complete the purchase and sale of its applicable percentage of the aggregate amount of the Offered Shares at the Closing Time for any reason whatsoever, including by reason of Section 17 hereof, the other Underwriter shall have the right, but shall not be obligated, to purchase the Offered Shares which would otherwise have been purchased by the Underwriter which fails to purchase. If, with respect to the Offered Shares, the non-defaulting Underwriter elects not to exercise such rights to assume the entire obligations of the defaulting Underwriter, then the Corporation shall have the right to either (i) proceed with the sale of the Offered Shares (less the defaulted Offered Shares) to the non-defaulting Underwriter; or (ii) terminate its obligations hereunder without liability except pursuant to the provisions of Section 13 and Section 15 in respect of the non-defaulting Underwriter.
(3)
Subject to compliance with Canadian Securities Laws, without affecting the firm obligation of the Underwriters to purchase from the Corporation 11,034,500 Offered Shares at the Offering Price in accordance with this Agreement, after the Underwriters have made reasonable effort to sell all of the Offered Shares at the Offering Price, the Offering Price may be decreased by the Underwriters and further changed from time to time to an amount not greater than the Offering Price specified herein. Such decrease in the Offering Price will not affect the Underwriters’ Commission ($0.3625 per Offered Share) to be paid by the Corporation to the Underwriters, and it will not decrease the amount of the net proceeds of the Offering to be paid by the Underwriters to the Corporation ($6.8875 per Offered Share), before deducting expenses of the Offering. The Underwriters will inform the Corporation if the Offering Price is decreased.
Section 19
Notices
Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered,
in the case of the Corporation, to:
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention:
Vic Neufeld — President & Chief Executive Officer
40
with a copy of any such notice to:
Stikeman Elliott LLP
5300 Commerce Court
199 Bay Street
Toronto, ON M5L 1B9
Attention:
Curtis Cusinato
Fax:
(416) 947-0866
in the case of the Underwriters, to:
Clarus Securities Inc.
130 King Street West
Suite 3640
Toronto, ON M5X 1A9
Attention:
Robert Orviss
Fax:
(416) 343-2799
with a copy of any such notice to:
Borden Ladner Gervais LLP
Bay Adelaide Centre — East Tower
22 Adelaide Street West King Street West
Toronto, ON M5H 4E3
Attention:
Andrew Powers
Fax:
(416) 367-6749
The Corporation and the Underwriters may change their respective addresses for notices by notice given in the manner aforesaid. Any such notice or other communication shall be in writing, and unless delivered personally to the addressee or to a responsible officer of the addressee, as applicable, shall be given by telecopy and shall be deemed to have been given when: (i) in the case of a notice delivered personally to a responsible officer of the addressee, when so delivered; and (ii) in the case of a notice delivered or given by telecopy on the first business day following the day on which it is sent.
Section 20
Miscellaneous
(a)
Actions of Underwriters
. Except with respect to Section 13, Section 17 and Section 18, all transactions and notices on behalf of the Underwriters hereunder or contemplated hereby may be carried out or given on behalf of the Underwriters by Clarus and the Underwriters shall in good faith discuss with each other the nature of any such transactions and notices prior to giving effect thereto or the delivery thereof, as the case may be.
41
(b)
Successors and Assigns
. This Agreement shall enure to the benefit of, and shall be binding upon, the Underwriters and the Corporation and their respective successors and legal representatives.
(c)
Governing Law
. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(d)
Time of the Essence
. Time shall be of the essence hereof and, following any waiver or indulgence by any party, time shall again be of the essence hereof.
(e)
Interpretation
. The words, “hereunder”, “hereof” and similar phrases mean and refer to the Agreement formed as a result of the acceptance by the Corporation of this offer by the Underwriters to purchase the Offered Shares.
(f)
Survival
. All representations, warranties, covenants and agreements of the Corporation and/or the Underwriters herein contained or contained in documents submitted pursuant to this Agreement and in connection with the transaction of purchase and sale herein contemplated shall survive for a period ending on the date that is two years following the Closing Date. Notwithstanding the preceding sentence, Section 13 shall survive the purchase and sale of the Offered Shares and the termination of this Agreement and shall continue in full force and effect for the benefit of the Underwriters or the Corporation, as the case may be, regardless of any subsequent disposition of the Offered Shares or any investigation by or on behalf of the Underwriters with respect thereto without limitation other than any limitation requirements of applicable law. The Underwriters and the Corporation shall be entitled to rely on the representations and warranties of the Corporation or the Underwriters, as the case may be, contained herein or delivered pursuant hereto notwithstanding any investigation which the Underwriters or the Corporation may undertake or which may be undertaken on their behalf.
(g)
Electronic Copies
. Each of the parties hereto shall be entitled to rely on delivery of a facsimile or PDF copy of this Agreement and acceptance by each such party of any such facsimile or PDF copy shall be legally effective to create a valid and binding agreement between the parties hereto in accordance with the terms hereof.
(h)
Severability
. If one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein.
(i)
Counterparts
. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.
(j)
Several and Joint
. In performing their respective obligations under this Agreement, the Underwriters shall be acting severally and not jointly and
42
severally. Nothing in this Agreement is intended to create any relationship in the nature of a partnership, or joint venture between the Underwriters.
(k)
Market Stabilization Activities
. In connection with the distribution of the Offered Shares, the Underwriters (or any of them) may effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which might otherwise prevail in the open market, but in each case as permitted by Canadian Securities Laws. Such stabilizing transactions, if any, may be discontinued by the Underwriters at any time.
(l)
No Fiduciary Duty
. The Corporation acknowledges that in connection with the Offering, the Underwriter: (i) have acted at arm’s length, are not agents of, and owe no fiduciary duties to, the Corporation or any other person, (ii) owe the Corporation only those duties and obligations set forth in this Agreement, and (iii) may have interests that differ from those of the Corporation. The Corporation waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the Offering.
(m)
Entire Agreement
. This Agreement constitutes the only agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations and understandings in respect of the Offering, including the engagement letter dated October 16, 2017. This Agreement may be amended or modified in any respect by written instrument only.
(n)
Further Assurances
. Each of the parties hereto shall do or cause to be done all such acts and things and shall execute or cause to be executed all such documents, agreements and other instruments as may reasonably be necessary or desirable for the purpose of carrying out the provisions and intent of this Agreement.
[Remainder of page intentionally left blank]
43
If this Agreement accurately reflects the terms of the transactions which we are to enter into and are agreed to by you, please communicate your acceptance by executing the enclosed copies of this Agreement where indicated and returning them to us.
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Yours very truly,
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CLARUS SECURITIES INC.
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CORMARK SECURITIES INC.
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By:
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Signed “Robert Orviss”
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By:
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Signed “Chris Shaw”
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Robert Orviss
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Chris Shaw
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Managing Director
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Managing Director
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CANACCORD GENUITY CORP.
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PI FINANCIAL CORP.
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By:
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Signed “Steve Winokur”
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By:
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Signed “Blake Corbet”
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Steve Winokur
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Blake Corbet
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Managing Director
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Managing Director
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The foregoing is hereby accepted and agreed to by the undersigned as of the date first written above.
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APHRIA INC.
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By:
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Signed “Carl Merton”
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Carl Merton
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Chief Financial Officer
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44
SCHEDULE “A”
SUBSIDIARY
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Jurisdiction of
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Authorized Share
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Issued and Outstanding
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Name
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Incorporation
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Capital
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Shares
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Pure Natures Wellness Inc.
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Ontario
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Unlimited common shares
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50,179,588
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SCHEDULE “B”
EXISTING RIGHTS
(1)
7,155,869 options to acquire Common Shares pursuant to the Corporation’s stock option plan, with a weighted average exercise price of $2.57 and expiry dates ranging from November 2017 to June 2021.
(2)
3,016,361 warrants to acquire Common Shares at an exercise price of $1.50 and an expiry date of December 2, 2019.
(3)
429,080 warrants to acquire Common Shares at an exercise price of $1.75 and an expiry date of December 11, 2018.
(4)
200,000 warrants to acquire Common Shares at an exercise price of $3.14 and an expiry date of September 26, 2021.
SCHEDULE “C”
COMPLIANCE WITH UNITED STATES SECURITIES LAWS
(In the event of any U.S. sales)
1.
Capitalized terms used in this Schedule “C” and not defined in this Schedule “C” shall have the meanings given in the Underwriting Agreement to which this Schedule “C” is annexed and the following terms shall have the meanings indicated:
“
Directed Selling Efforts
” means “directed selling efforts” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Offered Securities and shall include, without limitation, the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of any of such Offered Securities;
“
Disqualification Event
” means any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) of Regulation D;
“
Foreign Issuer
” means a “
foreign issuer
” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means any issuer that is (a) the government of any country, or of any political subdivision of a country, other than the United States, or (b) a national of any country other than the United States, or (c) a corporation or other organization incorporated or organized under the laws of any country other than the United States, except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: (1) more than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States, and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States;
“
General Solicitation
” and “
General Advertising
” means “general solicitation” and “general advertising”, respectively, as used in Rule 502(c) of Regulation D, including, without limitation, advertisements, articles, notices or other communication published on the Internet or in any newspaper, magazine or similar media or broadcast over television, radio or on the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising or in any manner involving a public offering within the meaning of section 4(a)(2) of the U.S. Securities Act;
“
Offered Securities
” means the Common Shares offered and sold in the Offering, including any Common Shares issued pursuant to the Over-Allotment Option;
“
Offshore Transaction
” means “offshore transaction” as defined in Regulation S;
“
Regulation D Offered Securities
” means the Offered Securities to be offered and sold to U.S. Accredited Investors in the Offering in reliance on Rule 506(b) of Regulation D;
“
Selling Firms
” means the Underwriters together with other investment dealers and brokers which participate in the offer and sale of the Offered Securities under the terms of this Agreement, including this Schedule “C”;
“
Substantial U.S. Market Interest
” means “substantial U.S. market interest” as that term is defined in Regulation S; and
“
U.S. Purchaser
” means any purchaser of the Offered Securities that is, or is acting for the account or benefit of, a person in the United States, or any person offered the Offered Securities in the United States.
2.
The Corporation represents, warrants and covenants to the Underwriters and the U.S. Affiliates that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
(a)
the Corporation is a Foreign Issuer, and there is no Substantial U.S. Market Interest with respect to the Offered Securities or any other class of equity securities of the Corporation;
(b)
none of the Corporation, its affiliates (as defined in Rule 405 under the U.S. Securities Act) or any person acting on its or their behalf (except for the Underwriters, their respective U.S. Affiliates and any person acting on their behalf, as to whom no representation, warranty or covenant is made) (i) has engaged or will engage in any Directed Selling Efforts, (ii) has taken or will take any action that would cause the exemptions afforded by Rule 506(b) of Regulation D and Rule 144A to be unavailable for offers and sales of Offered Securities to, or for the account or benefit of, persons in the United States in accordance with this Schedule “C”, or the exclusion from registration afforded by Rule 903 of Regulation S to be unavailable for offers and sales of the Offered Securities in Offshore Transactions in accordance with the Underwriting Agreement, or (iii) has engaged in or will engage in any form of General Solicitation or General Advertising with respect to offers or sales of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
the Offered Securities satisfy the requirements set forth in Rule 144A(d)(3) under the U.S. Securities Act;
(d)
so long as any Offered Securities which have been sold to, or for the account or benefit of, persons in the United States in reliance upon Rule 144A are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the U.S. Securities Act, and if the Corporation is neither exempt from reporting pursuant to Rule 12g3-2(b) of the U.S. Exchange Act nor subject to and in compliance with Section 13 or 15(d) of the U.S. Exchange Act, the Corporation will furnish to any holder of such Offered Securities and any prospective purchaser of the Offered Securities designated by such holder, upon request of such holder, the information required to be delivered pursuant to Rule 144A(d)(4)
2
under the U.S. Securities Act (so long as such requirement is necessary in order to permit holders of such Offered Securities to effect resales under Rule 144A);
(e)
except with respect to the offer and sale of the Offered Securities offered under this Agreement, the Corporation has not, within six months before the commencement of the offer and sale of the Offered Securities, and will not within six months after the latest of the Closing Date and any Over-Allotment Option Closing Date, offer or sell any securities in a manner that would be integrated with the offer and sale of the Offered Securities and would cause the exemptions from registration pursuant to Rule 144A or Rule 506(b) of Regulation D or the exclusion from registration set forth in Rule 903 of Regulation S to become unavailable with respect to the offer and sale of the Offered Securities;
(f)
except with respect to (i) offers and resales of Offered Securities to Qualified Institutional Buyers in reliance on Rule 144A and (ii) offers of Offered Securities by the Underwriters through the U.S. Affiliates for sale directly by the Corporation to Substituted Purchasers that are U.S. Accredited Investors in reliance on Rule 506(b) of Regulation D, both pursuant to the terms of this Agreement, none of the Corporation, any of its affiliates, or any person acting on their behalf has made or will make (i) any offer to sell, or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, a person in the United States, or (ii) any sale of the Offered Securities unless, at the time the buy order was or will have been originated, the purchaser is outside the United States or the Corporation, its affiliates an any person acting on their behalf reasonably believe that the purchaser is outside the United States;
(g)
the Corporation is not, and after giving effect to the offer and sale of the Offered Securities and the application of the proceeds as described in the Prospectus, will not be, an “investment company” within the meaning of the United States Investment Company Act of 1940, as amended, registered or required to be registered under such Act;
(h)
neither the Corporation nor any of the predecessors or affiliates thereof has been subject to any order, judgment or decree of any court of competent jurisdiction temporarily, preliminarily or permanently enjoining such person for failure to comply with Rule 503 of Regulation D concerning the filing of a notice of sales on Form D;
(i)
the Corporation will, within prescribed time periods, prepare and file any forms or notices required under the U.S. Securities Act or applicable blue sky laws in connection with the offer and sale of the Offered Securities;
(j)
none of the Corporation, any of its affiliates or any person acting on any of their behalf (other than the Underwriters, their respective U.S. Affiliates or any person acting on their behalf, as to whom no representation, warranty or covenant is made) has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with the offer or sale of the Offered Securities;
3
(k)
none of the Corporation or any of its predecessors or subsidiaries has had the registration of a class of securities under the U.S. Exchange Act revoked by the SEC pursuant to Section 12(j) of the U.S. Exchange Act and any rules or regulations promulgated under the U.S. Exchange Act;
(l)
upon receipt of a written request from a purchaser that is, or is purchasing for the account or benefit of, a person in the United States, the Corporation shall make a determination if the Corporation is a “passive foreign investment company” (a “
PFIC
”) within the meaning of section 1297(a) of the United States Internal Revenue Code of 1986, as amended (the “
Code
”), during any calendar year following the purchase of Offered Securities by such purchaser, and if the Corporation determines that it is a PFIC during such year, the Corporation will provide to such purchaser, upon written request, all information that would be required to permit a United States shareholder to make an election to treat the Corporation as a “qualified electing fund” for the purposes of the Code; and
(m)
with respect to Regulation D Offered Securities, none of the Corporation, any of its predecessors, any affiliated issuer issuing securities in the offering of Regulation D Offered Securities, any director, executive officer, other officer of the Corporation participating in the offering of Regulation D Offered Securities, any beneficial owner of 20% or more of the Corporation’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the U.S. Securities Act) connected with the Corporation in any capacity at the time of sale in the offering of Regulation D Offered Securities (each, an “
Issuer Covered Person
” and, together, “
Issuer Covered Persons
”) is subject to a Disqualification Event. The Corporation has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Corporation has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Underwriters and U.S. Affiliates a copy of any disclosures provided thereunder.
3.
Each of the Underwriters, severally and not jointly, represents and warrants to the Corporation that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
(a)
it acknowledges that the Offered Securities have not been and will not be registered under the U.S. Securities Act or applicable state securities laws and may not be offered or sold to, or for the account or benefit of, persons in the United States, except pursuant to transactions exempt from or not subject to the registration requirements under the U.S. Securities Act and exemptions from registration under applicable state securities laws. Accordingly, it has offered and sold, and will offer and sell, the Offered Securities forming part of its allotment only (a) in an Offshore Transaction in accordance with Rule 903 of Regulation S or (b) as provided in paragraphs 3(b) through 3(n) below. None of it, its U.S. Affiliate or any person acting on its or their behalf, has made or will make (except as permitted in paragraphs 3(b) through 3(n) below): (i) any offer to sell or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, any person in the United States; or (ii) any sale of Offered Securities to
4
any purchaser unless, at the time the buy order was or will have been originated, the purchaser was outside the United States, or it, its U.S. Affiliate or persons acting on their behalf reasonably believed that such purchaser was outside the United States. None of it, its U.S. Affiliate, or any persons acting on its or their behalf has engaged or will engaged in any Directed Selling Efforts;
(b)
it has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities, except with its U.S. Affiliate, any U.S. Affiliate of any Selling Firms or with the prior written consent of the Corporation. It shall require each Selling Firm and its U.S. Affiliate to agree, for the benefit of the Corporation, to be bound by and to comply with, and shall use its commercially reasonable efforts to ensure that each Selling Firm and its U.S. Affiliate complies with, the provisions of this Schedule “C” as if such provisions applied to such Selling Firm or affiliate;
(c)
all offers and sales of the Offered Securities by it to, or for the account or benefit of, persons in the United States have been and will be effected only by its U.S. Affiliate, and in all such cases in compliance with all applicable United States federal and state laws relating to the registration and conduct of securities brokers and dealers and all applicable state securities laws;
(d)
its U.S. Affiliate is, and will be on the date of each offer and sale of Offered Securities to, or for the account or benefit of, persons in the United States, duly registered as a broker-dealer under the U.S. Exchange Act and under all applicable state securities laws (unless exempt therefrom) and a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc.;
(e)
it and its affiliates have not solicited and will not solicit, either directly or through a person acting on its or their behalf, offers for, and have not offered to sell and will not offer to sell, Offered Securities to, or for the account or benefit of, persons in the United States by any form of General Solicitation or General Advertising;
(f)
immediately prior to soliciting any offerees of Offered Securities to, or for the account or benefit of, persons in the United States, the Underwriter, its U.S. Affiliate and any person acting on its or their behalf had reasonable grounds to believe and did believe that each offeree solicited by it pursuant to Rule 144A was a Qualified Institutional Buyer with which it has a pre-existing relationship and each offeree solicited by it pursuant to Rule 506(b) of Regulation D was a U.S. Accredited Investor with which it has a pre-existing relationship, and at the time of completion of each sale of Offered Securities to, or for the account or benefit of, such person in the United States, the Underwriter, its U.S. Affiliate, and any person acting on its or their behalf will have reasonable ground to believe and will believe, that each purchaser thereof is a Qualified Institutional Buyer or U.S. Accredited Investor, as applicable;
(g)
each offeree of Offered Securities solicited by it that is, or is acting for the account or benefit of, a person in the United States shall be provided with a copy of the U.S. Private Placement Memorandum and each purchaser of Offered
5
Securities from it that is, or is acting for the account or benefit of, a person in the United States shall be provided, prior to the time of its purchase of any Offered Securities, with a copy of the final U.S. Private Placement Memorandum and no other written material will be used in connection with the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(h)
at least one Business Day prior to the time of delivery, the Corporation and its transfer agent will be provided with a list of all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States solicited by it;
(i)
prior to any sale of Offered Securities to a U.S. Purchaser, it shall cause each such U.S. Purchaser that is a U.S. Accredited Investor purchasing such Offered Securities from the Corporation pursuant to Rule 506(b) of Regulation D to execute an Subscription Agreement for Accredited Investors in form attached as Exhibit II to the final U.S. Private Placement Memorandum; it shall cause each U.S. Purchaser who is a Qualified Institutional Buyer purchasing such Offered Securities pursuant to Rule 144A to execute a Qualified Institutional Buyer Letter in the form attached as Exhibit I to the final U.S. Private Placement Memorandum;
(j)
at the Closing, each Underwriter (together with its U.S. Affiliate) that participated in the offer of Offered Securities to, or for the account or benefit of, persons in the United States, will provide a certificate, substantially in the form of Appendix I to this Schedule “C”, relating to the manner of the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States, or will be deemed to have represented that neither it nor its U.S. Affiliate offered or sold Offered Securities to, or for the account or benefit of, persons in the United States;
(k)
it will inform, and will cause its U.S. Affiliate to inform, all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States by delivery of the U.S. Private Placement Memorandum that the Offered Securities have not been and will not be registered under the U.S. Securities Act and are being sold to them without registration under the U.S. Securities Act in reliance upon an exemption from such registration pursuant to Rule 144A or Rule 506(b) of Regulation D, as applicable;
(l)
none of the Underwriter, its affiliates, or any person acting on any of their behalf has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities;
(m)
with respect to Regulation D Offered Securities, (i) the Underwriter or the U.S. Affiliate, (ii) the Underwriter’s or the U.S. Affiliate’s general partners or managing members, (iii) any of the Underwriter’s or U.S. Affiliate’s directors, executive officers or other officers participating in the offering of the Regulation D Offered Securities, (iv) any of the Underwriter’s or the U.S. Affiliate’s general
6
partners’ or managing members’ directors, executive officers or other officers participating in the offering of the Regulation D Offered Securities or (v) any other person associated with any of the above persons (including without limitation, any Selling Firm and any such person related to any Selling Firm) that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with sale of Regulation D Offered Securities (each, a “
Dealer Covered Person
” and, collectively, the “
Dealer Covered Persons
”), is subject to any to any Disqualification Event. The Underwriter has exercised reasonable care to determine whether any Dealer Covered Person is subject to a Disqualification Event. The Underwriter and the U.S. Affiliate have complied, to the extent applicable, with their disclosure obligations under Rule 506(e), and have furnished to the Corporation a copy of any disclosures provided thereunder; and
(n)
as of the Closing Date (and any Over-Allotment Option Closing Date), the Underwriter is not aware of any person (other than any Dealer Covered Person) that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of any Regulation D Offered Securities.
7
APPENDIX I
TO SCHEDULE “C”
UNDERWRITERS’ CERTIFICATE
In connection with the private placement to, or for the account or benefit of, persons in the United States of Offered Securities of Aphria Inc. (the “
Corporation
”) pursuant to the underwriting agreement dated October 20, 2017, between the Corporation and the Underwriters named in the underwriting agreement (the “
Underwriting Agreement
”), each of the undersigned does hereby certify as follows:
(a)
the U.S. Affiliate is a duly registered broker or dealer with the United States Securities and Exchange Commission, and is a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc. on the date of this certificate and on the date of each offer and sale of Offered Securities made by it, and all offers and sales of the Offered Securities to, or for the account or benefit of, persons in the United States have been effected by the U.S. Affiliate in accordance with all applicable U.S. broker-dealer requirements;
(b)
each purchaser of Offered Securities that is, or is acting for the account or benefit of, a person in the United States solicited by us was, prior to the sale of Offered Securities to such purchaser, provided with a copy of the final U.S. Private Placement Memorandum, and we and our U.S. Affiliates have not used and will not use any written material other than the U.S. Private Placement Memorandum in connection with the offering of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
immediately prior to our transmitting the U.S. Private Placement Memorandum to offerees of Offered Securities to, or for the account or benefit of, persons in the United States, we had reasonable grounds to believe, and did believe, that each offeree was a Qualified Institutional Buyer or a U.S. Accredited Investor with whom we have a pre-existing relationship, and on the date of this certificate we continue to believe that each purchaser of the Offered Securities purchasing from us through our U.S. Affiliate is a Qualified Institutional Buyer and that that each purchaser of the Offered Securities solicited by us and purchasing directly from the Corporation is a U.S. Accredited Investor;
(d)
no form of General Solicitation or General Advertising was used by us or our U.S. Affiliate in connection with the offer or sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(e)
in connection with each sale of Offered Securities to U.S. Purchasers that are U.S. Accredited Investors purchasing pursuant to Rule 506(b) of Regulation D solicited by us, we caused each such U.S. Purchaser to execute and deliver a Subscription Agreement for Accredited Investors in the form of Exhibit II attached to the final U.S. Private Placement Memorandum; and we caused each U.S. Purchaser who is a Qualified Institutional Buyer purchasing such Offered
Securities pursuant to Rule 144A solicited by us to execute and deliver a Qualified Institutional Buyer Letter in the form of Exhibit I attached to the final U.S. Private Placement Memorandum;
(f)
we have not engaged and will not engage in any violation of Regulation M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities;
(g)
with respect to Regulation D Offered Securities, each of the undersigned represents that none of its Dealer Covered Persons is subject to any Disqualification Event except for a Disqualification Event a description of which has been furnished in writing to the Corporation prior to the date hereof;
(h)
as of the Closing, each of the undersigned is not aware of any person (other than any Dealer Covered Person) that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of any Regulation D Offered Securities; and
(i)
the offering of the Offered Securities to, or for the account or benefit of, persons in the United States has been conducted by us in accordance with the Underwriting Agreement, including Schedule “C” to the Underwriting Agreement.
9
Capitalized terms used in this certificate and not defined in this certificate have the meanings ascribed thereto in the Underwriting Agreement (including the Schedule “C” to the Underwriting Agreement).
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10
Exhibit
99.43
EXECUTION VERSION
UNDERWRITING AGREEMENT
December 15, 2017
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention: Vic Neufeld, President & Chief Executive Officer
Dear Mesdames/Sirs:
Clarus Securities Inc. (“
Clarus
”), as lead underwriter, AltaCorp Capital Inc., Cannaccord Genuity Corp. and Cormark Securities Inc. (collectively, the “
Underwriters
” and each individually, an “
Underwriter
”) hereby severally, and not jointly, nor jointly and severally, in their respective percentages set out in Section 18 below, offer to purchase from Aphria Inc. (the “
Corporation
”) and the Corporation hereby agrees to issue and sell to the Underwriters, 7,272,740 Common Shares of the Corporation (the “
Purchased Shares
”), on an underwritten basis, at the purchase price of $13.75 per Purchased Share (the “
Offering Price
”), for aggregate gross proceeds of $100,000,175.
The Underwriters may arrange for substituted purchasers (the “
Substituted Purchasers
”) for the Offered Shares (as defined below), where such Substituted Purchasers are resident in the Selling Jurisdictions (as defined below). Each Substituted Purchaser shall purchase the Offered Shares at the Offering Price, and to the extent that Substituted Purchasers purchase Offered Shares, the obligations of the Underwriters to do so will be reduced by the number of Offered Shares purchased by the Substituted Purchasers from the Corporation.
The Underwriters propose to distribute the Offered Shares in Canada pursuant to the Final Prospectus (as defined below) and may also distribute the Offered Shares to, or for the account or benefit of, persons in the United States (as defined below) in transactions that are exempt from the registration requirements of the U.S. Securities Act (as defined below) pursuant to the U.S. Private Placement Memorandum (as defined below), all in the manner contemplated by this Agreement.
Subject to applicable law, including applicable Securities Laws (as defined below) and the terms of this Agreement, the Offered Shares may also be distributed outside of Canada and the United States, in each jurisdiction as mutually agreed to by the Corporation and the Underwriters where they may be lawfully sold by the Underwriters without: (i) giving rise to any requirement under the laws of such jurisdiction to prepare and/or file a prospectus or document having similar effect; or (ii) creating any ongoing compliance or continuous disclosure obligations for the Corporation pursuant to the laws of such jurisdiction.
The Corporation hereby grants to the Underwriters an option (the “
Over-Allotment Option
”) to purchase up to an additional 1,090,911 Common Shares (the “
Over-Allotment Shares
”) at the Offering Price for additional gross proceeds of up to $15,000,026, upon the terms and conditions set forth herein for the purpose of covering over-allotments made in connection
with the Offering (as defined below) and for market stabilization purposes, if any. The Over-Allotment Option shall be exercisable, in whole or in part, and from time to time, by the Underwriters, for a period of 30 days from and including the Closing Date by giving written notice to the Corporation, as more particularly described in Section 12 hereof. Pursuant to such notice, the Underwriters shall purchase in their respective percentages set out in Section 18 below, and the Corporation shall deliver and sell, the number of Over-Allotment Shares indicated in such notice, in accordance with this Agreement.
The Purchased Shares and the Over-Allotment Shares are collectively referred to herein as the “
Offered Shares
” and the offering of the Offered Shares by the Corporation is hereinafter referred to as the “
Offering
”. The price of any Offered Shares sold under this Agreement shall be the Offering Price.
The Underwriters shall be entitled to appoint a selling group consisting of other registered dealers in accordance with applicable Securities Laws for the purposes of arranging for purchasers of the Offered Shares. Any investment dealer who is a member of any selling group formed by the Underwriters pursuant to the provisions of this Agreement or with whom any Underwriter has a contractual relationship with respect to the Offering, if any, shall agree with such Underwriter to comply with the covenants and obligations given by the Underwriters herein. The fee payable to any such investment dealer who is a member of any selling group shall be for the account of the Underwriters.
The Underwriters may offer the Offered Shares at a price less than the Offering Price as described in further detail in Section 18 below, in compliance with Canadian Securities Laws and, specifically, the requirements of NI 44-101 (as defined below) and the disclosure concerning the same contained in the Prospectus.
In consideration of the services to be rendered by the Underwriters in connection with the Offering, the Corporation agrees to pay to the Underwriters the Commission (as defined below) at the Closing Time (as defined below).
TERMS AND CONDITIONS
The following are additional terms and conditions of this Agreement between the Corporation and the Underwriters:
Section 1
Definitions and Interpretation
(1)
Where used in this Agreement or in any amendment hereto, the following terms have the following meanings, respectively:
“
ACMPR
” means the
Access to Cannabis for Medical Purposes Regulations
in effect since August 2016;
“
Agreement
” means this underwriting agreement, as it may be amended from time to time;
2
“
Applicable Laws
” means all applicable laws, rules, regulations, policies, statutes, ordinances, codes, orders, consents, decrees, judgments, decisions, rulings, awards, or guidelines, the terms and conditions of any Permits, including any judicial or administrative interpretation thereof, of any Governmental Authority, including without limitation the ACMPR;
“
associate
”, “
affiliate
”, “
insider
” and “
person
” have the respective meanings given to them in the Securities Act;
“
Authorizations
” means any regulatory licences, approvals, permits, approvals, consents, certificates, registrations, filings or other authorizations of or issued by any Governmental Authority under Applicable Laws including the Licences;
“
Business
” means the business of growing, cultivating, harvesting, storing, packaging, labelling, marketing, supplying, selling, shipping and disposing of, prescription medical marijuana;
“
Business Assets
” means all tangible and intangible property and assets owned (either directly or indirectly), leased, licensed, loaned, operated or used, including all real property, fixed assets, facilities, equipment, inventories and accounts receivable, by the Corporation and the Subsidiary in connection with the Business;
“
Business Day
” means a day, other than a Saturday, a Sunday or statutory or civic holiday in the City of Toronto, Ontario;
“
Canadian Securities Laws
” means, collectively, all applicable securities laws of each of the Qualifying Jurisdictions and the respective rules and regulations under such laws together with applicable published instruments, notices and orders of the securities regulatory authorities in the Qualifying Jurisdictions, including the rules and policies of the TSX;
“
Claims
” has the meaning ascribed thereto in Section 13 of this Agreement
“
Clarus
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Closing
” means the completion of the sale of the Offered Shares and the purchase by the Underwriters of the Offered Shares pursuant to this Agreement;
“
Closing Date
” means January 9, 2018 or such earlier or later date as may be agreed to in writing by the Corporation and the Underwriters, each acting reasonably;
“
Closing Time
” means 8:00 a.m. (Toronto time) on the Closing Date, or such other time on the Closing Date as may be agreed to by the Corporation and the Underwriters;
“
Commission
” has the meaning ascribed thereto in Section 14 of this Agreement;
“
Common Shares
” means the common shares in the capital of the Corporation;
3
“
Corporation
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Debt Instrument
” means any and all loans, bonds, notes, debentures, indentures, promissory notes, mortgages, guarantees or other instruments evidencing indebtedness (demand or otherwise) for borrowed money or other liability to which the Corporation or its Subsidiary are a party or to which their property or assets are otherwise bound;
“
distribution
” means distribution or distribution to the public, as the case may be, for the purposes of Canadian Securities Laws or any of them;
“
Documents Incorporated by Reference
” means all financial statements, related management’s discussion and analysis, management information circulars, joint information circulars, annual information forms, material change reports or other documents filed by the Corporation, whether before or after the date of this Agreement, that are required to be incorporated by reference into the Prospectus;
“
Employee Plans
” has the meaning ascribed thereto in Section 7(pp) of this Agreement;
“
Environmental Laws
” means all Applicable Laws relating to the environment or environmental issues (including air, surface, water and stratospheric matters), pollution or protection of human health and safety, including without limitation relating to the release, threatened release, manufacture, processing, blending, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials;
“
Final Prospectus
” means the (final) short form prospectus of the Corporation relating to the Offering, including all of the Documents Incorporated by Reference and any Supplementary Material thereto, prepared and to be filed by the Corporation with the Securities Commissions in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Final Receipt has been issued;
“
Final Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Final Prospectus in each of the Qualifying Jurisdictions;
“
Financial Statements
” means the audited consolidated financial statements for the twelve months ended May 31, 2017 and May 31, 2016, together with the notes thereto and the auditors’ report thereon and the condensed interim consolidated financial statements for the three months ended August 31, 2017 and August 31, 2016, together with the notes thereto;
“
Government Official
” means (a) any official, officer, employee, or representative of, or any person acting in an official capacity for or on behalf of, any Governmental Authority, (b) any salaried political party official, elected member of political office or candidate for political office, or (c) any company, business, enterprise or other entity owned or controlled by any person described in the foregoing clauses;
4
“
Governmental Authority
” means and includes, without limitation, any national or federal government, province, state, municipality or other political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing, including Health Canada;
“
Hazardous Materials
” means chemicals, fluids, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products;
“
IFRS
” means International Financial Reporting Standards as issued by the International Accounting Standards Board;
“
including
” means including but not limited to;
“
Indemnified Party
” or “
Indemnified Parties
” have the meanings ascribed thereto in Section 13 of this Agreement;
“
Indemnitor
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
Licences
” means (i) Licence No. 10-MM0065/2017 issued by Health Canada pursuant to Section 35 of the ACMPR and its regulations, with an effective date of September 29, 2017 and expiry date of September 25, 2019, granting the Corporation the authority to produce, sell, possess, ship, transport, deliver and destroy dried marihuana, marihuana (including live plants, clippings and seed) and cannabis oil and (ii) Licence No. 2017/6931 issued by Health Canada pursuant to the
Narcotic Control Regulations
under the
Controlled Drugs and Substances Act
, with an effective date of November 16, 2017 and an expiry date of December 31, 2017, granting to the Corporation the authority to possess, sell and transport medical cannabis oil and resin to international markets;
“
Liens
” means any encumbrance or title defect of whatever kind or nature, regardless of form, whether or not registered or registrable and whether or not consensual or arising by law (statutory or otherwise), including any mortgage, lien, charge, pledge or security interest, whether fixed or floating, or any assignment, lease, option, right of pre-emption, privilege, encumbrance, easement, servitude, right of way, restrictive covenant, right of use or any other right or claim of any kind or nature whatever which affects ownership or possession of, or title to, any interest in, or right to use or occupy such property or assets;
“
Losses
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
marketing materials
” has the meaning ascribed thereto in NI 41-101;
“
Marketing Material
” means the term sheet for the Offering dated December 13, 2017 as agreed to between the Corporation and Clarus;
“
Material Adverse Effect
” means any event, change, fact, or state of being which could reasonably be expected to have a significant and adverse effect on the business, affairs, capital, operation, properties, permits, assets, liabilities (absolute, accrued, contingent or
5
otherwise) or condition (financial or otherwise) of the Corporation and its Subsidiary considered on a consolidated basis;
“
Material Agreement
” means any and all contracts, commitments, agreements (written or oral), instruments, leases or other documents, including licences, sub-licenses, supply agreements, manufacturing agreements, distribution agreements, sales agreements, or any other similar type agreements, to which the Corporation or the Subsidiary is a party or to which their Business Assets are otherwise bound, and which is material to the Corporation and the Subsidiary on a consolidated basis;
“
material change
”, “
material fact
” and “
misrepresentation
” have the respective meanings ascribed thereto in the Securities Act;
“
MI 11-102
” means Multilateral Instrument 11-102 —
Passport System;
“
NP 11-202
” means National Policy 11-202 —
Process for Prospectus Reviews in Multiple Jurisdictions;
“
NI 41-101
” means National Instrument 41-101 —
General Prospectus Requirements;
“
NI 44-101
” means National Instrument 44-101 -
Short Form Prospectus Distributions;
“
NI 51-102
” means National Instrument 51-102 —
Continuous Disclosure Obligations;
“
NI 52-109
” means National Instrument 52-109 —
Certification of Disclosure in Issuers’ Annual and Interim Filings;
“
Offered Shares
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering Documents
” means the Preliminary Prospectus, the Final Prospectus, any Supplementary Material and, if applicable, the U.S. Private Placement Memorandum;
“
Offering Price
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Over-Allotment Option
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
“
Over-Allotment Shares
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
“
Passport System
” means the system for review of prospectus filings set out in MI 11-102 and NP 11-202;
“
person
” shall be broadly interpreted and shall include any individual, corporation, partnership, joint venture, association, trust or other legal entity;
6
“
Preliminary Prospectus
” means the preliminary short form prospectus of the Corporation dated December 15, 2017, including all of the Documents Incorporated by Reference and any Supplementary Material thereto, prepared and filed by the Corporation in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Preliminary Receipt will be issued no later than 5:00 p.m. (Toronto time) on December 18, 2017;
“
Preliminary Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Preliminary Prospectus in each of the Qualifying Jurisdictions;
“
Principal Regulator
” means the Ontario Securities Commission;
“
Prospectus
” means, collectively, the Preliminary Prospectus and the Final Prospectus;
“
provide
” in the context of sending or making available marketing materials to a potential investor of Offered Shares has the meaning ascribed thereto under Canadian Securities Laws, whether in the context of a “road show” (as defined in NI 41-101) or otherwise;
“
Public Disclosure Record
” means collectively, all of the documents which have been filed on www.sedar.com since June 1, 2017 by or on behalf of the Corporation with the Securities Commissions pursuant to the requirements of Canadian Securities Laws;
“
Purchased Shares
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Purchasers
” means, collectively, each of the purchasers of Offered Shares arranged by the Underwriters, including the Substituted Purchasers, in connection with the Offering, including, if applicable, the Underwriters;
“
Qualified Institutional Buyers
” means “qualified institutional buyers” as such term is defined in Rule 144A(a)(1) of the U.S. Securities Act;
“
Qualifying Jurisdictions
” means all of the provinces of Canada, except for Québec;
“
Regulation D
” means Regulation D adopted by the SEC under the U.S. Securities Act;
“
Regulation S
” means Regulation S adopted by the SEC under the U.S. Securities Act;
“
Repayment Event
” means any event or condition which gives the holder of any Debt Instrument (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a material portion of such indebtedness by the Corporation or its subsidiaries;
“
Rule 144A
” means Rule 144A under the U.S. Securities Act;
“
SEC
” means the United States Securities and Exchange Commission;
7
“
Securities Act
” means the
Securities Act
(Ontario);
“
Securities Commissions
” means the securities regulatory authority in each of the Qualifying Jurisdictions;
“
Securities Laws
” means collectively, Canadian Securities Laws, U.S. Securities Laws and all applicable securities laws, rules, regulations, policies and other instruments promulgated by the Securities Regulators in any of the other Selling Jurisdictions;
“
Securities Regulators
” means collectively, the securities regulators or other securities regulatory authorities in the Selling Jurisdictions;
“
SEDAR
” means the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators;
“
Selling Jurisdictions
” means, collectively, each of the Qualifying Jurisdictions and may also include, the United States and any other jurisdictions outside of Canada and the United States as mutually agreed to by the Corporation and the Underwriters;
“
subsidiary
” or “
subsidiaries
” has the meaning ascribed thereto in the Securities Act;
“
Subsidiary
” means Pure Natures Wellness Inc., a corporation existing under the laws of Ontario;
“
Substituted Purchasers
” has the meaning ascribed thereto in the second paragraph of this Agreement;
“
Supplementary Material
” means, collectively, any amendment to the Preliminary Prospectus or the Final Prospectus, and any amendment or supplemental prospectus or ancillary materials that may be filed by or on behalf of the Corporation under Canadian Securities Laws relating to the distribution of the Offered Shares;
“
template version
” has the meaning ascribed thereto under NI 41-101 and includes any revised template version of marketing materials as contemplated by NI 41-101;
“
TSX
” means the Toronto Stock Exchange;
“
Underwriters
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
United States
” means the United States of America, its territories and possessions, any state of the United States and the District of Columbia;
“
U.S. Affiliates
” means the Underwriters’ respective United States registered broker dealer affiliates;
8
“
U.S. Private Placement Memorandum
” means the private placement offering memorandum in the event of an offering of the Offered Shares in the United States, which will include and supplement the Prospectus;
“
U.S. Exchange Act
” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations made under the United States Securities Exchange Act of 1934, as amended;
“
U.S. Securities Act
” means the United States Securities Act of 1933, as amended, and the rules and regulations made under the United States Securities Act of 1933, as amended; and
“
U.S. Securities Laws
” means all applicable securities legislation in the United States, including, without limitation, the U.S. Exchange Act and U.S. Securities Act;
(2)
Any reference in this Agreement to a section or subsection shall refer to a section or subsection of this Agreement.
(3)
All words and personal pronouns relating thereto shall be read and construed as the number and gender of the party or parties referred to in each case required and the verb shall be construed as agreeing with the required word and/or pronoun.
(4)
Any reference in this Agreement to $ or to “dollars” shall refer to the lawful currency of Canada, unless otherwise specified.
(5)
The following are the schedules to this Agreement, which schedules are deemed to be a part hereof and are hereby incorporated by reference herein:
Schedule “A” Subsidiary
Schedule “B” Existing Rights
Schedule “C” Compliance with United States Securities Laws (if applicable)
Section 2
Attributes of the Offered Shares.
The Offered Shares to be sold by the Corporation hereunder shall have the rights, privileges, restrictions and conditions that conform in all material respects to the rights, privileges, restrictions and conditions set forth in the Offering Documents.
The Underwriters severally agree not to offer or sell the Offered Shares in such a manner as to require registration of any of them or the filing of a prospectus or any similar document under the laws of any jurisdiction outside the Qualifying Jurisdictions and to distribute or offer the Offered Shares only in the Qualifying Jurisdictions and in accordance with all applicable laws. However, the Corporation and each Underwriter acknowledge that, in the event of any U.S. sales, the U.S. Affiliates of the Underwriters may offer and resell the Offered Shares to, or for the account or benefit of, persons within the United States to Qualified Institutional Buyers pursuant to Rule 144A, all in accordance with Schedule “C”, provided that no such action on the part of the Underwriters or their U.S. Affiliates shall in any way oblige the Corporation to
9
register any Offered Shares under the U.S. Securities Act or the securities laws of any state of the United States.
Any agreements between the Underwriters and the members of any selling group will contain restrictions which are substantially the same as those contained in this Section 2.
Notwithstanding the foregoing, an Underwriter will not be liable to the Corporation under this section or Schedule “C” with respect to a violation by another Underwriter or its U.S. Affiliate(s) of the provisions of this section or Schedule “C” if the former Underwriter or its U.S. Affiliate, as applicable, is not itself also in violation.
Section 3
Filing of Prospectus.
(1)
The Corporation shall:
(a)
not later than 11:59 p.m. (Toronto time) on the date hereof, have filed the Preliminary Prospectus pursuant to the Passport System with the Securities Commissions;
(b)
promptly (i) use commercially reasonable efforts to resolve all comments made and deficiencies raised in respect of the Preliminary Prospectus by the Principal Regulator, and (ii) file the Final Prospectus and obtain a Final Receipt not later than 5:00 p.m. (Toronto time) on January 3, 2018, and otherwise fulfill all legal requirements to qualify the Offered Shares for distribution to the public in the Qualifying Jurisdictions through the Underwriters or any other investment dealer or broker registered to transact such business in the applicable Qualifying Jurisdictions contracting with the Underwriters, and to qualify the grant of the Over-Allotment Option; and
(c)
until the date on which the distribution of the Offered Shares is completed, promptly take, or cause to be taken, all additional steps and proceedings that may from time to time be required under Canadian Securities Laws to continue to qualify the distribution of the Offered Shares for sale to the public and the grant of the Over-Allotment Option to the Underwriters or, in the event that the Offered Shares or the Over-Allotment Option have, for any reason, ceased to so qualify, to again so qualify the Offered Shares and the Over-Allotment Option.
(2)
Prior to the filing of the Offering Documents and thereafter, during the period of distribution of the Offered Shares, the Corporation shall have allowed the Underwriters to participate fully in the preparation of, and to approve the form and content of, such documents and shall have allowed the Underwriters to conduct all due diligence investigations (which shall include the attendance of management of the Corporation and the current auditors of the Corporation at one or more due diligence sessions to be held) which they may reasonably require in order to fulfill their obligations as underwriters and in order to enable them to responsibly execute the certificate required to be executed by them at the end of the Prospectus.
10
(3)
It shall be a condition precedent to (i) the Underwriters’ execution of any certificate in any Prospectus, that the Underwriters be satisfied as to the form and substance of the document, and (ii) the delivery of each U.S. Private Placement Memorandum (if applicable) to any purchaser or prospective purchaser, that the Underwriters and their U.S. Affiliates be satisfied as to the form and substance of such document.
Section 4
Deliveries on Filing and Related Matters.
(1)
The Corporation shall deliver to each of the Underwriters:
(a)
prior to the time of each filing thereof, a copy of the Preliminary Prospectus and the Final Prospectus each manually signed on behalf of the Corporation, by the persons and in the form signed and certified as required by Canadian Securities Laws;
(b)
a copy of the preliminary U.S. Private Placement Memorandum or the final U.S. Private Placement Memorandum, if and as applicable;
(c)
prior to the time of filing thereof, a copy of any Supplementary Material, or other document required to be filed with or delivered to, the Securities Commissions by the Corporation under Canadian Securities Laws in connection with the Offering, including any document incorporated by reference in the Final Prospectus (other than documents already filed publicly with a Securities Commission);
(d)
concurrently with the filing of the Final Prospectus with the Securities Commissions, a “long-form” comfort letter of PricewaterhouseCoopers LLP dated the date of the Final Prospectus (with the requisite procedures to be completed by such auditor within two (2) Business Days of the date of such letter), in form and substance satisfactory to the Underwriters, acting reasonably, addressed to the Underwriters, the Corporation and the board of directors of the Corporation, with respect to the verification of financial and accounting information and other numerical data of a financial nature contained in the Final Prospectus (including all Documents Incorporated by Reference) and matters involving changes or developments since the respective dates as of which specific financial information is given therein which letter shall be in addition to the auditors’ consent letter and comfort letter (if any) addressed to the Securities Commissions; and
(e)
prior to the filing of the Final Prospectus with the Securities Commissions, a copy of the TSX conditional approval letter indicating that the application for the listing and posting for trading on the TSX of the Offered Shares has been approved, subject only to satisfaction by the Corporation of the customary post-closing conditions as specified by the TSX.
Unless otherwise advised in writing, such deliveries shall also constitute the Corporation’s consent to the Underwriters’ use of the Offering Documents in connection with the distribution of the Offered Shares in compliance with this Agreement and Securities Laws.
11
(2)
The Corporation represents and warrants to the Underwriters with respect to the Offering Documents that as at their respective dates of delivery to the Underwriters as set out in Section 4(1) above:
(a)
all information and statements in such documents (including information and statements incorporated by reference to the extent they have not been superseded by the information and statements in the Offering Documents) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) are true and correct, in all material respects, and contain no misrepresentation and constitute full, true and plain disclosure of all material facts relating to the Corporation, the Offering and the Offered Shares, as required by Canadian Securities Laws;
(b)
no material fact or information in such documents (including information and statements incorporated by reference) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) has been omitted therefrom which is required to be stated in such disclosure or is necessary to make the statements or information contained in such disclosure not misleading in light of the circumstances under which they were made;
(c)
except with respect to information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus, the Prospectus and any Supplementary Material comply fully with the requirements of the Canadian Securities Laws.
(3)
The Corporation shall cause commercial copies of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum, as the case may be, to be delivered to the Underwriters without charge, in such quantities and in such cities as the Underwriters may reasonably request by written instructions to the printer of such documents as soon as possible after obtaining the Preliminary Receipt or the Final Receipt, as the case may be, but, in any event on or before noon (Toronto time) on the next Business Day (or for delivery locations outside of Toronto, on the second Business Day). Such deliveries shall constitute the consent of the Corporation to the Underwriters’ use of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum for the distribution of the Offered Shares in the Qualifying Jurisdictions in compliance with the provisions of this Agreement and Canadian Securities Laws and the offer and sale of the Offered Shares to, or for the account or benefit of, persons in the United States in compliance with the provisions of this Agreement (including, without limitation, Schedule “C” hereto) and U.S. Securities Laws. The Corporation shall similarly cause to be delivered commercial copies of any Supplementary Material and hereby similarly consents to the Underwriters’ use thereof. The Corporation shall cause to be provided to the Underwriters, without cost, such number of copies of any Documents Incorporated by Reference as the Underwriters may reasonably request for use in connection with the distribution of the Offered Shares.
12
(4)
Each of the Corporation and the Underwriters have approved the Marketing Material, including any template version thereof which the Corporation has filed with the Securities Commissions and which is and will be incorporated by reference into the Prospectus, as the case may be. The Corporation and the Underwriters each covenant and agree that during the distribution of the Offered Shares, it will not provide any potential investor of Offered Shares with any marketing materials except for marketing materials that comply with, and have been approved in accordance with, NI 44-101. If requested by the Underwriter, in addition to the Marketing Materials, the Corporation will cooperate, acting reasonably, with the Underwriter in approving any other marketing materials to be used in connection with the Offering.
(5)
Subject to compliance with Securities Laws, during the period commencing on the date hereof and until completion of the distribution of the Offered Shares, the Corporation will promptly provide to the Underwriters drafts of any press releases of the Corporation for review by the Underwriters prior to issuance and shall obtain the prior approval of the Underwriters as to the content and form of any press release relating to the Offering prior to issuance, such approval not to be unreasonably withheld or delayed. If required by Securities Laws, any press release announcing or otherwise referring to the Offering disseminated in the United States shall comply with the requirements of Rule 135c under the U.S. Securities Act and any press release announcing or otherwise referring to the Offering disseminated outside the United States shall include an appropriate notation on each page as follows: “
Not for distribution to the U.S. news wire services, or dissemination in the United States
”.
(6)
Notwithstanding any provision hereof, nothing in this Agreement will create any obligation of the Corporation to file a registration statement or otherwise register or qualify the Offered Shares for sale or distribution outside of Canada.
Section 5
Material Change.
(1)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation covenants and agrees with the Underwriters that it shall promptly notify the Underwriters in writing with full particulars of:
(a)
any material change (actual, anticipated, contemplated or threatened) in respect of the Corporation and the Subsidiary considered on a consolidated basis;
(b)
any material fact in respect of the Corporation which has arisen or has been discovered and would have been required to have been stated in any of the Offering Documents had the fact arisen or been discovered on, or prior to, the date of such document; and
(c)
any change in any material fact (which for the purposes of this Agreement shall be deemed to include the disclosure of any previously undisclosed material fact) contained in the Offering Documents which fact or change is, or may be, of such a nature as to render any statement in such Offering Document misleading or untrue in any material respect or which would result in a misrepresentation in the
13
Offering Document or which would result in any of the Offering Documents not complying (to the extent that such compliance is required) with Securities Laws.
The Corporation shall promptly, and in any event within any applicable time limitation, comply, to the satisfaction of the Underwriters, acting reasonably, with all applicable filings and other requirements under Canadian Securities Laws and U.S. Securities Laws as a result of such fact or change; provided that the Corporation shall not file any Supplementary Material or other document without first providing the Underwriters with a copy of such Supplementary Material or other document and consulting with the Underwriters with respect to the form and content thereof. The Corporation shall in good faith discuss with the Underwriters any fact or change in circumstances (actual, anticipated, contemplated or threatened, financial or otherwise) which is of such a nature that there is or could be reasonable doubt whether written notice need be given under this Section 5.
(2)
If during the period of distribution of the Offered Shares there shall be any change in Canadian Securities Laws or other laws which results in any requirement to file Supplementary Material, the Corporation will promptly prepare and file such Supplementary Material with the appropriate Securities Commissions where such filing is required, provided that the Corporation shall have allowed the Underwriters and its counsel to participate in the preparation and review of any Supplementary Material.
(3)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation will notify the Underwriters promptly:
(a)
when any supplement to any of the Offering Documents or any Supplementary Material shall have been filed;
(b)
of any request by any Securities Commission to amend or supplement the Prospectus or for additional information;
(c)
of the suspension of the qualification of the Offered Shares or the Over-Allotment Option for offering, sale, issuance, or grant, as applicable, in any jurisdiction, or of any order suspending or preventing the use of the Offering Documents (or any Supplementary Material) or of the institution or, to the knowledge of the Corporation, threatening of any proceedings for any such purpose; and
(d)
of the issuance by any Securities Commission or any stock exchange of any order having the effect of ceasing or suspending the distribution of the Offered Shares or the trading in any securities of the Corporation, or of the institution or, to the knowledge of the Corporation, threatening of any proceeding for any such purpose. The Corporation will use its reasonable best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use or such order ceasing or suspending the distribution of the Offered Shares or the trading in the shares of the Corporation and, if any such order is issued, to obtain the lifting thereof at the earliest possible time.
14
Section 6
Regulatory Approvals.
The Corporation will make all necessary filings, obtain all necessary consents and approvals (if any) and pay all filing fees required to be paid in connection with the transactions contemplated by this Agreement. The Corporation will cooperate with the Underwriters in connection with the qualification of the Offered Shares for offer and sale and the grant of the Over-Allotment Option, under the Canadian Securities Laws and in maintaining such qualifications in effect for so long as required for the distribution of the Offered Shares.
Section 7
Representations and Warranties of the Corporation.
The Corporation represents and warrants to each of the Underwriters, and acknowledges that each of them is relying upon such representations and warranties in connection with the purchase of the Offered Shares, that:
(a)
Good Standing of the Corporation.
The Corporation (i) is a corporation existing under the laws of Ontario and is and will at the Closing Time be current and up-to-date with all material filings required to be made and in good standing under the
Business Corporations Act
(Ontario), (ii) has all requisite corporate power and capacity to own, lease and operate its properties and assets, including its Business Assets, and to conduct its business as now carried on by it or proposed to be carried on by it as described in the Offering Documents, and (iii) has all requisite corporate power and authority to create, issue and sell the Offered Shares and to grant the Over-Allotment Option and to execute, deliver and perform its obligations under this Agreement.
(b)
Good Standing of Subsidiary.
The Corporation’s only material principal wholly-owned Canadian subsidiary is listed in Schedule “A” which schedule is true, complete and accurate in all respects. The Subsidiary is a corporation incorporated, organized and existing under the laws of the jurisdiction of incorporation set out in Schedule “A”, is current and up-to-date with all material filings required to be made and has all requisite corporate power and capacity to own, lease and operate its properties and assets, including their Business Assets, and to conduct its business as is now carried on by it or proposed to be carried on by it as described in the Offering Documents, and it duly qualified to transact business and it in good standing in each jurisdiction in which such qualification is required. All of the issued and outstanding shares in the capital of the Subsidiary have been duly authorized and validly issued, are fully paid and are directly or indirectly beneficially owned by the Corporation, free and clear of any Liens, and none of the outstanding securities of the Subsidiary were issued in violation of the pre-emptive or similar rights of any security holder of the Subsidiary. There exist no options, warrants, purchase rights, or other contracts or commitments that could require the Corporation to sell, transfer or otherwise dispose of any securities of the Subsidiary.
15
(c)
No Proceedings for Dissolution.
No act or proceeding has been taken by or against the Corporation or the Subsidiary in connection with their liquidation, winding-up or bankruptcy, or to their knowledge are pending.
(d)
Share Capital of the Corporation.
The authorized and issued share capital of the Corporation consists of an unlimited number of Common Shares of which 152,102,525 Common Shares were issued and outstanding as at the close of business on December 14, 2017. The description of the attributes of the authorized and issued share capital of the Corporation as set out under the heading “Description of Securities Being Distributed” in the Prospectus is true and correct. Neither the Corporation nor the Subsidiary are party to any agreement, nor is the Corporation aware of any agreement, which in any manner affects the voting control of any securities of the Corporation or its Subsidiary.
(e)
Share Capital of Subsidiary.
The authorized and issued share capital of the Subsidiary as set forth in Schedule “A” hereto is true and correct.
(f)
Form of Share Certificates.
The form of certificate respecting the Common Shares has been approved and adopted by the board of directors of the Corporation and does not conflict with any applicable laws and complies with the rules and regulations of the TSX.
(g)
Common Shares are Listed.
The Common Shares are listed and posted for trading on the TSX, and neither the Corporation nor the Subsidiary has taken any action which would reasonably be expected to result in the delisting or suspension of the Common Shares on or from the TSX.
(h)
TSX Compliance.
Except as disclosed to the Underwriters, the Corporation is, and will at the Closing Time be, in compliance in all material respects with the by-laws, policies, rules and regulations of the TSX existing on the date hereof.
(i)
No Cease Trade Orders.
No order ceasing or suspending trading in the securities of the Corporation or prohibiting the sale of securities by the Corporation has been issued by an exchange or securities regulatory authority, and no proceedings for this purpose have been instituted, or are, to the Corporation’s knowledge, pending, contemplated or threatened.
(j)
Reporting Issuer Status.
The Corporation is a “reporting issuer” in each of the provinces of Canada, other than Quebec, and is not currently in default of any requirement of the Canadian Securities Laws of such jurisdictions and the Corporation is not included on a list of defaulting reporting issuers maintained by any of the Securities Commissions.
(k)
Offered Shares Validly Issued.
The Offered Shares have been, or prior to the Closing Time will be, duly and validly authorized for issuance and sale pursuant to this Agreement and when issued and delivered by the Corporation pursuant to this Agreement, against payment of the consideration therefor, will be validly issued as fully paid and non-assessable Common Shares.
16
(l)
Qualified Investments
. Subject to the qualifications and limitations described under “Eligibility for Investment” in the Final Prospectus, the Offered Shares will be qualified investments under the Income Tax Act (Canada) and the regulations thereunder for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans, a registered disability savings plan and tax free savings accounts.
(m)
Transfer Agent
. Computershare Investor Services Inc. at its offices in Toronto, Ontario has been duly appointed as the transfer agent and registrar for the Common Shares.
(n)
Absence of Rights
. As of December 14, 2017 no person has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other security convertible into or exchangeable for any such shares or to require the Corporation to purchase, redeem or otherwise acquire any of the issued and outstanding shares of the Corporation except for the Existing Rights set out in Schedule “B” to this Agreement and as otherwise disclosed to the Underwriters. The Offered Shares, upon issuance, will not be issued in violation of or subject to any pre-emptive rights or contractual rights to purchase securities issued by the Corporation.
(o)
Corporate Actions
. The Corporation has taken, or will have taken prior to the Closing Time, all necessary corporate action, (i) to authorize the execution, delivery and performance of this Agreement, (ii) to authorize the execution and filing, as applicable, of the Offering Documents, (iii) to validly issue and sell the Offered Shares as fully paid and non-assessable Common Shares, (iv) grant the Over-Allotment Option; and (v) issue the Over-Allotment Shares upon exercise of the Over-Allotment Option.
(p)
Valid and Binding Documents
. This Agreement has been duly authorized, executed and delivered by the Corporation and will constitute a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms, provided that enforcement thereof may be limited by laws affecting creditors’ rights generally, that specific performance and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction, and that the provisions relating to indemnity, contribution and waiver of contribution may be unenforceable and that enforceability is subject to the provisions of the
Limitation Act
(Ontario).
(q)
No Consents, Approvals etc.
The execution and delivery of this Agreement and the fulfilment of the terms hereof by the Corporation and the issuance, sale and delivery of the Offered Shares to be issued and sold by the Corporation and the grant of the Over-Allotment Option do not and will not require the consent, approval, authorization, registration or qualification of or with any Governmental Authority, stock exchange or other third party (including under the terms of any
17
Material Agreement or Debt Instrument), except: (i) those which have been obtained or those which may be required and shall be obtained prior to the Closing Time under the Securities Laws or the rules of the TSX, including in compliance with the Securities Laws regarding the distribution of the Offered Shares and the Over-Allotment Option in the Qualifying Jurisdictions, and (ii) such customary post-closing notices or filings required to be submitted within the applicable time frame pursuant to Securities Laws, as may be required in connection with the Offering.
(r)
Continuous Disclosure
. The Corporation is in compliance in all material respects with its timely and continuous disclosure obligations under Canadian Securities Laws, including insider reporting obligations, and, without limiting the generality of the foregoing, there has been no material fact or material change relating to the Corporation which has not been publicly disclosed and the information and statements in the Public Disclosure Record were true and correct as of the respective dates of such information and statements and at the time such documents were filed on SEDAR, do not contain any misrepresentations and no material facts have been omitted therefrom which would make such information materially misleading, and the Corporation has not filed any confidential material change reports which remain confidential as at the date hereof. There are no circumstances presently existing under which liability is or would reasonably be expected to be incurred under Part XXIII.1 –
Civil Liability for Secondary Market Disclosure
of the Securities Act and analogous provisions under Securities Laws in the other Qualifying Jurisdictions.
(s)
Forward-Looking Information
. With respect to forward-looking information contained in the Corporation’s public disclosure documents, including for certainty the Documents Incorporated by Reference:
(i)
the Corporation has a reasonable basis for the forward-looking information; and
(ii)
all material forward-looking information is identified as such, and all such documents cautions users of forward-looking information that actual results may vary from the forward-looking information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information; and accurately states the material factors or assumptions used to develop forward-looking information.
(t)
Financial Statements
. The Financial Statements;
(i)
present fairly, in all material respects, the financial position of the Corporation on a consolidated basis and the statements of operations, retained earnings, cash flow from operations and changes in financial information of the Corporation on a consolidated basis for the periods specified in such Financial Statements;
18
(ii)
have been prepared in accordance with IFRS, applied on a consistent basis throughout the periods involved; and
(iii)
do not contain any misrepresentations, with respect to the period covered by the Financial Statements.
(u)
Off-Balance Sheet Transactions
. There are no off-balance sheet transactions, arrangements, obligations or liabilities of the Corporation or its Subsidiary whether direct, indirect, absolute, contingent or otherwise.
(v)
Accounting Policies
. There has been no change in accounting policies or practices of the Corporation or its Subsidiary since May 31, 2017, other than as disclosed in the Financial Statements.
(w)
Liabilities
. Neither the Corporation nor the Subsidiary has any liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, which are not disclosed or referred to in the Financial Statements, other than liabilities, obligations, or indebtedness or commitments: (i) incurred in the normal course of business; or (ii) which would not, individually or in the aggregate, have a Material Adverse Effect.
(x)
Independent Auditors
. The auditors who reported on and certified the Financial Statements for the fiscal year ended May 31, 2017 were independent and the Corporation’s current auditors are independent with respect to the Corporation within the meaning of the rules of professional conduct applicable to auditors in Canada and there has never been a “reportable event” (within the meaning of National Instrument 51-102) with the current, or to the best knowledge of the Corporation any predecessor, auditors of the Corporation during the last three years.
(y)
Accounting Controls
. The Corporation maintains, and will maintain, a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain asset accountability, (iii) access to monies and investments is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(z)
Purchases and Sales
. Neither the Corporation nor the Subsidiary has approved, has entered into any agreement in respect of, or has any knowledge, as the case may be, of:
(i)
the purchase of any Business Assets or any interest therein, or the sale, transfer or other disposition of any Business Assets or any interest therein currently owned, directly or indirectly, by the Corporation or the Subsidiary whether by asset sale, transfer of shares, or otherwise;
19
(ii)
a transaction which would result in the change of control (by sale or transfer of Common Shares or sale of all or substantially all of the assets of the Corporation or the Subsidiary or otherwise) of the Corporation or the Subsidiary; or
(iii)
a proposed or planned disposition of Common Shares by any shareholder who owns, directly or indirectly, 10% or more of the outstanding Common Shares or common shares of the Subsidiary.
(aa)
Title to Business Assets
. The Corporation and the Subsidiary have good, valid and marketable title to and have all necessary rights in respect of all of their Business Assets as owned, leased, licensed, loaned, operated or used by them or over which they have rights, free and clear of Liens, and no other rights or Business Assets are necessary for the conduct of the Business as currently conducted or as proposed to be conducted. The Corporation knows of no claim or basis for any claim that might or could have a Material Adverse Effect on the rights of the Corporation or the Subsidiary to use, transfer, lease, license, operate, sell or otherwise exploit such Business Assets and neither the Corporation nor the Subsidiary has any obligation to pay any commission, license fee or similar payment to any person in respect thereof, other than as disclosed in the Offering Documents and there are no outstanding rights of first refusal or other pre-emptive rights of purchase which entitle any person to acquire any of the rights, title or interests in the Business Assets.
(bb)
Compliance with Laws, Regulatory Approvals and Authorizations
. Pure Natures Wellness Inc. is an approved licensed producer in the medical cannabis industry and all operations of the Corporation and the Subsidiary in respect of or in connection with the Business Assets have been and continue to be conducted in accordance with best industry practices and, to the knowledge of the Corporation, in material compliance with all Applicable Laws. The Corporation and the Subsidiary have obtained and are in compliance with all Authorizations to permit them to conduct their Business as currently conducted or proposed to be conducted. All of the Authorizations issued to date are valid and in full force and effect and neither the Corporation nor the Subsidiary have received any correspondence or notice from any Governmental Authority alleging or asserting material non-compliance with any Applicable Laws or Authorizations. Neither the Corporation nor the Subsidiary have received any notice of proceedings or actions relating to the revocation, suspension, limitation or modification of any Authorizations or any notice advising of the refusal to grant any Authorization that has been applied for or is in process of being granted and has no knowledge or reason to believe that any such Governmental Authority is considering taking or would have reasonable ground to take any such action.
(cc)
Research and Development
. All product research and development activities, including quality assurance, quality control, testing, and research and analysis activities, conducted by the Corporation and the Subsidiary in connection with their business is being conducted in compliance, in all material respects, with all
20
industry, laboratory safety, management and training standards applicable to the Business and all such processes, procedures and practices required in connection with such activities are in place as necessary and are being complied with in all material respects.
(dd)
Business Relationships
. All agreements with third parties in connection with the Business have been entered into and are being performed by the Corporation and the Subsidiary and, to the knowledge of the Corporation, by all other third parties thereto, in compliance with their terms. There exists no actual or, to the knowledge of the Corporation, threatened termination, cancellation or limitation of, or any material adverse modification or material change in, the business relationship of the Corporation or the Subsidiary, with any supplier or customer, or any group of suppliers or customers whose business with or whose purchases or inventories/components provided to the business of the Corporation or the Subsidiary are individually or in the aggregate material to the assets, business, properties, operations or financial condition of the Corporation or the Subsidiary. All such business relationships are intact and mutually cooperative, and there exists no condition or state of fact or circumstances that would prevent the Corporation or the Subsidiary from conducting such business with any such third parties in the same manner in all material respects as currently conducted or proposed to be conducted.
(ee)
Privacy Protection
. Each of the Corporation and the Subsidiary has security measures and safeguards in place to protect personal information it collects from registered patients and customers and other parties from illegal or unauthorized access or use by its personnel or third parties or access or use by its personnel or third parties in a manner that violates the privacy rights of third parties. The Corporation and the Subsidiary have complied, in all material respects, with all applicable privacy and consumer protection legislation and neither has collected, received, stored, disclosed, transferred, used, misused or permitted unauthorized access to any information protected by privacy laws, whether collected directly or from third parties, in an unlawful manner. The Corporation and the Subsidiary have taken all reasonable steps to protect personal information against loss or theft and against unauthorized access, copying, use, modification, disclosure or other misuse.
(ff)
Intellectual Property
. The Corporation and the Subsidiary own or possess the right to use all material patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of their respective businesses, and the Corporation is not aware of any bona fide claim to the contrary or any challenge by any other person to the rights of the Corporation and the Subsidiary with respect to the foregoing. To the knowledge of the Corporation, the Corporation’s business, including that of the Subsidiary, as now conducted does not, and as currently proposed to be conducted will not, infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right
21
of any person. No bona fide claim has been made against the Corporation or the Subsidiary alleging the infringement by the Corporation or the Subsidiary of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person.
(gg)
Environmental and Workplace Laws
. Each of the Corporation and the Subsidiary is currently in compliance, in all material respects, with all Environmental Laws, including all reporting and monitoring requirements thereunder, and there are no pending or, to the knowledge of the Corporation, any threatened, administrative, regulatory or judicial actions, suits, demands, claims, liens, notices of non-compliance or violation, investigation or proceedings relating to any Environmental Laws. Neither the Corporation nor the Subsidiary have ever received any notice of any non-compliance in respect of Environmental Laws, there are no events or circumstances that might reasonably be expected to form the basis of an order for clean up or remediation under Environmental Laws or relating to any Hazardous Materials and there are no permits required under Environmental Laws for the conduct of the Business. The facilities and operations of the Corporation and the Subsidiary are currently being conducted, and to the knowledge of the Corporation have been conducted, in all material respects in accordance with all applicable workers’ compensation and health and safety and workplace laws, regulations and policies.
(hh)
Insurance
. The Corporation and the Subsidiary maintain insurance by insurers of recognized financial responsibility, against such losses, risks and damages to their Business Assets in such amounts that are customary for the business in which they are engaged and on a basis consistent with reasonably prudent persons in comparable businesses, and all of the policies in respect of such insurance coverage, fidelity or surety bonds insuring the Corporation, the Subsidiary, and their respective directors, officers and employees, and the Business Assets, are in good standing and in full force and effect in all respects, and not in default. Each of the Corporation and the Subsidiary is in compliance with the terms of such policies and instruments in all material respects and there are no material claims by the Corporation or the Subsidiary under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; the Corporation has no reason to believe that it will not be able to renew such existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue the Business at a cost that would not have a Material Adverse Effect, and neither the Corporation nor the Subsidiary has failed to promptly give any notice of any material claim thereunder.
(ii)
Material Agreements and Debt Instruments
. All Material Agreements and Debt Instruments have been described or disclosed in the Offering Documents and each Material Agreement and Debt Instrument is valid, subsisting, in good standing and in full force and effect, enforceable in accordance with the terms thereof. The Corporation and the Subsidiary have, in all material respects, performed all obligations in a timely manner under, and are in compliance, in all material
22
respects, with all terms and conditions (including any financial covenants) contained in each Material Agreement and Debt Instrument. Neither the Corporation nor the Subsidiary are in material breach, violation or default nor has it received any notification from any party claiming that the Corporation or such Subsidiary is in material breach, violation or default under any Material Agreement or Debt Instrument and no other party, to the knowledge of the Corporation, is in material breach, violation or default of any term under any Material Agreement or Debt Instrument.
(jj)
No Material Changes
. Since May 31, 2017, other than as disclosed in the Prospectus (a) there has been no material change in the assets, liabilities, obligations (absolute, accrued, contingent or otherwise) business, condition (financial or otherwise), properties, capital or results of operations of the Corporation and the Subsidiary considered as one enterprise, and (b) there have been no transactions entered into by the Corporation or the Subsidiary, other than those in the ordinary course of business, which are material with respect to the Corporation and the Subsidiary considered as one enterprise.
(kk)
Absence of Proceedings
. There is no action, suit, proceeding, inquiry or investigation before or brought by any Governmental Authority, domestic or foreign, now pending or, to the knowledge of the Corporation, threatened against or affecting the Corporation, any subsidiary or the Business Assets (including in respect of any product liability claims) which is required to be disclosed in the Offering Documents, and which if not so disclosed, or which if determined adversely, would have a Material Adverse Effect, or would materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Corporation of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Corporation or the Subsidiary is a party or of which any of their respective property or assets is subject, which are not described in the Offering Documents would not reasonably be expected to result in a Material Adverse Effect.
(ll)
Absence of Defaults and Conflicts
. Neither the Corporation nor the Subsidiary is in material violation, default or breach of, and the execution, delivery and performance of this Agreement, the Offering Documents and the consummation of the transactions and compliance by the Corporation with its obligations hereunder and thereunder, the sale of the Offered Shares and the grant of the Over-Allotment Option do not and will not, whether with or without the giving of notice or passage of time or both, result in a material violation, default or breach of, or conflict with, or result in a Repayment Event or the creation or imposition of any Lien upon any property or assets of the Corporation, including the Business Assets, or the Subsidiary under the terms or provisions of (i) any Material Agreements or Debt Instruments, (ii) the articles or by-laws or other constating documents or resolutions of the directors or shareholders of the Corporation or the Subsidiary, (iii) any existing Applicable Laws, including Securities Laws, (iv) any judgment, order, writ or decree of any government,
23
government instrumentality or court, domestic or foreign, having jurisdiction over the Corporation, or the Subsidiary or any of their assets, properties or operations.
(mm)
Labour Matters.
No material work stoppage, strike, lock-out, labour disruption, dispute grievance, arbitration, proceeding or other conflict with the employees of the Corporation or the Subsidiary currently exists or, to the knowledge of the Corporation, is imminent or pending and the Corporation and its Subsidiary are in material compliance with all provisions of all federal, national, regional, provincial and local laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours.
(nn)
Employment Standards.
There are no material complaints against the Corporation or the Subsidiary before any employment standards branch or tribunal or human rights tribunal, nor any complaints or any occurrence which would reasonably be expected to lead to a complaint under any human rights legislation or employment standards legislation that would be material to the Corporation. There are no outstanding decisions or settlements or pending settlements under applicable employment standards legislation which place any material obligation upon the Corporation or the Subsidiary to do or refrain from doing any act. The Corporation and Subsidiary are currently in material compliance with all workers’ compensation, occupational health and safety and similar legislation, including payment in full of all amounts owing thereunder, and there are no pending claims or outstanding orders of a material nature against either of them under applicable workers’ compensation legislation, occupational health and safety or similar legislation nor has any event occurred which may give rise to any such material claim.
(oo)
Collective Bargaining Agreements.
Neither the Corporation nor the Subsidiary is party to any collective bargaining agreements with unionized employees. To the knowledge of the Corporation, no action has been taken or is being contemplated to organize or unionize any other employees of the Corporation or the Subsidiary that would have a Material Adverse Effect.
(pp)
Employee Plans.
The Offering Documents disclose, to the extent required by applicable Canadian Securities Laws, each material plan for retirement, bonus, stock purchase, profit sharing, stock option, deferred compensation, severance or termination pay, insurance, medical, hospital, dental, vision care, drug, sick leave, disability, salary continuation, legal benefits, unemployment benefits, vacation, incentive or otherwise contributed to, or required to be contributed to, by the Corporation for the benefit of any current or former director, officer, employee or consultant of the Corporation (the “
Employee Plans
”), each of which has been maintained in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Employee Plans.
(qq)
Taxes.
All tax returns, reports, elections, remittances and payments of the Corporation and the Subsidiary required by applicable law to have been filed or
24
made in any applicable jurisdiction, have been filed or made (as the case may be) and are true, complete and correct except where the failure to make such filing, election, or remittance and payment would not constitute a Material Adverse Effect, and all taxes of the Corporation and of the Subsidiary have been paid or accrued in the Financial Statements (except as any extension may have been requested or granted and in any case in which the failure to file, pay or accrue such taxes would not result in a Material Adverse Effect). There are no examinations of any tax return of the Corporation or the Subsidiary currently in progress and there are no issues or disputes outstanding with any governmental authority respecting any taxes that have been paid, or may be payable, by the Corporation or the Subsidiary.
(rr)
Anti-Bribery Laws
. Neither the Corporation nor the Subsidiary nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of the foregoing, has (i) violated any anti-bribery or anti-corruption laws applicable to the Corporation and the Subsidiary, including
Canada’s Corruption of Foreign Public Officials Act
, or (ii) offered, paid, promised to pay, or authorized the payment of any money, or offered, given, promised to give, or authorized the giving of anything of value, that goes beyond what is reasonable and customary and/or of modest value: (X) to any Government Official, whether directly or through any other person, for the purpose of influencing any act or decision of a Government Official in his or her official capacity; inducing a Government Official to do or omit to do any act in violation of his or her lawful duties; securing any improper advantage; inducing a Government Official to influence or affect any act or decision of any Governmental Authority; or assisting any representative of the Corporation or the Subsidiary in obtaining or retaining business for or with, or directing business to, any person; or (Y) to any person in a manner which would constitute or have the purpose or effect of public or commercial bribery, or the acceptance of or acquiescence in extortion, kickbacks, or other unlawful or improper means of obtaining business or any improper advantage. Neither the Corporation nor the Subsidiary nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of foregoing, has (i) conducted or initiated any review, audit, or internal investigation that concluded the Corporation, a subsidiary or any director, officer, employee, consultant, representative or agent of the foregoing violated such laws or committed any material wrongdoing, or (ii) made a voluntary, directed, or involuntary disclosure to any Governmental Authority responsible for enforcing anti-bribery or anti-corruption laws, in each case with respect to any alleged act or omission arising under or relating to non-compliance with any such laws, or received any notice, request, or citation from any person alleging non-compliance with any such laws.
(ss)
No Significant Acquisitions
. The Corporation has not completed any “significant acquisition” (within the meaning of such term under NI 51-102) nor is it proposing any “probable acquisitions” (within the meaning of such term under NI 44-101F1) that would require the inclusion or incorporation by reference of
25
any additional financial statements or pro forma financial statements in the Prospectus or the filing of a Business Acquisition Report pursuant to Canadian Securities Laws.
(tt)
Corporation Short Form Eligible
. The Corporation is eligible to file a short form prospectus in each of the Qualifying Jurisdictions pursuant to applicable Canadian Securities Laws and on the date of and upon filing of the Final Prospectus there will be no documents required to be filed under the Canadian Securities Laws in connection with the distribution of the Offered Shares that will not have been filed as required.
(uu)
Compliance with Laws
. The Corporation has complied, or will have complied, in all material respects with all relevant statutory and regulatory requirements required to be complied with prior to the Closing Time in connection with the Offering. Neither the Corporation nor the Subsidiary is aware of any legislation or proposed legislation, which they anticipate will have a Material Adverse Effect.
(vv)
No Loans
. Except as disclosed in the Financial Statements, neither the Corporation nor the Subsidiary has made any material loans to or guaranteed the material obligations of any person.
(ww)
Directors and Officers
. None of the directors or officers of the Corporation are now, or have ever been, subject to an order or ruling of any securities regulatory authority or stock exchange prohibiting such individual from acting as a director or officer of a public company or of a company listed on a particular stock exchange.
(xx)
Minute Books and Records
. The minute books and records of the Corporation and the Subsidiary made available to counsel for the Underwriters in connection with their due diligence investigation of the Corporation for the periods requested to the date hereof are all of the minute books and material records of the Corporation and the Subsidiary and contain copies of all material proceedings (or certified copies thereof or drafts thereof pending approval) of the shareholders, the directors and all committees of directors of the Corporation and the Subsidiary, as the case may be, to the date of review of such corporate records and minute books and there have been no other meetings, resolutions or proceedings of the shareholders, directors or any committees of the directors of the Corporation and the Subsidiary to the date hereof not reflected in such minute books and other records, other than those which have been disclosed to the Underwriters or which are not material in the context of the Corporation and the Subsidiary.
(yy)
No Dividends
. During the previous 12 months, the Corporation has not, directly or indirectly, declared or paid any dividend or declared or made any other distribution on any of its shares or securities of any class, or, directly or indirectly, redeemed, purchased or otherwise acquired any of its Common Shares or securities or agreed to do any of the foregoing. There are no restrictions upon or impediment to, the declaration or payment of dividends by the directors of the
26
Corporation or the payment of dividends by the Corporation in the constating documents or in any Material Agreements or Debt Instruments.
(zz)
Fees and Commissions.
Other than the Underwriters (and their selling group members) pursuant to this Agreement, there is no other person acting at the request of the Corporation, or to the knowledge of the Corporation, purporting to act who is entitled to any brokerage, agency or other fiscal advisory or similar fee in connection with the Offering or transactions contemplated herein.
(aaa)
Entitlement to Proceeds.
Other than the Corporation, there is no person that is or will be entitled to demand any of the net proceeds of the Offering.
(bbb)
Related Parties.
Except as described or disclosed in the Offering Documents, none of the directors, officers or employees of the Corporation, any known holder of more than 10% of any class of securities of the Corporation or securities of any person exchangeable for more than 10% of any class of securities of the Corporation, or any known associate or affiliate of any of the foregoing persons or companies (as such terms are defined in the Securities Act), has had any material interest, direct or indirect, in any material transaction within the previous two years or any proposed material transaction which, as the case may be, materially affected or is reasonably expected to materially affect the Corporation and the Subsidiary, on a consolidated basis. Neither the Corporation nor the Subsidiary has any material loans or other indebtedness outstanding which has been made to any of its shareholders, officers, directors or employees, past or present, or any person not dealing at “arm’s length” (within the meaning of the Income Tax Act (Canada)) with them.
(ccc)
Sales by Insiders.
To the knowledge of the Corporation, no insider of the Corporation has a present intention to sell any securities of the Corporation held by it other than has been disclosed to the Underwriters.
Section 8
Covenants of the Corporation
The Corporation covenants and agrees with the Underwriters, and acknowledges that each of them is relying on such covenants in connection with the purchase of the Offered Shares, as follows:
(1)
Notification of Filings.
The Corporation will advise the Underwriters, promptly after receiving notice thereof, of the time when the Offering Documents have been filed and receipts, as applicable, therefor have been obtained and will provide evidence reasonably satisfactory to the Underwriters of each such filing and copies of such receipts.
(2)
Standstill.
The Corporation will not directly or indirectly, for a period commencing on the date of this Agreement and ending 90 days after the Closing Date, without the prior written consent of Clarus, on behalf of the Underwriters, such consent not to be unreasonably withheld or delayed, authorize, sell or issue or announce its intention to authorize, sell or issue, or negotiate or enter into an agreement to sell or issue, any securities of the Corporation (including those that are convertible or exchangeable into
27
securities of the Corporation) other than (i) pursuant to the Offering; (ii) the issuance of non-convertible debt securities; (iii) upon the exercise of convertible securities, options or warrants of the Corporation outstanding as of the date hereof; (iv) pursuant to the Corporation’s stock option plan or any other share compensation arrangement of the Company; (v) pursuant to any acquisition of shares or assets of arm’s length persons, or (vi) in connection with any strategic transactions, investments or supply agreements between the Corporation and a third party, including any stock options that may be issued to any arm’s length persons in connection with such strategic transactions, investments or supply agreements.
(3)
Lock-Up Agreements
. The Corporation will cause each of the directors and officers of the Corporation who are directors or officers effective as of the Closing Date, to enter into lock-up agreements in a form satisfactory to the Corporation and Clarus, on behalf of the Underwriters, each acting reasonably pursuant to which each such person agrees, for a period of 90 days after the Closing Date, not to directly or indirectly, offer, sell, contract to sell, grant any option to purchase, make any short sale, or otherwise dispose of, or transfer, or announce any intention to do so, any Common Shares, whether now owned directly or indirectly, or under their control or direction, or with respect to which each has beneficial ownership, or enter into any transaction or arrangement that has the effect of transferring, in whole or in part, any of the economic consequences of ownership of Common Shares, whether such transaction is settled by the delivery of Common Shares, other securities, cash or otherwise other than pursuant to a take-over bid or any other similar transaction made generally to all of the shareholders of the Corporation.
(4)
Maintain Reporting Issuer Status
. The Corporation will use its commercially reasonable best efforts to maintain its status as a “reporting issuer” (or the equivalent thereof) not in default of the requirements of the Canadian Securities Laws in each of the provinces of Canada other than Quebec, and following the filing of the Final Prospectus in each of the Qualifying Jurisdictions, to the date that is at least 24 months following the Closing Date, provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(5)
Maintain Stock Exchange Listing
. The Corporation will use its commercially reasonable best efforts to maintain the listing of the Common Shares (including those issuable pursuant to the Offering) on the TSX or such other recognized stock exchange or quotation system as the Underwriters may approve, acting reasonably, for a period of at least 24 months following the Closing Date, provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(6)
Validly Issued Securities
. The Corporation will, provided it receives payment therefor, ensure that at the Closing Time the Offered Shares have been duly and validly issued as fully paid and non-assessable Common Shares.
(7)
Use of Proceeds
. The Corporation will use the proceeds of the Offering in the manner specified in the Prospectus under the heading “Use of Proceeds”.
28
(8)
Consents and Approvals
. The Corporation will have made or obtained, as applicable, using commercially reasonable best efforts at or prior to the Closing Time, all consents, approvals, permits, authorizations or filings as may be required by the Corporation under Securities Laws necessary for the consummation of the transactions contemplated herein, other than customary post-closing filings required to be submitted within the applicable time frame pursuant to Securities Laws and the rules of the TSX.
(9)
Closing Conditions
. The Corporation will have, at or prior to the Closing Time, fulfilled or caused to be fulfilled, each of the conditions set out in Section 10 hereof.
Section 9
Representations, Warranties and Covenants of the Underwriters
(1)
Each Underwriter hereby severally, and not jointly, nor jointly and severally, represents and warrants to the Corporation, the following:
(a)
Registration
. The Underwriters are, and will remain so, until the completion of the Offering, appropriately registered under applicable Canadian Securities Laws so as to permit it to lawfully fulfill its obligations hereunder;
(b)
Authority
. The Underwriters have good and sufficient right and authority to enter into this Agreement and complete the transactions contemplated under this Agreement on the terms and conditions set forth herein.
(c)
Marketing Materials
. Other than the Marketing Material, the Underwriters have not provided any marketing materials to any potential investors in connection with the Offering.
(2)
The Underwriters hereby severally, and not jointly, nor jointly and severally, covenant and agree with the Corporation, the following:
(a)
Jurisdictions and Offering Price
. During the period of distribution of the Offered Shares by or through the Underwriters, the Underwriters will offer and sell Offered Shares to the public only in the Selling Jurisdictions where they may lawfully be offered for sale upon the terms and conditions set forth in the Prospectus and this Agreement either directly or through other registered investment dealers and brokers. The Underwriters shall be entitled to assume that the Offered Shares are qualified for distribution in any Qualifying Jurisdiction where the Final Receipt shall have been obtained following the filing of the Prospectus.
(b)
Compliance with Securities Laws
. The Underwriters will comply with applicable Securities Laws in connection with the offer and sale and distribution of the Offered Shares.
(c)
U.S. Sales
. The Underwriters will not directly or indirectly, solicit offers to purchase or sell the Offered Shares or deliver any Offering Document to purchasers so as to require registration of the Offered Shares or the filing of a prospectus or registration statement with respect to the Offered Shares under the
29
Laws of any jurisdiction other than the Qualifying Jurisdictions, including without limitation, the United States.
(d)
Completion of Distribution
. The Underwriters will use their commercially reasonable best efforts to complete the distribution of the Offered Shares as promptly as possible after the Closing Time. Clarus will notify the Corporation when the Underwriters have ceased the distribution of the Offered Shares, and, within thirty (30) days after the Closing Date, will provide the Corporation, in writing, with a breakdown of the number of Offered Shares distributed (i) in each of the Qualifying Jurisdictions, and (ii) in any other Selling Jurisdictions.
(e)
Liability on Default
. No Underwriter shall be liable to the Corporation under this Section with respect to a breach or default by the other Underwriter.
Section 10
Conditions of Closing
The Underwriters’ obligation to purchase the Offered Shares pursuant to this Agreement (including the obligation to complete the purchase of the Purchased Shares and the Over-Allotment Shares, as the case may be) shall be subject to the following conditions having been met at the Closing Time:
(1)
the Underwriters receiving favourable legal opinions from Stikeman Elliott LLP, counsel to the Corporation (who may rely, to the extent appropriate in the circumstances, on the opinions of local counsel acceptable to counsel to the Underwriters as to the qualification of the Offered Shares for sale to the public and as to other matters governed by the laws of jurisdictions in Canada other than the provinces in which they are qualified to practice and may rely, to the extent appropriate in the circumstances, as to matters of fact on certificates of officers, public and exchange officials or of the auditor or transfer agent of the Corporation), substantially to the effect set forth below, subject to customary assumptions, qualifications and limitations:
(a)
the Corporation is a corporation validly incorporated and existing under the
Business Corporations Act
(Ontario) and has all requisite corporate power and capacity to carry on business, to own and lease properties and assets;
(b)
the Corporation has all necessary corporate power and authority to (i) execute, deliver and perform its obligations under this Agreement, (ii) to create, issue and sell the Offered Shares, and (iii) to grant the Over-Allotment Option;
(c)
the authorized and issued capital of the Corporation;
(d)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder and this Agreement has been duly executed and delivered by the Corporation and constitutes a legal, valid and binding obligation of the Corporation enforceable against it in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting the rights of creditors generally and subject to such other standard assumptions and qualifications including the
30
qualifications that equitable remedies may be granted in the discretion of a court of competent jurisdiction and that enforcement of rights to indemnity, contribution and waiver of contribution set out in this Agreement may be limited by applicable law;
(e)
the execution and delivery of this Agreement and the fulfilment of the terms of this Agreement by the Corporation and the issuance, sale and delivery of the Offered Shares and the grant of the Over-Allotment Option, do not and will not result in a breach of or default under, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach of or default under, and do not and will not conflict with the articles and by-laws of the Corporation, any resolutions of the shareholders or directors of the Corporation, or any applicable corporate law or Securities Laws;
(f)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of each of the Preliminary Prospectus and the Final Prospectus (and any Supplementary Material) and the filing thereof with the Securities Commissions in the Qualifying Jurisdictions;
(g)
the Offered Shares have been validly issued as fully paid and non-assessable shares in the capital of the Corporation;
(h)
all necessary documents have been filed, all necessary proceedings have been taken and all necessary authorizations, approvals, permits, consents and orders have been obtained under Canadian Securities Laws to qualify the distribution to the public of the Offered Shares in the Qualifying Jurisdictions by or through persons who are duly registered under the applicable Canadian Securities Laws and who have complied with the relevant provisions of such applicable Canadian Securities Laws and to qualify the grant of the Over-Allotment Option;
(i)
subject to the qualifications and assumptions set out therein, the statements set forth in the Preliminary Prospectus and the Final Prospectus under the caption “Eligibility for Investment” and “Canadian Federal Income Tax Considerations”, insofar as they purport to describe the provisions of the laws referred to therein, are fair summaries of the matters discussed therein;
(j)
subject only to the standard listing conditions, the Offered Shares have been conditionally listed or approved for listing on the TSX; and
(k)
to such other matters as may reasonably be requested by the Underwriters no less than 48 hours prior to the Closing Time;
in form and substance acceptable to the Underwriters and their counsel, acting reasonably.
(2)
the Underwriters receiving favourable legal opinions from counsel to the Subsidiary in form and substance acceptable to the Underwriters and their counsel, acting reasonably, substantially to the effect set out below:
31
(a)
the Subsidiary having been incorporated and existing under the
Business Corporations Act
(Ontario);
(b)
the Subsidiary having the corporate capacity and power to own and lease its properties and assets and to conduct its business as described in the Prospectus; and
(c)
as to the authorized and issued share capital of the Subsidiary and to the ownership thereof;
(3)
if any of the Offered Shares are offered or sold in the United States, the Underwriters shall have received at the Closing Time a customary and favourable legal opinion dated the Closing Date of Dorsey & Whitney LLP in form and substance reasonably satisfactory to the Underwriters to the effect that no registration is required under the U.S. Securities Act in connection with the offer and sale of such Offered Shares under Rule 144A, provided, in each case, that such offer, sale and delivery of Offered Shares in the United States is made in compliance with this Agreement and the terms set out in Schedule “C” hereto and provided further that it being understood that no opinion is expressed as to any subsequent resale of any Offered Shares. In providing the foregoing opinion, such counsel may rely upon the covenants, representation and warranties of the Corporation and the Underwriters set forth in this Agreement and Schedule “C” hereto, and upon the covenants, representation and warranties of any purchasers in the United States;
(4)
the Underwriters having received certificates dated the Closing Date and signed by two senior officers of the Corporation as may be acceptable to the Underwriters, acting reasonably, in form and substance satisfactory to the Underwriters, acting reasonably, with respect to:
(a)
the constating documents of the Corporation;
(b)
the resolutions of the directors of the Corporation relevant to the Offering Documents, the sale of the Offered Shares, the grant of the Over-Allotment Option, and the authorization of this Agreement and the transactions contemplated herein; and
(c)
the incumbency and signatures of signing officers for the Corporation;
(5)
the Underwriters receiving certificates of status and/or compliance, where issuable under applicable law, for the Corporation and the Subsidiary, each dated within one Business Day prior to the Closing Date;
(6)
the Underwriters receiving an auditors “bring down” comfort letter dated the Closing Date from PricewaterhouseCoopers LLP, in form and substance satisfactory to the Underwriters, acting reasonably, bringing forward to a date not more than two Business Days prior to the Closing Date the information contained in the comfort letter referred to in Section 4(1)(d) hereof;
32
(7)
the Underwriters receiving a certificate dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer or such other senior officer(s) of the Corporation as may be acceptable to the Underwriters, certifying for and on behalf of the Corporation and without personal liability, after having made due enquiries, that:
(a)
the representations and warranties of the Corporation contained in this Agreement, and in any certificates of the Corporation delivered pursuant to or in connection with this Agreement, are true and correct in all material respects as of the Closing Time as if such representations and warranties were made as at the Closing Time, after giving effect to the transactions contemplated hereby;
(b)
the Corporation has complied in all material respects with all the covenants and satisfied in all material respects all the terms and conditions of this Agreement on its part to be complied with and satisfied at or prior to the Closing Time;
(c)
no order, ruling or determination having the effect of suspending the sale or ceasing the trading or prohibiting the sale of the Offered Shares or any other securities of the Corporation (including the Common Shares) has been issued by any regulatory authority and is continuing in effect and no proceedings for that purpose have been instituted or are pending or, to the knowledge of such officers, contemplated or threatened by any regulatory authority;
(d)
since the respective dates as of which information is given in the Final Prospectus (A) there has been no material change (actual, anticipated, contemplated or threatened, whether financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise), prospects or capital of the Corporation on a consolidated basis, and (B) no transaction has been entered into by the Corporation or the Subsidiary which is material to the Corporation on a consolidated basis, other than as disclosed in the Final Prospectus or the Supplementary Material, as the case may be; and
(e)
there has been no change in any material fact (which includes the disclosure of any previously undisclosed material fact) contained in the Final Prospectus which fact or change is, or may be, of such a nature as to render any statement in the Final Prospectus misleading or untrue in any material respect or which would result in a misrepresentation in the Final Prospectus or which would result in the Final Prospectus not complying with applicable Canadian Securities Laws;
(8)
the Underwriters receiving the executed lock-up agreements from each director and executive officer of the Corporation (other than as contemplated by Section 8(3)) in favour of the Underwriters in a form satisfactory to the Underwriters as required pursuant to Section 8(3) of this Agreement;
(9)
the Underwriters receiving a certificate from Computershare Investor Services Inc. as to the number of Common Shares issued and outstanding as at the end of business day on the date prior to the Closing Date;
33
(10)
no order, ruling or determination having the effect of ceasing or suspending trading in any securities of the Corporation or prohibiting the sale of the Offered Shares or any of the Corporation’s issued securities being issued and no proceeding for such purpose being pending or, to the knowledge of the Corporation, threatened by any securities regulatory authority or the TSX;
(11)
the Corporation having delivered to the Underwriters evidence of the approval (or conditional approval) of the listing and posting for trading of the Offered Shares on the TSX, subject only to satisfaction by the Corporation of standard listing conditions;
(12)
the Corporation complying with all of its covenants and obligations under this Agreement required to be satisfied at or prior to the Closing Time;
(13)
the Underwriters not having exercised any rights of termination set forth herein; and
(14)
the Underwriters having received such further certificates, opinions of counsel and other documentation from the Corporation contemplated herein, provided, however, that the Underwriters or their counsel shall request any such certificate or document within a reasonable period prior to the Closing Time that is sufficient for the Corporation to obtain and deliver such certificate, opinion or document.
Section 11
Closing
(1)
Location of Closing
. The Offering will be completed at the offices of Stikeman Elliott LLP in Toronto, Ontario at the Closing Time.
(2)
Securities
. At the Closing Time, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters in Toronto, Ontario, the Offered Shares in electronic or certificated form against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Offered Shares being issued and sold hereunder to purchasers that are not President’s List purchasers by wire transfer or certified cheque, net of the Commission and expenses of the Underwriters payable by the Corporation as set out in this Agreement.
Section 12
Closing of the Over-Allotment Option
(1)
Written Notice of Exercise
. The Over-Allotment Option may be exercised for a period of 30 days from and including the Closing Date. Clarus, on behalf of the Underwriters, shall provide written notice to the Corporation of its election to exercise the Over-Allotment Option, which notice will set forth: (i) the aggregate number of Over-Allotment Shares to be purchased; and (ii) the closing date for the Over-Allotment Shares, provided that such closing date shall not be less than two Business Days and no more than seven Business Days following the date of such notice, and in any event not later than the 30
th
day following the Closing Date.
(2)
Closing
. The purchase and sale of the Over-Allotment Shares, if required, shall be completed at such time and place as the Underwriters and the Corporation may agree, and in accordance with Section 12(1) above.
34
(3)
Securities
. At the closing of the Over-Allotment Option, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters the Over-Allotment Shares, in electronic or certificated form, registered as directed by the Underwriters, against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Over-Allotment Shares being issued and sold by wire transfer or certified cheque, net of the Commission and any expenses of the Underwriters payable by the Corporation as set out in this Agreement.
(4)
Deliveries
. The applicable terms, conditions and provisions of this Agreement (including the provisions of Section 10 relating to closing deliveries) shall apply
mutatis mutandis
to the Closing of the issuance of any Over-Allotment Shares pursuant to any exercise of the Over-Allotment Option.
(5)
Adjustments
. In the event that the Corporation shall subdivide, consolidate, reclassify or otherwise change its Common Shares during the period in which the Over-Allotment Option is exercisable, appropriate adjustments will be made to the Offering Price and to the number of Over-Allotment Shares issuable on exercise thereof such that the Underwriters are entitled to arrange for the sale of the same number and type of securities that the Underwriters would have otherwise arranged for had they exercised such Over-Allotment Option immediately prior to such subdivision, consolidation, reclassification or change.
Section 13
Indemnification and Contribution
(1)
The Corporation and the Subsidiary, as the case may be (collectively, the “
Indemnitor
”) hereby agrees to indemnify and hold each of the Underwriters, and/or any of their respective affiliates and each of their respective directors, officers, employees, partners, agents, shareholders, each other person, if any, controlling the Underwriters or any of their subsidiaries (collectively, the “
Indemnified Parties
” and individually an “
Indemnified Party
”) harmless from and against any and all losses, claims (including shareholder actions, derivative or otherwise), actions, suits, proceedings, damages, liabilities or expenses of whatever nature or kind, joint or several, including the aggregate amount paid in reasonable settlement of any actions, suits, proceedings, investigations or claims, and the reasonable fees, expenses and taxes of one counsel to the Indemnified Parties taken as a whole (collectively, the “
Losses
”) that may be incurred in investigating or advising with respect to and/or defending or settling any action, suit, proceeding, investigation or claim that may be made or threatened against any Indemnified Party or in enforcing this indemnity (collectively, the “
Claims
”) or to which the Indemnified Parties may become subject or otherwise involved in any capacity insofar as such Claims relate to, are caused by, result from, arise out of or are based, directly or indirectly, upon the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder or otherwise in connection with the matters referred to in this Agreement, and to reimburse each Indemnified Party forthwith, upon demand, for any legal or other expenses reasonably incurred by such Indemnified Party in connection with any Claim. This indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such
35
Losses were solely caused by the gross negligence, wilful misconduct or fraud of the Indemnified Party.
(2)
If for any reason (other than a determination as to any of the events referred to above) the foregoing indemnity is unavailable to an Indemnified Party, or is insufficient to hold them harmless, then the Indemnitor shall contribute to the Losses paid or payable by such Indemnified Party as a result of such Claim in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnitor or its shareholders on the one hand and the Indemnified Party on the other hand but also the relative fault of the Indemnitor and the Indemnified Party as well as any relevant equitable considerations, provided that the Indemnitor shall in any event contribute to the Losses paid or payable by the Indemnified Party as a result of such Claim, in such amount that is in excess of the amount of the Commission actually received by the Underwriters pursuant to this Agreement. In the event that the Indemnitor may be entitled to contribution from the Indemnified Parties under the provisions of any statute or law, the Indemnitor shall be limited to contribution in any amount not exceeding the lesser of the portion of the Losses giving rise to such contribution for which the Underwriters are responsible and the amount of the Commission received by the Underwriters. However, no party shall be entitled to contribution under this subsection to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses for which contribution is being sought hereunder, were solely caused by the gross negligence, wilful misconduct or fraud of such party.
(3)
Promptly after receipt of notice of the commencement of any Claim against an Indemnified Party or after receipt of notice of the commencement of any investigation, which is based, directly or indirectly, upon any matter in respect of which indemnification may be sought from the Indemnitor hereunder, the Underwriters will notify the Corporation in writing of the commencement thereof and the Indemnitor will undertake the investigation and defence thereof on behalf of the Indemnified Parties, including the prompt employment of counsel of good standing acceptable to the Indemnified Parties, acting reasonably, and the payment of all expenses, reasonably incurred. The omission to so notify the Indemnitor shall not relieve the Indemnitor of any liability which the Indemnitor may have to an Indemnified Party except only to the extent that any such delay in giving or failure to give notice as herein required results in the forfeiture by the Indemnitor of substantive rights or defences. The Indemnitor shall throughout the course thereof provide copies of all relevant documentation to the Indemnified Party and will keep the Indemnified Party advised of all discussions and significant actions proposed in respect thereof.
(4)
Notwithstanding the foregoing paragraph, any Indemnified Party shall also have the right to employ separate counsel in any such Claim and participate in the defence thereof, and the fees and expenses of such counsel shall be borne by the Indemnified Party unless:
(a)
the employment of separate counsel has been authorized in writing by the Corporation;
36
(b)
the Corporation has not assumed the defence of the Claim within a reasonable period of time after receiving notice of the Claim;
(c)
the named parties to any such Claim include both the Indemnitor and the Indemnified Parties and the Indemnified Parties have been advised by their counsel that representation of both parties by the same counsel would be inappropriate due to an actual or a potential conflict of interest; or
(d)
there are one or more defences available to the Indemnified Parties which are different from or in addition to those available to the Indemnitor such that there may be a conflict of interest between the parties;
in which case such fees and expenses of such counsel to the Indemnified Parties shall be for the Indemnitor’s account.
(5)
The Indemnitor agrees that if any Claim shall be brought or commenced against the Indemnitor and/or any Indemnified Party and the personnel of such Indemnified Party shall be required to testify in connection therewith or shall be required to participate or respond to procedures designed to discover information regarding, in connection with, or by reason of the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder, the Indemnified Party shall have the right to employ its own counsel in connection therewith, and the reasonable fees and expenses of such counsel as well as the reasonable costs (including an amount to reimburse the Indemnified Party monthly for time spent by its personnel in connection therewith at their normal per diem rates together with such disbursements and reasonable out-of-pocket expenses incurred by the personnel of the Indemnified Party in connection therewith) shall be paid by the Corporation as they occur.
(6)
A party hereunder shall not, without the other party’s prior written consent, such consent not to be unreasonably withheld, conditioned or delayed, settle, compromise, consent to the entry of any judgment, or make an admission of liability with respect to any Claims or seek to terminate any Claims in respect of which indemnification may be sought hereunder.
(7)
The rights accorded to the Indemnified Parties hereunder shall be in addition to any rights an Indemnified Party may have at common law or otherwise.
(8)
The Indemnitor agrees to waive any right the Indemnitor may have of first requiring the Indemnified Party to proceed against or enforce any right, power, remedy, security or claim payment from any other person before claiming under this indemnity. The Indemnitor hereby acknowledges that the Underwriters are acting as trustees for each of the other Indemnified Parties of the Indemnitor’s covenants under this indemnity and the Underwriters agree to accept such trust and to hold and enforce such covenants on behalf of such persons.
(9)
The indemnity and contribution obligations of the Indemnitor shall be in addition to any liability which the Indemnitor may otherwise have, shall extend upon the same terms and conditions to the Indemnified Parties who are not signatories hereto and shall be binding
37
upon and enure to the benefit of any successors, assigns, heirs and personal representatives of the Corporation and the Indemnified Parties.
Section 14
Compensation of the Underwriters
At the Closing Time, the Corporation shall pay to Clarus, on behalf of the Underwriters, a cash fee (the “
Commission
”) equal to 4.75% of the aggregate gross proceeds received from the sale of the Offered Shares (including for certainty on any exercise of the Over-Allotment Option) in consideration of the services to be rendered by the Underwriters in connection with the Offering. The Commission will be netted out of the gross proceeds of the Offering.
Section 15
Expenses
Whether or not the purchase and sale of the Offered Shares shall be completed, all costs and expenses of or incidental to the sale and delivery of the Offered Shares and of or incidental to all matters in connection with the transactions herein shall be borne by the Corporation, including, without limitation, all expenses of or incidental to the issue, sale or distribution of the Offered Shares, the fees and expenses of the Corporation’s counsel, auditors and independent experts, all costs incurred in connection with the preparation of documents relating to the Offering, and the reasonable expenses and fees incurred by the Underwriters which shall include the reasonable fees (to a maximum of $75,000 exclusive of disbursements and taxes, such amount not to be exceeded without the written approval of the Corporation, such approval not to be unreasonably withheld) and disbursements of the Underwriters’ counsel and applicable taxes thereon. The Underwriters’ expenses will be netted out of the gross proceeds of the Offering. With the exception of legal expenses, the reimbursement by the Company of all other out-of-pocket expenses incurred by the Underwriters shall not exceed $25,000 in the aggregate.
Section 16
All Terms to be Conditions
The Corporation agrees that the conditions contained in this Agreement will be complied with insofar as the same relate to acts to be performed or caused to be performed by the Corporation and each of the Corporation and the Underwriters will use its respective commercially reasonable efforts to cause all such conditions to be complied with. It is understood that the Underwriters may waive, in whole or in part, or extend the time for compliance with, any of such terms and conditions without prejudice to the rights of the Underwriters in respect of any such terms and conditions or any other or subsequent breach or non-compliance, provided that to be binding on the Underwriters any such waiver or extension must be in writing.
Section 17
Termination by Underwriters in Certain Events
(1)
Each Underwriter shall also be entitled to terminate its obligation to purchase the Offered Shares by written notice to that effect given to the Corporation at or prior to the Closing Time if:
(a)
Material Change Out
- there shall be any material change or change in a material fact, or there should be discovered any previously undisclosed material fact required to be disclosed in the Preliminary Prospectus, the Final Prospectus or any
38
amendment thereto, in each case which, in the reasonable opinion of the Underwriters (or any of them), has or would be expected to have a significant adverse effect on the market price or value of the Common Shares, or any other securities of the Corporation;
(b)
Disaster Out
- there should develop, occur or come into effect or existence any event, action, state, condition (including without limitation, terrorism or accident) or major financial occurrence of national or international consequence or a new or change in any law or regulation which in the sole opinion of the Underwriters, or any one of them, seriously adversely affects or involves or may seriously adversely affect or involve the financial markets or the business, operations or affairs of the Corporation and its subsidiaries taken as a whole or the market price or value of the securities of the Corporation;
(c)
Regulatory Out
— there shall be (i) any inquiry, action, suit, proceeding or investigation (whether formal or informal) is commenced, announced or threatened in relation to the Corporation or any one of the officers or directors of the Corporation or any of its principal shareholders where wrong-doing is alleged or any order is made by any federal, provincial, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality including without limitation the TSX or Securities Commissions which involves a finding of wrong-doing; or (ii) any order, action or proceeding which cease trades or otherwise operates to prevent or restrict the trading of the Common Shares or any other securities of the Corporation is made or threatened by a securities regulatory authority; or
(d)
Breach Out
- the Corporation is in breach of any material term, condition or covenant of this Agreement or any material representation or warranty given by the Corporation in this Agreement becomes or is false.
(2)
If this Agreement is terminated by any of the Underwriters pursuant to Section 17(1), there shall be no further liability on the part of such Underwriter or of the Corporation to such Underwriter, except in respect of any liability which may have arisen or may thereafter arise under Section 13 and Section 15.
(3)
The right of the Underwriters or any of them to terminate their respective obligations under this Agreement is in addition to such other remedies as they may have in respect of any default, act or failure to act of the Corporation in respect of any of the matters contemplated by this Agreement. A notice of termination given by one Underwriter under this Section 17 shall not be binding upon the other Underwriter.
Section 18
Obligations of the Underwriters to be Several
(1)
Subject to the terms and conditions hereof, the obligation of the Underwriters to purchase the Offered Shares shall be several and not joint. The percentage of the Offered Shares to be severally purchased and paid for by each of the Underwriters shall be as follows:
39
|
Clarus Securities Inc.
|
|
70
|
%
|
|
|
|
|
|
|
AltaCorp Capital Inc.
|
|
10
|
%
|
|
|
|
|
|
|
Canaccord Genuity Corp.
|
|
10
|
%
|
|
|
|
|
|
|
Cormark Securities Inc.
|
|
10
|
%
|
(2)
If an Underwriter shall not complete the purchase and sale of its applicable percentage of the aggregate amount of the Offered Shares at the Closing Time for any reason whatsoever, including by reason of Section 17 hereof, the other Underwriter shall have the right, but shall not be obligated, to purchase the Offered Shares which would otherwise have been purchased by the Underwriter which fails to purchase. If, with respect to the Offered Shares, the non-defaulting Underwriter elects not to exercise such rights to assume the entire obligations of the defaulting Underwriter, then the Corporation shall have the right to either (i) proceed with the sale of the Offered Shares (less the defaulted Offered Shares) to the non-defaulting Underwriter; or (ii) terminate its obligations hereunder without liability except pursuant to the provisions of Section 13 and Section 15 in respect of the non-defaulting Underwriter.
(3)
Subject to compliance with Canadian Securities Laws, without affecting the firm obligation of the Underwriters to purchase from the Corporation 7,272,740 Offered Shares at the Offering Price in accordance with this Agreement, after the Underwriters have made reasonable effort to sell all of the Offered Shares at the Offering Price, the Offering Price may be decreased by the Underwriters and further changed from time to time to an amount not greater than the Offering Price specified herein. Such decrease in the Offering Price will not affect the Underwriters’ Commission ($0.6531 per Offered Share) to be paid by the Corporation to the Underwriters, and it will not decrease the amount of the net proceeds of the Offering to be paid by the Underwriters to the Corporation ($13.0969 per Offered Share), before deducting expenses of the Offering. The Underwriters will inform the Corporation if the Offering Price is decreased.
Section 19
Notices
Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered,
in the case of the Corporation, to:
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention: Vic Neufeld – President & Chief Executive Officer
40
with a copy of any such notice to:
Stikeman Elliott LLP
5300 Commerce Court
199 Bay Street
Toronto, ON M5L 1B9
Attention:
Curtis Cusinato
Fax:
(416) 947-0866
in the case of the Underwriters, to:
Clarus Securities Inc.
130 King Street West
Suite 3640
Toronto, ON M5X 1A9
Attention:
Robert Orviss
Fax:
(416) 343-2799
with a copy of any such notice to:
Borden Ladner Gervais LLP
Bay Adelaide Centre — East Tower
22 Adelaide Street West King Street West
Toronto, ON M5H 4E3
Attention:
Andrew Powers
Fax:
(416) 367-6749
The Corporation and the Underwriters may change their respective addresses for notices by notice given in the manner aforesaid. Any such notice or other communication shall be in writing, and unless delivered personally to the addressee or to a responsible officer of the addressee, as applicable, shall be given by telecopy and shall be deemed to have been given when: (i) in the case of a notice delivered personally to a responsible officer of the addressee, when so delivered; and (ii) in the case of a notice delivered or given by telecopy on the first business day following the day on which it is sent.
Section 20
Miscellaneous
(a)
Actions of Underwriters
. Except with respect to Section 13, Section 17 and Section 18, all transactions and notices on behalf of the Underwriters hereunder or contemplated hereby may be carried out or given on behalf of the Underwriters by Clarus and the Underwriters shall in good faith discuss with each other the nature of any such transactions and notices prior to giving effect thereto or the delivery thereof, as the case may be.
41
(b)
Successors and Assigns
. This Agreement shall enure to the benefit of, and shall be binding upon, the Underwriters and the Corporation and their respective successors and legal representatives.
(c)
Governing Law
. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(d)
Time of the Essence
. Time shall be of the essence hereof and, following any waiver or indulgence by any party, time shall again be of the essence hereof.
(e)
Interpretation
. The words, “hereunder”, “hereof” and similar phrases mean and refer to the Agreement formed as a result of the acceptance by the Corporation of this offer by the Underwriters to purchase the Offered Shares.
(f)
Survival
. All representations, warranties, covenants and agreements of the Corporation and/or the Underwriters herein contained or contained in documents submitted pursuant to this Agreement and in connection with the transaction of purchase and sale herein contemplated shall survive for a period ending on the date that is two years following the Closing Date. Notwithstanding the preceding sentence, Section 13 shall survive the purchase and sale of the Offered Shares and the termination of this Agreement and shall continue in full force and effect for the benefit of the Underwriters or the Corporation, as the case may be, regardless of any subsequent disposition of the Offered Shares or any investigation by or on behalf of the Underwriters with respect thereto without limitation other than any limitation requirements of applicable law. The Underwriters and the Corporation shall be entitled to rely on the representations and warranties of the Corporation or the Underwriters, as the case may be, contained herein or delivered pursuant hereto notwithstanding any investigation which the Underwriters or the Corporation may undertake or which may be undertaken on their behalf.
(g)
Electronic Copies
. Each of the parties hereto shall be entitled to rely on delivery of a facsimile or PDF copy of this Agreement and acceptance by each such party of any such facsimile or PDF copy shall be legally effective to create a valid and binding agreement between the parties hereto in accordance with the terms hereof.
(h)
Severability
. If one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein.
(i)
Counterparts
. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.
(j)
Several and Joint
. In performing their respective obligations under this Agreement, the Underwriters shall be acting severally and not jointly and
42
severally. Nothing in this Agreement is intended to create any relationship in the nature of a partnership, or joint venture between the Underwriters.
(k)
Market Stabilization Activities
. In connection with the distribution of the Offered Shares, the Underwriters (or any of them) may effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which might otherwise prevail in the open market, but in each case as permitted by Canadian Securities Laws. Such stabilizing transactions, if any, may be discontinued by the Underwriters at any time.
(l)
No Fiduciary Duty
. The Corporation acknowledges that in connection with the Offering, the Underwriter: (i) have acted at arm’s length, are not agents of, and owe no fiduciary duties to, the Corporation or any other person, (ii) owe the Corporation only those duties and obligations set forth in this Agreement, and (iii) may have interests that differ from those of the Corporation. The Corporation waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the Offering.
(m)
Entire Agreement
. This Agreement constitutes the only agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations and understandings in respect of the Offering, including the engagement letter dated December 12, 2017. This Agreement may be amended or modified in any respect by written instrument only.
(n)
Further Assurances
. Each of the parties hereto shall do or cause to be done all such acts and things and shall execute or cause to be executed all such documents, agreements and other instruments as may reasonably be necessary or desirable for TOR01: 7189960: v4A
[Remainder of page intentionally left blank]
43
If this Agreement accurately reflects the terms of the transactions which we are to enter into and are agreed to by you, please communicate your acceptance by executing the enclosed copies of this Agreement where indicated and returning them to us.
Yours very truly,
|
CLARUS SECURITIES INC.
|
ALTACORP CAPITAL INC.
|
|
|
|
|
|
|
|
By:
|
Signed “Robert Orviss”
|
|
By:
|
Signed “Jeff Fallows”
|
|
|
Robert Orviss
|
|
|
Jeff Fallows
|
|
|
Managing Director
|
|
|
Managing Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CANACCORD GENUITY CORP.
|
CORMARK SECURITIES INC.
|
|
|
|
|
|
|
|
By:
|
Signed “Steve Winokur”
|
|
By:
|
Signed “Chris Shaw”
|
|
|
Steve Winokur
|
|
|
Chris Shaw
|
|
|
Managing Director
|
|
|
Managing Director
|
The foregoing is hereby accepted and agreed to by the undersigned as of the date first written above.
|
APHRIA INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
Signed “Carl Merton”
|
|
|
|
|
|
Carl Merton
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
44
SCHEDULE “A”
SUBSIDIARY
|
Name
|
|
Jurisdiction of
Incorporation
|
|
Authorized Share
Capital
|
|
Issued and Outstanding
Shares
|
|
Pure Natures Wellness Inc.
|
|
Ontario
|
|
Unlimited common shares
|
|
50,179,588
|
SCHEDULE “B”
EXISTING RIGHTS
(1)
7,179,704 options to acquire Common Shares pursuant to the Corporation’s stock option plan, with a weighted average exercise price of $3.28 and expiry dates ranging from October 2018 to October 2022.
(2)
2,860,550 warrants to acquire Common Shares at an exercise price of $1.50 and an expiry date of December 2, 2019.
(3)
379,002 warrants to acquire Common Shares at an exercise price of $1.75 and an expiry date of December 11, 2018.
(4)
200,000 warrants to acquire Common Shares at an exercise price of $3.14 and an expiry date of September 26, 2021.
SCHEDULE “C”
COMPLIANCE WITH UNITED STATES SECURITIES LAWS
(In the event of any U.S. sales)
1.
Capitalized terms used in this Schedule “C” and not defined in this Schedule “C” shall have the meanings given in the Underwriting Agreement to which this Schedule “C” is annexed and the following terms shall have the meanings indicated:
“
Directed Selling Efforts
” means “directed selling efforts” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Offered Securities and shall include, without limitation, the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of any of such Offered Securities;
“
Foreign Issuer
” means a “
foreign issuer
” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means any issuer that is (a) the government of any country, or of any political subdivision of a country, other than the United States, or (b) a national of any country other than the United States, or (c) a corporation or other organization incorporated or organized under the laws of any country other than the United States, except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: (1) more than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States, and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States;
“
General Solicitation
” and “
General Advertising
” means “general solicitation” and “general advertising”, respectively, as used in Rule 502(c) of Regulation D, including, without limitation, advertisements, articles, notices or other communication published on the Internet or in any newspaper, magazine or similar media or broadcast over television, radio or on the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising or in any manner involving a public offering within the meaning of section 4(a)(2) of the U.S. Securities Act;
“
Offered Securities
” means the Common Shares offered and sold in the Offering, including any Common Shares issued pursuant to the Over-Allotment Option;
“
Offshore Transaction
” means “offshore transaction” as defined in Regulation S;
“
Selling Firms
” means the Underwriters together with other investment dealers and brokers which participate in the offer and sale of the Offered Securities under the terms of this Agreement, including this Schedule “C”;
“
Substantial U.S. Market Interest
” means “substantial U.S. market interest” as that term is defined in Regulation S; and
“
U.S. Purchaser
” means any purchaser of the Offered Securities that is, or is acting for the account or benefit of, a person in the United States, or any person offered the Offered Securities in the United States.
2.
The Corporation represents, warrants and covenants to the Underwriters and the U.S. Affiliates that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
(a)
the Corporation is a Foreign Issuer, and there is no Substantial U.S. Market Interest with respect to the Offered Securities or any other class of equity securities of the Corporation;
(b)
none of the Corporation, its affiliates (as defined in Rule 405 under the U.S. Securities Act) or any person acting on its or their behalf (except for the Underwriters, their respective U.S. Affiliates and any person acting on their behalf, as to whom no representation, warranty or covenant is made) (i) has engaged or will engage in any Directed Selling Efforts, (ii) has taken or will take any action that would cause the exemption afforded by Rule 144A to be unavailable for offers and sales of Offered Securities to, or for the account or benefit of, persons in the United States in accordance with this Schedule “C”, or the exclusion from registration afforded by Rule 903 of Regulation S to be unavailable for offers and sales of the Offered Securities in Offshore Transactions in accordance with the Underwriting Agreement, or (iii) has engaged in or will engage in any form of General Solicitation or General Advertising with respect to offers or sales of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
the Offered Securities satisfy the requirements set forth in Rule 144A(d)(3) under the U.S. Securities Act;
(d)
so long as any Offered Securities which have been sold to, or for the account or benefit of, persons in the United States in reliance upon Rule 144A are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the U.S. Securities Act, and if the Corporation is neither exempt from reporting pursuant to Rule 12g3-2(b) of the U.S. Exchange Act nor subject to and in compliance with Section 13 or 15(d) of the U.S. Exchange Act, the Corporation will furnish to any holder of such Offered Securities and any prospective purchaser of the Offered Securities designated by such holder, upon request of such holder, the information required to be delivered pursuant to Rule 144A(d)(4) under the U.S. Securities Act (so long as such requirement is necessary in order to permit holders of such Offered Securities to effect resales under Rule 144A);
(e)
except with respect to the offer and sale of the Offered Securities offered under this Agreement, the Corporation has not, within six months before the commencement of the offer and sale of the Offered Securities, and will not within six months after the latest of the Closing Date and any Over-Allotment Option
2
Closing Date, offer or sell any securities in a manner that would be integrated with the offer and sale of the Offered Securities and would cause the exemptions from registration pursuant to Rule 144A or the exclusion from registration set forth in Rule 903 of Regulation S to become unavailable with respect to the offer and sale of the Offered Securities;
(f)
except with respect to offers and resales of Offered Securities to Qualified Institutional Buyers in reliance on Rule 144A, pursuant to the terms of this Agreement, none of the Corporation, any of its affiliates, or any person acting on their behalf has made or will make (i) any offer to sell, or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, a person in the United States, or (ii) any sale of the Offered Securities unless, at the time the buy order was or will have been originated, the purchaser is outside the United States or the Corporation, its affiliates an any person acting on their behalf reasonably believe that the purchaser is outside the United States;
(g)
the Corporation is not, and after giving effect to the offer and sale of the Offered Securities and the application of the proceeds as described in the Prospectus, will not be, an “investment company” within the meaning of the United States Investment Company Act of 1940, as amended, registered or required to be registered under such Act;
(h)
none of the Corporation, any of its affiliates or any person acting on any of their behalf (other than the Underwriters, their respective U.S. Affiliates or any person acting on their behalf, as to whom no representation, warranty or covenant is made) has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with the offer or sale of the Offered Securities;
(i)
none of the Corporation or any of its predecessors or subsidiaries has had the registration of a class of securities under the U.S. Exchange Act revoked by the SEC pursuant to Section 12(j) of the U.S. Exchange Act and any rules or regulations promulgated under the U.S. Exchange Act; and
(j)
upon receipt of a written request from a purchaser that is, or is purchasing for the account or benefit of, a person in the United States, the Corporation shall make a determination if the Corporation is a “passive foreign investment company” (a “
PFIC
”) within the meaning of section 1297(a) of the United States Internal Revenue Code of 1986, as amended (the “
Code
”), during any calendar year following the purchase of Offered Securities by such purchaser, and if the Corporation determines that it is a PFIC during such year, the Corporation will provide to such purchaser, upon written request, all information that would be required to permit a United States shareholder to make an election to treat the Corporation as a “qualified electing fund” for the purposes of the Code.
3.
Each of the Underwriters, severally and not jointly, represents and warrants to the Corporation that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
3
(a)
it acknowledges that the Offered Securities have not been and will not be registered under the U.S. Securities Act or applicable state securities laws and may not be offered or sold to, or for the account or benefit of, persons in the United States, except pursuant to transactions exempt from or not subject to the registration requirements under the U.S. Securities Act and exemptions from registration under applicable state securities laws. Accordingly, it has offered and sold, and will offer and sell, the Offered Securities forming part of its allotment only (a) in an Offshore Transaction in accordance with Rule 903 of Regulation S or (b) as provided in paragraphs 3(b) through 3(n) below. None of it, its U.S. Affiliate or any person acting on its or their behalf, has made or will make (except as permitted in paragraphs 3(b) through 3(n) below): (i) any offer to sell or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, any person in the United States; or (ii) any sale of Offered Securities to any purchaser unless, at the time the buy order was or will have been originated, the purchaser was outside the United States, or it, its U.S. Affiliate or persons acting on their behalf reasonably believed that such purchaser was outside the United States. None of it, its U.S. Affiliate, or any persons acting on its or their behalf has engaged or will engaged in any Directed Selling Efforts;
(b)
it has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities, except with its U.S. Affiliate, any U.S. Affiliate of any Selling Firms or with the prior written consent of the Corporation. It shall require each Selling Firm and its U.S. Affiliate to agree, for the benefit of the Corporation, to be bound by and to comply with, and shall use its commercially reasonable efforts to ensure that each Selling Firm and its U.S. Affiliate complies with, the provisions of this Schedule “C” as if such provisions applied to such Selling Firm or affiliate;
(c)
all offers and sales of the Offered Securities by it to, or for the account or benefit of, persons in the United States have been and will be effected only by its U.S. Affiliate, and in all such cases in compliance with all applicable United States federal and state laws relating to the registration and conduct of securities brokers and dealers and all applicable state securities laws;
(d)
its U.S. Affiliate is, and will be on the date of each offer and sale of Offered Securities to, or for the account or benefit of, persons in the United States, duly registered as a broker-dealer under the U.S. Exchange Act and under all applicable state securities laws (unless exempt therefrom) and a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc.;
(e)
it and its affiliates have not solicited and will not solicit, either directly or through a person acting on its or their behalf, offers for, and have not offered to sell and will not offer to sell, Offered Securities to, or for the account or benefit of, persons in the United States by any form of General Solicitation or General Advertising;
(f)
immediately prior to soliciting any offerees of Offered Securities to, or for the account or benefit of, persons in the United States, the Underwriter, its U.S. Affiliate and any person acting on its or their behalf had reasonable grounds to
4
believe and did believe that each offeree solicited by it pursuant to Rule 144A was a Qualified Institutional Buyer with which it has a pre-existing relationship, and at the time of completion of each sale of Offered Securities to, or for the account or benefit of, such person in the United States, the Underwriter, its U.S. Affiliate, and any person acting on its or their behalf will have reasonable ground to believe and will believe, that each purchaser thereof is a Qualified Institutional Buyer;
(g)
each offeree of Offered Securities solicited by it that is, or is acting for the account or benefit of, a person in the United States shall be provided with a copy of the U.S. Private Placement Memorandum and each purchaser of Offered Securities from it that is, or is acting for the account or benefit of, a person in the United States shall be provided, prior to the time of its purchase of any Offered Securities, with a copy of the final U.S. Private Placement Memorandum and no other written material will be used in connection with the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(h)
at least one Business Day prior to the time of delivery, the Corporation and its transfer agent will be provided with a list of all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States solicited by it;
(i)
prior to any sale of Offered Securities to a U.S. Purchaser, it shall cause each such U.S. Purchaser that is a Qualified Institutional Buyer purchasing such Offered Securities pursuant to Rule 144A to execute a Qualified Institutional Buyer Letter in the form attached as Exhibit I to the final U.S. Private Placement Memorandum;
(j)
at the Closing, each Underwriter (together with its U.S. Affiliate) that participated in the offer of Offered Securities to, or for the account or benefit of, persons in the United States, will provide a certificate, substantially in the form of Appendix I to this Schedule “C”, relating to the manner of the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States, or will be deemed to have represented that neither it nor its U.S. Affiliate offered or sold Offered Securities to, or for the account or benefit of, persons in the United States;
(k)
it will inform, and will cause its U.S. Affiliate to inform, all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States by delivery of the U.S. Private Placement Memorandum that the Offered Securities have not been and will not be registered under the U.S. Securities Act and are “restricted securities” as defined in Rule 144(a)(3) under the U.S. Securities Act and are being offered and sold to them without registration under the U.S. Securities Act in reliance upon an exemption from such registration pursuant to Rule 144A; and
(l)
none of the Underwriter, its affiliates, or any person acting on any of their behalf has taken or will take, directly or indirectly, any action in violation of Regulation
5
M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities.
6
APPENDIX I
TO SCHEDULE “C”
UNDERWRITERS’ CERTIFICATE
In connection with the private placement to, or for the account or benefit of, persons in the United States of Offered Securities of Aphria Inc. (the “
Corporation
”) pursuant to the underwriting agreement dated December 15, 2017, between the Corporation and the Underwriters named in the underwriting agreement (the “
Underwriting Agreement
”), each of the undersigned does hereby certify as follows:
(a)
the U.S. Affiliate is a duly registered broker or dealer with the United States Securities and Exchange Commission, and is a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc. on the date of this certificate and on the date of each offer and sale of Offered Securities made by it, and all offers and sales of the Offered Securities to, or for the account or benefit of, persons in the United States have been effected by the U.S. Affiliate in accordance with all applicable U.S. broker-dealer requirements;
(b)
each purchaser of Offered Securities that is, or is acting for the account or benefit of, a person in the United States solicited by us was, prior to the sale of Offered Securities to such purchaser, provided with a copy of the final U.S. Private Placement Memorandum, and we and our U.S. Affiliates have not used and will not use any written material other than the U.S. Private Placement Memorandum in connection with the offering of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
immediately prior to our transmitting the U.S. Private Placement Memorandum to offerees of Offered Securities to, or for the account or benefit of, persons in the United States, we had reasonable grounds to believe, and did believe, that each offeree was a Qualified Institutional Buyer with whom we have a pre-existing relationship, and on the date of this certificate we continue to believe that each purchaser of the Offered Securities purchasing from us through our U.S. Affiliate is a Qualified Institutional Buyer;
(d)
no form of General Solicitation or General Advertising was used by us or our U.S. Affiliate in connection with the offer or sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(e)
in connection with each sale of Offered Securities to U.S. Purchasers that are Qualified Institutional Buyers purchasing pursuant to Rule 144A solicited by us, we caused each such U.S. Purchaser to execute and deliver a Qualified Institutional Buyer Letter in the form of Exhibit I attached to the final U.S. Private Placement Memorandum;
(f)
we have not engaged and will not engage in any violation of Regulation M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities;
(g)
no Directed Selling Efforts were engaged in by us with respect to the offer or sale of the Offered Securities by us; and
(h)
the offering of the Offered Securities to, or for the account or benefit of, persons in the United States has been conducted by us in accordance with the Underwriting Agreement, including Schedule “C” to the Underwriting Agreement.
8
Capitalized terms used in this certificate and not defined in this certificate have the meanings ascribed thereto in the Underwriting Agreement (including the Schedule “C” to the Underwriting Agreement).
DATED the day of , 2017.
9
Exhibit 99.49
Aphria Inc.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 2017 AND NOVEMBER 30, 2016
(Unaudited, expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited — In thousands of Canadian dollars)
|
|
|
Note
|
|
November 30,
2017
|
|
May 31, 2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
116,087
|
|
$
|
79,910
|
|
|
Marketable securities
|
|
4
|
|
55,855
|
|
87,347
|
|
|
Accounts receivable
|
|
|
|
2,666
|
|
826
|
|
|
Other current assets
|
|
5
|
|
8,783
|
|
5,571
|
|
|
Inventory
|
|
6
|
|
8,706
|
|
3,887
|
|
|
Biological assets
|
|
7
|
|
1,398
|
|
1,363
|
|
|
Due from related parties
|
|
8
|
|
—
|
|
464
|
|
|
Land available for sale
|
|
9
|
|
3,160
|
|
—
|
|
|
Current portion of convertible notes receivable
|
|
11
|
|
2,578
|
|
—
|
|
|
|
|
|
|
199,233
|
|
179,368
|
|
|
Capital assets
|
|
9
|
|
134,251
|
|
72,500
|
|
|
Intangible assets
|
|
10
|
|
1,579
|
|
1,891
|
|
|
Convertible notes receivable
|
|
11
|
|
8,996
|
|
1,361
|
|
|
Embedded derivatives
|
|
11
|
|
5,251
|
|
173
|
|
|
Interest in equity investee
|
|
12
|
|
27,493
|
|
28,376
|
|
|
Long-term investments
|
|
13
|
|
60,088
|
|
27,788
|
|
|
Deferred tax asset
|
|
14
|
|
1,511
|
|
3,315
|
|
|
Goodwill
|
|
|
|
1,200
|
|
1,200
|
|
|
|
|
|
|
$
|
439,602
|
|
$
|
315,972
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
15,709
|
|
$
|
5,874
|
|
|
Income taxes payable
|
|
14
|
|
851
|
|
—
|
|
|
Deferred gain on sale of intellectual property
|
|
|
|
2,333
|
|
2,800
|
|
|
Current portion of promissory note payable
|
|
16
|
|
768
|
|
878
|
|
|
Current portion of long-term debt
|
|
17
|
|
790
|
|
765
|
|
|
|
|
|
|
20,451
|
|
10,317
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
16
|
|
—
|
|
366
|
|
|
Long-term debt
|
|
17
|
|
31,022
|
|
31,420
|
|
|
Shareholders’ equity
|
|
|
|
51,473
|
|
42,103
|
|
|
Share capital
|
|
18
|
|
363,479
|
|
274,317
|
|
|
Warrants
|
|
19
|
|
445
|
|
445
|
|
|
Share-based payment reserve
|
|
|
|
7,633
|
|
3,230
|
|
|
Accumulated other comprehensive loss
|
|
|
|
(801
|
)
|
—
|
|
|
Retained earnings (deficit)
|
|
|
|
17,373
|
|
(4,123
|
)
|
|
|
|
|
|
388,129
|
|
273,869
|
|
|
|
|
|
|
$
|
439,602
|
|
$
|
315,972
|
|
Nature of operations (Note 1)
Commitments (Note 28)
Subsequent events (Note 29)
Approved on behalf of the Board:
|
”John Cervini”
|
|
“Cole Cacciavillani”
|
|
Signed: Director
|
|
Signed: Director
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
2
Aphria Inc.
Condensed Interim Consolidated Statements of Income and Comprehensive Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Revenue
|
|
|
|
$
|
8,504
|
|
$
|
5,227
|
|
$
|
14,624
|
|
$
|
9,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
6
|
|
2,746
|
|
1,180
|
|
4,092
|
|
2,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
|
|
5,758
|
|
4,047
|
|
10,532
|
|
7,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
2,671
|
|
1,233
|
|
3,807
|
|
2,572
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(3,115
|
)
|
(1,307
|
)
|
(7,380
|
)
|
(3,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
6,202
|
|
4,121
|
|
14,105
|
|
7,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
21
|
|
1,973
|
|
1,225
|
|
3,708
|
|
2,184
|
|
|
Share-based compensation
|
|
22
|
|
2,200
|
|
251
|
|
4,709
|
|
455
|
|
|
Selling, marketing and promotion
|
|
|
|
2,819
|
|
1,819
|
|
4,767
|
|
3,200
|
|
|
Amortization
|
|
|
|
276
|
|
251
|
|
515
|
|
452
|
|
|
Research and development
|
|
|
|
80
|
|
89
|
|
170
|
|
338
|
|
|
|
|
|
|
7,348
|
|
3,635
|
|
13,869
|
|
6,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,146
|
)
|
486
|
|
236
|
|
1,274
|
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
|
|
183
|
|
—
|
|
476
|
|
—
|
|
|
Foreign exchange gain
|
|
|
|
282
|
|
—
|
|
131
|
|
—
|
|
|
Gain (loss) on marketable securities
|
|
4
|
|
55
|
|
—
|
|
(1,691
|
)
|
—
|
|
|
(Loss) gain on sale of capital assets
|
|
9
|
|
—
|
|
—
|
|
(7
|
)
|
11
|
|
|
(Loss) gain on dilution of ownership in equity investee
|
|
12
|
|
(16
|
)
|
—
|
|
7,535
|
|
—
|
|
|
Loss from equity investee
|
|
12
|
|
(441
|
)
|
—
|
|
(9,281
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
|
|
233
|
|
—
|
|
467
|
|
—
|
|
|
Finance income, net
|
|
23
|
|
1,432
|
|
196
|
|
1,912
|
|
292
|
|
|
Unrealized gain on embedded derivatives
|
|
11
|
|
95
|
|
—
|
|
628
|
|
—
|
|
|
Gain on long-term investments
|
|
24
|
|
6,075
|
|
263
|
|
25,157
|
|
263
|
|
|
|
|
|
|
7,898
|
|
459
|
|
25,327
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
6,752
|
|
945
|
|
25,563
|
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
14
|
|
297
|
|
—
|
|
4,067
|
|
—
|
|
|
Net income
|
|
|
|
6,455
|
|
945
|
|
21,496
|
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) from equity investee
|
|
12
|
|
520
|
|
—
|
|
(801
|
)
|
—
|
|
|
Net comprehensive income
|
|
|
|
$
|
6,975
|
|
$
|
945
|
|
$
|
20,695
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
|
|
138,839,530
|
|
95,624,114
|
|
138,775,253
|
|
84,644,788
|
|
|
Weighted average number of common shares - diluted
|
|
|
|
145,878,443
|
|
101,606,150
|
|
146,075,449
|
|
90,626,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
25
|
|
$
|
0.05
|
|
$
|
0.01
|
|
$
|
0.15
|
|
$
|
0.02
|
|
|
Earnings per share - diluted
|
|
25
|
|
$
|
0.04
|
|
$
|
0.01
|
|
$
|
0.15
|
|
$
|
0.02
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
3
Aphria Inc.
Condensed Interim Consolidated Statements of Changes in Equity
(Unaudited — In thousands of Canadian dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Share-based
|
|
other
|
|
Retained
|
|
|
|
|
|
|
common
|
|
Share capital
|
|
Warrants
|
|
payment
|
|
comprehensive
|
|
earnings
|
|
|
|
|
|
|
shares
|
|
(Note 18)
|
|
(Note 19)
|
|
reserve
|
|
loss
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,917
|
|
$
|
694
|
|
$
|
1,724
|
|
$
|
—
|
|
$
|
(8,321
|
)
|
$
|
35,014
|
|
|
Share issuance - August 2016 bought deal
|
|
17,250,000
|
|
31,959
|
|
—
|
|
—
|
|
—
|
|
—
|
|
31,959
|
|
|
Share issuance - November 2016 bought deal
|
|
10,062,500
|
|
37,263
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37,263
|
|
|
Share issuance - warrants exercised
|
|
13,769,966
|
|
21,132
|
|
(480
|
)
|
—
|
|
—
|
|
—
|
|
20,652
|
|
|
Share issuance - options exercised
|
|
435,815
|
|
598
|
|
—
|
|
(233
|
)
|
—
|
|
—
|
|
365
|
|
|
Share issuance - intangible asset acquisition
|
|
38,759
|
|
100
|
|
359
|
|
—
|
|
—
|
|
—
|
|
459
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
455
|
|
—
|
|
—
|
|
455
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,840
|
|
1,840
|
|
|
Balance at November 30, 2016
|
|
111,610,973
|
|
$
|
131,969
|
|
$
|
573
|
|
$
|
1,946
|
|
$
|
—
|
|
$
|
(6,481
|
)
|
$
|
128,007
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Share-based
|
|
other
|
|
Retained
|
|
|
|
|
|
|
common
|
|
Share capital
|
|
Warrants
|
|
payment
|
|
comprehensive
|
|
earnings
|
|
|
|
|
|
|
shares
|
|
(Note 18)
|
|
(Note 19)
|
|
reserve
|
|
loss
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
$
|
445
|
|
$
|
3,230
|
|
$
|
—
|
|
$
|
(4,123
|
)
|
$
|
273,869
|
|
|
Share issuance - November 2017 bought deal
|
|
12,689,675
|
|
86,661
|
|
—
|
|
—
|
|
—
|
|
—
|
|
86,661
|
|
|
Share issuance - warrants exercised
|
|
417,855
|
|
638
|
|
—
|
|
—
|
|
—
|
|
—
|
|
638
|
|
|
Share issuance - options exercised
|
|
132,488
|
|
249
|
|
—
|
|
(92
|
)
|
—
|
|
—
|
|
157
|
|
|
Share issuance - deferred share units
|
|
2,525
|
|
15
|
|
—
|
|
—
|
|
—
|
|
—
|
|
15
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
1,412
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,412
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
4,495
|
|
—
|
|
—
|
|
4,495
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
—
|
|
—
|
|
—
|
|
—
|
|
187
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(801
|
)
|
21,496
|
|
20,695
|
|
|
Balance at November 30, 2017
|
|
151,871,247
|
|
$
|
363,479
|
|
$
|
445
|
|
$
|
7,633
|
|
$
|
(801
|
)
|
$
|
17,373
|
|
$
|
388,129
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
4
Aphria Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited — In thousands of Canadian dollars)
|
|
|
|
|
For the six months ended
|
|
|
|
|
|
|
November 30,
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
|
|
$
|
21,496
|
|
$
|
1,840
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
14
|
|
4,067
|
|
—
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
3,807
|
|
2,572
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(7,380
|
)
|
(3,107
|
)
|
|
Loss on marketable securities
|
|
4
|
|
1,691
|
|
—
|
|
|
Unrealized foreign exchange gain on convertible notes receivable
|
|
11
|
|
(77
|
)
|
—
|
|
|
Amortization
|
|
9,10
|
|
1,404
|
|
934
|
|
|
Loss (gain) on sale of capital assets
|
|
9
|
|
7
|
|
(11
|
)
|
|
Disposition and usage of bearer plants
|
|
9
|
|
3
|
|
47
|
|
|
Accretion interest on convertible note receivable
|
|
11
|
|
(585
|
)
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
11
|
|
(628
|
)
|
—
|
|
|
Loss from equity investee
|
|
12
|
|
9,281
|
|
—
|
|
|
Gain on dilution of ownership in equity investee
|
|
12
|
|
(7,535
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
12
|
|
(467
|
)
|
—
|
|
|
Consulting revenue
|
|
16
|
|
(476
|
)
|
—
|
|
|
Amortization of finance fees on long-term debt
|
|
|
|
2
|
|
2
|
|
|
Share-based compensation
|
|
22
|
|
4,709
|
|
455
|
|
|
Gain on long-term investments
|
|
24
|
|
(25,157
|
)
|
(256
|
)
|
|
Change in non-cash working capital
|
|
26
|
|
(3,747
|
)
|
(318
|
)
|
|
|
|
|
|
415
|
|
2,158
|
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
86,661
|
|
69,222
|
|
|
Share capital issued on warrants exercised
|
|
|
|
638
|
|
20,652
|
|
|
Share capital issued on share-based compensation exercised
|
|
|
|
172
|
|
365
|
|
|
Advances from related parties
|
|
8
|
|
2,823
|
|
267
|
|
|
Repayment of amounts due to related parties
|
|
8
|
|
(2,327
|
)
|
(267
|
)
|
|
Proceeds from long-term debt
|
|
17
|
|
—
|
|
7,825
|
|
|
Repayment of long-term debt
|
|
17
|
|
(375
|
)
|
(277
|
)
|
|
|
|
|
|
87,592
|
|
97,787
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Repayment of promissory notes receivable
|
|
|
|
—
|
|
440
|
|
|
Investment in capital assets
|
|
9
|
|
(59,014
|
)
|
(11,153
|
)
|
|
Proceeds from disposal of capital asssets
|
|
9
|
|
200
|
|
33
|
|
|
Investment in intangible assets, net of shares issued
|
|
10
|
|
(9
|
)
|
(1,306
|
)
|
|
Convertible notes advances
|
|
11
|
|
(14,001
|
)
|
—
|
|
|
Investment in marketable securities
|
|
4
|
|
(5,000
|
)
|
—
|
|
|
Proceeds from disposal of marketable securities
|
|
4
|
|
34,801
|
|
—
|
|
|
Investment in long-term investments
|
|
13
|
|
(10,897
|
)
|
(6,418
|
)
|
|
Proceeds from disposal of long-term investments
|
|
13
|
|
2,090
|
|
601
|
|
|
|
|
|
|
(51,830
|
)
|
(17,803
|
)
|
|
Net increase in cash and cash equivalents
|
|
|
|
36,177
|
|
82,142
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
79,910
|
|
16,473
|
|
|
Cash and cash equivalents, end of period
|
|
|
|
$
|
116,087
|
|
$
|
98,615
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
5
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). The registered office is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These condensed interim consolidated financial statements were approved by the Company’s Board of Directors on January 9, 2018.
2.
Basis of preparation
(a)
Statement of compliance
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.
(b)
Basis of measurement
These condensed interim consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management is Canadian dollars. These condensed interim consolidated financial statements are presented in Canadian dollars.
(d)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases.
|
Wholly owned subsidiaries
|
|
Jurisdiction of incorporation
|
|
Pure Natures Wellness Inc. (o/a Aphria)
|
|
Ontario
|
|
1974568 Ontario Ltd.
|
|
Ontario
|
|
Aphria (Arizona) Inc.
|
|
Arizona
|
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.
6
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
(e)
Amalgamation
Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
(f)
Interest in equity investees
The Company’s interest in equity investees is comprised of its interest in associates.
|
Equity investee
|
|
Jurisdiction of incorporation
|
|
Liberty Health Sciences Inc.
|
|
British Columbia
|
|
(formerly DFMMJ Investments, Ltd.)
|
|
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the condensed interim consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity investments is tested for impairment in accordance with the policy described in the annual audited financial statements.
3.
Significant accounting policies
These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2017.
New standards applicable during the reporting period
IFRS 5 — Non-current Assets Held for Sale; Assets and liabilities held for disposal are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction,
7
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.
New standards and interpretations issued but not yet adopted:
IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company is assessing the impact of the standard on its convertible notes receivable and its investments where it holds less than significant influence. The Company has determined that no significant impact is anticipated from the new standard.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the period of the adoption of the new standard.
The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.
IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard, with a focus on consulting contracts and royalty fees.
The Company is still considering the impact on its customer loyalty programme, which is currently under reconsideration. The new standard will require that the total consideration received be allocated to the points and goods based on relative stand-alone selling prices rather than based on the residual method.
The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.
IFRS 16 — Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of income and comprehensive income to improve clarity.
8
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
4.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating
|
|
Interest
|
|
Maturity
|
|
November 30,
|
|
|
|
|
|
|
at purchase
|
|
rate
|
|
date
|
|
2017
|
|
May 31, 2017
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Molson Coors Brewing Company
|
|
BBB-
|
|
3.950
|
%
|
10/06/17
|
|
—
|
|
1,116
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.320
|
%
|
12/19/17
|
|
2,032
|
|
1,988
|
|
|
Goldman Sachs & Co. LLC
|
|
A+
|
|
3.375
|
%
|
2/01/18
|
|
—
|
|
5,078
|
|
|
The Manufacturer’s Life Insurance Company
|
|
AA-
|
|
2.819
|
%
|
2/26/18
|
|
1,465
|
|
1,472
|
|
|
Canadian Western Bank
|
|
A-
|
|
2.531
|
%
|
3/22/18
|
|
3,023
|
|
3,039
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
8/02/18
|
|
1,024
|
|
1,037
|
|
|
Sobeys Inc.
|
|
BB+
|
|
3.520
|
%
|
8/08/18
|
|
3,055
|
|
3,078
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
2.770
|
%
|
12/11/18
|
|
—
|
|
5,180
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
1/14/19
|
|
1,536
|
|
1,535
|
|
|
Sun Life Financial Inc.
|
|
A
|
|
2.770
|
%
|
5/13/19
|
|
3,029
|
|
3,064
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
6/14/19
|
|
5,145
|
|
5,207
|
|
|
Canadian Natural Resources Ltd.
|
|
BBB+
|
|
3.050
|
%
|
6/19/19
|
|
—
|
|
2,054
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,028
|
|
1,028
|
|
|
Laurentian Bank of Canada
|
|
BBB
|
|
2.500
|
%
|
1/23/20
|
|
3,038
|
|
6,099
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
2/03/20
|
|
4,007
|
|
4,008
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
3/09/20
|
|
5,290
|
|
5,395
|
|
|
Central 1 Credit Union
|
|
A
|
|
1.870
|
%
|
3/16/20
|
|
—
|
|
5,020
|
|
|
Choice Properties REIT
|
|
BBB
|
|
3.600
|
%
|
4/20/20
|
|
5,163
|
|
5,237
|
|
|
Penske Truck Leasing Co., L.P.
|
|
BBB
|
|
2.950
|
%
|
6/12/20
|
|
—
|
|
5,145
|
|
|
Westcoast Energy Inc.
|
|
BBB+
|
|
4.570
|
%
|
7/02/20
|
|
5,387
|
|
5,430
|
|
|
Bank of Montreal (USD)
|
|
A+
|
|
1.400
|
%
|
4/10/18
|
|
3,874
|
|
4,052
|
|
|
Citigroup Inc. (USD)
|
|
BBB+
|
|
2.050
|
%
|
12/17/18
|
|
3,904
|
|
4,081
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
4/15/19
|
|
3,855
|
|
4,040
|
|
|
Wells Fargo & Company (USD)
|
|
A
|
|
2.150
|
%
|
1/30/20
|
|
—
|
|
3,964
|
|
|
|
|
|
|
|
|
|
|
$
|
55,855
|
|
$
|
87,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of marketable securities as at November 30, 2017 was $56,276 (May 31, 2017 — $87,138). During the three and six months ended November 30, 2017, the company divested of certain marketable securities in its Canadian portfolio for proceeds of $24,702 and $34,801, resulting in a loss on disposal of $256 and $387 (2016 - $nil and $nil), and re-invested $nil and $5,000 (2016 - $nil and $nil). During the three and six months ended November 30, 2017, the Company recognized a gain (loss) of $55 and ($1,691) on its marketable securities portfolio, of which $311 and ($1,304) (2016 - $nil and $nil) represented unrealized fair value adjustments.
9
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
5.
Other current assets
Other current assets are comprised of:
|
|
|
November 30,
2017
|
|
May 31, 2017
|
|
|
HST receivable
|
|
$
|
5,970
|
|
$
|
3,675
|
|
|
Accrued interest
|
|
1,088
|
|
701
|
|
|
Credit card receivable
|
|
188
|
|
103
|
|
|
Prepaid assets
|
|
605
|
|
1,060
|
|
|
Other
|
|
932
|
|
32
|
|
|
|
|
$
|
8,783
|
|
$
|
5,571
|
|
6.
Inventory
Inventory is comprised of:
|
|
|
Capitalized
cost
|
|
Fair value
adjustment
|
|
|
November 30,
2017
|
|
May 31, 2017
|
|
|
Harvested cannabis
|
|
$
|
1,712
|
|
$
|
3,472
|
|
|
$
|
5,184
|
|
$
|
2,507
|
|
|
Harvested cannabis trim
|
|
651
|
|
1,416
|
|
|
2,067
|
|
421
|
|
|
Cannabis oil
|
|
518
|
|
511
|
|
|
1,029
|
|
682
|
|
|
Packaging and supplies
|
|
426
|
|
—
|
|
|
426
|
|
277
|
|
|
|
|
$
|
3,307
|
|
$
|
5,399
|
|
|
$
|
8,706
|
|
$
|
3,887
|
|
During the three and six months ended November 30, 2017, the Company recorded $2,746 and $4,092 (2016 - $1,180 and $2,234) related to production costs. Included in production costs for the three and six months ended November 30, 2017 is $54 and $95 of cannabis oil conversion costs (2016 - $15 and $43) and $61 and $98 related to the cost of accessories (2016 - $nil and $nil). Included in cost of sales is amortization of $500 and $889 (2016 - $228 and $482) related to capital assets utilized in production. During the three and six months ended November 30, 2017, the Company expensed $2,671 and $3,807 (2016 — $1,233 and $2,572) of fair value adjustments on the sale of its biological assets included in inventory.
The Company holds 1,382.4 kilograms of harvested cannabis (May 31, 2017 — 668.5 kgs), 688.9 kilograms of harvested cannabis trim (May 31, 2017 — 140.1 kgs) and 1,646.6 litres of cannabis oils or 274.4 kilograms equivalent (May 31, 2017 — 1,091.3 litres or 181.9 kilograms equivalent) at November 30, 2017.
7.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance as at May 31, 2017
|
|
$
|
1,363
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
7,380
|
|
|
Production costs capitalized
|
|
3,642
|
|
|
Transferred to inventory upon harvest
|
|
(10,956
|
)
|
|
Transferred to capital assets
|
|
(31
|
)
|
|
Balance as at November 30, 2017
|
|
$
|
1,398
|
|
The Company values medical cannabis plants at cost from the date of initial clipping from mother plants until the end of the twelfth week of its growing cycle. Measurement of the biological asset at fair value less costs to sell and costs to complete begins at the thirteenth week until harvest. The Company has determined the fair value less costs to sell of harvested cannabis
10
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
to be $3.75 per gram. The Company has determined the fair value less costs to sell of its harvested cannabis trim to be $3.00 per gram, upon harvest.
The net effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $3,115 and $7,380 during the three and six months ended November 30, 2017 (2016 — increase of $1,307 and $3,107). In determining the fair value of biological assets, management is required to make several estimates, including: the expected cost required to grow the cannabis up to the point of harvest; harvesting costs; selling costs; sales price; and, expected yields for the cannabis plant. All of which represent Level 3 on the fair value hierarchy. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
8.
Related party transactions
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its operating expenditures. The balance owing from related parties as at November 30, 2017 was $nil (May 31, 2017 - $464). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the three and six months ended November 30, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $54 and $93 (2016 - $72 and $267). Included in this amount was rent of $9 and $17 charged during the three and six months ended November 30, 2017 (2016 - $8 and $33).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.), a related party through an equity investment.
|
|
|
Amount
|
|
|
Balance due to (from) related parties as at May 31, 2017
|
|
$
|
(464
|
)
|
|
Related party charges in the period
|
|
93
|
|
|
Payments to related parties in the period
|
|
(93
|
)
|
|
Non-cash payments made on behalf of related parties in the period
|
|
(32
|
)
|
|
Payments made on behalf of related parties in the period
|
|
(2,234
|
)
|
|
Repayments made by related parties in the period
|
|
2,730
|
|
|
Balance as at November 30, 2017
|
|
$
|
—
|
|
During the period, the Company purchased capital assets for $995 from a company controlled by a director. During the prior year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6,100. The purchase price was allocated as follows: (i) $1,300 to land; (ii) $3,550 to greenhouse infrastructure; and, (iii) $1,250 to licenses and permits — intangible assets.
Key management personnel compensation was comprised of:
|
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
|
Salaries
|
|
$
|
660
|
|
$
|
417
|
|
|
Short-term employment benefits (included in office and general)
|
|
36
|
|
19
|
|
|
Share-based compensation
|
|
2,217
|
|
265
|
|
|
|
|
$
|
2,913
|
|
$
|
701
|
|
Directors and officers of the Company control 11.1% or 16,858,264 of the voting shares of the Company.
11
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
9. Capital assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Greenhouse
|
|
|
|
|
|
Leasehold
|
|
Construction
|
|
capital
|
|
|
|
|
Land
|
|
infrastructure
|
|
Bearer plants
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,499
|
|
$
|
4,812
|
|
$
|
65
|
|
$
|
8,376
|
|
|
Additions
|
|
10,725
|
|
4,018
|
|
112
|
|
1,700
|
|
16
|
|
49,958
|
|
66,529
|
|
|
Transfers
|
|
104
|
|
12,152
|
|
—
|
|
174
|
|
(4,566
|
)
|
(7,864
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(67
|
)
|
(33
|
)
|
—
|
|
—
|
|
(100
|
)
|
|
At May 31, 2017
|
|
10,829
|
|
16,170
|
|
45
|
|
5,340
|
|
262
|
|
42,159
|
|
74,805
|
|
|
Additions
|
|
1,550
|
|
—
|
|
31
|
|
2,330
|
|
—
|
|
62,293
|
|
66,204
|
|
|
Transfers
|
|
(3,160
|
)
|
6,990
|
|
—
|
|
697
|
|
—
|
|
(7,687
|
)
|
(3,160
|
)
|
|
Disposals
|
|
—
|
|
(207
|
)
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
(210
|
)
|
|
At November 30, 2017
|
|
$
|
9,219
|
|
$
|
22,953
|
|
$
|
73
|
|
$
|
8,367
|
|
$
|
262
|
|
$
|
96,765
|
|
$
|
137,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
554
|
|
$
|
513
|
|
$
|
—
|
|
$
|
1,067
|
|
|
Amortization
|
|
—
|
|
458
|
|
—
|
|
717
|
|
74
|
|
—
|
|
1,249
|
|
|
Transfers
|
|
—
|
|
525
|
|
—
|
|
—
|
|
(525
|
)
|
—
|
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
—
|
|
(11
|
)
|
|
At May 31, 2017
|
|
—
|
|
983
|
|
—
|
|
1,260
|
|
62
|
|
—
|
|
2,305
|
|
|
Amortization
|
|
—
|
|
484
|
|
—
|
|
584
|
|
15
|
|
—
|
|
1,083
|
|
|
At November 30, 2017
|
|
$
|
—
|
|
$
|
1,467
|
|
$
|
—
|
|
$
|
1,844
|
|
$
|
77
|
|
$
|
—
|
|
$
|
3,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,945
|
|
$
|
4,299
|
|
$
|
65
|
|
$
|
7,309
|
|
|
At May 31, 2017
|
|
$
|
10,829
|
|
$
|
15,187
|
|
$
|
45
|
|
$
|
4,080
|
|
$
|
200
|
|
$
|
42,159
|
|
$
|
72,500
|
|
|
At November 30, 2017
|
|
$
|
9,219
|
|
$
|
21,486
|
|
$
|
73
|
|
$
|
6,523
|
|
$
|
185
|
|
$
|
96,765
|
|
$
|
134,251
|
|
During the three and six months ended November 30, 2017, the Company sold assets that were not yet in use prior to disposal with a cost of $nil and $207 (2016 - $nil and $33) and a net book value of $nil and $207 (2016 - $nil and $22), for proceeds of $nil and $200 (2016 - $nil and $33), resulting in a loss on sale of capital assets of $nil and $7 (2016 - $nil and $11).
As at November 30, 2017, there was approximately $7,190 (May 31, 2017 - $nil) in accounts payable and accrued liabilities relating to construction in progress.
On August 9, 2017, the Company entered into a series of agreements with Nuuvera Corp. (“Nuuvera”). Under the terms of one of the agreements, the Company agreed to sell 100 acres of land owned on Mersea Road 8 Leamington, Ontario in exchange for $4,000. The agreement is subject to standard closing conditions, including the severance of the 100 acres from the overall site owned by the Company on Mersea Road 8, Leamington, Ontario. The Company expects the transaction to close before the fiscal year-end. As a result of the agreement, the Company reclassified $3,160 of cost included in land to assets available for sale.
12
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
10. Intangible assets
|
|
|
|
|
|
|
|
|
Tokyo Smoke
|
|
|
|
Total
|
|
|
|
|
Corporate
|
|
Licenses &
|
|
Patents &
|
|
licensing
|
|
CannWay
|
|
intangible
|
|
|
|
|
website
|
|
permits
|
|
trademarks
|
|
agreement
|
|
brand
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
162
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,428
|
|
$
|
4,590
|
|
|
Additions
|
|
56
|
|
1,250
|
|
—
|
|
459
|
|
—
|
|
1,765
|
|
|
At May 31, 2017
|
|
218
|
|
1,250
|
|
—
|
|
459
|
|
4,428
|
|
6,355
|
|
|
Additions
|
|
—
|
|
—
|
|
9
|
|
—
|
|
—
|
|
9
|
|
|
At November 30, 2017
|
|
$
|
218
|
|
$
|
1,250
|
|
$
|
9
|
|
$
|
459
|
|
$
|
4,428
|
|
$
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
88
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
184
|
|
$
|
272
|
|
|
Amortization
|
|
68
|
|
153
|
|
—
|
|
57
|
|
414
|
|
692
|
|
|
Impairment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
3,500
|
|
|
At May 31, 2017
|
|
156
|
|
153
|
|
—
|
|
57
|
|
4,098
|
|
4,464
|
|
|
Amortization
|
|
27
|
|
83
|
|
1
|
|
46
|
|
164
|
|
321
|
|
|
At November 30, 2017
|
|
$
|
183
|
|
$
|
236
|
|
$
|
1
|
|
$
|
103
|
|
$
|
4,262
|
|
$
|
4,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
74
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,244
|
|
$
|
4,318
|
|
|
At May 31, 2017
|
|
$
|
62
|
|
$
|
1,097
|
|
$
|
—
|
|
$
|
402
|
|
$
|
330
|
|
$
|
1,891
|
|
|
At November 30, 2017
|
|
$
|
35
|
|
$
|
1,014
|
|
$
|
8
|
|
$
|
356
|
|
$
|
166
|
|
$
|
1,579
|
|
11.
Convertible notes receivable
|
|
|
Notes receivable
|
|
Embedded derivatives
|
|
|
|
|
November 30,
|
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
2017
|
|
May 31, 2017
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,390
|
|
$
|
1,361
|
|
$
|
1,105
|
|
$
|
173
|
|
|
Copperstate Farms Investors, LLC
|
|
2,578
|
|
—
|
|
—
|
|
—
|
|
|
HydRx Farms Ltd. (d/b/a Scientus Pharma)
|
|
7,606
|
|
—
|
|
4,146
|
|
—
|
|
|
|
|
11,574
|
|
1,361
|
|
5,251
|
|
173
|
|
|
Deduct - current portion
|
|
(2,578
|
)
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
8,996
|
|
$
|
1,361
|
|
$
|
5,251
|
|
$
|
173
|
|
CannaRoyalty Corp.
During the three and six month period, the Company’s note receivable from CannaRoyalty Corp. (“CR”) increased by $15 and $29 representing the recognition of accretion interest on the note and the embedded derivative increased by $399 and $932, representing the change in fair value of the conversion feature on the note.
As at November 30, 2017, the convertible note receivable totalled $2,495.
13
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Copperstate Farms Investors, LLC
On August 31, 2017, the Company lent Copperstate Farms Investors, LLC (“CSF”) $2,000 USD ($2,501 CAD) in exchange for a senior secured convertible loan. The convertible debenture bears interest at 9%, is due on May 15, 2018 (“Maturity Date”). The loan is pre-payable at any time by CSF, however no principal payments are due prior to the Maturity Date. If at least $500 USD of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for $500 USD plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at $500 USD per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at $500 USD per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. Since the option to settle payments in membership units is solely at the discretion of CSF, no embedded derivative has been recognized.
As at November 30, 2017, the convertible note receivable totalled $2,000 USD ($2,578 CAD).
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria lent $11,500 to Scientus Pharma (“SP”) as a convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days.
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. The fair value of the derivative asset related to the convertible note is $4,146 at November 30, 2017.
During the three and six month period, the Company’s note receivable from SP increased by $556 and $556 representing the recognition of accretion interest on the note and the embedded derivative decreased by $304 and $304, representing the change in fair value of the conversion feature on the note.
As at November 30, 2017, the convertible note receivable totalled $11,752.
The fair value for the embedded derivatives was determined using the Black Scholes option pricing model using the following assumptions: the risk-free rate of 0.85-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
12.
Interest in equity investee
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Associated company
|
|
|
|
|
|
|
Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.)
|
|
$
|
27,493
|
|
$
|
28,376
|
|
|
|
|
|
|
|
|
|
|
Liberty Health Sciences Inc.
As at May 31, 2017 the Company owned 312,592,308 common shares in DFMMJ Investments, Ltd. (“DFMMJ”), representing approximately 46.1% of DFMMJ’s issued and outstanding common shares.
On July 20, 2017, as part of the business combination DFMMJ received an investment from a third party of $9,150 for 43,990,370 subscription shares at $0.208 per share. As a result, the Company’s interest in DFMMJ was diluted from 46.1% to 43.3%, with the Company realizing a dilution gain of $1,961 from the change in equity interest.
14
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Further on July 20, 2017, DFMMJ completed its business combination with SecureCom Mobile Inc. (“SecureCom”). After amalgamation, SecureCom changed its name to Liberty Health Sciences Inc. (“LHS”) and remained the resulting issuer. Management determined the Company should account for its investment in the newly consolidated LHS using the equity method as a continuation of the treatment previously applied to its investment in DFMMJ. Prior to the transaction, the Company held 8,000,000 shares directly in SecureCom, which have been historically treated as a Level 1 Long-Term Investment. As a result of the business combination, the 130,044,447 total outstanding common shares of SecureCom were added to the share base of LHS, and the fair value of the Company’s investment in SecureCom ($1,664) was added to the carrying value of its interest in the equity investee. Upon completion of the business combination, all 852,063,664 outstanding shares were consolidated for Consideration Shares in LHS. As a result, the Company held 320,592,308 (37.6%) of the total outstanding shares of LHS. Due to the dilution of ownership in the combined entity, the Company recognized a further unrealized gain on dilution with respect to the outstanding shares owned by third parties of $5,590 and a corresponding increase to the cost base of its investment by the same value.
Upon the completion of the transaction, LHS consolidated its issued and outstanding common shares, broker warrants and existing stock options on the basis of three pre-consolidation common shares held for one post-consolidation common share. As a result of the three-for-one exchange, Aphria now holds 106,864,102 common shares of LHS, representing a 37.6% ownership.
During the three months ended November 30, 2017, LHS issued an additional 521,833 shares to third parties. As a result, the Company’s interest in LHS was diluted and the Company realized a dilution loss of $16 from the change in equity interest.
For the three and six months ended November 30, 2017, the Company reported a total (loss) gain on dilution of ownership in equity investee of ($16) and $7,535 (2016 - $nil and $nil).
For the three months ended November 30, 2017 and for the period from May 1, 2017 to November 30, 2017 the investee, LHS, reported a net loss of $974 and $24,671, and a net comprehensive gain (loss) of $409 and ($26,798) on its financial statements. In accordance with the equity method, Aphria recorded a loss of $441 and $9,281 and an other comprehensive gain (loss) of $520 and ($801) for the three and six months ended November 30, 2017, from its investee relative to its ownership of the outstanding common shares at the time.
The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements. The table also reconciles the summarized financial information to the carrying amount of the Company’s interest as at November 30, 2017:
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
April 30, 2017
|
|
|
Current assets
|
|
$
|
24,306
|
|
$
|
5,724
|
|
|
Non-current assets
|
|
54,298
|
|
5,000
|
|
|
Current liabilities
|
|
(627
|
)
|
—
|
|
|
Non-current liabilities
|
|
(13,890
|
)
|
—
|
|
|
Net assets
|
|
$
|
64,087
|
|
$
|
10,724
|
|
15
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening net assets
|
|
$
|
56,438
|
|
$
|
—
|
|
|
Intangible asset contributed
|
|
—
|
|
5,000
|
|
|
Cash contributions, net of share issuance costs
|
|
6,008
|
|
50,960
|
|
|
Share-based payments
|
|
1,373
|
|
—
|
|
|
Contributions on business combination
|
|
27,066
|
|
—
|
|
|
Net comprehensive (loss) income for the reporting period
|
|
(26,798
|
)
|
478
|
|
|
Closing net assets
|
|
$
|
64,087
|
|
$
|
56,438
|
|
|
|
|
|
|
|
|
|
Company’s share in %
|
|
37.6
|
%
|
46.1
|
%
|
|
Company’s share of net assets
|
|
$
|
24,097
|
|
$
|
26,018
|
|
|
Fair value adjustment due to profit elimination
|
|
—
|
|
(2,200
|
)
|
|
Goodwill
|
|
3,396
|
|
4,558
|
|
|
Carrying amount of interest in associate
|
|
$
|
27,493
|
|
$
|
28,376
|
|
Based on its closing share price of $1.71 as at November 30, 2017, the LHS shares held by Aphria have a fair value of approximately $182,738.
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
28,376
|
|
$
|
—
|
|
|
Investment
|
|
—
|
|
28,166
|
|
|
Transfer of fair value of SecureCom shares on reverse takeover
|
|
1,664
|
|
—
|
|
|
Gain on account of dilution of ownership
|
|
7,535
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(9,281
|
)
|
210
|
|
|
Share of reported comprehensive loss
|
|
(801
|
)
|
—
|
|
|
Closing balance
|
|
$
|
27,493
|
|
$
|
28,376
|
|
16
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
13. Long-term investments
|
|
|
Cost
|
|
Fair value
|
|
|
|
|
|
Subtotal
|
|
|
|
Fair value
|
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
Divesture/
|
|
November 30,
|
|
Change in
|
|
November 30,
|
|
|
|
|
2017
|
|
2017
|
|
Investment
|
|
Transfer
|
|
2017
|
|
fair value
|
|
2017
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,380
|
|
$
|
1,793
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,793
|
|
$
|
1,441
|
|
$
|
3,234
|
|
|
Kalytera Therapeutics, Inc.
|
|
3,014
|
|
1,111
|
|
—
|
|
(1,111
|
)
|
—
|
|
—
|
|
—
|
|
|
MassRoots, Inc.
|
|
508
|
|
562
|
|
—
|
|
(232
|
)
|
330
|
|
(192
|
)
|
138
|
|
|
SecureCom Mobile Inc.
|
|
520
|
|
1,664
|
|
—
|
|
(1,664
|
)
|
—
|
|
—
|
|
—
|
|
|
Tetra Bio-Pharma Inc.
|
|
2,300
|
|
9,500
|
|
—
|
|
—
|
|
9,500
|
|
(2,600
|
)
|
6,900
|
|
|
Canabo Medical Inc.
|
|
1,160
|
|
316
|
|
—
|
|
—
|
|
316
|
|
204
|
|
520
|
|
|
|
|
8,882
|
|
14,946
|
|
—
|
|
(3,007
|
)
|
11,939
|
|
(1,147
|
)
|
10,792
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC
|
|
1,755
|
|
1,755
|
|
—
|
|
—
|
|
1,755
|
|
5,691
|
|
7,446
|
|
|
Copperstate Farms Investors, LLC
|
|
7,539
|
|
7,560
|
|
1,868
|
|
—
|
|
9,428
|
|
17,434
|
|
26,862
|
|
|
Resolve Digital Health Inc.
|
|
718
|
|
1,000
|
|
—
|
|
—
|
|
1,000
|
|
(282
|
)
|
718
|
|
|
Resolve Digital Health Inc.
|
|
282
|
|
242
|
|
—
|
|
—
|
|
242
|
|
(42
|
)
|
200
|
|
|
Green Acre Capital Fund
|
|
300
|
|
285
|
|
400
|
|
—
|
|
685
|
|
45
|
|
730
|
|
|
Scythian Biosciences Inc.
|
|
2,000
|
|
2,000
|
|
—
|
|
(2,000
|
)
|
—
|
|
—
|
|
—
|
|
|
TS BrandCo Holdings Inc.
|
|
—
|
|
—
|
|
1,000
|
|
—
|
|
1,000
|
|
1,746
|
|
2,746
|
|
|
Nuuvera Corp.
|
|
—
|
|
—
|
|
6,979
|
|
—
|
|
6,979
|
|
2,971
|
|
9,950
|
|
|
Green Tank Holdings Corp.
|
|
—
|
|
—
|
|
650
|
|
—
|
|
650
|
|
(6
|
)
|
644
|
|
|
|
|
12,594
|
|
12,842
|
|
10,897
|
|
(2,000
|
)
|
21,739
|
|
27,557
|
|
49,296
|
|
|
|
|
$
|
21,476
|
|
$
|
27,788
|
|
$
|
10,897
|
|
$
|
(5,007
|
)
|
$
|
33,678
|
|
$
|
26,410
|
|
$
|
60,088
|
|
The fair value attached to warrants in both Level 1 and Level 3 were determined using the Black-Scholes option pricing model.
CannaRoyalty Corp.
The Company holds 1,100,000 common shares at a cost of $1,380, with a fair value of $3,234 as at November 30, 2017.
Kalytera Therapeutics, Inc.
During the period, the Company sold its 6,172,000 common shares in Kalytera Therapeutics, Inc. (note 24).
MassRoots, Inc.
During the period, the Company sold 350,000 common shares in MassRoots, Inc. (note 24). The Company holds 500,000 common shares at a cost of $251 USD ($304 CAD), with a fair value of $107 USD ($138 CAD) as at November 30, 2017.
SecureCom Mobile Inc. (“SecureCom”)
In July 2017, SecureCom amalgamated with DFMMJ and was re-named LHS. As a result, the Company transferred the fair value of its investment in SecureCom into its investment in LHS recognized as Interest in equity investee (note 12).
Tetra Bio-Pharma Inc.
The Company owns 10,000,000 common shares at a cost of $2,300, with a fair value of $6,900 as at November 30, 2017.
Canabo Medical Inc.
The Company owns 800,000 common shares with a cost of $1,160 and a fair value of $520 as at November 30, 2017.
17
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited – In thousands of Canadian dollars, except share and per share amounts)
Scythian Biosciences Inc. (“Scythian”)
In August 2017, the Company’s subscription receipts converted to common shares. As part of the conversion, Scythian consolidated its shares on a 20:1 basis. On August 8, 2017, Scythian began trading on the TSX-Venture Exchange. During the period, the Company sold its 250,000 common shares in Scythian Biosciences Inc. (note 24).
Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”)
In July 2017, the Company purchased an additional 2,668 membership units in CSF for $1,334 USD ($1,668 CAD). The Company contracted an independent third party to perform a formal valuation of both Copperstate and CSF as at August 31, 2017 to determine the fair value of its investment in both entities. The independent valuator used a discounted cash flow method in determining the fair value of both Copperstate and CSF. The significant unobservable inputs (Level 3) included in the discounted cash flow model used when determining the fair value of Copperstate and CSF include:
|
Valuation
Technique
|
|
Significant
Unobservable
Input(s)
|
|
Relationship of Unobservable
Input(s) to Fair Value
|
|
Mitigating Factor(s)
|
|
Discounted cash flow analysis
|
|
·
Future cash flows — primarily driven by future gross margin assumption
|
|
·
Increases (decreases) in future cash flows increase (decrease) fair value
|
|
·
Increases (decreases) in cash flows tend to be accompanied by increases (decreases) in discount rates that may offset changes in fair value from cash flows
|
|
|
|
·
Discount rate
|
|
·
Increases (decreases) in discount rate decrease (increase) fair value
|
|
·
Increases (decreases) in discount rates tend to be accompanied by increases (decreases) in cash flows that may offset changes in fair value from discount rates
|
|
|
|
·
Terminal EBITDA multiple
|
|
·
Increases (decreases) in terminal EBITDA multiple increase (decrease) fair value
|
|
·
No mitigating factors
|
|
|
|
·
Probability that marijuana remains a Schedule I drug
|
|
·
Increases (decreases) in probability that marijuana remains a schedule I drug decrease (increase) fair value
|
|
·
No mitigating factors
|
Key valuation assumptions include a discount rate of 13%, terminal EBITDA multiple of 7 and probability of 90% that marijuana remains a Schedule I controlled substance under the Controlled Substances Act in the United States.
As a result of these transactions, the Company owns 5,000 membership units in Copperstate for total cost of $1,300 USD ($1,755 CAD), with a fair value of $7,446 and owns 13,868 membership units in CSF for a total cost of $7,094 USD ($9,407 CAD) with a fair value of $26,862 as at November 30, 2017.
Resolve Digital Health Inc.
The Company owns 2,000,024 common shares and 2,000,024 warrants at a total cost of $1,000, with a fair value of $918 as at November 30, 2017. The Company determined the fair value of its investment, based on the most recent financing at the same price, the Company’s carrying value of the shares is equal to its fair value.
Green Acre Capital Fund
The Company committed $2,000 to the expected $30,000 fund and as of the balance sheet date has funded $700. At November 30, 2017, the Company determined that the fair value of its investment, based on its proportionate share of net assets, was $730 as at November 30, 2017.
18
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
TS BrandCo Holdings Inc.
In June 2017, the Company entered into a subscription agreement with TS BrandCo Holdings Inc. (“Tokyo Smoke”) for the purchase of 140,845 common shares, for a total cost of $1,000. The Company has determined that, due to the recent merger with a third party public company (note 29), the fair value was $2,746 as at November 30, 2017.
Nuuvera Corp.
In August 2017, the Company entered into a subscription agreement with Nuuvera Corp. for the purchase of 2,000,000 common shares, for a total cost of $2,029. In November 2017, the Company purchased an additional 1,980,000 common shares for $4,950. The Company has determined that, due to the recent equity financing with third parties, the fair value was $9,950 as at November 30, 2017.
Green Tank Holdings Corp.
In November 2017, the Company entered into a subscription agreement with Green Tank Holdings Corp. for the purchase of 98,425 preferred shares, for a total cost of $500 USD ($650 CAD). The Company determined the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $6 due to changes in the foreign exchange rate.
14.
Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
|
Income before income taxes
|
|
$
|
25,563
|
|
$
|
1,840
|
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Expected income tax expense at combined basic federal and provincial tax rate
|
|
6,774
|
|
488
|
|
|
|
|
|
|
|
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Non-deductible share-based compensation and other expenses
|
|
1,267
|
|
138
|
|
|
Non-taxable portion of losses (gains)
|
|
(3,677
|
)
|
—
|
|
|
Utilization of tax attributes not previously recognized
|
|
—
|
|
(979
|
)
|
|
Other
|
|
(297
|
)
|
(74
|
)
|
|
Tax assets not recognized
|
|
—
|
|
427
|
|
|
|
|
$
|
4,067
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Income tax expense is comprised of:
|
|
|
|
|
|
|
Current
|
|
$
|
851
|
|
$
|
—
|
|
|
Future
|
|
3,216
|
|
—
|
|
|
|
|
$
|
4,067
|
|
$
|
—
|
|
19
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The following table summarizes the components of deferred tax:
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
2,190
|
|
$
|
1,313
|
|
|
Capital loss carry forward
|
|
1,255
|
|
381
|
|
|
Share issuance and financing fees
|
|
4,485
|
|
3,448
|
|
|
Other
|
|
99
|
|
34
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(245
|
)
|
(164
|
)
|
|
Intangible assets in excess of tax costs
|
|
(138
|
)
|
(194
|
)
|
|
Unrealized gain
|
|
(4,599
|
)
|
(914
|
)
|
|
Biological assets and inventory in excess of tax costs
|
|
(1,536
|
)
|
(589
|
)
|
|
Net deferred tax assets
|
|
$
|
1,511
|
|
$
|
3,315
|
|
15.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the end of the period, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.
16.
Promissory note payable
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Note payable to Copperstate Farms, LLC - $1,300 USD ($1,755), opening balance, bearing nominal interest, two-year term, repayable in eight quarterly instalments of $162 USD
|
|
$
|
1,244
|
|
$
|
1,539
|
|
|
Reduction of Promissory note payable balance with respect to consulting services provided
|
|
(476
|
)
|
(295
|
)
|
|
Balance remaining
|
|
768
|
|
1,244
|
|
|
Deduct - principal portion included in current liabilities
|
|
(768
|
)
|
(878
|
)
|
|
|
|
$
|
—
|
|
$
|
366
|
|
20
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
17.
Long-term debt
|
|
|
November 30,
|
|
|
|
|
|
|
2017
|
|
May 31, 2017
|
|
|
Term loan - $25,000 - 1.95%, compounded monthly, 15-year amortization due in April 2022
|
|
$
|
25,000
|
|
$
|
25,000
|
|
|
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021
|
|
1,111
|
|
1,164
|
|
|
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021
|
|
3,581
|
|
3,645
|
|
|
Vendor take-back mortgage owed to related party - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021
|
|
2,138
|
|
2,396
|
|
|
|
|
31,830
|
|
32,205
|
|
|
Deduct - unamortized financing fees
|
|
(18
|
)
|
(20
|
)
|
|
- principal portion included in current liabilities
|
|
(790
|
)
|
(765
|
)
|
|
|
|
$
|
31,022
|
|
$
|
31,420
|
|
Total long-term debt repayments are as follows:
|
Next 12 months
|
|
$
|
7 90
|
|
|
2 years
|
|
836
|
|
|
3 years
|
|
887
|
|
|
4 years
|
|
4,317
|
|
|
5 years
|
|
25,000
|
|
|
Balance of obligation
|
|
$
|
31,830
|
|
The term loan of $25,000 was entered into on May 9, 2017 and is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, certain cash security and an assignment of fire insurance to the lender.
The mortgage payable of $3,581 and term loan of $1,111 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of $2,138, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St. West. The mortgage is secured by a second charge on the property at 265 Talbot St. West, Leamington, Ontario.
21
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
18.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at November 30, 2017, the Company has issued 151,871,247 shares, of which 600,000 shares were held and subject to various escrow agreements.
|
|
|
Number of
|
|
|
|
|
Common Shares
|
|
shares
|
|
Amount
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
|
Bought deal, net of cash issuance costs
|
|
12,689,675
|
|
86,661
|
|
|
Warrants exercised
|
|
417,855
|
|
638
|
|
|
Options exercised
|
|
132,488
|
|
249
|
|
|
Deferred share units exercised
|
|
2,525
|
|
15
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
1,412
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
|
|
|
151,871,247
|
|
$
|
363,479
|
|
a)
Throughout the three and six-month period, 189,388 and 417,855 warrants with exercise prices ranging from $1.50 to $1.75 were exercised for $294 and $638.
b)
Throughout the three and six-month period, 101,069 and 132,488 shares were issued from the exercise of stock options with exercise prices ranging from $0.90 to $5.72 for $211 and $249.
c)
Throughout the three and six-month period, 2,525 shares were issued in accordance with the deferred share unit plan to a former director of the Company.
d)
In January 2017, the Company issued 112,500 common shares in escrow pursuant to a third party consulting agreement for greenhouse related services, net of cash issuance costs. At November 30, 2017, all 112,500 common shares of the shares in escrow have been released.
e)
In November 2017, the Company closed a bought deal financing in which it issued 12,689,675 common shares at a purchase price of $7.25 per share for $86,661, net of cash issuance costs.
f)
During the period the Company recognized $1,412 income tax recovery on share issuance costs.
19.
Warrants
The warrant details of the Company are as follows:
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
Type of warrant
|
|
Expiry date
|
|
warrants
|
|
average price
|
|
Amount
|
|
|
Compensation warrant / option
|
|
December 10, 2018
|
|
106,157
|
|
$
|
1.75
|
|
$
|
85
|
|
|
Warrant
|
|
December 11, 2018
|
|
281,346
|
|
1.75
|
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
2,880,550
|
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
3.14
|
|
360
|
|
|
|
|
|
|
3,468,053
|
|
$
|
1.62
|
|
$
|
445
|
|
22
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
November 30, 2017
|
|
May 31, 2017
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
warrants
|
|
average price
|
|
warrants
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
3,885,908
|
|
$
|
1.61
|
|
18,721,987
|
|
$
|
1.51
|
|
|
Expired during the period
|
|
—
|
|
—
|
|
(50,305
|
)
|
1.20
|
|
|
Issued during the period
|
|
—
|
|
—
|
|
465,391
|
|
2.35
|
|
|
Exercised during the period
|
|
(417,855
|
)
|
1.53
|
|
(15,251,165
|
)
|
1.51
|
|
|
Outstanding, end of the period
|
|
3,468,053
|
|
$
|
1.62
|
|
3,885,908
|
|
$
|
1.61
|
|
20.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $2,055 and $4,495 during the three and six months ended November 30, 2017 (2016 - $251 and $455). The total fair value of options granted during the period was $6,091 (2016 - $1,998).
|
|
|
November 30, 2017
|
|
May 31, 2017
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
options
|
|
average price
|
|
options
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
5,926,001
|
|
$
|
1.99
|
|
4,975,000
|
|
$
|
0.84
|
|
|
Exercised during the period
|
|
(137,965
|
)
|
1.43
|
|
(1,121,999
|
)
|
1.05
|
|
|
Issued during the period
|
|
2,078,000
|
|
6.20
|
|
2,253,000
|
|
3.99
|
|
|
Cancelled during the period
|
|
(3,000
|
)
|
3.07
|
|
(180,000
|
)
|
1.09
|
|
|
Outstanding, end of the period
|
|
7,863,036
|
|
$
|
3.11
|
|
5,926,001
|
|
$
|
1.99
|
|
|
Exercisable, end of the period
|
|
5,469,842
|
|
$
|
2.45
|
|
3,919,542
|
|
$
|
1.36
|
|
In June 2017, the Company issued 250,000 stock options at an exercise price of $5.44 per share, exercisable for 5 years to officers of the company. 83,333 vest immediately and the remainder vest over 2 years.
In July 2017, the Company issued 1,015,000 stock options at an exercise price of $5.24 per share, exercisable for 3 years to employees, officers and consultants of the company. 688,333 vest immediately and the remainder vest over 2 years.
In October 2017, the Company issued 533,000 stock options at an exercise price of $6.90 per share, exercisable for 3 to 5 years to employees, officers and consultants of the company. 244,330 vest immediately and the remainder vest over 2 years.
In November 2017, the Company issued 280,000 stock options at an exercise price of $9.05 per share, exercisable for 3 years to employees, officers and consultants of the company. 93,332 vest immediately and the remainder vest over 2 years.
23
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The outstanding option details of the Company are as follows:
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
average
|
|
Number of
|
|
Vested and
|
|
|
Expiry date
|
|
exercise price
|
|
options
|
|
exercisable
|
|
|
December 2017
|
|
$
|
1.10
|
|
600,000
|
|
133,560
|
|
|
October 2018
|
|
$
|
1.17
|
|
20,000
|
|
20,000
|
|
|
November 2018
|
|
$
|
1.49
|
|
20,000
|
|
20,000
|
|
|
December 2018
|
|
$
|
1.30
|
|
165,000
|
|
165,000
|
|
|
April 2019
|
|
$
|
1.67
|
|
30,000
|
|
30,000
|
|
|
June 2019
|
|
$
|
0.60
|
|
2,500,000
|
|
2,500,000
|
|
|
September 2019
|
|
$
|
3.00
|
|
75,000
|
|
52,633
|
|
|
October 2019
|
|
$
|
3.47 — 3.70
|
|
63,400
|
|
56,733
|
|
|
November 2019
|
|
$
|
3.90
|
|
986,967
|
|
655,624
|
|
|
December 2019
|
|
$
|
5.25
|
|
500,000
|
|
133,332
|
|
|
January 2020
|
|
$
|
5.72
|
|
44,000
|
|
13,998
|
|
|
April 2020
|
|
$
|
7.92
|
|
140,000
|
|
54,999
|
|
|
July 2020
|
|
$
|
5.24
|
|
1,014,000
|
|
704,642
|
|
|
September 2020
|
|
$
|
0.85
|
|
185,000
|
|
185,000
|
|
|
November 2020
|
|
$
|
1.19
|
|
50,000
|
|
50,000
|
|
|
June 2021
|
|
$
|
1.40
|
|
266,669
|
|
173,333
|
|
|
June 2021
|
|
$
|
1.48
|
|
30,000
|
|
30,000
|
|
|
June 2022
|
|
$
|
5.44
|
|
250,000
|
|
83,333
|
|
|
July 2021
|
|
$
|
1.64
|
|
110,000
|
|
69,993
|
|
|
October 2020
|
|
$
|
6.90
|
|
533,000
|
|
244,330
|
|
|
November 2020
|
|
$
|
9.05
|
|
280,000
|
|
93,332
|
|
|
Outstanding, end of the period
|
|
$
|
3.11
|
|
7,863,036
|
|
5,469,842
|
|
The Company used the Black Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 3 and 5 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.
21.
General and administrative expenses
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
354
|
|
$
|
205
|
|
$
|
660
|
|
$
|
417
|
|
|
Consulting fees
|
|
63
|
|
35
|
|
158
|
|
79
|
|
|
Office and general
|
|
567
|
|
417
|
|
1,119
|
|
708
|
|
|
Professional fees
|
|
480
|
|
134
|
|
697
|
|
240
|
|
|
Salaries and wages
|
|
317
|
|
263
|
|
725
|
|
488
|
|
|
Travel and accomodation
|
|
168
|
|
146
|
|
304
|
|
219
|
|
|
Rent
|
|
24
|
|
25
|
|
45
|
|
33
|
|
|
|
|
$
|
1,973
|
|
$
|
1,225
|
|
$
|
3,708
|
|
$
|
2,184
|
|
24
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
22.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
$
|
2,055
|
|
$
|
251
|
|
$
|
4,495
|
|
$
|
455
|
|
|
Share-based compensation accrued in the prior period
|
|
—
|
|
—
|
|
(44
|
)
|
—
|
|
|
Share-based compensation issued on behalf of a related party
|
|
—
|
|
—
|
|
(32
|
)
|
—
|
|
|
Shares for services compensation
|
|
74
|
|
—
|
|
187
|
|
—
|
|
|
Deferred share units expensed in the period
|
|
71
|
|
—
|
|
103
|
|
—
|
|
|
|
|
$
|
2,200
|
|
$
|
251
|
|
$
|
4,709
|
|
$
|
455
|
|
During the period, the Company issued 7,119 deferred share units to certain directors of the Company, under the terms of the Company’s Deferred Share Unit Plan.
23.
Finance income, net
Finance income, net, is comprised of:
|
|
|
For the three months ended
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Interest income
|
|
$
|
1,763
|
|
$
|
291
|
|
$
|
2,579
|
|
$
|
436
|
|
|
Interest expense
|
|
(331
|
)
|
(95
|
)
|
(667
|
)
|
(144
|
)
|
|
|
|
$
|
1 ,432
|
|
$
|
1 96
|
|
$
|
1,912
|
|
$
|
292
|
|
24.
Gain on long-term investments
Gain on long-term investments for the three and six months ended November 30, 2017 is comprised of:
|
|
|
|
|
Fair value
|
|
Gain (loss) on
|
|
Change in fair
|
|
|
|
|
Investment
|
|
Proceeds
|
|
May 31, 2017
|
|
disposal
|
|
value
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
Kalytera Therapeutics, Inc. - shares
|
|
$
|
763
|
|
$
|
1,111
|
|
$
|
(348
|
)
|
$
|
—
|
|
$
|
(348
|
)
|
|
MassRoots, Inc. - shares
|
|
102
|
|
232
|
|
(130
|
)
|
—
|
|
(130
|
)
|
|
Scythian Biosciences Inc. - shares
|
|
1,225
|
|
2,000
|
|
(775
|
)
|
—
|
|
(775
|
)
|
|
Long-term investments (Note 13)
|
|
—
|
|
—
|
|
—
|
|
26,410
|
|
26,410
|
|
|
Six months ended November 30, 2017
|
|
$
|
2,090
|
|
$
|
3,343
|
|
$
|
(1,253
|
)
|
$
|
26,410
|
|
$
|
25,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less transactions in previous quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
—
|
|
—
|
|
—
|
|
19,082
|
|
19,082
|
|
|
Three months ended November 30, 2017
|
|
$
|
2,090
|
|
$
|
3,343
|
|
$
|
(1,253
|
)
|
$
|
7,328
|
|
$
|
6,075
|
|
25
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
25.
Earnings per share
The calculation of earnings per share for the three months ended November 30, 2017 was based on the net income attributable to common shareholders of $6,455 (2016 — $945) and a weighted average number of common shares outstanding of 138,839,530 (2016 — 95,624,114) calculated as follows:
|
|
|
2017
|
|
2016
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
6,455
|
|
$
|
945
|
|
|
Average number of common shares outstanding during the period
|
|
138,839,530
|
|
95,624,114
|
|
|
Earnings per share - basic
|
|
$
|
0.05
|
|
$
|
0.01
|
|
|
|
|
2017
|
|
2016
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
6,455
|
|
$
|
945
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
138,839,530
|
|
95,624,114
|
|
|
“In the money” warrants outstanding during the period
|
|
2,735,654
|
|
2,760,475
|
|
|
“In the money” options outstanding during the period
|
|
4,303,259
|
|
3,221,561
|
|
|
|
|
145,878,443
|
|
101,606,150
|
|
|
Earnings per share - diluted
|
|
$
|
0.04
|
|
$
|
0.01
|
|
The calculation of earnings per share for the six months ended November 30, 2017 was based on the net income attributable to common shareholders of $21,496 (2016 — $1,840) and a weighted average number of common shares outstanding of 138,775,253 (2016 — 84,644,788) calculated as follows:
|
|
|
2017
|
|
2016
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
21,496
|
|
$
|
1,840
|
|
|
Average number of common shares outstanding during the period
|
|
138,775,253
|
|
84,644,788
|
|
|
Earnings per share - basic
|
|
$
|
0.15
|
|
$
|
0.02
|
|
|
|
|
2017
|
|
2016
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
21,496
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
138,775,253
|
|
84,644,788
|
|
|
“In the money” warrants outstanding during the period
|
|
2,796,468
|
|
2,760,475
|
|
|
“In the money” options outstanding during the period
|
|
4,503,728
|
|
3,221,561
|
|
|
|
|
146,075,449
|
|
90,626,824
|
|
|
Earnings per share - diluted
|
|
$
|
0.15
|
|
$
|
0.02
|
|
26
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
26.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
For the six months ended
|
|
|
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
(1,840
|
)
|
$
|
172
|
|
|
Decrease (increase) in other current assets
|
|
(3,212
|
)
|
(2,295
|
)
|
|
Decrease (increase) in inventory, net of fair value adjustment
|
|
(8,626
|
)
|
(3,359
|
)
|
|
Decrease (increase) in biological assets, net of fair value adjustment
|
|
7,345
|
|
3,271
|
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
2,586
|
|
1,893
|
|
|
|
|
$
|
(3,747
|
)
|
$
|
(318
|
)
|
27.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities and long-term investments, with the exception of the debentures in CannaRoyalty Corp., Copperstate Farms Investors, LLC and HydRx Ltd. (d/b/a Scientus Pharma) and embedded derivatives as fair value through profit or loss (“FVTPL”), accounts receivable and other current assets as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term debt as other financial liabilities. The debentures in CannaRoyalty Corp., Copperstate Farms Investors, LLC and HydRx Ltd. (d/b/a Scientus Pharma) are accounted for on an amortized cost basis.
The carrying values of accounts receivable and other current assets, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $31,830 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at November 30, 2017 was $31,678.
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
|
Level 1
|
|
quoted prices (unadjusted) in active markets for identical assets and liabilities
|
|
Level 2
|
|
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from
|
|
|
|
observable market data
|
|
Level 3
|
|
inputs for assets and liabilities not based upon observable market data
|
27
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
116,087
|
|
$
|
—
|
|
$
|
—
|
|
$
|
116,087
|
|
|
Marketable securities
|
|
55,855
|
|
—
|
|
—
|
|
55,855
|
|
|
Embedded derivatives
|
|
—
|
|
—
|
|
5,251
|
|
5,251
|
|
|
Long-term investments
|
|
10,792
|
|
—
|
|
49,296
|
|
60,088
|
|
|
Outstanding, end of the period
|
|
$
|
182,734
|
|
$
|
—
|
|
$
|
54,547
|
|
$
|
237,281
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,910
|
|
$
|
—
|
|
$
|
—
|
|
$
|
79,910
|
|
|
Marketable securities
|
|
87,347
|
|
|
|
|
|
87,347
|
|
|
Embedded derivatives
|
|
—
|
|
—
|
|
173
|
|
173
|
|
|
Long-term investments
|
|
14,946
|
|
—
|
|
12,842
|
|
27,788
|
|
|
Outstanding, end of the period
|
|
$
|
182,203
|
|
$
|
—
|
|
$
|
13,015
|
|
$
|
195,218
|
|
The following table presents the changes in level 3 items for the periods ended November 30, 2017 and November 30, 2016:
|
|
|
Unlisted
|
|
|
|
|
|
|
|
|
Equity
|
|
Trading
|
|
|
|
|
|
|
securities
|
|
derivatives
|
|
Total
|
|
|
Opening balance November 30, 2016
|
|
$
|
1,797
|
|
$
|
173
|
|
$
|
1,970
|
|
|
Acquisitions
|
|
10,847
|
|
—
|
|
10,847
|
|
|
Disposals
|
|
(50
|
)
|
—
|
|
(50
|
)
|
|
Unrealized gain on fair value
|
|
248
|
|
—
|
|
248
|
|
|
Closing balance May 31, 2017
|
|
$
|
12,842
|
|
$
|
173
|
|
$
|
13,015
|
|
|
Acquisitions
|
|
10,897
|
|
4,450
|
|
15,347
|
|
|
Reclassification to Level 1
|
|
(2,000
|
)
|
—
|
|
(2,000
|
)
|
|
Unrealized gain on fair value
|
|
27,557
|
|
628
|
|
28,185
|
|
|
Closing balance November 30, 2017
|
|
$
|
49,296
|
|
$
|
5,251
|
|
$
|
54,547
|
|
Investments in Scythian Biosciences Inc., originally classified as a level 3 investments, were reclassified subsequent to the investee going public. During the period, the Company sold its shares in Scythian Biosciences Inc.
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
(a)
Credit risk
The maximum credit exposure at November 30, 2017 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other current assets and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
28
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
61-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
2,666
|
|
$
|
2,155
|
|
$
|
249
|
|
$
|
42
|
|
$
|
220
|
|
|
|
|
|
|
81
|
%
|
9
|
%
|
2
|
%
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at November 30, 2017, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at November 30, 2017, management regards liquidity risk to be low.
(c)
Currency rate risk
As at November 30, 2017, a portion of the Company’s financial assets and liabilities held in USD consist of marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.
The Company is exposed to unrealized foreign exchange risk through its convertible notes receivable and long-term investments. A 1% change in the foreign exchange rate would result in an unrealized gain or loss of approximately $379.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents and marketable securities as capital.
29
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and six months ended November 30, 2017 and November 30, 2016
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
28.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. The Company has lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9 and $20, respectively. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty Health Sciences Inc. (formerly DFMMJ Investments, Ltd.). The Company has agreed to contribute an additional $1,300 to Green Acre Capital Fund. The Company has committed purchase orders outstanding at November 30, 2017 related to capital asset expansion of $53,093, of which $33,731 are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:
|
|
|
Years ending November 30,
|
|
|
2018
|
|
$
|
34,597
|
|
|
2019
|
|
19,392
|
|
|
2020
|
|
13
|
|
|
|
|
$
|
54,002
|
|
29.
Subsequent events
Subsequent to quarter-end, TS BrandCo Holdings Inc. announced that it merged with DOJA Cannabis Company Ltd. and was to rename the reporting issuer Hiku Brands Company Ltd. The Company contributed $10,000 as an equity investment in Hiku Brand Company Ltd. on the same date.
Subsequent to quarter-end, the Company entered a purchase and sale agreement to acquire land, buildings and greenhouses at 225 and 231 Talbot Street West, Leamington, Ontario for $5,250. The Company anticipates the transaction closing before the end of the next quarter.
Subsequent to quarter-end, the Company closed a bought deal and issued 8,363,651 common shares for gross proceeds of $115,000.
Subsequent to quarter-end, the Company entered a strategic relationship with Double Diamond Farms to form a corporation, internally identified as GrowCo. GrowCo is to be capitalized with $10,200 of seed capital from Aphria and $9,800 of seed capital from Double Diamond Farms. GrowCo is to enter into a purchase and sale agreement with Double Diamond Farms to acquire 100 acres of land, including almost 32 acres of greenhouses. GrowCo is expected to require $80,000 to $100,000 of capital to complete the purchase and sale agreement and the necessary retrofits of the greenhouses to legally grow cannabis. GrowCo anticipates securing bank financing for a portion of the capital required. Any remaining capital needs will be loaned by Aphria to GrowCo.
Subsequent to quarter-end, the Company funded an additional $500 of its $2,000 commitment to Green Acre Capital Fund. Cumulative contributions to Green Acre Capital Fund is $1,200.
30
Exhibit 99.50
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the three months and six months ended November 30, 2017. It is supplemental to, and should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and the accompanying notes for the period ended November 30, 2017, as well as the financial statements and MD&A for the year ended May 31, 2017. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to “all-in” cost of sales, cash costs to produce, gross profit before fair value adjustments (previously referred to as adjusted gross profit), adjusted gross margin, adjusted EBITDA from operations, adjusted EBITDA from equity investee, adjusted EBITDA and strategic investments, which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“All-in” cost of sales of dried cannabis per gram is equal to production costs less the costs of accessories less cannabis oil conversion costs (“cost of sales of dried cannabis”) plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is gross profit before fair value adjustments divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted EBITDA from operations is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) bad debts (recovery), plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations exclusive of its equity investee.
·
Adjusted EBITDA (loss) from equity investee is calculated based on the same approach as outlined above for adjusted EBITDA from operations, based on the operations of its equity investee and pro-rated based on the Company’s percentage of ownership. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated from its equity investee’s operations.
·
Adjusted EBITDA is adjusted EBITDA from operations plus (minus) adjusted EBITDA (loss) from equity investee. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
·
Strategic investments are the total cash flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.
This MD&A is prepared as January 9, 2018.
COMPANY OVERVIEW
Aphria Inc. is continued in Ontario, the Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licenced to produce and sell medical marijuana under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). PNW received its licence to produce and sell medical marijuana on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. PNW’s operations are based in Leamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be a scalable low-cost producer of medical marijuana.
1
The Company is focused on producing and selling medical marijuana and its derivatives through a two-pronged growth strategy, including both retail sales and wholesale channels. Retail sales are primarily sold through Aphria’s online store as well as telephone orders. Wholesale shipments are sold to other ACMPR Licenced Producers.
INVESTOR HIGHLIGHTS
|
|
|
Q2 - 2018
|
|
Q1 - 2018
|
|
|
Revenue
|
|
$
|
8,504
|
|
$
|
6,120
|
|
|
Kilograms equivalents sold
|
|
1,237.0
|
|
852.0
|
|
|
Cost of sales
|
|
$
|
2,302
|
|
$
|
(1,784
|
)
|
|
Production costs
|
|
$
|
2,746
|
|
$
|
1,346
|
|
|
Cash cost to produce dried cannabis / gram
1
|
|
$
|
1.45
|
|
$
|
0.95
|
|
|
“All-in” cost of sales of dried cannabis / gram
1
|
|
$
|
2.13
|
|
$
|
1.61
|
|
|
Adjusted gross margin
1
|
|
67.7
|
%
|
78.0
|
%
|
|
Adjusted EBITDA from operations
1
|
|
$
|
1,621
|
|
$
|
1,699
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
171,942
|
|
$
|
118,731
|
|
|
Working capital
|
|
$
|
178,782
|
|
$
|
135,128
|
|
|
Capital and intangible asset expenditures
|
|
$
|
35,319
|
|
$
|
23,704
|
|
|
Strategic investments
1
|
|
$
|
5,600
|
|
$
|
20,131
|
|
·
Retail & wholesale platforms
·
Current production capacity equal to 9,000 kgs (annualized) production capability
·
Short-term capacity upgrade to 30,000 kgs (annualized) production capability expected in next 6 months
·
Mid-term capacity upgrade to 100,000 kgs (annualized) production capability expected in 14 months
·
Long-term capacity available via additional 100 acre property in Leamington, Ontario and subsequent event for GrowCo investment (as further described below)
·
No crop failures since inception
·
Nine consecutive quarters of positive adjusted EBITDA
·
Bought deal closed during the period for gross proceeds of $92,000 and bought deal closed subsequent to the reporting period for gross proceeds of $115,000
·
Temporary increase in “all-in” cost of sales of dried cannabis per gram and cash cost to produce dried cannabis per gram due to longer than anticipated Health Canada approvals
·
Strong executive team
·
20+ years of Pharmaceutical experience
·
35+ years of greenhouse growing experience
QUARTERLY HIGHLIGHTS
Operational highlights — Continued progress on expansion projects
The Company continues to work towards the completion of its Part III and Part IV fully capitalized expansion projects. The construction of both the 200,000 and 700,000 sq. ft. state-of-the-art greenhouse facilities are progressing as scheduled with the first sale expected in May 2018 from Part III and January 2019 from Part IV. Upon completion of both projects, at 1,000,000 sq. ft. of cumulative greenhouse growing space the Company anticipates 100,000 kgs in annualized production capacity. Further, on September 29, 2017, the Company received approval for its recently completed four Level 9 vaults, each with a maximum allowable storage capacity of 3,125 kgs. The economies of scale achieved as a result of the completion of these expansion projects as well as the approval of the additional vault space will further promote Aphria’s commitment to being a low-cost producer in the industry.
2
Aphria reports ninth consecutive quarter of positive adjusted EBITDA from operations
The Company reported adjusted EBITDA, as defined above, of $1,621 for the quarter. This marks the ninth consecutive quarter where the Company has reported positive adjusted EBITDA. The Company has recorded total adjusted EBITDA of $6,670 for the trailing twelve-month period.
Aphria reports retained earnings in the current quarter
As a result of its cumulative net earnings to date exceeding its historical losses, Aphria reported retained earnings of $17,373 as at November 30, 2017. The Company remains as one of less than a handful of publicly-traded licenced producers to achieve this milestone.
Investment in Green Tank Holdings Corp.
During the quarter, the Company entered a subscription agreement with Green Tank Holdings Corp. (“Green Tank”) for the purchase of 98,425 common shares, for a total cost of $650 (USD$500).
Additional investment in Nuuvera Corp.
During the quarter, the Company entered into a subscription agreement with Nuuvera Corp. for the purchase of an additional 1,980,000 common shares, for a total cost of $4,950.
Closing of bought deal financing
During the quarter, the Company closed its bought deal financing. Under the bought deal, the Company issued 12,689,675 common shares for net proceeds of $86,661 after accounting for underwriting, legal and other costs. The Company plans to use the proceeds primarily to fund International strategic investments, including direct investment, construction or acquisition of production facilities in new markets, located in federal legal markets (specifically excluding the United States), all related to cannabis production facilities; strategic investments to enhance the Company’s product offerings or cultivation capabilities; construction or acquisition of domestic retail facilities for distribution of cannabis under the Cannabis Act (Canada), in those provinces which may allow it; construction or acquisition of domestic production facilities, if required to support provincialism within the Cannabis Act (Canada); and general corporate purposes.
Legislative changes to minimum wages in Ontario and its impact on Aphria
The Ontario provincial government passed legislation which will result in the legislative minimum wage increasing to $14.00, effective January 1, 2018 and to $15.00 per hour effective January 1, 2019. The minimum wage increase to $14.00 will increase the Company’s wages, across all lines of its business, by $600 per annum. If this increase had been in effect in the current quarter, the Company’s “all-in” cost of sales of dried cannabis per gram would have increased by approximately $0.12 per gram.
The minimum wage increase to $15.00, based on current employee counts and wage levels, is expected to increase the Company’s wages, across all lines of its business, by $300 per annum, when it comes into effect in January 2019.
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation to recognize the eventual fair value of the plant. At the time of harvest, the accumulated cost of each plant is based on the number of grams harvested and the Company increases the cost value to its full fair value less costs to sell.
3
As at November 30, 2017, the Company’s harvested cannabis and cannabis oil, as detailed in Note 6, and biological assets, as detailed in Note 7 of its financial statements, are as follows:
|
|
|
November 30,
|
|
August 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
Harvested cannabis - at cost
|
|
$
|
1,712
|
|
$
|
945
|
|
|
Harvested cannabis - fair value increment
|
|
3,472
|
|
1,761
|
|
|
Harvested cannabis trim - at cost
|
|
651
|
|
395
|
|
|
Harvested cannabis trim - fair value increment
|
|
1,416
|
|
849
|
|
|
Cannabis oil - at cost
|
|
518
|
|
586
|
|
|
Cannabis oil - fair value increment
|
|
511
|
|
987
|
|
|
Biological assets - at cost
|
|
1,001
|
|
1,679
|
|
|
Biological assets - fair value increment
|
|
397
|
|
1,755
|
|
|
Cannabis products - at fair value
|
|
$
|
9,678
|
|
$
|
8,957
|
|
In an effort to increase transparency, the Company’s biological assets are carried at cost plus fair value increments of $0.65, $1.29, $1.94 and $2.51 per gram for weeks 13, 14, 15 and 16, respectively. Harvested cannabis, harvested cannabis trim and cannabis oil are carried at fair values of $3.75 per gram, $3.00 per gram and $0.625 per mL, respectively. The individual components of fair values are as follows:
|
|
|
November 30,
|
|
August 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
Harvested cannabis - at cost - per gram
|
|
$
|
1.24
|
|
$
|
1.17
|
|
|
Harvested cannabis - fair value increment - per gram
|
|
$
|
2.51
|
|
$
|
2.58
|
|
|
Harvested cannabis trim - at cost - per gram
|
|
$
|
0.94
|
|
$
|
0.94
|
|
|
Harvested cannabis trim - fair value increment - per gram
|
|
$
|
2.06
|
|
$
|
2.06
|
|
|
Cannabis oil - at cost - per mL
|
|
$
|
0.31
|
|
$
|
0.23
|
|
|
Cannabis oil - fair value increment - per mL
|
|
$
|
0.32
|
|
$
|
0.40
|
|
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
$
|
2,746
|
|
$
|
1,346
|
|
|
Add (less):
|
|
|
|
|
|
|
Cost of accessories
|
|
$
|
(61
|
)
|
$
|
(37
|
)
|
|
Cannabis oil conversion costs
|
|
$
|
(54
|
)
|
$
|
(41
|
)
|
|
Increase in plant inventory
|
|
$
|
—
|
|
$
|
100
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
2,631
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,236,954
|
|
851,999
|
|
|
|
|
|
|
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
2.13
|
|
$
|
1.61
|
|
4
During the quarter, the Company experienced a temporary increase in its “all-in” costs of sales of dried cannabis per gram. In an effort to bring an increased supply of cannabis to its patients as soon as possible after obtaining Health Canada approval of its Part II expansion, the Company transferred less than ideal aged vegetative plants into the expansion upon receiving the approval. The plants transferred were older than we traditionally transfer, as we dealt with a longer than expected approval process. The impact of transferring older plants was a decrease in yield. The yield decrease spread our actual costs across lower harvest yields resulting in significant amount of unabsorbed overhead, which was expensed in the quarter.
Calculation of cash costs to produce dried cannabis per gram
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
Cash costs to produce dried cannabis per gram
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
2,631
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Amortization
|
|
$
|
(500
|
)
|
$
|
(389
|
)
|
|
Packaging costs
|
|
$
|
(333
|
)
|
$
|
(170
|
)
|
|
Cash costs to produce dried cannabis
|
|
$
|
1,798
|
|
$
|
809
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,236,954
|
|
851,999
|
|
|
|
|
|
|
|
|
|
Cash costs to produce per gram
|
|
$
|
1.45
|
|
$
|
0.95
|
|
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended November 30, 2017 was $8,504 versus $5,227 in the same period of the prior year and $6,120 in the first quarter of fiscal 2018.
The increase in revenue from the same period in the prior year was largely related to the continued growth of both wholesale shipments and onboarded patients offset by an increase in grams sold through wholesale channels at a lower average selling price per gram equivalent. The increased grams sold through wholesale channels were available because of the increased production related to the Company’s Part II expansion and reduction in retail purchases (on a per gram basis) by veterans, as a result of the previously announced changes to VAC’s reimbursement policies (“VAC Policy”) for veterans.
The increase in revenue during the quarter from the prior quarter was largely related to:
·
Continued acceleration of patient onboarding, including sales of 113,079 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 694,875 gram equivalents to patients on-boarded prior to the quarter;
·
Wholesale orders to other Licensed Producers of 429,000 grams;
·
Maintained the percentage of cannabis oil sold for retail sales, at a higher average price than dried cannabis, at 33.7%; and,
·
Increased average retail selling price (excluding wholesale) during the period from $7.91 to $8.10.
5
These factors were partially offset by an increase in grams sold through wholesale channels at a lower average selling price per gram. As a result of the changes to the VAC Policy, the Company recorded sales of approximately $1.9 million to veterans in the quarter. This was an increase of approximately $0.2 from the previous three months, versus an increase of approximately $0.6 million in the prior year for the same comparative periods.
Gross profit and gross margin
The gross profit for the three months ended November 30, 2017 was $6,202, compared to $4,121 in the same quarter in the prior year and $7,903 in the previous quarter. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year offset by the increased production costs per gram equivalent and the increase in the fair value adjustment for biological assets against the decrease in average selling price per gram equivalent.
The gross profit for the three months ended November 30, 2017 decreased to $6,202, compared to $7,903 in the prior quarter, as shown below:
|
|
|
Three months ended
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
|
|
2017
|
|
2017
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,504
|
|
$
|
6,120
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
2,746
|
|
1,346
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
5,758
|
|
4,774
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
2,671
|
|
1,136
|
|
|
Fair value adjustment on growth of biological assets
|
|
(3,115
|
)
|
(4,265
|
)
|
|
|
|
(444
|
)
|
(3,129
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
6,202
|
|
$
|
7,903
|
|
|
Gross margin
|
|
72.9
|
%
|
129.1
|
%
|
Cost of sales currently consist of three main categories: (i) production costs (formerly defined as cost of goods sold) and, (ii) fair value adjustment on sale of inventory and (iii) fair value adjustment on growth of biological assets:
(i) Production costs include the direct cost of materials and labour related to the medical cannabis sold. This would include growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the net effect of the non-cash fair value adjustment of inventory sold in the period.
(iii) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the net effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced and sold in the period. In an effort to increase transparency, management deems it necessary to disclose that inventory of harvested cannabis (Note 7 — Consolidated financial statements for the three months and six months ended November 30, 2017) consists of harvested cannabis, harvested cannabis trim and cannabis oil, of which harvested cannabis is carried at a value of $3.75 per gram, harvested cannabis trim is carried at $3.00 per gram and cannabis oil is carried at $0.625 per mL (6mL of cannabis oil is equivalent to 1 gram of dried product).
6
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of gross profit before fair value adjustments and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Gross profit before fair value adjustments and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the three months ended November 30, 2017:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
|
November 30, 2017
|
|
|
|
November 30, 2017
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,504
|
|
$
|
—
|
|
$
|
8,504
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
2,746
|
|
—
|
|
2,746
|
|
|
Fair value adjustment on sale of inventory
|
|
2,671
|
|
(2,671
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(3,115
|
)
|
3,115
|
|
—
|
|
|
|
|
2,302
|
|
444
|
|
2,746
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
6,202
|
|
$
|
(444
|
)
|
$
|
5,758
|
|
|
Gross margin
|
|
72.9
|
%
|
|
|
67.7
|
%
|
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the six months ended November 30, 2017:
|
|
|
Six months ended
|
|
|
|
Six months ended
|
|
|
|
|
November 30, 2017
|
|
|
|
November 30, 2017
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,624
|
|
$
|
—
|
|
$
|
14,624
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
4,092
|
|
—
|
|
4,092
|
|
|
Fair value adjustment on sale of inventory
|
|
3,807
|
|
(3,807
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(7,380
|
)
|
7,380
|
|
—
|
|
|
|
|
519
|
|
3,573
|
|
4,092
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
14,105
|
|
$
|
(3,573
|
)
|
$
|
10,532
|
|
|
Gross margin
|
|
96.5
|
%
|
|
|
72.0
|
%
|
Selling, general and administrative
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development and impairment of intangible asset. These costs increased by $3,713 to $7,348 from $3,635 in the same quarter in the prior year and increased $7,240 to $13,869 from $6,629 in the six-month period of the prior year.
7
Selling, general and administrative costs
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
General and administrative
|
|
$
|
1,973
|
|
$
|
1,225
|
|
$
|
3,708
|
|
$
|
2,184
|
|
|
Share-based compensation
|
|
2,200
|
|
251
|
|
4,709
|
|
455
|
|
|
Selling, marketing and promotion
|
|
2,819
|
|
1,819
|
|
4,767
|
|
3,200
|
|
|
Amortization
|
|
276
|
|
251
|
|
515
|
|
452
|
|
|
Research and development
|
|
80
|
|
89
|
|
170
|
|
338
|
|
|
|
|
$
|
7,348
|
|
$
|
3,635
|
|
$
|
13,869
|
|
$
|
6,629
|
|
General and administrative costs
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Executive compensation
|
|
$
|
354
|
|
$
|
205
|
|
$
|
660
|
|
$
|
417
|
|
|
Consulting fees
|
|
63
|
|
35
|
|
158
|
|
79
|
|
|
Office and general
|
|
567
|
|
417
|
|
1,119
|
|
708
|
|
|
Professional fees
|
|
480
|
|
134
|
|
697
|
|
240
|
|
|
Salaries and wages
|
|
317
|
|
263
|
|
725
|
|
488
|
|
|
Travel and accomondation
|
|
168
|
|
146
|
|
304
|
|
219
|
|
|
Rent
|
|
24
|
|
25
|
|
45
|
|
33
|
|
|
|
|
$
|
1,973
|
|
$
|
1,225
|
|
$
|
3,708
|
|
$
|
2,184
|
|
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Executive and director compensation as a result of changes in our executive and director compensation as described in our Management Information Circular dated September 11, 2017;
·
Salaries and wages and office and general as a result of increased activity within the business over the same period in the prior year;
·
Professional fees, predominantly comprised of legal costs, associated with various negotiations and reviews of current and potential business relationships necessary to sustain growth of the Company, including recurring costs related to our listing on the TSX.
Share-based compensation
The Company recognized share-based compensation expense of $2,200 for the three months ended November 30, 2017 compared to $251 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is consistent with the increase in stock options vesting during the respective period. The Company issued 813,000 in the current period compared to 1,145,000 in the same period of the prior year. Of the stock options granted in the quarter, 337,662 vested in the quarter.
For the six months ended November 30, 2017, the Company incurred share-based compensation of $4,709 as opposed to $455 for the prior year. The increase in share-based compensation is consistent with the increase in stock options vesting during the respective period. The Company issued 2,078,000 in the current period compared to 1,568,000 in the same period of the prior year. Of the stock options granted in the quarter, 1,109,328 vested in the quarter.
8
Selling, marketing and promotion costs
For the three months ended November 30, 2017, the Company incurred selling, marketing and promotion costs of $2,819, or 33.1% of revenue versus $1,819 or 34.8% of revenue in the comparable prior period. These costs related to patient acquisition and ongoing patient maintenance, the Company’s call centre operations, shipping costs, marketing department, as well as the development of promotional and information materials. Patient acquisition and ongoing patient maintenance costs include payments to individual clinics to perform medical studies as well as reimbursement of operating costs incurred by clinics on the Company’s behalf. The increase in selling, marketing and promotion cost is directly correlated with the increase in patient and sales volumes over the comparable period.
For the six months ended November 30, 2017, the Company incurred selling marketing and promotion costs of $4,767 or 32.6% of revenue, as opposed to $3,200 or 33.3% of revenue, in the comparable prior period. The increase in costs in the six-month period is consistent with the increase in the three-month period.
Amortization
The Company incurred amortization charges of $276 for the three months ended November 30, 2017 compared to $251 for the same period in the prior year. The increase in amortization charges are a result of the capital expenditures made during the prior fiscal year and being put in to use during the current fiscal year.
The Company incurred amortization charges of $515 for the six months ended November 30, 2017 compared to $452 for the same period in the previous year. The increase for the six month period is consistent with the increase for the three month period.
Research and development
Research and development costs of $80 were expensed during the three months ended November 30, 2017 compared to $89 in same period last year. These relate to costs associated with process validation of the Company’s internal chemistry and micro biology labs, as well as researching different aspects of genetics. The Company also has continued experimenting with different growing methods and methods of extraction of cannabis oils and related derivatives for future commercialization.
For the six months ended November 30, 2017, the Company incurred research and development costs of $170 as opposed to $338 in the same period in the previous year.
Non-operating items
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Consulting revenue
|
|
$
|
183
|
|
$
|
—
|
|
$
|
476
|
|
$
|
—
|
|
|
Foreign exchange gain
|
|
282
|
|
—
|
|
131
|
|
—
|
|
|
Gain (loss) on marketable securities
|
|
55
|
|
—
|
|
(1,691
|
)
|
—
|
|
|
(Loss) gain on sale of capital assets
|
|
—
|
|
—
|
|
(7
|
)
|
11
|
|
|
(Loss) gain on dilution of ownership in equity investee
|
|
(16
|
)
|
—
|
|
7,535
|
|
—
|
|
|
Loss from equity investee
|
|
(441
|
)
|
—
|
|
(9,281
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
233
|
|
—
|
|
467
|
|
—
|
|
|
Finance income, net
|
|
1,432
|
|
196
|
|
1,912
|
|
292
|
|
|
Unrealized gain on embedded derivatives
|
|
95
|
|
—
|
|
628
|
|
—
|
|
|
Gain on long-term investments
|
|
6,075
|
|
263
|
|
25,157
|
|
263
|
|
|
|
|
$
|
7,898
|
|
$
|
459
|
|
$
|
25,327
|
|
$
|
566
|
|
9
During the quarter, The Company contracted an independent third party to perform a formal valuation of both Copperstate and CSF as at August 31, 2017, to determine the fair value of its investment in both entities. The independent valuator used a discount cash flow method in determining the fair value of both Copperstate and CSF. As a result of the valuation, the Company increased the fair value of its investments in Copperstate by approximately $23,125 of which $22,188 was recorded in the previous three months.
Net income
The Company recorded net income for the three months ended November 30, 2017 of $6,455 or $0.05 per share as opposed to net income of $945 or $0.01 per share in the same period of the prior year.
The Company recorded net income for the six months ended November 30, 2017 of $21,496 or $0.15 per share as opposed to net income of $1,840 or $0.02 per share in the same period of the prior year.
Adjusted EBITDA
Adjusted EBITDA from operations is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA from operations as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) bad debts (recovery), plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) unrealized loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management, all as follows:
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Net income
|
|
$
|
6,455
|
|
$
|
945
|
|
$
|
21,496
|
|
$
|
1,840
|
|
|
Income taxes
|
|
297
|
|
—
|
|
4,067
|
|
—
|
|
|
Finance income, net
|
|
(1,432
|
)
|
(196
|
)
|
(1,912
|
)
|
(292
|
)
|
|
Amortization
|
|
776
|
|
479
|
|
1,404
|
|
934
|
|
|
Share-based compensation
|
|
2,200
|
|
251
|
|
4,709
|
|
455
|
|
|
Fair value adjustment on sale of inventory
|
|
2,671
|
|
1,233
|
|
3,807
|
|
2,572
|
|
|
Fair value adjustment on growth of biological assets
|
|
(3,115
|
)
|
(1,307
|
)
|
(7,380
|
)
|
(3,107
|
)
|
|
Disposition and usage of bearer plants
|
|
—
|
|
33
|
|
3
|
|
47
|
|
|
Allowance for bad debts
|
|
52
|
|
22
|
|
65
|
|
76
|
|
|
Loss from equity investee
|
|
441
|
|
—
|
|
9,281
|
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
(233
|
)
|
—
|
|
(467
|
)
|
—
|
|
|
Loss (gain) on dilution of ownership in equity investee
|
|
16
|
|
—
|
|
(7,535
|
)
|
—
|
|
|
Loss (gain) on sale of capital assets
|
|
—
|
|
—
|
|
7
|
|
(11
|
)
|
|
Foreign exchange gain
|
|
(282
|
)
|
—
|
|
(131
|
)
|
—
|
|
|
Loss (gain) on marketable securities
|
|
(55
|
)
|
—
|
|
1,691
|
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
(95
|
)
|
—
|
|
(628
|
)
|
—
|
|
|
Gain on long-term investments
|
|
(6,075
|
)
|
(263
|
)
|
(25,157
|
)
|
(263
|
)
|
|
Adjusted EBITDA from operations
|
|
$
|
1,621
|
|
$
|
1,197
|
|
$
|
3,320
|
|
$
|
2,251
|
|
10
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
November 30,
|
|
November 30,
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Adjusted EBITDA from operations
|
|
$
|
1,621
|
|
$
|
1,197
|
|
$
|
3,320
|
|
$
|
2,251
|
|
|
Adjusted EBITDA loss from equity investee
|
|
(731
|
)
|
—
|
|
(1,406
|
)
|
—
|
|
|
Adjusted EBITDA
|
|
$
|
890
|
|
$
|
1,197
|
|
$
|
1,914
|
|
$
|
2,251
|
|
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations for the period decreased by $1,743 from cash flow generated in operations of $2,158 in the six-month period of the prior year to cash flow generated in operations of $415 in the current three-month period. The decrease in cash flow generated from operations is primarily a result of:
·
Increase in non-cash working capital of approximately $3,747, comprised primarily of increased HST receivable, inventory and prepaid assets offset by increased accounts payable and accrued liabilities.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at November 30, 2017, Aphria maintained $116,087 of cash and cash equivalents on hand plus $55,855 in liquid marketable securities, compared to $98,615 in cash and cash equivalents at November 30, 2016 and $79,910 in cash and cash equivalents plus $87,347 in liquid marketable securities at May 31, 2017. Liquid sources of cash increased $73,327 in the twelve-month period and increased $53,212 in the quarter.
Working capital provides funds for the Company to meet its operational and capital requirements. As at November 30, 2017, the Company maintained working capital of $178,782. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 12 months.
Capital and intangible asset expenditures
For the three months ended November 30, 2017, the Company invested $59,023 in capital and intangible assets, of which $388 are considered maintenance CAPEX and the remaining $58,635 growth CAPEX, related to the property acquisitions and the Company’s Part III and Part IV Expansions.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its equity investee, Liberty Health Sciences Inc.
During the previous fiscal year, the Company terminated its lease commitment for rental of greenhouse and warehouse space in conjunction with the purchase of the 265 Talbot St. West property. The Company continues to lease office space from a related party. The lease commitment ends December 31, 2018 with the option to renew for two additional 5 year periods. As disclosed previously, the Company has agreed to contribute an additional $1,300 to Green Acre Capital Fund. The Company has a lease commitments until September 2019 and August 2020 for the use of two motor vehicles.
11
Minimum payments payable over the next five years are as follows:
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
year
|
|
1 - 3 years
|
|
4 - 5 years
|
|
After 5 years
|
|
|
Outstanding capital related commitments
|
|
$
|
53,893
|
|
$
|
34,531
|
|
$
|
19,362
|
|
$
|
—
|
|
$
|
—
|
|
|
Operating leases
|
|
40
|
|
37
|
|
3
|
|
—
|
|
—
|
|
|
Motor vehicle leases
|
|
69
|
|
29
|
|
40
|
|
—
|
|
—
|
|
|
Long-term debt
|
|
31,830
|
|
790
|
|
1,723
|
|
4,317
|
|
25,000
|
|
|
Total
|
|
$
|
85,832
|
|
$
|
35,387
|
|
$
|
21,128
|
|
$
|
4,317
|
|
$
|
25,000
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the period.
Share capital
Aphria has the following securities issued and outstanding, as at January 9, 2018:
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Presently
|
|
|
|
& in-the-
|
|
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
money
|
|
Fully diluted
|
|
|
Common stock
|
|
161,165,319
|
|
—
|
|
—
|
|
161,165,319
|
|
|
Warrants
|
|
2,839,872
|
|
2,839,872
|
|
2,839,872
|
|
2,839,872
|
|
|
Stock options
|
|
7,098,741
|
|
5,191,516
|
|
5,191,516
|
|
5,191,516
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
169,196,707
|
|
*
Based on closing price on January 9, 2018
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2018, ended November 30, 2017. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2017 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
|
|
|
Feb/17
|
|
May/17
|
|
Aug/17
|
|
Nov/17
|
|
|
Revenue
|
|
$
|
5,119
|
|
$
|
5,718
|
|
$
|
6,120
|
|
$
|
8,504
|
|
|
Net income (loss)
|
|
4,950
|
|
(2,593
|
)
|
15,041
|
|
6,455
|
|
|
Earnings (loss) per share - basic
|
|
0.04
|
|
(0.02
|
)
|
0.11
|
|
0.05
|
|
|
Earnings (loss) per share - fully diluted
|
|
0.04
|
|
(0.02
|
)
|
0.10
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb/16
|
|
May/16
|
|
Aug/16
|
|
Nov/16
|
|
|
Revenue
|
|
$
|
2,680
|
|
$
|
2,776
|
|
$
|
4,376
|
|
$
|
5,227
|
|
|
Net income
|
|
4
|
|
1,302
|
|
895
|
|
945
|
|
|
Earnings per share - basic
|
|
0.00
|
|
0.02
|
|
0.01
|
|
0.01
|
|
|
Income per share - fully diluted
|
|
0.00
|
|
0.02
|
|
0.01
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
RELATED PARTY BALANCES AND TRANSACTIONS
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. Through these related parties, Aphria can leverage the purchasing power for growing related commodities and labour, which provides the Company with better rates than if Aphria was sourcing these on its own. These transactions are measured at their exchange amounts. The balance owing from related parties as at November 30, 2017 was $nil (May 31, 2017 - $464). These amounts were due upon demand and are non-interest bearing. These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani and Mr. John Cervini).
During the three and six months ended November 30, 2017, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $54 and $93 (2016 - $72 and $267). Included in this amount was rent of $9 and $17 charged during the three and six months ended November 30, 2017 (2016 - $8 and $33).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc., a related party through an equity investment.
ISSUERS WITH U.S. CANNABIS-RELATED ACTIVITIES
On October 16, 2017, the Canadian Securities Administrators published Staff Notice 51-352
Issuers with U.S. Marijuana-Related Activities
(the “Staff Notice”) which provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis-related activities in the U.S. as permitted within a particular state’s regulatory framework. All issuers with U.S. cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other required disclosure documents.
Also on October 16, 2017, the TSX provided clarity regarding the application of Sections 306 (Minimum Listing Requirements) and 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities) of the TSX Company Manual (collectively, the “Requirements”) to applicants and TSX-listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review.
As a result of the Company’s investments in certain U.S. entities (as described herein), Aphria is properly subject to the Staff Notice and accordingly provides the following disclosure:
Nature of U.S. Investments:
Liberty Health Sciences Inc. (Florida)
In May 2017, Aphria invested $25,000 into DFMMJ Investments, Ltd. (“DFMMJ”), which would acquire all or substantially all of the assets of Chestnut Hill Tree Farm LLC, (“Chestnut”) through its subsidiary DFMMJ Investments, LLC, and subsequently amalgamate into a subsidiary of SecureCom Mobile Inc. (“SecureCom”), a public company listed on the Canadian Securities Exchange, as part of a business combination. The funds, when combined with an additional $35,000 raised in a brokered private placement led by Clarus Securities Inc., were invested and used in an entity renamed Liberty Health Sciences Inc. On July 20, 2017, DFMMJ completed its business combination with SecureCom through a reverse
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takeover acquisition. Upon the completion of the transaction, Liberty consolidated its issued and outstanding common shares and other securities on the basis of three pre-consolidation common shares held for one post-consolidation common share. As a result of the three-for-one exchange, Aphria now holds 106,864,102 common shares of Liberty, a reporting issuer on the Canadian Securities Exchange, representing a 37.6% ownership. Liberty, through its subsidiary, is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. Further, the Company has agreed to license the Aphria medical brand to Liberty, in exchange for a 3% perpetual royalty on all sales of cannabis and related products. There is not an event that requires regulatory approval by the Florida Department of Health with respect to the Company’s license to Liberty. The Company only licenses its name and branding to Liberty and Liberty cultivates its own product in Florida.
Copperstate Farms, LLC & Copperstate Farms Investors, LLC (Arizona)
On October 27, 2016, Aphria entered into an intellectual property transfer agreement with Copperstate Farms, LLC (“Copperstate”), a licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act.
Copperstate maintains a 40-acre, high-tech, Dutch-style greenhouse facility in Snowflake, Arizona. Copperstate is one of the largest medical cannabis greenhouse facilities in Arizona. Under the terms of the agreement, Aphria received 5,000 membership units in Copperstate in exchange for a promissory note valued at US$1,300 (the “Promissory Note”). Aphria also licensed certain of its intellectual property, to be delivered over a two-year term, to Copperstate in exchange for quarterly cash payments, equivalent to the value of the required quarterly payment on the Promissory Note, effectively offsetting each other. In addition, Aphria made a direct cash contribution of US$1,300 to the parent company of Copperstate, Copperstate Farms Investors, LLC (“CSF”), in return for 2,600 membership units in CSF. The transaction was subject to TSXV approval and received final approval from the TSXV on December 21, 2016. Prior to receiving such final approval, Aphria acquired an additional 2,600 membership units in CSF, increasing its ownership in CSF to 5,200 membership units. On March 27, 2017, Aphria made an additional investment of US$3,000 in CSF, for an additional 6,000 membership units.
On July 26, 2017, the Company purchased an additional 2,668 additional membership units of CSF for US$1,334. Further, the Company lent CSF US$2,000 in exchange for a senior secured convertible loan, as well as an additional US$666 as a note payable with no set terms of repayment. The note payable has been repaid in full. The convertible debenture bears interest at 9%, is due on May 15, 2018 and includes the right to convert the debenture into membership units at US$500 per unit. The loan is pre-payable at any time by CSF; no principal payments are due prior to the Maturity Date. If at least US$500 of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for US$500, plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at US$500 per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at US$500 per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona.
The increase in fair value in Copperstate between May 31 and November 30, 2017 was comprised of several factors, including: (i) the closing of a private placement on August 3, 2017, wherein the membership units of Copperstate were available for purchase at a discount to market up until such date; (ii) Copperstate completing its first commercial harvests and confirming its ability to complete a commercial harvest; (iii) Copperstate completing its first sale of commercial harvests, including confirming a wholesale price at which its product could be sold in the Arizona market; and (iv) business investments related to entering into the concentrate markets as opposed to remaining focused solely on the flower market, thereby changing Copperstate’s financial forecasts.
As at May 31, 2017, the Company performed its fair value assessment of Copperstate. In calculating that fair value, the Company applied a basic valuation tenet: that a party will not pay more for an identical asset than it can acquire it from a different party at a lower price (the “Valuation Tenet”). On May 31, 2017, Copperstate’s original private placement remained open with membership units available at $500 per unit directly from Copperstate. Multiple parties at arm’s-length to the Company purchased membership units at the price of $500 per unit as late as August 3, 2017. Applying the Valuation Tenet, since a third party could acquire units at $500 each from Copperstate, they would not pay the Company
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more than $500 a unit, the Company calculated the fair value of Copperstate based on this $500 amount. At August 31, 2017 with the private placement now closed, a third party would not be able to acquire the units at $500 from Copperstate and, accordingly, would be forced to purchase them from the Company or an existing membership unit holder at market value (fair value). As part of this process, the Company engaged an independent third party to perform a valuation of Copperstate. That valuation was used to calculate the fair value of the Company’s investment in Copperstate, key valuation assumptions included a discount rate of 13%, terminal EBITDA multiple of 7 and the probability that cannabis remains a Schedule I drug of 90%.
Enforcement of U.S. Federal Laws
Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the ACMPR, in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam that have legalized cannabis in some form. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule I controlled substance under the Controlled Substances Act (the “CSA”) and as such, violates federal law in the United States.
As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard. On February 14, 2014, in conjunction with DOJ policies set forth in the Ogden-Cole Memos, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks clarifying Bank Secrecy Act expectations for financial institutions seeking to provide services to cannabis-related business (“FinCEN Guidance”). While the FinCEN Guidance made clear that it did not alter in any way DOJ’s authority to enforce federal law, it placed enhanced due diligence obligations on banks transacting with cannabis-related businesses, and offered a pathway for banks to provide financial services to such businesses.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, however, he disagreed that it had been implemented effectively and, on January 4, 2017, Attorney General Jeff Sessions issued a memorandum (the “Sessions Memo”) that rescinded the Cole Memorandum. The Sessions Memo rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to marijuana enforcement, including the First and Second Cole Memos, on the basis that they are unnecessary, given the well-established principles governing federal prosecution that already in place. Those principals are included in chapter 9.27.000 of the U.S. Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
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The result of the rescission of the Cole Memorandum is that federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute marijuana activities despite the existence of state-level laws that may be inconsistent with federal prohibitions; however, discretion is still given to the federal prosecutor to weigh all relevant considerations of the crime, including the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. No direction was given to federal prosecutors as to the priority they should ascribe to such activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, Attorney General Jeff Sessions’s statement in relation to the rescission of the Cole Memorandum (the “Sessions Memorandum”) did not discuss the treatment of medical cannabis by federal prosecutors. As it pertains to the FinCen guidance, while it was based upon the Cole Memorandum which was recently rescinded, it has not been terminated or rescinded by the United States Treasury Department to date, and thus remains in force. The Treasury Department has not released any additional guidance since the Sessions’s Memorandum was released, and until additional guidance is provided it is unknown how federal banking regulators will react to the Session’s Memorandum and the status of the FinCen Guidance.
Medical cannabis is currently protected against enforcement by enacted legislation from U.S. Congress in the form of the Rohrabacher-Blumenauer Amendment (as defined below) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical marijuana laws enacted at the state level, and said amendment remains in force today via the continuing resolutions that have been passed. Additionally, the Rohrabacher-Blumenauer language is presently included in the Senate version of the Department of Justice Appropriations bill that will be voted upon by Congress in January 2018. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law, however medical operators are still entitled to the protections of the Rohrabacher-Farr legislation which has been utilized by medical operators to enjoin attempted prosecutions. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, and also divert the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the
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nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
U.S. Enforcement Proceedings
The United States Congress has passed appropriations bills each of the last three years that included the Rohrabacher Amendment Title: H.R.2578 — Commerce, Justice, Science, and Related Agencies Appropriations Act, 2016, which by its terms does not appropriate any federal funds to the U.S. Department of Justice for the prosecution of medical cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business — even those that have fully complied with state law—could be prosecuted for violations of federal law. If Congress restores funding, the United States government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Ability to Access Public and Private Capital
The Company has historically, and continues to have, robust access to both public and private capital in Canada in order to support its continuing operations. This is evidenced by the Company’s consistent ability to access public capital on separate occasions. The Company has had cannabis-related activities in the U.S. since 2015, including the Copperstate transaction, which was approved by the TSXV prior to its closing. As disclosed earlier in August of this year, the Company’s Common Shares have traded on the TSX and previously the TSX Venture Exchange for three years during which time the Company has raised over $331 million from investors by way of six offerings by short form prospectus. In addition to certain Canadian Schedule 1 banks accepting deposits from entities positioned in the legal medical cannabis sectors, there are also a number of credit unions that have historically provided, and continue to provide, debt financings in this space. More particularly, the Company itself has previously closed a suite of financings with one of the largest credit unions in Ontario in amounts totaling approximately $30,000 and at interest rates below 4%. The Company has never needed to access public equity capital in the United States. All capital requirements have been adequately met in Canada and the Company expects that to continue.
In respect of Liberty and Copperstate, the Company has limited means to cause these subsidiaries to access capital as they each have their own boards and management that make such decisions largely independent of the Company. Each of Liberty and Copperstate has been successful in raising private capital with and without the participation of the Company. Liberty and Copperstate have each undertaken private placements. We are not aware of any inability of either Liberty or Copperstate to continue as a going concern, irrespective of their ability to access public equity capital.
Regulation of Medical Cannabis in Florida
Liberty is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Medical Marijuana Use under the provisions of the Senate Bill 8A, Fla. Stat. 386.981 et seq. The Florida Department of Health issued the license (the “Liberty License”) to Chestnut on November 23, 2015 and Liberty acquired the rights to the Liberty License on May 23, 2017 via the exclusive management agreement entered into between Liberty and Chestnut. On September 28, 2017, the Florida Department of Health, Office of Medical Marijuana Use, approved the transfer of the Liberty License to DFMMJ, the wholly-owned subsidiary of Liberty, which now solely owns and is entitled to utilize the License in Florida.
The Liberty License permits the sale of low THC cannabis (now grandfathered to produce and sell high THC cannabis) and medical cannabis to treat a number of medical conditions in the State of Florida which are delineated in Florida Statutes section 386.981. Under the terms of the Liberty License, Liberty is permitted to sell medical cannabis only to qualified medical patients that are registered with the state. Only certified physicians who have successfully completed a medical
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cannabis educational program can register patients and their medical cannabis orders on the Florida Office of Compassionate Use Registry. Liberty maintains an open and collaborative relationship with the Florida Department of Health and Liberty’s operations are in full compliance with all laws and regulations.
Under the Liberty License, Liberty can operate up to 25 dispensaries statewide. Currently, the dispensaries can be in any geographic location within the state as long as the local municipality’s zoning regulations authorize such a use and/or the proposed site is zoned for a pharmacy use and is not within 500 feet of a church or school. In the State of Florida, only cannabis that is grown in the state can be sold in the state. As Florida is a vertically integrated system, Liberty (and other licensees) is required to cultivate, harvest, process and sell/dispense/deliver its own medical cannabis products. The state also allows Liberty to make a wholesale purchase of medical cannabis from, or a distribution of medical cannabis to, another licensed dispensing organization within the state. At the present time, Liberty’s principal products include cannabis oil in capsule, oral solution, sublingual solution, and vaporizer forms due to regulatory restrictions on the sale of dry flower in the state.
Regulatory Framework
The State of Florida Statutes 381.986(8)(a) provides a regulatory framework that requires licensed producers, which are statutorily defined as “Medical Marijuana Treatment Centers” (“MMTC”), to both cultivate, process and dispense medical cannabis in a vertically integrated marketplace.
Licensing Requirements
Licenses issued by the Department of Health, Office of Medical Marijuana Use (the “Department”) may be renewed biennially so long as the licensee meets requirements of the law and pays a renewal fee. License holders can only own one license and MMTC’s can operate up to a maximum of 25 dispensaries throughout the State of Florida. Applicants must demonstrate (and licensed MMTC’s must maintain) that: (i) they have been registered to do business in the State of Florida for the previous five years, (ii) they possess a valid certificate of registration issued by the Florida Department of Agriculture, (iii) they have the technical and technological ability to cultivate and produce cannabis, including, but not limited to, low-THC cannabis, (iv) they have the ability to secure the premises, resources, and personnel necessary to operate as an MMTC, (v) they have the ability to maintain accountability of all raw materials, finished products, and any byproducts to prevent diversion or unlawful access to or possession of these substances, (vi) they have an infrastructure reasonably located to dispense cannabis to registered qualified patients statewide or regionally as determined by the Department, (vii) they have the financial ability to maintain operations for the duration of the 2-year approval cycle, including the provision of certified financial statements to the department, (viii) all owners, officers, board members and managers have passed a Level II background screening, inclusive of fingerprinting, and ensure that a medical director is employed to supervise the activities of the MMTC, and (ix) they have a diversity plan and veterans plan accompanied by a contractual process for establishing business relationships with veterans and minority contractors and/or employees.
Upon approval of the application by the Department, the applicant must post a performance bond of up to US$5 million, which may be reduced by meeting certain criteria.
Dispensary Requirements
An MMTC may not dispense more than a 70-day supply of cannabis. The MMTC employee who dispenses the cannabis must enter into the registry his or her name or unique employee identifier. The MMTC must verify that: (i) the qualified patient and the caregiver, if applicable, each has an active registration in the registry and active and valid medical cannabis use registry identification card, (ii) the amount and type of cannabis dispensed matches the physician certification in the registry for the qualified patient, and (iii) the physician certification has not already been filled. An MMTC may not dispense to a qualified patient younger than 18 years of age, only to such patient’s caregiver. An MMTC may not dispense or sell any other type of cannabis, alcohol, or illicit drug-related product, except a cannabis delivery device as specified in the physician certification. An MMTC must, upon dispensing, record in the registry: (i) the date, time, quantity and form of
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cannabis dispensed, (ii) the type of cannabis delivery device dispensed, and (iii) the name and registry identification number of the qualified patient or caregiver to whom the cannabis delivery device was dispensed. An MMTC must ensure that patient records are not visible to anyone other than the patient, caregiver, and MMTC employees.
Security Requirements for Cultivation, Processing and Dispensing Facilities
With respect to security requirements for cultivation, processing and dispensing facilities, an MMTC must maintain a fully operational alarm system that secures all entry points and perimeter windows, and is equipped with motion detectors, pressure switches, and duress, panic and hold-up alarms. The MMTC must also have a 24-hour video surveillance system with specified features. MMTCs must retain video surveillance recordings for at least 45 days, or longer upon the request of law enforcement. An MMTC’s outdoor premises must have sufficient lighting from dusk until dawn.
An MMTC’s dispensing facilities must include a waiting area with sufficient space and seating to accommodate qualified patients and caregivers and at least one private consultation area and such facilities may not display products or dispense cannabis or cannabis delivery devices in the waiting area and may not dispense cannabis from its premises between the hours of 9:00 p.m. and 7:00 a.m. but may perform all other operations and deliver cannabis to qualified patients 24-hours a day.
Transportation and Storage Requirements
Cannabis must be stored in a secured, locked room or a vault. An MMTC must have at least two employees, or two employees of a security agency, on the premises at all times where cultivation, processing, or storing of cannabis occurs. MMTC employees must wear an identification badge and visitors must wear a visitor pass at all times on the premises. An MMTC must report to law enforcement within 24 hours after the MMTC is notified of or becomes aware of the theft, diversion or loss of cannabis. A cannabis transportation manifest must be maintained in any vehicle transporting cannabis or a cannabis delivery device. The manifest must be generated from the MMTC’s seed-to-sale tracking system and must include the: (i) departure date and time, (ii) name, address, and license number of the originating MMTC, (iii) name and address of the recipient, (iv) quantity and form of any cannabis or cannabis delivery device being transported, (v) arrival date and time, (vi) delivery vehicle make and model and license plate number; and (vii) name and signature of the MMTC employees delivering the product. Further, a copy of the transportation manifest must be provided to each individual, MMTC that receives a delivery. MMTCs must retain copies of all cannabis transportation manifests for at least three years. Cannabis and cannabis delivery devices must be locked in a separate compartment or container within the vehicle and employees transporting cannabis or cannabis delivery devices must have their employee identification on them at all times. Lastly, at least two people must be in a vehicle transporting cannabis or cannabis delivery devices, and at least one person must remain in the vehicle while the cannabis or cannabis delivery device is being delivered.
Department Inspections
The Department shall conduct announced or unannounced inspections of MMTCs to determine compliance with the laws and rules. The Department shall inspect an MMTC upon receiving a complaint or notice that the MMTC has dispensed cannabis containing mold, bacteria, or other contaminants that may cause an adverse effect to humans or the environment. The Department shall conduct at least a biennial inspection of each MMTC to evaluate the MMTC’s records, personnel, equipment, security, sanitation practices, and quality assurance practices.
Regulation of Medical Cannabis in Arizona
Copperstate is a licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act, 2010
(the “Act”). In 2010, Arizona voters approved Proposition 203, an initiative which legalized the medial use of cannabis. The Arizona Department of Health Services (“ADHS”) established the Arizona Department of Health Services Medical Marijuana Program (“MMJ Program”), which includes a vertically integrated license, meaning if allocated a Medical Marijuana
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Dispensary Registration Certificate (“Dispensary License”), entities are authorized to dispense and cultivate medical cannabis. Each Dispensary License allows the holding entity to operate one on-site cultivation facility, and one off-site cultivation facility which can be located anywhere within the State of Arizona. An entity holding a Dispensary License is required to file an application to renew with the ADHS on an annual basis, which must also include audited annual financial statements. While a Dispensary License may not be sold, transferred or otherwise conveyed, Dispensary License holders are permitted to contract with third parties to provide various services related to the ongoing operation, maintenance and governance of its dispensary and/or cultivation facility so long as such contracts do not violate the requirements of the Act or the MMJ Program.
Regulatory Framework
Arizona citizens adopted the Arizona Medical
Marijuana
Act (“AMMA”) via citizens’ initiative in November 2010. The AMMA is codified in Arizona Revised Statutes (“ARS”) § 36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (“AZDHS”) as the regulator for the program and authorized AZDHS to promulgate, adopt and enforce regulations for the AMMA. These AZDHS Regulations are embodied in the Arizona Administrative Code (“AAC”) Title 9 Chapter 17 (the “Rules”). ARS § 36-2801(11) defines a “nonprofit medical cannabis dispensary” as not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses cannabis or related supplies and educational materials to cardholders (a “Dispensary”).
Licensing Requirements
In order for an applicant to receive a Dispensary Registration Certificate (a “Certificate”) they must: (i) fill out an application on the form proscribed by AZDHS, (ii) submit the applying entity’s articles of incorporation and by-laws, (iii) submit fingerprints for each principal officer or board member of the applicant for a background check to exclude felonies, (iv) submit a business plan and policies and procedures for inventory control, security, patient education, and patient recordkeeping that are consistent with the AMMA and the Rules to ensure that the Dispensary will operate in compliance and (v) designate an Arizona licensed physician as the Medical Director for the Dispensary. Certificates are renewed annually so long as the Dispensary is in good standing with AZDHS and pays the renewal fee and submits an independent third party financial audit.
Approval to Operate
Once an applicant has been issued a Certificate, they are allowed to establish one physical retail dispensary location, one cultivation location which is co-located at the dispensary’s retail site (if allowed by local zoning) and one additional off-site cultivation location. None of these sites can be operational, however, until the Dispensary receives an approval to operate from AZDHS for the applicable site. This approval to operate requires: (i) an application on the AZDHS form, (ii) demonstration of compliance with local zoning regulations, (iii) a site plan and floor plan for the applicable property, and (iv) an in-person inspection by AZDHS of the applicable location to ensure compliance with the Rules and consistency with the Dispensary’s applicable policies and procedures.
Security Requirements for Dispensary Facilities
Any Dispensary facility (both retail and cultivation) must abide by the following security requirements: (i) ensure that access to the facilities is limited to authorized Dispensary Agents who are in possession of a Dispensary Agent card, (ii) equip the facility with: (a) intrusion alarms and surveillance equipment, (b) exterior and interior lighting to facilitate surveillance, (c) at least one 19-inch monitor for surveillance and a video capable of printing a high resolution still image, (d) high resolution video cameras at all points of sale, entrances, exits, and limited access areas, both in and around the building, (e) 30 days’ video storage, (f) failure notifications and battery backups for the security system and (g) panic buttons inside each building.
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Transportation Requirements
Dispensaries may transport medical cannabis between their own sites or between their sites and another Dispensary’s sites and must comply with the following Rules: (i) prior to transportation, the Dispensary’s agent must complete a trip plan showing: (a) the name of the dispensary agent in charge of transporting the cannabis, (b) the date and start time of the trip, (c) a description of the cannabis, cannabis plants, or cannabis paraphernalia being transported; and (d) the anticipated route of transportation, (ii) during transport the Dispensary Agent shall: (a) carry a copy of the trip plan at all times, (b) use a vehicle with no medical cannabis identification, (c) carry a cell phone, and (d) ensure that no cannabis is visible, and (iii) Dispensaries must maintain trip plan records.
AZDHS Inspections and Enforcement
AZDHS may inspect a facility at any time upon five days’ notice to the Dispensary. However, if someone has alleged that the Dispensary is not in compliance with the AMMA or the Rules, AZDHS may conduct an unannounced inspection. AZDHS will provide written notice to the Dispensary of any violations found during any inspection and the Dispensary then has 20 working days to take corrective action and notify AZDHS.
AZDHS must revoke a Certificate if a Dispensary: (i) operates before obtaining approval to operate a dispensary from the Department, (ii) dispenses, delivers, or otherwise transfers cannabis to an entity other than another dispensary with a valid dispensary registration certificate issued by the Department, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card, (iii) acquires usable cannabis or mature cannabis plants from any entity other than another dispensary with a valid dispensary registration certificate issued by the Department, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card, or (iv) if a principal officer or board member has been convicted of an excluded felony offense.
Furthermore, AZDHS may revoke a Certificate if a Dispensary does not: (i) comply with the requirements of the AMMA or the Rules, (ii) implement the policies and procedures or comply with the statements provided to the Department with the dispensary’s application.
Compliance of U.S. Investments
Liberty is in compliance with applicable licensing requirements and the regulatory framework enacted by the State of Florida, including but not limited to the Financial Crimes Enforcement Network memorandum issued by the Treasury Department in February of 2014 (“FinCEN Memo”). The FinCEN Memo provides instructions to banks seeking to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Liberty maintains a banking relationship in Florida, with a certain bank that is in full compliance with the Treasury Department’s federal rules and regulations as they pertain to a state approved cannabis business. More specifically, and as further detailed above, Liberty is licensed to operate as a “medical cannabis treatment center” under applicable Florida law pursuant to the terms of the Liberty License issued by the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. The Liberty License grants Liberty the authority to possess, cultivate, process, dispense and sell medical cannabis in the State of Florida. Liberty has not experienced any material non-compliance nor has been subject to any notices of violation by the Florida Department of Health, Office of Medical Marijuana Use.
Copperstate is in compliance with applicable licensing requirements and the regulatory framework enacted by the State of Arizona. As further detailed above, Copperstate is a licensed producer and seller of medical cannabis under the Act and is compliant with the rules, requirements and reporting standards of the MMJ Program with respect to the ongoing operation and governance of its dispensary/cultivation facility. In addition, Copperstate maintains a banking relationship in Arizona with a certain bank that is in full compliance with the Treasury Department’s federal rules and regulations as they pertain to a state approved cannabis business. Copperstate has not experienced any material non-compliance nor has been subject to any notices of violation by the ADHS.
21
The Company understands that each of Liberty and Copperstate has implemented measures designed to ensure compliance with applicable U.S. state laws on an ongoing basis, including:
·
weekly correspondence and updates with advisors;
·
development of standard operating procedures;
·
appropriate employee training for all standard operating procedures; and
·
subscription to monitoring programs with large banks to monitor and ensure compliance with the FinCEN Memo.
The Company confirms that the U.S. cannabis-related activities of each of Liberty and Copperstate and to the best of the Company’s knowledge, each Non-Material Investee are conducted in a manner consistent with the U.S. federal enforcement priorities articulated in the currently rescinded Cole Memorandum and to the best of the Company’s knowledge each of the Non-Material Investees are in compliance with licensing requirements and applicable state regulatory frameworks.
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties. The economic, industry and risk factors discussed in our Annual Report, each in respect of the year ended May 31, 2017 and in our Short Form Prospectus, dated December 22, November 1, 2017 and February 17, 2017, remain substantially unchanged in respect of the three months and six months ended November 30, 2017. The more significant of which are reported below.
Risks Related to the United States
The Company maintains multiple investments in U.S.-based entities who participate at multiple levels in the U.S. marijuana industry. The Board has undertaken to consider, evaluate, assess and provide additional disclosure on any risks there may be to investors as a result of certain investments in entities involved with medical marijuana in the United States. Outlined below is a summary of certain risks that the Board has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
In light of recent announcements, the TSX may initiate delisting reviews for companies with U.S. assets more expeditiously than it would have previously, in the absence of such announcements.
On October 16, 2017, the TSX provided clarity regarding the application of the Requirements to applicants and TSX-listed issuers in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that amount other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. In order to comply with the Requirements, the Company may be required to effect one or more reorganizations, restructurings, transactions or series of transactions, which may include a divesture of U.S. cannabis assets.
While marijuana is legal in many US state jurisdictions, it continues to be a controlled substance under the United States federal Controlled Substances Act
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical marijuana under the
Access to Cannabis for Medical Purposes Regulations,
investors are cautioned that in the United States, marijuana is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 29 states, plus the District of Columbia, Puerto Rico and Guam that have legalized marijuana in some form, including Arizona and Florida as noted above in connection with the investments in both Copperstate Farms LLC, and Copperstate Farms Investors, LLC
22
(together referred to as “Copperstate”) and Liberty. Notwithstanding the permissive regulatory environment of medical marijuana at the state level, marijuana continues to be categorized as a Schedule I controlled substance under the
Controlled Substances Act
(the “CSA”) in the United States and as such, violates federal law in the United States.
The United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for prosecution of marijuana offenses of individuals who are in compliance with state medical marijuana laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business—even those that have fully complied with state law—could be prosecuted for violations of federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical marijuana licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of marijuana laws may be subject to change or may not proceed as previously outlined
As a result of the conflicting views between state legislatures and the federal government regarding marijuana, investments in marijuana businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of marijuana as a controlled substance at the federal level in the United States, several US states have enacted laws relating to marijuana for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of marijuana offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard.
On February 14, 2014, in conjunction with DOJ policies set forth in the Ogden-Cole Memos, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks clarifying Bank Secrecy Act expectations for financial institutions seeking to provide services to cannabis-related business (“FinCEN Guidance”). While the FinCEN Guidance made clear that it did not alter in any way DOJ’s authority to enforce federal law, it placed enhanced due diligence obligations on banks transacting with cannabis-related businesses, and offered a pathway for banks to provide financial services to such businesses.
In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, however, he disagreed that it had been implemented effectively and on January 4, 2017, Attorney General Jeff Sessions issued a memorandum (the “Sessions Memo”) that rescinded the Cole Memorandum. The Sessions Memo rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to marijuana enforcement, including the First and Second Cole Memos, on the basis that they are unnecessary, given the well-established principles governing federal prosecution that already in place. Those principals are included in chapter 9.27.000 of the U.S. Attorneys’ Manual and require federal prosecutors deciding which
23
cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
The result of the rescission of the Cole Memorandum is that federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute marijuana activities despite the existence of state-level laws that may be inconsistent with federal prohibitions; however, discretion is still given to the federal prosecutor to weigh all relevant considerations of the crime, including the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. No direction was given to federal prosecutors as to the priority they should ascribe to such activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, Attorney General Jeff Sessions’s statement in relation to the rescission of the Cole Memorandum (the “Sessions Memorandum”) did not discuss the treatment of medical cannabis by federal prosecutors. As it pertains to the FinCen guidance, while it was based upon the Cole Memorandum which was recently rescinded, it has not been terminated or rescinded by the United States Treasury Department to date, and thus remains in force. The Treasury Department has not released any additional guidance since the Sessions’s Memorandum was released, and until additional guidance is provided it is unknown how federal banking regulators will react to the Session’s Memorandum and the status of the FinCen Guidance.
Medical cannabis is currently protected against enforcement by enacted legislation from U.S. Congress in the form of the Rohrabacher-Blumenauer Amendment (as defined below) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical marijuana laws enacted at the state level, and said amendment remains in force today via the continuing resolutions that have been passed. Additionally, the Rohrabacher-Blumenauer language is presently included in the Senate version of the Department of Justice Appropriations bill that will be voted upon by Congress in Jnauary 2018. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law, however medical operators are still entitled to the protections of the Rohrabacher-Farr legislation which has been utilized by medical operators to enjoin attempted prosecutions. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, and also divert the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
The Board has informed its decision to authorize and approve the investments in Copperstate and Liberty based on the guidelines outlined in the Cole Memorandum and despite the recession of the Cole Memorandum, believes that the risk of federal prosecution and enforcement is currently unlikely. However, unless and protections for medical cannabis are memorialized in federal legislation, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the
Currency and Foreign Transactions Reporting Act of 1970
(commonly known as the
Bank Secrecy Act
), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada)
, as amended, and the rules and regulations thereunder, the
Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
24
In February 2014, the FinCen Memo provided instructions to banks seeking to provide services to marijuana-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to marijuana-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on marijuana-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. However, the Sessions Memo rescinding the Cole Memorandums does not have an impact on the FinCen Memo and as of today’s date, the FinCen Memo has not been withdrawn or rescinded.
In the event that any of the Company’s investments, or any proceeds thereof, or any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, affect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the investments in Copperstate or Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
As of the date hereof, following discussions with its legal counsel, the Company is not aware of any violation of the above noted statutes as a result of its investments in Copperstate and Liberty and has no reason to believe that such investments may be constituted as, whether directly or indirectly, money laundering or proceeds of crime. However, any future exposure to money laundering or proceeds of crime could subject the Company to financial losses, business disruption and damage to the Company’s reputation. In addition, there is a risk that the Company may be subject to investigation and sanctions by a regulator and/or to civil and criminal liability if the Company has failed to comply with the Company’s legal obligations relating to the reporting of money laundering or other offences.
The Company’s investments in the United States may be subject to heightened scrutiny
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction, in addition to those described herein.
Government policy changes or public opinion may also result in a significant influence over the regulation of the marijuana industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical marijuana in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical marijuana, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by Aphria or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies.
25
Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical marijuana, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production
Reliance on a Single Facility
To date, Aphria’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party mail and courier services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation and/or rising costs associated with these services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential 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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall
26
and any legal proceedings that might arise in connection with the recall. Aphria 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 management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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.
Reliance on the Licence
Aphria’s ability to grow, store and sell medical marijuana in Canada is dependent on maintaining its licence with Health Canada. Failure to comply with the requirements of the licence or any failure to maintain its licence would have a material adverse impact on the business, financial condition and operating results of Aphria. Although Aphria believes it will meet the requirements of the ACMPR for extension of the licence, there can be no guarantee that Health Canada will extend or renew the licence or, if it is extended or renewed, that it will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the licence or should it renew the licence on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected.
27
Reliance on Veterans Affairs Canada (“VAC”) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a 3 gram per day limit, subject to certain exceptions, and a $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed elsewhere in this MD&A, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, if and when adult recreational use of cannabis is implemented by the Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult recreational use of cannabis, the Company may be materially adversely affected.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2017, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the three months ended November 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
SUBSEQUENT EVENTS
Subsequent to quarter-end, TS BrandCo Holdings Inc. announced that it merged with DOJA Cannabis Company Ltd. and was to rename the reporting issuer Hiku Brands Company Ltd. The Company contributed $10,000 as an equity investment in Hiku Brand Company Ltd. on the same date.
Subsequent to quarter-end, the Company entered a purchase and sale agreement to acquire land, buildings and greenhouses at 225 and 231 Talbot Street West, Leamington, Ontario for $5,250. The Company anticipates the transaction closing before the end of the next quarter.
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Subsequent to quarter-end, the Company closed a bought deal and issued 8,363,651 common shares for gross proceeds of $115,000.
Subsequent to quarter-end, the Company entered a strategic relationship with Double Diamond Farms to form a corporation, internally identified as GrowCo. GrowCo is to be capitalized with $10,200 of seed capital from Aphria and $9,800 of seed capital from Double Diamond Farms. GrowCo is to enter into a purchase and sale agreement with Double Diamond Farms to acquire 100 acres of land, including almost 32 acres of greenhouses. GrowCo is expected to require $80,000 to $100,000 of capital to complete the purchase and sale agreement and the necessary retrofits of the greenhouses to legally grow cannabis. GrowCo anticipates securing bank financing for a portion of the capital required. Any remaining capital needs will be loaned by Aphria to GrowCo.
Subsequent to quarter-end, the Company funded an additional $500 of its $2,000 commitment to Green Acre Capital Fund. Cumulative contributions to Green Acre Capital Fund is $1,200.
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to process cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical marijuana and marijuana-related offenses in the United States.
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Exhibit 99.59
SEDAR FILING VERSION
APHRIA INC.
as the Purchaser
and
NUUVERA INC.
as the Company
ARRANGEMENT AGREEMENT
January 28, 2018
TABLE OF CONTENTS
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ARTICLE 1
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INTERPRETATION
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Section 1.1
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Defined Terms
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1
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Section 1.2
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Certain Rules of Interpretation
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16
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Section 1.3
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Schedules
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17
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ARTICLE 2
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THE ARRANGEMENT
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Section 2.1
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Arrangement
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Section 2.2
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Interim Order
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18
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Section 2.3
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The Company Meeting
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19
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Section 2.4
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The Company Circular
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21
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Section 2.5
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Final Order
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22
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Section 2.6
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Court Proceedings
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Section 2.7
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Options, Warrants and Other Securities
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Section 2.8
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Articles of Arrangement and Effective Date
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Section 2.9
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Payment of Consideration
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Section 2.10
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Withholding Taxes
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Section 2.11
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U.S. Securities Law Matters
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Section 2.12
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Adjustment of Consideration
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ARTICLE 3
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REPRESENTATIONS AND WARRANTIES
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Section 3.1
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Representations and Warranties of the Company
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Section 3.2
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Representations and Warranties of the Purchaser
|
27
|
|
|
|
|
|
ARTICLE 4
|
|
COVENANTS
|
|
|
|
|
|
Section 4.1
|
Conduct of Business of the Company
|
27
|
|
Section 4.2
|
Conduct of Business of the Purchaser
|
31
|
|
Section 4.3
|
Covenants Regarding the Arrangement
|
32
|
|
Section 4.4
|
Regulatory Approvals
|
34
|
|
Section 4.5
|
Access to Information; Confidentiality
|
35
|
|
Section 4.6
|
Pre-Acquisition Reorganization
|
36
|
|
Section 4.7
|
Public Communications
|
38
|
|
Section 4.8
|
Notice and Cure Provisions
|
39
|
|
Section 4.9
|
Insurance and Indemnification
|
40
|
|
Section 4.10
|
TSX-V Delisting
|
40
|
|
Section 4.11
|
Board of Directors
|
40
|
i
|
ARTICLE 5
|
|
ADDITIONAL COVENANTS REGARDING NON-SOLICITATION
|
|
|
|
|
|
Section 5.1
|
Non-Solicitation
|
41
|
|
Section 5.2
|
Notification of Acquisition Proposals
|
42
|
|
Section 5.3
|
Responding to an Acquisition Proposal
|
43
|
|
Section 5.4
|
Right to Match
|
44
|
|
Section 5.5
|
Breach by Subsidiaries and Representatives
|
46
|
|
|
|
|
|
ARTICLE 6
|
|
CONDITIONS
|
|
|
|
|
|
Section 6.1
|
Mutual Conditions Precedent
|
46
|
|
Section 6.2
|
Additional Conditions Precedent to the Obligations of the Purchaser
|
47
|
|
Section 6.3
|
Additional Conditions Precedent to the Obligations of the Company
|
48
|
|
Section 6.4
|
Satisfaction of Conditions
|
49
|
|
|
|
|
|
ARTICLE 7
|
|
TERM AND TERMINATION
|
|
|
|
|
|
Section 7.1
|
Term
|
49
|
|
Section 7.2
|
Termination
|
49
|
|
Section 7.3
|
Effect of Termination/Survival
|
51
|
|
|
|
|
|
ARTICLE 8
|
|
GENERAL PROVISIONS
|
|
|
|
|
|
Section 8.1
|
Amendments
|
52
|
|
Section 8.2
|
Termination Fees
|
52
|
|
Section 8.3
|
Expenses
|
53
|
|
Section 8.4
|
Notices
|
54
|
|
Section 8.5
|
Time of the Essence
|
55
|
|
Section 8.6
|
Injunctive Relief
|
55
|
|
Section 8.7
|
Third Party Beneficiaries
|
56
|
|
Section 8.8
|
Waiver
|
56
|
|
Section 8.9
|
Entire Agreement
|
56
|
|
Section 8.10
|
Successors and Assigns
|
56
|
|
Section 8.11
|
Severability
|
57
|
|
Section 8.12
|
Governing Law
|
57
|
|
Section 8.13
|
Rules of Construction
|
57
|
|
Section 8.14
|
No Liability
|
57
|
|
Section 8.15
|
Language
|
57
|
|
Section 8.16
|
Counterparts
|
57
|
|
|
|
|
|
SCHEDULES
|
|
|
|
|
Schedule A
|
PLAN OF ARRANGEMENT
|
|
|
Schedule B
|
ARRANGEMENT RESOLUTION
|
|
ii
|
Schedule C
|
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
|
|
|
Schedule D
|
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
|
|
|
Schedule E
|
FORM OF SUPPORT AND VOTING AGREEMENT
|
|
iii
ARRANGEMENT AGREEMENT
THIS AGREEMENT
is made as of the 28
th
day of January, 2018,
BETWEEN:
APHRIA INC.
, a corporation continued under the laws of the Province of Ontario
(the “
Purchaser
”)
- and -
NUUVERA INC.
, a corporation incorporated under the laws of the Province of Ontario;
(the “
Company
”).
NOW THEREFORE,
in consideration of the covenants and agreements herein contained, the Parties agree as follows:
ARTICLE 1
INTERPRETATION
Section 1.1
Defined Terms.
As used in this Agreement, the following terms have the following meanings:
“
ACMPR
” means the
Access to Cannabis for Medical Purposes Regulations
(Canada) issued pursuant to the
Controlled Drugs and Substances Act
(Canada).
“
Acquisition Proposal
” means, other than the transactions contemplated by this Agreement and other than any transaction involving only the Company and/or one or more of its wholly-owned Subsidiaries, any offer, proposal or inquiry (written or oral) from any Person or group of Persons other than the Purchaser (or any affiliate of the Purchaser) after the date of this Agreement relating to: (i) any sale, disposition, alliance or joint venture (or any lease, long-term supply agreement or other arrangement having the same economic effect as the foregoing), direct or indirect, in a single transaction or a series of related transactions, of assets representing 20% or more of the consolidated assets or contributing 20% or more of the consolidated revenue of the Company and its Subsidiaries or of 20% or more of the voting or equity securities of the Company or any of its Subsidiaries (or rights or interests in such voting or equity securities); (ii) any direct or indirect take-over bid, exchange offer, treasury issuance or other transaction that, if consummated, would result in such Person or group of Persons beneficially owning 20% or more of any class of
voting, equity or other securities of the Company or any of its Subsidiaries (including securities convertible or exercisable or exchangeable for voting, equity or other securities of the Company or any of its Subsidiaries); (iii) any plan of arrangement, merger, amalgamation, consolidation, share exchange, business combination, reorganization, recapitalization, liquidation, dissolution, winding up or exclusive license involving the Company or any of its Subsidiaries; or (iv) any other similar transaction or series of transactions involving the Company or any of its Subsidiaries.
“
affiliate
” has the meaning specified in National Instrument 45-106 —
Prospectus and Registration Exemptions
.
“Agreement”
means this arrangement agreement.
“
Arrangement
” means an arrangement under Section 182(1) of the OBCA on the terms and subject to the conditions set out in the Plan of Arrangement, subject to any amendments or variations to the Plan of Arrangement made in accordance with the terms of this Agreement, the Plan of Arrangement or made at the direction of the Court in the Final Order with the prior written consent of the Company and the Purchaser, each acting reasonably.
“
Arrangement Issued Securities
” means all securities to be issued pursuant to the Arrangement, including the Consideration Shares and the Replacement Options.
“
Arrangement Resolution
” means the special resolution approving the Plan of Arrangement to be considered at the Company Meeting, substantially in the form of Schedule B.
“
Articles of Arrangement
” means the articles of arrangement of the Company in respect of the Arrangement required by the OBCA to be sent to the Director after the Final Order is made, which shall include the Plan of Arrangement and otherwise be in a form and content satisfactory to the Company and the Purchaser, each acting reasonably.
“
associate
” has the meaning specified in the
Securities Act
(Ontario).
“
Authorization
” means, with respect to any Person, any order, permit, approval, consent, waiver, licence or similar authorization of any Governmental Entity having jurisdiction over the Person, and includes the Company License and the Purchaser License.
“
Board
” means the board of directors of the Company as constituted from time to time.
“
Board Recommendation
” has the meaning specified in Section 2.4(2).
“Business Day”
means any day of the year, other than a Saturday, Sunday or any day on which major banks are generally closed for business in Toronto, Ontario.
2
“
cannabis
” has the meaning given to such term in the ACMPR.
“
Cash Consideration
” means $1.00 per Company Share.
“
Certificate of Arrangement
” means the certificate of arrangement to be issued by the Director pursuant to subsection 183(2) of the OBCA in respect of the Articles of Arrangement.
“
Change in Recommendation
” has the meaning specified in Section 7.2(1)(d)(ii).
“
Collective Agreement
” means a collective bargaining agreement or union agreement.
“
Common Shares
” means the common shares in the capital of the Company.
“
Company
” means Nuuvera Inc.
“
Company Circular
” means the notice of the Company Meeting and accompanying management information circular, including all schedules, appendices and exhibits to, and information incorporated by reference in, such management information circular, to be sent to the Company Common Shareholders in connection with the Company Meeting, as amended, supplemented or otherwise modified from time to time in accordance with the terms of this Agreement.
“Company Common Shareholders”
means the registered or beneficial holders of the Common Shares, as the context requires.
“
Company Data Room
” means the material contained in the virtual Company Data Room established by the Company as at 5:00 p.m. on January 27, 2018, the index of documents of which is appended to the Company Disclosure Letter.
“
Company Disclosure Letter
” means the disclosure letter dated the date of this Agreement and delivered by the Company to the Purchaser with this Agreement.
“
Company Employees
” means the employees of the Company and its Subsidiaries.
“
Company Filings
” means all documents publicly filed under the profile of the Company on the System for Electronic Document Analysis Retrieval (SEDAR) since December 14, 2017.
“
Company License
” means the license issued by Health Canada to the Company and its Subsidiaries pursuant to Section 9.2 of the Narcotic Control Regulations to the
Controlled Drugs and Substances Act
(Canada).
“
Company Locked-up Shareholders
” means each of those persons set out in Section 1.1 of the Company Disclosure Letter and all of the directors and senior officers of the Company.
3
“
Company Material Adverse Effect
” means any change, event, occurrence, effect, state of facts or circumstance that, individually or in the aggregate with other such changes, events, occurrences, effects, state of facts or circumstances is or could reasonably be expected to be material and adverse to the current and future business, operations, results of operations, assets, properties, capitalization, condition (financial or otherwise) or liabilities (contingent or otherwise) of the Company and its Subsidiaries, taken as a whole, except any such change, event, occurrence, effect, state of facts or circumstance resulting from:
(a)
any change affecting the cannabis industry as a whole;
(b)
any change in global, national or regional political conditions (including the outbreak or escalation of war or acts of terrorism) or in general economic, business, regulatory, political or market conditions or in national or global financial or capital markets;
(c)
any adoption, proposal, implementation or change in Law or any interpretation of Law by any Governmental Entity;
(d)
any change in GAAP applicable to the Company;
(e)
any natural disaster;
(f)
the failure by the Company to meet any internal, third party or public projections, forecasts, guidance or estimates of revenues or earnings (it being understood that the cause underlying any such failure may be taken into account in determining whether a Company Material Adverse Effect has occurred);
(g)
the announcement of this Agreement, including any loss or threatened loss of, or adverse change or threatened adverse change in, the relationship of the Company or its Subsidiaries with the Company’s employees, customers, suppliers, partners and other Persons with which the Company or any of its Subsidiaries has business relations;
(h)
any action taken (or omitted to be taken) by the Company that is consented to by, the Purchaser expressly in writing;
(i)
any matter which has been disclosed by the Company in the Company Disclosure Letter;
(j)
any actions taken (or omitted to be taken) upon the written request of the Purchaser; or
(k)
any change in the market price or trading volume of any securities of the Company (it being understood that the causes underlying such change in market price may be taken into account in determining whether a Company Material Adverse Effect has occurred),
4
provided, however, that with respect to clauses (a) through to and including (e), such matter does not have a materially disproportionate effect on the Company and its Subsidiaries, taken as a whole, relative to other comparable companies and entities operating in the industry in which the Company and/or its Subsidiaries operate, and unless expressly provided in any particular section of this Agreement, references in certain sections of this Agreement to dollar amounts are not intended to be, and shall not be deemed to be, illustrative or interpretive for purposes of determining whether a “Company Material Adverse Effect” has occurred.
“
Company Meeting
” means the special meeting of Company Common Shareholders, including any adjournment or postponement of such special meeting in accordance with the terms of this Agreement, to be called and held in accordance with the Interim Order to consider the Arrangement Resolution.
“
Company Optionholders
” means the holders of Company Options.
“Company Options”
means the outstanding options to purchase Common Shares issued pursuant to the Company’s stock option plan, effective as of December 29, 2017, as listed in section (f) of the Company Disclosure Letter.
“
Company Securityholders
” means, collectively, the Company Common Shareholders, the Company Optionholders and the Company Warrantholders.
“
Company Warrantholders
” means the registered or beneficial holders of Company Warrants.
“
Company Warrants
” means the warrants of the Company, each of which will entitle the holder thereof to acquire one Common Share at a price of $7.20 per Common Share, to be issued pursuant to the Offering and as reflected in the Company Filings.
“
Commissioner of Competition
” means the Commissioner of Competition appointed pursuant to Subsection 7(1) of the
Competition Act
or his or her designee.
“
Competition Act
” means the
Competition Act
(Canada).
“
Competition Act Clearance
” means:
(i)
the Purchaser shall have received an advance ruling certificate issued by the Commissioner of Competition under Subsection 102(1) of the Competition Act in respect of the transactions contemplated by this Agreement; or
(ii)
both of the following shall have occurred:
(A)
the relevant waiting period under Section 123 of the Competition Act in respect of the transactions contemplated
5
by this Agreement, including any extension thereof, shall have expired, been waived or been terminated, and
(B)
the Purchaser shall have received a No Action Letter.
“
Confidentiality Agreement
” means the confidentiality and non-disclosure agreement between the Company and the Purchaser dated January 26, 2018.
“
Consideration
” means the consideration to be received by non-dissenting Company Common Shareholders (other than the Purchaser) pursuant to the Plan of Arrangement in respect of each Common Share that is issued and outstanding immediately prior to the Effective Time, consisting of the Cash Consideration and the Share Consideration.
“
Consideration Shares
” means the Purchaser Shares to be issued in exchange for Common Shares pursuant to the Arrangement.
“
Constating Documents
” means articles of incorporation, amalgamation, or continuation, as applicable, by-laws and all amendments to such articles or by-laws.
“Contract”
means any legally binding agreement, commitment, engagement, contract, franchise, licence, obligation or undertaking (written or oral) to which a Party or any of its respective Subsidiaries is a party or by which it or any of its respective Subsidiaries is bound or affected or to which any of their respective properties or assets is subject.
“
Court
” means the Ontario Superior Court of Justice (Commercial List).
“
Depositary
” means TSX Trust Company, or any other depositary or trust company, bank or financial institution as the Purchaser may appoint to act as depositary with the approval of the Company, acting reasonably, for the purpose of, among other things, exchanging certificates representing Common Shares for Consideration Shares in connection with the Arrangement.
“
Director
” means the Director appointed pursuant to Section 278 of the OBCA.
“
Dissent Rights
” means the rights of dissent in respect of the Arrangement described in the Plan of Arrangement.
“
Effective Date
” means the date shown on the Certificate of Arrangement giving effect to the Arrangement.
“
Effective Time
” means 12:01 a.m. on the Effective Date, or such other time as the Parties agree to in writing before the Effective Date.
“Employee Plans”
means all health, welfare, supplemental unemployment benefit, change of control, bonus, profit sharing, option, insurance, compensation, incentive, incentive compensation, deferred compensation, share purchase, share
6
compensation, disability, pension, vacation, severance or termination pay, retirement or retirement savings plans, or other employee benefit plans, policies, trusts, funds, agreements, or arrangements for the benefit of employees, former employees, directors or former directors of a Party or any of its subsidiaries, which are maintained by or binding upon such Party or any of its subsidiaries or in respect of which such Party or any of its subsidiaries has an actual or contingent liability excluding all obligations for severance and termination pursuant to a statute.
“
Environmental Laws
” means all Laws and agreements with Governmental Entities and all other statutory requirements relating to public health or the protection of the environment and all Authorizations issued pursuant to such Laws, agreements or other statutory requirements.
“
Exclusivity Agreement
” means the letter agreement dated January 25, 2018 between the Company and the Purchaser.
“
Fairness Opinion
” means an opinion of Canaccord Genuity Corp. to the effect that, as of the date hereof, the Consideration to be received by the Company Common Shareholders (other than the Purchaser and its affiliates) is fair, from a financial point of view, to such holders.
“
Final Order
” means the final order of the Court in a form acceptable to the Company and the Purchaser, each acting reasonably, approving the Arrangement, as such order may be amended by the Court (with the consent of both the Company and the Purchaser, each acting reasonably) at any time prior to the Effective Date or, if appealed, then, unless such appeal is withdrawn or denied, as affirmed or as amended (provided that any such amendment is acceptable to both the Company and the Purchaser, each acting reasonably) on appeal.
“
GAAP
” means generally accepted accounting principles as set-out in the
CPA Canada Handbook — Accounting
for an entity that prepares its financial statements in accordance with International Financial Reporting Standards, at the relevant time, applied on a consistent basis.
“Governmental Entity”
means (i) any international, multinational, national, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral body, commission, commissioner, board, bureau, ministry, agency or instrumentality, domestic or foreign, (ii) any subdivision or authority of any of the above, (iii) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing or (iv) any stock exchange.
“Intellectual Property”
means domestic and foreign: (i) patents, applications for patents and reissues, divisions, continuations, renewals, extensions and continuations-in-part of patents or patent applications; (ii) proprietary and non-public business information, including inventions (whether patentable or not), invention disclosures, improvements, discoveries, trade secrets, confidential information, know-how, methods, processes, designs, technology, technical data,
7
schematics, formulae and customer lists, and documentation relating to any of the foregoing; (iii) copyrights, copyright registrations and applications for copyright registration; (iv) mask works, mask work registrations and applications for mask work registrations; (v) designs, design registrations, design registration applications and integrated circuit topographies; (vi) trade names, business names, corporate names, domain names, website names and world wide web addresses, common law trade-marks, trade-mark registrations, trade mark applications, trade dress and logos, and the goodwill associated with any of the foregoing; (vii) Software; and (viii) any other intellectual property and industrial property.
“
Interim Order
” means the interim order of the Court, providing for, among other things, the calling and holding of the Company Meeting, as such order may be amended by the Court with the consent of the Company and the Purchaser, each acting reasonably.
“Key Regulatory Approvals”
means (i) the Competition Act Clearance, unless the Purchaser determines that the transactions contemplated by this Agreement are not subject to Part IX of the Competition Act; and (ii) the Stock Exchange Approval.
“
Law
” means, with respect to any Person, any and all applicable law (statutory, common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement, whether domestic or foreign, enacted, adopted, promulgated or applied by a Governmental Entity that is binding upon or applicable to such Person or its business, undertaking, property or securities, and to the extent that they have the force of law, policies, guidelines, notices and protocols of any Governmental Entity, as amended.
“
Lien
” means any mortgage, charge, pledge, hypothec, security interest, prior claim, encroachments, option, right of first refusal or first offer, occupancy right, covenant, assignment, lien (statutory or otherwise), defect of title, or restriction or adverse right or claim, or other third party interest or encumbrance of any kind, in each case, whether contingent or absolute.
“
Loan Amount
” has the meaning ascribed thereto in the Plan of Arrangement.
“
Matching Period”
has the meaning specified in Section 5.4(1)(e).
“
Material Contract
” means any Contract:
(a)
that if terminated or modified or if it ceased to be in effect, would reasonably be expected to have a Company Material Adverse Effect;
(b)
relating directly or indirectly to the guarantee of any material liabilities or material obligations or to indebtedness for borrowed money;
(c)
restricting the incurrence of indebtedness by the Company or any of its Subsidiaries (including by requiring the granting of an equal and rateable
8
Lien) or the incurrence of any Liens on any properties or assets of the Company or any of its Subsidiaries, or restricting the payment of dividends by the Company in each case, in any material respect;
(d)
under which a Person made payments to the Company and its Subsidiaries in excess of $500,000 during the calendar year ended December 31, 2017;
(e)
under which the Company and/or its Subsidiaries made payments to any Person in excess of $500,000 during the calendar year ended December 31, 2017;
(f)
under which the Company or any of its Subsidiaries is obligated to make or expects to receive payments in excess of $500,000 over the remaining term;
(g)
providing for the establishment, investment in, organization or formation of any joint venture, limited liability company, partnership or similar entity
(h)
that creates an exclusive dealing arrangement or right of first offer or refusal that materially limits the Company’s business;
(i)
with a Governmental Entity for a value in excess of $100,000;
(j)
that contains any material exclusivity or non-solicitation obligations of the Company or any of its Subsidiaries;
(k)
providing for severance or change in control payments;
(l)
providing for the purchase, sale or exchange of, or option to purchase, sell or exchange, any property or asset where the purchase or sale price or agreed value or fair market value of such property or asset exceeds $1 million;
(m)
that limits or restricts in any material respect (A) the ability of the Company or any Subsidiary to engage in any line of business or carry on business in any geographic area, or (B) the scope of Persons to whom the Company or any of its Subsidiaries may sell products or deliver services; or
(n)
that is otherwise material to the Company and its Subsidiaries, taken as a whole.
“
MD&A
” means management’s discussion and analysis.
“
MI 61-101
” means Multilateral Instrument 61-101
Protection of Minority Shareholders in Special Transactions
.
“Misrepresentation”
means an untrue statement of a material fact or an omission to state a material fact required or necessary to make the statements contained therein not misleading in light of the circumstances in which they are made.
9
“
No Action Letter
” means written confirmation from the Commissioner of Competition that he or she does not, at that time, intend to make an application under Section 92 of the
Competition Act
in respect of the transactions contemplated by this Agreement.
“
OBCA
” means the
Business Corporations Act
(Ontario).
“
Offering
” means the proposed “bought deal” prospectus offering of units of the Company as announced on January 24, 2018.
“
officer
” has the meaning specified in the
Securities Act
(Ontario).
“Ordinary Course”
means, with respect to an action taken by a Party, that such action is consistent with the past practices of such Party and is taken in the ordinary course of the normal day-to-day operations of the business of such Party.
“
Outside Date
” means May 31, 2018 or such later date as may be agreed to in writing by the Parties, subject to: (i) the right of any Party to extend the Outside Date for up to an additional 45 days if the condition in Section 6.1(3) has not been satisfied; and (ii) the right of the Purchaser to extend the Outside Date for up to an additional 45 days if the condition in Section 6.2(4) has not been satisfied; provided that (i) notwithstanding the foregoing, no Party shall be permitted to extend the Outside Date if the failure of the applicable condition to be satisfied is primarily the result of such Party’s failure to comply with its covenants herein and (ii) in no event shall the Outside Date be extended by more than 45 days in the aggregate without the written consent of both Parties.
“Parties”
means the Company and the Purchaser and “
Party
” means any one of them.
“Permitted Liens”
means, in respect of a Party or any of its Subsidiaries, any one or more of the following:
(a)
Liens for Taxes which are not yet due or delinquent or that are being properly contested in good faith by appropriate proceedings and in respect of which reserves have been provided in the most recent publicly filed financial statements;
(b)
inchoate or statutory Liens of contractors, subcontractors, mechanics, workers, suppliers, materialmen, carriers and others in respect of the construction, maintenance, repair or operation of assets, provided that such Liens are related to obligations not due or delinquent, are not registered against title to any assets and in respect of which adequate holdbacks are being maintained as required by applicable Law;
(c)
the right reserved to or vested in any Governmental Entity by any statutory provision or by the terms of any lease, licence, franchise, grant or permit of a Party or any of its Subsidiaries, to terminate any such lease, licence, franchise,
10
grant or permit, or to require annual or other payments as a condition of their continuance;
(d)
easements, servitudes, restrictions, restrictive covenants, rights of way, licenses, permits and other similar rights in real or immovable property that in each case do not materially detract from the value or materially interfere with the use of the real or immovable property subject thereto;
(e)
zoning and building by-laws and ordinances, regulations made by public authorities that in each case do not materially detract from the value or materially interfere with the use of the real or immovable property subject thereto;
(f)
such other imperfections or irregularities of title or Lien that, in each case, do not materially adversely affect the use of the properties or assets subject thereto or otherwise materially adversely impair business operations of such properties; and
(g)
agreements with any Governmental Entity and any public utilities or private suppliers of services that in each case do not materially detract from the value or materially interfere with the use of the real or immovable property subject thereto.
“Person”
includes any individual, partnership, association, body corporate, organization, trust, estate, trustee, executor, administrator, legal representative, government (including Governmental Entity), syndicate or other entity, whether or not having legal status.
“
Plan of Arrangement
” means the plan of arrangement, substantially in the form of Schedule A, subject to any amendments or variations to such plan made in accordance with Section 8.1 hereof, the Plan of Arrangement itself or made at the direction of the Court in the Final Order with the prior written consent of the Company and the Purchaser, each acting reasonably.
“
Pre-Acquisition Reorganization
” has the meaning specified in Section 4.6.
“Purchaser”
means Aphria Inc.
“
Purchaser Disclosure Letter
” means the disclosure letter dated the date of this Agreement and delivered by the Purchaser to the Company with this Agreement.
“
Purchaser Filings
” means all documents publicly filed under the profile of the Purchaser on the System for Electronic Document Analysis Retrieval (SEDAR) since June 1, 2016.
“
Purchaser License
” means the license issued by Health Canada to the Purchaser and expiring on September 25, 2019 pursuant to section 35 of the ACMPR, as renewed and amended by Health Canada from time to time, granting the Purchaser
11
the authority to produce, sell, possess, ship, transport, deliver and destroy dried cannabis and cannabis plants, as well as cannabis oil extracts.
“
Purchaser Material Adverse Effect
” means any change, event, occurrence, effect, state of facts or circumstance that, individually or in the aggregate with other such changes, events, occurrences, effects, state of facts or circumstances is or could reasonably be expected to be material and adverse to the current and future business, operations, results of operations, assets, properties, capitalization, condition (financial or otherwise) or liabilities (contingent or otherwise) of the Purchaser and its Subsidiaries, taken as a whole, except any such change, event, occurrence, effect, state of facts or circumstance resulting from:
(a)
any change affecting the cannabis industry as a whole (excluding, but only while the Purchaser has a direct or indirect material ownership interest in entities engaged in US cannabis related activities, any written notice sent by the TSX notifying the Purchaser of a formal delisting review of the Purchaser or the Purchaser Shares);
(b)
any change in global, national or regional political conditions (including the outbreak or escalation of war or acts of terrorism) or in general economic, business, regulatory, political or market conditions or in national or global financial or capital markets;
(c)
any adoption, proposal, implementation or change in Law or any interpretation of Law by any Governmental Entity (excluding, but only while the Purchaser has a direct or indirect material ownership interest in entities engaged in U.S. cannabis related activities, any change in Law enacted by the United States Congress and the President of the United States resulting in budgetary and/or operational authority being granted to the Department of Justice to prosecute enforcement actions either criminally or civilly against medical marijuana companies who are operating lawfully in accordance with state law and/or licensure requirements in a state where medical marijuana is legal);
(d)
any change in GAAP applicable to the Purchaser;
(e)
any natural disaster;
(f)
the failure by the Purchaser to meet any internal, third party or public projections, forecasts, guidance or estimates of revenues or earnings (it being understood that the cause underlying any such failure may be taken into account in determining whether a Purchaser Material Adverse Effect has occurred);
(g)
the announcement of this Agreement, including any loss or threatened loss of, or adverse change or threatened adverse change in, the relationship of the Purchaser or its Subsidiaries with the Purchaser’s employees, customers,
12
suppliers partners and other Persons with which the Purchaser or any of its Subsidiaries has business relations;
(h)
any action taken (or omitted to be taken) by the Purchaser that is consented to by the Company expressly in writing;
(i)
any matter which has been disclosed by the Purchaser in the Purchaser Disclosure Letter;
(j)
any actions taken (or omitted to be taken) upon the written request of the Company; or
(k)
any change in the market price or trading volume of any securities of the Purchaser (it being understood that the causes underlying such change in market price may be taken into account in determining whether a Purchaser Material Adverse Effect has occurred),
provided, however, that with respect to clauses (a) through to and including (e), such matter does not have a materially disproportionate effect on the Purchaser and its Subsidiaries, taken as a whole, relative to other comparable companies and entities operating in the industry in which the Purchaser and/or its Subsidiaries operate, and unless expressly provided in any particular section of this Agreement, references in certain sections of this Agreement to dollar amounts are not intended to be, and shall not be deemed to be, illustrative or interpretive for purposes of determining whether a “Purchaser Material Adverse Effect” has occurred.
“
Purchaser Shares
” means the common shares in the capital of the Purchaser.
“Regulatory Approval”
means any consent, waiver, permit, exemption, review, order, decision or approval of, or any registration and filing with, any Governmental Entity, or the expiry, waiver or termination of any waiting period imposed by Law or a Governmental Entity, in each case in connection with the Arrangement, and includes the Key Regulatory Approvals.
“
Replacement Option
” means an option or right to purchase Purchaser Shares granted by the Purchaser in replacement of Company Options pursuant to the Arrangement.
“
Representative
” has the meaning specified in Section 5.1(1).
“
Required Approval
” has the meaning specified in Section 2.2(1)(b).
“
Restricted Cash Amount
” means an amount equal to the sum of (i) $87,000,000 and (ii) money actually received by the Company upon exercise of Company Options or Company Warrants if exercised following the date hereof and before the Effective Date, or such other amount as the Parties may agree to in writing.
13
“
Securities Authority
” means the Ontario Securities Commission and any other applicable securities commissions or securities regulatory authority of a province or territory of Canada.
“
Securities Laws
” means the
Securities Act
(Ontario) and any other applicable provincial securities Laws.
“Share Consideration”
means 0.3546 of a Purchaser Share for each Common Share subject to adjustments in accordance with Section 2.12.
“Software”
means computer software and programs (both source code and object code form), all proprietary rights in the computer software and programs and all documentation and other materials related to the computer software and programs.
“
Stock Exchange Approval
” means the conditional approval of the TSX to list the Purchaser Shares to be issued pursuant to the Arrangement, subject only to conditions to be satisfied in connection with the completion of the Arrangement and/or following the completion of the Arrangement.
“
Subject Securities
” has the meaning specified in Section 2.2(2).
“Subject Shares”
has the meaning specified in Section 4.3(6)(a).
“
Subsidiary
” has the meaning specified in National Instrument 45-106 -
Prospectus and Registration Exemptions
as in effect on the date of this Agreement.
“
Superior Proposal
” means any unsolicited
bona fide
written Acquisition Proposal from Person(s) who are an arm’s length third party or parties, made after the date of this Agreement, to acquire not less than all of the outstanding Common Shares or all or substantially all of the assets of the Company on a consolidated basis that:
(a)
complies with Securities Laws and did not result from or involve a breach of this Agreement, the Exclusivity Agreement or any other agreement between the Person making the Acquisition Proposal and the Company or any of its Subsidiaries;
(b)
is reasonably capable of being completed without undue delay relative to the Arrangement, taking into account, all financial, legal, regulatory and other aspects of such proposal and the Person making such proposal but for this purpose of determining if there is a Superior Proposal, the existence of the Support and Voting Agreements shall be disregarded;
(c)
is not subject to any financing contingency and in respect of which adequate arrangements have been made to ensure that the required consideration will be available to effect payment in full for all of the Common Shares or assets, as the case may be;
(d)
is not subject to any due diligence or access condition;
14
(e)
the Board determines, in its good faith judgment, after receiving the advice of its outside legal and financial advisors and after taking into account all the terms and conditions of the Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Acquisition Proposal and the party making such Acquisition Proposal, would, if consummated in accordance with its terms, but without assuming away the risk of non-completion, result in a transaction which is more favourable, from a financial point of view, to the Company Common Shareholders, than the Arrangement (including any amendments to the terms and conditions of the Arrangement proposed by the Purchaser pursuant to Section 5.4(2)); and
(f)
in the event that the Company does not have the financial resources to pay the Termination Fee, the terms of such Acquisition Proposal provide that the person making such Superior Proposal shall advance or otherwise provide the Company the cash required for the Company to pay the Termination Fee and such amount shall be advanced or provided on or before the date such Termination Fee becomes payable.
“Superior Proposal Notice”
has the meaning specified in Section 5.4(1)(c).
“
Support and Voting Agreements
” means, collectively, the support and voting agreements dated the date hereof between the Purchaser and each of the Company Locked-up Shareholders, substantially in the form of Schedule E, which,
inter alia
, may not be terminated by the Company Locked-up Shareholders in the event of a Superior Proposal.
“Tax Act”
means the
Income Tax Act
(Canada).
“Tax Returns”
means any and all returns, reports, declarations, elections, notices, forms, designations, filings, and statements (including estimated tax returns and reports, withholding tax returns and reports, and information returns and reports) filed or required to be filed in respect of Taxes.
“Taxes”
means (i) any and all taxes, duties, fees, excises, premiums, assessments, imposts, levies and other charges or assessments of any kind whatsoever imposed by any Governmental Entity, whether computed on a separate, consolidated, unitary, combined or other basis, including those levied on, or measured by, or described with respect to, income, gross receipts, profits, gains, windfalls, capital, capital stock, production, recapture, transfer, land transfer, license, gift, occupation, wealth, environment, net worth, indebtedness, surplus, sales, goods and services, harmonized sales, use, value-added, excise, special assessment, stamp, withholding, business, franchising, real or personal property, health, employee health, payroll, workers’ compensation, employment or unemployment, severance, social services, social security, education, utility, surtaxes, customs, import or export, and including all license and registration fees and all employment insurance, health insurance and government pension plan premiums or contributions; (ii) all interest, penalties, fines, additions to tax or other additional amounts imposed by any Governmental Entity on or in respect of amounts of the type described in clause (i) above or this clause (ii);
15
(iii) any liability for the payment of any amounts of the type described in clauses (i) or (ii) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period; and (iv) any liability for the payment of any amounts of the type described in clauses (i) or (ii) as a result of any express or implied obligation to indemnify any other Person or as a result of being a transferee or successor in interest to any party.
“Terminating Party”
has the meaning specified in Section 4.8(3).
“
Termination Fee
” has the meaning specified in Section 8.2.
“
Termination Fee Event
” has the meaning specified in Section 8.2.
“Termination Notice”
has the meaning specified in Section 4.8(3).
“
TSX
” means the Toronto Stock Exchange.
“
TSX-V
” means the TSX Venture Exchange.
“
United States
” means the United States of America, its territories and possessions, any State of the United States and the District of Colombia.
“
U.S. Securities Act
” means the
United States Securities Act of 1933
, as the same has been, and hereafter from time to time may be, amended.
Section 1.2
Certain Rules of Interpretation.
In this Agreement, unless otherwise specified:
(1)
Headings, etc.
The provision of a Table of Contents, the division of this Agreement into Articles and Sections and the insertion of headings are for convenient reference only and do not affect the construction or interpretation of this Agreement.
(2)
Currency.
All references to dollars or to $ are references to Canadian dollars.
(3)
Gender and Number.
Any reference to gender includes all genders. Words importing the singular number only include the plural and vice versa.
(4)
Certain Phrases and References, etc.
The words
“including”, “includes”
and
“include”
mean
“including (or includes or include) without limitation,”
and
“the aggregate of”, “the total of”, “the sum of”
, or a phrase of similar meaning means
“the aggregate (or total or sum), without duplication, of.”
Unless stated otherwise,
“Article”, “Section”
, and
“Schedule”
followed by a number or letter mean and refer to the specified Article or Section of or Schedule to this Agreement. The term “
Agreement
” and any reference in this Agreement to this Agreement or any other agreement or document includes, and is a reference to, this Agreement or such other agreement or document as it may have been, or may from time to time be, amended, restated, replaced, supplemented or novated and includes all schedules to it. The term “
made available to the Purchaser
” means copies of the subject materials were
16
included in the Company Data Room or otherwise provided in writing in the manner expressly set forth in the Company Disclosure Letter.
(5)
Capitalized Terms.
All capitalized terms used in any Schedule, the Company Disclosure Letter or the Purchaser Disclosure Letter have the meanings ascribed to them in this Agreement.
(6)
Knowledge
. Where any representation or warranty is expressly qualified by reference to the knowledge of the Company, it is deemed to refer to the knowledge of Ronald Schmeichel, Lorne Abony, Jordon Greenberg, Josh Epstein and James Eaton, after due and diligent inquiry. Where any representation or warranty is expressly qualified by reference to the knowledge of the Purchaser, it is deemed to refer to the knowledge of Vic Neufeld, John Cervini, Cole Cacciavillani and Carl Merton, after due and diligent inquiry.
(7)
Accounting Terms.
All accounting terms are to be interpreted in accordance with GAAP and all determinations of an accounting nature in respect of the Company required to be made shall be made in a manner consistent with GAAP.
(8)
Statutes.
Any reference to a statute refers to such statute and all rules and regulations made under it, as it or they may have been or may from time to time be amended or re-enacted, unless stated otherwise.
(9)
Computation of Time.
A period of time is to be computed as beginning on the day following the event that began the period and ending at 4:30 p.m. on the last day of the period, if the last day of the period is a Business Day, or at 4:30 p.m. on the next Business Day if the last day of the period is not a Business Day.
(10)
Time References.
References to time are to local time, Toronto, Ontario.
(11)
Subsidiaries.
To the extent any covenants or agreements relate, directly or indirectly, to a Subsidiary of the Company, each such provision shall be construed as a covenant by the Company to cause (to the fullest extent to which it is legally capable) such Subsidiary to perform the required action.
Section 1.3
Schedules.
The schedules attached to this Agreement form an integral part of this Agreement for all purposes of it.
ARTICLE 2
THE ARRANGEMENT
Section 2.1
Arrangement
The Company and the Purchaser agree that the Arrangement will be implemented in accordance with and subject to the terms and conditions of this Agreement and the Plan of Arrangement.
17
Section 2.2
Interim Order
(1)
As soon as reasonably practicable after the date of this Agreement, but in any event at a time so as to permit the Company Meeting to be held on or before the date specified in Section 2.3(a), the Company shall apply in a manner reasonably acceptable to the Purchaser pursuant to Section 182 of the OBCA and, in cooperation with the Purchaser, prepare, file and diligently pursue an application for the Interim Order, which must provide, among other things:
(a)
for the class of persons to whom notice is to be provided in respect of the Arrangement and the Company Meeting and for the manner in which such notice is to be provided;
(b)
that the required level of approval (the “
Required Approval
”) for the Arrangement Resolution shall be not less than (i) 66 2/3% of the votes cast on the Arrangement Resolution by Company Common Shareholders present in person or represented by proxy and entitled to vote at the Company Meeting; and (ii) a simple majority of the votes attached to Common Shares held by Company Common Shareholders present in person or represented by proxy and entitled to vote at the Company Meeting excluding for this purpose votes attached to Common Shares held by persons described in items (a) through (d) of section 8.1(2) of MI 61-101.
(c)
that the terms, restrictions and conditions of the Company’s Constating Documents relating to the holding of a meeting of Company Common Shareholders, including quorum requirements and all other matters, shall, unless varied by the Interim Order, apply in respect of the Company Meeting;
(d)
for the grant of the Dissent Rights to those Company Common Shareholders who are registered Company Common Shareholders;
(e)
for the notice requirements with respect to the presentation of the application to the Court for the Final Order;
(f)
that the Company Meeting may be adjourned or postponed from time to time by the Company in accordance with the terms of this Agreement without the need for additional approval of the Court;
(g)
confirmation of the record date for the purposes of determining the Company Common Shareholders entitled to notice of and to vote at the Company Meeting in accordance with the Interim Order;
(h)
that the record date for the Company Common Shareholders entitled to notice of and to vote at the Company Meeting will not change in respect of any adjournment(s) of the Company Meeting, unless required by Securities Laws; and
18
(i)
for such other matters as the Purchaser may reasonably require, subject to obtaining the prior consent of the Company, such consent not to be unreasonably withheld or delayed.
(2)
In seeking the Interim Order, the Company shall advise the Court that it is the Purchaser’s intention to rely upon the exemption from registration provided by Section 3(a)(10) of the U.S. Securities Act with respect to the issuance of all Arrangement Issued Securities to be issued pursuant to the Arrangement, based and conditioned on the Court’s approval of the Arrangement and its determination that the Arrangement is fair and reasonable to holders of Company securities whose rights are affected by the Arrangement (collectively, the “
Subject Securities
”) to whom will be issued Arrangement Issued Securities pursuant to the Arrangement, following a hearing and after considering of the substantive and procedural terms and conditions thereof.
Section 2.3
The Company Meeting
The Company shall:
(a)
convene and conduct the Company Meeting in accordance with the Interim Order, the Company’s Constating Documents and Law as soon as practical and, in any event but subject to compliance by the Purchaser with its obligations in Section 2.4, on or before March 30, 2018 (or such later date as may be agreed to by the Parties in writing or required as a result of a delay by the Purchaser in providing the information required pursuant to Section 2.4) and not adjourn, postpone or cancel (or propose the adjournment, postponement or cancellation of) the Company Meeting without the prior written consent of the Purchaser, except:
(A)
in the case of an adjournment, as required for quorum purposes (in which case the Company Meeting shall be adjourned and not cancelled); or
(B)
as required or permitted under, Section 5.4(5) or Section 4.8(3).
(b)
solicit proxies in favour of the approval of the Arrangement Resolution and against any resolution submitted by any Company Common Shareholder that is inconsistent with the Arrangement Resolution and the completion of any of the transactions contemplated by this Agreement, including, if so requested by the Purchaser, at the Purchaser’s expense, using dealer and proxy solicitation services firms and cooperating with any Persons engaged, with the consent of the Company, by the Purchaser to solicit proxies in favour of the approval of the Arrangement Resolution;
(c)
provide the Purchaser with copies of or access to information regarding the Company Meeting generated by any transfer agent, dealer or proxy solicitation services firm, as reasonably requested in writing from time to time by the Purchaser;
19
(d)
permit the Purchaser at its expense to, on behalf of the management of the Company, directly or through a soliciting dealer approved in writing by the Company, actively solicit proxies in favour of the Arrangement on behalf of management of the Company in compliance with Law and disclose in the Company Circular that the Purchaser may make such solicitations;
(e)
consult with the Purchaser in fixing the record date for the Company Meeting and the date of the Company Meeting, give notice to the Purchaser of the Company Meeting and allow the Purchaser’s representatives and legal counsel to attend the Company Meeting;
(f)
promptly advise the Purchaser, at such times as the Purchaser may reasonably request in writing and at least on a daily basis on each of the last ten (10) Business Days prior to the date of the Company Meeting, as to the aggregate tally of the proxies received by the Company in respect of the Arrangement Resolution;
(g)
promptly advise the Purchaser of any communication (written or oral) from any Person in opposition to the Arrangement, written notice of dissent, purported exercise or withdrawal of Dissent Rights, and provide the Purchaser with an opportunity to review and comment upon any written communications sent by or on behalf of the Company to any such Person and to participate in any discussions, negotiations or proceedings involving any such Person;
(h)
not make any payment or settlement offer, or agree to any payment or settlement prior to the Effective Time with respect to any claims regarding the Arrangement or Dissent Rights without the prior written consent of the Purchaser;
(i)
not change the record date for the Company Common Shareholders entitled to vote at the Company Meeting in connection with any adjournment or postponement of the Company Meeting, unless required by Law;
(j)
at the reasonable written request of the Purchaser from time to time, provide the Purchaser with a list (in both written and electronic form) of (i) the registered Company Common Shareholders, together with their addresses and respective holdings of Common Shares, (ii) the names, addresses and holdings of all Persons having rights issued by the Company to acquire Common Shares (including holders of Company Options and Company Warrants), and (iii) participants and book-based nominee registrants such as CDS & Co., CEDE & Co. and DTC, and non-objecting beneficial owners of Common Shares, together with their addresses and respective holdings of Common Shares; and
(k)
notwithstanding the receipt by the Company of a Superior Proposal in accordance with Article 5, unless otherwise agreed to in writing by the Purchaser, continue to take all reasonable steps necessary to hold the
20
Company Meeting and to cause the Arrangement to be voted on at the Company Meeting and not propose to adjourn or postpone the Company Meeting other than as permitted or required by Section 2.3(a).
Section 2.4
The Company Circular
(1)
The Company shall promptly prepare and complete, in consultation with the Purchaser, the Company Circular together with any other documents required by Law in connection with the Company Meeting and the Arrangement, and the Company shall, promptly after obtaining the Interim Order, cause the Company Circular and such other documents to be filed and sent to each Company Common Shareholder and other Person as required by the Interim Order and Law, in each case so as to permit the Company Meeting to be held by the date specified in Section 2.3(a).
(2)
The Company shall ensure that the Company Circular complies in material respects with Law, does not contain any Misrepresentation (other than in respect to any written information with respect to the Purchaser that is furnished in writing by or on behalf of the Purchaser for inclusion in the Company Circular) and provides the Company Common Shareholders with sufficient information to permit them to form a reasoned judgement concerning the matters to be placed before the Company Meeting. Without limiting the generality of the foregoing, the Company Circular must include: (i) a copy of the Fairness Opinion; (ii) a statement that the Board has received the Fairness Opinion, and has unanimously determined (with directors abstaining or recusing themselves as required), after receiving legal and financial advice: (A) that the Arrangement is fair to the Company Common Shareholders; (B) the Arrangement and the entering into of this Agreement is in the best interests of the Company; and (C) that the Board (with directors abstaining or recusing themselves as required) recommends that the Company Common Shareholders vote in favour of the Arrangement Resolution (collectively, the “
Board Recommendation
”), and (iii) a statement that each of the Company Locked-up Shareholders have entered into Support and Voting Agreements pursuant to which they intend to vote all of their Common Shares in favour of the Arrangement Resolution and against any resolution submitted by any Company Common Shareholder that is inconsistent therewith, and which cannot be terminated in the event of a Superior Proposal.
(3)
The Company shall give the Purchaser and its legal counsel a reasonable opportunity to review and comment on drafts of the Company Circular and other related documents, and shall give reasonable consideration to any comments made by the Purchaser and its counsel, and agrees that all information relating solely to the Purchaser for inclusion in the Company Circular and any information describing the terms of the Arrangement and/or the Plan of Arrangement must be in a form and content satisfactory to the Purchaser, acting reasonably. The Company shall provide the Purchaser with a final copy of the Company Circular prior to its mailing to the Company Common Shareholders.
21
(4)
The Purchaser shall as soon as reasonably practicable after the date hereof, and in any event within thirty (30) days of the date hereof, provide the Company with all information regarding the Purchaser, its affiliates and the Purchaser Shares, including any
pro forma
financial statements, as required by Law and requested by the Company in writing for inclusion in the Company Circular or in any amendments or supplements to such Company Circular. The Purchaser shall ensure that such information does not include any Misrepresentation concerning the Purchaser, its affiliates and the Consideration Shares.
(5)
Each Party shall promptly notify the other Party if it becomes aware that the Company Circular contains a Misrepresentation, or otherwise requires an amendment or supplement. The Parties shall, in a manner consistent with this Section 2.4, co-operate in the preparation of any such amendment or supplement as required or appropriate, and the Company shall, in a manner provided in the Interim Order, promptly mail, file or otherwise publicly disseminate any such amendment or supplement to the Company Common Shareholders and, if required by the Court or by Law, file the same with the Securities Authorities or any other Governmental Entity as required.
Section 2.5
Final Order
Following approval of the Arrangement Resolution, the Company shall take all steps necessary or desirable to submit the Arrangement to the Court and diligently pursue an application for the Final Order pursuant to Section 182 of the OBCA, as soon as reasonably practicable, but in any event not later than three Business Days after the Arrangement Resolution is passed at the Company Meeting.
Section 2.6
Court Proceedings
The Purchaser shall cooperate with and assist the Company in seeking the Interim Order and the Final Order, including by providing to the Company on a timely basis any information required by applicable Law to be supplied by the Purchaser in connection therewith as requested by the Company in writing. In connection with all Court proceedings relating to obtaining the Interim Order and the Final Order, the Company shall:
(a)
diligently pursue, and cooperate with the Purchaser in diligently pursuing, the Interim Order and the Final Order;
(b)
provide legal counsel to the Purchaser with a reasonable opportunity to review and comment upon drafts of all material to be filed with the Court in connection with the Arrangement, and give reasonable consideration to all such comments;
(c)
provide copies of any notice of appearance, evidence or other documents served on the Company or its legal counsel in respect of the application for the Interim Order or the Final Order or any appeal from them, and any notice, written or oral, indicating the intention of any Person to appeal, or oppose the granting of, the Interim Order or the Final Order;
22
(d)
ensure that all material filed with the Court in connection with the Arrangement is consistent with this Agreement and the Plan of Arrangement;
(e)
not file any material with the Court in connection with the Arrangement or serve any such material, or agree to modify or amend any material so filed or served, except as contemplated by this Agreement or with the Purchaser’s prior written consent not to be unreasonably withheld, conditioned or delayed, provided the Purchaser is not required to agree or consent to any increase in the Consideration or other modification or amendment to such filed or served materials that expands or increases the Purchaser’s obligations, or diminishes or limits the Purchaser’s rights, set forth in any such filed or served materials or under this Agreement;
(f)
oppose any proposal from any Person that the Final Order contain any provision inconsistent with this Agreement, and if required by the terms of the Final Order or by Law to return to Court with respect to the Final Order do so only after notice to, and in consultation and cooperation with, the Purchaser; and
(g)
not object to legal counsel to the Purchaser making such submissions on the hearing of the motion for the Interim Order and the application for the Final Order as such counsel considers appropriate, provided the Purchaser advises the Company of the nature of any such submissions prior to the hearing and such submissions are consistent with this Agreement and the Plan of Arrangement.
Section 2.7
Options, Warrants and Other Securities
The Parties acknowledge and agree that all Company Options that are not exercised, whether conditionally or otherwise, prior to the Effective Time shall be treated in accordance with the provisions of the Plan of Arrangement, and the Company shall take all such reasonable steps as may be necessary or desirable to give effect to the foregoing. The Company agrees that the indenture governing the Company Warrants will be drafted to provide that each holder of a Company Warrant outstanding immediately prior to the Effective Time shall receive upon the subsequent exercise of such holder’s Company Warrant on or after the Effective Time, in accordance with its terms, and shall accept in lieu of each Common Share to which such holder was theretofore entitled upon such exercise but for the same aggregate consideration payable therefor, the Consideration.
Section 2.8
Articles of Arrangement and Effective Date
(1)
The Company shall amend the Plan of Arrangement from time to time at the reasonable request of the Purchaser, provided that no such amendment is inconsistent with the Interim Order or the Final Order or is prejudicial to the Company or the Company Securityholders.
(2)
The Company shall send the Articles of Arrangement to the Director within 2 (two) Business Days of the satisfaction or, where not prohibited, the waiver by the
23
applicable Party or Parties in whose favour the condition is, of the conditions set out in Article 6 (excluding conditions that, by their terms, cannot be satisfied until the Effective Date, but subject to the satisfaction or, where not prohibited, the waiver by the applicable Party or Parties in whose favour the condition is, of those conditions as of the Effective Date), unless another time or date is agreed to in writing by the Parties provided that the Company shall not be required to file the Articles of Arrangement with the Director unless the Company has received written confirmation, in form satisfactory to it, acting reasonably, from the Depositary that it has received the consideration referred to in Section 2.9.
(3)
The closing of the Arrangement will take place at the offices of Stikeman Elliott LLP, 5300 Commerce Court West, 199 Bay Street, Toronto, ON M5L 1B9, or at such other location as may be agreed upon by the Parties.
Section 2.9
Payment of Consideration
(1)
The Purchaser will, following receipt of the Final Order and prior to the sending by the Company of the Articles of Arrangement to the Director, deliver or cause to be delivered to the Depositary in escrow (the terms of such escrow to be satisfactory to the Company and the Purchaser, each acting reasonably) pending the Effective Time, sufficient Purchaser Shares (and any treasury directions addressed to Purchaser’s transfer agent as may be necessary) to satisfy the aggregate Share Consideration to be paid to Company Common Shareholders (other than dissenting Company Common Shareholders) under the Arrangement.
(2)
On the date referred to in Section 2.9(1), the Company shall deposit or cause to be deposited in escrow (the terms of such escrow to be satisfactory to the Company and the Purchaser, each acting reasonably) an amount equal to the Loan Amount with the Depositary to be held in escrow in order to complete the step described in Section 2.3(a) of the Plan of Arrangement.
Section 2.10
Withholding Taxes
The Purchaser, the Depositary and the Company shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable to any Company Securityholder such amounts as the Purchaser, the Depositary and the Company (as applicable) may be permitted or required to deduct and withhold therefrom under any provision of applicable Laws in respect of Taxes. To the extent that such amounts are so deducted, withheld and remitted, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.
Section 2.11
U.S. Securities Law Matters
(a)
The Parties agree that the Arrangement will be carried out with the intention that all Arrangement Issued Securities will be issued by the Purchaser in reliance on the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) thereunder. In order to ensure the availability of the exemption under Section 3(a)(10) of the U.S. Securities Act
24
and to facilitate the Purchaser’s compliance with other United States securities Laws, the Parties agree that the Arrangement will be carried out on the following basis:
(b)
pursuant to Section 2.2(2), prior to the issuance of the Interim Order, the Court will be advised as to the intention of the Parties to rely on the exemption provided by Section 3(a)(10) of the U.S. Securities Act with respect to the issuance of all Arrangement Issued Securities pursuant to the Arrangement, based on the Court’s approval of the Arrangement;
(c)
prior to the issuance of the Interim Order, the Company will file with the Court a copy of the proposed text of the Company Circular together with any other documents required by Law in connection with the Company Meeting;
(d)
the Court will be required to satisfy itself as to the substantive and procedural fairness of the Arrangement to the holders of Subject Securities to whom will be issued Arrangement Issued Securities pursuant to the Arrangement;
(e)
the Company will ensure that each Company Common Shareholder and any other Person entitled to receive Consideration Shares pursuant to the Arrangement will be given adequate and appropriate notice advising them of their right to attend the hearing of the Court to give approval to the Arrangement and providing them with sufficient information necessary for them to exercise that right;
(f)
all Persons entitled to receive Consideration Shares pursuant to the Arrangement will be advised that Consideration Shares issued pursuant to the Arrangement have not been registered under the U.S. Securities Act and will be issued by the Purchaser in reliance on the exemption provided by Section 3(a)(10) of the U.S. Securities Act, and shall be without trading restrictions under the U.S. Securities Act (other than those that would apply under the U.S. Securities Act to Persons who are, have been within 90 days of the Effective Time, or, at the Effective Time, become affiliates (as defined by Rule 144 of the U.S. Securities Act) of the Purchaser;
(g)
the Final Order approving the terms and conditions of the Arrangement that is obtained from the Court will expressly state that the Arrangement is approved by the Court as fair and reasonable to all Persons entitled to receive Amalgamation Issued Securities pursuant to the Arrangement;
(h)
the Interim Order approving the Company Meeting will specify that each Person entitled to receive Arrangement Issued Securities pursuant to the Arrangement will have the right to appear before the Court at the hearing of the Court to give approval of the Arrangement so long as they enter an appearance within a reasonable time;
25
(i)
holders of Company Options entitled to receive Replacement Options pursuant to the Arrangement will be advised that the Replacement Options issued pursuant to the Arrangement (and underlying Purchaser Shares) have not been registered under the U.S. Securities Act and will be issued and exchanged by Purchaser in reliance on the exemption provided under Section 3(a)(10) under the U.S. Securities Act, but that such exemption does not exempt the issuance of securities upon the exercise of such Replacement Options; therefore, the Purchaser Shares issuable upon exercise of the Replacement Options cannot be issued in the U.S. or to a person in the U.S. in reliance on the exemption under Section 3(a)(10) thereof and the Replacement Options may only be exercised pursuant to a then-available exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws;
(j)
each holder of Subject Securities will be advised that with respect to Amalgamation Issued Securities issued to persons who are, have been within 90 days of the Effective Time, or, at the Effective Time become, affiliates (as defined by Rule 144 of the U.S. Securities Act) of the Purchaser, such securities will be subject to restrictions on resale under U.S. Securities Laws, including Rule 144 under the U.S. Securities Act;
(k)
the Court will hold a hearing before approving the fairness of the terms and conditions of the Arrangement and issuing the Final Order; and
(l)
the Company shall request that the Final Order shall include a statement to substantially the following effect:
“This Order will serve as a basis of a claim to an exemption, pursuant to section 3(a)(10) of the United States Securities Act of 1933, as amended, from the registration requirements otherwise imposed by that act, regarding the distribution of securities of the Purchaser pursuant to the Plan of Arrangement.”.
Section 2.12
Adjustment of Consideration
Notwithstanding any restriction or any other matter in this Agreement to the contrary, if, between the date of this Agreement and the Effective Time, the issued and outstanding Purchaser Shares shall have been changed into a different number of shares by reason of any split, consolidation or stock dividend of the issued and outstanding Purchaser Shares or similar event, then the Consideration to be paid per Company Common Share shall be appropriately adjusted to provide to Company Shareholders the same economic effect as contemplated by this Agreement and the Arrangement prior to such action and as so adjusted shall, from and after the date of such event, be the Share Consideration to be paid per Company Common Share
26
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1
Representations and Warranties of the Company
(1)
Except as set forth in the correspondingly numbered paragraph of the Company Disclosure Letter, the Company represents and warrants to the Purchaser as set forth in Schedule C and acknowledges and agrees that the Purchaser is relying upon such representations and warranties in connection with the entering into of this Agreement.
(2)
The representations and warranties of the Company contained in this Agreement shall not survive the completion of the Arrangement and shall expire and be terminated on the earlier of the Effective Time and the date on which this Agreement is terminated in accordance with its terms.
Section 3.2
Representations and Warranties of the Purchaser
(1)
Except as set forth in the correspondingly numbered paragraph of the Purchaser Disclosure Letter, the Purchaser represents and warrants to the Company as set forth in Schedule D and acknowledges and agrees that the Company is relying upon the representations and warranties in connection with the entering into of this Agreement.
(2)
The representations and warranties of the Purchaser contained in this Agreement shall not survive the completion of the Arrangement and shall expire and be terminated on the earlier of the Effective Time and the date on which this Agreement is terminated in accordance with its terms.
ARTICLE 4
COVENANTS
Section 4.1
Conduct of Business of the Company.
(1)
The Company covenants and agrees that, during the period from the date of this Agreement until the earlier of the Effective Time and the time that this Agreement is terminated in accordance with its terms, except: (i) with the prior written consent of the Purchaser not to be unreasonably withheld; (ii) as required or permitted by this Agreement; (iii) as required by Law; or (iv) as expressly contemplated by the Company Disclosure Letter, the Company shall, and shall cause each of its Subsidiaries to, conduct its business in the Ordinary Course and in accordance with Laws, and the Company shall use commercially reasonable efforts to maintain and preserve its and its Subsidiaries’ business organization, properties, employees, goodwill and business relationships with customers, suppliers, partners and other Persons with which the Company or any of its Subsidiaries has material business relations.
(2)
Without limiting the generality of Section 4.1(1), the Company covenants and agrees that, during the period from the date of this Agreement until the earlier of the Effective Time and the time that this Agreement is terminated in accordance with its
27
terms, except: (i) with the prior written consent of the Purchaser not to be unreasonably withheld; (ii) as required or permitted by this Agreement; (iii) as required by Law; or (iv) as expressly contemplated by the Company Disclosure Letter, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:
(a)
amend its Constating Documents or, in the case of any Subsidiary which is not a corporation, its similar organizational documents;
(b)
split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) or amend any term of any outstanding debt security;
(c)
redeem, repurchase, or otherwise acquire or offer to redeem, repurchase or otherwise acquire any shares of its capital stock or the capital stock of its Subsidiaries;
(d)
issue, deliver, sell, pledge or otherwise encumber, or authorize the issuance, delivery, sale, pledge or other encumbrance of any shares of its capital stock or other equity or voting interests, including the capital stock of its Subsidiaries, or any options, warrants or similar rights exercisable or exchangeable for or convertible into such capital stock or other equity or voting interests, or other rights that are linked to the price or the value of Company Common Shares except for (i) the issuance of Common Shares issuable upon the exercise of the currently outstanding Company Options; (ii) in connection with internal funding among the Company and wholly-owned Subsidiaries; and (iii) the issuance of up to (A) 9,409,093 units of the Company (each unit consisting of one Common Share and one-half of one Company Warrant) for cash consideration of $5.50 per unit; and (B) 4,704,547 underlying Common Shares issuable in connection with the exercise of such Company Warrants, in each case in connection with the Offering and as reflected in the Company Filings;
(e)
amend the terms of any of its securities;
(f)
acquire (by merger, consolidation, acquisition of stock or assets or otherwise), directly or indirectly, in one transaction or in a series of related transactions, assets, securities, properties, interests or businesses or make any investment either by the purchase of securities, contribution of capital, property transfer, or purchase of any other property or assets of any other Person, or acquire any license rights, other than (i) pursuant to a Contract in existence on the date hereof or (ii) pursuant to acquisitions in the Ordinary Course not in excess of $1,000,000 in purchase price;
(g)
sell, lease, transfer, license, mortgage, or otherwise dispose of any of its assets which in the aggregate exceed $500,000 except for (i) assets which are
28
obsolete and which individually or in the aggregate do not exceed $500,000, or (ii) inventory sold in the Ordinary Course;
(h)
enter into any joint venture or similar agreement, arrangement or relationship;
(i)
make any capital expenditure or commitment to do so which individually or in the aggregate exceeds $500,000;
(j)
prepay any long-term indebtedness before its scheduled maturity or increase, create, incur, assume or otherwise become liable for any indebtedness for borrowed money or guarantees thereof;
(k)
make any loan or advance to, or any capital contribution or investment in, or assume, guarantee or otherwise become liable with respect to the liabilities or obligations of, any Person other than a wholly-owned Subsidiary of the Company;
(l)
reduce the stated capital of any of its securities;
(m)
reorganize, amalgamate or merge the Company or any Subsidiary or adopt a plan of liquidation or resolution providing for the liquidation or dissolution of the Company or any of its Subsidiaries;
(n)
grant any Lien (other than Permitted Liens) on any assets of the Company or its Subsidiaries;
(o)
(A) make or rescind any material Tax election, amend, in any manner adverse to the Company, any Tax Return, settle or compromise any material liability for Taxes or change or revoke any of its methods of Tax accounting, or (B) take any action with respect to the computation of Taxes or the preparation of Tax Returns that is in any material respect inconsistent with past practice;
(p)
enter into any interest rate, currency, equity or commodity swaps, hedges, derivatives, forward sales contracts or similar financial instruments;
(q)
make any bonus or profit sharing distribution or similar payment of any kind except as may be required by the terms of a Contract listed in section 4.1(2)(q) of the Company Disclosure Letter;
(r)
make any change in the Company’s methods of accounting, except as required by concurrent changes in GAAP or as required by a Governmental Entity;
(s)
grant any general increase in the rate of wages, salaries, bonuses or other remuneration of any employees, except as may be required by the terms of a Contract listed in section (z) of the Company Disclosure Letter, or accelerate
29
the vesting of any Company Options except as contemplated by section 4.1(2)(s) of the Company Disclosure Letter;
(t)
except as required by Law: (i) increase any severance, change of control or termination pay (or improvements to notice or pay in lieu of notice) to (or amend any existing arrangement with) any current or former Company Employee or any current or former director of the Company or any of its Subsidiaries; (ii) increase the benefits payable under any existing severance or termination pay policies with any current or former Company Employee or any current or former director of the Company or any of its Subsidiaries; (iii) increase the benefits payable under any employment agreements with any current or former Company Employee or any current or former director of the Company or any of its Subsidiaries; (iv) enter into any employment, deferred compensation or other similar agreement (or amend any such existing agreement) with any current or former Company Employee or any current or former director of the Company or any of its Subsidiaries; (v) increase compensation, bonus levels or other benefits payable to any current or former Company Employee or any current or former director of the Company or any of its Subsidiaries; (vi) adopt any new Employee Plan or any amendment or modification of an existing Employee Plan; (vii) increase or agree to increase, any funding obligation or accelerate, or agree to accelerate, the timing of any funding contribution under any Employee Plan; (vii) grant any equity, equity-based or similar awards; or (viii) reduce the Company’s or its Subsidiaries work force except in the Ordinary Course;
(u)
enter into any agreement or arrangement that limits or otherwise restricts in any material respect the Company or any successor thereto, or that would, after the Effective Time, limit or restrict in any material respect the Company or any of its affiliates from competing in any manner;
(v)
enter into or amend any Contract with any broker, finder or investment banker including any amendment of any of the Contracts listed in section (dd) of the Company Disclosure Letter;
(w)
cancel, waive, release, assign, settle or compromise any material claims or rights of the Company or its Subsidiaries;
(x)
compromise or settle any litigation, proceeding or governmental investigation relating to the assets or the business of the Company in excess of an aggregate amount of $250,000;
(y)
amend or modify, or terminate or waive any right under, any Material Contract or enter into any contract or agreement that would be a Material Contract if in effect on the date hereof;
(z)
knowingly take any action or fail to take any action which action or failure to act would result in the material loss, expiration or surrender of, or the loss of any material benefit under, or reasonably be expected to cause any
30
Governmental Entity to institute proceedings for the suspension, revocation or limitation of rights under, any material Authorizations necessary to conduct its businesses as now conducted or as proposed to be conducted, or fail to prosecute with commercially reasonable due diligence any pending applications to any Governmental Entities for material Authorizations;
(aa)
enter into, amend or modify any union recognition agreement, Collective Agreement or similar agreement with any trade union or representative body other than in the Ordinary Course and upon reasonable consultation with the Purchaser;
(bb)
except as contemplated in Section 4.9
[Director & Officer Insurance]
amend, modify or terminate any material insurance policy of the Company or any Subsidiary in effect on the date of this Agreement;
(cc)
abandon or fail to diligently pursue any application for any material licences, permits, Authorizations or registrations
;
(dd)
grant or commit to grant an exclusive licence or otherwise transfer any Intellectual Property or exclusive rights in or in respect thereto that is material to the Company and its Subsidiaries taken as a whole, other than in the Ordinary Course or to wholly-owned Subsidiaries;
(ee)
materially change its business or regulatory strategy;
(ff)
knowingly take any action or knowingly enter into any transaction (other than a transaction contemplated by this Agreement (including the Pre-Acquisition Reorganization) that could reasonably be expected to have the effect of materially reducing or eliminating the amount of the tax cost “bump” pursuant to paragraphs 88(1)(c) and 88(1)(d) of the Tax Act in respect of the securities of any affiliates or Subsidiaries and other nondepreciable capital property owned by the Company or any of its Subsidiaries on the date hereof, upon an amalgamation or winding-up of the Company or any of its Subsidiaries (or any of their respective successors); or
(gg)
authorize, agree, resolve or otherwise commit, whether or not in writing, to do any of the foregoing.
Section 4.2
Conduct of Business of the Purchaser.
The Purchaser covenants and agrees that, during the period from the date of this Agreement until the earlier of the Effective Time and the time that this Agreement is terminated in accordance with its terms, the Purchaser shall use commercially reasonable efforts to maintain and preserve its and its Subsidiaries’ business organization, properties, employees, goodwill and business relationships with customers, suppliers, partners and other Persons with which the Purchaser or any of its Subsidiaries has material business relations, and shall not, directly or indirectly:
(a)
split, combine, reclassify or amend the terms of the Purchaser Shares;
31
(b)
amend its articles of amalgamation, by-laws or other Constating Documents in any manner that would have a material and adverse impact on the value of the Purchaser Shares;
(c)
declare, set aside or pay any dividend or other distribution (whether in cash, securities or property or any combination thereof) in respect of any Purchaser Shares;
(d)
redeem, purchase or otherwise acquire or offer to redeem, purchase or otherwise acquire any Purchaser Shares, other than purchases of Purchaser Shares made in the public markets or off-market at then prevailing market price and other than redemptions or repurchases of Purchaser Shares in connection with the administration of equity or employee incentive plans;
(e)
adopt a plan of liquidation or resolutions providing for the liquidation or dissolution of the Purchaser; or
(f)
authorize, agree, resolve or otherwise commit to do any of the foregoing.
Section 4.3
Covenants Regarding the Arrangement.
(1)
Subject to Section 4.4, each of the Company and the Purchaser shall use its commercially reasonable efforts to take, or cause to be taken, all actions and to do or cause to be done all things required or advisable under Law to consummate and make effective, as soon as reasonably practicable, the transactions contemplated by this Agreement, including:
(a)
using commercially reasonable efforts to satisfy, or cause the satisfaction of, all conditions precedent in this Agreement and take all steps set forth in the Interim Order and Final Order applicable to it and comply promptly with all requirements imposed by Law on it or its Subsidiaries with respect to this Agreement or the Arrangement;
(b)
using commercially reasonable efforts to obtain, as soon as practicable following execution of this Agreement, and maintain all third party or other consents, waivers, permits, exemptions, orders, approvals, agreements, amendments or confirmations that are (i) necessary to be obtained under the Material Contracts in connection with the Arrangement or this Agreement, or (ii) required in order to maintain the Material Contracts in full force and effect following completion of the Arrangement, in each case, on terms that are reasonably satisfactory to the Purchaser;
(c)
using commercially reasonable efforts to oppose, lift or rescind any injunction, restraining or other order, decree or ruling seeking to restrain, enjoin or otherwise prohibit or delay or otherwise adversely affect the consummation of the Arrangement and defend, or cause to be defended, any proceedings to which it is a party or brought against it or its directors or officers challenging the Arrangement or this Agreement; and
32
(d)
not taking any action, or refrain from taking any commercially reasonable action, or permitting any action to be taken or not taken, which would reasonably be expected to prevent, materially delay or otherwise impede the consummation of the Arrangement or the transactions contemplated by this Agreement.
(2)
The Purchaser shall use its commercially reasonable efforts to obtain and maintain in force the Stock Exchange Approval.
(3)
The Company shall promptly notify the Purchaser of:
(a)
any Company Material Adverse Effect;
(b)
any notice or other communication from any Person alleging that the consent (or waiver, permit, exemption, order, approval, agreement, amendment or confirmation) of such Person is required in connection with this Agreement or the Arrangement;
(c)
any notice or other communication from any Person to the effect that such Person is terminating or otherwise materially adversely modifying its relationship with the Company or any of its Subsidiaries as a result of this Agreement or the Arrangement;
(d)
any notice or other communication from any Governmental Entity in connection with this Agreement (and the Company shall contemporaneously provide a copy of any such written notice or communication to the Purchaser); or
(e)
any filing, actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting the Company or any of its Subsidiaries.
(4)
The Company will, in all material respects, conduct itself so as to keep the Purchaser fully informed as to the material decisions required to be made or actions required to be taken with respect to the operation of its business, provided that such disclosure is not otherwise prohibited by reason of confidentiality obligation owed to a third party for which a waiver could not be obtained.
(5)
The Purchaser shall promptly notify the Company in writing of:
(a)
any Purchaser Material Adverse Effect;
(b)
any notice or other communication from any Person alleging that the consent (or waiver, permit, exemption, order, approval, agreement, amendment or confirmation) of such Person is required in connection with this Agreement or the Arrangement;
33
(c)
any filing, actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting the Purchaser or any of its Subsidiaries; or
(d)
any notice or other communication from any Governmental Entity in connection with this Agreement (and the Company shall contemporaneously provide a copy of any such written notice or communication to the Purchaser).
(6)
The Purchaser hereby covenants and agrees during the term of this Agreement:
(a)
not to sell or transfer or otherwise dispose of any right or interest in any of the Company Common Shares it currently owns or acquires after the date hereof (such securities, the “
Subject Shares
”) or enter into any agreement, arrangement, commitment or understanding in connection therewith;
(b)
not to, other than as set forth herein, grant or agree to grant any proxies or powers of attorney, deposit any Subject Shares into a voting trust or pooling agreement, or enter into a voting agreement, commitment, understanding or arrangement, oral or written, with respect to the voting of any Subject Shares;
(c)
cause the Subject Shares to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the Subject Shares at the Company Meeting; and
(d)
to vote the Subject Shares in favour of the approval, consent, ratification and adoption of the Arrangement Resolution and the transactions contemplated hereby.
Section 4.4
Regulatory Approvals
(1)
As soon as reasonably practicable after the date hereof, each Party, or where appropriate, both Parties jointly, shall make all notifications, filings, applications and submissions with Governmental Entities required or advisable, and shall use commercially reasonable efforts to obtain and maintain, the Key Regulatory Approvals and such other Regulatory Approvals reasonably deemed by any of the Parties to be necessary to discharge their respective obligations under this Agreement or otherwise advisable under Laws in connection with the Arrangement and this Agreement. It being acknowledged and agreed that the Purchaser shall pay all filing fees in respect of the Key Regulatory Approvals.
(2)
The Parties shall cooperate with one another in connection with obtaining the Regulatory Approvals required or desirable in connection herewith including by providing or submitting on a timely basis all documentation and information that is required, or in the opinion of the Purchaser, advisable, in connection with obtaining the Regulatory Approvals and using their commercially reasonable efforts to ensure that such information does not contain a Misrepresentation.
34
(3)
The Parties shall cooperate with and keep one another fully informed as to the status of and the processes and proceedings relating to obtaining the Regulatory Approvals, and shall promptly notify each other of any communication from any Governmental Entity in respect of the Arrangement or this Agreement, and shall not make any submissions or filings, participate in any meetings or any material conversations with any Governmental Entity in respect of any filings, investigations or other inquiries related to the Arrangement or this Agreement unless it consults with the other Party in advance and, to the extent not precluded by such Governmental Entity, gives the other Party the opportunity to review drafts of any submissions or filings, or attend and participate in any communications or meetings. Despite the foregoing, submissions, filings or other written communications with any Governmental Entity may be redacted as necessary before sharing with the other Party to address reasonable attorney-client or other privilege or confidentiality concerns, provided that a Party must provide external legal counsel to the other Party non-redacted versions of drafts or final submissions, filings or other written communications with any Governmental Entity on the basis that the redacted information will not be shared with its clients.
(4)
Each Party shall promptly notify the other Party if it becomes aware that any (i) application, filing, document or other submission for a Regulatory Approval contains a Misrepresentation, or (ii) any Regulatory Approval contains, reflects or was obtained following the submission of any application, filing, document or other submission containing a Misrepresentation, such that an amendment or supplement may be necessary or advisable. In such case, the Company shall, in consultation with and subject to the prior approval of the Purchaser, co-operate in the preparation, filing and dissemination, as applicable, of any such amendment or supplement.
(5)
The Parties shall request that the Regulatory Approvals be processed by the applicable Governmental Entity on an expedited basis and, to the extent that a public hearing is held, the Parties shall request the earliest possible hearing date for the consideration of the Regulatory Approvals.
(6)
If any objections are asserted with respect to the transactions contemplated by this Agreement under any Law, or if any proceeding is instituted or threatened by any Governmental Entity challenging or which could lead to a challenge of any of the transactions contemplated by this Agreement as not in compliance with Law, the Parties shall use their commercially reasonable efforts consistent with the terms of this Agreement to resolve such proceeding so as to allow the Effective Time to occur on or prior to the Outside Date.
Section 4.5
Access to Information; Confidentiality
(1)
The Company shall give the Purchaser and its Representatives (a) upon reasonable notice, reasonable access during normal business hours to its and its Subsidiaries’ (i) premises, (ii) property and assets (including all books and records, whether retained internally or otherwise), (iii) Contracts and Leases, and (iv) senior personnel, so long as the access does not unduly interfere with the Ordinary Course conduct of the business of the Company; and (b) such financial and operating data or other
35
information with respect to the assets or business of the Company as the Purchaser from time to time reasonably requests. The Company shall continue to afford the Purchaser and its Representatives access to the Company Data Room. Without limiting the foregoing, and subject to the terms of any existing Contracts, the Company shall, upon the Purchaser’s request, facilitate discussions between the Purchaser and any third party from whom consent may be required.
(2)
Investigations made by or on behalf of the Purchaser, whether under this Section 4.5 or otherwise, will not waive, diminish the scope of, or otherwise affect any representation or warranty made by the Company in this Agreement.
(3)
The Purchaser acknowledges that the Confidentiality Agreement continues to apply and that any information provided under Section 4.5(1) above that is non-public and/or proprietary in nature shall be subject to the terms of the Confidentiality Agreement.
(4)
The Company acknowledges that it has reviewed the terms of the Support and Voting Agreements, and in particular the provisions in Section 3.2 thereof. The Company further acknowledges and agrees that if this Agreement is terminated for any reason, then no provisions in the Confidentiality Agreement (including any “use” provisions) or any other agreement between the Parties will prohibit or restrict the Purchaser from directly or indirectly commencing a take-over bid for the Common Shares. The Company further agrees that in connection with any such take-over bid by the Purchaser, whether direct or indirect, the Company will issue a “deposit period news release” to shorten the initial deposit period to 35 days from the date of the take-over bid.
Section 4.6
Pre-Acquisition Reorganization
(1)
The Company agrees that, upon request of the Purchaser and at the Purchaser’s expense, the Company shall (i) perform such reorganizations of its corporate structure, capital structure, business, operations and assets or such other transactions as the Purchaser may request, acting reasonably (each a “
Pre-Acquisition Reorganization
”), and (ii) cooperate with the Purchaser and its advisors to determine the nature of the Pre-Acquisition Reorganizations that might be undertaken and the manner in which they would most effectively be undertaken.
(2)
Without limiting the generality of the foregoing, the Company acknowledges that the Purchaser may enter into transactions (the “
Bump Transactions
”) designed to step up the tax basis in certain capital property of the Company and/or its affiliates for purposes of the Tax Act and agrees to use commercially reasonable efforts to provide information reasonably requested and required by the Purchaser in this regard on a timely basis and to assist in the obtaining of any such information.
(3)
The Company will not be obligated to participate in any Pre-Acquisition Reorganization under Section 4.6(1) unless such Pre-Acquisition Reorganization:
(a)
can be implemented immediately prior to the Effective Date;
36
(b)
is not prejudicial to the Company or the Company Common Shareholders, as a whole, in any material respect;
(c)
does not unreasonably interfere with the ongoing operations of the Company or any of its Subsidiaries;
(d)
does not result in (i) any material breach by the Company of any existing contract or commitment of the Company; or (ii) a breach of any Law;
(e)
does not require the approval of the Company Common Shareholders;
(f)
would not reasonably be expected to impede or delay the completion of the Arrangement in any material respect; and
(g)
would not result in any Taxes being imposed on, or any adverse Tax or other consequences to, any securityholder of the Company incrementally greater than the Taxes or other consequences to such party in connection with the Arrangement in the absence of any Pre-Acquisition Reorganization.
(4)
The Purchaser must provide written notice to the Company of any proposed Pre-Acquisition Reorganization at least 10 Business Days prior to the Effective Date. Upon receipt of such notice, if the conditions in Section 4.6(2) are satisfied the Company and the Purchaser shall work cooperatively and use commercial reasonable efforts to prepare prior to the Effective Time all documentation necessary and do such other acts and things as are necessary to give effect to such Pre-Acquisition Reorganization, including any amendment to this Agreement or the Plan of Arrangement and shall seek to have any such Pre-Acquisition Reorganization made effective as of the last moment of the Business Day ending immediately prior to the Effective Date (but after the Purchaser has waived or confirmed in writing that all of the conditions set out in Section 6.1 and Section 6.2 have been satisfied and that it is prepared to promptly without condition proceed to effect the Arrangement).
(5)
The Purchaser agrees that it will be responsible for all costs and expenses (including professional fees and expenses) associated with any Pre-Acquisition Reorganization to be carried out at its request and that any Pre-Acquisition Reorganization will not be considered in determining whether a representation, warranty or covenant of the Company under this Agreement has been breached (including where any such Pre-Acquisition Reorganization requires the consent of any third party under a Contract) or if a condition for the benefit of the Purchaser has been satisfied.
(6)
The Purchaser shall indemnify the Company, its Subsidiaries and their respective officers, directors and employees (to the extent that such persons are assessed with statutory liability thereto) for all direct and indirect costs or losses, liabilities, damages, claims, costs, expenses, interest awards, judgments and penalties, including any adverse Tax consequences, out of-pocket costs and expenses, including out-of-pocket legal fees and disbursements, suffered or incurred in connection with or as a result of any proposed Pre-Acquisition Reorganization or the unwinding of any Pre-Acquisition Reorganization.
37
(7)
In order to enable the Company to advance the loan contemplated by Section 2.3(a) of the Plan of Arrangement, the Company agrees that it shall cooperate with the Purchaser to determine (i) the amount, if any, required to be distributed, directly or indirectly, to the Company by any of its Subsidiaries, (ii) the manner in which such distributions shall be consummated and (iii) the time at which such distributions shall be made by each Subsidiary to the Company. In any event, no later than two Business Days prior to the scheduled Effective Date, the Purchaser shall deliver a written notice to the Company specifying (x) the total amount to be advanced by way of non-interest bearing demand loan by the Company to the Purchaser pursuant to Section 2.3(a) of the Plan of Arrangement (such amount being the “
Loan Amount
”, as defined in the Plan of Arrangement), (y) to the extent that the Company does not already have cash in an amount at least equal to the Loan Amount, the total amount to be distributed to the Company by its Subsidiaries so that the Company will have cash in an amount equal to the Loan Amount (which amount shall be distributed no later than the Business Day prior to the date funds are to be deposited with the Depositary in accordance with Section 2.9(2)) and (z) the manner in which such distributions shall be consummated.
Section 4.7
Public Communications
(1)
The Company and the Purchaser shall agree on the text of joint press releases by which the Company and the Purchaser will announce (i) the execution of this Agreement and (ii) the completion of the Arrangement. The Parties shall co-operate in the preparation of presentations, if any, to Company Common Shareholders regarding the Arrangement. A Party must not issue any press release or make any other public statement or disclosure with respect to this Agreement or the Arrangement without the consent of the other Party (which consent shall not be unreasonably withheld, conditioned or delayed), and the Company must not make any filing with any Governmental Entity (except as contemplated by this Article 4) with respect to this Agreement or the Arrangement without the consent of the Purchaser (which consent shall not be unreasonably withheld, conditioned or delayed); provided that any Party that is required to make disclosure by Law shall use its commercially reasonable efforts to give the other Party prior oral or written notice and a reasonable opportunity to review or comment on the disclosure or filing (other than with respect to confidential information contained in such disclosure or filing). The Party making such disclosure shall give reasonable consideration to any comments made by the other Party or its counsel, and if such prior notice is not possible, shall give such notice immediately following the making of such disclosure or filing.
(2)
Without limiting the generality of the foregoing and for greater certainty, each Party acknowledges and agrees that the other Party shall file, in accordance with Securities Laws, this Agreement, together with a material change report related thereto, under such Party’s profile on SEDAR.
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Section 4.8
Notice and Cure Provisions
(1)
Each Party shall promptly notify the other Party of the occurrence, or failure to occur, of any event or state of facts which occurrence or failure would, or would be reasonably likely to:
(a)
cause any of the representations or warranties of such Party contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Effective Time; or
(b)
result in the failure to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such Party under this Agreement.
(2)
Notification provided under this Section 4.8 will not affect the representations, warranties, covenants, agreements or obligations of the Parties (or remedies with respect thereto) or the conditions to the obligations of the Parties under this Agreement.
(3)
The Purchaser may not elect to exercise its right to terminate this Agreement pursuant to Section 7.2(1)(d)(i) or Section 7.2(1)(d)(iv) and the Company may not elect to exercise its right to terminate this Agreement pursuant to Section 7.2(1)(c)(i) or Section 7.2(1)(c)(ii), unless the Party seeking to terminate the Agreement (the “
Terminating Party
”) has delivered a written notice (“
Termination Notice
”) to the other Party (the “
Breaching Party
”) specifying in reasonable detail all breaches of covenants, or incorrect representations and warranties or other matters which the Terminating Party asserts as the basis for termination. After delivering a Termination Notice, provided the Breaching Party is proceeding diligently to cure such matter and such matter is capable of being cured prior to the Outside Date (with any intentional breach being deemed to be incurable), the Terminating Party may not exercise such termination right until the earlier of (a) the Outside Date, and (b) if such matter has not been cured by the date that is 10 Business Days following receipt of such Termination Notice by the Breaching Party. If the Terminating Party delivers a Termination Notice prior to the date of the Company Meeting, unless the Parties agree otherwise, the Company shall postpone or adjourn the Company Meeting to the earlier of (a) 10 Business Days prior to the Outside Date and (b) the date that is 10 Business Days following receipt of such Termination Notice by the Breaching Party. Notwithstanding the foregoing or any other provision of this Agreement, a Termination Notice may not be delivered by the Company prior to the Outside Date, and the Company may not terminate this Agreement pursuant to Section 7.2(1)(c)(i) or Section 7.2(1)(c)(ii) prior to the Outside Date, as a result of any written notice sent by the TSX notifying the Purchaser of a formal delisting review of the Purchaser or the Purchaser Shares, or any change in Law enacted by the United States Congress and the President of the United States resulting in budgetary and/or operational authority being granted to the Department of Justice to prosecute enforcement actions either criminally or civilly against medical marijuana companies who are operating lawfully in accordance with state law and/or licensure requirements in a state where medical marijuana is legal.
39
Section 4.9
Insurance and Indemnification
(1)
Prior to the Effective Date, the Company shall purchase customary “tail” policies of directors’ and officers’ liability insurance providing protection no less favourable in the aggregate to the protection provided by the policies maintained by the Company and its Subsidiaries which are in effect immediately prior to the Effective Date and providing protection in respect of claims arising from facts or events which occurred on or prior to the Effective Date and the Purchaser shall, or shall cause the Company and its Subsidiaries to maintain such tail policies in effect without any reduction in scope or coverage for six (6) years from the Effective Date; provided that the Purchaser shall not be required to pay any amounts in respect of such coverage prior to the Effective Time and provided further that the cost of such policies shall not exceed 300% of the Company’s current annual aggregate premium for policies currently maintained by the Company or its Subsidiaries.
(2)
The Purchaser shall, from and after the Effective Time, honour all rights to indemnification or exculpation now existing in favour of present and former employees, officers and directors of the Company and its Subsidiaries to the extent that they are contained in the Constating Documents of the Company or disclosed in the Company Data Room, and acknowledges that such rights, to the extent that they are disclosed in the Company Data Room, shall survive unamended the completion of the Plan of Arrangement and shall continue in full force and effect in accordance with their terms for a period of not less than six (6) years from the Effective Date.
(3)
This Section 4.9 shall survive the consummation of the Arrangement and is intended to be for the benefit of, and shall be enforceable by, the present and former directors and officers of the Company, its Subsidiaries and their respective heirs, executors, administrators and personal representatives (the Indemnified Persons) and shall be binding on the Purchaser, the Company, its Subsidiaries and their respective successors and assigns, and, for such purpose, the Company hereby confirms that it is acting as agent on behalf of the Indemnified Persons.
Section 4.10
TSX-V Delisting
Subject to Laws, the Purchaser and the Company shall use their commercially reasonable efforts to cause the Common Shares to be de-listed from the TSX-V with effect promptly following the acquisition by Purchaser of the Common Shares pursuant to the Arrangement.
Section 4.11
Board of Directors
Contemporaneously with the Effective Time, the board of directors of the Purchaser shall appoint one (1) individual designated by the Company and approved by the Purchaser, acting reasonably, to the board of directors of the Purchaser provided such designee of the Company must be “independent” within the meaning of Section 1.4 of National Instrument 52-110 —
Audit Committees
.
40
ARTICLE 5
ADDITIONAL COVENANTS REGARDING NON-SOLICITATION
Section 5.1
Non-Solicitation
(1)
Except as expressly provided in this Article 5, the Company and its Subsidiaries shall not, directly or indirectly, through any officer, director, employee, representative (including any financial or other adviser) or agent of the Company or of any of its Subsidiaries (collectively “
Representatives
”), or otherwise, and shall not permit any such Person to:
(a)
solicit, assist, initiate, encourage or otherwise facilitate, (including by way of furnishing or providing copies of, access to, or disclosure of, any confidential information, properties, facilities, books or records of the Company or any Subsidiary or entering into any form of agreement, arrangement or understanding) any inquiry, proposal or offer that constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal;
(b)
enter into or otherwise engage or participate in any discussions or negotiations with any Person (other than the Purchaser) regarding any inquiry, proposal or offer that constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal; or
(c)
make a Change in Recommendation.
(2)
The Company shall, and shall cause its Subsidiaries and its Representatives to, immediately cease and terminate, and cause to be terminated, any solicitation, encouragement, discussion, negotiations, or other activities commenced prior to the date of this Agreement with any Person (other than the Purchaser) with respect to any inquiry, proposal or offer that constitutes, or may reasonably be expected to constitute or lead to, an Acquisition Proposal, and in connection therewith the Company shall:
(a)
discontinue access to and disclosure of all information, including the Company Data Room and any confidential information, properties, facilities, books and records of the Company or any Subsidiary; and
(b)
within two Business Days of the date hereof, to the extent it is permitted to do so, request, and exercise all rights it has to require (i) the return or destruction of all copies of any confidential information regarding the Company or any Subsidiary provided to any such Person other than the Purchaser; and (ii) the destruction of all material including or incorporating or otherwise reflecting such confidential information regarding the Company or any Subsidiary, to the extent that such information has not previously been returned or destroyed, using its commercially reasonable efforts to ensure that such requests are fully complied with in accordance with the terms of such rights or entitlements.
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(3)
The Company represents and warrants that the Company has not waived any confidentiality, standstill or similar agreement or restriction to which the Company or any Subsidiary is a party relating to an Acquisition Proposal, and covenants and agrees that (i) the Company shall take all necessary action to enforce each confidentiality, standstill, use, business purpose or similar agreement or restriction to which the Company or any Subsidiary is a party, and (ii) neither the Company, nor any Subsidiary nor any of their respective Representatives will, without the prior written consent of the Purchaser (which may be withheld or delayed in the Purchaser’s sole and absolute discretion), release any Person from, or waive, amend, suspend or otherwise modify such Person’s obligations respecting the Company, or any of its Subsidiaries, under any confidentiality, standstill, use, business purpose or similar agreement or restriction to which the Company or any Subsidiary is a party, it being acknowledged and agreed that the automatic termination of any standstill provisions of any such agreement or restriction as a result of entering into and announcement of this Agreement by the Company pursuant to the express terms of any such agreement or restriction, shall not be a violation of this Section 5.1 and that the Company shall not be prohibited from considering a Superior Proposal from a party whose obligations so terminated automatically upon the entering into and announcement of this Agreement.
Section 5.2
Notification of Acquisition Proposals
(1)
If after the date of this Agreement, the Company or any of its Subsidiaries or any of their respective Representatives, receives or otherwise becomes aware of any inquiry, proposal or offer that constitutes or could reasonably be expected to constitute or lead to an Acquisition Proposal, or any request for copies of, access to, or disclosure of, confidential information relating to the Company or any Subsidiary, including but not limited to information, access, or disclosure relating to the properties, facilities, books or records of the Company or any Subsidiary, the Company (a) shall promptly notify the Purchaser, at first orally, and then, and in any event within 24 hours in writing, of such Acquisition Proposal, inquiry, proposal, offer or request, including a description of its material terms and conditions, the identity of all Persons making the Acquisition Proposal, inquiry, proposal, offer or request, and shall provide the Purchaser with copies of all documents, correspondence or other material received in respect of, from or on behalf of any such Person and such other details of such Acquisition Proposal, inquiry, proposal, offer or request as the Purchaser may reasonably request in writing; and (b) may contact the Person making such Acquisition Proposal, inquiry, proposal, offer or request and its Representatives solely for the purpose of clarifying the terms and conditions of such Acquisition Proposal, inquiry, proposal, offer or request so as to determine whether such Acquisition Proposal, inquiry, proposal, offer or request is, or would reasonably be expected to lead to, a Superior Proposal.
(2)
The Company shall keep the Purchaser reasonably informed on a current basis of the status of developments and negotiations with respect to any Acquisition Proposal, inquiry, proposal, offer or request, including any changes, modifications or other amendments to any such Acquisition Proposal, inquiry, proposal, offer or request
42
and shall provide to the Purchaser copies of all material or substantive correspondence if in writing or electronic form, and if not in writing or electronic form, a description of the material terms of such correspondence sent or communicated to the Company by or on behalf of any Person making such Acquisition Proposal, inquiry, proposal, offer or request.
Section 5.3
Responding to an Acquisition Proposal
(1)
Notwithstanding Section 5.1, if at any time, prior to obtaining the Required Approval, the Company receives an unsolicited written Acquisition Proposal, the Company may engage in or participate in discussions or negotiations with such Person regarding such Acquisition Proposal and may provide copies of, access to or disclosure of confidential information, properties, facilities, books or records of the Company or its Subsidiaries, if and only if:
(a)
the Board first determines in good faith, after consultation with its financial advisors and its outside counsel, that such Acquisition Proposal constitutes or could reasonably be expected to constitute or lead to a Superior Proposal, and, after consultation with its outside counsel, that the failure to engage in such discussions or negotiations would be inconsistent with its fiduciary duties;
(b)
such Person was not restricted from making such Acquisition Proposal pursuant to an existing confidentiality, standstill, non-disclosure, use, business purpose or similar restriction with the Company or its Subsidiaries;
(c)
the Acquisition Proposal did not arise, directly or indirectly, as a result of a violation by the Company of this Article 5 or the Exclusivity Agreement;
(d)
the Company enters into a confidentiality and standstill agreement with such Person on customary terms, provided that such confidentiality and standstill agreement may allow such Person to make an Acquisition Proposal confidentially to the Board that constitutes, or could reasonably be expected to constitute or lead to, a Superior Proposal; and
(e)
the Company promptly provides the Purchaser with:
(i)
prior written notice stating the Company’s intention to participate in such discussions or negotiations and to provide such copies, access or disclosure;
(ii)
prior to providing any such copies, access or disclosure, a true, complete and final executed copy of the confidentiality and standstill agreement referred to in Section 5.3(1)(d); and
(iii)
any non-public information concerning the Company and its Subsidiaries provided to such other Person which was not previously provided to the Purchaser.
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Section 5.4
Right to Match
(1)
If the Company receives an Acquisition Proposal that constitutes a Superior Proposal prior to obtaining the Required Approval, the Board may make a Change in Recommendation and approve, recommend or enter into a definitive agreement with respect to such Superior Proposal, if and only if:
(a)
the Person making the Superior Proposal was not restricted from making such Superior Proposal pursuant to an existing confidentiality, standstill use, business purpose or similar restriction;
(b)
the Acquisition Proposal, inquiry, proposal, offer or request did not arise, directly or indirectly, as a result of a violation by the Company of this Article 5 or the Exclusivity Agreement;
(c)
the Company has delivered to the Purchaser a written notice of the determination of the Board that such Acquisition Proposal constitutes a Superior Proposal and of the intention of the Board enter into such definitive agreement, together with a written notice from the Board regarding the value and financial terms that the Board, in consultation with its financial advisors, has determined should be ascribed to any non-cash consideration offered under such Acquisition Proposal (the “
Superior Proposal Notice
”);
(d)
the Company or its Representatives has provided the Purchaser a copy of the proposed definitive agreement for the Superior Proposal;
(e)
at least five (5) Business Days (the “
Matching Period
”) have elapsed from the date that is the later of the date on which the Purchaser received the Superior Proposal Notice and a copy of the proposed definitive agreement for the Superior Proposal from the Company;
(f)
during any Matching Period, the Purchaser has had the opportunity (but not the obligation), in accordance with Section 5.4(2), to offer to amend this Agreement and the Arrangement in order for such Acquisition Proposal to cease to be a Superior Proposal;
(g)
after the Matching Period, the Board has determined in good faith, after consultation with its legal counsel and financial advisors, that such Acquisition Proposal continues to constitute a Superior Proposal (and, if applicable, compared to the terms of the Arrangement as proposed to be amended by the Purchaser under Section 5.4(2));
(h)
the Board has determined, in good faith, after consultation with the Company’s outside legal counsel that it is necessary for the Board to enter into a definitive agreement with respect to such Superior Proposal in order to satisfy their fiduciary duties to the Company; and
44
(i)
such Superior Proposal does not require the Company or any other Person to seek to interfere with the attempted successful completion of the Arrangement or any alternative transaction pursued by the Purchaser pursuant to the terms of the Support and Voting Agreements (including requiring the Company to delay, adjourn, postpone or cancel the Company Meeting) or provide for the payment of any break, termination or other fees or expenses or confer any rights or options to acquire assets or securities of the Company or any of its Subsidiaries to any Person in the event that the Company or any of its Subsidiaries completes the Arrangement or any other similar transaction with the Purchaser agreed to prior to the termination of this Agreement or pursuant to the Support and Voting Agreements.
(2)
During the Matching Period, or such longer period as the Company may approve in writing for such purpose: (a) the Board shall review any offer made by the Purchaser under Section 5.4(1)(f) to amend the terms of this Agreement and the Arrangement in good faith in order to determine whether such proposal would, upon acceptance, result in the Acquisition Proposal previously constituting a Superior Proposal ceasing to be a Superior Proposal; and (b) the Company shall, and shall cause its Representatives to, negotiate in good faith with the Purchaser to make such amendments to the terms of this Agreement and the Arrangement as would enable the Purchaser to proceed with the transactions contemplated by this Agreement on such amended terms. If the Board determines that such Acquisition Proposal would cease to be a Superior Proposal, the Company shall promptly so advise the Purchaser and the Company and the Purchaser shall amend this Agreement to reflect such offer made by the Purchaser, and shall take and cause to be taken all such actions as are necessary to give effect to the foregoing.
(3)
Each successive amendment or modification to any Acquisition Proposal that results in an increase in, or modification of, the consideration (or value of such consideration) to be received by the Company Common Shareholders or other material terms or conditions thereof shall constitute a new Acquisition Proposal for the purposes of this Section 5.4, and the Purchaser shall be afforded a new five (5) Business Day Matching Period from the later of the date on which the Purchaser received the Superior Proposal Notice and a copy of the proposed definitive agreement for the new Superior Proposal from the Company.
(4)
The Board shall promptly reaffirm the Board Recommendation by press release after any Acquisition Proposal which is not determined to be a Superior Proposal is publicly announced or the Board determines that a proposed amendment to the terms of this Agreement as contemplated under Section 5.4(2) would result in an Acquisition Proposal no longer being a Superior Proposal. The Company shall provide the Purchaser and its outside legal with a reasonable opportunity to review the form and content of any such press release and shall make all reasonable amendments to such press release as requested by the Purchaser and its counsel.
(5)
If the Company provides a Superior Proposal Notice to the Purchaser after a date that is less than 10 Business Days before the Company Meeting, the Company shall
45
either proceed with or shall postpone or adjourn the Company Meeting, as directed by the Purchaser acting reasonably, to a date that is not more than 10 Business Days after the scheduled date of the Company Meeting, but in any event to a date that is not less than five Business Days prior to the Outside Date.
(6)
Nothing contained in this Section 5.4 shall limit in any way the obligation of the Company to convene and hold the Company Meeting in accordance with Section 2.3 of this Agreement while this Agreement remains in force.
(7)
Nothing contained in this Agreement shall prevent the Board from complying with Section 2.17 of National Instrument 62-104 -
Takeover Bids and Issuer Bids
and similar provisions under Securities Laws relating to the provision of a directors’ circular in respect of an Acquisition Proposal that is not a Superior Proposal.
Section 5.5
Breach by Subsidiaries and Representatives
Without limiting the generality of the foregoing, the Company shall advise its Subsidiaries and their respective Representatives of the prohibitions set out in this Article 5 and any violation of the restrictions set forth in this Article 5 by the Company, its Subsidiaries or their respective Representatives is deemed to be a breach of this Article 5 by the Company.
ARTICLE 6
CONDITIONS
Section 6.1
Mutual Conditions Precedent
The Parties are not required to complete the Arrangement unless each of the following conditions is satisfied, which conditions may only be waived, in whole or in part, by the mutual consent of each of the Parties:
(1)
Arrangement Resolution.
The Arrangement Resolution has been approved and adopted by the Company Common Shareholders at the Company Meeting in accordance with the Interim Order.
(2)
Interim and Final Order.
The Interim Order and the Final Order have each been obtained on terms consistent with this Agreement, and have not been set aside or modified in a manner unacceptable to either the Company or the Purchaser, each acting reasonably, on appeal or otherwise.
(3)
Key Regulatory Approvals.
Each of the Key Regulatory Approvals has been made, given or obtained on terms acceptable to the Purchaser and the Company, each acting reasonably, and each such Key Regulatory Approval is in force and has not been modified or rescinded.
(4)
Illegality.
No Law is in effect that makes the consummation of the Arrangement illegal or otherwise prohibits or enjoins the Company or the Purchaser from consummating the Arrangement.
46
Section 6.2
Additional Conditions Precedent to the Obligations of the Purchaser
The Purchaser is not required to complete the Arrangement unless each of the following conditions is satisfied, which conditions are for the exclusive benefit of the Purchaser and may only be waived, in whole or in part, by the Purchaser in its sole discretion:
(1)
Representations and Warranties
. The representations and warranties of the Company set forth in Section (b) [
Organization and Qualification
], Section (c) [
Authority Relative to this Agreement
], Section (f) [
Capitalization
], Section (w) [
Authorizations
], and Section (dd) [
Brokers
] of Schedule “C” were true and correct as of the date of this Agreement and are true and correct as of the Effective Time other than for
de minimis
inaccuracies, and all other representations and warranties of the Company set forth in this Agreement were true and correct as of the date of this Agreement and are true and correct as of the Effective Time in all respects, except where any failure or failures of such representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to result in a Company Material Adverse Effect (disregarding any materiality or “Company Material Adverse Effect” qualification contained in any such representation and warranty for the purpose of determining whether any such failure or failures would not, individually or in the aggregate, reasonably be expected to result in such a Company Material Adverse Effect), in each case except for representations and warranties made as of a specified date, the accuracy of which shall be determined as of such specified date, and the Company has delivered a certificate confirming same to the Purchaser, executed by two senior officers of the Company (in each case without personal liability) addressed to the Purchaser and dated the Effective Date.
(2)
Performance of Covenants
. The Company has fulfilled or complied in all material respects with each of the covenants of the Company contained in this Agreement to be fulfilled or complied with by it on or prior to the Effective Time, and has delivered a certificate confirming same to the Purchaser, executed by two (2) senior officers of the Company (in each case without personal liability) addressed to the Purchaser and dated the Effective Date.
(3)
No Legal Action.
There is no action or proceeding (whether, for greater certainty, by a Governmental Entity or any other Person other than the Purchaser or its Subsidiary) pending or threatened in any jurisdiction to:
(a)
cease trade, enjoin, prohibit, or impose any limitations, damages or conditions on, the Purchaser’s ability to acquire, hold, or exercise full rights of ownership over, any Common Shares, including the right to vote the Common Shares;
(b)
prohibit or restrict the Arrangement, or the ownership or operation by the Purchaser or its Subsidiaries of a material portion of the business or assets of the Purchaser and its Subsidiaries, the Company or any of its Subsidiaries, or compel the Purchaser or its Subsidiaries to dispose of or hold separate any material portion of the business or assets of the Purchaser and its
47
Subsidiaries, the Company or any of its Subsidiaries as a result of the Arrangement or the transactions contemplated by this Agreement; or
(c)
prevent or materially delay the consummation of the Arrangement, or if the Arrangement is consummated, have a Company Material Adverse Effect or a material and adverse effect on the Purchaser.
(4)
Approvals
. All Regulatory Approvals and all other third party consents, waivers, permits, orders and approvals that are necessary, proper or advisable to consummate the transactions contemplated by this Agreement and the failure of which to obtain individually or in the aggregate, would be reasonably expected to have a Company Material Adverse Effect or would be reasonably expected to be material and adverse to the Purchaser, shall have been obtained or received on terms that are acceptable to the Purchaser, acting reasonably.
(5)
Dissent Rights.
Dissent Rights have not been exercised with respect to more than 5.0% of the issued and outstanding Common Shares.
(6)
Company Material Adverse Effect
. Since the date of this Agreement, there shall have not occurred and be continuing a Company Material Adverse Effect.
(7)
Minimum Cash Balance
. The Company and its Subsidiaries, on a consolidated basis, shall have unrestricted cash in an amount equal to no less than the Restricted Cash Amount.
Section 6.3
Additional Conditions Precedent to the Obligations of the Company
The Company is not required to complete the Arrangement unless each of the following conditions is satisfied, which conditions are for the exclusive benefit of the Company and may only be waived, in whole or in part, by the Company in its sole discretion:
(1)
Representations and Warranties
. The representations and warranties of the Purchaser were true and correct as of the date of this Agreement and are true and correct as of the Effective Time in all respects, except where any failure or failures of such representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to result in a Purchaser Material Adverse Effect (disregarding any materiality or “Purchaser Material Adverse Effect” qualification contained in any such representation and warranty for the purpose of determining whether any such failure or failures would not, individually or in the aggregate, reasonably be expected to result in such a Purchaser Material Adverse Effect), in each case except for representations and warranties made as of a specified date, the accuracy of which shall be determined as of such specified date, and the Company has delivered a certificate confirming same to the Company, executed by two senior officers of the Purchaser (in each case without personal liability) addressed to the Company and dated the Effective Date.
48
(2)
Performance of Covenants.
The Purchaser has fulfilled or complied in all material respects with each of the covenants of the Purchaser contained in this Agreement to be fulfilled or complied with by it on or prior to the Effective Time, and has delivered a certificate confirming same to the Company, executed by two (2) senior officers of the Purchaser (in each case without personal liability) addressed to the Company and dated the Effective Date.
(3)
Purchaser Material Adverse Effect
. Since the date of this Agreement, there shall have not occurred and be continuing a Purchaser Material Adverse Effect.
(4)
Deposit of Consideration.
Subject to obtaining the Final Order and the satisfaction or waiver of the other conditions precedent contained herein in its favour (other than conditions which, by their nature, are only capable of being satisfied as of the Effective Time), the Purchaser has deposited or caused to be deposited with the Depositary in escrow, the aggregate Share Consideration to be paid pursuant to the Arrangement.
Section 6.4
Satisfaction of Conditions
The conditions precedent set out in Section 6.1, Section 6.2 and Section 6.3 will be conclusively deemed to have been satisfied, waived or released when the Certificate of Arrangement is issued by the Director.
ARTICLE 7
TERM AND TERMINATION
Section 7.1
Term
This Agreement shall be effective from the date hereof until the earlier of the Effective Date and the termination of this Agreement in accordance with its terms.
Section 7.2
Termination
(1)
This Agreement may be terminated prior to the Effective Time by:
(a)
the mutual written agreement of the Parties; or
(b)
either the Company or the Purchaser:
(i)
if the Required Approval is not obtained at the Company Meeting in accordance with the Interim Order, provided that a Party may not terminate this Agreement pursuant to this Section 7.2(1)(b)(i) if the failure to obtain the Required Approval has been caused by, or is a result of, a breach by such Party of any of its representations or warranties or the failure of such Party to perform any of its covenants or agreements under this Agreement;
49
(ii)
if, after the date of this Agreement, any Law is enacted, made, enforced or amended, as applicable, that makes the consummation of the Arrangement illegal or otherwise permanently prohibits or enjoins the Company or the Purchaser from consummating the Arrangement, and such Law has, if applicable, become final and non-appealable, provided the Party seeking to terminate this Agreement pursuant to this Section 7.2(1)(b)(ii) has used its commercially reasonable efforts to, as applicable, appeal or overturn such Law or otherwise have it lifted or rendered non-applicable in respect of the Arrangement; or
(iii)
if the Effective Time does not occur on or prior to the Outside Date, provided that a Party may not terminate this Agreement pursuant to this Section 7.2(1)(b)(iii) if the failure of the Effective Time to so occur has been caused by, or is a result of, a breach by such Party of any of its representations or warranties or the failure of such Party to perform any of its covenants or agreements under this Agreement; or
(c)
the Company if:
(i)
a breach of any representation or warranty or failure to perform any covenant or agreement on the part of the Purchaser under this Agreement occurs that would cause any condition in Section 6.3(1)
[Purchaser Reps and Warranties Condition]
or Section 6.3(2)
[Purchaser Covenants Condition]
not to be satisfied, and such breach or failure is incapable of being cured or is not cured on or prior to the Outside Date in accordance with the terms of Section 4.8(3); provided that the Company is not then in breach of this Agreement so as to directly or indirectly cause any condition in Section 6.2(1)
[Company Reps and Warranties Condition]
or Section 6.2(2)
[Company Covenants Condition]
not to be satisfied; or
(ii)
since the date of this Agreement, there has occurred and is continuing a Purchaser Material Adverse Effect;
(d)
the Purchaser if:
(i)
a breach of any representation or warranty or failure to perform any covenant or agreement on the part of the Company under this Agreement occurs that would cause any condition in Section 6.2(1)
[Company Reps and Warranties Condition]
or Section 6.2(2)
[Company Covenants Condition]
not to be satisfied, and such breach or failure is incapable of being cured on or prior to the Outside Date or is not cured in accordance with the terms of Section 4.8(3); provided that the Purchaser is not then in breach of this Agreement so as to directly or indirectly cause any condition in Section 6.3(1)
[Purchaser Reps and Warranties Condition]
or Section 6.3(2)
[Purchaser Covenants Condition]
not to be satisfied;
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(ii)
the Board or any committee of the Board (A) fails to unanimously recommend or withdraws, amends, modifies or qualifies, or publicly proposes or states an intention to withdraw, amend, modify or qualify, the Board Recommendation, (B) accepts, approves, endorses or recommends, or publicly proposes to accept, approve, endorse or recommend or takes no position or a neutral position, in each case with respect to a publicly announced, or otherwise publicly disclosed, Acquisition Proposal for more than five Business Days (or beyond the third Business Day prior to the date of the Meeting, if sooner), (C) accepts, approves, endorses, recommends or executes or enters into (other than a confidentiality and standstill agreement permitted by and in accordance with Section 5.3) or publicly proposes to accept, approve, endorse, recommend or execute or enter into any agreement, letter of intent, understanding or arrangement relating to an Acquisition Proposal or any proposal or offer that could reasonably be expected to lead to an Acquisition Proposal; (D) fails to publicly reaffirm the Board Recommendation (without qualification) within five Business Days after having been requested in writing by the Purchaser to do so (collectively, a “
Change in Recommendation
”), or (E) the Company breaches Article 5 in any material respect;
(iii)
any event occurs as a result of which the condition set forth in Section 6.2(5)
[Dissent Rights Condition]
is not capable of being satisfied by the Outside Date; or
(iv)
since the date of this Agreement, there has occurred and is continuing a Company Material Adverse Effect.
(2)
The Party desiring to terminate this Agreement pursuant to this Section 7.2 (other than pursuant to Section 7.2(1)(a)) shall give written notice of such termination to the other Party, specifying in reasonable detail the basis for such Party’s exercise of its termination right.
Section 7.3
Effect of Termination/Survival
If this Agreement is terminated pursuant to Section 7.1 or Section 7.2, this Agreement shall become void and of no further force or effect without liability of any Party (or any shareholder, director, officer, employee, agent, consultant or representative of such Party) to any other Party to this Agreement, except that: (a) in the event of termination under Section 7.1, Section 4.9 shall survive for a period of six (6) years following such termination; and (b) in the event of termination under Section 7.2, this Section 7.3 and Section 8.2 through to and including Section 8.15 and Section 4.5(4) shall survive, and provided further that no Party shall be relieved of any liability for any wilful and material breach by it of this Agreement.
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ARTICLE 8
GENERAL PROVISIONS
Section 8.1
Amendments
This Agreement and the Plan of Arrangement may, at any time and from time to time before or after the holding of the Company Meeting but not later than the Effective Time, be amended, subject to the Plan of Arrangement, the Interim Order and the Final Order, by mutual written agreement of the Parties, and any such amendment may, without limitation:
(a)
change the time for performance of any of the obligations or acts of the Parties;
(b)
modify any representation or warranty contained in this Agreement or in any document delivered pursuant to this Agreement;
(c)
modify any of the covenants contained in this Agreement and waive or modify performance of any of the obligations of the Parties; and/or
(d)
modify any mutual conditions contained in this Agreement.
Section 8.2
Termination Fees
(1)
Despite any other provision in this Agreement relating to the payment of fees and expenses, including the payment of brokerage fees, if a Termination Fee Event occurs, the Company shall pay the Purchaser the Termination Fee in accordance with Section 8.2(3).
(2)
For the purposes of this Agreement, “
Termination Fee
” means $25 million and “
Termination Fee Event
” means the termination of this Agreement:
(a)
by the Purchaser, pursuant to Section 7.2(1)(d)(ii) [
Change in Recommendation or Breach of Section 5.1(1)
];
(b)
pursuant to any subsection of Section 7.2 if at such time the Purchaser is entitled to terminate this Agreement pursuant to Section 7.2(1)(d)(ii) [
Change in Recommendation or Breach of Article 5
];
(c)
by the Company or the Purchaser pursuant to Section 7.2(1)(b)(i)
[Failure of Shareholders to Approve]
or Section 7.2(1)(b)(iii)
[Effective Time not prior to Outside Date]
or by the Purchaser pursuant to Section 7.2(1)(d)(i) [
Breach of Reps and Warranties or Covenants by Compan
y] if;
(i)
prior to such termination, an Acquisition Proposal is made or publicly announced or otherwise publicly disclosed by any Person (other than the Purchaser or any of its affiliates) or any Person (other than the Purchaser or any of its affiliates) shall have publicly announced an intention to make an Acquisition Proposal; and
52
(ii)
within nine (9) months following the date of such termination, (A) an Acquisition Proposal (whether or not such Acquisition Proposal is the same Acquisition Proposal referred to in clause (i) above) is consummated, or (B) the Company or one or more of its Subsidiaries, directly or indirectly, in one or more transactions, enters into a contract in respect of an Acquisition Proposal (whether or not such Acquisition Proposal is the same Acquisition Proposal referred to in clause (i) above) and such Acquisition Proposal is later consummated (whether or not within nine (9) months after such termination).
For purposes of the foregoing, the term “Acquisition Proposal” shall have the meaning assigned to such term in Section 1.1, except that references to “20% or more” shall be deemed to be references to 50% or more.
(3)
The Termination Fee shall be paid by the Company to the Purchaser as follows, by wire transfer of immediately available funds to an account designated by the Purchaser, if a Termination Fee Event occurs due to:
(a)
a termination of this Agreement described in Section 8.2(2)(a) or Section 8.2(2)(b), within two (2) Business Days of the occurrence of such Termination Fee Event; and
(b)
a termination of this Agreement described in Section 8.2(2)(c), on or prior to consummation of the Acquisition Proposal referred to in Section 8.2(2)(c).
(4)
The Company acknowledges that the agreements contained in this Section 8.2 are an integral part of the transactions contemplated by this Agreement, and that without these agreements the Purchaser would not enter into this Agreement, and that the amounts set out in this Section 8.2 represent liquidated damages which are a genuine pre-estimate of the damages, including opportunity costs, which the Purchaser will suffer or incur as a result of the event giving rise to such damages and resultant termination of this Agreement, and is not a penalty. The Company irrevocably waives any right it may have to raise as a defence that any such liquidated damages are excessive or punitive.
(5)
Subject to Section 7.3, the Purchaser hereby expressly acknowledges and agrees that, upon any termination of this Agreement under circumstances where it is entitled to the Termination Fee and such Termination Fee is paid in full within the prescribed time period, it shall be precluded from any other remedy against the Company or its Subsidiaries and shall not seek to obtain any recovery, judgment or damages of any kind against the Company or its Subsidiaries in connection with this Agreement.
Section 8.3
Expenses
(1)
Except as expressly otherwise provided in this Agreement, all out-of-pocket third party transaction expenses incurred in connection with this Agreement and the Plan of Arrangement and the transactions contemplated hereunder and thereunder,
53
including all costs, expenses and fees of the Company incurred prior to or after the Effective Time in connection with, or incidental to, the Plan of Arrangement, shall be paid by the Party incurring such expenses, whether or not the Arrangement is consummated.
(2)
The Company confirms that other than the fees disclosed in section (dd) of the Company Disclosure Letter, no broker, finder or investment banker is or will be entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement
Section 8.4
Notices.
Any notice, or other communication given regarding the matters contemplated by this Agreement (must be in writing, sent by personal delivery, courier or facsimile (but not by electronic mail) and addressed:
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(a)
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to the Purchaser at:
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Aphria Inc.
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103-245 Talbot Street West
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Leamington, Ontario
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N8H 1N8
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Attention:
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Chief Financial Officer
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Telephone:
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[REDACTED]
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Facsimile:
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[REDACTED]
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Email:
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carlm@aphria.com
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with a copy (which shall not constitute notice) to:
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Stikeman Elliott LLP
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5300 Commerce Court West
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199 Bay Street
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Toronto, ON M5L 1B9
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Attention:
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Curtis Cusinato/Sean Vanderpol
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Telephone:
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(416) 869-5221 / (416) 869-5523
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Facsimile:
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(416) 947-0866
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Email:
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CCusinato@stikeman.com / SVanderpol@stikeman.com
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(b)
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to the Company at:
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Nuuvera Inc.
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5 Hazelton Avenue
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Toronto, ON
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M5R 2E1
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Attention:
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Lorne Abony
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Telephone:
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[REDACTED]
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Facsimile:
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[REDACTED]
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with a copy to:
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Norton Rose Fulbright Canada LLP
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Royal Bank Plaza, South Tower, Suite 3800
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200 Bay Street, P.O. Box 84
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Toronto, ON M5J 2Z4
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Attention:
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Walied Soliman / Paul Fitzgerald
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Telephone:
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(416) 216-4820 / (416) 216-3941
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Facsimile:
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(416) 216-3930
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Email:
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walied.soliman@nortonrosefulbright.com /
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paul.fitzgerald@nortonrosefulbright.com
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Any notice or other communication is deemed to be given and received (i) if sent by personal delivery, same day courier or facsimile or email, on the date of delivery if it is a Business Day and the delivery was made prior to 4:00 p.m. (local time in place of receipt) and otherwise on the next Business Day or (ii) if sent by overnight courier, on the next Business Day. A Party may change its address for service from time to time by providing a notice in accordance with the foregoing. Any subsequent notice or other communication must be sent to the Party at its changed address. Any element of a Party’s address that is not specifically changed in a notice will be assumed not to be changed. Sending a copy of a notice or other communication to a Party’s legal counsel as contemplated above is for information purposes only and does not constitute delivery of the notice or other communication to that Party. The failure to send a copy of a notice or other communication to legal counsel does not invalidate delivery of that notice or other communication to a Party.
Section 8.5
Time of the Essence.
Time is of the essence in this Agreement.
Section 8.6
Injunctive Relief.
The Parties agree that irreparable harm would occur for which money damages would not be an adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to specific performance injunctive and other equitable relief to prevent breaches of this Agreement, and to enforce compliance with the terms of this Agreement without any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or other equitable relief, this being in addition to any other remedy to which the Parties may be entitled at law or in equity.
55
Section 8.7
Third Party Beneficiaries.
(1)
Except as provided in Section 4.9 which, without limiting its terms, is intended as stipulations for the benefit of the third Persons mentioned in such provisions (such third Persons referred to in this Section 8.7 as the “
Indemnified Persons
”), the Company and the Purchaser intend that this Agreement will not benefit or create any right or cause of action in favour of any Person, other than the Parties and that no Person, other than the Parties, shall be entitled to rely on the provisions of this Agreement in any action, suit, proceeding, hearing or other forum.
(2)
Despite the foregoing, the Purchaser acknowledges to each of the Indemnified Persons their direct rights against it under Section 4.9 of this Agreement, which are intended for the benefit of, and shall be enforceable by, each Indemnified Person, his or her heirs and his or her legal representatives, and for such purpose, the Company confirms that it is acting as trustee on their behalf, and agrees to enforce such provisions on their behalf. The Parties reserve their right to vary or rescind the rights at any time and in any way whatsoever, if any, granted by or under this Agreement to any Person who is not a Party, without notice to or consent of that Person, including any Indemnified Person.
Section 8.8
Waiver.
No waiver of any of the provisions of this Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the Party to be bound by the waiver. A Party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a Party from any other or further exercise of that right or the exercise of any other right.
Section 8.9
Entire Agreement.
This Agreement, including the Schedules hereto, the Company Disclosure Letter, the Purchaser Disclosure Letter, the Confidentiality Agreement and the Exclusivity Agreement constitutes the entire agreement between the Parties with respect to the transactions contemplated by this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties. There are no representations, warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the Parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. The Parties have not relied and are not relying on any other information, discussion or understanding in entering into and completing the transactions contemplated by this Agreement.
Section 8.10
Successors and Assigns.
(1)
This Agreement becomes effective only when executed by the Company and the Purchaser. After that time, it will be binding upon and enure to the benefit of the Company, the Purchaser and their respective successors and permitted assigns.
56
(2)
Neither this Agreement nor any of the rights or obligations under this Agreement are assignable or transferable by any Party without the prior written consent of the other Party.
Section 8.11
Severability.
If any provision of this Agreement is determined to be illegal, invalid or unenforceable by an arbitrator or any court of competent jurisdiction, that provision will be severed from this Agreement and the remaining provisions shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible.
Section 8.12
Governing Law.
(1)
This Agreement will be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(2)
Each Party irrevocably attorns and submits to the non-exclusive jurisdiction of the Ontario courts situated in the City of Toronto and waives objection to the venue of any proceeding in such court or that such court provides an inconvenient forum.
Section 8.13
Rules of Construction.
The Parties to this Agreement waive the application of any Law or rule of construction providing that ambiguities in any agreement or other document shall be construed against the Party drafting such agreement or other document.
Section 8.14
No Liability.
No director or officer of the Purchaser or any of its affiliates shall have any personal liability whatsoever to the Company under this Agreement or any other document delivered in connection with the transactions contemplated hereby on behalf of the Purchaser. No director or officer of the Company or any of its Subsidiaries shall have any personal liability whatsoever to the Purchaser under this Agreement or any other document delivered in connection with the transactions contemplated hereby on behalf of the Company or any of its Subsidiaries.
Section 8.15
Language.
The Parties expressly acknowledge that they have requested that this Agreement and all ancillary and related documents thereto be drafted in the English language only. Les parties aux présentes reconnaissent avoir exigé que la présente entente et tous les documents qui y sont accessoires soient rédigés en anglais seulement.
Section 8.16
Counterparts.
This Agreement may be executed in any number of counterparts (including counterparts by facsimile) and all such counterparts taken together shall be deemed to
57
constitute one and the same instrument. The Parties shall be entitled to rely upon delivery of an executed facsimile or similar executed electronic copy of this Agreement, and such facsimile or similar executed electronic copy shall be legally effective to create a valid and binding agreement between the Parties.
[
Remainder of page intentionally left blank
.]
58
IN WITNESS WHEREOF
the Parties have executed this Arrangement Agreement.
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APHRIA INC.
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By:
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(signed “Carl Merton”)
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Authorized Signing Officer
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NUUVERA INC.
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By:
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(signed “Lorne Abony”)
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Authorized Signing Officer
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Signature Page to Arrangement Agreement
SCHEDULE A
PLAN OF ARRANGEMENT
PLAN OF ARRANGEMENT UNDER SECTION 182
OF THE
BUSINESS CORPORATIONS ACT
(ONTARIO)
ARTICLE 1
INTERPRETATION
1.1
Definitions
Unless indicated otherwise, where used in this Plan of Arrangement, capitalized terms used but not defined shall have the meanings ascribed thereto in the Arrangement Agreement and the following terms shall have the following meanings (and grammatical variations of such terms shall have corresponding meanings):
“
Arrangement
” means an arrangement under Section 182(1) of the OBCA on the terms and subject to the conditions set out in this Plan of Arrangement, subject to any amendments or variations to the Plan of Arrangement made in accordance with the terms of the Arrangement Agreement or Section 6.1 of this Plan of Arrangement or made at the direction of the Court in the Final Order with the prior written consent of the Company and the Purchaser, each acting reasonably.
“
Arrangement Agreement
” means the arrangement agreement dated as of January 28, 2018 between the Purchaser and the Company, as same may be amended, supplemented or restated in accordance therewith, prior to the Effective Time, providing for, among other things, the Arrangement.
“
Arrangement Resolution
” means the special resolution approving this Plan of Arrangement presented to the Company Common Shareholders at the Company Meeting.
“
Articles of Arrangement
” means the articles of arrangement of the Company in respect of the Arrangement, required by the OBCA to be sent to the Director after the Final Order is made, which shall include this Plan of Arrangement and otherwise be in a form and content satisfactory to the Company and the Purchaser, each acting reasonably.
“
Business Day
” means a day of the year, other than a Saturday, Sunday or any day on which major banks are generally closed for business in Toronto, Ontario.
“
Cash Consideration
” means $1.00 per Common Share.
“
Certificate of Arrangement
” means the certificate of arrangement issued by the Director pursuant to subsection 183(2) of the OBCA in respect of the Articles of Arrangement.
“
Common Shares
” means the common shares in the capital of the Company.
“
Company
” means Nuuvera Inc.
“
Company Circular
” means the notice of the Company Meeting and accompanying management information circular, including all schedules, appendices and exhibits to, and information incorporated by reference in, such management information circular, to be sent to the Company Common Shareholders in connection with the Company Meeting, as amended, supplemented or otherwise modified from time to time in accordance with the terms of the Arrangement Agreement.
“Company Common Shareholders”
means the registered or beneficial holders of the Common Shares, as the context requires.
“
Company Meeting
” means the special meeting of Company Common Shareholders, including any adjournment or postponement of such special meeting in accordance with the terms of the Arrangement Agreement, to be called and held in accordance with the Interim Order to consider the Arrangement Resolution;
“
Company Options
” means the outstanding options to purchase Common Shares issued pursuant to the Stock Option Plan, and which are outstanding as of the Effective Time.
“
Company Optionholders
” means holders of Company Options.
“
Company Securityholders
” means, collectively, the Company Common Shareholders, the Company Optionholders and the Company Warrantholders.
“
Company Warrantholders
” means the registered or beneficial holders of Company Warrants.
“
Company Warrants
” means the warrants of the Company, each of which will entitle the holder thereof to acquire one Common Share at a price of $7.20 per Common Share, to be issued pursuant to the “bought deal” prospectus offering of units of the Company as announced on January 24, 2018 and as reflected in the Company Filings.
“
Consideration
” means the consideration to be received by non-dissenting Company Common Shareholders pursuant to the Plan of Arrangement in respect of each Common Share that is issued and outstanding immediately prior to the Effective Time, consisting of the Cash Consideration and the Share Consideration.
“
Court
” means the Ontario Superior Court of Justice (Commercial List).
“
Depositary
” means TSX Trust Company, or any other depositary or trust company, bank or financial institution as the Purchaser may appoint to act as depositary with the approval of the Company, acting reasonably.
“
Director
” means the Director appointed pursuant to Section 278 of the OBCA.
“
Dissent Rights
” has the meaning specified in Section 3.1.
“
Dissenting Holder
” means a registered holder of Common Shares who has properly exercised its Dissent Rights in accordance with Section 3.1 and has not withdrawn or been deemed to have withdrawn such exercise of Dissent Right and who is ultimately determined to be entitled to be paid the fair value of its Common Shares.
2
“
Effective Date
” means the date shown on the Certificate of Arrangement, giving effect to the Arrangement.
“
Effective Time
” means 12:01 a.m. (Toronto time) on the Effective Date, or such other time as the Parties agree to in writing before the Effective Date.
“
Eligible Holder
” means a beneficial holder of Common Shares that is: (i) a resident of Canada for purposes of the Tax Act and not exempt from tax under Part I of the Tax Act; or (ii) a partnership, any member of which is a resident of Canada for purposes of the Tax Act and not exempt from tax under Part I of the Tax Act.
“
Exchange Ratio
” means the sum of (i) 0.3546, plus (ii) the fraction resulting from dividing $1.00 by the volume weighted average trading price of the Purchaser Shares on the TSX for the 10 day period immediately preceding the Effective Date.
“
Final Order
” means the final order of the Court in a form acceptable to the Company and the Purchaser, each acting reasonably, approving the Arrangement, as such order may be amended by the Court (with the consent of both the Company and the Purchaser, each acting reasonably) at any time prior to the Effective Date or, if appealed, then, unless such appeal is withdrawn or denied, as affirmed or as amended (provided that any such amendment is acceptable to both the Company and the Purchaser, each acting reasonably) on appeal.
“
Governmental Entity
” means (i) any international, multinational, national, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral body, commission, board, bureau, ministry, agency or instrumentality, domestic or foreign, (ii) any subdivision, agent or authority of any of the above, (iii) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing or (iv) any stock exchange.
“
Interim Order
” means the interim order of the Court in a form acceptable to the Company and the Purchaser, each acting reasonably, providing for, among other things, the calling and holding of the Company Meeting, as such order may be amended by the Court with the consent of the Company and the Purchaser, each acting reasonably.
“
Law
” means, with respect to any Person, any and all applicable law (statutory, common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other similar requirement, whether domestic or foreign, enacted, adopted, promulgated or applied by a Governmental Entity that is binding upon or applicable to such Person or its business, undertaking, property or securities, and to the extent that they have the force of law, policies, guidelines, notices and protocols of any Governmental Entity, as amended.
“
Lien
” means any mortgage, charge, pledge, hypothec, security interest, prior claim, encroachments, option, right of first refusal or first offer, occupancy right, covenant, assignment, lien (statutory or otherwise), defect of title, or restriction or adverse right or claim, or other third party interest or encumbrance of any kind, in each case, whether contingent or absolute.
3
“
Letter of Transmittal
” means the letter of transmittal to be sent by the Company to Company Common Shareholders in connection with the Arrangement.
“
Loan Amount
” means an amount of cash on hand of the Company as determined in accordance with Section 4.6(7) of the Arrangement Agreement, to be lent to the Purchaser by the Company and deposited with the Depositary by the Company in accordance with Section 2.3(a) hereof and at the time provided for in Section 2.9 of the Arrangement Agreement.
“
OBCA
” means the
Business Corporations Act
(Ontario).
“
Parties
” means the Company and the Purchaser and “
Party
” means any one of them.
“
Person
” includes any individual, partnership, association, body corporate, organization, trust, estate, trustee, executor, administrator, legal representative, government (including Governmental Entity), syndicate or other entity, whether or not having legal status.
“
Plan of Arrangement
” means this plan of arrangement proposed under Section 182 of the OBCA, and any amendments or variations made in accordance with Section 8.1 of the Arrangement Agreement or Section 6.1 of this plan of arrangement or made at the direction of the Court in the Final Order with the consent of the Company and the Purchaser, each acting reasonably.
“
Purchaser
” means Aphria Inc.
“
Purchaser Shares
” means the common shares in the capital of the Purchaser.
“
Replacement Option
” means an option or right to purchase Purchaser Shares granted by the Purchaser in replacement of Company Options on the basis set forth in Section 2.3(d).
“Share Consideration”
means 0.3546 of a Purchaser Share for each Common Share.
“
Stock Option Plan
” means the Company’s incentive stock option plan, adopted as of December 29, 2017, as amended.
“
Tax Act
” means the
Income Tax Act
(Canada) and the regulations made thereunder, as now in effect and as they may be promulgated or amended from time to time.
“
TSX
” means the Toronto Stock Exchange.
“
Warrant Indenture
” means the indenture governing the Company Warrants.
1.2
Certain Rules of Interpretation.
In this Agreement, unless otherwise specified:
(1)
Headings, etc.
The division of this Plan of Arrangement into Articles and Sections and the insertion of headings are for convenient reference only and do not affect the construction or interpretation of this Plan of Arrangement.
(2)
Currency.
All references to dollars or to $ are references to Canadian dollars.
4
(3)
Gender and Number.
Any reference to gender includes all genders. Words importing the singular number only include the plural and vice versa.
(4)
Certain Phrases, etc
. Wherever the word “including,” “includes” or “include” is used in this Plan of Arrangement, it shall be deemed to be followed by the words “without limitation.” the word “or” shall be disjunctive but not exclusive. The phrase “the aggregate of,” “the total of,” “the sum of” or a phrase of similar meaning means “the aggregate (or total or sum), without duplication, of.” References herein to a Person in a particular capacity or capacities shall exclude such Person in any other capacity.
(5)
Statutes.
Any reference to a statute refers to such statute and all rules and regulations made under it, as it or they may have been or may from time to time be amended or re-enacted, unless stated otherwise.
(6)
Computation of Time.
A period of time is to be computed as beginning on the day following the event that began the period and ending at 4:30 p.m. on the last day of the period, if the last day of the period is a Business Day, or at 4:30 p.m. on the next Business Day if the last day of the period is not a Business Day. If the date on which any action is required or permitted to be taken under this Plan of Arrangement by a Person is not a Business Day, such action shall be required or permitted to be taken on the next succeeding day which is a Business Day.
(7)
Time References.
References to time are to local time, Toronto, Ontario.
ARTICLE 2
THE ARRANGEMENT
2.1
Arrangement Agreement
This Plan of Arrangement is made pursuant to and subject to the provisions of the Arrangement Agreement.
2.2
Binding Effect
This Plan of Arrangement and the Arrangement will become effective at, and be binding at and after, the times referred to in Section 2.3 on: (i) the Company, (ii) the Purchaser, (iii) all registered and beneficial Company Common Shareholders (including Dissenting Shareholders), and (iv) all holders of Company Options and Company Warrants or participants in the Stock Option Plan, in each case without any further act or formality required on the part of any Person.
2.3
Arrangement
Commencing at the Effective Time, the following shall occur and shall be deemed to occur as set out below without any further authorization, act or formality, in each case effective as at two minute intervals starting at the Effective Time:
(a)
the Company shall lend an amount equal to the Loan Amount to the Purchaser, and the Purchaser shall deliver to the Company a duly issued and executed
5
demand promissory note to evidence such loan and the full amount of such loan shall be immediately deposited by the Company at the direction of the Purchaser with the Depositary to be held in a segregated trust account by the Depositary for the purpose of paying the Cash Consideration for the Common Shares;
(b)
each of the Common Shares held by a Dissenting Holder in respect of which Dissent Rights have been validly exercised shall be deemed to have been transferred without any further act or formality to the Purchaser in consideration for a debt claim against the Purchaser for the amount determined under Article 3, and:
(i)
such Dissenting Holder shall cease to be the holder of such Common Shares and to have any rights as a Company Common Shareholder other than the right to be paid fair value for such Common Shares as set out in Section 3.1;
(ii)
such Dissenting Holder’s name shall be removed as the holder of such Common Shares from the register of Common Shares maintained by or on behalf of the Company; and
(iii)
the Purchaser shall be deemed to be the transferee of such Common Shares free and clear of all Liens (other than the right to be paid fair value for such Common Shares as set out in Section 3.1), and shall be entered in the register of Common Shares maintained by or on behalf of the Company; and
(c)
each Common Share outstanding immediately prior to the Effective Time (other than Common Shares held by a Dissenting Holder in respect of which Dissent Rights have been validly exercised under Section 2.3(b) and any Common Shares held by the Purchaser or any affiliates thereof) shall, without any further action by or on behalf of any Company Common Shareholder, be deemed to be assigned and transferred by the holder thereof to the Purchaser in exchange for the Consideration, and
(i)
each holder of such Common Shares shall cease to be the holder thereof and to have any rights as a Company Common Shareholder other than the right to be paid the Consideration per Common Share in accordance with this Plan of Arrangement;
(ii)
the name of each such holder shall be removed from the register of the Common Shares maintained by or on behalf of the Company; and
(iii)
the Purchaser shall be deemed to be the transferee of such Common Shares free and clear of all Liens and shall be entered in the register of the Common Shares maintained by or on behalf of the Company.
(d)
each Company Option outstanding at the Effective Time (whether vested or unvested) will be exchanged for a Replacement Option to acquire such number of Purchaser Shares as is equal to: (A) that number of Common Shares that were
6
issuable upon exercise of such Company Option immediately prior to the Effective Time, multiplied by (B) the Exchange Ratio, rounded down to the nearest whole number of Purchaser Shares, at an exercise price per Purchaser Share equal to the greater of (i) the quotient determined by dividing: (X) the exercise price per Common Share at which such Company Option was exercisable immediately prior to the Effective Time, by (Y) the Exchange Ratio, rounded up to the nearest whole cent, and (ii) such minimum amount that meets the requirements of paragraph 7(1.4)(c) of the Tax Act. All terms and conditions of a Replacement Option, including the term to expiry, vesting, conditions to and manner of exercising, shall be the same as the Company Option for which it was exchanged, and any certificate or option agreement previously evidencing the Company Option shall thereafter evidence and be deemed to evidence such Replacement Option;
2.4
Tax Elections
An Eligible Holder who receives Purchaser Shares under the Arrangement shall be entitled to make an income tax election pursuant to subsection 85(1) of the Tax Act, or subsection 85(2) of the Tax Act if such beneficial owner is a partnership, (and in each case, where applicable, the analogous provisions of provincial income tax law) with respect to the transfer of its Common Shares to the Purchaser and receipt of the Purchaser Shares by providing two signed copies of the necessary prescribed election form(s) to the Depositary within 90 days following the Effective Date, duly completed with the details of the number of Common Shares transferred and the applicable agreed amounts for the purposes of such elections. Thereafter, subject to the election forms being correct and complete and complying with the provisions of the Tax Act (and applicable provincial income tax law), the forms will be signed by the Purchaser and returned to such Eligible Holder within 90 days after the receipt thereof by the Depositary for filing with the Canada Revenue Agency (or the applicable provincial taxing authority) by such Eligible Holder. The Purchaser will not be responsible for the proper completion of any election form and, except for the Purchaser’s obligation to return (within 90 days after the receipt thereof by the Depositary) duly completed election forms which are received by the Depositary within 90 days of the Effective Date, the Purchaser will not be responsible for any taxes, interest or penalties resulting from the failure by an Eligible Holder to properly complete or file the election forms in the form and manner and within the time prescribed by the Tax Act (or any applicable provincial legislation). In its sole discretion, the Purchaser may choose to sign and return an election form received by the Depositary more than 90 days following the Effective Date, but the Purchaser will have no obligation to do so.
2.5
No Fractional Purchaser Shares and Rounding of Cash Consideration
(a)
In no event shall any fractional Purchaser Shares be issued under this Plan of Arrangement. Where the aggregate number of Purchaser Shares to be issued to a Company Common Shareholder as consideration under this Plan of Arrangement would result in a fraction of a Purchaser Share being issuable, then the number of Purchaser Shares to be issued to such Company Common Shareholder shall be rounded down to the closest whole number and, in lieu of the issuance of a fractional Purchaser Share thereof, the Purchaser will pay to each such holder a cash payment (rounded up to the nearest cent) determined by reference to the volume weighted average trading price
7
of Purchaser Shares on the TSX for the five trading days on which such Purchaser Shares trade on the TSX immediately preceding the Effective Date.
(b)
If the aggregate cash amount which an Company Common Shareholder is entitled to receive pursuant to Section 2.1(c) and Section 5.1(b)(i) would otherwise include a fraction of $0.01, then the aggregate cash amount to which such Company Common Shareholder shall be entitled to receive shall be rounded up to the nearest whole $0.01.
ARTICLE 3
RIGHTS OF DISSENT
3.1
Rights of Dissent
Each registered holder of Common Shares may exercise dissent rights with respect to any Common Shares held by such holder (“
Dissent Rights
”) in connection with the Arrangement pursuant to and in the manner set forth in Section 185 of the OBCA, as modified by the Interim Order and this Section 3.1, provided that, notwithstanding subsection 185(6) of the OBCA, the written objection to the Arrangement Resolution referred to in subsection 185(6) of the OBCA must be received by the Company not later than 5:00 p.m. (Toronto time) two Business Days immediately preceding the date of the Company Meeting (as it may be adjourned or postponed from time to time). Each Dissenting Holder that duly exercises such holder’s Dissent Rights shall be deemed to have transferred the Common Shares held by such holder and in respect of which Dissent Rights have been validly exercised to the Purchaser free and clear of all Liens (other than the right to be paid fair value for such Common Shares as set out in this Section 3.1), as provided in Section 2.3(b) and if they:
(a)
ultimately are entitled to be paid fair value for such Common Shares: (i) shall be deemed not to have participated in the transactions in Article 2 (other than Section 2.3(b)); (ii) will be entitled to be paid the fair value of such Common Shares by the Purchaser, which fair value, notwithstanding anything to the contrary contained in Part XIV of the OBCA, shall be determined as of the close of business on the Business Day before the Arrangement Resolution was adopted; and (iii) will not be entitled to any other payment or consideration, including any payment that would be payable under the Arrangement had such holder not exercised their Dissent Rights in respect of such Common Shares; or
(b)
ultimately are not entitled, for any reason, to be paid fair value for such Common Shares, shall be deemed to have participated in the Arrangement on the same basis as a Company Common Shareholder that is not a Dissenting Holder and shall be entitled to receive only the Consideration contemplated by Section 2.3(c) hereof that such Dissenting Holder would have received pursuant to the Arrangement if such Dissenting Holder had not exercised its Dissent Rights.
3.2
Recognition of Dissenting Holders
(a)
In no circumstances shall the Purchaser, the Company or any other Person be required to recognize a Person exercising Dissent Rights unless such Person is the registered holder of those Common Shares in respect of which such rights are sought to be exercised.
8
(b)
For greater certainty, in no case shall the Purchaser, the Company or any other Person be required to recognize Dissenting Holders as holders of Common Shares in respect of which Dissent Rights have been validly exercised after the completion of the transfer under Section 2.3(b), and the names of such Dissenting Holders shall be removed from the registers of holders of Common Shares in respect of which Dissent Rights have been validly exercised at the same time as the event described in Section 2.3(b) occurs. In addition to any other restrictions under Section 185 of the OBCA, none of the following shall be entitled to exercise Dissent Rights: (i) Company Optionholders; (ii) Company Warrantholders; and (iii) Company Common Shareholders who vote or have instructed a proxyholder to vote such Common Shares in favour of the Arrangement Resolution (but only in respect of such Common Shares).
ARTICLE 4
COMPANY WARRANTS
4.1
Company Warrants
In accordance with the terms of the Warrant Indenture, each holder of a Company Warrant shall be entitled to receive (and such holder shall accept) upon the exercise of such holder’s Company Warrant, in lieu of Company Common Shares to which such holder was theretofore entitled upon such exercise and for the same aggregate consideration payable therefor, the number of Purchaser Shares and the amount of cash which the holder would have been entitled to receive as a result of the transactions contemplated by this Arrangement if, immediately prior to the Effective Date, such holder had been the registered holder of the number of Company Common Shares to which such holder would have been entitled if such holder had exercised such holder’s Company Warrants immediately prior to the Effective Time. Each Company Warrant shall continue to be governed by and be subject to the terms of the applicable Warrant Indenture.
4.2
Exercise of Company Warrants Post-Effective Time
Upon any exercise of a Company Warrant following the Effective Time, the Company shall: (i) deliver, or cause to be delivered, the cash and Purchaser Shares needed to settle such exercise, and (ii) cause the Purchaser to issue the necessary number of Purchaser Shares needed to settle such exercise.
4.3
Idem
This Article 4 is subject to adjustment in accordance with the terms of the Company Warrant Indenture.
ARTICLE 5
CERTIFICATES AND PAYMENTS
5.1
Payment and Delivery of Consideration
(a)
Prior to the sending by the Company of the Articles of Arrangement to the Director:
9
(i)
the Company shall deposit, or cause to be deposited, for the benefit of the Company Common Shareholders, cash with the Depositary in the aggregate amount equal to the payments in respect of the Common Shares required by Section 2.3(c) of this Plan of Arrangement in accordance with Section 2.9(2) of the Arrangement Agreement; and
(ii)
the Purchaser shall deliver, or cause to be delivered, the Purchaser Shares to the Depositary to satisfy the Share Consideration issuable and/or payable to the Company Common Shareholders pursuant to this Plan of Arrangement (other than Company Common Shareholders who have validly exercising Dissent Rights and who have not withdrawn their notice of objection).
(b)
Upon surrender to the Depositary for cancellation of a certificate which immediately prior to the Effective Time represented outstanding Common Shares that were transferred pursuant to Section 2.3(c), together with a duly completed and executed Letter of Transmittal and such additional documents and instruments as the Depositary may reasonably require, the Company Common Shareholder(s) represented by such surrendered certificate shall be entitled to receive in exchange therefor, and the Depositary shall deliver to such Company Common Shareholder(s):
(i)
a cheque, wire or other form of immediately available funds representing the Cash Consideration which such Company Common Shareholder(s) has the right to receive under this Plan of Arrangement for such Common Shares, less any amounts withheld pursuant to Section 5.3; and
(ii)
a certificate representing the number of Purchaser Shares to which such holder is entitled to receive under the Arrangement, which Purchaser Shares will be registered in such name or names and either (A) delivered to the address or addresses as such Company Common Shareholder directed in their Letter of Transmittal; or (B) made available for pick up at the offices of the Depositary in accordance with the instructions of the Company Common Shareholder in the Letter of Transmittal,
and any certificate representing Common Shares so surrendered shall forthwith thereafter be cancelled.
(c)
Until surrendered as contemplated by this Section 5.1, each certificate that immediately prior to the Effective Time represented Common Shares (other than Common Shares in respect of which Dissent Rights have been validly exercised and not withdrawn), shall be deemed after the Effective Time to represent only the right to receive upon such surrender the Consideration in lieu of such certificate as contemplated in this Section 5.1, less any amounts withheld pursuant to Section 5.3. Any such certificate formerly representing Common Shares not duly surrendered on or before the second anniversary of the Effective Date shall cease to represent a claim by or interest of any former holder of Common Shares of any kind or nature against or in the Company or the
10
Purchaser. On such date, all Consideration to which such former holder was entitled shall be deemed to have been surrendered to the Purchaser and shall be paid over by the Depositary to the Purchaser or as directed by the Purchaser.
(d)
Any payment made by way of cheque by the Depositary pursuant to this Plan of Arrangement that has not been deposited or has been returned to the Depositary or that otherwise remains unclaimed, in each case, on or before the second anniversary of the Effective Time, and any right or claim to payment hereunder that remains outstanding on the second anniversary of the Effective Time shall cease to represent a right or claim of any kind or nature and the right of the holder to receive the applicable Consideration pursuant to this Plan of Arrangement shall terminate and be deemed to be surrendered and forfeited to the Purchaser for no consideration.
5.2
Lost Certificates
In the event any certificate which immediately prior to the Effective Time represented one or more outstanding Common Shares that were transferred pursuant to Section 2.3 shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed, the Depositary will issue in exchange for such lost, stolen or destroyed certificate, the Consideration that such Shareholder has the right to receive in accordance with Section 2.3 and such Shareholder’s Letter of Transmittal. When authorizing such exchange for any lost, stolen or destroyed certificate, the Person to whom such Consideration is to be delivered shall as a condition precedent to the delivery of such Consideration, give a bond satisfactory to the Purchaser and the Depositary (each acting reasonably) in such sum as the Purchaser may direct (acting reasonably), or otherwise indemnify the Purchaser and the Company in a manner satisfactory to the Purchaser (acting reasonably) against any claim that may be made against the Purchaser and the Company with respect to the certificate alleged to have been lost, stolen or destroyed.
5.3
Withholding Rights
The Purchaser, the Company or the Depositary shall be entitled to deduct and withhold from any amount payable to any Person under the Plan of Arrangement (including, without limitation, any amounts payable pursuant to Section 3.1), such amounts as the Purchaser, the Company or the Depositary determines, acting reasonably, are required or permitted to be deducted and withheld with respect to such payment under the Tax Act, the United States
Internal Revenue Code of 1986
or any provision of any other Law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes hereof as having been paid to the Person in respect of which such withholding was made, provided that such amounts are actually remitted to the appropriate taxing authority.
11
5.4
No Liens
Any exchange or transfer of securities pursuant to this Plan of Arrangement shall be free and clear of any Liens or other claims of third parties of any kind.
ARTICLE 6
AMENDMENTS
6.1
Amendments to Plan of Arrangement
(a)
The Company and the Purchaser may amend, modify and/or supplement this Plan of Arrangement at any time and from time to time prior to the Effective Time, provided that each such amendment, modification and/or supplement must (i) be set out in writing, (ii) be approved by the Purchaser and the Company (subject to the Arrangement Agreement), each acting reasonably, (iii) filed with the Court and, if made following the Company Meeting, approved by the Court, and (iv) communicated to holders of Common Shares if and as required by the Court.
(b)
Any amendment, modification or supplement to this Plan of Arrangement may be proposed by the Company or the Purchaser at any time prior to the Company Meeting (provided that the Purchaser or the Company (subject to the Arrangement Agreement), as applicable, shall have consented thereto) with or without any other prior notice or communication, and if so proposed and accepted by the Persons voting at the Company Meeting (other than as may be required under the Interim Order), shall become part of this Plan of Arrangement for all purposes.
(c)
Any amendment, modification or supplement to this Plan of Arrangement that is approved or directed by the Court following the Company Meeting shall be effective only if (i) it is consented to in writing by each of the Company and the Purchaser (in each case, acting reasonably), and (ii) if required by the Court, it is consented to by some or all of the Company Common Shareholders voting in the manner directed by the Court.
(d)
Any amendment, modification or supplement to this Plan of Arrangement may be made following the Effective Date unilaterally by the Purchaser, provided that it concerns a matter which, in the reasonable opinion of the Purchaser, is of an administrative nature required to better give effect to the implementation of this Plan of Arrangement and is not adverse to the economic interest of any former Company Common Shareholder.
ARTICLE 7
FURTHER ASSURANCES
7.1
Further Assurances
Notwithstanding that the transactions and events set out in this Plan of Arrangement shall occur and shall be deemed to occur in the order set out in this Plan of Arrangement
12
without any further act or formality, each of the Parties shall make, do and execute, or cause to be made, done and executed, all such further acts, deeds, agreements, transfers, assurances, instruments or documents as may reasonably be required by either of them in order further to document or evidence any of the transactions or events set out in this Plan of Arrangement.
13
SCHEDULE B
ARRANGEMENT RESOLUTION
BE IT RESOLVED THAT:
1.
The arrangement (the “
Arrangement
”) under Section 182 of the
Business Corporations Act
(Ontario) (the “
OBCA
”) of Nuuvera Inc. (the “
Company
”), as more particularly described and set forth in the management proxy circular (the “
Circular
”) dated [
·
], 2018 of the Company accompanying the notice of this meeting (as the Arrangement may be amended, modified or supplemented in accordance with the definitive agreement (as it may be amended, the “
Arrangement Agreement
”) made as of January 28, 2018 between the Company and Aphria Inc. is hereby authorized, approved and adopted.
2.
The plan of arrangement of the Company (as it has been or may be amended, modified or supplemented in accordance with the Arrangement Agreement (the “
Plan of Arrangement
”)), the full text of which is set out in Appendix [
·
] to the Circular, is hereby authorized, approved and adopted.
3.
The (i) Arrangement Agreement and related transactions, (ii) actions of the directors of the Company in approving the Arrangement Agreement, and (iii) actions of the directors and officers of the Company in executing and delivering the Arrangement Agreement, and any amendments, modifications or supplements thereto, are hereby ratified and approved.
4.
The Company is hereby authorized to apply for a final order from the Ontario Superior Court of Justice (Commercial List) to approve the Arrangement on the terms set forth in the Arrangement Agreement and the Plan of Arrangement (as they may be amended, modified or supplemented and as described in the Circular).
5.
Notwithstanding that this resolution has been passed (and the Arrangement adopted) by the shareholders of the Company or that the Arrangement has been approved by the Ontario Superior Court of Justice (Commercial List), the directors of the Company are hereby authorized and empowered to, without notice to or approval of the shareholders of the Company, (i) amend, modify or supplement the Arrangement Agreement or the Plan of Arrangement to the extent permitted thereby and (ii) subject to the terms of the Arrangement Agreement, not to proceed with the Arrangement and related transactions.
6.
Any officer or director of the Company is hereby authorized and directed for and on behalf of the Company to execute and deliver for filing with the Director under the OBCA articles of arrangement and such other documents as are necessary or desirable to give effect to the Arrangement in accordance with the Arrangement Agreement, such determination to be conclusively evidenced by the execution and delivery of such articles of arrangement and any such other documents.
7.
Any officer or director of the Company is hereby authorized and directed for and on behalf of the Company to execute or cause to be executed and to deliver or cause to be delivered all such other documents and instruments and to perform or cause to be performed all such other acts and things as such person determines may be necessary or desirable to give full effect to the foregoing resolution and the matters authorized thereby, such determination to be conclusively evidenced by the execution and delivery of such document or instrument or the doing of any such act or thing.
SCHEDULE C
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
(a)
Fairness Opinion and Directors’ Approvals
. As of the date hereof:
(i)
Canaccord Genuity Corp., financial advisor to the Board, has delivered an oral opinion to the Board to the effect that as of the date hereof, subject to the assumptions and limitations set out therein, the Consideration to be received under the Arrangement is fair from a financial point of view to the Company Common Shareholders other than the Purchaser and its affiliates (the “
Fairness Opinion
”);
(ii)
the Company has been authorized by Canaccord Genuity Corp. to permit inclusion of the Fairness Opinion and references thereto and summaries thereof in the Company Circular; and
(iii)
the Board has unanimously (i) determined that the Arrangement is in the best interests of the Company and is fair to the Company Common Shareholders, (ii) resolved to recommend to the Company Common Shareholders that they vote in favour of the Arrangement Resolution and (iii) approved the Arrangement pursuant to the Plan of Arrangement and the execution and performance of this Agreement;
(b)
Organization and Qualification
. The Company is a corporation duly continued and validly existing under the applicable Laws of its jurisdiction of incorporation, continuance or creation and has all necessary corporate power and authority to own its property and assets as now owned and to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the character of its properties, owned, leased, licensed or otherwise held, or the nature of its activities, makes such qualification necessary.
(c)
Authority Relative to this Agreement
. The Company has all necessary corporate power, authority and capacity to enter into this Agreement and all other agreements and instruments to be executed by the Company as contemplated by this Agreement, and to perform its obligations hereunder and under such agreements and instruments. The execution and delivery of this Agreement by the Company and the performance by the Company of its obligations under this Agreement have been duly authorized by the Board and, except for obtaining the Required Approval, the Interim Order and the Final Order in the manner contemplated herein, and filing the Articles of Arrangement with the Director, no other corporate proceedings on its part are necessary to authorize this Agreement or the Arrangement, other than, with respect to the Company Circular and other matters relating thereto, the approval of the Board. This Agreement has been duly executed and delivered by the Company, and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the qualification that such enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting
rights of creditors and that equitable remedies, including specific performance, are discretionary and may not be ordered.
(d)
No Violation
. Neither the authorization, execution and delivery of this Agreement by the Company nor the completion of the transactions contemplated by this Agreement or the Arrangement, nor the performance of its obligations hereunder or thereunder, nor compliance by the Company with any of the provisions hereof or thereof will result in a violation or breach of, constitute a default (or an event which, with notice or lapse of time or both, would become a default), require any consent or approval to be obtained or notice to be given under, or give rise to any third party right of termination, cancellation, suspension, acceleration, penalty or payment obligation or right to purchase or sale under, any provision of:
(i)
its articles or by-laws;
(ii)
any Authorization or Contract to which the Company is a party or to which it or any of its properties or assets are bound; or
(iii)
any Laws (assuming compliance with the matters referred to in paragraph (e) below), regulation, order, judgment or decree applicable to the Company or any of its Subsidiaries or any of their respective properties or assets;
except in the case of (ii) and (iii) above for such breaches, defaults, consents, terminations, cancellations, suspensions, accelerations, penalties, payment obligations or rights which would not individually or in the aggregate be material and adverse to the Company and its Subsidiaries on a consolidated basis.
(e)
Governmental Approvals
. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Arrangement requires no consent, waiver or approval or any action by or in respect of, or filing with, or notification to, any Governmental Entity other than: (i) the Interim Order and any approvals required by the Interim Order; (ii) the Final Order; (iii) sending the Articles of Arrangement to the Director; (iv) compliance with any applicable Securities Laws and stock exchange rules and regulations; (v) receipt of the Key Regulatory Approvals; and (vi) any actions, filings or notifications the absence of which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
(f)
Capitalization
.
(i)
The authorized share capital of the Company consists of an unlimited number of Common Shares. As of the date hereof, there were issued and outstanding 80,130,000 Common Shares.
(ii)
As of the date hereof, an aggregate of up to 8,421,364 Common Shares are issuable upon the exercise of Company Options, the exercise prices, expiration dates and other material terms of which (including the vesting schedules) are set forth in section (f) of the Company Disclosure Letter, and up to 4,090,910
2
Common Shares will be issuable upon the exercise of the Company Warrants. The Company has included in the Company Data Room a true and complete copy of the stock option plan governing the Company Options, and a true and complete copy of the warrant indenture governing such Company Warrants will be included in the Company Data Room following closing of the Offering.
(iii)
Except for the Company Options, the Company Warrants to be issued on closing of the Offering and, with respect to Subsidiaries of the Company, as disclosed in the Company Disclosure Letter, there are no securities, options, warrants, stock appreciation rights, restricted stock units, conversion privileges or other rights, agreements, arrangements or commitments (pre-emptive, contingent or otherwise) of any character whatsoever to which the Company or any of its Subsidiaries is a party or by which any of the Company or its Subsidiaries may be bound, obligating or which may obligate the Company or any of its Subsidiaries to issue, grant, deliver, extend, or enter into any such security, option, warrant, stock appreciation right, restricted stock unit, conversion privilege or other right, agreement, arrangement or commitment.
(iv)
All outstanding Common Shares have been duly authorized and validly issued, are fully paid and non-assessable, and all Common Shares issuable upon the exercise of Company Options and Company Warrants in accordance with their respective terms have been or, in the case of the Company Warrants, will be, duly authorized and, upon issuance, will be validly issued as fully paid and non-assessable, and are not and will not be subject to, or issued in violation of, any pre-emptive rights. All securities of the Company (including the Common Shares and the Company Options) have been, and the Company Warrants will be, issued in compliance with all applicable Laws and Securities Laws.
(v)
There are no securities of the Company or of any of its Subsidiaries outstanding which have the right to vote generally (or are convertible into or exchangeable for securities having the right to vote generally) with the holders of the outstanding Common Shares on any matter. There are no outstanding contractual or other obligations of the Company or any subsidiary to repurchase, redeem or otherwise acquire any of its securities or with respect to the voting or disposition of any outstanding securities of any of its subsidiaries. There are no outstanding bonds, debentures or other evidences of indebtedness of the Company or any of its subsidiaries having the right to vote with the holders of the outstanding Common Shares on any matters.
(g)
Ownership of Subsidiaries
. Section (g) of the Company Disclosure Letter includes complete and accurate lists of all Subsidiaries owned, directly or indirectly, by the Company, each of which is wholly-owned except as disclosed in section (g) of the Company Disclosure Letter. All of the issued and outstanding shares and other ownership interests in the Subsidiaries of the Company are duly authorized, validly issued, fully paid and, where the concept exists, non-assessable, and all such shares and other ownership interests held directly or indirectly by the Company are legally and beneficially owned free and clear of all Liens (other than Permitted Liens), and there are
3
no outstanding options, warrants, rights, entitlements, understandings or commitments (contingent or otherwise) regarding the right to purchase or acquire, or securities convertible into or exchangeable for, any such shares or other ownership interests of any of the subsidiaries of the Company, except as disclosed in section (g) of the Company Disclosure Letter. Other than as disclosed in section (g) of the Company Disclosure Letter, there are no Contracts, commitments, understandings or restrictions which require any Subsidiaries of the Company to issue, sell or deliver any shares or other ownership interests, or any securities or obligations convertible into or exchangeable for, any shares or other ownership interests. Except for ownership of equity interests in the Subsidiaries listed on section (g) of the Company Disclosure Letter, the Company, directly or indirectly through any of its Subsidiaries or otherwise, does not own any equity interest of any kind in any other Person.
(h)
Reporting Status and Securities Laws Matters
. The Company is a “reporting issuer” or the equivalent and not on the list of reporting issuers in default under applicable Canadian provincial Securities Laws in British Columbia, Alberta and Ontario. The Company is in compliance, in all material respects, with all applicable Securities Laws and there are no current, pending or, to the knowledge of the Company, threatened proceedings before any Securities Authority or other Governmental Entity relating to any alleged non-compliance with any Securities Laws. The Common Shares are listed on, and the Company is in compliance in all material respects with the rules and policies of, the TSX-V. No delisting, suspension of trading in or cease trading order with respect to any securities of the Company and to the knowledge of the Company no inquiry or investigation (formal or informal) of any Securities Authority or the TSX-V is in effect or ongoing or, to the knowledge of the Company, expected to be implemented or undertaken.
(i)
Company Filings
. The Company has filed all documents required to be filed by it in accordance with applicable Securities Laws with the Securities Authorities and/or the TSX-V. The Company has timely filed or furnished all Company Filings required to be filed or furnished by the Company with any Governmental Entity (including “documents affecting the rights of securityholders” and “material contracts” required to be filed by Part 12 of National Instrument 51-102 —
Continuous Disclosure Obligations
). Each of the Company Filings complied as filed in all material respects with applicable Securities Laws and did not, as of the date filed (or, if amended or superseded by a subsequent filing prior to the date of this Agreement, on the date of such filing), contain any Misrepresentation. The Company has not filed any confidential material change report which at the date of this Agreement remains confidential. Not in limitation of the foregoing, the underwriting agreement dated January 24, 2018 by and among the Company, Clarus Securities Inc., Canaccord Genuity Corp. and GMP Securities L.P. was timely filed in accordance with all applicable Securities Laws and the representations made by the Company to and for the benefit of the underwriters in such agreement are true and correct.
(j)
Financial Statements
. The consolidated audited financial statements of Nuuvera Holdings Limited as at and for period from incorporation on January 30, 2017 to September 30, 2017 (including the notes thereto) and any related MD&A (collectively,
4
the “
Company Financial Statements
”) were prepared in accordance with IFRS consistently applied (except (a) as otherwise indicated in such financial statements and the notes thereto or, in the case of audited statements, in the related report of the Company’s independent auditors, or (b) in the case of unaudited interim statements, are subject to normal period-end adjustments and may omit notes which are not required by applicable Laws in the unaudited statements) and present fairly, in all material respects, the consolidated financial position, financial performance and cash flows of the Company for the dates and periods indicated therein (subject, in the case of any unaudited interim financial statements, to normal period-end adjustments) and reflect reserves required by IFRS in respect of all material contingent liabilities, if any, of the Company on a consolidated basis. There has been no material change in the Company’s accounting policies, except as described in the Company Financial Statements, since January 30, 2017.
(k)
Internal Controls and Financial Reporting
. The Company has (i) designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company and its Subsidiaries is made known to the Chief Executive Officer and Chief Financial Officer of the Company on a timely basis, particularly during the periods in which the annual or interim filings are being prepared; (ii) designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS; (iii) has evaluated the effectiveness of the Company’s disclosure controls and procedures and has disclosed in its MD&A its conclusions about the effectiveness of its disclosure controls and procedures; and (iv) has evaluated the effectiveness of the Company’s internal control over financial reporting and has disclosed in its MD&A its conclusions about the effectiveness of internal control over financial reporting and, if applicable, the necessary disclosure relating to any material weaknesses. To the knowledge of the Company, as of the date of this Agreement:
(i)
there are no material weaknesses in, the internal controls over financial reporting of the Company that could reasonably be expected to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(ii)
there is and has been no fraud, whether or not material, involving management or any other employees who have a significant role in the internal control over financial reporting of the Company. Since January 30, 2017, the Company has received no: (x) complaints from any source regarding accounting, internal accounting controls or auditing matters; or (y) expressions of concern from employees of the Company regarding questionable accounting or auditing matters.
(l)
Books and Records; Disclosure
. The financial books, records and accounts of the Company and its Subsidiaries: (i) have been maintained in accordance with applicable Laws and IFRS on a basis consistent with prior years; (ii) are stated in reasonable detail and accurately and fairly reflect the material transactions, acquisitions and dispositions
5
of the assets of the Company and its Subsidiaries; and (iii) accurately and fairly reflect the basis for the Company Financial Statements.
(m)
Independent Auditors
. The Company’s current auditors are independent with respect to the Company within the meaning of the rules of professional conduct applicable to auditors in Canada and there has never been a “reportable event” (within the meaning of National Instrument 51-102) with the current, or to the best knowledge of the Company any predecessor, auditors of the Company during the last three years.
(n)
Minute Books
. The corporate minute books of the Company and its Subsidiaries contain minutes of all meetings and resolutions of its boards of directors and committees of its board of directors, other than those portions of minutes of meetings reflecting discussions of the Arrangement, and shareholders, held according to applicable Laws and are complete and accurate in all material respects.
(o)
No Undisclosed Liabilities
. The Company and its Subsidiaries have no material outstanding indebtedness, liabilities or obligations, whether accrued, absolute, contingent or otherwise, and are not party to or bound by any suretyship, guarantee, indemnification or assumption agreement, or endorsement of, or any other similar commitment with respect to the obligations, liabilities or indebtedness of any Person, other than those specifically identified in the Company Financial Statements, which relate to the proposed Arrangement or incurred in the Ordinary Course and which are not material since the date of the most recent Company Financial Statements.
(p)
No Material Change
. Since September 30, 2017:
(i)
the Company and its Subsidiaries has conducted its business only in the Ordinary Course, excluding matters relating to the proposed Arrangement;
(ii)
there has not occurred any event, occurrence or development or a state of circumstances or facts which has had or would, individually or in the aggregate, reasonably be expected to have any Company Material Adverse Effect;
(iii)
except as disclosed in section (p) of the Company Disclosure Letter, there has not been any acquisition or sale by the Company or its Subsidiaries of any material property or assets;
(iv)
there has not been any incurrence, assumption or guarantee by the Company or its Subsidiaries of any material debt for borrowed money, any creation or assumption by the Company or its Subsidiaries of any Lien or any making by the Company or its Subsidiaries of any material loan, advance or capital contribution to or investment in any other Person, except as disclosed in the Company Financial Statements;
(v)
there has been no dividend or distribution of any kind declared, paid or made by the Company on any Common Shares;
6
(vi)
the Company has not effected or passed any resolution to approve a split, consolidation or reclassification of any of the outstanding Common Shares;
(vii)
other than as disclosed in section (p)(vii) of the Company Disclosure Letter, there has not been any material increase in or modification of the compensation payable to or to become payable by the Company or its Subsidiaries to any of their respective directors, officers, employees or consultants or any grant to any such director, officer, employee or consultant of any increase in severance, change in control or termination pay or any increase or modification of any Employee Plans of the Company (including the granting of Company Options) made to, for or with any of such directors, officers, employees or consultants; and
(viii)
the Company has not removed any auditor or director or terminated any senior officer.
(q)
Litigation
. Other than as disclosed in section (q) of the Company Disclosure Letter, there is no claim, action, suit, grievance, complaint, proceeding, arbitration, charge, audit, indictment or investigation that is pending or has been commenced or, to the knowledge of the Company, is threatened affecting the Company or its Subsidiaries or affecting any of their property or assets (whether owned or leased) at law or in equity, which, individually or in the aggregate, if determined adversely to the Company or its Subsidiaries, has or could reasonably be expected to result in liability to the Company or its Subsidiaries in excess of $250,000. Neither the Company, its Subsidiaries nor any their respective assets or properties is subject to any outstanding judgment, order, writ, injunction or decree material to the Company and its Subsidiaries on a consolidated basis.
(r)
Taxes
.
(i)
The Company and each of its Subsidiaries has duly and timely filed all material Tax Returns required to be filed prior to the date hereof with the appropriate Governmental Entities and all such Tax Returns are true and correct in all material respects.
(ii)
The Company and each of its Subsidiaries has duly and timely paid all material Taxes, including all instalments on account of Taxes for the current year that are due and payable by it whether or not assessed by the appropriate Governmental Entity.
(iii)
The Company and each of its Subsidiaries has duly and timely collected all material amount of all Taxes required to be collected and has duly and timely paid and remitted the same to the appropriate Governmental Entity.
(iv)
There are no material proceedings, investigations, audits or claims now pending against the Company or its Subsidiaries in respect of any Taxes and no Governmental Entity has asserted in writing, or to the knowledge of the Company, has threatened to assert against the Company or its Subsidiaries any
7
deficiency or claim for Taxes or interest thereon or penalties in connection therewith.
(v)
There are no outstanding agreements, arrangements, waivers or objections extending the statutory period or providing for an extension of time with respect to the assessment or reassessment of Taxes or the filing of any Tax Return by, or any payment of Taxes by, the Company or any of its Subsidiaries.
(vi)
To the knowledge of the Company, there are no material Liens for Taxes upon any property or assets of the Company and its Subsidiaries (whether owned or leased), except Liens for current Taxes not yet due.
(vii)
The Company or its Subsidiaries are not a party to any agreement, understanding, or arrangement relating to allocating or sharing any material amount of Taxes.
(viii)
The Company and each of its Subsidiaries has duly and timely withheld from any amount paid or credited by it to or for the account or benefit of any Person, including any employees and any non-resident Person, the amount of all material Taxes and other deductions required by any Laws to be withheld from any such amount and has duly and timely remitted the same to the appropriate Governmental Entity.
(ix)
The Company is a “taxable Canadian corporation” for the purposes of the Tax Act.
(s)
Data Privacy and Security
. Neither the Company nor any of its Subsidiaries have been notified in writing of and, to the knowledge of the Company, is not the subject of any complaint, regulatory investigation or proceeding related to data security or privacy.
(t)
Property
.
(i)
The Company or its Subsidiaries is the registered and/or beneficial owner of the real property described in section (t) of the Company Disclosure Letter (collectively, the “
Company Owned Real Property
”) free and clear of all Liens, except Permitted Liens.
(ii)
Other than the Company Owned Real Property, the Company and its Subsidiaries do not own any other real property.
(iii)
In respect of the Company Owned Real Property: neither the Company nor its Subsidiaries have received any notice, and have no knowledge, of any intention of any Governmental Entity to expropriate all or any part of the Company Owned Real Property; there are no leases in respect of the Company Owned Real Property or any part thereof other than Permitted Liens; other than as disclosed in section (t)(iii) of the Company Disclosure Letter, no Person has any right of first refusal, option, or other right to acquire the Company Owned Real Property
8
or any part thereof other than Permitted Liens; to the knowledge of the Company, the Company or its Subsidiaries is not in default under any of its material obligations arising out of any Permitted Liens beyond any applicable cure periods; all necessary permits and approvals have been obtained from the appropriate Governmental Entity in respect of the Company’s and its Subsidiaries present use of and operations on the Company Owned Real Property; the Company and its Subsidiaries have no present or future obligation to pay moneys to any Governmental Entity in connection with any on-site or off-site servicing, including off-site roads, services or utilities, save and except obligations which exist by virtue of the Permitted Liens.
(iv)
Each property currently leased or subleased by the Company or its Subsidiaries from a third party (collectively, the “
Company Leased Properties
”) is listed in section (t)(iii) of the Company Disclosure Letter, identifying the documents under which such leasehold interests are held (collectively, the “
Company Lease Documents
”). The Company or its Subsidiaries, as applicable, holds good and valid leasehold interests in the Company Leased Properties, free and clear of all Liens other than Permitted Liens. Each of the Company Lease Documents is valid, binding and in full force and effect as against the Company and its Subsidiaries, as applicable, and to the knowledge of the Company, as against the other parties thereto. To the knowledge of the Company, neither the Company, its Subsidiaries nor any of the other parties to the Company Lease Documents, is in material breach or violation or default (in each case, with or without notice or lapse of time or both) under any of the Company Lease Documents which breach, violation or default has not been cured, and the Company and its Subsidiaries has not received or given any notice of default under any such agreement which remains uncured.
(v)
The Company and each of its Subsidiaries has good and valid title to, or a valid and enforceable leasehold interest in, all of its and their respective other material assets and property not listed above in paragraph (s) and the Company’s and its Subsidiaries’ ownership of or leasehold interest in any such property is not subject to any Liens, except for Permitted Liens.
(vi)
The Company Owned Real Property and the Company Leased Properties, as applicable, are adequately serviced by utilities (or well water with adequate septic systems, if any) having adequate capacities for the normal operations of the Company’s and its Subsidiaries facilities.
(u)
Sufficiency of Assets
. The Company and its Subsidiaries have valid, good and marketable title to all personal property owned by them, free and clear of all Liens other than Permitted Liens. The assets and property owned, leased or licensed by the Company and its Subsidiaries are sufficient, in all material respects, for conducting the business, as currently conducted, of the Company.
(v)
Material Contracts
. With respect to the Material Contracts of the Company:
9
(i)
Section (v) of the Company Disclosure Letter includes a complete and accurate list of all Material Contracts to which the Company is a party and that are currently in force. The Company has made available to the Purchaser for inspection true and complete copies of all such Material Contracts.
(ii)
Except as would not be reasonably expected to result in, individually or in the aggregate, a Company Material Adverse Effect, all of the Material Contracts are in full force and effect, and the Company or one of its Subsidiaries is entitled to all rights and benefits thereunder in accordance with the terms thereof. The Company or its applicable Subsidiaries has not waived any rights under a Material Contract and no material default or breach exists in respect thereof on the part of the Company or its applicable Subsidiaries, or to the knowledge of the Company, on the part of any other party thereto, and no event has occurred which, after the giving of notice or the lapse of time or both, would constitute such a default or breach or trigger a right of termination of any of such Material Contracts.
(iii)
All of the Material Contracts are valid and binding obligations of the Company or one of its Subsidiaries, as the case may be, enforceable in accordance with their respective terms, except as may be limited by bankruptcy, insolvency and other laws affecting the enforcement of creditors’ rights generally and subject to the qualification that equitable remedies may only be granted in the discretion of a court of competent jurisdiction.
(iv)
As at the date hereof, neither the Company nor any of its Subsidiaries has received written notice that any party to a Material Contract, intends to cancel, terminate or otherwise modify or not renew such Material Contract, and to the knowledge of the Company, no such action has been threatened.
(v)
Neither the entering into of this Agreement, nor the consummation of the Arrangement will trigger any change of control or similar provisions in any of the Material Contracts.
(w)
Authorizations
.
(i)
The Company and its Subsidiaries have obtained and are in compliance with all material Authorizations required by applicable Laws, necessary to conduct their current business as now being conducted.
(ii)
All material Authorizations of the Company and its Subsidiaries are in full force and effect, and, to the knowledge of the Company, no suspension or cancellation thereof has been threatened.
(iii)
Other than as disclosed in section (w)(iii) of the Company Disclosure Letter, no material Authorizations of the Company or any of its Subsidiaries will in any way be affected by, or terminate or lapse by reason of, the transactions
10
contemplated by this Agreement or any of the other agreements contemplated hereunder or executed herewith.
(iv)
There are no facts, events or circumstances that would reasonably be expected to result in a failure to obtain or failure to be in compliance with such Authorizations as are necessary to conduct the business of the Company and its Subsidiaries as it is currently being conducted.
(x)
Environmental Matters
.
(i)
The Company and each of its Subsidiaries have, in all material respects, carried on its businesses and operations in compliance with all applicable Environmental Laws.
(ii)
Neither the Company nor any its Subsidiaries have received any order, request or written notice from any Person either alleging a material violation of any Environmental Law or requiring that the Company or any of its Subsidiaries carry out any work, incur any costs or assume any liabilities, related to a violation of Environmental Laws or to any agreements with any Governmental Entity with respect to or pursuant to Environmental Laws.
(iii)
To the knowledge of the Company, there are no hazardous substances or other conditions that could reasonably be expected to result in liability of or adversely affect the Company or any of its Subsidiaries under or related to any Environmental Law on, at, in, under or from any of the Company Owned Real Property or Company Leased Properties (including the workplace environment) currently or, to the knowledge of the Company, previously owned, leased or operated by the Company or any of its Subsidiaries.
(iv)
There are no pending claims or, to the knowledge of the Company, threatened claims, against the Company or any of its Subsidiaries arising out of any Environmental Laws.
(y)
Compliance with Laws
.
(i)
The Company and each of its Subsidiaries have complied with and are not in violation, in any material respect, of any applicable Laws.
(ii)
Neither the Company nor any of its Subsidiaries has received any written notices or other written correspondence from any Governmental Entity (1) regarding any violation (or any investigation, inspection, audit, or other proceeding by any Governmental Entity involving allegations of any violation) of any Law (other than Environmental Laws) or (2) of any circumstances that may have existed or currently exist which could lead to a loss, suspension, or modification of, or a refusal to issue, any material Authorization. To the knowledge of the Company, no investigation, inspection, audit or other proceeding by any Governmental
11
Entity involving allegations of any material violation of any Law (other than Environmental Laws) is threatened or contemplated.
(iii)
Neither the Company, its Subsidiaries nor, to the knowledge of the Company, any of their directors, executives, representatives, agents or employees (i) has used or is using any corporate funds for any illegal contributions, gifts, entertainment or other expenses relating to political activity that would be illegal, (ii) has used or is using any corporate funds for any direct or indirect illegal payments to any foreign or domestic governmental officials or employees, (iii) has violated or is violating any provision of the
United States Foreign Corrupt Practices Act of 1977
, the
Corruption of Foreign Public Officials Act
(Canada) or any similar Laws of other jurisdictions, (iv) has established or maintained, or is maintaining, any illegal fund of corporate monies or other properties or (v) has made any bribe, illegal rebate, illegal payoff, influence payment, kickback or other illegal payment of any nature.
(z)
Employment & Labour Matters
. Except as disclosed in section (z) of the Company Disclosure Letter:
(i)
Neither the Company nor any of its Subsidiaries are:
(A)
party to any Contract providing for termination notice, payment in lieu of termination notice, change of control payments, or severance payments to, or any employment or consulting agreement with, any current or former director, officer or employee of the Company or its Subsidiaries other than such arising from any applicable Law; and
(B)
party to any Collective Agreement nor, to the knowledge of the Company, subject to any application for certification or threatened union-organizing campaigns for employees not covered under a Collective Agreement nor are there any current, or to the knowledge of the Company, pending or threatened strikes or lockouts at the Company or its Subsidiaries .
(ii)
There are no labour disputes, strikes, organizing activities or work stoppages against the Company or any of its Subsidiaries pending, or to knowledge of the Company, threatened.
(iii)
The execution, delivery and performance of this Agreement and the consummation of the Arrangement will not result in the automatic acceleration of the time of payment or vesting of entitlements otherwise available under any Employee Plan of the Company or any of its Subsidiaries.
(iv)
The Company and each of its Subsidiaries has been and is now in compliance, in all material respects, with all terms and conditions of employment, with respect to employment and labour, including, wages, hours of work, overtime, human rights, occupational health and safety and workers compensation, and there are
12
no current, or, to the knowledge of the Company, pending or threatened proceedings (including grievances, arbitration, applications or pending applications) before any Governmental Entity or labour arbitrator with respect to any of the foregoing Employee Plans of the Company and its Subsidiaries (other than routine claim for benefits).
(v)
To the knowledge of the Company, no executive or manager of the Company or its Subsidiaries (A) has any present intention to terminate their employment, or (B) is a party to any confidentiality, non-competition, proprietary rights or other such agreement with any other Person besides the Company or its Subsidiaries which would impede the business, be material to the performance of such employee’s employment duties, or the ability of the Company and any of its Subsidiaries, or the Purchaser and any of its Subsidiaries to conduct the business.
(vi)
There are no outstanding assessments, penalties, fines, liens, charges, surcharges, or other amounts due or owing pursuant to any provincial workers’ compensation statute or regulation, and nether the Company nor any of its Subsidiaries has been reassessed in any material respect under such statute or regulation during the past three (3) years and, to the knowledge of the Company, no audit of the Company or any its Subsidiaries is currently being performed pursuant to any provincial workers’ compensation statute or regulation, and, to the knowledge of the Company, there are no claims or potential claims which may materially adversely affect the Company’s or any of its Subsidiaries’ accident cost experience in respect of the business.
(vii)
Section (z) of the Company Disclosure Letter contains a correct and complete list of each member of management and independent contractors/consultants of the Company and its Subsidiaries, indicating their respective location, hire date, position, salary, benefits and current status (full time, part-time, active, non-active), as applicable and whether they are subject to a written employment contract.
(viii)
Each independent contractor/consultant who is disclosed in section (z) of the Company Disclosure Letter has, to the knowledge of the Company, been properly classified by the Company and its Subsidiaries as an independent contractor and neither the Company, nor any of its Subsidiaries has received any notice from any Governmental Entity disputing such classification.
(ix)
Section (z) of the Company Disclosure Letter lists all Employee Plans of the Company and its Subsidiaries. The Company has made available to the Purchaser true, correct and complete copies of all such Employee Plans as amended.
(xi)
No Employee Plan of the Company or any of its Subsidiaries contains or has ever contained a “defined benefit provision” as such term is defined in subsection 147.1 of the Tax Act.
13
(xii)
All Employee Plans of the Company and its Subsidiaries are and have been established, registered, funded and administered in all material respects: in (x) accordance with applicable Laws and (y) in accordance with their terms. To the knowledge of the Company, no fact or circumstance exists which could adversely affect the registered status of any such Employee Plan.
(xiii)
All contributions, premiums or taxes required to be made or paid by the Company or any of its Subsidiaries under the terms of each Employee Plan of the Company and its Subsidiaries or by applicable Laws have been made in a timely fashion.
(aa)
Intellectual Property
.
(i)
The Company and its Subsidiaries own all right, title and interest in and to, or is validly licensed (and are not in material breach of such licenses), all Intellectual Property that is material to the conduct of the business, as currently conducted, of the Company and its Subsidiaries (collectively, the “
Company Intellectual Property Rights
”). All such Company Intellectual Property Rights are sufficient, in all material respects, for conducting the business, as currently conducted, of the Company and its Subsidiaries, and to the knowledge of the Company, all such Company Intellectual Property Rights are valid and enforceable (subject to the effects of bankruptcy, insolvency, reorganization, moratorium or laws relating to or affecting creditors’ rights generally), and do not infringe upon the Intellectual Property rights of any third party.
(ii)
The Company and its Subsidiaries, as applicable, own all right, title and interest in and to the trademarks, trade names and service marks listed in section (aa) of the Company Disclosure Letter.
(bb)
Health Canada
. All Material Contracts in relation to the licences and permits issued by Health Canada have been provided to or made available to the Purchaser and its representatives.
(cc)
Related Party Transactions
. With the exception of this Agreement and any contracts related to Company Options and employment agreements included in the Company Data Room, there are no Contracts or other transactions currently in place between the Company or any of its Subsidiaries, on the one hand, and: (i) any officer or director of the Company or any of its Subsidiaries; and (ii) any affiliate or associate of any such, officer or director. Except as disclosed in section (cc) of the Company Disclosure Letter, to the knowledge of the Company, no related party of the Company (within the meaning of MI 61-101) together with its associated entities, beneficially owns or exercises control or direction over 1% or more of the outstanding Common Shares, except for related parties who will not receive a “collateral benefit” (within the meaning of MI 61-101) as a consequence of the transactions contemplated by this Agreement.
(dd)
Brokers
. Other than as disclosed in section (dd) of the Company Disclosure Letter, no broker, investment banker, financial advisor or other Person is entitled to any broker’s,
14
finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Company or any of its Subsidiaries
(ee)
Insurance
. As of the date hereof, the Company and each of its Subsidiaries have such policies of insurance as are included in the Company Data Room. All insurance maintained by the Company and its Subsidiaries is in full force and effect and in good standing and is in amounts and in respect of such risks as are normal and usual for companies of similar size operating in the cannabis industry.
15
SCHEDULE D
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
(a)
Organization and Qualification
. The Purchaser is a corporation duly incorporated and validly existing under the Laws of its jurisdiction of incorporation and has all necessary corporate power and authority to own its property and assets as now owned and to carry on its business as it is now being conducted. The Purchaser is duly qualified to do business and is in good standing in each jurisdiction in which the character of its properties, owned, leased, licensed or otherwise held, or the nature of its activities, makes such qualification necessary.
(b)
Authority Relative to this Agreement
. The Purchaser has all necessary corporate power, authority and capacity to enter into this Agreement and all other agreements and instruments to be executed by the Purchaser as contemplated by this Agreement, and to perform its obligations hereunder and under such agreements and instruments. The execution and delivery of this Agreement by the Purchaser and the performance by the Purchaser of its obligations under this Agreement have been duly authorized by the Purchaser board or directors and no other corporate proceedings on its part are necessary to authorize this Agreement, the Arrangement or the issuance of the Consideration Shares. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to the qualification that such enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting rights of creditors and that equitable remedies, including specific performance, are discretionary and may not be ordered.
(c)
No Violation
. Neither the authorization, execution and delivery of this Agreement by the Purchaser nor the completion of the transactions contemplated by this Agreement or the Arrangement, nor the performance of its obligations hereunder or thereunder, nor compliance by the Purchaser with any of the provisions hereof or thereof will result in a violation or breach of, constitute a default (or an event which, with notice or lapse of time or both, would become a default), require any consent or approval to be obtained or notice to be given under, or give rise to any third party right of termination, cancellation, suspension, acceleration, penalty or payment obligation or right to purchase or sale under, any provision of:
(i)
its articles or by-laws;
(ii)
any Authorization or Contract to which the Purchaser is a party or to which it or any of its properties or assets are bound; or
(iii)
any Laws (assuming compliance with the matters referred to in paragraph (d) below), regulation, order, judgment or decree applicable to the Purchaser or any of its Subsidiaries or any of their respective properties or assets;
except in the case of (ii) and (iii) above for such breaches, defaults, consents, terminations, cancellations, suspensions, accelerations, penalties, payment obligations or rights which would not individually or in the aggregate be material and adverse to the Purchaser and its Subsidiaries on a consolidated basis.
(d)
Governmental Approvals
. The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the Arrangement requires no consent, waiver or approval or any action by or in respect of, or filing with, or notification to, any Governmental Entity other than: (i) the Interim Order and any approvals required by the Interim Order; (ii) the Final Order; (iii) sending the Articles of Arrangement to the Director; (iv) compliance with any applicable Securities Laws and stock exchange rules and regulations; (v) receipt of the Key Regulatory Approvals; and (vi) any actions, filings or notifications the absence of which would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect.
(e)
Capitalization
.
(i)
The authorized share capital of the Purchaser consists of an unlimited number of common shares. As of the date hereof, there were issued and outstanding 163,051,452 Purchaser Shares.
(ii)
As of the date hereof, an aggregate of up to 4,773,232 Purchaser Shares are issuable upon the exercise of outstanding incentive stock compensation plans of the Purchaser and up to 2,542,371 Purchaser Shares are issuable upon the exercise of outstanding common share purchase warrants of the Purchaser, the exercise prices, expiration dates and other material terms of which are set forth in section (e) of the Purchaser Disclosure Letter. As of the date hereof, except for such Purchaser Shares described in the immediately preceding sentence and the Consideration Shares issuable in connection with the Arrangement, there are no securities, options, warrants, stock appreciation rights, restricted stock units, conversion privileges or other rights, agreements, arrangements or commitments (pre-emptive, contingent or otherwise) of any character whatsoever to which the Purchaser or any of its Subsidiaries is a party or by which any of the Purchaser or its Subsidiaries may be bound, obligating or which may obligate the Purchaser or any of its Subsidiaries to issue, grant, deliver, extend, or enter into any such security, option, warrant, stock appreciation right, restricted stock unit, conversion privilege or other right, agreement, arrangement or commitment.
(iii)
All outstanding Purchaser Shares have been duly authorized and validly issued and are fully paid and non-assessable.
(f)
Purchaser Shares
. The Consideration Shares to be issued pursuant to the Arrangement have been duly authorized and reserved for issuance and, upon issuance, will be validly issued as fully paid and non-assessable shares in the capital of the Purchaser, will not have been issued in violation of any pre-emptive rights or contractual rights to purchase securities and will be listed for trading on the TSX.
2
(g)
Reporting Status and Securities Laws Matters
. The Purchaser is a “reporting issuer” or the equivalent and not on the list of reporting issuers in default under applicable Canadian provincial Securities Laws in each of the provinces of Canada, other than Quebec. The Purchaser is in compliance, in all material respects, with all applicable Securities Laws and there are no current, pending or, to the knowledge of the Purchaser, threatened proceedings before any Securities Authority or other Governmental Entity relating to any alleged non-compliance with any Securities Laws. Except as disclosed in the Purchaser Disclosure Letter, the Purchaser Shares are listed on and the Purchaser is in compliance with the rules and policies of, the TSX and no delisting, suspension of trading in or cease trading order with respect to any securities of the Purchaser is in effect and to the knowledge of the Purchaser, no inquiry or investigation (formal or informal) of any Securities Authority or the TSX is in effect or ongoing or, to the knowledge of the Purchaser, expected to be implemented or undertaken.
(h)
Purchaser Filings
. The Purchaser has filed all documents required to be filed by it in accordance with applicable Securities Laws with the Securities Authorities and/or the TSX since June 1, 2016. The documents comprising the Purchaser Filings complied as filed in all material respects with applicable Securities Laws and did not, as of the date filed (or, if amended or superseded by a subsequent filing prior to the date of this Agreement, on the date of such subsequent filing), contain any Misrepresentation. The Purchaser has not filed any confidential material change report which at the date of this Agreement remains confidential.
(i)
Financial Statements
. The Purchaser’s consolidated audited financial statements as at and for the fiscal years ended May 31, 2017 and 2016 (including the notes thereto) and related MD&A and the Purchaser’s consolidated financial statements as at and for the six months ended November 30, 2017 and related MD&A (collectively, the “
Purchaser Financial Statements
”) were prepared in accordance with IFRS consistently applied (except (a) as otherwise indicated in such financial statements and the notes thereto or, in the case of audited statements, in the related report of the Purchaser’s independent auditors, or (b) in the case of unaudited interim statements, are subject to normal period-end adjustments and may omit notes which are not required by applicable Laws in the unaudited statements) and present fairly, in all material respects, the consolidated financial position, financial performance and cash flows of the Purchaser for the dates and periods indicated therein (subject, in the case of any unaudited interim financial statements, to normal period-end adjustments) and reflect reserves required by IFRS in respect of all material contingent liabilities, if any, of the Purchaser on a consolidated basis. There has been no material change in the Purchaser’s accounting policies, except as described in the Purchaser Financial Statements, since June 1, 2016.
(j)
Internal Controls and Financial Reporting
. The Purchaser has (i) designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Purchaser is made known to the Chief Executive Officer and Chief Financial Officer of the Purchaser on a timely basis, particularly during the periods in which the annual or interim filings are being prepared; (ii) designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
3
accordance with IFRS; (iii) has evaluated the effectiveness of the Purchaser’s disclosure controls and procedures and has disclosed in its MD&A its conclusions about the effectiveness of its disclosure controls and procedures; and (iv) has evaluated the effectiveness of the Purchaser’s internal control over financial reporting and has disclosed in its MD&A its conclusions about the effectiveness of internal control over financial reporting and, if applicable, the necessary disclosure relating to any material weaknesses. To the knowledge of the Purchaser, as of the date of this Agreement:
(i)
there are no material weaknesses in, the internal controls over financial reporting of the Purchaser that could reasonably be expected to adversely affect the Purchaser’s ability to record, process, summarize and report financial information; and
(ii)
there is and has been no fraud, whether or not material, involving management or any other employees who have a significant role in the internal control over financial reporting of the Purchaser. Since June 1, 2016, the Purchaser has received no: (x) complaints from any source regarding accounting, internal accounting controls or auditing matters; or (y) expressions of concern from employees of the Purchaser regarding questionable accounting or auditing matters.
(k)
Independent Auditors
. The Purchaser’s current auditors are independent with respect to the Purchaser within the meaning of the rules of professional conduct applicable to auditors in Canada and there has never been a “reportable event” (within the meaning of National Instrument 51-102) with the current, or to the best knowledge of the Company any predecessor, auditors of the Company during the last three years.
(l)
No Undisclosed Liabilities
. Except as disclosed in section (l) of the Purchaser Disclosure Letter, the Purchaser has no material outstanding indebtedness, liability or obligation (including liabilities or obligations to fund any operations or work program, to give any guarantees or for Taxes), whether accrued, absolute, contingent or otherwise, and is not party to or bound by any suretyship, guarantee, indemnification or assumption agreement, or endorsement of, or any other similar commitment with respect to the obligations, liabilities or indebtedness of any Person, other than those specifically identified in the Purchaser Financial Statements, which relate to the proposed Arrangement or incurred in the Ordinary Course since the date of the most recent Purchaser Financial Statements.
(m)
No Material Change
. Since June 1, 2016, other than the transactions contemplated in this Agreement or as disclosed in the Purchaser Filings: (i) the business of the Purchaser and its Subsidiaries has been conducted in the Ordinary Course; (ii) there has not been any event, occurrence, development or state of circumstances or facts that has had or would be reasonably expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect; (iii) there has been no dividend or distribution of any kind declared, paid or made by the Purchaser on any Purchaser Shares; and (iv) the Purchaser has not effected or passed any resolution to approve a split, consolidation or reclassification of any of the outstanding Purchaser Shares.
4
(n)
Litigation
. There is no claim, action, suit, grievance, complaint, proceeding, arbitration, charge, audit, indictment or investigation that is pending or has been commenced or, to the knowledge of the Purchaser, is threatened affecting the Purchaser or any of its Subsidiaries or affecting any of their respective property or assets (whether owned or leased) at law or in equity, which, individually or in the aggregate, if determined adversely to the Purchaser, has or could reasonably be expected to result in liability to the Purchaser in excess of $1,000,000. Except as disclosed in section (n) of the Purchaser Disclosure Letter, neither the Purchaser nor any of its respective assets or properties is subject to any outstanding judgment, order, writ, injunction or decree material to the Purchaser and its Subsidiaries on a consolidated basis.
(o)
Taxes
. There are no material proceedings, investigations, audits or claims now pending against the Purchaser or its Subsidiaries in respect of any Taxes and no Governmental Entity has asserted in writing, or to the knowledge of the Purchaser, has threatened to assert against the Purchaser or its Subsidiaries any deficiency or claim for Taxes or interest thereon or penalties in connection therewith.
(p)
Insurance
. All insurance maintained by the Purchaser and its Subsidiaries is in full force and effect and in good standing and is in amounts and in respect of such risks as are normal and usual for companies of similar size operating in the cannabis industry.
(q)
Data Privacy and Security
. Neither the Purchaser nor any of its Subsidiaries have been notified in writing of and, to the knowledge of the Purchaser, is not subject of any complaint, regulatory investigation or proceeding related to data security or privacy.
(r)
Material Contracts
. Except as would not be reasonably expected to result in, individually or in the aggregate, a Purchaser Material Adverse Effect, all of the Contracts which are material to the Purchaser and its Subsidiaries on a consolidated basis are in full force and effect, and the Company or one of its Subsidiaries is entitled to all rights and benefits thereunder in accordance with the terms thereof.
(s)
Authorizations
. The Purchaser and its Subsidiaries have obtained and are in compliance with all material Authorizations required by applicable Laws, necessary to conduct their current business as not being conducted.
(t)
Compliance with Laws
.
(i)
The Purchaser and each of its Subsidiaries have complied with and are not in violation, in any material respect, of any applicable Laws.
(ii)
Neither the Purchaser nor any of its Subsidiaries has received any written notices or other written correspondence from any Governmental Entity (1) regarding any violation (or any investigation, inspection, audit, or other proceeding by any Governmental Entity involving allegations of any violation) of any Law or (2) of any circumstances that may have existed or currently exist which could lead to a loss, suspension, or modification of, or a refusal to issue, any material
5
Authorization. To the knowledge of the Purchaser, no investigation, inspection, audit or other proceeding by any Governmental Entity involving allegations of any material violation of any Law is threatened or contemplated.
(iii)
Neither the Purchaser, its Subsidiaries nor, to the knowledge of the Purchaser, any of their directors, executives, representatives, agents or employees (i) has used or is using any corporate funds for any illegal contributions, gifts, entertainment or other expenses relating to political activity that would be illegal, (ii) has used or is using any corporate funds for any direct or indirect illegal payments to any foreign or domestic governmental officials or employees, (iii) has violated or is violating any provision of the
United States Foreign Corrupt Practices Act of 1977
, the
Corruption of Foreign Public Officials Act
(Canada) or any similar Laws of other jurisdictions, (iv) has established or maintained, or is maintaining, any illegal fund of corporate monies or other properties or (v) has made any bribe, illegal rebate, illegal payoff, influence payment, kickback or other illegal payment of any nature.
(u)
Security Ownership
. Except as disclosed in section (u) of the Purchaser Disclosure Letter, the Purchaser and its affiliates do not beneficially own any securities of the Company or any of its affiliates.
(v)
Brokers
. Other than as disclosed in section (v) of the Purchaser Disclosure Letter, no broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Purchaser.
6
VOTING SUPPORT AGREEMENT
THIS AGREEMENT
is made as of January 28, 2018
AMONG:
·
(the “
Shareholder
”)
- and -
Aphria Inc., a corporation existing under the laws of Ontario (“
Purchaser
”)
RECITALS:
WHEREAS
, in connection with an arrangement agreement between the Purchaser and Nuuvera Inc. (the “
Company
”) dated the date hereof (as may be amended, modified or supplemented from time to time in accordance with its terms, the “
Arrangement Agreement
”), the Purchaser proposes to acquire all of the issued and outstanding common shares (the “
Common Shares
”) of the Company subject to the terms and conditions set forth in the Arrangement Agreement;
WHEREAS
, it is contemplated that the proposed transaction will be effected pursuant to a statutory plan of arrangement (the “
Arrangement
”) under Section 182 of the
Business Corporations Act
(Ontario);
WHEREAS
, the Shareholder is the beneficial owner, directly or indirectly, of the Subject Shares listed in Schedule A hereto; and
WHEREAS
, this Agreement sets out the terms and conditions of the agreement of the Shareholder to abide by the covenants in respect of the Subject Shares and the other restrictions and covenants set forth herein;
NOW THEREFORE
, in consideration of the mutual covenants and agreements set forth in this Agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged) the parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
1.1
Definitions
Capitalized terms used herein and not otherwise defined have the meanings ascribed thereto in the Arrangement Agreement. In this Agreement, including the recitals:
“
affiliate
” of any Person means, at the time such determination is being made, any other Person controlling, controlled by or under common control with such first Person, in
each case, whether directly or indirectly, and “
control
” and any derivation thereof means the holding of voting securities of another entity sufficient to elect a majority of the board of directors (or the equivalent) of such entity;
“
Agreement
” means this voting support agreement dated as of the date hereof between the Shareholder and the Purchaser, as it may be amended, modified or supplemented from time to time in accordance with its terms;
“
Arrangement
” has the meaning ascribed thereto in the recitals hereof;
“
Arrangement Agreement
” has the meaning ascribed thereto in the recitals hereof;
“
Common Shares
” has the meaning ascribed thereto in the recitals hereof;
“
Company
” has the meaning ascribed thereto in the recitals hereof;
“
Expiry Time
” has the meaning ascribed thereto in Section 3.1(a);
“
Notice
” has the meaning ascribed thereto in Section 4.8;
“
Parties
” means the Shareholder and the Purchaser and “Party” means any one of them;
“
Purchaser
” has the meaning ascribed thereto in the preamble hereof;
“
Shareholder
” has the meaning ascribed thereto in the preamble hereof;
“
Subject Shares
” means the Common Shares and other securities listed on Schedule A hereto and any Common Shares acquired by the Shareholder or any of its affiliates subsequent to the date hereof, and includes all securities which such Subject Shares may be converted into, exchanged for or otherwise changed into; and
“
Voting Support Outside Date
” means six (6) months from the date hereof.
1.2
Gender and Number
Any reference to gender includes all genders. Words importing the singular number only include the plural and vice versa.
1.3
Currency
All references to dollars or to $ are references to Canadian dollars.
1.4
Headings.
The division of this Agreement into Articles, Sections and Schedules and the insertion of the recitals and headings are for convenient reference only and do not affect the construction or interpretation of this Agreement and, unless otherwise stated, all references in this Agreement or in the Schedules hereto to Articles, Sections and Schedules refer to Articles, Sections and
2
Schedules of and to this Agreement or of the Schedules in which such reference is made, as applicable.
1.5
Date for any Action
A period of time is to be computed as beginning on the day following the event that began the period and ending at 4:30 p.m. (Toronto Time) on the last day of the period, if the last day of the period is a Business Day, or at 4:30 p.m. (Toronto Time) on the next Business Day if the last day of the period is not a Business Day. If the date on which any action is required or permitted to be taken under this Agreement by a Person is not a Business Day, such action shall be required or permitted to be taken on the next succeeding Business Day.
1.6
Governing Law
This Agreement will be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. Each Party irrevocably attorns and submits to the non-exclusive jurisdiction of the courts of the Province of Ontario and waives objection to the venue of any proceeding in such court or that such court provides an inconvenient forum.
1.7
Incorporation of Schedules
Schedule A attached hereto, for all purposes hereof, forms an integral part of this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1
Representations and Warranties of the Shareholder
The Shareholder represents and warrants to the Purchaser (and acknowledges that the Purchaser is relying on these representations and warranties in completing the transactions contemplated hereby and by the Arrangement Agreement) that:
(a)
The Shareholder, if the Shareholder is not a natural person, is a corporation or other entity validly existing under the laws of the jurisdiction of its incorporation.
(b)
The Shareholder, if the Shareholder is not a natural person, has the requisite corporate power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly executed and delivered by the Shareholder and constitutes a legal, valid and binding agreement of the Shareholder enforceable against the Shareholder in accordance with its terms subject only to any limitation under bankruptcy, insolvency or other applicable laws affecting the enforcement of creditors’ rights generally and the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction.
(c)
The Shareholder exercises control or direction over all of the Subject Shares set forth opposite its name in Schedule A hereto. Other than the Subject Shares,
3
neither the Shareholder nor any of its affiliates, beneficially own, or exercise control or direction over any additional securities, or any securities convertible or exchangeable into any additional securities, of the Company or any of its affiliates.
(d)
As at the date hereof, the Shareholder is, and immediately prior to the time at which the Subject Shares are acquired by the Purchaser under the Arrangement or an Alternative Transaction the Shareholder will be, the sole beneficial owner of the Subject Shares, with good and marketable title thereto, free and clear of all Liens.
(e)
The Shareholder has the sole right to sell and vote or direct the sale and voting of the Subject Shares.
(f)
No Person has any agreement or option, or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an agreement or option, for the purchase, acquisition or transfer of any of the Subject Shares or any interest therein or right thereto, except the Purchaser pursuant to this Agreement or the Arrangement Agreement.
(g)
No material consent, approval, order or authorization of, or declaration or filing with, any Person is required to be obtained by the Shareholder in connection with the execution and delivery of this Agreement by the Shareholder and the performance by it of its obligations under this Agreement, other than those that are contemplated by the Arrangement Agreement.
(h)
None of the Subject Shares is subject to any proxy, voting trust, vote pooling or other agreement with respect to the right to vote, call meetings of any of the Company’s securityholders or give consents or approvals of any kind, except this Agreement or as contemplated by the Arrangement Agreement.
(i)
None of the execution and delivery by the Shareholder of this Agreement or the completion of the transactions contemplated hereby or the compliance by the Shareholder with its obligations hereunder will violate, contravene, result in any breach of, or be in conflict with, or constitute a default under, or create a state of facts which after notice or lapse of time or both would constitute a default under, any term or provision of: (i) any constating documents of the Shareholder (if the Shareholder is not a natural person); (ii) any contract to which the Shareholder is a party or by which the Shareholder is bound; (iii) any judgment, decree, order or award of any Governmental Entity or (iv) any applicable law.
2.2
Representations and Warranties of the Purchaser
The Purchaser represents and warrants to the Shareholder (and acknowledges that the Shareholder is relying on these representations and warranties in completing the transactions contemplated hereby and by the Arrangement Agreement) that:
4
(a)
The Purchaser is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms subject only to any limitation under bankruptcy, insolvency or other applicable laws affecting the enforcement of creditors’ rights generally and the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction.
(b)
None of the execution and delivery by the Purchaser of this Agreement or the compliance by the Purchaser with the Purchaser’s obligations hereunder will violate, contravene, result in any breach of, or be in conflict with, or constitute a default under, or create a state of facts which after notice or lapse of time or both would constitute a default under, any term or provision of: (i) any constating documents of the Purchaser; (ii) any contract to which the Purchaser is a party or by which the Purchaser is bound; (iii) any judgment, decree, order or award of any Governmental Entity or (iv) any applicable law.
(c)
No material consent, approval, order or authorization of, or declaration or filing with, any Governmental Entity is required to be obtained by the Purchaser in connection with the execution and delivery of this Agreement, the performance by it of its obligations under this Agreement and the consummation by the Purchaser of the Arrangement, other than those which are contemplated by the Arrangement Agreement.
(d)
There are no claims, actions, suits, audits, proceedings, investigations or other actions pending against, or, to the knowledge of the Purchaser, threated against or affecting the Purchaser or any of its respective properties that, individually or in the aggregate, could reasonably be expected to have a material and adverse effect on the Purchaser’s ability to execute and deliver this Agreement and to perform its obligations contemplated by this Agreement or the Arrangement Agreement.
ARTICLE 3
COVENANTS
3.1
Covenants of the Shareholder
(a)
The Shareholder hereby covenants with the Purchaser that from the date of this Agreement until the termination of this Agreement in accordance with its terms (the “
Expiry Time
”), the Shareholder will not, without having first obtained the prior written consent of the Purchaser:
(i)
sell, transfer, gift, assign, convey, pledge, hypothecate, encumber, option or otherwise dispose of any right or interest in any of the Subject Shares or enter into any agreement, arrangement, commitment or understanding in connection therewith, other than (A) pursuant to the
5
Arrangement or an Alternative Transaction, (B) any exercise of Company Warrants or Company Options for Common Shares in accordance with their terms, or (C) to one or more corporations directly or indirectly wholly owned by the Shareholder without affecting beneficial ownership or control or direction over the Subject Shares, provided that in such case and for greater certainty, any Common Shares acquired as a result thereof shall be Subject Shares and subject to the terms and conditions of this Agreement;
(ii)
other than as set forth herein, grant or agree to grant any proxies or powers of attorney, deposit any Subject Shares into a voting trust or pooling agreement, or enter into a voting agreement, commitment, understanding or arrangement, oral or written, with respect to the voting of any Subject Shares; or
(iii)
requisition or join in the requisition of any meeting of any of the securityholders of the Company for the purpose of considering any resolution.
(b)
The Shareholder hereby covenants, undertakes and agrees from time to time, until the Expiry Time, to cause to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the Subject Shares:
(i)
at any meeting of any of the securityholders of the Company at which the Subject Shares are entitled to vote, including the Company Meeting; and
(ii)
in any action by written consent of the securityholders of the Company,
in favour of the approval, consent, ratification and adoption of the Arrangement Resolution and the transactions contemplated by the Arrangement Agreement (and any actions required for the consummation of the transactions contemplated by the Arrangement Agreement). In connection with the foregoing, subject to this Section 3.1(b), the Shareholder hereby agrees to deposit a proxy, or voting instruction form, as the case may be, duly completed and executed in respect of all of its Subject Shares (to the extent that they carry the right to vote) as soon as practicable following the mailing of the Company Circular and in any event at least 10 calendar days prior to the Company Meeting, voting all such Subject Shares (to the extent that they carry the right to vote) in favour of the Arrangement Resolution. The Shareholder hereby agrees that it will not take, nor permit any Person on its behalf to take, any action to withdraw, revoke, amend or invalidate any proxy or voting instruction form deposited pursuant to this Agreement notwithstanding any statutory or other rights or otherwise which the Shareholder might have unless this Agreement has at such time been previously terminated in accordance with Section 4.1.
(c)
The Shareholder hereby covenants, undertakes and agrees from time to time, until the Expiry Time, to cause to be counted as present for purposes of
6
establishing quorum and to vote (or cause to be voted) all of the Subject Shares (to the extent that they carry the right to vote) against any proposed action by the Company, any Company Common Shareholder, any of the Company’s Subsidiaries or any other Person: (i) in respect of any Acquisition Proposal or Superior Proposal or other merger, take-over bid, amalgamation, plan of arrangement, business combination, reorganization, recapitalization, dissolution, liquidation, winding up or similar transaction involving the Company or any Subsidiary of the Company that requires the approval of Company Common Shareholders under applicable law, other than the Arrangement or an Alternative Transaction; (ii) which would reasonably be regarded as being directed towards or likely to prevent or delay the successful completion of the Arrangement, including without limitation any amendment to the articles or bylaws of the Company or any of its Subsidiaries or their respective corporate structures or capitalization; or (iii) any action or agreement that would result in a breach of any representation, warranty, covenant or other obligation of the Company under the Arrangement Agreement.
(d)
The Shareholder hereby covenants, undertakes and agrees, in the event that any transaction for the proposed acquisition of at least a majority of the Common Shares of the Company, where such transaction requires the approval of Company Common Shareholders under applicable law, other than the Arrangement or an Alternative Transaction, is presented prior to the Effective Time for approval of, or acceptance by, the Company Common Shareholders, whether or not it may be recommended by the Board, not to directly or indirectly, accept, assist or otherwise further the successful completion of such transaction or purport to tender or deposit into any such transaction any of the Subject Shares.
(e)
Until the Expiry Time, subject to Section 4.5 the Shareholder will not, and will ensure that its affiliates do not, directly or indirectly, through any officer, director, employee, representative or agent or otherwise:
(i)
solicit proxies or become a participant in a solicitation in opposition to or competition with the Purchaser’s proposed purchase of the Common Shares as contemplated by the Arrangement;
(ii)
assist any Person in taking or planning any action that would compete with, restrain or otherwise serve to interfere with or inhibit the Purchaser’s proposed purchase of the Common Shares as contemplated by the Arrangement;
(iii)
act jointly or in concert with others with respect to voting securities of the Company for the purpose of opposing or competing with the Purchaser’s proposed purchase of the Common Shares as contemplated by the Arrangement;
(iv)
solicit, initiate, encourage or otherwise facilitate (including by way of furnishing or providing copies of, access to, or disclosure of, any
7
confidential information, properties, facilities, books or records of the Company or any Subsidiary or entering into any form of agreement, arrangement or understanding) any inquiry, proposal or offer that constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal;
(v)
participate in any discussions or negotiations with any Person (other than the Purchaser) regarding any inquiry, proposal or offer that constitutes or would reasonably be expected to constitute or lead to an Acquisition Proposal;
(vi)
accept or enter into, or publicly propose to accept or enter into, any letter of intent, agreement, arrangement or understanding regarding any Acquisition Proposal; or
(vii)
cooperate in any way with, assist or participate in, knowingly encourage or otherwise facilitate or encourage any effort or attempt by any other Person to do or seek to do any of the foregoing.
(f)
The Shareholder will not (i) exercise any dissent rights in respect of the Arrangement; (ii) contest in any way the approval of the Arrangement by any Governmental Entity; or (iii) take any other action of any kind, in each case which would reasonably be regarded as likely to reduce the success of, or materially delay or interfere with the completion of, the transactions contemplated by the Arrangement Agreement.
(g)
The Shareholder will, and will cause each of its affiliates and will instruct each of its representatives to, immediately cease and terminate, and cause to be terminated, any solicitation, encouragement, discussion, negotiations, or other activities commenced prior to the date of this Agreement with any Person (other than the Purchaser or an affiliate thereof) with respect to any inquiry, proposal or offer that constitutes, or may reasonably be expected to constitute or lead to, an Acquisition Proposal.
(h)
At the request of the Purchaser, the Shareholder will, and will cause its applicable affiliates and representatives to, use all commercially reasonable efforts in its capacity, and their capacities, as a Company Common Shareholder to assist the Company and the Purchaser to successfully complete the Arrangement and the other transactions contemplated by the Arrangement Agreement and this Agreement, including without limitation cooperating with the Purchaser and the Company to make all requisite regulatory filings, provided that the Shareholder shall not be obligated to incur any expense in providing such cooperation, including by participating in any claim, action, suit, proceeding or investigation whether civil, criminal, administrative, or investigative, unless the Purchaser reimburses the Shareholder for such expenses.
8
(i)
The Shareholder hereby consents to:
(i)
details of this Agreement being set out in any press release, information circular, including the Company Circular, and court documents produced by the Company, the Purchaser or any of their respective affiliates in connection with the transactions contemplated by this Agreement and the Arrangement Agreement; and
(ii)
this Agreement being made publicly available, including by filing on the System for Electronic Document Analysis and Retrieval (SEDAR) operated on behalf of the Securities Authorities.
(j)
Except as required by applicable law or stock exchange requirements, the Shareholder will not, and will ensure that their affiliates and representatives do not, make any public announcement with respect to the transactions contemplated herein or pursuant to the Arrangement Agreement without the prior written approval of the Purchaser.
3.2
Alternative Transaction
In the event that, in lieu of the Arrangement, the Purchaser seeks to complete the acquisition of the Common Shares other than as contemplated by the Arrangement Agreement on a basis that (a) provides for economic terms which, in relation to the Shareholder, on an after-tax basis, are at least equivalent to or better than those contemplated by the Arrangement Agreement, (b) would not likely result in a delay or time to completion beyond the Voting Support Outside Date, and (c) is otherwise on terms and conditions not materially more onerous on the Shareholder than the Arrangement (including any take-over bid) any such transaction, an “
Alternative Transaction
”), then during the term of this Agreement the Shareholder may, on its own accord, and shall, upon written request of the Purchaser, support the completion of such Alternative Transaction in the same manner as the Arrangement in accordance with the terms and conditions of this Agreement
mutatis mutandis
, including by (A) depositing or causing the deposit of its Subject Shares (including any Common Shares issuable upon the exercise of any Company Options or Company Warrants) into an Alternative Transaction conducted by way of a take-over bid made by the Purchaser or an affiliate of Purchaser and not withdrawing them; and/or (B) voting or causing to be voted all of the Subject Shares (to the extent that they carry the right to vote) in favour of, and not dissenting from, such Alternative Transaction proposed by the Purchaser.
3.3
Covenants of the Purchaser
Subject to Section 4.1, the Purchaser will take all steps required of it under the Arrangement Agreement to cause the Arrangement to occur in accordance with the terms of and subject to the conditions set forth in the Arrangement Agreement.
9
ARTICLE 4
GENERAL
4.1
Termination
This Agreement will terminate and be of no further force or effect upon the earliest to occur of:
(a)
the mutual agreement in writing of the Shareholder and the Purchaser;
(b)
written notice by the Shareholder to the Purchaser if without the prior written consent of the Shareholder, there is any decrease in the aggregate amount of Consideration;
(c)
the valid termination of the Arrangement Agreement by the Company pursuant to Section [7.2(1)(c)(i)]
[Breach of the Purchaser’s representations, warranties or covenants under the Arrangement Agreement]
or Section [7.2(1)(c)(ii)]
[Purchaser Material Adverse Effect]
of the Arrangement Agreement;
(d)
the completion of the acquisition by the Purchaser of the Subject Shares; and
(e)
the Voting Support Outside Date.
4.2
Time of the Essence
Time is of the essence in this Agreement.
4.3
Effect of Termination
If this Agreement is terminated in accordance with the provisions of Section 4.1, no Party will have any further liability to perform its obligations under this Agreement except as expressly contemplated by this Agreement, and provided that neither the termination of this Agreement nor anything contained in Section 4.1 will relieve any Party from any liability for any breach by it of this Agreement, including from any inaccuracy in its representations and warranties and any non-performance by it of its covenants made herein.
4.4
Equitable Relief
The Parties agree that irreparable harm would occur for which money damages would not be an adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to injunctive and other equitable relief to prevent breaches of this Agreement, and to enforce compliance with the terms of this Agreement without any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or other equitable relief, this being in addition to any other remedy to which the Parties may be entitled at law or in equity.
10
4.5
Fiduciary Duty
Notwithstanding anything to the contrary herein, nothing herein shall restrict or limit any director or officer of the Company from taking any action required to be taken in the discharge of his or her fiduciary duty as a director or officer of the Company that is otherwise permitted by, and done in compliance with, the terms of the Arrangement Agreement. The Purchaser further hereby agrees that the Shareholder is not making any agreement or understanding herein in any capacity other than in the capacity as beneficial owner of the Subject Shares.
4.6
Waiver; Amendment
Each party hereto agrees and confirms that any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by all of the Parties or in the case of a waiver, by the Party against whom the waiver is to be effective. No waiver of any of the provisions of this Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the Party to be bound by the waiver. A Party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a Party from any other or further exercise of that right or the exercise of any other right. No waiver of any of the provisions of this Agreement will be deemed to constitute a waiver of any other provision (whether or not similar).
4.7
Entire Agreement
This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the Parties with respect thereto.
4.8
Notices
Any notice, or other communication given regarding the matters contemplated by this Agreement (each a “
Notice
”) (must be in writing, sent by personal delivery, courier or facsimile (but not by electronic mail) and addressed:
(a)
if to the Purchaser at:
Aphria Inc.
103-245 Talbot Street West
Leamington, Ontario
N8H 1N8
Attention:
Chief Financial Officer
Facsimile:
(416) 947-0866
with a copy (which shall not constitute notice) to:
Stikeman Elliott LLP
11
5300 Commerce Court West
199 Bay Street
Toronto, ON M5L 1B9
Attention:
Curtis Cusinato/Sean Vanderpol
Facsimile:
(416) 947-0866
(b)
to the Shareholder, at the address set out at Schedule B hereto.
Any Notice is deemed to be given and received (i) if sent by personal delivery or same day courier, on the date of delivery if it is a Business Day and the delivery was made prior to 4:30 p.m. (local time in place of receipt) and otherwise on the next Business Day, (ii) if sent by overnight courier, on the next Business Day, or (iii) if sent by facsimile, on the Business Day following the date of confirmation of transmission by the originating facsimile. A Party may change its address for service from time to time by providing a Notice in accordance with the foregoing. Any subsequent Notice must be sent to the Party at its changed address. Any element of a Party’s address that is not specifically changed in a Notice will be assumed not to be changed. Sending a copy of a Notice to a Party’s legal counsel as contemplated above is for information purposes only and does not constitute delivery of the Notice to that Party. The failure to send a copy of a Notice to legal counsel does not invalidate delivery of that Notice to a Party.
4.9
Severability
If any provision of this Agreement is determined to be illegal, invalid or unenforceable by an arbitrator or any court of competent jurisdiction, that provision will be severed from this Agreement and the remaining provisions shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible.
4.10
Successors and Assigns
The provisions of this Agreement will be binding upon and enure to the benefit of the parties hereto and their respective heirs, administrators, executors, legal representatives, successors and permitted assigns, provided that no Party may assign, delegate or otherwise transfer any of its rights, interests or obligations under this Agreement without the prior written consent of the other Party hereto, provided that the Purchaser may assign all or part of its rights under this Agreement to, and its obligations under this Agreement may be assumed by, any of its affiliates, provided that if such assignment and/or assumption takes place, the Purchaser shall continue to be liable joint and severally with such affiliate for all of its obligations hereunder.
4.11
Independent Legal Advice
Each of the Parties hereby acknowledges that it has been afforded the opportunity to obtain independent legal advice and confirms by the execution and delivery of this Agreement that
12
they have either done so or waived their right to do so in connection with the entering into of this Agreement.
4.12
Further Assurances
The parties hereto will, with reasonable diligence, do all things and provide all such reasonable assurances as may be required to consummate the transactions contemplated by this Agreement, and each Party will provide such further documents or instruments required by the other Party as may be reasonably necessary or desirable to effect the purpose of this Agreement and carry out its provisions, whether before or after the Effective Time.
4.13
Counterparts
This Agreement may be executed in any number of counterparts (including counterparts by facsimile) and all such counterparts taken together shall be deemed to constitute one and the same instrument. The Parties shall be entitled to rely upon delivery of an executed facsimile or similar executed electronic copy of this Agreement, and such facsimile or similar executed electronic copy shall be legally effective to create a valid and binding agreement between the Parties.
[The remainder of this page has been intentionally left blank.]
13
IN WITNESS OF WHICH
the Parties have executed this Agreement as at the date first above written.
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[Shareholder]
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By:
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Name:
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Title:
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Aphria Inc.
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By:
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Name:
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Title:
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SCHEDULE A
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Number of Company Options and
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Owner
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Number of Common Shares
|
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Number of Company Warrants
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SCHEDULE B
[Shareholder Address for Notice]
Exhibit 99.80
Aphria Inc.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 2018 AND FEBRUARY 28, 2017
(Unaudited, expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited — In thousands of Canadian dollars)
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February 28,
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Note
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2018
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May 31, 2017
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Assets
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Current assets
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Cash and cash equivalents
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$
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119,435
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$
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79,910
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Marketable securities
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4
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54,248
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87,347
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Accounts receivable
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4,362
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826
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Other current assets
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5
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10,133
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5,571
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Inventory
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6
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11,761
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3,887
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Biological assets
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7
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3,101
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1,363
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Due from related parties
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8
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—
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464
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Assets available for sale
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9
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40,851
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—
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Current portion of convertible notes receivable
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12
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1,921
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—
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Promissory note receivable
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13
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33,395
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—
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279,207
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179,368
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Capital assets
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9
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236,504
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72,500
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Intangible assets
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10
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93,445
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1,891
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Convertible notes receivable
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12
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14,765
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1,534
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Interest in equity investee
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13
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—
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28,376
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Long-term investments
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14
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86,789
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27,788
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Deferred tax asset
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15
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—
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3,315
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Goodwill
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11
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143,907
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1,200
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$
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854,617
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$
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315,972
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Liabilities
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Current liabilities
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Accounts payable and accrued liabilities
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$
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22,495
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$
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5,874
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Income taxes payable
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15
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2,719
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—
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Deferred revenue
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4,100
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2,800
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Current portion of promissory note payable
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17
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555
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878
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Current portion of long-term debt
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18
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8,009
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765
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Current portion derivative liability
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13
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6,740
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—
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44,618
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10,317
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|
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Long-term liabilities
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Promissory note payable
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17
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623
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366
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Long-term debt
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18
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29,473
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31,420
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Derivative liability
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13
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10,110
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—
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Deferred tax liability
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15
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23,898
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—
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108,722
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42,103
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Shareholders’ equity
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Share capital
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19
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695,135
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274,317
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Warrants
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20
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445
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445
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Share-based payment reserve
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10,999
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3,230
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Accumulated other comprehensive loss
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(801
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)
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—
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Non-controlling interest
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22
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9,799
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—
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Retained earnings (deficit)
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30,318
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(4,123
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)
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745,895
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273,869
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$
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854,617
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$
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315,972
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Nature of operations (Note 1) , Commitments (Note 30), Subsequent events (Note 31)
Approved on behalf of the Board:
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“John Cervini”
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“Cole Cacciavillani”
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Signed: Director
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Signed: Director
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The accompanying notes are an integral part of these condensed interim consolidated financial statements
2
Aphria Inc.
Condensed Interim Consolidated Statements of Income and Comprehensive Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
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For the three months ended
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For the nine months ended
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February 28,
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February 28,
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Note
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2018
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2017
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2018
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2017
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Revenue
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$
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10,267
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$
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5,119
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$
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24,891
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$
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14,721
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Production costs
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6
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2,355
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1,536
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6,447
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3,770
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Gross profit before fair value adjustments
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7,912
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3,583
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18,444
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10,951
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Fair value adjustment on sale of inventory
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6
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3,443
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1,104
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7,250
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3,676
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Fair value adjustment on growth of biological assets
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7
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|
(4,101
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)
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(1,090
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)
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(11,481
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)
|
(4,197
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)
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Gross profit
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8,570
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3,569
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22,675
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11,472
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Operating expenses:
|
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|
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General and administrative
|
|
23
|
|
2,794
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|
1,231
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|
6,502
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|
3,415
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|
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Share-based compensation
|
|
24
|
|
5,959
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|
1,256
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|
10,668
|
|
1,711
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|
|
Selling, marketing and promotion
|
|
|
|
2,991
|
|
1,855
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|
7,758
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|
5,054
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|
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Amortization
|
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|
|
755
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263
|
|
1,270
|
|
715
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Research and development
|
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|
|
110
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|
96
|
|
280
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|
434
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|
|
Impairment of intangible asset
|
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—
|
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3,500
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—
|
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3,500
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|
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12,609
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8,201
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|
26,478
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|
14,829
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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(4,039
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)
|
(4,632
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)
|
(3,803
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)
|
(3,357
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
17
|
|
213
|
|
217
|
|
689
|
|
217
|
|
|
Foreign exchange (loss) gain
|
|
|
|
(62
|
)
|
65
|
|
69
|
|
65
|
|
|
(Loss) gain on marketable securities
|
|
4
|
|
(502
|
)
|
14
|
|
(2,193
|
)
|
14
|
|
|
(Loss) gain on sale of capital assets
|
|
9
|
|
(184
|
)
|
—
|
|
(191
|
)
|
11
|
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
—
|
|
—
|
|
7,535
|
|
—
|
|
|
Loss from equity investee
|
|
13
|
|
—
|
|
—
|
|
(9,281
|
)
|
—
|
|
|
Gain on sale of equity investee
|
|
13
|
|
26,347
|
|
—
|
|
26,347
|
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
|
|
233
|
|
—
|
|
700
|
|
—
|
|
|
Finance income, net
|
|
25
|
|
1,621
|
|
406
|
|
3,533
|
|
698
|
|
|
Unrealized (loss) gain on embedded derivatives
|
|
12
|
|
(52
|
)
|
—
|
|
576
|
|
—
|
|
|
Gain on long-term investments
|
|
26
|
|
14,544
|
|
8,880
|
|
39,701
|
|
9,143
|
|
|
Unrealized loss on derivative liability
|
|
13
|
|
(16,850
|
)
|
—
|
|
(16,850
|
)
|
—
|
|
|
Transaction costs
|
|
|
|
(4,253
|
)
|
—
|
|
(4,253
|
)
|
—
|
|
|
|
|
|
|
21,055
|
|
9,582
|
|
46,382
|
|
10,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
17,016
|
|
4,950
|
|
42,579
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
15
|
|
4,072
|
|
—
|
|
8,139
|
|
—
|
|
|
Net income
|
|
|
|
12,944
|
|
4,950
|
|
34,440
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss from equity investee
|
|
13
|
|
—
|
|
—
|
|
(801
|
)
|
—
|
|
|
Net comprehensive income
|
|
|
|
$
|
12,944
|
|
$
|
4,950
|
|
$
|
33,639
|
|
$
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income is attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners of Aphria Inc.
|
|
|
|
12,945
|
|
4,950
|
|
33,640
|
|
6,791
|
|
|
Non-controlling interest
|
|
22
|
|
(1
|
)
|
—
|
|
(1
|
)
|
—
|
|
|
|
|
|
|
$
|
12,944
|
|
$
|
4,950
|
|
$
|
33,639
|
|
$
|
6,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
|
|
161,120,698
|
|
111,976,759
|
|
147,274,372
|
|
93,655,328
|
|
|
Weighted average number of common shares - diluted
|
|
|
|
167,494,603
|
|
118,298,038
|
|
153,189,773
|
|
99,976,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
27
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.23
|
|
$
|
0.07
|
|
|
Earnings per share - diluted
|
|
27
|
|
$
|
0.08
|
|
$
|
0.04
|
|
$
|
0.22
|
|
$
|
0.07
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
3
Aphria Inc.
Condensed Interim Consolidated Statements of Changes in Equity
(Unaudited — In thousands of Canadian dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
|
|
other
|
|
controlling
|
|
Retained
|
|
|
|
|
|
|
Number of
|
|
Share capital
|
|
Warrants
|
|
payment
|
|
comprehensive
|
|
interest
|
|
earnings
|
|
|
|
|
|
|
common shares
|
|
(Note 19)
|
|
(Note 20)
|
|
reserve
|
|
loss
|
|
(Note 22)
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2016
|
|
70,053,933
|
|
$
|
40,917
|
|
$
|
694
|
|
$
|
1,724
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(8,321
|
)
|
$
|
35,014
|
|
|
Share issuance - August 2016 bought deal
|
|
17,250,000
|
|
31,959
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
31,959
|
|
|
Share issuance - November 2016 bought deal
|
|
10,062,500
|
|
37,263
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37,263
|
|
|
Share issuance - February 2017 bought deal
|
|
11,500,000
|
|
53,869
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
53,869
|
|
|
Share issuance - warrants exercised
|
|
14,558,932
|
|
22,601
|
|
(608
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
21,993
|
|
|
Share issuance - options exercised
|
|
572,596
|
|
762
|
|
—
|
|
(311
|
)
|
—
|
|
—
|
|
—
|
|
451
|
|
|
Share issuance - intangible asset acquisition
|
|
38,759
|
|
100
|
|
359
|
|
—
|
|
—
|
|
—
|
|
—
|
|
459
|
|
|
Share-based payments
|
|
37,500
|
|
186
|
|
—
|
|
1,509
|
|
—
|
|
—
|
|
—
|
|
1,695
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6,791
|
|
6,791
|
|
|
Balance at February 28, 2017
|
|
124,074,220
|
|
$
|
187,657
|
|
$
|
445
|
|
$
|
2,922
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,530
|
)
|
$
|
189,494
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
|
|
other
|
|
controlling
|
|
Retained
|
|
|
|
|
|
|
Number of
|
|
Share capital
|
|
Warrants
|
|
payment
|
|
comprehensive
|
|
interest
|
|
earnings
|
|
|
|
|
|
|
common shares
|
|
(Note 19)
|
|
(Note 20)
|
|
reserve
|
|
loss
|
|
(Note 22)
|
|
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
$
|
445
|
|
$
|
3,230
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4,123
|
)
|
$
|
273,869
|
|
|
Share issuance - November 2017 bought deal
|
|
12,689,675
|
|
86,661
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
86,661
|
|
|
Share issuance - January 2018 bought deal
|
|
8,363,651
|
|
109,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
109,000
|
|
|
Share issuance - Broken Coast acquisition
|
|
14,373,675
|
|
214,168
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
214,168
|
|
|
Share issuance - warrants exercised
|
|
1,584,036
|
|
2,400
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,400
|
|
|
Share issuance - options exercised
|
|
2,053,000
|
|
5,338
|
|
—
|
|
(2,000
|
)
|
—
|
|
—
|
|
—
|
|
3,338
|
|
|
Share issuance - deferred share units
|
|
5,050
|
|
62
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
62
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,002
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,002
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
9,769
|
|
—
|
|
—
|
|
—
|
|
9,769
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
187
|
|
|
Non-controlling interest
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9,800
|
|
—
|
|
9,800
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(801
|
)
|
(1
|
)
|
34,441
|
|
33,639
|
|
|
Balance at February 28, 2018
|
|
177,697,791
|
|
$
|
695,135
|
|
$
|
445
|
|
$
|
10,999
|
|
$
|
(801
|
)
|
$
|
9,799
|
|
$
|
30,318
|
|
$
|
745,895
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
4
Aphria Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited — In thousands of Canadian dollars)
|
|
|
|
|
For the nine months ended
|
|
|
|
|
|
|
February 28,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
|
|
$
|
34,440
|
|
$
|
6,791
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Future income taxes
|
|
15
|
|
6,030
|
|
—
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
7,250
|
|
3,676
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(11,481
|
)
|
(4,197
|
)
|
|
Loss (gain) on marketable securities
|
|
4
|
|
2,193
|
|
(14
|
)
|
|
Unrealized foreign exchange gain on convertible notes receivable
|
|
12
|
|
(60
|
)
|
—
|
|
|
Amortization
|
|
9,10
|
|
2,869
|
|
1,433
|
|
|
Loss (gain) on sale of capital assets
|
|
9
|
|
191
|
|
(11
|
)
|
|
Impairment of intangible asset
|
|
10
|
|
—
|
|
3,500
|
|
|
Accretion interest on convertible note receivable
|
|
12
|
|
(1,155
|
)
|
—
|
|
|
Unrealized gain on embedded derivatives
|
|
12
|
|
(576
|
)
|
—
|
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
(7,535
|
)
|
—
|
|
|
Loss from equity investee
|
|
13
|
|
9,281
|
|
—
|
|
|
Gain on sale of equity investee
|
|
13
|
|
(26,347
|
)
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
13
|
|
(700
|
)
|
—
|
|
|
Consulting revenue
|
|
17
|
|
(689
|
)
|
—
|
|
|
Other non-cash items
|
|
|
|
6
|
|
67
|
|
|
Share-based compensation
|
|
24
|
|
10,668
|
|
1,711
|
|
|
Gain on long-term investments
|
|
26
|
|
(39,701
|
)
|
(9,143
|
)
|
|
Unrealized loss on derivative liability
|
|
13
|
|
16,850
|
|
—
|
|
|
Transaction costs
|
|
|
|
4,253
|
|
—
|
|
|
Change in non-cash working capital
|
|
28
|
|
(5,217
|
)
|
1,433
|
|
|
|
|
|
|
570
|
|
5,246
|
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
195,661
|
|
123,091
|
|
|
Share capital issued on warrants, options and deferred share units exercised
|
|
|
|
5,800
|
|
22,444
|
|
|
Proceeds from non-controlling interest
|
|
|
|
9,800
|
|
—
|
|
|
Advances from related parties
|
|
8
|
|
9,260
|
|
350
|
|
|
Repayment of amounts due to related parties
|
|
8
|
|
(8,764
|
)
|
(350
|
)
|
|
Proceeds from long-term debt
|
|
18
|
|
—
|
|
7,825
|
|
|
Repayment of long-term debt
|
|
18
|
|
(620
|
)
|
(459
|
)
|
|
|
|
|
|
211,137
|
|
152,901
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Investment in marketable securities
|
|
4
|
|
(7,365
|
)
|
(53,366
|
)
|
|
Proceeds from disposal of marketable securities
|
|
4
|
|
38,271
|
|
15,702
|
|
|
Investment in capital and intangible assets, net of shares issued
|
|
9,10
|
|
(153,605
|
)
|
(35,879
|
)
|
|
Proceeds from disposal of capital assets
|
|
9
|
|
200
|
|
33
|
|
|
Convertible notes advances
|
|
12
|
|
(14,001
|
)
|
—
|
|
|
Repayment of convertible notes receivable
|
|
|
|
640
|
|
—
|
|
|
Repayment of promissory notes receivable
|
|
|
|
—
|
|
503
|
|
|
Investment in long-term investments
|
|
|
|
(45,746
|
)
|
(21,401
|
)
|
|
Proceeds from disposal of long-term investments
|
|
|
|
7,468
|
|
4,140
|
|
|
Net cash received on business acquisition
|
|
11
|
|
1,956
|
|
—
|
|
|
|
|
|
|
(172,182
|
)
|
(90,268
|
)
|
|
Net increase in cash and cash equivalents
|
|
|
|
39,525
|
|
67,879
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
79,910
|
|
16,473
|
|
|
Cash and cash equivalents, end of period
|
|
|
|
$
|
119,435
|
|
$
|
84,352
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
5
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). During the three months ended February 28, 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”) (note 11), Broken Coast is licensed to produce and sell medical cannabis under the provision of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”).
1974568 Ontario Ltd. is a 51% marjority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms. 1974568 Ontario Ltd. has applied for its cultivation licence under the provisions of the ACMPR. The registered office of the Company is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These condensed interim consolidated financial statements were approved by the Company’s Board of Directors on April 13, 2018.
2.
Basis of preparation
(a)
Statement of compliance
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.
(b)
Basis of measurement
These condensed interim consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management is Canadian dollars. These condensed interim consolidated financial statements are presented in Canadian dollars.
(d)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases.
|
Subsidiaries
|
|
Jurisdiction of incorporation
|
|
Ownership interest
|
|
|
Pure Natures Wellness Inc. (o/a Aphria)
|
|
Ontario
|
|
100
|
%
|
|
Aphria (Arizona) Inc.
|
|
Arizona
|
|
100
|
%
|
|
Cannan Growers Inc.
|
|
British Columbia
|
|
100
|
%
|
|
Broken Coast Cannabis Ltd.
|
|
British Columbia
|
|
99.86
|
%
|
|
1974568 Ontario Ltd.
|
|
Ontario
|
|
51
|
%
|
6
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
(e)
Amalgamation
Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
(f)
Interest in equity investees
The Company’s interest in equity investees is comprised of its interest in Liberty Health Sciences Inc. During the quarter, the Company entered into an agreement which has changed the classification of this investment from equity investee to assets held for sale (note 13).
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the condensed interim consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity investments is tested for impairment in accordance with the policy described in the annual audited financial statements.
3.
Significant accounting policies
These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2017.
New standards applicable during the reporting period
IFRS 3 — Business Combinations; The Company has applied the acquisition method in accounting for business combinations. The Company measures goodwill as the difference between the fair value of the consideration transferred, including contingent consideration and the recognized amount of any non-controlling interest in the acquiree, and the fair value of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Transaction costs that the Company incurs in connection with a business combination, such as finders’ fees, legal fees, due diligence fees and other professional and consulting fees, are expensed in the period as incurred.
7
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
IFRS 5 — Non-current Assets Held for Sale; Assets and liabilities held for disposal are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.
New standards and interpretations issued but not yet adopted:
IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. The Company is assessing the impact of the standard on its convertible notes receivable and its investments where it holds less than significant influence. The Company has determined that no significant impact is anticipated from the new standard.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Company’s disclosures about its financial instruments particularly in the period of the adoption of the new standard.
The Company will apply the new rules retrospectively from June 1, 2018 with the practical expedients permitted under the standards. Comparatives will not be restated.
IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company continues to assess the impact of the standard, with a focus on consulting contracts and royalty fees.
The Company is still considering the impact on its customer loyalty programme, which is currently under reconsideration. The new standard will require that the total consideration received be allocated to the points and goods based on relative stand-alone selling prices rather than based on the residual method.
The Company intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of adoption will be recognized in retained earnings as of June 1, 2018 and that comparatives will not be restated.
IFRS 16 — Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments, no significant impact is anticipated from the new standard.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.
8
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
4.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating at
|
|
Interest
|
|
Maturity
|
|
February 28,
|
|
|
|
|
|
|
purchase
|
|
rate
|
|
date
|
|
2018
|
|
May 31, 2017
|
|
|
Money Market Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Central 1 Credit Union
|
|
|
|
1.600
|
%
|
4/19/18
|
|
$
|
2,138
|
|
$
|
—
|
|
|
Enbridge Inc.
|
|
|
|
1.810
|
%
|
3/20/18
|
|
179
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Molson Coors Brewing Company
|
|
BBB-
|
|
3.950
|
%
|
10/06/17
|
|
—
|
|
1,116
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.320
|
%
|
12/19/17
|
|
—
|
|
1,988
|
|
|
Goldman Sachs & Co. LLC
|
|
A+
|
|
3.375
|
%
|
2/01/18
|
|
—
|
|
5,078
|
|
|
The Manufacturer’s Life Insurance Company
|
|
AA-
|
|
2.819
|
%
|
2/26/18
|
|
—
|
|
1,472
|
|
|
Canadian Western Bank
|
|
A-
|
|
2.531
|
%
|
3/22/18
|
|
3,035
|
|
3,039
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
8/02/18
|
|
1,010
|
|
1,037
|
|
|
Sobeys Inc.
|
|
BB+
|
|
3.520
|
%
|
8/08/18
|
|
3,023
|
|
3,078
|
|
|
Royal Bank of Canada
|
|
AA-
|
|
2.770
|
%
|
12/11/18
|
|
—
|
|
5,180
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
1/14/19
|
|
1,519
|
|
1,535
|
|
|
Sun Life Financial Inc.
|
|
A
|
|
2.770
|
%
|
5/13/19
|
|
3,038
|
|
3,064
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
6/14/19
|
|
5,075
|
|
5,207
|
|
|
Canadian Natural Resources Ltd.
|
|
BBB+
|
|
3.050
|
%
|
6/19/19
|
|
—
|
|
2,054
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,022
|
|
1,028
|
|
|
Laurentian Bank of Canada
|
|
BBB
|
|
2.500
|
%
|
1/23/20
|
|
2,996
|
|
6,099
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
2/03/20
|
|
3,941
|
|
4,008
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
3/09/20
|
|
5,294
|
|
5,395
|
|
|
Central 1 Credit Union
|
|
A
|
|
1.870
|
%
|
3/16/20
|
|
—
|
|
5,020
|
|
|
Choice Properties REIT
|
|
BBB
|
|
3.600
|
%
|
4/20/20
|
|
5,155
|
|
5,237
|
|
|
Penske Truck Leasing Co., L.P.
|
|
BBB
|
|
2.950
|
%
|
6/12/20
|
|
—
|
|
5,145
|
|
|
Westcoast Energy Inc.
|
|
BBB+
|
|
4.570
|
%
|
7/02/20
|
|
5,283
|
|
5,430
|
|
|
Bank of Montreal (USD)
|
|
A+
|
|
1.400
|
%
|
4/10/18
|
|
3,857
|
|
4,052
|
|
|
Citigroup Inc. (USD)
|
|
BBB+
|
|
2.050
|
%
|
12/17/18
|
|
3,850
|
|
4,081
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
4/15/19
|
|
3,833
|
|
4,040
|
|
|
Wells Fargo & Company (USD)
|
|
A
|
|
2.150
|
%
|
1/30/20
|
|
—
|
|
3,964
|
|
|
|
|
|
|
|
|
|
|
$
|
54,248
|
|
$
|
87,347
|
|
The cost of marketable securities as at February 28, 2018 was $55,128 (May 31, 2017 — $87,138). During the three and nine months ended February 28, 2018, the company divested of certain marketable securities in its Canadian portfolio for proceeds of $3,470 and $38,271, resulting in a gain (loss) on disposal of $10 and $(377) (2017 - $14 and $14), and re-invested $2,365 and $7,365 (2017 - $nil and $nil). During the three and nine months ended February 28, 2018, the Company recognized a gain (loss) of $(502) and $(2,193) (2017 - $14 and $14) on its marketable securities portfolio, of which $(512) and $(1,816) (2017 - $nil and $nil) represented unrealized fair value adjustments.
9
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
5.
Other current assets
Other current assets are comprised of:
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
HST receivable
|
|
$
|
6,319
|
|
$
|
3,675
|
|
|
Accrued interest
|
|
1,227
|
|
701
|
|
|
Credit card receivable
|
|
196
|
|
103
|
|
|
Prepaid assets
|
|
1,365
|
|
1,060
|
|
|
Other
|
|
1,026
|
|
32
|
|
|
|
|
$
|
10,133
|
|
$
|
5,571
|
|
6.
Inventory
Inventory is comprised of:
|
|
|
Capitalized
|
|
Fair value
|
|
|
February 28,
|
|
|
|
|
|
|
cost
|
|
adjustment
|
|
|
2018
|
|
May 31, 2017
|
|
|
Harvested cannabis
|
|
$
|
2,367
|
|
$
|
4,149
|
|
|
$
|
6,516
|
|
$
|
2,507
|
|
|
Harvested cannabis trim
|
|
506
|
|
775
|
|
|
1,281
|
|
421
|
|
|
Cannabis oil
|
|
1,591
|
|
1,668
|
|
|
3,259
|
|
682
|
|
|
Packaging and supplies
|
|
705
|
|
—
|
|
|
705
|
|
277
|
|
|
|
|
$
|
5,169
|
|
$
|
6,592
|
|
|
$
|
11,761
|
|
$
|
3,887
|
|
During the three and nine months ended February 28, 2018, the Company recorded $2,355 and $6,447 (2017 - $1,536 and $3,770) related to production costs. Included in production costs for the three and nine months ended February 28, 2018 is $62 and $157 of cannabis oil conversion costs (2017 - $50 and $93) and $71 and $169 related to the cost of accessories (2017 - $27 and $27). Included in cost of sales is amortization of $473 and $1,362 (2017 - $236 and $718). The Company also included $237 of amortization in inventory for the three and nine months ended February 28, 2018 related to capital assets utilized in production. During the three and nine months ended February 28, 2018, the Company expensed $3,443 and $7,250 (2017 — $1,104 and $3,676) of fair value adjustments on the sale of its biological assets included in inventory.
The Company holds 1,738.1 kilograms of harvested cannabis (May 31, 2017 — 668.5 kgs), 426.9 kilograms of harvested cannabis trim (May 31, 2017 — 140.1 kgs) and 5,053.8 litres of cannabis oils or 842.3 kilograms equivalent (May 31, 2017 — 1,091.3 litres or 181.9 kilograms equivalent) at February 28, 2018.
7.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance as at May 31, 2017
|
|
$
|
1,363
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
11,481
|
|
|
Purchased as part of business acquisition
|
|
767
|
|
|
Production costs capitalized
|
|
5,524
|
|
|
Transferred to inventory upon harvest
|
|
(15,968
|
)
|
|
Transferred to capital assets
|
|
(66
|
)
|
|
Balance at February 28, 2018
|
|
$
|
3,101
|
|
The Company values medical cannabis plants at cost from the date of initial clipping from mother plants until the end of
the ninth or twelfth week of its growing cycle. Measurement of the biological asset at fair value less costs to sell and costs to complete begins at the ninth, and thirteenth week until harvest. The Company has determined the fair value less costs to sell of harvested cannabis to be
10
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
$3.75 per gram. The Company has determined the fair value less costs to sell of its harvested cannabis trim to be $3.00 per gram, upon harvest.
The effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $4,101 and $11,481 during the three and nine months ended February 28, 2018 (2017 — increase of $1,090 and $4,197). In determining the fair value of biological assets, management is required to make several estimates, including: the expected cost required to grow the cannabis up to the point of harvest; harvesting costs; selling costs; sales price; and, expected yields for the cannabis plant. Increases in cost required up to the point of harvest, harvesting costs and selling costs will decrease the fair value of biological assets, while increases in sales price and expected yield for the cannabis plant will increase the fair value of biological assets. All of these significant estimates represent Level 3 on the fair value hierarchy. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
Sales price used in the valuation of biological assets is based on the average selling price of all cannabis products, and can vary based on different strains being grown as well as proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling, and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to variety of factors, such as strains being grown, length of growing cycle, and space allocated for growings. Management reviews all significant inputs based on historical information obtained as well as based on planned production schedules. Only when there is a material change from the existing expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the period, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.
8.
Related party transactions
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its operating expenditures. The balance owing from related parties as at February 28, 2018 was $nil (May 31, 2017 - $464). These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the three and nine months ended February 28, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $112 and $205 (2017 - $83 and $350). Included in this amount was rent of $10 and $36 charged during the three and nine months ended February 28, 2018 (2017 - $7 and $40).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc., a related party through an equity investment.
|
|
|
Amount
|
|
|
Balance due to (from) related parties as at May 31, 2017
|
|
$
|
(464
|
)
|
|
Related party charges in the period
|
|
205
|
|
|
Payments to related parties in the period
|
|
(205
|
)
|
|
Non-cash payments made on behalf of related parties in the period
|
|
(32
|
)
|
|
Payments made on behalf of related parties in the period
|
|
(8,559
|
)
|
|
Repayments made by related parties in the period
|
|
9,055
|
|
|
Balance at February 28, 2018
|
|
$
|
—
|
|
During the three months ended February 28, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc. and its sole holdings being the minority interests in Copperstate and CSF to Liberty Health Sciences Inc. for a purchase price of $20,000 (note 14). Liberty Health Sciences Inc., a related party through an equity investment, which the Company has entered into an agreement which has changed the classification of this investment from equity investee to assets held for sale (note 13).
During the nine months ended February 28, 2018, the Company purchased capital assets for $995 from a company controlled by a director. During the prior year, the Company purchased 36 acres of farm land, with 9 acres of greenhouses located thereon, from F.M. and Cacciavillani Farms Ltd., a company controlled by a director, for $6,100. The purchase price was allocated as follows: (i) $1,300 to land; (ii) $3,550 to greenhouse infrastructure; and, (iii) $1,250 to licences and
permits — intangible assets.
11
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Key management personnel compensation for the nine months ended February 28, 2018 and 2017 was comprised of:
|
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
|
Salaries
|
|
$
|
1,197
|
|
$
|
620
|
|
|
Short-term employment benefits (included in office and general)
|
|
49
|
|
35
|
|
|
Share-based compensation
|
|
4,276
|
|
423
|
|
|
|
|
$
|
5,522
|
|
$
|
1,078
|
|
Key management personnel compensation for the three months ended February 28, 2018 and 2017 was comprised of:
|
|
|
For the three months ended
|
|
|
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
|
Salaries
|
|
$
|
537
|
|
$
|
203
|
|
|
Short-term employment benefits (included in office and general)
|
|
13
|
|
16
|
|
|
Share-based compensation
|
|
2,059
|
|
158
|
|
|
|
|
$
|
2,609
|
|
$
|
377
|
|
Directors and officers of the Company control 10.5% or 18,594,172 of the voting shares of the Company.
9.
Capital assets
|
|
|
|
|
Production
|
|
|
|
|
|
Leasehold
|
|
Construction
|
|
Total capital
|
|
|
|
|
Land
|
|
Facility
|
|
Bearer plants
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,499
|
|
$
|
4,812
|
|
$
|
65
|
|
$
|
8,376
|
|
|
Additions
|
|
10,725
|
|
4,018
|
|
112
|
|
1,700
|
|
16
|
|
49,958
|
|
66,529
|
|
|
Transfers
|
|
104
|
|
12,152
|
|
—
|
|
174
|
|
(4,566
|
)
|
(7,864
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
(67
|
)
|
(33
|
)
|
—
|
|
—
|
|
(100
|
)
|
|
At May 31, 2017
|
|
10,829
|
|
16,170
|
|
45
|
|
5,340
|
|
262
|
|
42,159
|
|
74,805
|
|
|
Business acquisition
|
|
736
|
|
6,128
|
|
19
|
|
764
|
|
—
|
|
5,291
|
|
12,938
|
|
|
Additions
|
|
8,724
|
|
40,293
|
|
66
|
|
3,471
|
|
—
|
|
101,042
|
|
153,596
|
|
|
Transfers
|
|
—
|
|
6,990
|
|
—
|
|
697
|
|
—
|
|
(8,102
|
)
|
(415
|
)
|
|
Disposals
|
|
—
|
|
(207
|
)
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
(210
|
)
|
|
At February 28, 2018
|
|
$
|
20,289
|
|
$
|
69,374
|
|
$
|
127
|
|
$
|
10,272
|
|
$
|
262
|
|
$
|
140,390
|
|
$
|
240,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
554
|
|
$
|
513
|
|
$
|
—
|
|
$
|
1,067
|
|
|
Amortization
|
|
—
|
|
458
|
|
—
|
|
717
|
|
74
|
|
—
|
|
1,249
|
|
|
Transfers
|
|
—
|
|
525
|
|
—
|
|
—
|
|
(525
|
)
|
—
|
|
—
|
|
|
Disposals
|
|
—
|
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
—
|
|
(11
|
)
|
|
At May 31, 2017
|
|
—
|
|
983
|
|
—
|
|
1,260
|
|
62
|
|
—
|
|
2,305
|
|
|
Amortization
|
|
—
|
|
866
|
|
—
|
|
1,014
|
|
25
|
|
—
|
|
1,905
|
|
|
At February 28, 2018
|
|
$
|
—
|
|
$
|
1,849
|
|
$
|
—
|
|
$
|
2,274
|
|
$
|
87
|
|
$
|
—
|
|
$
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,945
|
|
$
|
4,299
|
|
$
|
65
|
|
$
|
7,309
|
|
|
At May 31, 2017
|
|
$
|
10,829
|
|
$
|
15,187
|
|
$
|
45
|
|
$
|
4,080
|
|
$
|
200
|
|
$
|
42,159
|
|
$
|
72,500
|
|
|
At February 28, 2018
|
|
$
|
20,289
|
|
$
|
67,525
|
|
$
|
127
|
|
$
|
7,998
|
|
$
|
175
|
|
$
|
140,390
|
|
$
|
236,504
|
|
12
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
During the three and nine months ended February 28, 2018, the Company sold assets that were not yet in use prior to disposal with a cost of $nil and $207 (2017 - $nil and $33) and a net book value of $nil and $207 (2017 - $nil and $22), for proceeds of $nil and $200 (2017 - $nil and $33), resulting in a loss (gain) on sale of capital assets of $nil and $7 (2017 - $nil and $(11)).
During the three months ended February 28, 2018, the Company entered into an agreement to sell a piece of equipment, which was not in use and classified within construction in process, for $180 USD ($231 CAD). As a result of this agreement, the Company recognized a loss on sale of capital assets of $184, transferred $415 of cost included in construction, and included the recoverable value of $231 in assets available for sale. During the three and nine months ended February 28, 2018, the company recognized a total loss (gain) on sale of capital assets of $7 and $191 (2017 - $nil and $(11)).
Included in assets available for sale is $231 recoverable value for the sale of a piece of equipment, $20,000 fair value of long-term investments (note 14), and $20,620 carrying value of an equity investment classified as available for sale (note 13).
10.
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
Tokyo Smoke
|
|
|
|
Total
|
|
|
|
|
Customer
|
|
Corporate
|
|
Licences &
|
|
|
|
licensing
|
|
Trademarks &
|
|
intangible
|
|
|
|
|
relationships
|
|
website
|
|
permits
|
|
Non-compete
|
|
agreement
|
|
brands
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
162
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,428
|
|
$
|
4,590
|
|
|
Additions
|
|
—
|
|
56
|
|
1,250
|
|
—
|
|
459
|
|
—
|
|
1,765
|
|
|
At May 31, 2017
|
|
—
|
|
218
|
|
1,250
|
|
—
|
|
459
|
|
4,428
|
|
6,355
|
|
|
Business acquisition
|
|
11,730
|
|
39
|
|
6,320
|
|
1,930
|
|
—
|
|
72,490
|
|
92,509
|
|
|
Additions
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9
|
|
9
|
|
|
At February 28, 2018
|
|
$
|
11,730
|
|
$
|
257
|
|
$
|
7,570
|
|
$
|
1,930
|
|
$
|
459
|
|
$
|
76,927
|
|
$
|
98,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
88
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
184
|
|
$
|
272
|
|
|
Amortization
|
|
—
|
|
68
|
|
153
|
|
—
|
|
57
|
|
414
|
|
692
|
|
|
Impairment
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,500
|
|
3,500
|
|
|
At May 31, 2017
|
|
—
|
|
156
|
|
153
|
|
—
|
|
57
|
|
4,098
|
|
4,464
|
|
|
Amortization
|
|
98
|
|
43
|
|
124
|
|
80
|
|
69
|
|
550
|
|
964
|
|
|
At February 28, 2018
|
|
$
|
98
|
|
$
|
199
|
|
$
|
277
|
|
$
|
80
|
|
$
|
126
|
|
$
|
4,648
|
|
$
|
5,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2016
|
|
$
|
—
|
|
$
|
74
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,244
|
|
$
|
4,318
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
62
|
|
$
|
1,097
|
|
$
|
—
|
|
$
|
402
|
|
$
|
330
|
|
$
|
1,891
|
|
|
At February 28, 2018
|
|
$
|
11,632
|
|
$
|
58
|
|
$
|
7,293
|
|
$
|
1,850
|
|
$
|
333
|
|
$
|
72,279
|
|
$
|
93,445
|
|
11.
Acquisition of Broken Coast
On February 13, 2018 the Company entered into a share purchase agreement to purchase all of the shares of Cannan Growers Inc. (“Cannan”), a holding company owning shares of Broken Coast Cannabis Ltd. (“Broken Coast”), and to acquire the remaining shares for a combined total of 99.86% of the issued and outstanding shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate 14,373,675 common shares. The share purchase agreement entitled the Company to control over Broken Coast on February 1, 2018, which became the effective acquisition date.
The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the acquisition date:
13
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Note
|
|
Number of shares
|
|
Share price
|
|
Amount
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
(i)
|
|
14,373,675
|
|
$
|
14.90
|
|
$
|
214,168
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
1,956
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
305
|
|
|
Other current assets
|
|
|
|
|
|
|
|
43
|
|
|
Inventory
|
|
|
|
|
|
|
|
2,149
|
|
|
Biological assets
|
|
|
|
|
|
|
|
767
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
12,938
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
11,730
|
|
|
Corporate website
|
|
|
|
|
|
|
|
39
|
|
|
Licence
|
|
|
|
|
|
|
|
6,320
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
1,930
|
|
|
Trademark & brands
|
|
|
|
|
|
|
|
72,490
|
|
|
Goodwill
|
|
|
|
|
|
|
|
142,707
|
|
|
Total assets
|
|
|
|
|
|
|
|
253,374
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
8,475
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
632
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
24,185
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
5,914
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
39,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
Share price based on the price of the shares on February 1, 2018.
The amount of net income and comprehensive income of Broken Coast since the acquisition date included in these condensed interim consolidated financial statements was $252. Net income and comprehensive net income for the Company would have been higher by approximately $2,268 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company has incurred transaction costs to date of $1,643.
Included in goodwill is $1,200 from the acquisition of CannWay and $142,707 from the acquisition of Broken Coast.
12.
Convertible notes receivable
|
|
|
Notes receivable
|
|
Embedded derivatives
|
|
|
|
|
February 28,
|
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
2018
|
|
May 31, 2017
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,404
|
|
$
|
1,361
|
|
$
|
1,348
|
|
$
|
173
|
|
|
Copperstate Farms Investors, LLC
|
|
1,921
|
|
—
|
|
—
|
|
—
|
|
|
HydRx Farms Ltd. (d/b/a Scientus Pharma)
|
|
8,162
|
|
—
|
|
3,851
|
|
—
|
|
|
|
|
11,487
|
|
1,361
|
|
5,199
|
|
173
|
|
|
Deduct - current portion
|
|
(1,921
|
)
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
9,566
|
|
$
|
1,361
|
|
$
|
5,199
|
|
$
|
173
|
|
14
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
CannaRoyalty Corp.
During the three and nine month period, the Company’s note receivable from CannaRoyalty Corp. (“CR”) increased by $14 and $43 representing the recognition of accretion interest on the note and the embedded derivative increased by $243 and $1,175, representing the change in fair value of the conversion feature on the note.
As at February 28, 2018, the convertible note receivable totalled $2,752.
Copperstate Farms Investors, LLC
On August 31, 2017, the Company lent Copperstate Farms Investors, LLC (“CSF”) $2,000 USD ($2,501 CAD) in exchange for a senior secured convertible loan. The convertible debenture bears interest at 9%, is due on May 15, 2018 (“Maturity Date”). The loan is pre-payable at any time by CSF, however no principal payments are due prior to the Maturity Date. If at least $500 USD of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for $500 USD plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at $500 USD per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at $500 USD per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. Since the option to settle payments in membership units is solely at the discretion of CSF, no embedded derivative has been recognized. During the three months ended February 28, 2018, the Company received $500 USD as a partial repayment of the convertible note receivable.
As at February 28, 2018, the convertible note receivable totalled $1,500 USD ($1,921 CAD).
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria lent $11,500 to Scientus Pharma (“SP”) as a convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days.
The option to settle payments in common shares represents an embedded derivative in the form of a call option to the Company. The fair value of the derivative asset related to the convertible note is $3,851 at February 28, 2018.
During the three and nine month period, the Company’s note receivable from SP increased by $556 and $1,112 representing the recognition of accretion interest on the note and the embedded derivative decreased by $295 and $599, representing the change in fair value of the conversion feature on the note.
As at February 28, 2018, the convertible note receivable totalled $12,013.
During the three and nine month period, the Company lent a total of $nil and $14,001 in convertible notes, recognized total accretion interest revenue of $570 and $1,155, and recorded an unrealized (loss) gain on embedded derivatives of $(52) and $576.
The fair value for the embedded derivatives was determined using the Black Scholes option pricing model using the following assumptions: the risk-free rate of 0.85-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
15
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
13.
Interest in equity investee
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
28,376
|
|
$
|
—
|
|
|
Investment
|
|
—
|
|
28,166
|
|
|
Transfer of fair value of SecureCom shares on reverse takeover
|
|
1,664
|
|
—
|
|
|
Gain on account of dilution of ownership
|
|
7,535
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(9,281
|
)
|
210
|
|
|
Share of reported comprehensive loss
|
|
(801
|
)
|
—
|
|
|
Equity investee sold
|
|
(6,873
|
)
|
—
|
|
|
Transfer to assets available for sale
|
|
(20,620
|
)
|
—
|
|
|
Closing balance
|
|
$
|
—
|
|
$
|
28,376
|
|
Liberty Health Sciences Inc. (“LHS”)
During the three months ended February 28, 2018, the Company entered into a share purchase agreement (the “Transaction”) to sell 26,716,025 common shares of LHS in exchange for promissory note receivable of $33,395. The proceeds from the promissory note were received subsequent to quarter-end. The 26,716,025 common shares sold represent all the Company’s shares in LHS that are not subject to Canadian Securities Exchange (“CSE”) escrow requirements. The transaction also included a call/put obligation (“Obligation Agreement”) for the 80,148,077 remaining shares in LHS held by the Company, which are currently subject to the CSE mandatory escrow requirements. As each new tranche of shares becomes freely trading, the Obligation Agreement results in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of LHS, based on LHS’s 10 day volume weighted trading price.
The Transaction includes an opt-out for Aphria’s benefit, in the event that the Toronto Stock Exchange amends their regulations such that it permits U.S. based cannabis investments and in such instance the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agrees to pay the buyers a $2,500 termination fee.
Based on the terms of the Obligation Agreement, the Company determined that the remaining shares held in LHS meet the requirements under IFRS 5 and have been reclassified as held for sale. The Company has stopped recording the investment as an equity investment for the three months ended February 28, 2018 and transferred the carrying value $20,620 to assets held for sale (note 9). The Company recorded a derivative liability of $16,850 as a result of the 18% discount to the market price of LHS, based on LHS’s 10 day volume weighted trading price in the Obligation Agreement. Based on its closing share price of $1.22 as at February 28, 2018, the LHS shares held by Aphria have a fair value of $97,781, which is $77,161 higher than the carrying value recorded in assets held for sale.
The Company used the Monte-Carlo simulation to estimate the fair value of the derivative liability, using the following assumptions: risk-free rate of 1%; expected life of 0.4 — 2.4 years; volatility of 60% based on comparable companies; forfeiture rate of 0%; and, dividend yield of nil.
Prior to completion of the Transaction and reclassification of the investment to assets held for sale, LHS reported a net loss $24,671 and a net comprehensive gain (loss) of $(26,798) for the period from May 1, 2017 to November 30, 2017. In accordance with the equity method, Aphria recorded a loss of $nil and $9,281 and an other comprehensive loss of $nil and $801 for the three and nine months ended February 28, 2018, from its investee relative to its ownership of the outstanding common shares at the time. The Company also recorded a gain on dilution of ownership in equity investee of $7,535 for the nine months ended February 28, 2018. No further loss from equity investee or gain on dilution of ownership in equity investee has been recorded in the period due to the reclassification of the investment from equity investment to asset held for sale.
16
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
14.
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
Fair value
|
|
|
|
|
Cost
|
|
|
Fair value
|
|
|
|
Divesture/
|
|
|
February 28,
|
|
Change in
|
|
February 28,
|
|
|
|
|
May 31, 2017
|
|
|
May 31, 2017
|
|
Investment
|
|
Transfer
|
|
|
2018
|
|
fair value
|
|
2018
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,380
|
|
|
$
|
1,793
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
1,793
|
|
$
|
1,936
|
|
$
|
3,729
|
|
|
Kalytera Therapeutics, Inc.
|
|
3,014
|
|
|
1,111
|
|
—
|
|
(1,111
|
)
|
|
—
|
|
—
|
|
—
|
|
|
MassRoots, Inc.
|
|
508
|
|
|
562
|
|
—
|
|
(232
|
)
|
|
330
|
|
(173
|
)
|
157
|
|
|
SecureCom Mobile Inc.
|
|
520
|
|
|
1,664
|
|
—
|
|
(1,664
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Tetra Bio-Pharma Inc.
|
|
2,300
|
|
|
9,500
|
|
—
|
|
—
|
|
|
9,500
|
|
(700
|
)
|
8,800
|
|
|
Canabo Medical Inc.
|
|
1,160
|
|
|
316
|
|
—
|
|
(316
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Hiku Brands Company Ltd.
|
|
—
|
|
|
—
|
|
10,000
|
|
1,000
|
|
|
11,000
|
|
8,946
|
|
19,946
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
8,423
|
|
6,102
|
|
|
14,525
|
|
10,588
|
|
25,113
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
1,627
|
|
—
|
|
|
1,627
|
|
(709
|
)
|
918
|
|
|
Scythian Biosciences Corp.
|
|
—
|
|
|
—
|
|
9,349
|
|
—
|
|
|
9,349
|
|
4,799
|
|
14,148
|
|
|
Scythian Biosciences Corp.
|
|
—
|
|
|
—
|
|
3,153
|
|
—
|
|
|
3,153
|
|
1,038
|
|
4,191
|
|
|
|
|
8,882
|
|
|
14,946
|
|
32,552
|
|
3,779
|
|
|
51,277
|
|
25,725
|
|
77,002
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC
|
|
1,755
|
|
|
1,755
|
|
—
|
|
—
|
|
|
1,755
|
|
3,545
|
|
5,300
|
|
|
Copperstate Farms Investors, LLC
|
|
7,539
|
|
|
7,560
|
|
1,868
|
|
—
|
|
|
9,428
|
|
5,272
|
|
14,700
|
|
|
Resolve Digital Health Inc.
|
|
718
|
|
|
1,000
|
|
—
|
|
—
|
|
|
1,000
|
|
2,000
|
|
3,000
|
|
|
Resolve Digital Health Inc.
|
|
282
|
|
|
242
|
|
—
|
|
—
|
|
|
242
|
|
1,542
|
|
1,784
|
|
|
Green Acre Capital Fund
|
|
300
|
|
|
285
|
|
900
|
|
—
|
|
|
1,185
|
|
682
|
|
1,867
|
|
|
Scythian Biosciences Inc.
|
|
2,000
|
|
|
2,000
|
|
—
|
|
(2,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
TS BrandCo Holdings Inc.
|
|
—
|
|
|
—
|
|
1,000
|
|
(1,000
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Nuuvera Inc.
|
|
—
|
|
|
—
|
|
6,979
|
|
(6,979
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Green Tank Holdings Corp.
|
|
—
|
|
|
—
|
|
650
|
|
—
|
|
|
650
|
|
(10
|
)
|
640
|
|
|
Althea Company Pty Ltd.
|
|
—
|
|
|
—
|
|
2,483
|
|
—
|
|
|
2,483
|
|
13
|
|
2,496
|
|
|
|
|
12,594
|
|
|
12,842
|
|
13,880
|
|
(9,979
|
)
|
|
16,743
|
|
13,044
|
|
29,787
|
|
|
|
|
21,476
|
|
|
27,788
|
|
46,432
|
|
(6,200
|
)
|
|
68,020
|
|
38,769
|
|
106,789
|
|
|
Deduct - assets available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
$
|
21,476
|
|
|
$
|
27,788
|
|
$
|
46,432
|
|
$
|
(6,200
|
)
|
|
$
|
68,020
|
|
$
|
38,769
|
|
$
|
86,789
|
|
The fair value attached to warrants in both Level 1 and Level 3 were determined using the Black-Scholes option pricing model using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 1 and 2 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective warrant.
CannaRoyalty Corp.
The Company holds 1,100,000 common shares at a cost of $1,380, with a fair value of $3,729 as at February 28, 2018.
Kalytera Therapeutics, Inc.
During the nine months ended February 28, 2018, the Company sold its 6,172,000 common shares in Kalytera Therapeutics, Inc. (note 26).
MassRoots, Inc.
During the nine months ended February 28, 2018, the Company sold 350,000 common shares in MassRoots, Inc. (note 26). The Company holds 500,000 common shares at a cost of $251 USD ($304 CAD), with a fair value of $123 USD ($157 CAD) as at February 28, 2018.
SecureCom Mobile Inc. (“SecureCom”)
In July 2017, SecureCom amalgamated with DFMMJ and was re-named LHS. As a result, the Company transferred the fair value of its investment in SecureCom into its investment in LHS recognized as Interest in equity investee (note 13).
Tetra Bio-Pharma Inc.
The Company owns 10,000,000 common shares at a cost of $2,300, with a fair value of $8,800 as at February 28, 2018.
17
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Canabo Medical Inc.
During the three months ended February 28, 2018, the Company sold its 800,000 common shares in Canabo Medical Inc. (note 26).
Hiku Brands Company Ltd (formerly TS BrandCo Holdings Inc.)
In June 2017, the Company entered into a subscription agreement with TS BrandCo Holdings Inc. (“Tokyo Smoke”) for the purchase of 140,845 common shares, for a total cost of $1,000. During the three months ended February 28, 2018, TS BrandCo Holdings Inc. merged with DOJA Cannabis Company Ltd. and renamed the reporting issuer Hiku Brands Company Ltd. (“Hiku”). As part of the merger, each common share of Tokyo Smoke was exchanged for 13 common shares of Hiku. During the three months ended February 28, 2018, the Company contributed $10,000 as an equity investment in Hiku for 7,194,244 common shares. As a result of these transactions, the Company holds 9,025,229 common shares at a cost of $11,000, with a fair value of $19,946 as at February 28, 2018.
Nuuvera Inc. (“Nuuvera”)
In August 2017, the Company entered into a subscription agreement with Nuuvera for the purchase of 2,000,000 common shares, for a total cost of $2,029. In November 2017, the Company purchased an additional 1,980,000 common shares for $4,950. In January 2018, the Company sold 500,000 common shares for gross proceeds of $2,945 (note 26). On January 9, 2018 Nuuvera began trading on the TSX-Venture Exchange.
In February 2018, the Company purchased an additional 1,818,190 units for $10,050. Each unit is comprised of one common share and one half of one common share purchase warrant. Each whole common share purchase warrant is exercisable to purchase one common share at a price of $7.20 per share for a period of 24 months. The Company holds 5,298,190 common shares and 909,095 common share purchase warrants at a cost of $16,152, with a fair value of $26,031 as at February 28, 2018. Subsequent to quarter-end, the Company acquired 100% of the issued and outstanding common shares of Nuuvera (note 31).
Scythian Biosciences Inc. (“Scythian”)
In August 2017, the Company’s subscription receipts converted to common shares. As part of the conversion, Scythian consolidated its shares on a 20:1 basis. On August 8, 2017, Scythian began trading on the TSX-Venture Exchange. During the nine months ended February 28, 2018, the Company sold its 250,000 common shares in Scythian (note 26).
In February 2018, the Company purchased 672,125 units of Scythian for $12,502. Each unit is comprised of one common share and one common share purchase warrant. Each common share purchase warrant is exercisable to purchase one common share at a price of $22.00 per share for a period of 24 months. The Company holds 672,125 common shares and 672,125 common share purchase warrants at a cost of $12,502, with a fair value of $18,339 as at February 28, 2018.
Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”)
In July 2017, the Company purchased an additional 2,668 membership units in CSF for $1,334 USD ($1,668 CAD). During the three months ended February 28, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc. and its sole holdings being the minority interests in Copperstate and CSF to LHS for a purchase price of $20,000. The Company has received a refundable deposit of $2,000 in connection with the sale, which is subject to various closing conditions and is expected to close within the next 3 months.
As a result of these transactions, the Company owns 5,000 membership units in Copperstate for total cost of $1,300 USD ($1,755 CAD), with a fair value of $5,300 and owns 13,868 membership units in CSF for a total cost of $7,094 USD ($9,407 CAD) with a fair value of $14,700 as at February 28, 2018. The fair value has been determined by the sale price from the definitive agreement with LHS. As a result of the definitive agreement with LHS, the Company has recorded the total value of $20,000 as available for sale (note 9).
Resolve Digital Health Inc.
The Company owns 2,000,024 common shares and 2,000,024 warrants at a total cost of $1,000, with a fair value of $4,784 as at February 28, 2018. The Company determined the fair value of its investment based on the most recent financing.
Green Acre Capital Fund
The Company committed $2,000 to the expected $25,000 fund and as of the balance sheet date has funded $1,200. The Company determined that the fair value of its investment, based on its proportionate share of net assets, was $1,867 as at February 28, 2018.
18
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Green Tank Holdings Corp.
In November 2017, the Company entered into a subscription agreement with Green Tank Holdings Corp. for the purchase of 98,425 preferred shares, for a total cost of $500 USD ($650 CAD). The Company determined the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $10 due to changes in the foreign exchange rate.
Althea Company Pty Ltd. (“Althea”)
In February 2018, the Company entered into a subscription agreement with Althea for the purchase of 2,500 common shares, for a total cost of $2,500 AUD ($2,483 CAD). Part of the consideration was satisfied through a promissory note (note 17). The Company determined the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value. The Company recognized a gain from the change in fair value of $13 due to changes in the foreign exchange rate. Subsequent to quarter-end, the Company acquired an addition 2,000 common shares (note 31).
15.
Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
|
Income before income taxes
|
|
$
|
42,579
|
|
$
|
6,791
|
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Expected income tax expense at combined basic federal and provincial tax rate
|
|
11,283
|
|
1,800
|
|
|
|
|
|
|
|
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Non-deductible share-based compensation and other expenses
|
|
2,856
|
|
482
|
|
|
Non-taxable portion of losses (gains)
|
|
(5,832
|
)
|
(1,196
|
)
|
|
Utilization of tax attributes not previously recognized
|
|
—
|
|
(979
|
)
|
|
Other
|
|
(168
|
)
|
(571
|
)
|
|
Tax assets not recognized
|
|
—
|
|
464
|
|
|
|
|
$
|
8,139
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Income tax expense is comprised of:
|
|
|
|
|
|
|
Current
|
|
$
|
2,109
|
|
$
|
—
|
|
|
Future
|
|
6,030
|
|
—
|
|
|
|
|
$
|
8,139
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of deferred tax:
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
—
|
|
$
|
1,313
|
|
|
Capital loss carry forward
|
|
380
|
|
381
|
|
|
Share issuance and financing fees
|
|
5,522
|
|
3,448
|
|
|
Other
|
|
356
|
|
34
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(799
|
)
|
(164
|
)
|
|
Intangible assets in excess of tax costs
|
|
(24,505
|
)
|
(194
|
)
|
|
Unrealized gain
|
|
(2,791
|
)
|
(914
|
)
|
|
Biological assets and inventory in excess of tax costs
|
|
(2,061
|
)
|
(589
|
)
|
|
Net deferred tax (liabilities) assets
|
|
$
|
(23,898
|
)
|
$
|
3,315
|
|
19
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
16.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the end of the period, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.
17.
Promissory note payable
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Note payable to Copperstate Farms, LLC - $1,300 USD ($1,755), opening balance, bearing nominal interest, two-year term, repayable in eight quarterly instalments of $162 USD
|
|
$
|
1,244
|
|
$
|
1,539
|
|
|
Reduction of Promissory note payable balance with respect to consulting services provided
|
|
(689
|
)
|
(295
|
)
|
|
Balance remaining
|
|
555
|
|
1,244
|
|
|
Deduct - principal portion included in current liabilities
|
|
(555
|
)
|
(878
|
)
|
|
|
|
$
|
—
|
|
$
|
366
|
|
During the three months ended February 28, 2018, the Company entered into a promissory note with Althea for $700 AUD ($686), as part of the purchase of Althea common shares (note 14), the note is due and payable on December 31, 2020. The Company reached an agreement with Althea where the promissory note amount will be used by Althea to purchase products from the Company in connection with a supply agreement entered into in September 2017.
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Note payable to Althea Company Pty Ltd - $700 AUD ($686), opening balance, non-interest bearing, due and payable on December 31, 2020
|
|
$
|
686
|
|
$
|
—
|
|
|
Reduction of Promissory note payable balance with respect to product provided
|
|
(63
|
)
|
—
|
|
|
Balance remaining
|
|
623
|
|
—
|
|
|
Deduct - principal portion included in current liabilities
|
|
—
|
|
—
|
|
|
|
|
$
|
623
|
|
$
|
—
|
|
20
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
18.
Long-term debt
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Term loan - $25,000 - 3.95%, compounded monthly, 5 year term with a 15-year amortization, repayable in equal monthly installments of $188 including interest, due in April 2022
|
|
$
|
25,000
|
|
$
|
25,000
|
|
|
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021
|
|
1,084
|
|
1,164
|
|
|
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021
|
|
3,549
|
|
3,645
|
|
|
Vendor take-back mortgage owed to related party - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021
|
|
2,004
|
|
2,396
|
|
|
Term loan - $1,500 - 3.28%, with a 7-year amortization, due on demand
|
|
1,187
|
|
—
|
|
|
Term loan - $3,000 - 5.45%, with a 5-year amortization, due on demand
|
|
3,000
|
|
—
|
|
|
Mortgage payable - $1,760 - 3.27%, with a 20-year amortization, due on demand
|
|
1,708
|
|
—
|
|
|
|
|
37,532
|
|
32,205
|
|
|
Deduct
|
- unamortized financing fees
|
|
(50
|
)
|
(20
|
)
|
|
|
- principal portion included in current liabilities
|
|
(8,009
|
)
|
(765
|
)
|
|
|
|
$
|
29,473
|
|
$
|
31,420
|
|
Total long-term debt repayments are as follows:
|
Next 12 months
|
|
|
|
$
|
8,009
|
|
|
2 years
|
|
|
|
2,213
|
|
|
3 years
|
|
|
|
2,321
|
|
|
4 years
|
|
|
|
5,565
|
|
|
5 years
|
|
|
|
19,424
|
|
|
Balance of obligation
|
|
|
|
$
|
37,532
|
|
The term loan of $25,000 was entered into on May 9, 2017 and is secured by a first charge on the Company’s real estate holdings, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments start on the term loan in March 2018.
The mortgage payable of $3,549 and term loan of $1,084 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of $2,004, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot St. West. The mortgage is secured by a second charge on the property at 265 Talbot St. West, Leamington, Ontario.
The term loans of $1,187 and $3,000, and mortgage payable of $1,708 were acquired as part of the acquisition of Broken Coast (note 11). The loans and mortgage are secured by corporate and personal guarantors, as well as by a first charge on the property at 3695 Drink Water Road, Duncan, British Columbia. Subsequent to quarter-end, all of the loans have been paid in full.
21
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
19.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at February 28, 2018, the Company has issued 177,697,791 shares, of which 8,453,138 shares were held and subject to various escrow agreements.
|
|
|
Number of
|
|
|
|
|
Common Shares
|
|
shares
|
|
Amount
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
|
November 2017 bought deal, net of cash issuance costs
|
|
12,689,675
|
|
86,661
|
|
|
January 2018 bought deal, net of cash issuance costs
|
|
8,363,651
|
|
109,000
|
|
|
Broken Coast acquisition
|
|
14,373,675
|
|
214,168
|
|
|
Warrants exercised
|
|
1,584,036
|
|
2,400
|
|
|
Options exercised
|
|
2,053,000
|
|
5,338
|
|
|
Deferred share units exercised
|
|
5,050
|
|
62
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,002
|
|
|
Shares held in escrow earned in exchange for services
|
|
—
|
|
187
|
|
|
|
|
177,697,791
|
|
$
|
695,135
|
|
a)
Throughout the three and nine-month period, 1,166,181 and 1,584,036 warrants with exercise prices ranging from $1.50 to $1.75 were exercised for $1,762 and $2,400.
b)
Throughout the three and nine-month period, 1,920,512 and 2,053,000 shares were issued from the exercise of stock options with exercise prices ranging from $0.60 to $9.05 for $5,089 and $5,338.
c)
Throughout the three and nine-month period, 2,525 and 5,050 shares were issued in accordance with the deferred share unit plan to former directors of the Company.
d)
In January 2017, the Company issued 112,500 common shares in escrow pursuant to a third party consulting agreement for greenhouse related services, net of cash issuance costs. At February 28, 2018, all 112,500 common shares of the shares in escrow have been released.
e)
In November 2017, the Company closed a bought deal financing in which it issued 12,689,675 common shares at a purchase price of $7.25 per share for $86,661, net of cash issuance costs.
f)
In January 2018, the Company closed a bought deal financing in which it issued 8,363,651 common shares at a purchase price of $13.75 per share for $109,000 net of cash issuance costs.
g)
In February 2018, the Company completed the acquisition of Broken Coast (note 11) in which it issued 14,373,675 common shares at a deemed price of $14.90 for $214,168.
h)
During the three and nine-month period, the Company recognized $1,590 and $3,002 income tax recovery on share issuance costs.
20.
Warrants
The warrant details of the Company are as follows:
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
Type of warrant
|
|
Expiry date
|
|
warrants
|
|
average price
|
|
Amount
|
|
|
Compensation warrant / option
|
|
December 10, 2018
|
|
106,157
|
|
$
|
1.75
|
|
$
|
85
|
|
|
Warrant
|
|
December 11, 2018
|
|
229,846
|
|
1.75
|
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
1,765,869
|
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
3.14
|
|
360
|
|
|
|
|
|
|
2,301,872
|
|
$
|
1.68
|
|
$
|
445
|
|
22
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
February 28, 2018
|
|
May 31, 2017
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
warrants
|
|
average price
|
|
warrants
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
3,885,908
|
|
$
|
1.61
|
|
18,721,987
|
|
$
|
1.51
|
|
|
Expired during the period
|
|
—
|
|
—
|
|
(50,305
|
)
|
1.20
|
|
|
Issued during the period
|
|
—
|
|
—
|
|
465,391
|
|
2.35
|
|
|
Exercised during the period
|
|
(1,584,036
|
)
|
1.52
|
|
(15,251,165
|
)
|
1.51
|
|
|
Outstanding, end of the period
|
|
2,301,872
|
|
$
|
1.68
|
|
3,885,908
|
|
$
|
1.61
|
|
21.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $5,274 and $9,769 during the three and nine months ended February 28, 2018 (2017 - $1,054 and $1,509). The total fair value of options granted during the period was $20,158 (2017 - $2,846), including $9,509 of options granted as part of the acquisition of Broken Coast.
|
|
|
February 28, 2018
|
|
May 31, 2017
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
options
|
|
average price
|
|
options
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
5,926,001
|
|
$
|
1.99
|
|
4,975,000
|
|
$
|
0.84
|
|
|
Exercised during the period
|
|
(2,102,081
|
)
|
1.96
|
|
(1,121,999
|
)
|
1.05
|
|
|
Issued during the period
|
|
3,953,000
|
|
12.87
|
|
2,253,000
|
|
3.99
|
|
|
Cancelled during the period
|
|
(472,773
|
)
|
1.14
|
|
(180,000
|
)
|
1.09
|
|
|
Outstanding, end of the period
|
|
7,304,147
|
|
$
|
7.94
|
|
5,926,001
|
|
$
|
1.99
|
|
|
Exercisable, end of the period
|
|
3,758,799
|
|
$
|
3.73
|
|
3,919,542
|
|
$
|
1.36
|
|
In June 2017, the Company issued 250,000 stock options at an exercise price of $5.44 per share, exercisable for 5 years to officers of the company. 83,333 vest immediately and the remainder vest over 2 years.
In July 2017, the Company issued 1,015,000 stock options at an exercise price of $5.24 per share, exercisable for 3 years to employees, officers and consultants of the company. 688,333 vest immediately and the remainder vest over 2 years.
In October 2017, the Company issued 533,000 stock options at an exercise price of $6.90 per share, exercisable for 3 to 5 years to employees, officers and consultants of the company. 244,330 vest immediately and the remainder vest over 2 years.
In November 2017, the Company issued 330,000 stock options at an exercise price of $9.05 - $9.28 per share, exercisable for 3 years to employees and consultants of the company. 109,998 vest immediately and the remainder vest over 2 years.
In December 2017, the Company issued 100,000 stock options at an exercise price of $14.06 per share, exercisable for 3 years to employees of the company. 33,333 vest immediately and the remainder vest over 2 years.
In January 2018, the Company issued 1,000,000 stock options at an exercise price of $20.19 per share, exercisable for 3 years as part of the business acquisition. All of the options vest over 3 years.
In January 2018, the Company issued 725,000 stock options at an exercise price of $21.70 - $22.89 per share, exercisable for 3 — 5 years to employees, officers and consultants of the company. 171,662 vest immediately and the remainder vest over 2 - 3 years.
23
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The outstanding option details of the Company are as follows:
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
average exercise
|
|
Number of
|
|
Vested and
|
|
|
Expiry date
|
|
price
|
|
options
|
|
exercisable
|
|
|
October 2018
|
|
$
|
1.17
|
|
20,000
|
|
20,000
|
|
|
November 2018
|
|
$
|
1.49
|
|
20,000
|
|
20,000
|
|
|
December 2018
|
|
$
|
1.30
|
|
30,000
|
|
30,000
|
|
|
April 2019
|
|
$
|
1.67
|
|
30,000
|
|
30,000
|
|
|
June 2019
|
|
$
|
0.60
|
|
1,480,000
|
|
1,480,000
|
|
|
September 2019
|
|
$
|
3.00
|
|
42,365
|
|
27,410
|
|
|
October 2019
|
|
$
|
3.47
|
|
13,400
|
|
6,733
|
|
|
November 2019
|
|
$
|
3.90
|
|
867,052
|
|
536,709
|
|
|
December 2019
|
|
$
|
5.25
|
|
500,000
|
|
133,332
|
|
|
January 2020
|
|
$
|
5.72
|
|
20,668
|
|
5,667
|
|
|
April 2020
|
|
$
|
7.92
|
|
133,334
|
|
55,000
|
|
|
June 2020
|
|
$
|
5.44
|
|
216,668
|
|
49,999
|
|
|
July 2020
|
|
$
|
5.24
|
|
764,324
|
|
459,633
|
|
|
September 2020
|
|
$
|
0.85
|
|
185,000
|
|
185,000
|
|
|
October 2020
|
|
$
|
6.90
|
|
383,000
|
|
94,330
|
|
|
November 2020
|
|
$
|
1.19
|
|
50,000
|
|
50,000
|
|
|
November 2020
|
|
$
|
9.05
|
|
270,000
|
|
83,332
|
|
|
November 2020
|
|
$
|
9.28
|
|
50,000
|
|
16,666
|
|
|
December 2020
|
|
$
|
14.06
|
|
100,000
|
|
33,333
|
|
|
January 2021
|
|
$
|
21.70
|
|
525,000
|
|
151,664
|
|
|
January 2021
|
|
$
|
22.89
|
|
150,000
|
|
19,998
|
|
|
January 2021
|
|
$
|
22.08
|
|
50,000
|
|
—
|
|
|
May 2021
|
|
$
|
20.19
|
|
1,000,000
|
|
—
|
|
|
June 2021
|
|
$
|
1.40
|
|
193,336
|
|
100,000
|
|
|
August 2021
|
|
$
|
1.64
|
|
110,000
|
|
69,993
|
|
|
October 2022
|
|
$
|
6.90
|
|
100,000
|
|
100,000
|
|
|
Outstanding, end of the period
|
|
$
|
7.94
|
|
7,304,147
|
|
3,758,799
|
|
The Company used the Black Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 3 and 5 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.
22.
Non-controlling interest
The following tables summarise the information relating to the Company’s subsidiary, 1974568 Ontario Ltd., before intercompany eliminations.
|
|
|
February 28,
|
|
|
|
|
|
|
2018
|
|
May 31, 2017
|
|
|
Current assets
|
|
$
|
8,016
|
|
$
|
—
|
|
|
Non-current assets
|
|
59,155
|
|
—
|
|
|
Current liabilities
|
|
(2,788
|
)
|
—
|
|
|
Non-current liabilities
|
|
(44,384
|
)
|
—
|
|
|
Net assets
|
|
19,999
|
|
—
|
|
|
|
|
|
|
|
|
|
Non-controlling interest %
|
|
49
|
%
|
—
|
|
|
Non-controlling interest
|
|
$
|
9,799
|
|
$
|
—
|
|
24
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Total expenses
|
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
|
Net loss and comprehensive loss
|
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
|
Non-controlling interest %
|
|
49
|
%
|
—
|
|
49
|
%
|
—
|
|
|
|
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
—
|
|
23.
General and administrative expenses
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
567
|
|
$
|
203
|
|
$
|
1,227
|
|
$
|
620
|
|
|
Consulting fees
|
|
52
|
|
53
|
|
210
|
|
132
|
|
|
Office and general
|
|
636
|
|
397
|
|
1,755
|
|
1,106
|
|
|
Professional fees
|
|
665
|
|
151
|
|
1,362
|
|
391
|
|
|
Salaries and wages
|
|
651
|
|
301
|
|
1,376
|
|
789
|
|
|
Travel and accomodation
|
|
213
|
|
101
|
|
517
|
|
320
|
|
|
Rent
|
|
10
|
|
25
|
|
55
|
|
57
|
|
|
|
|
$
|
2,794
|
|
$
|
1,231
|
|
$
|
6,502
|
|
$
|
3,415
|
|
24.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
$
|
5,274
|
|
$
|
1,054
|
|
$
|
9,769
|
|
$
|
1,509
|
|
|
Share-based compensation accrued in the prior period
|
|
—
|
|
—
|
|
(44
|
)
|
—
|
|
|
Share-based compensation issued on behalf of a related party
|
|
—
|
|
—
|
|
(32
|
)
|
—
|
|
|
Shares for services compensation
|
|
—
|
|
186
|
|
187
|
|
186
|
|
|
Deferred share units expensed in the period
|
|
685
|
|
16
|
|
788
|
|
16
|
|
|
|
|
$
|
5,959
|
|
$
|
1,256
|
|
$
|
10,668
|
|
$
|
1,711
|
|
During the period, the Company issued 8,314 deferred share units to certain directors of the Company, under the terms of the Company’s Deferred Share Unit Plan.
25.
Finance income, net
Finance income, net, is comprised of:
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Interest income
|
|
$
|
1,970
|
|
$
|
499
|
|
$
|
4,549
|
|
$
|
934
|
|
|
Interest expense
|
|
(349
|
)
|
(93
|
)
|
(1,016
|
)
|
(236
|
)
|
|
|
|
$
|
1,621
|
|
$
|
406
|
|
$
|
3,533
|
|
$
|
698
|
|
25
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
26.
Gain on long-term investments
Gain on long-term investments for the three and nine months ended February 28, 2018 is comprised of:
|
|
|
|
|
Fair value May
|
|
|
Gain (loss) on
|
|
Change in fair
|
|
|
|
|
|
Investment
|
|
Proceeds
|
|
31, 2017
|
|
|
disposal
|
|
value
|
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kalytera Therapeutics, Inc. - shares
|
|
$
|
763
|
|
$
|
1,111
|
|
|
$
|
(348
|
)
|
$
|
—
|
|
|
$
|
(348
|
)
|
|
MassRoots, Inc. - shares
|
|
102
|
|
232
|
|
|
(130
|
)
|
—
|
|
|
(130
|
)
|
|
Canabo Medical Inc. - shares
|
|
433
|
|
316
|
|
|
117
|
|
—
|
|
|
117
|
|
|
Nuuvera Inc. - shares
|
|
2,945
|
|
877
|
|
|
2,068
|
|
—
|
|
|
2,068
|
|
|
Scythian Biosciences Inc. - shares
|
|
1,225
|
|
2,000
|
|
|
(775
|
)
|
—
|
|
|
(775
|
)
|
|
Long-term investments (Note 13)
|
|
—
|
|
—
|
|
|
—
|
|
38,769
|
|
|
38,769
|
|
|
Nine months ended February 28, 2018
|
|
$
|
5,468
|
|
$
|
4,536
|
|
|
$
|
932
|
|
$
|
38,769
|
|
|
$
|
39,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less transactions in previous quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
2,090
|
|
3,343
|
|
|
(1,253
|
)
|
26,410
|
|
|
25,157
|
|
|
Three months ended February 28, 2018
|
|
$
|
3,378
|
|
$
|
1,193
|
|
|
$
|
2,185
|
|
$
|
12,359
|
|
|
$
|
14,544
|
|
27.
Earnings per share
The calculation of earnings per share for the three months ended February 28, 2018 was based on the net income attributable to common shareholders of $12,944 (2017 — $4,950) and a weighted average number of common shares outstanding of 161,120,698 (2017 — 111,976,759) calculated as follows:
|
|
|
2018
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
12,944
|
|
$
|
4,950
|
|
|
Average number of common shares outstanding during the period
|
|
161,120,698
|
|
111,976,759
|
|
|
Earnings per share - basic
|
|
$
|
0.08
|
|
$
|
0.04
|
|
|
|
|
2018
|
|
2017
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
12,944
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
161,120,698
|
|
111,976,759
|
|
|
“In the money” warrants outstanding during the period
|
|
2,077,483
|
|
2,445,570
|
|
|
“In the money” options outstanding during the period
|
|
4,296,422
|
|
3,875,709
|
|
|
|
|
167,494,603
|
|
118,298,038
|
|
|
Earnings per share - diluted
|
|
$
|
0.08
|
|
$
|
0.04
|
|
26
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
The calculation of earnings per share for the nine months ended February 28, 2018 was based on the net income attributable to common shareholders of $34,440 (2017 — $6,791) and a weighted average number of common shares outstanding of 147,274,372 (2017 — 93,655,328) calculated as follows:
|
|
|
2018
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
34,440
|
|
$
|
6,791
|
|
|
Average number of common shares outstanding during the period
|
|
147,274,372
|
|
93,655,328
|
|
|
Earnings per share - basic
|
|
$
|
0.23
|
|
$
|
0.07
|
|
|
|
|
2018
|
|
2017
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
34,440
|
|
$
|
6,791
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
147,274,372
|
|
93,655,328
|
|
|
“In the money” warrants outstanding during the period
|
|
2,005,656
|
|
2,445,570
|
|
|
“In the money” options outstanding during the period
|
|
3,909,745
|
|
3,875,709
|
|
|
|
|
153,189,773
|
|
99,976,607
|
|
|
Earnings per share - diluted
|
|
$
|
0.22
|
|
$
|
0.07
|
|
28.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
For the nine months ended
|
|
|
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
(3,231
|
)
|
$
|
(261
|
)
|
|
Decrease (increase) in other current assets
|
|
(4,519
|
)
|
(1,637
|
)
|
|
Decrease (increase) in inventory, net of fair value adjustment
|
|
(3,609
|
)
|
(123
|
)
|
|
Decrease (increase) in biological assets, net of fair value adjustment
|
|
1,081
|
|
124
|
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
2,974
|
|
3,330
|
|
|
Increase (decrease) in income taxes payable
|
|
2,087
|
|
—
|
|
|
|
|
$
|
(5,217
|
)
|
$
|
1,433
|
|
29.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities, long-term investments, and embedded derivatives as fair value through profit or loss (“FVTPL”), accounts receivable and other current assets as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, and long-term debt as other financial liabilities. The convertible notes receivable are accounted for on an amortized cost basis.
The carrying values of accounts receivable and other current assets, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $37,532 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at February 28, 2018 was $35,280.
27
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
|
Level 1
|
|
quoted prices (unadjusted) in active markets for identical assets and liabilities
|
|
Level 2
|
|
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable
|
|
|
|
market data
|
|
Level 3
|
|
inputs for assets and liabilities not based upon observable market data
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2018
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,435
|
|
$
|
—
|
|
$
|
—
|
|
$
|
119,435
|
|
|
Marketable securities
|
|
54,248
|
|
—
|
|
—
|
|
54,248
|
|
|
Embedded derivatives (note 12)
|
|
—
|
|
—
|
|
5,199
|
|
5,199
|
|
|
Long-term investments
|
|
77,002
|
|
—
|
|
29,787
|
|
106,789
|
|
|
Outstanding, end of the period
|
|
$
|
250,685
|
|
$
|
—
|
|
$
|
34,986
|
|
$
|
285,671
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2017
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,910
|
|
$
|
—
|
|
$
|
—
|
|
$
|
79,910
|
|
|
Marketable securities
|
|
87,347
|
|
—
|
|
—
|
|
87,347
|
|
|
Embedded derivatives
|
|
—
|
|
—
|
|
173
|
|
173
|
|
|
Long-term investments
|
|
14,946
|
|
—
|
|
12,842
|
|
27,788
|
|
|
Outstanding, end of the period
|
|
$
|
182,203
|
|
$
|
—
|
|
$
|
13,015
|
|
$
|
195,218
|
|
The following table presents the changes in level 3 items for the periods ended February 28, 2018 and February 28, 2017:
|
|
|
Unlisted
|
|
|
|
|
|
|
|
|
equity
|
|
Trading
|
|
|
|
|
|
|
securities
|
|
derivatives
|
|
Total
|
|
|
Opening balance February 28, 2017
|
|
$
|
6,443
|
|
$
|
173
|
|
$
|
6,616
|
|
|
Acquisitions
|
|
6,050
|
|
—
|
|
6,050
|
|
|
Disposals
|
|
(50
|
)
|
—
|
|
(50
|
)
|
|
Unrealized gain on fair value
|
|
399
|
|
—
|
|
399
|
|
|
Closing balance May 31, 2017
|
|
$
|
12,842
|
|
$
|
173
|
|
$
|
13,015
|
|
|
Acquisitions
|
|
13,880
|
|
4,450
|
|
18,330
|
|
|
Reclassification to Level 1
|
|
(9,979
|
)
|
—
|
|
(9,979
|
)
|
|
Unrealized gain on fair value
|
|
13,044
|
|
576
|
|
13,620
|
|
|
Closing balance February 28, 2018
|
|
$
|
29,787
|
|
$
|
5,199
|
|
$
|
34,986
|
|
Investments in Scythian Biosciences Corp., TS BrandCo Holdings Inc. and Nuuvera Inc., originally classified as a Level 3 investment, were reclassified subsequent to the investee going public. During the nine months ended February 28, 2018, the Company sold its shares in Scythian Biosciences Corp.
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
28
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
(a)
Credit risk
The maximum credit exposure at February 28, 2018 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other current assets and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
61-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
4,362
|
|
$
|
2,667
|
|
$
|
743
|
|
$
|
15
|
|
$
|
937
|
|
|
|
|
|
|
61
|
%
|
17
|
%
|
0
|
%
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at February 28, 2018, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at February 28, 2018, management regards liquidity risk to be low.
(c)
Currency rate risk
As at February 28, 2018, a portion of the Company’s financial assets and liabilities held in USD consist of marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.
The Company is exposed to unrealized foreign exchange risk through its convertible notes receivable and long-term investments. A 1% change in the foreign exchange rate would result in an unrealized gain or loss of approximately $26.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents and marketable securities as capital.
29
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months and nine months ended February 28, 2018 and February 28, 2017
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
30.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. The Company has lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9 and $20, respectively. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty Health Sciences Inc. The Company has agreed to contribute an additional $800 to Green Acre Capital Fund. The Company has committed purchase orders outstanding at February 28, 2018 related to capital asset expansion of $51,016, all of which are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:
|
|
|
Years ending February 28,
|
|
|
2019
|
|
$
|
51,872
|
|
|
2020
|
|
25
|
|
|
2021
|
|
8
|
|
|
|
|
$
|
51,905
|
|
31.
Subsequent events
Subsequent to quarter-end, the Company completed an arrangement agreement (the “Arrangement”) under the provisions of the Business Corporations Act (Ontario), pursuant to which, among other things, the Company has acquired all of the common shares of Nuuvera. Under the terms of the Arrangement the Company shall pay $0.62 and 0.3546 of a common share of the Company, for each Nuuvera common share held prior to the Arrangement. The Company has recorded $2,500 in transaction costs related to the transaction as at February 28, 2018.
Subsequent to quarter-end, the Company acquired 2,000 common shares of Althea for $2,500 AUD ($2,496 CAD). As a result of this transaction, the Company holds 33.1% of the issued and outstanding common shares of Althea and is considered to hold significant influence.
30
Exhibit 99.81
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the three and nine months ended February 28, 2018. It is supplemental to, and should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and the accompanying notes for the three and nine months ended February 28, 2018, as well as the financial statements and MD& A for the year ended May 31, 2017. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to “all-in” cost of sales, cash costs to produce, gross profit before fair value adjustments (previously referred to as adjusted gross profit), adjusted gross margin, adjusted EBITDA and strategic investments, which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“All-in” cost of sales of dried cannabis per gram is equal to production costs less the costs of accessories less cannabis oil conversion costs (“cost of sales of dried cannabis”) plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Gram equivalents is determined by actual grams sold as dried cannabis and a formula, based on an ‘equivalency factor’ that can be specific to each strain. At the current time, the Company’s ‘equivalency factor’ is 1 gram per 6 mL of cannabis oil. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is gross profit before fair value adjustments divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations exclusive of its equity investee.
·
Strategic investments are the total cash out flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - wholly owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for wholly owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - majority owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for majority owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.
This MD&A is prepared as April 13, 2018.
COMPANY OVERVIEW
Aphria Inc. is continued in Ontario, the Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Pure Natures Wellness Inc. (o/a Aphria) (“PNW”), a wholly-owned subsidiary of the Company, is licenced to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). PNW received
1
its licence to produce and sell medical cannabis on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. PNW’s operations are based in Leamington, Ontario. The Leamington greenhouse facility provides Aphria with the opportunity to be a scalable low-cost producer of medical cannabis.
Broken Coast Cannabis Ltd. (“Broken Coast), a subsidiary of the Company, acquired in February 2018, is licenced to produce and sell medical cannabis under the provisions of the ACMPR. Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with a leading premium cannabis brand.
1974568 Ontario Ltd. is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms. 1974568 Ontario Ltd. has applied for its cultivation licence under the provisions of the ACMPR.
On a go-forward basis, Aphria will refer to its original Leamington campus as “Aphria One” and its investment in 1974568 Ontario Ltd. as “Aphria Diamond”.
The Company is focused on producing and selling medical cannabis and its derivatives through a two-pronged growth strategy, including both retail sales and wholesale channels. Retail sales are primarily sold through Aphria’s online store as well as telephone orders. Wholesale shipments are sold to other ACMPR Licenced Producers and in the future will include sales to Shoppers Drug Mart, once they are licensed under the ACMPR, and the provincial / territorial control boards under
The Cannabis Act
..
INVESTOR HIGHLIGHTS
|
|
|
Q3 - 2018
|
|
Q2 - 2018
|
|
|
Revenue
|
|
$
|
10,267
|
|
$
|
8,504
|
|
|
Kilograms equivalents sold
|
|
1,428.1
|
|
1,237.0
|
|
|
Production costs
|
|
$
|
2,355
|
|
$
|
2,746
|
|
|
Cash cost to produce dried cannabis / gram
1
|
|
$
|
0.96
|
|
$
|
1.45
|
|
|
“All-in” cost of sales of dried cannabis / gram
1
|
|
$
|
1.56
|
|
$
|
2.13
|
|
|
Adjusted gross margin
1
|
|
77.1
|
%
|
67.7
|
%
|
|
Adjusted EBITDA
1
|
|
$
|
2,940
|
|
$
|
1,621
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
173,683
|
|
$
|
171,942
|
|
|
Working capital
|
|
$
|
234,589
|
|
$
|
178,782
|
|
|
Capital and intangible asset expenditures - wholly owned subsidiaries
1
|
|
$
|
35,427
|
|
$
|
35,319
|
|
|
Capital and intangible asset expenditures - majority owned subsidiaries
1
|
|
$
|
59,155
|
|
$
|
—
|
|
|
Strategic investments
1
|
|
$
|
3 4,016
|
|
$
|
5,600
|
|
1
— Non-GAAP measure
·
Production capacity increased to 30,000 kgs (annualized) in March 2018 after Health Canada approval of Aphria One’s Part III expansion
·
Mid-term capacity upgrade to 225,000 kgs (annualized) production capability expected by November 2018, with a further 5,000 kgs (annualized) within one year thereafter
·
Long-term capacity available via additional 200 acre property located beside Aphria Diamond
·
Acquisition of Broken Coast leading premium cannabis brand to serve the future recreational market
·
Acquisition of Nuuvera Inc. (“Nuuvera”) and launch of Aphria International Inc. to focus on established regulated international cannabis markets
·
Began divesting of the Company’s equity investment in passive US assets
·
Letter of intent with SAQ to supply up to 12,000 kg of cannabis annually to Quebec market
·
No crop failures since inception
·
Ten consecutive quarters of positive adjusted EBITDA
2
·
Bought deal closed during the period for net proceeds of $109,000
·
Strong executive team
·
20+ years of Pharmaceutical experience
·
35+ years of potted plant greenhouse growing experience
·
30+ years of vegetable greenhouse growing experience
QUARTERLY HIGHLIGHTS
Focus shifts to inventory build for adult use market in Canada and International opportunities
As the Company focuses on the emerging adult use market and develops a larger international presence, the Company will de-emphasize its short-term wholesale opportunities with other LPs to build inventory. The inventory build will be deployed as part of the pipeline fill for the introduction of adult use cannabis in Canada. This modification of corporate strategy is expected to result in lower sales level in the Company’s fourth quarter of 2018, with those sales occurring in the first or second quarter of its 2019 fiscal year.
Continued progress on expansion projects
Aphria One
The Company continues to work towards the completion of Aphria One’s Part IV fully capitalized expansion project. The construction of the 700,000 sq. ft. state-of-the-art greenhouse facility is progressing as scheduled with the first sale expected in January 2019.
Aphria Diamond
Aphria Diamond continues with its retrofits and has applied to Health Canada for a cultivation license on the property. The Company continues to anticipate the first sale from Aphria Diamond to Aphria to be in the month of January 2019.
Broken Coast
As of today’s date, Broken Coast’s production capacity is 2,600 kgs annually. Broken Coast’s Phase III expansion project, increasing capacity to 4,500 kgs annually, is awaiting approval by Health Canada. The Company previously announced that Broken Coast’s Phase IV expansion project would be complete by January 2019. After making several changes to the design of the project, to integrate best practices from both companies and maximize the use of the property owned by Broken Coast, Aphria has changed the expected completion date to July 2019 and expected first sale to October 2019.
Acquisition of Broken Coast Cannabis Ltd.
During the quarter, the Company completed the acquisition of 99.86% of the issued and outstanding common shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate of 14,373,675 common shares. The Company issued 1,000,000 options to key management of Broken Coast. The options have an exercise price of $20.19, exercisable for 3 years and vest over 3 years. Broken Coast operates a fully licensed, purpose-built, indoor cannabis production facility on Vancouver Island, and represents one of the leading premium cannabis producers in Canada.
Acquisition of Nuuvera Inc. and launch of Aphria International Inc.
Subsequent to quarter-end, the Company completed an arrangement agreement (the “Arrangement”) under the provision of the Business Corporations Act (Ontario), pursuant to which, among other things, the Company acquired all the common shares of Nuuvera. Under the terms of the Arrangement, the Company paid $0.62 and 0.3546 of a common share of the Company, for each Nuuvera common share held prior to the Arrangement. Nuuvera will be renamed to Aphria International Inc. and will focus on existing and future opportunities in established regulated international cannabis markets including, but not limited to, Germany, Italy, Spain, Portugal, Malta, Australia and Lesotho.
The Company also acquired the only Canadian Cannabis GMP-certified lab, enabling the Company to process cannabis products under a GMP license for export internationally. Further, Aphria now has a strong presence in the Maritimes, including an existing supply agreement in New Brunswick and a relationship with Breathing Green Solutions in Nova Scotia.
3
Divesture of equity investment in passive US assets
During the quarter, the Company began the divestiture process of its equity investment in Liberty Health Sciences Inc. (“Liberty”) and of its wholly owned subsidiary Aphria (Arizona) Inc., which holds minority interests in Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”).
The Company sold 26,716,025 common shares of Liberty, representing 25% of the shares held by the Company in exchange for a promissory note receivable of $33,395, which note was repaid subsequent to quarter-end. The Company recognized a gain from the sale of these shares of $26,347. The Company also entered into a call/put obligation (“Obligation Agreement”) to dispose of the remaining 80,148,077 shares in Liberty that are currently subject to mandatory CSE escrow requirements. As each new tranche of shares becomes freely trading, the Obligation Agreement results in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price. Based on the share price on February 28, 2018 of Liberty, with an 18% discount, the Company would receive proceeds on the remaining shares of $80,180 and recognize an additional gain of $59,561 as a result of this agreement, although future results may vary.
The Obligation Agreement includes an opt-out for Aphria’s benefit. In the event that the Toronto Stock Exchange amends their regulations such that it permits U.S. based cannabis investments, the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agreed to pay the buyers a $2,500 termination fee.
The Company entered into a definitive agreement with respect to the sale of the Company’s subsidiary Aphria (Arizona) Inc., its sole holdings being the minority interests in Copperstate and CSF to Liberty for a purchase price of $20,000. The sale is subject to various closing conditions, including a right of first refusal by CSF shareholders and is expected to close before the end of the first quarter of Aphria’s 2019 fiscal year. The total cost of the investments in Aphria (Arizona) Inc. is $11,162 and the investment is recorded in the Company’s financial statements at its fair value of $20,000.
Tenth consecutive quarter of positive adjusted EBITDA
The Company reported adjusted EBITDA, as defined above, of $2,940 for the quarter. This marks the tenth consecutive quarter where the Company has reported positive adjusted EBITDA. The Company has recorded total adjusted EBITDA of $8,689 for the trailing twelve-month period.
Additional investment in Green Acre Capital Fund
During the quarter, the Company funded an additional $500 of its $2,000 commitment to Green Acre Capital Fund. Cumulative contributions to Green Acre Capital Fund is $1,200.
Investment in Aphria Diamond
During the quarter, the Company entered a strategic relationship with Double Diamond Farms to form a corporation, known as Aphria Diamond. Aphria Diamond has been capitalized with $10,200 of seed capital from Aphria and $9,800 of seed capital from Double Diamond Farms. Aphria Diamond completed a purchase and sale agreement with Double Diamond Farms to acquire 100 acres of land, including almost 32 acres of greenhouses for $41,000. The Company incurred $879 in closing costs with the acquisition which have been capitalized. Aphria Diamond is expected to require $40,000 to $60,000 of additional capital to complete the necessary retrofits of the greenhouses to legally grow cannabis.
Aphria Diamond anticipates securing bank financing for a portion of the capital required. Any remaining capital needs will be loaned by Aphria to Aphria Diamond. As at February 28, 2018, the Company funded $44,384 related to the purchase and the necessary retrofits of the greenhouses.
Investment in Hiku Brands Company Ltd.
During the quarter, TS BrandCo Holdings Inc. (“Tokyo Smoke”) merged with DOJA Cannabis Company Ltd. and renamed the reporting issuer Hiku Brands Company Ltd. (“Hiku”). As part of the merger, each common share of Tokyo Smoke was exchanged for 13 common shares of Hiku. The Company held 140,845 common shares in Toyko Smoke at the time of the merger. Post-merger, the Company invested $10,000 in Hiku for 7,194,244 common shares. As a result of these transactions, the Company holds 9,025,229 common shares in Hiku.
4
Investment in Althea Company Pty Ltd.
During the quarter, the Company entered into a subscription agreement with Althea Company Pty Ltd. (“Althea”) for the purchase of 2,500 common shares, for a total cost of $2,500 AUD ($2,483 CAD). Subsequent to quarter-end, Althea secured its Medical Cannabis Licence, granted by the Australian Government’s Office of Drug Control. The Licence provides Althea with authorization to cultivate medical cannabis. Althea has not completed construction of their facility to begin cultivation activities to date and intends on relying on Aphria for supply of medical cannabis until its facility is completed. Subsequent to Althea receiving its Licence, the Company acquired an additional 2,000 common shares of Althea for $2,500 AUD ($2,496 CAD). As a result of these transactions, the Company holds 33.1% of the issued and outstanding common shares of Althea.
Closing of bought deal financing
During the quarter, the Company closed its bought deal financing. Under the bought deal, the Company issued 8,363,651 common shares for net proceeds of $109,000 after accounting for underwriting, legal and other costs. The Company plans to use the proceeds primarily to fund International strategic investments, including the direct investment in, construction of or acquisition of production facilities in new federally legal markets, all related to cannabis production facilities; strategic investments to enhance the Company’s product offerings or cultivation capabilities; construction or acquisition of domestic retail facilities for distribution of cannabis under
The Cannabis Act
, in those provinces which may allow it; construction of or acquisition of domestic production facilities, if required, to support provincialism within
The Cannabis Act
; and general corporate purposes.
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth for Aphria One and ninth week of growth for Broken Coast. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation to recognize the eventual fair value of the plant. At the time of harvest, the accumulated cost of each plant is based on the number of grams harvested and the Company increases the cost value to its full fair value less costs to sell.
As at February 28, 2018, the Company’s harvested cannabis and cannabis oil, as detailed in Note 6, and biological assets, as detailed in Note 7 of its financial statements, are as follows:
|
|
|
February 28,
|
|
November 30,
|
|
|
|
|
2018
|
|
2017
|
|
|
Harvested cannabis - at cost
|
|
$
|
2,367
|
|
$
|
1,712
|
|
|
Harvested cannabis - fair value increment
|
|
4,149
|
|
3,472
|
|
|
Harvested cannabis trim - at cost
|
|
506
|
|
651
|
|
|
Harvested cannabis trim - fair value increment
|
|
775
|
|
1,416
|
|
|
Cannabis oil - at cost
|
|
1,591
|
|
518
|
|
|
Cannabis oil - fair value increment
|
|
1,668
|
|
511
|
|
|
Biological assets - at cost
|
|
1,916
|
|
1,001
|
|
|
Biological assets - fair value increment
|
|
1,185
|
|
397
|
|
|
Cannabis products - at fair value
|
|
$
|
14,157
|
|
$
|
9,678
|
|
In an effort to increase transparency, Aphria One’s biological assets are carried at cost plus fair value increments of $0.65, $1.29, $1.94 and $2.51 per gram for weeks 13, 14, 15 and 16, respectively. Broken Coast’s biological assets are carried at cost plus fair value increments of $0.57, $1.13, $1.70 and $2.26 per gram for weeks 10, 11, 12 and 13 respectively. Harvested cannabis, harvested cannabis trim and cannabis oil are carried at fair values of $3.75 per gram, $3.00 per gram and $0.64 per mL, respectively. The individual components of fair values are as follows:
5
|
|
|
February 28,
|
|
November 30,
|
|
|
|
|
2018
|
|
2017
|
|
|
Harvested cannabis - at cost - per gram
|
|
$
|
1.36
|
|
$
|
1.24
|
|
|
Harvested cannabis - fair value increment - per gram
|
|
$
|
2.39
|
|
$
|
2.51
|
|
|
Harvested cannabis trim - at cost - per gram
|
|
$
|
1.19
|
|
$
|
0.94
|
|
|
Harvested cannabis trim - fair value increment - per gram
|
|
$
|
1.81
|
|
$
|
2.06
|
|
|
Cannabis oil - at cost - per mL
|
|
$
|
0.31
|
|
$
|
0.31
|
|
|
Cannabis oil - fair value increment - per mL
|
|
$
|
0.33
|
|
$
|
0.32
|
|
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
February 28,
|
|
November 30,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
$
|
2,355
|
|
$
|
2,746
|
|
|
Add (less):
|
|
|
|
|
|
|
Cost of accessories
|
|
$
|
(71
|
)
|
$
|
(61
|
)
|
|
Cannabis oil conversion costs
|
|
$
|
(62
|
)
|
$
|
(54
|
)
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
2,222
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,428,097
|
|
1,236,954
|
|
|
|
|
|
|
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
1.56
|
|
$
|
2.13
|
|
1
In prior quarters the Company recorded adjustments to “All-in” cost of sales of dried cannabis per gram, for increases in plant inventory. This adjustment was made as a result of the Company using a standard cost method and allocating additional costs to plant inventory, when there was a significant change in the number of plants, without a change in the overall costs of the Company, which occurs during the months prior to and just after an increase in production tied to an expansion. This adjustment is subjective, and requires management to make significant assumptions as to whether the increase in cost included in biological assets, is a result of improved operations, a result of an expansion or a result of other factors. The adjustment is not listed in the chart above because the adjustment is $Nil in each of the quarters presented.
Calculation of cash costs to produce dried cannabis per gram
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
February 28,
|
|
November 30,
|
|
|
Cash costs to produce dried cannabis per gram
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
2,222
|
|
$
|
2,631
|
|
|
Less:
|
|
|
|
|
|
|
Amortization
|
|
$
|
(473
|
)
|
$
|
(500
|
)
|
|
Packaging costs
|
|
$
|
(373
|
)
|
$
|
(333
|
)
|
|
Cash costs to produce dried cannabis
|
|
$
|
1,376
|
|
$
|
1,798
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,428,097
|
|
1,236,954
|
|
|
|
|
|
|
|
|
|
Cash costs to produce per gram
|
|
$
|
0.96
|
|
$
|
1.45
|
|
6
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended February 28, 2018 was $10,267 versus $5,119 in the same period of the prior year and $8,504 in the second quarter of fiscal 2018, representing an increase of 100.6% from the prior year and a 20.7% increase from the prior quarter.
Revenue for the nine months ended February 28, 2018 was $24,891 versus $14,721 in the same period of the prior year, representing a 69.1% increase.
The increase in revenue during the quarter from the prior quarter was related to:
·
Acquisition of Broken Coast, which provided an additional 173,971 gram equivalents sold in the quarter;
·
Continued patient onboarding, including sales of 272,464 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 536,456 gram equivalents to patients on-boarded prior to the quarter;
·
Increased sales to veterans in the quarter;
·
Wholesale orders to other Licensed Producers of 445,206 grams; and,
·
Increased average retail selling price (excluding wholesale) during the period from $8.10 to $8.30.
These factors were partially offset by:
·
A minor decrease in the percentage of cannabis oil sold for retail sales, of 0.6%.
The increase in revenue for the year-to-date, as compared to the prior year’s year-to-date, is consistent with the Company’s increase in patients and the acquisition of Broken Coast.
Gross profit and gross margin
The gross profit for the three months ended February 28, 2018 was $8,570, compared to $3,569 in the same quarter in the prior year and $6,202 in the previous quarter. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year plus the acquisition of Broken Coast offset by changes in the fair value adjustment for biological assets.
|
|
|
Three months ended
|
|
|
|
|
February 28,
|
|
November 30,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,267
|
|
$
|
8,504
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
2,355
|
|
2,746
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
7,912
|
|
5,758
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
3,443
|
|
2,671
|
|
|
Fair value adjustment on growth of biological assets
|
|
(4,101
|
)
|
(3,115
|
)
|
|
|
|
(658
|
)
|
(444
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
8,570
|
|
$
|
6,202
|
|
|
Gross margin
|
|
83.5
|
%
|
72.9
|
%
|
7
Cost of sales currently consist of three main categories: (i) production costs (formerly defined as cost of goods sold) and, (ii) fair value adjustment on sale of inventory and (iii) fair value adjustment on growth of biological assets:
(i) Production costs include the direct cost of materials and labour, including supervisors and indirect labour, related to the medical cannabis sold. This would include growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis. Included in indirect labour is the cost of all employees, such as custodial, maintenance, etc., who do not directly interact with the plants or inventory but operate within the greenhouse production area. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of inventory sold in the period.
(iii) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced in the period. In an effort to increase transparency, inventory of harvested cannabis (Note 6 — Consolidated financial statements for the three months and nine months ended February 28, 2018) consists of harvested cannabis, harvested cannabis trim and cannabis oil, of which harvested cannabis is carried at a value of $3.75 per gram, harvested cannabis trim is carried at $3.00 per gram and cannabis oil is carried at $0.64 per mL (6mL of cannabis oil is equivalent to 1 gram of dried product).
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of gross profit before fair value adjustments and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Gross profit before fair value adjustments and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the three months ended February 28, 2018:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
|
February 28, 2018
|
|
|
|
February 28, 2018
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
Revenue
|
|
$
|
10,267
|
|
$
|
—
|
|
$
|
1 0,267
|
|
|
Production costs
|
|
2,355
|
|
—
|
|
2,355
|
|
|
Fair value adjustment on sale of inventory
|
|
3,443
|
|
(3,443
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(4,101
|
)
|
4,101
|
|
—
|
|
|
|
|
1,697
|
|
658
|
|
2,355
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
8 ,570
|
|
$
|
(658
|
)
|
$
|
7,912
|
|
|
Gross margin
|
|
83.5
|
%
|
|
|
77.1
|
%
|
The gross profit for the nine months ended February 28, 2018 was $22,675, compared to $11,472 in the same period of the prior year. The increase in gross profit from the prior year is consistent with the Company’s much larger patient base combined with the increase in the net fair value adjustments for biological assets as a result of the Company’s increased production levels.
8
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the nine months ended February 28, 2018:
|
|
|
Nine months ended
|
|
|
|
Nine months ended
|
|
|
|
|
February 28, 2018
|
|
|
|
February 28, 2018
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
24,891
|
|
$
|
—
|
|
$
|
24,891
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
6,447
|
|
—
|
|
6,447
|
|
|
Fair value adjustment on sale of inventory
|
|
7,250
|
|
(7,250
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(11,481
|
)
|
11,481
|
|
—
|
|
|
|
|
2,216
|
|
4,231
|
|
6,447
|
|
|
Gross profit
|
|
$
|
22,675
|
|
$
|
(4,231
|
)
|
$
|
1 8,444
|
|
|
Gross margin
|
|
91.1
|
%
|
|
|
74.1
|
%
|
Selling, general and administrative
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development and impairment of intangible asset. These costs increased by $4,408 to $12,609 from $8,201 in the same quarter in the prior year and increased $11,649 to $26,478 from $14,829 in the nine-month period of the prior year.
Selling, general and administrative costs
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
General and administrative
|
|
$
|
2,794
|
|
$
|
1,231
|
|
$
|
6,502
|
|
$
|
3,415
|
|
|
Share-based compensation
|
|
5,959
|
|
1,256
|
|
10,668
|
|
1,711
|
|
|
Selling, marketing and promotion
|
|
2,991
|
|
1,855
|
|
7,758
|
|
5,054
|
|
|
Amortization
|
|
755
|
|
263
|
|
1,270
|
|
715
|
|
|
Research and development
|
|
110
|
|
96
|
|
280
|
|
434
|
|
|
Impairment of intangible asset
|
|
—
|
|
3,500
|
|
—
|
|
3,500
|
|
|
|
|
$
|
12,609
|
|
$
|
8,201
|
|
$
|
26,478
|
|
$
|
14,829
|
|
General and administrative costs
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
567
|
|
$
|
203
|
|
$
|
1,227
|
|
$
|
620
|
|
|
Consulting fees
|
|
52
|
|
53
|
|
210
|
|
132
|
|
|
Office and general
|
|
636
|
|
397
|
|
1,755
|
|
1,106
|
|
|
Professional fees
|
|
665
|
|
151
|
|
1,362
|
|
391
|
|
|
Salaries and wages
|
|
651
|
|
301
|
|
1,376
|
|
789
|
|
|
Travel and accomondation
|
|
213
|
|
101
|
|
517
|
|
320
|
|
|
Rent
|
|
10
|
|
25
|
|
55
|
|
57
|
|
|
|
|
$
|
2,794
|
|
$
|
1,231
|
|
$
|
6,502
|
|
$
|
3,415
|
|
9
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Executive and director compensation increases in the quarter as a result of increased activity within the business over the same period in the prior year;
·
Salaries and wages, office and general, and travel and accommodation as a result of increased activity within the business over the same period in the prior year;
·
Professional fees, predominantly comprised of legal costs, associated with various negotiations and reviews of current and potential business relationships necessary to sustain growth of the Company, including recurring costs related to our listing on the TSX.
Share-based compensation
The Company recognized share-based compensation expense of $5,959 for the three months ended February 28, 2018 compared to $1,256 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is a result of an increase in stock options vesting, as well as an increase in stock price used in the valuation of options issued in the current period. The Company issued 1,825,000 in the current period compared, which includes 1,000,000 stock options as part of the acquisition of Broken Coast, to 545,000 in the same period of the prior year. Of the stock options granted in the quarter, 204,995 vested in the quarter.
For the nine months ended February 28, 2018, the Company incurred share-based compensation of $10,668 as opposed to $1,711 for the prior year. The increase in share-based compensation is a result of an increase in stock options vesting, as well as an increase in stock price used in the valuation of options issued in the current period. The Company issued 3,953,000 in the current period compared to 2,113,000 in the same period of the prior year. Of the stock options granted in the quarter, 1,351,630 vested in the quarter.
Selling, marketing and promotion costs
For the three months ended February 28, 2018, the Company incurred selling, marketing and promotion costs of $2,991, or 29.1% of revenue versus $1,855 or 36.2% of revenue in the comparable prior period. These costs related to patient acquisition and ongoing patient maintenance, the Company’s call center operations, shipping costs, marketing department, as well as the development of promotional and information materials. Patient acquisition and ongoing patient maintenance costs include payments to individual clinics to perform medical studies as well as reimbursement of operating costs incurred by clinics on the Company’s behalf. The increase in selling, marketing and promotion cost is directly correlated with the increase in patient and sales volumes over the comparable period.
For the nine months ended February 28, 2018, the Company incurred selling marketing and promotion costs of $7,758 or 31.2% of revenue, as opposed to $5,054 or 34.3% of revenue, in the comparable prior period. The increase in costs in the nine-month period is consistent with the increase in the three-month period.
Amortization
The Company incurred amortization charges of $755 for the three months ended February 28, 2018 compared to $263 for the same period in the prior year. The increase in amortization charges are a result of the capital expenditures made during the prior fiscal year and their being put in to use during the current fiscal year.
The Company incurred amortization charges of $1,270 for the nine months ended February 28, 2018 compared to $715 for the same period in the previous year. The increase for the nine month period is consistent with the increase for the three month period.
Research and development
Research and development costs of $110 were expensed during the three months ended February 28, 2018 compared to $96 in same period last year. These relate to costs associated with the development of new cannabis products.
10
For the nine months ended February 28, 2018, the Company incurred research and development costs of $280 as opposed to $434 in the same period in the previous year.
Non-operating items
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Consulting revenue
|
|
$
|
213
|
|
$
|
217
|
|
$
|
689
|
|
$
|
217
|
|
|
Foreign exchange (loss) gain
|
|
(62
|
)
|
65
|
|
69
|
|
65
|
|
|
(Loss) gain on marketable securities
|
|
(502
|
)
|
14
|
|
(2,193
|
)
|
14
|
|
|
(Loss) gain on sale of capital assets
|
|
(184
|
)
|
—
|
|
(191
|
)
|
11
|
|
|
Gain on dilution of ownership in equity investee
|
|
—
|
|
—
|
|
7,535
|
|
—
|
|
|
Loss from equity investee
|
|
—
|
|
—
|
|
(9,281
|
)
|
—
|
|
|
Gain on sale of equity investee
|
|
26,347
|
|
—
|
|
26,347
|
|
—
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
233
|
|
—
|
|
700
|
|
—
|
|
|
Finance income, net
|
|
1,621
|
|
406
|
|
3,533
|
|
698
|
|
|
Unrealized (loss) gain on embedded derivatives
|
|
(52
|
)
|
—
|
|
576
|
|
—
|
|
|
Gain on long-term investments
|
|
14,544
|
|
8,880
|
|
39,701
|
|
9,143
|
|
|
Unrealized loss on derivative liability
|
|
(16,850
|
)
|
—
|
|
(16,850
|
)
|
—
|
|
|
Transaction costs
|
|
(4,253
|
)
|
—
|
|
(4,253
|
)
|
—
|
|
|
|
|
$
|
21,055
|
|
$
|
9,582
|
|
$
|
46,382
|
|
$
|
10,148
|
|
During the quarter, the Company sold 25% of its interest in equity investee for $33,395 recognizing a gain on the sale of $26,347 for the three and nine months ended February 28, 2018. During the three and nine months ended February 28, 2018, the Company recognized approximately $22,100 and $25,700 of unrealized gain on the change in fair value of its Level 1 long-term investments due to changes in market price, and a realized gain of approximately $2,200 and $900 on the disposal of long-term investments. The Company also recognized unrealized (loss) gain of approximately $(9,800) and $13,000 for the three and nine months ended on February 28, 2018 on its Level 3 long-term investments. The Company recorded a derivative liability of $16,850 as a result of the 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price in the Obligation Agreement. Based on its closing share price of $1.22 as at February 28, 2018, the Liberty shares held by Aphria have a fair value of $97,781, which is $77,161 higher than the carrying value recorded in assets held for sale. The Company also incurred $4,253 of transaction costs for the three and nine months ended February 28, 2018, of which $1,643 relate to the acquisition of Broken Coast, $2,500 relate to the acquisition of Nuuvera, and the remaining transaction costs relate to other transactions which were abandoned.
Net income
The Company recorded net income for the three months ended February 28, 2018 of $12,944 or $0.08 per share as opposed to net income of $4,950 or $0.04 per share in the same period of the prior year.
The Company recorded net income for the nine months ended February 28, 2018 of $34,440 or $0.23 per share as opposed to net income of $6,791 or $0.07 per share in the same period of the prior year.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA from operations as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus amortization of non-capital assets, plus impairment of intangible assets, plus (minus) loss (gain) on disposal of
11
capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (profit) from equity investee, minus deferred gain on sale of intellectual property recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) unrealized loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management, all as follows:
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
February 28,
|
|
February 28,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Net income
|
|
$
|
12,944
|
|
$
|
4,950
|
|
$
|
34,440
|
|
$
|
6,791
|
|
|
Income taxes
|
|
4,072
|
|
—
|
|
8,139
|
|
—
|
|
|
Transaction costs
|
|
4,253
|
|
—
|
|
4,253
|
|
—
|
|
|
Unrealized loss on derivative liability
|
|
16,850
|
|
—
|
|
16,850
|
|
—
|
|
|
Gain on long-term investments
|
|
(14,544
|
)
|
(8,880
|
)
|
(39,701
|
)
|
(9,143
|
)
|
|
Unrealized loss (gain) on embedded derivatives
|
|
52
|
|
—
|
|
(576
|
)
|
—
|
|
|
Finance income, net
|
|
(1,621
|
)
|
(406
|
)
|
(3,533
|
)
|
(698
|
)
|
|
Deferred gain on sale of intellectual property recognized
|
|
(233
|
)
|
—
|
|
(700
|
)
|
—
|
|
|
Gain on sale of equity investee
|
|
(26,347
|
)
|
—
|
|
(26,347
|
)
|
—
|
|
|
Loss from equity investee
|
|
—
|
|
—
|
|
9,281
|
|
—
|
|
|
Gain on dilution of ownership in equity investee
|
|
—
|
|
—
|
|
(7,535
|
)
|
—
|
|
|
Loss (gain) on sale of capital assets
|
|
184
|
|
—
|
|
191
|
|
(11
|
)
|
|
Loss (gain) on marketable securities
|
|
502
|
|
(14
|
)
|
2,193
|
|
(14
|
)
|
|
Foreign exchange loss (gain)
|
|
62
|
|
(65
|
)
|
(69
|
)
|
(65
|
)
|
|
Impairment of intangible asset
|
|
—
|
|
3,500
|
|
—
|
|
3,500
|
|
|
Amortization
|
|
1,465
|
|
499
|
|
2,869
|
|
1,433
|
|
|
Share-based compensation
|
|
5,959
|
|
1,256
|
|
10,668
|
|
1,711
|
|
|
Fair value adjustment on growth of biological assets
|
|
(4,101
|
)
|
(1,090
|
)
|
(11,481
|
)
|
(4,197
|
)
|
|
Fair value adjustment on sale of inventory
|
|
3,443
|
|
1,104
|
|
7,250
|
|
3,676
|
|
|
Disposition and usage of bearer plants
|
|
—
|
|
17
|
|
3
|
|
64
|
|
|
Adjusted EBITDA
|
|
$
|
2,940
|
|
$
|
871
|
|
$
|
6,195
|
|
$
|
3,047
|
|
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations for the period decreased by $4,676 from cash flow generated from operations of $5,246 in the nine-month period of the prior year to cash flow generated from operations of $570 in the current period. The decrease in cash flow generated from operations is primarily a result of:
·
Increase in non-cash working capital of approximately $5,000, comprised primarily of increased HST receivable, inventory, prepaid assets and other current assets offset by increased accounts payable and accrued liabilities and income taxes payable.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at February 28, 2018, Aphria maintained $119,435 of cash and cash equivalents on hand plus $54,248 in liquid marketable securities, compared to $84,351 in cash and cash equivalents plus $37,678 marketable securities at February 28, 2017 and $79,910 in cash and cash equivalents plus $87,347 in liquid marketable securities at May 31, 2017. Liquid sources of cash increased $51,654 in the twelve-month period and increased $6,426 in the nine-month period.
12
Working capital provides funds for the Company to meet its operational and capital requirements. As at February 28, 2018, the Company maintained working capital of $234,589. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 12 months.
Capital and intangible asset expenditures
For the three months ended February 28, 2018, the Company invested $35,427 in capital and intangible assets through wholly owned subsidiaries, exclusive of business acquisitions, of which $763 are considered maintenance CAPEX and the remaining $34,664 growth CAPEX, related to Broken Coast Phase IV expansion, Aphria One’s Part III and Part IV Expansions.
For the three months ended February 28, 2018, the Company invested $59,155 in capital and intangible assets through majority owned subsidiaries, exclusive of business acquisitions, of which $nil are considered maintenance CAPEX and the remaining $59,155 growth CAPEX, related to Aphria Diamond land and building acquisition and retrofits.
In addition, the Company paid non-cash consideration of $214,168 in a business acquisition in the quarter, of which $105,447 has been allocated to capital and intangible assets.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its equity investee, Liberty Health Sciences Inc.
During the previous fiscal year, the Company terminated its lease commitment for rental of greenhouse and warehouse space in conjunction with the purchase of the 265 Talbot St. West property. The Company continues to lease office space from a related party. The lease commitment ends December 31, 2018 with the option to renew for two additional 5 year periods. As disclosed previously, the Company has agreed to contribute an additional $800 to Green Acre Capital Fund. The Company has a lease commitments until September 2019 and August 2020 for the use of two motor vehicles.
Minimum payments payable over the next five years are as follows:
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1
year
|
|
1 - 3 years
|
|
4 - 5 years
|
|
After 5 years
|
|
|
Outstanding capital related commitments
|
|
$
|
51,016
|
|
$
|
51,016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Investment commitment
|
|
800
|
|
800
|
|
—
|
|
—
|
|
—
|
|
|
Operating leases
|
|
27
|
|
27
|
|
—
|
|
—
|
|
—
|
|
|
Motor vehicle leases
|
|
62
|
|
29
|
|
33
|
|
—
|
|
—
|
|
|
Long-term debt
|
|
37,532
|
|
8,009
|
|
4,534
|
|
24,989
|
|
—
|
|
|
Total
|
|
$
|
89,437
|
|
$
|
59,881
|
|
$
|
4,567
|
|
$
|
24,989
|
|
$
|
—
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the period.
13
Share capital
Aphria has the following securities issued and outstanding, as at January 9, 2018:
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Presently
|
|
|
|
& in-the-
|
|
Fully
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
money
|
|
diluted
|
|
|
Common stock
|
|
209,680,955
|
|
—
|
|
—
|
|
209,680,955
|
|
|
Warrants
|
|
3,215,504
|
|
3,215,504
|
|
1,547,272
|
|
1,547,272
|
|
|
Stock options
|
|
9,581,811
|
|
5,131,048
|
|
4,708,551
|
|
4,708,551
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
215,936,778
|
|
*
Based on closing price on April 13, 2018
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2018, ended February 28, 2018. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2017 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
|
|
|
May/17
|
|
Aug/17
|
|
Nov/17
|
|
Feb/18
|
|
|
Revenue
|
|
$
|
5,718
|
|
$
|
6,120
|
|
$
|
8,504
|
|
$
|
10,267
|
|
|
Net income (loss)
|
|
(2,593
|
)
|
15,041
|
|
6,455
|
|
12,944
|
|
|
Earnings (loss) per share - basic
|
|
(0.02
|
)
|
0.11
|
|
0.05
|
|
0.08
|
|
|
Earnings (loss) per share - fully diluted
|
|
(0.02
|
)
|
0.10
|
|
0.04
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May/16
|
|
Aug/16
|
|
Nov/16
|
|
Feb/17
|
|
|
Revenue
|
|
$
|
2,776
|
|
$
|
4,376
|
|
$
|
5,227
|
|
$
|
5,119
|
|
|
Net income
|
|
1,302
|
|
895
|
|
945
|
|
4,950
|
|
|
Earnings per share - basic
|
|
0.02
|
|
0.01
|
|
0.01
|
|
0.04
|
|
|
Income per share - fully diluted
|
|
0.02
|
|
0.01
|
|
0.01
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RELATED PARTY BALANCES AND TRANSACTIONS
Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. Through these related parties, Aphria can leverage the purchasing power for growing related commodities and labour, which provides the Company with better rates than if Aphria was sourcing these on its own. These transactions are measured at their exchange amounts. The balance owing from related parties as at February 28, 2018 was $nil (May 31, 2017 - $464). These amounts were due upon demand and are non-interest bearing. These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani and Mr. John Cervini).
During the three and nine months ended February 28, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $112 and $205 (2017 - $83 and $350). Included in this amount was rent of $10 and $36 charged during the three and nine months ended February 28, 2018 (2017 - $7 and $40).
The Company funded the start-up costs and operations of Liberty Health Sciences Inc., a related party through an equity investment.
14
During the three months ended February 28, 2018, the Company entered into a definitive agreement with respect to the sale of Aphria’s subsidiary Aphria (Arizona) Inc. and its sole holdings being the minority interests in Copperstate and CSF to Liberty Health Sciences Inc. for a purchase price of $20,000. In addition, the Company has entered into an agreement which has changed the classification of its investment in Liberty Health Sciences Inc. from equity investee to assets held for sale.
ISSUERS WITH U.S. CANNABIS-RELATED ACTIVITIES
On October 16, 2017, the Canadian Securities Administrators published Staff Notice 51-352
Issuers with U.S. Marijuana-Related Activities
(the ‘‘Staff Notice’’) which provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis-related activities in the U.S. as permitted within a particular state’s regulatory framework. All issuers with U.S. cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other required disclosure documents.
Also on October 16, 2017, the TSX provided clarity regarding the application of Sections 306 (Minimum Listing Requirements) and 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities) of the TSX Company Manual (collectively, the ‘‘Requirements’’) to applicants and TSX-listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review.
As a result of the Company’s investments in certain U.S. entities (as described herein), Aphria is properly subject to the Staff Notice and accordingly provides the following disclosure:
Nature of U.S. Investments:
Liberty Health Sciences Inc. (Florida)
In May 2017, Aphria invested $25,000 into DFMMJ Investments, Ltd. (‘‘DFMMJ’’), which acquired all or substantially all the assets of Chestnut Hill Tree Farm LLC, (‘‘Chestnut’’) through its subsidiary DFMMJ Investments, LLC, and subsequently amalgamate into a subsidiary of SecureCom Mobile Inc. (‘‘SecureCom’’), a public company listed on the Canadian Securities Exchange, as part of a business combination. The funds, when combined with an additional $35,000 raised in a brokered private placement led by Clarus Securities Inc., were invested and used in an entity renamed Liberty Health Sciences Inc. On July 20, 2017, DFMMJ completed its business combination with SecureCom through a reverse takeover acquisition. Upon the completion of the transaction, Liberty consolidated its issued and outstanding common shares and other securities on the basis of three pre-consolidation common shares held for one post-consolidation common share. As a result of the three-for-one exchange, Aphria held 106,864,102 common shares of Liberty, , representing a 37.6% ownership. Liberty, through its subsidiary, is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. The Company only licenses its name and branding to Liberty and Liberty cultivates its own product in Florida. In February 2018, the Company sold 25% of its ownership in Liberty and entered into an Obligation Agreement to dispose of its remaining interests in Liberty over the period to July 2020.
15
Copperstate Farms, LLC & Copperstate Farms Investors, LLC (Arizona)
On October 27, 2016, Aphria entered into an intellectual property transfer agreement with Copperstate Farms, LLC (“Copperstate”), a licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act
. Copperstate maintains a 40-acre, high-tech, Dutch-style greenhouse facility in Snowflake, Arizona. Copperstate is one of the largest medical cannabis greenhouse facilities in Arizona. Under the terms of the agreement, Aphria received 5,000 membership units in Copperstate in exchange for a promissory note valued at US$1,300 (the ‘‘Promissory Note’’). Aphria also licensed certain of its intellectual property, to be delivered over a two-year term, to Copperstate in exchange for quarterly cash payments, equivalent to the value of the required quarterly payment on the Promissory Note, effectively offsetting each other. In addition, Aphria made a direct cash contribution of US$1,300 to the parent company of Copperstate, Copperstate Farms Investors, LLC (“CSF”), in return for 2,600 membership units in CSF. The transaction was subject to TSXV approval and received final approval from the TSXV on December 21, 2016. Prior to receiving such final approval, Aphria acquired an additional 2,600 membership units in CSF, increasing its ownership in CSF to 5,200 membership units. On March 27, 2017, Aphria made an additional investment of US$3,000 in CSF, for an additional 6,000 membership units.
On July 26, 2017, the Company purchased an additional 2,668 additional membership units of CSF for US$1,334. Further, the Company lent CSF US$2,000 in exchange for a senior secured convertible loan, as well as an additional US$666 as a note payable with no set terms of repayment. The note payable was repaid in full. The convertible debenture bears interest at 9%, is due on May 15, 2018 and includes the right to convert the debenture into membership units at US$500 per unit. The loan is pre-payable at any time by CSF; no principal payments are due prior to the Maturity Date. If at least US$500 of the outstanding loan balance is not repaid by February 28, 2018, then an automatic conversion would be triggered for US$500, plus any accrued but unpaid interest, net of any repayments towards the principal, of the loan balance at US$500 per unit. If the outstanding loan balance has not been repaid before the Maturity Date, an automatic conversion would be triggered for the remaining loan balance at US$500 per unit. The convertible loan is secured by a first charge on CSF’s greenhouse assets and real property located in Snowflake, Arizona. In February 2018, the Company entered into a purchase and sale agreement to sell 100% of its interests in Aphria (Arizona) Inc. to Liberty for $20,000. The transaction is expected to close in the first quarter of Aphria’s 2019 fiscal year.
Enforcement of U.S. Federal Laws
Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the ACMPR, in the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total of 37 states, plus the District of Columbia, Puerto Rico and Guam that have legalized cannabis in some form. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule I controlled substance under the Controlled Substances Act (the “CSA”) and as such, violates federal law in the United States.
As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the ‘‘Cole Memorandum’’) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states have enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard. On February 14, 2014, in conjunction with DOJ policies set forth in the Ogden-Cole Memos, the U.S. Department of the Treasury
16
Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks clarifying Bank Secrecy Act expectations for financial institutions seeking to provide services to cannabis-related business (“FinCEN Guidance”). While the FinCEN Guidance made clear that it did not alter in any way DOJ’s authority to enforce federal law, it placed enhanced due diligence obligations on banks transacting with cannabis-related businesses, and offered a pathway for banks to provide financial services to such businesses.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit, however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “Sessions Memo”) that rescinded the Cole Memorandum. The Sessions Memo rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement, including the First and Second Cole Memos, on the basis that they are unnecessary, given the well-established principles governing federal prosecution that already in place. Those principals are included in chapter 9.27.000 of the U.S. Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
The result of the rescission of the Cole Memorandum is that federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions; however, discretion is still given to the federal prosecutor to weigh all relevant considerations of the crime, including the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. No direction was given to federal prosecutors as to the priority they should ascribe to such activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, Attorney General Jeff Sessions’s statement in relation to the rescission of the Cole Memorandum (the “Sessions Memorandum”) did not discuss the treatment of medical cannabis by federal prosecutors. As it pertains to the FinCen guidance, while it was based upon the Cole Memorandum which was recently rescinded, it has not been terminated or rescinded by the United States Treasury Department to date, and thus remains in force. The Treasury Department has not released any additional guidance since the Sessions’s Memorandum was released, and until additional guidance is provided it is unknown how federal banking regulators will react to the Session’s Memorandum and the status of the FinCen Guidance.
Medical cannabis is currently protected against enforcement by enacted legislation from U.S. Congress in the form of the 2018 Leahy Amendment to the Omnibus Appropriations Bill (as defined below) which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, and the bill remains in force today after being passed by the United States Congress and signed into law by the President on March 23, 2018. Due to the ambiguity of the Sessions Memorandum in relation to medical cannabis, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law, however medical operators are still entitled to the protections of the Leahy Amendment legislation which has been utilized by medical operators to enjoin attempted prosecutions. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, and also divert the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company.
For the reasons set forth above, the Company’s existing investments in the United States, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction.
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Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.
Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
U.S. Enforcement Proceedings
The United States Congress has passed appropriations bills each of the last three years that included the Rohrabacher Amendment Title: H.R.2578 — Commerce, Justice, Science, and Related Agencies Appropriations Act, 2016 (“Rohrabacher”), which by its terms does not appropriate any federal funds to the U.S. Department of Justice for the prosecution of medical cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business — even those that have fully complied with state law—could be prosecuted for violations of federal law. If Congress restores funding, the United States government will have the authority to prosecute individuals for violations of the law before it lacked funding under the CSA’s five-year statute of limitations. The United States Congress recently passed the Leahy Amendment (which is substantially similar to the previously enacted Rohrabacher Amendment), as part of the Omnibus Appropriations Bill for fiscal year 2018.
Ability to Access Public and Private Capital
The Company has historically, and continues to have, robust access to both public and private capital in Canada in order to support its continuing operations. This is evidenced by the Company’s consistent ability to access public capital on separate occasions. The Company has had cannabis-related activities in the U.S. since 2015, including the Copperstate transaction, which was approved by the TSXV prior to its closing. As disclosed earlier in August of this year, the Company’s Common Shares have traded on the TSX and previously the TSX Venture Exchange for three years during which time the Company has raised over $446 million from investors by way of seven offerings by short form prospectus. In addition to certain Canadian Schedule 1 banks accepting deposits from entities positioned in the legal medical cannabis sectors, there are also a number of credit unions that have historically provided, and continue to provide, debt financings in this space. More particularly, the Company itself has previously closed a suite of financings with one of the largest credit unions in Ontario in amounts totaling approximately $30,000 and at interest rates below 4%. The Company has never needed to access public equity capital in the United States. All capital requirements have been adequately met in Canada and the Company expects that to continue.
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In respect of Liberty and Copperstate, the Company has limited means to cause these subsidiaries to access capital as they each have their own boards and management that make such decisions largely independent of the Company. Each of Liberty and Copperstate has been successful in raising private capital with and without the participation of the Company. Liberty and Copperstate have each undertaken private placements. We are not aware of any inability of either Liberty or Copperstate to continue as a going concern, irrespective of their ability to access public equity capital.
Regulation of Medical Cannabis in Florida
Liberty is licensed to produce and sell medical cannabis in the State of Florida through the Florida Department of Health, Office of Medical Marijuana Use under the provisions of the Senate Bill 8A, Fla. Stat. 386.981 et seq. The Florida Department of Health issued the license (the ‘‘Liberty License’’) to Chestnut on November 23, 2015 and Liberty acquired the rights to the Liberty License on May 23, 2017 via the exclusive management agreement entered into between Liberty and Chestnut. On September 28, 2017, the Florida Department of Health, Office of Medical Marijuana Use, approved the transfer of the Liberty License to DFMMJ, the wholly-owned subsidiary of Liberty, which now solely owns and is entitled to utilize the License in Florida.
The Liberty License permits the sale of low THC cannabis (now grandfathered to produce and sell high THC cannabis) and medical cannabis to treat a number of medical conditions in the State of Florida which are delineated in Florida Statutes section 386.981. Under the terms of the Liberty License, Liberty is permitted to sell medical cannabis only to qualified medical patients that are registered with the state. Only certified physicians who have successfully completed a medical cannabis educational program can register patients and their medical cannabis orders on the Florida Office of Compassionate Use Registry. Liberty maintains an open and collaborative relationship with the Florida Department of Health and Liberty’s operations are in full compliance with all laws and regulations.
Under the Liberty License, Liberty can operate up to 25 dispensaries statewide. Currently, the dispensaries can be in any geographic location within the state as long as the local municipality’s zoning regulations authorize such a use and/or the proposed site is zoned for a pharmacy use and is not within 500 feet of a church or school. In the State of Florida, only cannabis that is grown in the state can be sold in the state. As Florida is a vertically integrated system, Liberty (and other licensees) is required to cultivate, harvest, process and sell/dispense/deliver its own medical cannabis products. The state also allows Liberty to make a wholesale purchase of medical cannabis from, or a distribution of medical cannabis to, another licensed dispensing organization within the state. At the present time, Liberty’s principal products include cannabis oil in capsule, oral solution, sublingual solution, and vaporizer forms due to regulatory restrictions on the sale of dry flower in the state.
Regulatory Framework
The State of Florida Statutes 381.986(8)(a) provides a regulatory framework that requires licensed producers, which are statutorily defined as ‘‘Medical Marijuana Treatment Centers’’ (‘‘MMTC’’), to both cultivate, process and dispense medical cannabis in a vertically integrated marketplace.
Licensing Requirements
Licenses issued by the Department of Health, Office of Medical Marijuana Use (the ‘‘Department’’) may be renewed biennially so long as the licensee meets requirements of the law and pays a renewal fee. License holders can only own one license and MMTC’s can operate up to a maximum of 25 dispensaries throughout the State of Florida. Applicants must demonstrate (and licensed MMTC’s must maintain) that: (i) they have been registered to do business in the State of Florida for the previous five years, (ii) they possess a valid certificate of registration issued by the Florida Department of Agriculture, (iii) they have the technical and technological ability to cultivate and produce cannabis, including, but not limited to, low-THC cannabis, (iv) they have the ability to secure the premises, resources, and personnel necessary to operate as an MMTC, (v) they have the ability to maintain accountability of all raw materials, finished products, and any byproducts to prevent diversion or unlawful access to or possession of these substances, (vi) they have an infrastructure
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reasonably located to dispense cannabis to registered qualified patients statewide or regionally as determined by the Department, (vii) they have the financial ability to maintain operations for the duration of the 2-year approval cycle, including the provision of certified financial statements to the department, (viii) all owners, officers, board members and managers have passed a Level II background screening, inclusive of fingerprinting, and ensure that a medical director is employed to supervise the activities of the MMTC, and (ix) they have a diversity plan and veterans plan accompanied by a contractual process for establishing business relationships with veterans and minority contractors and/or employees.
Upon approval of the application by the Department, the applicant must post a performance bond of up to US$5 million, which may be reduced by meeting certain criteria.
Dispensary Requirements
An MMTC may not dispense more than a 70-day supply of cannabis. The MMTC employee who dispenses the cannabis must enter into the registry his or her name or unique employee identifier. The MMTC must verify that: (i) the qualified patient and the caregiver, if applicable, each has an active registration in the registry and active and valid medical cannabis use registry identification card, (ii) the amount and type of cannabis dispensed matches the physician certification in the registry for the qualified patient, and (iii) the physician certification has not already been filled. An MMTC may not dispense to a qualified patient younger than 18 years of age, only to such patient’s caregiver. An MMTC may not dispense or sell any other type of cannabis, alcohol, or illicit drug-related product, except a cannabis delivery device as specified in the physician certification. An MMTC must, upon dispensing, record in the registry: (i) the date, time, quantity and form of cannabis dispensed, (ii) the type of cannabis delivery device dispensed, and (iii) the name and registry identification number of the qualified patient or caregiver to whom the cannabis delivery device was dispensed. An MMTC must ensure that patient records are not visible to anyone other than the patient, caregiver, and MMTC employees.
Security Requirements for Cultivation, Processing and Dispensing Facilities
With respect to security requirements for cultivation, processing and dispensing facilities, an MMTC must maintain a fully operational alarm system that secures all entry points and perimeter windows, and is equipped with motion detectors, pressure switches, and duress, panic and hold-up alarms. The MMTC must also have a 24-hour video surveillance system with specified features. MMTCs must retain video surveillance recordings for at least 45 days, or longer upon the request of law enforcement. An MMTC’s outdoor premises must have sufficient lighting from dusk until dawn.
An MMTC’s dispensing facilities must include a waiting area with sufficient space and seating to accommodate qualified patients and caregivers and at least one private consultation area and such facilities may not display products or dispense cannabis or cannabis delivery devices in the waiting area and may not dispense cannabis from its premises between the hours of 9:00 p.m. and 7:00 a.m. but may perform all other operations and deliver cannabis to qualified patients 24-hours a day.
Transportation and Storage Requirements
Cannabis must be stored in a secured, locked room or a vault. An MMTC must have at least two employees, or two employees of a security agency, on the premises at all times where cultivation, processing, or storing of cannabis occurs. MMTC employees must wear an identification badge and visitors must wear a visitor pass at all times on the premises. An MMTC must report to law enforcement within 24 hours after the MMTC is notified of or becomes aware of the theft, diversion or loss of cannabis. A cannabis transportation manifest must be maintained in any vehicle transporting cannabis or a cannabis delivery device. The manifest must be generated from the MMTC’s seed-to-sale tracking system and must include the: (i) departure date and time, (ii) name, address, and license number of the originating MMTC, (iii) name and address of the recipient, (iv) quantity and form of any cannabis or cannabis delivery device being transported, (v) arrival date and time, (vi) delivery vehicle make and model and license plate number; and (vii) name and signature of the MMTC employees delivering the product. Further, a copy of the transportation manifest must be provided to each individual, MMTC that receives a delivery. MMTCs must retain copies of all cannabis transportation manifests for at least three years.
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Cannabis and cannabis delivery devices must be locked in a separate compartment or container within the vehicle and employees transporting cannabis or cannabis delivery devices must have their employee identification on them at all times. Lastly, at least two people must be in a vehicle transporting cannabis or cannabis delivery devices, and at least one person must remain in the vehicle while the cannabis or cannabis delivery device is being delivered.
Department Inspections
The Department shall conduct announced or unannounced inspections of MMTCs to determine compliance with the laws and rules. The Department shall inspect an MMTC upon receiving a complaint or notice that the MMTC has dispensed cannabis containing mold, bacteria, or other contaminants that may cause an adverse effect to humans or the environment. The Department shall conduct at least a biennial inspection of each MMTC to evaluate the MMTC’s records, personnel, equipment, security, sanitation practices, and quality assurance practices.
Regulation of Medical Cannabis in Arizona
Copperstate is a licensed producer and seller of medical cannabis under the
Arizona Medical Marijuana Act, 2010
(the ‘‘Act’’). In 2010, Arizona voters approved Proposition 203, an initiative which legalized the medial use of cannabis. The Arizona Department of Health Services (‘‘ADHS’’) established the Arizona Department of Health Services Medical Marijuana Program (‘‘MMJ Program’’), which includes a vertically integrated license, meaning if allocated a Medical Marijuana Dispensary Registration Certificate (‘‘Dispensary License’’), entities are authorized to dispense and cultivate medical cannabis. Each Dispensary License allows the holding entity to operate one on-site cultivation facility, and one off-site cultivation facility which can be located anywhere within the State of Arizona. An entity holding a Dispensary License is required to file an application to renew with the ADHS on an annual basis, which must also include audited annual financial statements. While a Dispensary License may not be sold, transferred or otherwise conveyed, Dispensary License holders are permitted to contract with third parties to provide various services related to the ongoing operation, maintenance and governance of its dispensary and/or cultivation facility so long as such contracts do not violate the requirements of the Act or the MMJ Program.
Regulatory Framework
Arizona citizens adopted the Arizona Medical
Marijuana
Act (‘‘AMMA’’) via citizens’ initiative in November 2010. The AMMA is codified in Arizona Revised Statutes (‘‘ARS’’) § 36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (‘‘AZDHS’’) as the regulator for the program and authorized AZDHS to promulgate, adopt and enforce regulations for the AMMA. These AZDHS Regulations are embodied in the Arizona Administrative Code (‘‘AAC’’) Title 9 Chapter 17 (the ‘‘Rules’’). ARS § 36-2801(11) defines a ‘‘nonprofit medical cannabis dispensary’’ as not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses cannabis or related supplies and educational materials to cardholders (a ‘‘Dispensary’’).
Licensing Requirements
In order for an applicant to receive a Dispensary Registration Certificate (a ‘‘Certificate’’) they must: (i) fill out an application on the form proscribed by AZDHS, (ii) submit the applying entity’s articles of incorporation and by-laws, (iii) submit fingerprints for each principal officer or board member of the applicant for a background check to exclude felonies, (iv) submit a business plan and policies and procedures for inventory control, security, patient education, and patient recordkeeping that are consistent with the AMMA and the Rules to ensure that the Dispensary will operate in compliance and (v) designate an Arizona licensed physician as the Medical Director for the Dispensary. Certificates are renewed annually so long as the Dispensary is in good standing with AZDHS and pays the renewal fee and submits an independent third party financial audit.
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Approval to Operate
Once an applicant has been issued a Certificate, they are allowed to establish one physical retail dispensary location, one cultivation location which is co-located at the dispensary’s retail site (if allowed by local zoning) and one additional off-site cultivation location. None of these sites can be operational, however, until the Dispensary receives an approval to operate from AZDHS for the applicable site. This approval to operate requires: (i) an application on the AZDHS form, (ii) demonstration of compliance with local zoning regulations, (iii) a site plan and floor plan for the applicable property, and (iv) an in-person inspection by AZDHS of the applicable location to ensure compliance with the Rules and consistency with the Dispensary’s applicable policies and procedures.
Security Requirements for Dispensary Facilities
Any Dispensary facility (both retail and cultivation) must abide by the following security requirements: (i) ensure that access to the facilities is limited to authorized Dispensary Agents who are in possession of a Dispensary Agent card, (ii) equip the facility with: (a) intrusion alarms and surveillance equipment, (b) exterior and interior lighting to facilitate surveillance, (c) at least one 19-inch monitor for surveillance and a video capable of printing a high resolution still image, (d) high resolution video cameras at all points of sale, entrances, exits, and limited access areas, both in and around the building, (e) 30 days’ video storage, (f) failure notifications and battery backups for the security system and (g) panic buttons inside each building.
Transportation Requirements
Dispensaries may transport medical cannabis between their own sites or between their sites and another Dispensary’s sites and must comply with the following Rules: (i) prior to transportation, the Dispensary’s agent must complete a trip plan showing: (a) the name of the dispensary agent in charge of transporting the cannabis, (b) the date and start time of the trip, (c) a description of the cannabis, cannabis plants, or cannabis paraphernalia being transported; and (d) the anticipated route of transportation, (ii) during transport the Dispensary Agent shall: (a) carry a copy of the trip plan at all times, (b) use a vehicle with no medical cannabis identification, (c) carry a cell phone, and (d) ensure that no cannabis is visible, and (iii) Dispensaries must maintain trip plan records.
AZDHS Inspections and Enforcement
AZDHS may inspect a facility at any time upon five days’ notice to the Dispensary. However, if someone has alleged that the Dispensary is not in compliance with the AMMA or the Rules, AZDHS may conduct an unannounced inspection. AZDHS will provide written notice to the Dispensary of any violations found during any inspection and the Dispensary then has 20 working days to take corrective action and notify AZDHS.
AZDHS must revoke a Certificate if a Dispensary: (i) operates before obtaining approval to operate a dispensary from the Department, (ii) dispenses, delivers, or otherwise transfers cannabis to an entity other than another dispensary with a valid dispensary registration certificate issued by the Department, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card, (iii) acquires usable cannabis or mature cannabis plants from any entity other than another dispensary with a valid dispensary registration certificate issued by the Department, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card, or (iv) if a principal officer or board member has been convicted of an excluded felony offense.
Furthermore, AZDHS may revoke a Certificate if a Dispensary does not: (i) comply with the requirements of the AMMA or the Rules, (ii) implement the policies and procedures or comply with the statements provided to the Department with the dispensary’s application.
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Compliance of U.S. Investments
Liberty is in compliance with applicable licensing requirements and the regulatory framework enacted by the State of Florida, including but not limited to the Financial Crimes Enforcement Network memorandum issued by the Treasury Department in February of 2014 (‘‘FinCEN Memo’’). The FinCEN Memo provides instructions to banks seeking to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Liberty maintains a banking relationship in Florida, with a certain bank that is in full compliance with the Treasury Department’s federal rules and regulations as they pertain to a state approved cannabis business. More specifically, and as further detailed above, Liberty is licensed to operate as a ‘‘medical cannabis treatment center’’ under applicable Florida law pursuant to the terms of the Liberty License issued by the Florida Department of Health, Office of Compassionate Use under the provisions of the Compassionate Medical Cannabis Act of 2014. The Liberty License grants Liberty the authority to possess, cultivate, process, dispense and sell medical cannabis in the State of Florida. Liberty has not experienced any material non-compliance nor has been subject to any notices of violation by the Florida Department of Health, Office of Medical Marijuana Use.
Copperstate is in compliance with applicable licensing requirements and the regulatory framework enacted by the State of Arizona. As further detailed above, Copperstate is a licensed producer and seller of medical cannabis under the Act and is compliant with the rules, requirements and reporting standards of the MMJ Program with respect to the ongoing operation and governance of its dispensary/cultivation facility. In addition, Copperstate maintains a banking relationship in Arizona with a certain bank that is in full compliance with the Treasury Department’s federal rules and regulations as they pertain to a state approved cannabis business. Copperstate has not experienced any material non-compliance nor has been subject to any notices of violation by the ADHS.
The Company understands that each of Liberty and Copperstate has implemented measures designed to ensure compliance with applicable U.S. state laws on an ongoing basis, including:
·
weekly correspondence and updates with advisors;
·
development of standard operating procedures;
·
appropriate employee training for all standard operating procedures; and
·
subscription to monitoring programs with large banks to monitor and ensure compliance with the FinCEN Memo.
The Company confirms that the U.S. cannabis-related activities of each of Liberty and Copperstate and to the best of the Company’s knowledge, each Non-Material Investee are conducted in a manner consistent with the U.S. federal enforcement priorities articulated in the currently rescinded Cole Memorandum and to the best of the Company’s knowledge each of the Non-Material Investees are in compliance with licensing requirements and applicable state regulatory frameworks.
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties. The economic, industry and risk factors discussed in our Annual Report, each in respect of the year ended May 31, 2017 and in our Short Form Prospectus, dated December 22, 2017, November 1, 2017, May 3, 2017 and February 17, 2017, remain substantially unchanged in respect of the three months and nine months ended February 28, 2018. The more significant of which are reported below.
In light of recent announcements, the TSX may initiate delisting reviews for companies with U.S. assets more expeditiously than it would have previously, in the absence of such announcements.
On October 16, 2017, the TSX provided clarity regarding the application of the Requirements to applicants and TSX-listed issuers in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. These business activities may
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include (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the U.S., (ii) commercial interests or arrangements with such entities, (iii) providing services or products specifically targeted to such entities, or (iv) commercial interests or arrangements with entities engaging in providing services or products to U.S. cannabis companies. The TSX reminded issuers that among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. In order to comply with the Requirements, the Company may be required to effect one or more reorganizations, restructurings, transactions or series of transactions, which may include a divestiture of U.S. cannabis assets.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the
Currency and Foreign Transactions Reporting Act of 1970
(commonly known as the
Bank Secrecy Act
), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada)
, as amended, and the rules and regulations thereunder, the
Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the FinCen Memo provided instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. However, the Sessions Memo rescinding the Cole Memorandums does not have an impact on the FinCen Memo and as of today’s date, the FinCen Memo has not been withdrawn or rescinded and remains in effect.
In the event that any of the Company’s investments, or any proceeds thereof, or any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, affect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, in the event that a determination was made that the investments in Copperstate or Liberty (or any future investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
As of the date hereof, following discussions with its legal counsel, the Company is not aware of any violation of the above noted statutes as a result of its investments in Copperstate and Liberty and has no reason to believe that such investments may be constituted as, whether directly or indirectly, money laundering or proceeds of crime. However, any future exposure to money laundering or proceeds of crime could subject the Company to financial losses, business disruption and damage to the Company’s reputation. In addition, there is a risk that the Company may be subject to investigation and sanctions by a regulator and/or to civil and criminal liability if the Company has failed to comply with the Company’s legal obligations relating to the reporting of money laundering or other offences.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities
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analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by Aphria or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production
Reliance on a Single Facility
To date, Aphria’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on Aphria’s ability to continue producing medical cannabis, its business, financial condition and prospects.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party mail and courier services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation and/or rising costs associated with these services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products 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 Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential products.
25
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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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 management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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.
Reliance on the Licence
Aphria’s ability to grow, store and sell medical cannabis in Canada is dependent on maintaining its licence with Health Canada. Failure to comply with the requirements of the licence or any failure to maintain its licence would have a material adverse impact on the business, financial condition and operating results of Aphria. Although Aphria believes it will meet the
26
requirements of the ACMPR for extension of the licence, there can be no guarantee that Health Canada will extend or renew the licence or, if it is extended or renewed, that it will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the licence or should it renew the licence on different terms, the business, financial condition and results of the operation of Aphria would be materially adversely affected.
Reliance on Veterans Affairs Canada (“VAC”) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a 3 gram per day limit, subject to certain exceptions, and a $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed elsewhere in this MD&A, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, if and when adult recreational use of cannabis is implemented by the Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult recreational use of cannabis, the Company may be materially adversely affected.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2017, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the three months ended February 28, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
27
SUBSEQUENT EVENTS
Subsequent to quarter-end, the Company completed an arrangement agreement (the “Arrangement”) under the provisions of the Business Corporations Act (Ontario), pursuant to which, among other things, the Company has acquired all of the common shares of Nuuvera. Under the terms of the Arrangement the Company shall pay $0.62 and 0.3546 of a common share of the Company, for each Nuuvera common share held prior to the Arrangement. The Company has recorded $2,500 in transaction costs related to the transaction as at February 28, 2018.
Subsequent to quarter-end, the Company acquired 2,000 common shares of Althea for $2,500 AUD ($2,496 CAD). As a result of this transaction, the Company holds 33.1% of the issued and outstanding common shares of Althea and is considered to hold significant influence.
Subsequent to quarter-end, Health Canada issued a license amendment approve Aphria One’s Part III Expansion project. The amendment approved an additional 200,000 square feet of production space increasing Aphria One’s production capabilities to 30,000 kgs (annually).
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to process cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical cannabis and cannabis-related offenses in the United States.
28
Exhibit 99.91
EXPLANATORY NOTE
The business acquisition report of Aphria Inc. (the “
Company
”) originally dated March 1, 2018 (the “
Original BAR
”) has been amended and restated by this amended and restated business acquisition report (the “
Amended and Restated BAR
”) in order to supersede the financial statements included with the Original BAR and replace them with the following: (i) the audited financial statements of Broken Coast (as such term is defined in the Amended and Restated BAR) as at and for the years ended December 31, 2017 and 2016 and the notes thereto, together with the independent auditor’s report thereon; (ii) the audited financial statements of Cannan (as such term is defined in the Amended and Restated BAR) as at and for the years ended December 31, 2017 and 2016 and the notes thereto, together with the independent auditor’s report thereon; and (iii) the unaudited pro forma consolidated financial statements of Aphria for the year ended May 31, 2017 and six month period ended November 30, 2017.
This Amended and Restated BAR also updates certain information in Item 2.7 and Item 3 of the Original BAR. Other than the amendments referred to above, this Amended and Restated BAR does not change any of the information contained in the Original BAR or reflect any events that have occurred after the date of the Original BAR. This explanatory note does not form a part of, and is not incorporated by reference in, the Amended and Restated BAR.
Form 51-102F4
Amended and Restated Business Acquisition Report
Item 1 Identity of Company
1.1
Name and Address of Company
Aphria Inc. (the “
Company
” or “
Aphria
”)
245 Talbot St. W., Suite 103
Leamington, ON N8H 1N8
1.2
Executive Officer
For further information, please contact Carl Merton, Chief Financial Officer, by telephone at (519) 398-8800.
Item 2 Details of Acquisition
2.1
Nature of Business Acquired
On February 13, 2018 Aphria acquired 99.86% of all of the issued and outstanding Class A common shares of Broken Coast Cannabis Inc. (“
Broken Coast
”), a leading premium cannabis producer located in British Columbia as well as all of the issued and outstanding shares of Cannan Growers Inc. (“
Cannan
”) (the “
Transaction
”).
The closing was effected pursuant to the terms of a definitive share purchase agreement dated February 13, 2018 (the “
SPA
”) by and among the Company and the vendors party thereto (collectively, the “
Vendors
”). Pursuant to the SPA, the Company has acquired 99.86% of the Class A common shares of Broken Coast and all of the issued and outstanding shares of Cannan held by the Vendors, as applicable, for an aggregate purchase price of approximately CAN$217 million, subject to customary adjustments. The purchase price has been satisfied by Aphria issuing to the Vendors today an aggregate of 14,373,675 common shares in the capital of the Company.
2.2
Acquisition Date
February 13, 2018.
2.3
Consideration
As consideration for the Transaction, the purchase price was satisfied by issuing to the Vendors an aggregate of 14,373,675 common shares in the capital of the Company.
2
2.4
Effect on Financial Position
The Company does not have any plans or proposals for material changes in its business affairs, or the affairs of Broken Coast or Cannan, which would have a significant effect on the financial performance or position of the Company.
2.5
Prior Valuations
To the knowledge of the Company, there has not been any valuation opinion obtained within the last 12 months by the Company, Broken Coast or Cannan.
2.6
Parties to Transaction
The Transaction was not with an informed person (as such term is defined in section 1.1 of National Instrument 51-102 -Continuous Disclosure Obligations), associate or affiliate of the Company.
2.7
Date of Report
May 10, 2018.
Item 3 Financial Statements and Other Information
The following financial statements are attached as schedules to this Amended and Restated Business Acquisition Report and form an integral part of this Amended and Restated Business Acquisition Report:
Exhibit A — Selected Unaudited Pro Forma Consolidated Financial Data
Attached as Exhibit A are the Unaudited Pro Forma Consolidated Financial Statements of Aphria for the year ended May 31, 2017 and six month period ended November 30, 2017, by combining the actual results of Aphria with the constructed results of Broken Coast and Cannan for the year ended June 30, 2017.
The constructed statements of net income for both Broken Coast and Cannan have been constructed with a period from July 1, 2016 to June 30, 2017. To arrive at this constructed period, Broken Coast and Cannan’s three months and nine months ended September 30, 2017 and 2016 were utilized to calculate results for the six months ended June 30, 2017 and June 30, 2016. The six months ended June 30, 2016 were removed from Broken Coast and Cannan’s twelve months ended December 31, 2016 results. The resulting amounts were then added to the result for the six months ended June 30, 2017.
Similarly, the constructed results for the six month period ended November 30, 2017 were calculated by combining Aphria’s actual results from June 1 to November 30, 2017 with the constructed results for Broken Coast and Cannan for the six months ended December 31, 2017. To arrive at this constructed period, Broken Coast and Cannan’s three months and nine months ended September 30, 2017 were utilized to calculate results for the six months ended June 30, 2017. The six months ended June 30, 2017 were removed from Broken Coast
3
and Cannan’s twelve months ended December 31, 2017 results. All giving the effect to the successful completion of the Transaction as if the Transaction occurred on June 1, 2016.
Exhibit B - Audited Financial Statements of Broken Coast
Attached as Exhibit B hereto are the audited financial statements of Broken Coast as at and for the years ended December 31, 2017 and 2016 and the notes thereto, together with the independent auditor’s report thereon.
Exhibit C - Audited Financial Statements of Cannan
Attached as Exhibit C hereto are the audited financial statements of Cannan as at and for the years ended December 31, 2017 and 2016 and the notes thereto, together with the independent auditor’s report thereon.
Caution Regarding Unaudited Pro Forma Condensed Combined Financial Statements
This Amended and Restated Business Acquisition Report contains the unaudited pro forma consolidated financial statements of the Company comprised of the pro forma consolidated statements of net income of the Company for the six months ended November 30, 2017 and the year ended May 31, 2017, giving effect to the Transaction.
Such unaudited pro forma condensed combined financial statements have been prepared using certain of the Company’s, Broken Coast’s and Cannan’s respective historical financial statements as more particularly described in the notes to such unaudited pro forma consolidated financial statements. In preparing such unaudited pro forma consolidated financial statements, the Company has not independently verified the financial statements of Broken Coast or Cannan that were used to prepare the unaudited pro forma condensed combined financial statements. The historical unaudited consolidated and historical audited consolidated financial information has been adjusted in the unaudited pro forma consolidated financial statements to give effect to events that are: (i) directly attributable to the pro forma events, for which there are firm commitments and for which the complete financial effects are objectively determinable and (ii) with respect to the unaudited pro forma consolidated statements of earnings, expected to have a continuing impact on the combined company’s results. As such, the impact from merger-related expenses is not included in the unaudited pro forma condensed combined statements of earnings. The unaudited pro forma consolidated financial statements do not reflect any cost savings from operational efficiencies or synergies that could result from the Transaction or for liabilities that may result from integration planning. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not necessarily reflect what the combined company’s financial condition and results of operations would have been had the Transaction occurred on the dates indicated.
They also may not be useful in predicting the future financial condition and results of the operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The pro forma adjustments and purchase price allocation for Broken Coast and
4
Cannan are based on preliminary estimates of the fair value of the consideration paid and the fair value of the assets acquired and liabilities assumed, currently available information and certain assumptions that the Company believes are reasonable in the circumstances, as described in the notes to the unaudited pro forma condensed combined financial statements. As a result of these factors, the actual adjustments will differ from the pro forma adjustments, and the differences may be material.
Forward-Looking Statements
This Amended and Restated Business Acquisition Report may contain certain “forward-looking statements” or “forward-looking information” under applicable securities laws. Forward-looking terms such as “may,” “will,” “could,” “should,” “would,” “plan,” “potential,” “intend,” “anticipate,” “project,” “target,” “believe,” “estimate” or “expect” and other words, terms and phrases of similar nature are often intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and represent management’s best judgment based on facts and assumptions that management considers reasonable.
Any such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and expectations to differ materially from the anticipated results or expectations expressed in this Amended and Restated Business Acquisition Report. The Company cautions readers that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. You are referred to the risk factors described in the Company’s most recent annual Management’s Discussion and Analysis, Annual Information Form and other documents on file with the Canadian securities regulatory authorities, which are available online under the Company’s SEDAR profile at www.sedar.com or on the Company’s website at www.aphria.com. The forward-looking statements and information contained in this Amended and Restated Business Acquisition Report represent the Company’s views only as of today’s date. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise, other than as required by law, rule or regulation. You should not place undue reliance on forward-looking statements.
5
Exhibit “A”
Selected Unaudited Pro Forma Consolidated Financial Data
(See attached)
Aphria Inc.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MAY 31, 2017 AND SIX MONTHS ENDED NOVEMBER 30, 2017
(Expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Pro Forma Consolidated Statements of Net Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Aphria
|
|
Broken Coast
|
|
Cannan
|
|
|
|
|
|
|
|
|
|
|
six months
|
|
six months
|
|
six months
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
December 31,
|
|
December 31,
|
|
|
|
Pro forma
|
|
|
|
|
|
|
2017
|
|
2017
|
|
2017
|
|
Note 5
|
|
adjustments
|
|
Pro forma
|
|
|
Revenue
|
|
$
|
14,624
|
|
$
|
3,717
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
18,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
4,092
|
|
3,239
|
|
—
|
|
(f)
|
|
(1,749
|
)
|
5,582
|
|
|
Gross profit before fair value adjustments
|
|
10,532
|
|
478
|
|
—
|
|
|
|
1,749
|
|
12,759
|
|
|
Fair value adjustment on sale of inventory
|
|
3,807
|
|
—
|
|
—
|
|
(f)
|
|
1,749
|
|
5,556
|
|
|
Fair value adjustment on growth of biological assets
|
|
(7,380
|
)
|
(3,578
|
)
|
—
|
|
|
|
—
|
|
(10,958
|
)
|
|
Gross profit
|
|
14,105
|
|
4,056
|
|
—
|
|
|
|
—
|
|
18,161
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
3,708
|
|
1,187
|
|
1
|
|
|
|
—
|
|
4,896
|
|
|
Share-based compensation
|
|
4,709
|
|
—
|
|
—
|
|
|
|
—
|
|
4,709
|
|
|
Selling, marketing and promotion
|
|
4,767
|
|
350
|
|
—
|
|
|
|
—
|
|
5,117
|
|
|
Amortization
|
|
515
|
|
231
|
|
—
|
|
(b)
|
|
4,250
|
|
4,996
|
|
|
Research and development
|
|
170
|
|
—
|
|
—
|
|
|
|
—
|
|
170
|
|
|
|
|
13,869
|
|
1,768
|
|
1
|
|
|
|
4,250
|
|
19,888
|
|
|
|
|
236
|
|
2,288
|
|
(1
|
)
|
|
|
(4,250
|
)
|
(1,727
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
476
|
|
19
|
|
—
|
|
|
|
—
|
|
495
|
|
|
Foreign exchange gain
|
|
131
|
|
—
|
|
—
|
|
|
|
—
|
|
131
|
|
|
Gain (loss) on marketable securities
|
|
(1,691
|
)
|
—
|
|
—
|
|
|
|
—
|
|
(1,691
|
)
|
|
(Loss) gain on sale of capital assets
|
|
(7
|
)
|
—
|
|
—
|
|
|
|
—
|
|
(7
|
)
|
|
(Loss) gain on dilution of ownership in equity investee
|
|
7,535
|
|
—
|
|
—
|
|
|
|
—
|
|
7,535
|
|
|
(Loss) gain from equity investee
|
|
(9,281
|
)
|
—
|
|
744
|
|
(d)
|
|
(744
|
)
|
(9,281
|
)
|
|
Deferred gain on sale of intellectual property recognized
|
|
467
|
|
—
|
|
—
|
|
|
|
—
|
|
467
|
|
|
Finance income, net
|
|
1,912
|
|
(61
|
)
|
—
|
|
|
|
—
|
|
1,851
|
|
|
Unrealized gain on embedded derivatives
|
|
628
|
|
—
|
|
—
|
|
|
|
—
|
|
628
|
|
|
Gain on long-term investments
|
|
25,157
|
|
—
|
|
—
|
|
|
|
—
|
|
25,157
|
|
|
|
|
25,327
|
|
(42
|
)
|
744
|
|
|
|
(744
|
)
|
25,285
|
|
|
Income before income taxes
|
|
25,563
|
|
2,246
|
|
743
|
|
|
|
(4,994
|
)
|
23,558
|
|
|
Income taxes
|
|
4,067
|
|
720
|
|
102
|
|
(c)
|
|
(1,126
|
)
|
3,661
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
(102
|
)
|
|
|
|
Net income
|
|
21,496
|
|
1,526
|
|
641
|
|
|
|
(3,766
|
)
|
19,897
|
|
|
Weighted average number of common shares - basic
|
|
138,775,253
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
153,148,928
|
|
|
Weighted average number of common shares - diluted
|
|
146,075,449
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
160,449,124
|
|
|
Earnings per share - basic
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
$
|
0.13
|
|
|
Earnings per share - diluted
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements
2
Aphria Inc.
Pro Forma Consolidated Statements of Net Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
For the year ended
|
|
|
|
|
Aphria
|
|
Broken Coast
|
|
Cannan
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
June 30,
|
|
June 30,
|
|
|
|
Pro forma
|
|
|
|
|
|
|
2017
|
|
2017
|
|
2017
|
|
Note 5
|
|
adjustments
|
|
Pro forma
|
|
|
Revenue
|
|
$
|
20,438
|
|
$
|
6,193
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
26,631
|
|
|
Production costs
|
|
4,585
|
|
6,387
|
|
—
|
|
(f)
|
|
(3,449
|
)
|
7,523
|
|
|
Gross profit before fair value adjustments
|
|
15,853
|
|
(194
|
)
|
—
|
|
|
|
3,449
|
|
19,108
|
|
|
Fair value adjustment on sale of inventory
|
|
3,561
|
|
—
|
|
—
|
|
(f)
|
|
3,449
|
|
7,010
|
|
|
Fair value adjustment on growth of biological assets
|
|
(5,005
|
)
|
(6,387
|
)
|
—
|
|
|
|
—
|
|
(11,392
|
)
|
|
Gross profit
|
|
17,297
|
|
6,193
|
|
—
|
|
|
|
—
|
|
23,490
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
4,678
|
|
1,594
|
|
23
|
|
|
|
—
|
|
6,295
|
|
|
Share-based compensation
|
|
2,399
|
|
30
|
|
—
|
|
|
|
—
|
|
2,429
|
|
|
Selling, marketing and promotion
|
|
6,664
|
|
561
|
|
—
|
|
|
|
—
|
|
7,225
|
|
|
Amortization
|
|
956
|
|
395
|
|
—
|
|
(b)
|
|
8,500
|
|
9,851
|
|
|
Research and development
|
|
492
|
|
—
|
|
—
|
|
|
|
—
|
|
492
|
|
|
Impairment of intangible asset
|
|
3,500
|
|
—
|
|
—
|
|
|
|
—
|
|
3,500
|
|
|
|
|
18,689
|
|
2,580
|
|
23
|
|
|
|
8,500
|
|
29,792
|
|
|
|
|
(1,392
|
)
|
3,613
|
|
(23
|
)
|
|
|
(8,500
|
)
|
(6,302
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
512
|
|
19
|
|
—
|
|
|
|
—
|
|
531
|
|
|
Foreign exchange gain
|
|
483
|
|
—
|
|
—
|
|
|
|
—
|
|
483
|
|
|
Gain (loss) on marketable securities
|
|
209
|
|
—
|
|
—
|
|
|
|
—
|
|
209
|
|
|
(Loss) gain on sale of capital assets
|
|
11
|
|
—
|
|
—
|
|
|
|
—
|
|
11
|
|
|
Gian from equity investee
|
|
210
|
|
—
|
|
1,010
|
|
(d)
|
|
(1,010
|
)
|
210
|
|
|
Finance income, net
|
|
728
|
|
(128
|
)
|
—
|
|
|
|
—
|
|
600
|
|
|
Gain on long-term investments
|
|
3,571
|
|
—
|
|
—
|
|
|
|
—
|
|
3,571
|
|
|
|
|
5,724
|
|
(109
|
)
|
1,010
|
|
|
|
(1,010
|
)
|
5,615
|
|
|
Income before income taxes
|
|
4,332
|
|
3,504
|
|
987
|
|
|
|
(9,510
|
)
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
134
|
|
949
|
|
132
|
|
(c)
|
|
(2,252
|
)
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
(e)
|
|
(132
|
)
|
|
|
|
Net income
|
|
4,198
|
|
2,555
|
|
855
|
|
|
|
(7,126
|
)
|
483
|
|
|
Weighted average number of common shares - basic
|
|
104,341,319
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
118,714,994
|
|
|
Weighted average number of common shares - diluted
|
|
111,427,893
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
125,801,568
|
|
|
Earnings per share - basic
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
$
|
0.00
|
|
|
Earnings per share - diluted
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements
3
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(In thousands of Canadian dollars, except share and per share amounts)
1.
Basis of presentation
The accompanying unaudited pro forma consolidated financial statements are based on the historical financial statements of Aphria Inc. (“Aphria”), Broken Coast Cannabis Ltd. (“Broken Coast”), and Cannan Growers Inc. (“Cannan”), consolidated and adjusted to give effect to the acquisition by Aphria, of approximately 99.86% of the issued and outstanding shares of Broken Coast and all of the issued and outstanding shares of Cannan (the “Acquisitions”). They are presented for illustrative purposes only and may not be indicative of the consolidated company’s financial position or results of operations that would have actually occurred had the Acquisitions been completed at or as of the dates indicated, nor is it indicative of our future operating results or financial position.
The data in the unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 and the six month period ended November 30, 2017 assumes that the Acquisitions took place at June 1, 2016, the beginning of the financial year.
The historical consolidated financial information has been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the Acquisitions, (2) objectively determinable, and (3) with respect to the statements of net income, expected to have a continuing impact on the consolidated results. The unaudited pro forma consolidated financial statements was based on and should be read in conjunction with the following historical financial statements and accompanying notes of Broken Coast and Cannan for the applicable periods, which are included elsewhere in the business acquisition report, and the financial statements of Aphria:
·
Historical audited consolidated financial statements of Aphria for the year ended May 31, 2017 and the related notes;
·
Historical unaudited condensed interim consolidated financial statements of Aphria for the three and six months ended November 30, 2017 and the related notes;
·
Historical audited financial statements of Broken Coast for the year ended December 31, 2017 and the related notes;
·
Historical audited financial statements of Cannan for the year ended December 31, 2017 and the related notes; and
The unaudited pro forma consolidated financial statements is presented for informational purposes only. The unaudited pro forma consolidated financial statements may not be indicative of the financial position that would have prevailed and operating results that would have been obtained if the Acquisitions had been completed on those dates or for the periods presented, nor do they claim to project the financial position or operating results which may be obtained in the future. The unaudited pro forma consolidated financial statements are not forecast or projection of future results. The actual financial position and results of operation of Aphria for any period following the closing of the Acquisitions will vary from the amounts set forth in the unaudited pro forma consolidated financial statements and such variations may be material. Any potential integration gains that may be realized and integration costs that may be incurred upon completion of the Acquisitions, have been excluded from the unaudited pro forma consolidated financial statements.
In the opinion of management, the accounting policies used in the preparation of the unaudited pro forma consolidated interim statements of net income for the six months ended November 30, 2017 and for the year ended May 31, 2017, include all the adjustments necessary for the fair presentation of the Acquisitions in accordance with the recognition and measurement principles of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and incorporate the significant accounting policies expected to be used to prepare Aphria’s consolidated financial statements. Certain financial statement line items included in Broken Coast and Cannan’s historical presentation have been disaggregated or condensed to conform to corresponding financial statement line items included in Aphria’s historical presentation.
4
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(In thousands of Canadian dollars, except share and per share amounts)
The unaudited pro forma consolidated financial statements have been prepared using the acquisition method of accounting in accordance with
IFRS 3, Business Combinations
(“IFRS 3”), as described in the unaudited condensed interim consolidated financial statements of Aphria for the three and nine months ended February 28, 2017. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets and liabilities assumed based on their estimated fair values. The pro forma adjustments related to the purchase price allocation in connection with the Acquisitions are preliminary and based upon information obtained to date and assumptions that we believe are reasonable. The actual purchase accounting adjustments are described in the unaudited condensed interim consolidated financial statements of Aphria for the three and nine months ended February 28, 2017 are preliminary and will be finalized as information becomes available, but limited to one year after the acquisition date, and may differ from those reflected in the unaudited pro forma consolidated financial statements presented above. The actual amounts that we record are based on our final allocation of the purchase price, after giving effect to the final purchase price adjustments at the closing date, and our final assessment of fair values may differ materially from those recorded in our unaudited pro forma consolidated financial statements. The unaudited pro forma consolidated statements of net income do not reflect any acquisition costs in connection with the Acquisitions.
The unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 has been derived as follows:
(i)
the consolidated statements of income and comprehensive income of Aphria for the year ended May 31, 2017 from the audited consolidated financial statements of Aphria as at May 31, 2017 and for the year then ended;
(ii)
the statement of comprehensive income of Broken Coast for the year ended December 31, 2016 from the audited financial statements of Broken Coast as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2016 and to add the unaudited financial statement of comprehensive income for the six month period ended June 30, 2017; and
(iii)
the statement of comprehensive income of Cannan for the year ended December 31, 2016 from the audited financial statements of Cannan as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2016 and to add the unaudited statement of comprehensive income for the six month period ended June 30, 2017.
The unaudited pro forma consolidated statements of net income for the six month period ended November 30, 2017 has been derived as follows:
(i)
the unaudited condensed interim consolidated statements of income and comprehensive income of Aphria for the six month period ended November 30, 2017 from the unaudited condensed interim consolidated financial statements of Aphria as at and for the periods ended November 30, 2017;
(ii)
the statement of comprehensive income of Broken Coast for the year ended December 31, 2017 from the audited financial statements of Broken Coast as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2017; and
(iii)
the statement of comprehensive income of Cannan for the year ended December 31, 2017 from the audited financial statements of Cannan as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2017.
The unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 include the results Broken Coast and Cannan for the year ended June 30, 2017. The unaudited pro forma consolidated statements of net income for the six month period ended November 30, 2017 include the results Broken Coast and Cannan for the six months ended December 31, 2017.
The unaudited pro forma consolidate financial statements are only a summary and are not necessarily indicative of the results of Aphria’s, Broken Coast’s or Cannan’s future operations.
5
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(In thousands of Canadian dollars, except share and per share amounts)
2.
Description of Transaction
Effective February 1, 2018, Aphria entered into a definitive purchase agreement and acquired 99.86% of the outstanding shares of Broken Coast, through a direct acquisition of 132,576.59 shares of Broken Coast and the acquisition of 100% of the shares of Cannan which owned the remaining 33,576 outstanding shares of Broken Coast. Pursuant to the terms and conditions set forth in the definitive agreement between Aphria, Broken Coast and Cannan that was entered into effective February 1, 2017 (the “Transaction”). The total consideration transferred was $216,899 to be paid in 14,373,675 Aphria shares issued at a deemed price of $15.09 representing the 20-day VWAP of Aphria at market close on the business day immediately prior to signing of the parties initial non-binding letter of intent.
3.
Significant accounting policies
The accounting policies used in preparing the unaudited pro forma consolidated financial statements are set out in Aphria’s audited consolidated financial statements for the year ended May 31, 2017 and as described in Aphria’s unaudited condensed interim consolidated financial statements for the three months and six months ended November 30, 2017. The financial statements of Broken Coast and Cannan (which form the basis of the unaudited pro forma consolidated financial statements) were prepared in accordance with IFRS.
The pro forma consolidated financial statements do not include all the information and disclosures required by IFRS for annual financial statements and should be read in conjunction with the financial statements of Aphria, the financial statements of Broken Coast, and the financial statements of Cannan that are incorporated by reference or included herein. These pro forma statements have been prepared in thousands of Canadian dollars unless otherwise noted.
6
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(In thousands of Canadian dollars, except share and per share amounts)
4.
Fair value of consideration transferred in connection with the Acquisitions
The following table summarizes the purchase price for the Acquisitions:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Number of
|
|
|
|
preliminary fair
|
|
|
|
|
Note
|
|
shares
|
|
Share price
|
|
value
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
(i)
|
|
14,373,675
|
|
$
|
14.90
|
|
214,168
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
1,956
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
305
|
|
|
Other current assets
|
|
|
|
|
|
|
|
43
|
|
|
Inventory
|
|
|
|
|
|
|
|
2,149
|
|
|
Biological assets
|
|
|
|
|
|
|
|
767
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
12,938
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
11,730
|
|
|
Corporate website
|
|
|
|
|
|
|
|
39
|
|
|
Licence
|
|
|
|
|
|
|
|
6,320
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
1,930
|
|
|
Trademark & brands
|
|
|
|
|
|
|
|
72,490
|
|
|
Goodwill
|
|
|
|
|
|
|
|
142,707
|
|
|
Total assets
|
|
|
|
|
|
|
|
253,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
8,475
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
632
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
24,185
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
5,914
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
39,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
Share price based on the closing price of the shares on February 1, 2018.
5.
Pro forma adjusments in connection with the Acquisitions
This note should be read in conjunction with Note 1
Basis of presentation
; Note 2
Description of transaction
; and Note 4
Fair value of consideration transferred in connection with the Acquisitions
. The following summarizes the pro forma adjustments in connection with the Acquisitions to give effect to the acquisition as if it had occurred on June 1, 2016 for purposes of the pro
7
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(In thousands of Canadian dollars, except share and per share amounts)
forma consolidated statements of net income for the year ended May 31, 2017, and the pro forma consolidated statements of net income for the six months ended November 30, 2017.
(a)
An increase in weighted average number of common shares basic and diluted to record the 14,373,675 shares issued for the Acquisitions.
(b)
An increase in amortization of $8,500 for the year ended May 31, 2017 and $4,250 for the six months ended November 30, 2017 representing the amortization of the preliminary fair value of the intangible assets acquired from the Acquisitions.
(c)
A reduction in income tax expense of $2,252 for the year ended May 31, 2017 and $1,126 for the six months ended November 30, 2017 representing the deferred tax impact of the the increase in amortization of the preliminary fair value of intangible assets acquired from the Acquisitions.
(d)
A reduction in the gain from equity investee of $744 for the six months ended December 31, 2017 and $1,010 for the year ended June 30, 2017 to eliminate Cannan’s share of the income of Broken Coast.
(e)
reduction in income tax expense of $132 for the year ended May 31, 2017 and $102 for the six months ended November 30, 2017 to eliminate the deferred tax expense recognized on Cannan’s share of the income in Broken Coast.
(f)
A reduction in production costs of $1,749 for the three months ended September 30, 2017 and $3,449 for the year ended June 30, 2017, with a corresponding increase in fair value adjustment on sale of inventory representing the expected fair value adjustment included in cost of inventory sold, to align the accounting presentation of Broken Coast with Aphria.
6.
Pro forma net income per share
The pro forma basic and diluted earnings per share have been calculated as follows:
|
|
|
For the year
|
|
For the six
|
|
|
|
|
ended
|
|
months ended
|
|
|
|
|
May 31,
|
|
November 30,
|
|
|
|
|
2017
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Pro forma net income for the period
|
|
$
|
483
|
|
$
|
19,897
|
|
|
Average number of common shares outstanding during the period
|
|
118,714,994
|
|
153,148,928
|
|
|
Pro forma earnings per share - basic
|
|
$
|
0.00
|
|
$
|
0.13
|
|
|
|
|
For the year
|
|
For the six
|
|
|
|
|
ended
|
|
months ended
|
|
|
|
|
May 31,
|
|
November 30,
|
|
|
|
|
2017
|
|
2017
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Pro forma net income for the period
|
|
$
|
483
|
|
$
|
19,897
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
118,714,994
|
|
153,148,928
|
|
|
“In the money” warrants outstanding during the period
|
|
2,697,681
|
|
2,796,468
|
|
|
“In the money” options outstanding during the period
|
|
4,388,893
|
|
4,503,728
|
|
|
|
|
125,801,568
|
|
160,449,124
|
|
|
pro forma earnings per share - diluted
|
|
$
|
0.00
|
|
$
|
0.12
|
|
8
Exhibit “B”
Audited Financial Statements of Broken Coast
(See attached)
BROKEN COAST CANNABIS LTD.
FINANCIAL STATEMENTS
31 DECEMBER 2017 AND 2016
Stated in Canadian Dollars
May 9, 2018
Independent Auditor’s Report
To the Shareholders of
Broken Coast Cannabis Ltd.
We have audited the accompanying financial statements of Broken Coast Cannabis Ltd., which comprise the statement of financial position as at December 31, 2017 and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers LLP
245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4
T: +1 519 985 8900, F: +1 519 258 5457
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Broken Coast Cannabis Ltd. as at December 31, 2017 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Windsor, Ontario, Canada
BROKEN COAST CANNABIS LTD.
Canadian Dollars
STATEMENTS OF FINANCIAL POSITION
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As at
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As at
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31 December
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31 December
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2017
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2016
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ASSETS
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Current Assets
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Cash
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$
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2,112,182
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$
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653,121
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Restricted cash
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250,000
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—
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Accounts receivable
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(7)
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342,449
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188,139
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Biological assets
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(8)
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544,006
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536,514
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Inventory
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(8)
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2,442,367
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1,394,656
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Prepaid expenses
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25,041
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34,869
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5,716,045
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2,807,299
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Non-current Assets
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Property, plant, and equipment
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(9)
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12,757,310
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3,723,098
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Intangible assets
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(10)
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40,558
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46,646
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12,797,868
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3,769,744
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$
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18,513,913
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$
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6,577,043
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LIABILITIES
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Current Liabilities
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Accounts payable and accrued liabilities
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(13)
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$
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1,756,612
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$
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421,569
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Goods and services tax payable
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40,839
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50,339
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Corporate taxes payable
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(17)
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817,382
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264,907
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Deferred revenue
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(3)
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64,926
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14,867
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Bank loans payable
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(11)
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5,749,754
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1,329,524
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Note payable
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(12)
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250,000
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250,000
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8,679,513
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2,331,206
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Non-current Liabilities
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Deferred income tax liability
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(17)
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487,156
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197,746
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9,166,669
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2,528,952
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EQUITY
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Share capital
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(14)
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4,255,530
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1,749,856
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Retained earnings
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5,091,714
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2,298,235
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9,347,244
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4,048,091
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$
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18,513,913
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$
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6,577,043
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Related party transactions
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(13)
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Contingent liability
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(18)
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Subsequent events
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(19)
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The financial statements were approved by the board of directors on 8 May 2018 and were signed on its behalf by:
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“Roberto Bresciani”
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Roberto Bresciani, Director
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— The accompanying notes form an integral part of the financial statements —
1
BROKEN COAST CANNABIS LTD.
Canadian Dollars
STATEMENTS OF COMPREHENSIVE INCOME
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Year ended
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Year ended
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31 December
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31 December
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2017
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2016
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CONTINUING OPERATIONS
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Sales
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$
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9,976,536
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$
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4,596,387
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Cost of sales (recovery)
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Gain on changes in fair value of biological asset
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(8)
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(7,477,300
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)
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(4,422,779
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)
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Inventory expense to cost of sales
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7,962,273
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4,254,624
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Processing fees
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192,587
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78,552
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Production costs
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327,304
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551,905
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Cost of sales
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1,004,864
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462,302
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Gross margin
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8,971,672
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4,134,085
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General and administrative expenses
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Salaries and wages
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2,302,033
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651,714
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Advertising and promotion
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958,328
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403,864
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Amortization of property, plant and equipment
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(9)
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670,306
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186,980
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Rental
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96,943
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161,210
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Sub-contracts and consulting
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79,098
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150,655
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Professional fees
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109,177
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65,558
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Interest on long-term debt
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102,091
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58,274
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Supplies
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142,699
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37,280
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Office
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190,717
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36,729
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Share based payments
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(14)
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—
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29,634
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Licenses and memberships
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28,244
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28,586
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Interest and bank charges
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18,391
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16,996
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Travel
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32,614
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15,228
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Insurance
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43,245
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12,279
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Amortization of intangible assets
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(10)
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16,356
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11,517
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Utilities
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5,085
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9,172
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Bad debts
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(7)
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43,245
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3,947
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4,838,572
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1,879,623
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Income from operations
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4,133,100
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2,254,462
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Other income
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87,280
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—
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Other expenses
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(38,648
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)
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—
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48,632
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—
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Net income and comprehensive income before income taxes
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4,181,732
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2,254,462
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Deferred income tax expense
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(17)
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(289,410
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)
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(128,820
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)
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Current income tax expense
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(17)
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(1,098,843
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)
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(264,907
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)
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Net income and comprehensive income for the year
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$
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2,793,479
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$
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1,860,735
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— The accompanying notes form an integral part of the financial statements —
2
BROKEN COAST CANNABIS LTD.
Canadian Dollars
STATEMENTS OF CHANGES IN EQUITY
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Retained
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Shareholders’
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Shares
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Amount
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Earnings
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Equity
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BALANCE AT 31 DECEMBER 2015
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121,107
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$
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945,504
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$
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437,500
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$
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1,383,004
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Issuance of shares for services
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140
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29,634
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—
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29,634
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Issuance of shares for cash
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3,660
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774,718
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—
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774,718
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Net income for the year
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—
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—
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1,860,735
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1,860,735
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BALANCE AT 31 DECEMBER 2016
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124,907
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$
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1,749,856
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$
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2,298,235
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$
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4,048,091
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Issuance of shares for assets
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10,669
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2,255,674
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—
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2,255,674
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Issuance of shares for cash
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184
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250,000
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—
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250,000
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Net income for the year
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—
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—
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2,793,479
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2,793,479
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BALANCE AT 31 DECEMBER 2017
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135,760
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$
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4,255,530
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$
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5,091,714
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$
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9,347,244
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— The accompanying notes form an integral part of the financial statements —
3
BROKEN COAST CANNABIS LTD.
Canadian Dollars
STATEMENTS OF CASH FLOWS
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Year
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Year
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Ended
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Ended
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31 December
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31 December
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2017
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2016
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OPERATING ACTIVITIES
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Income for the Year
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$
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2,793,479
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$
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1,860,735
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Items not Affecting Cash
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Gain on change in fair value of biological assets
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(7,477,300
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)
|
(4,422,779
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)
|
|
Share-based payments
|
|
—
|
|
29,634
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|
|
Amortization of property, plant and equipment
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670,306
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186,980
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Amortization of intangible assets
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16,356
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11,517
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Accretion of interest
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—
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|
7,192
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|
|
Deferred income tax expense
|
|
289,410
|
|
128,820
|
|
|
|
|
(3,707,749
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)
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(2,197,901
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)
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Net Change in Non-cash Working Capital
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|
|
|
|
|
|
Accounts receivable
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|
(154,310
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)
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(67,780
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)
|
|
Inventory
|
|
6,422,097
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|
3,470,409
|
|
|
Prepaid expenses
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9,828
|
|
(23,211
|
)
|
|
Accounts payable and accrued liabilities
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1,335,043
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|
221,088
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|
|
Goods and services tax payable
|
|
(9,500
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)
|
3,184
|
|
|
Corporate taxes payable
|
|
552,475
|
|
264,907
|
|
|
Deferred revenue
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50,059
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(33,141
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)
|
|
|
|
8,205,692
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|
3,835,456
|
|
|
|
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4,497,943
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1,637,555
|
|
|
|
|
|
|
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INVESTING ACTIVITIES
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Education grants received (advanced)
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—
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|
21,000
|
|
|
Purchase of property, plant and equipment
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(5,688,844
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)
|
(3,196,081
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)
|
|
Purchase of intangible assets
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|
(10,268
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)
|
(1,151
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)
|
|
|
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(5,699,112
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)
|
(3,176,232
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)
|
|
|
|
|
|
|
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FINANCING ACTIVITIES
|
|
|
|
|
|
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Proceeds on promissory note
|
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250,000
|
|
350,000
|
|
|
Repayment of promissory note
|
|
(250,000
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)
|
(350,000
|
)
|
|
Advances from (to) related parties
|
|
—
|
|
(385,030
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)
|
|
Proceeds from sale of shares
|
|
250,000
|
|
774,718
|
|
|
Proceeds on bank loans payable
|
|
2,815,908
|
|
1,329,524
|
|
|
Repayment of bank loans payable
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|
(155,678
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)
|
—
|
|
|
|
|
2,910,230
|
|
1,719,212
|
|
|
Net Increase in Cash
|
|
1,709,061
|
|
180,535
|
|
|
Cash position — beginning of year
|
|
653,121
|
|
472,586
|
|
|
Cash Position — End of Year
|
|
$
|
2,362,182
|
|
$
|
653,121
|
|
|
Supplementary Disclosure of Cash Flow Information
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|
|
|
|
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|
Shares issued for property acquisition (Note 9)
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|
$
|
2,255,674
|
|
$
|
—
|
|
|
Assumption of mortgage for property acquisition (Note 9)
|
|
$
|
1,760,000
|
|
$
|
—
|
|
— The accompanying notes form an integral part of the financial statements —
4
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
1)
Nature of operations
Broken Coast Cannabis Ltd. (the “Company”, or “Broken Coast”), formerly Greenleaf Medicinals Ltd., was incorporated under the Canada Business Corporations Act of British Columbia on 21 February 2013.
The registered and records office of the Company is 4
th
Floor, 931 Fort Street, Victoria, BC, V8V 3K3.
The Company is a licensed producer of medical marihuana based in Duncan, British Columbia, licensed under the Controlled Drugs and Substances Act (Canada). The principal activities of the Company are the production and sale of medical marihuana as regulated by the Access to Cannabis for Medicinal Purposes Regulations (“ACMPR”)
2)
Basis of preparation — Statement of Compliance
The financial statements of the Company have been prepared in accordance with IFRS and related IFRS Interpretations Committee (“IFRICs”) as issued by the International Accounting Standards Board (“IASB”).
These financial statements were approved by the board of directors and authorized for issue on 8 May 2018.
The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgments, and assumptions that affect the application of the Company’s accounting policies and reported amounts of assets and liabilities, profit and expenses. The areas involving a higher degree of judgements or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed Note 4. The estimates and associated assumptions are based on current facts and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
3)
Summary of significant accounting policies
a)
Basis of measurement
These financial statements have been prepared in Canadian dollars on a historical cost basis except for biological assets, which are measured at fair value. Historical cost is generally based upon the fair value of the consideration given in exchange for assets. These financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Company.
b)
Biological assets
The Company measures biological assets consisting of medicinal cannabis plants at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest.
c)
Inventory
Inventories of harvested finished goods and packing materials are recorded at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes 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.
5
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
d)
Measurement uncertainty
The preparation of these financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.
The Company’s key estimates relate to the valuation and estimated useful lives of property, plant and equipment, and the fair value measurement of inventory and biological assets. Actual results may differ from these estimates.
The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. These estimates require the extensive use of judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
e)
Property, plant and equipment and intangibles
Amortization is charged so as to write off the cost of the asset using the stated method over the estimated useful lives as follows:
|
Computer equipment
|
|
Straight-line
|
|
3 years
|
|
|
Equipment
|
|
Straight-line
|
|
5 years
|
|
|
Security equipment
|
|
Straight-line
|
|
5 years
|
|
|
Building
|
|
Straight-line
|
|
10 years
|
|
|
Website
|
|
Straight-line
|
|
5 years
|
|
|
Construction in progress
|
|
No term
|
|
Not amortized
|
|
Where an item of property, plant and equipment is comprised of major components with different useful lives, the components are accounted for as separate items of property, plant and equipment.
Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, are capitalized. Directly attributable expenses incurred for major capital projects and site preparation are capitalized until the asset is brought to a working condition for its intended use.
The costs of day-to-day servicing are recognized in profit or loss as incurred. These costs are more commonly referred to as “maintenance and repairs.”
Financing costs directly associated with the construction or acquisition of qualifying assets are capitalized at interest rates relating to loans specifically raised for that purpose, or at the average borrowing rate where the general pool of group borrowings is utilized. Capitalization of borrowing costs ceases when the asset is substantially complete.
6
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
The amortization method, useful life and residual values are assessed annually.
Subsequent costs
The cost of replacing part of an item within property, plant and equipment is recognized when the cost is incurred if it is probable that the future economic benefits will flow to the Company and the cost of the item can be measured reliably. All other costs are recognized as an expense as incurred.
Impairment
The Company’s tangible and intangible assets are reviewed for an indication of impairment at each statement of financial position date. If indication of impairment exists, the asset’s recoverable amount is estimated.
An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in profit and loss for the period.
Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis.
The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the 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. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Reversal of impairment
An impairment loss is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortization or amortization, if no impairment loss had been recognized. An impairment loss with respect to goodwill is never reversed.
7
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
f)
Revenue recognition
Revenue is recognized at the fair value consideration received or receivable. Revenue from the sale of goods is recognized when all of the following conditions have been satisfied, which is generally met once the products are shipped to customers.
·
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 amount of revenue can be reliably measured;
·
It is probable that the economic benefits associated with the transaction will flow to the entity; and
·
The costs incurred or to be incurred in respect of the transaction can be reliably measured.
As at 31 December 2017 the Company recognized deferred revenue totaling $64,926 (2016 - $14,867) for sales made to customers via the Company’s website for which products have not been shipped to customers.
g)
Research and development
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred. To date, no development costs have been capitalized.
h)
Share-based payments
Share-based payments to employees are measured at the fair value of the instruments issued and are amortized over the vesting periods using a graded attribution approach. Share-based payments to non-employees are measured at the fair value of the goods or services received or at the fair value of the equity instruments issued (if it is determined the fair value of the goods or services cannot be reliably measured), and are recorded at the date the goods or services are received.
i)
Joint arrangements
The Company applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in Joint arrangements are classified as either joint operations or joint ventures, depending on the contractual rights and obligations of each investor. Joint arrangements that are classified as joint operations are accounted for using the proportionate consolidation method whereby the Company recognizes its share of the assets, liabilities, revenues and expenses of the joint operations. Joint arrangements classified as joint ventures are accounted for using the equity method.
8
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
j)
Income taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in the Statement of Comprehensive Income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
k)
Financial instruments
All financial instruments must be recognized, initially, at fair value on the statement of financial position. The Company has classified each financial instrument into the following categories: “held-for-trading,” “loans and receivables,” “other financial liabilities”, and “fair value through profit and loss”. Subsequent measurement of the financial instruments is based on their respective classification. Unrealized gains and losses on held-for-trading instruments are recognized in earnings. The other categories of financial instruments are recognized at amortized cost using the effective interest method. The Company had made the following classifications:
|
Financial Assets or Liabilities
|
|
Category
|
|
Cash
|
|
Loans and receivables
|
|
Accounts receivable
|
|
Loans and receivables
|
|
Bank loans payable
|
|
Other financial liabilities
|
|
Note payable
|
|
Other financial liabilities
|
|
Accounts payable and accrued liabilities
|
|
Other financial liabilities
|
9
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
l)
Financial liabilities and equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expenses over the corresponding period. The effective interest rate is the rate that exactly discounts estimated future cash payments over the expected life of the financial liability, or, where appropriate, a shorter period.
The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.
4)
Critical accounting judgements and key sources of estimation uncertainty
In the application of the Company’s accounting policies, which are described in Note 3, management is required to make judgments, estimates and assumptions about the carrying amount and classification of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.
The following are the critical judgments and areas involving estimates, that management have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amount recognized in the financial statements.
a)
Key sources of estimation uncertainty
Useful life of property, plant and equipment
The Company reviews the estimated lives of its property, plant and equipment at the end of each reporting period. There were no material changes in the lives of plant and equipment for the years ended 31 December 2017 or 2016.
10
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
Biological assets and inventory
In calculating the value of the biological assets and inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, sales price, wastage and expected yields for the cannabis plant. In calculating final inventory values, management is required to determine an estimate for spoiled or expired inventory and compares the inventory cost verses net realizable value.
5)
Accounting standards issued but not yet effective
The following accounting standards have been issued by the International Accounting Standards Board but are not yet effective for the Company; both the effective date and the expected impact are noted, based on the information currently available.
a)
IFRS 9, Financial Instruments
IFRS 9 was initially issued by the IASB on 12 November 2009 and issued in its completed version in July 2014, and will replace IAS 39,
Financial Instruments: Recognition and Measurement
. IFRS 9 replaces the multiple rules in IAS 39 with a measurement model for debt instruments having three categories: amortized cost, fair value through OCI and fair value through profit and loss. 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. Financial assets that are equity instruments are measured at fair value through profit and loss unless irrevocably designated as fair value through OCI. The new standard also requires a single impairment method to be used, based on expected credit losses, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for financial years beginning on or after 1 January 2018.
b)
IFRS 15, Revenue from Contract with Customers
IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers.
The Company is currently assessing the effects of these new standards and intends to adopt them on their effective dates.
6)
Financial instrument classification and measurement
Financial instruments of the Company carried on the statement of financial position are carried at amortized cost. There are no significant differences between the carrying value of financial instruments and their estimated fair values as at 31 December 2017.
The Company classifies the fair value of these transactions according to the following hierarchy.
·
Level 1 — quoted prices in active markets for identical financial instruments.
·
Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
11
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
·
Level 3 — valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
a)
Fair values of financial assets and liabilities
The Company’s financial instruments include cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, bank loans payable, and notes payable. As at 31 December 2017 and 2016, the carrying value of cash is fair value. Amounts receivable, accounts payable and accrued liabilities, bank loans payable, and note payable approximate their fair value due to their short-term nature.
b)
Market risk
Market risk is the risk that changes in market prices will affect the Company’s earnings or the value of its financial instruments. Market risk is comprised of commodity price risk and interest rate risk. The objective of market risk management is to manage and control exposures within acceptable limits, while maximizing returns. The Company is not exposed to significant market risk.
c)
Credit risk
Credit risk arises from the potential that a counter party will fail to perform its obligations. The Company is exposed to credit risk from customers. The Company has a significant number of customers which minimizes the concentration of credit risk. Further mitigation of credit risk is achieved as the Company’s retail customers pay for their purchases before goods are shipped. The Company’s retail sales comprise 90% (2016 - 99%) of gross sales; accordingly, the Company is not exposed to significant credit risk.
d)
Interest rate risk
Interest rate risk is the risk of losses that arise as a result of changes in contracted interest rates. The Company is exposed to interest rate risk on variable rate term loan with Vancity. A 1% shift in the Company’s variable rate term loan would result in an impact of approximately $30,000.
e)
Currency risk
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s operations are limited to Canada which significantly reduces exposure to currency risk. As at 31 December 2017 and 2016, the Company holds no cash denominated in foreign currency and therefore is not exposed to significant foreign currency risk.
f)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company controls liquidity risk by ensuring that it has sufficient cash resources to pay for its financial obligations. As at 31 December 2017, the Company had a cash balance of $2,112,182 to settle current monetary liabilities of $8,614,587 which are due within one year. Subsequent to year-end, the Company was acquired by Aphria Inc. and the bank loans payable have been repaid in full. Accordingly, the Company is not significantly exposed to liquidity risk. The Company is obligated to the following contractual maturities of cash flows:
12
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
|
|
|
Carrying
|
|
Contractual
|
|
|
|
|
|
|
|
|
amount
|
|
Cash flows
|
|
Year 1
|
|
Years 2-5
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,756,612
|
|
$
|
1,756,612
|
|
$
|
1,756,612
|
|
$
|
—
|
|
|
Goods and services tax payable
|
|
40,839
|
|
40,839
|
|
40,839
|
|
—
|
|
|
Corporate taxes payable
|
|
817,382
|
|
817,382
|
|
817,382
|
|
|
|
|
Note payable
|
|
250,000
|
|
250,000
|
|
250,000
|
|
—
|
|
|
Bank loans payable
|
|
5,749,754
|
|
5,749,754
|
|
5,749,754
|
|
|
|
|
Total
|
|
$
|
8,614,587
|
|
$
|
8,614,587
|
|
$
|
8,614,587
|
|
$
|
—
|
|
7)
Accounts receivable
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Trade accounts receivables
|
|
$
|
382,449
|
|
$
|
192,086
|
|
|
Impairment of trade accounts receivable
|
|
(40,000
|
)
|
(3,947
|
)
|
|
|
|
$
|
342,449
|
|
$
|
188,139
|
|
During the year ended December 31, 2017, the Company impaired accounts receivable in the amount of $43,245 (2016 - $3,947) relating to uncollectable accounts and reported total bad debt expense of $43,245 (2016 – $3,947).
8)
Biological assets and inventory
The Company’s biological assets consist of medicinal cannabis plants. As at 31 December 2017 and 2016 the Company’s biological assets are comprised of:
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Opening balance
|
|
$
|
536,514
|
|
$
|
263,633
|
|
|
Changes in fair value due to biological transformation
|
|
7,477,300
|
|
4,422,779
|
|
|
Transfer to inventory upon harvest
|
|
(7,469,808
|
)
|
(4,149,898
|
)
|
|
Closing Balance
|
|
$
|
544,006
|
|
$
|
536,514
|
|
All of the plants are to be harvested as agricultural produce. The significant assumptions used in determining the fair value of biological assets are as follows:
i)
Expected yields by plant;
ii)
stage of growth;
iii)
selling prices;
iv)
wastage; and
v)
harvesting and selling costs.
The Company estimates the harvest yields for the plants at various stages of growth. The Company’s estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
Sales price used in the valuation of biological assets is based on the average selling price of all cannabis products, and can vary based on different strains being grown as well as proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling, and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to variety of factors, such as strains being grown, length of growing cycle, and space allocated for growing.
13
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
Management reviews all significant inputs based on historical information obtained as well as based on planned production schedules. Only when there is a material change from the existing expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the period, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.
Inventory is comprised of the following items:
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Finished goods — dry cannabis
|
|
$
|
242,013
|
|
$
|
835,453
|
|
|
Finished goods — cannabis oils
|
|
139,795
|
|
38,038
|
|
|
Harvested produce
|
|
1,999,217
|
|
463,072
|
|
|
Materials, supplies, and products for resale
|
|
61,342
|
|
58,093
|
|
|
|
|
$
|
2,442,367
|
|
$
|
1,394,656
|
|
The Company estimates the harvest yields for the plants at various stages of growth. As of 31 December 2017, it is expected that the Company’s biological assets will yield approximately 468kg (2016 – 71kg). The Company’s estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the gain or loss on biological assets. As at 31 December 2017, the Company held 546kg of dry cannabis (2016 – 81kg) and 125kg of cannabis oil (2016 – 15kg).
9)
Property, plant and equipment
Details are as follows:
|
|
|
|
|
|
|
|
|
Computer
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
and security
|
|
|
|
|
|
|
|
|
in progress
|
|
Land
|
|
Buildings
|
|
equipment
|
|
Equipment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OR DEEMED COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2015
|
|
$
|
—
|
|
$
|
—
|
|
$
|
622,655
|
|
$
|
94,850
|
|
$
|
136,431
|
|
$
|
853,936
|
|
|
Additions
|
|
2,632,813
|
|
—
|
|
—
|
|
221,615
|
|
341,653
|
|
3,196,081
|
|
|
At 31 December 2016
|
|
2,632,813
|
|
—
|
|
622,655
|
|
316,465
|
|
478,084
|
|
4,050,017
|
|
|
Additions
|
|
5,055,696
|
|
736,100
|
|
3,618,005
|
|
73,334
|
|
221,383
|
|
9,704,518
|
|
|
Transfers
|
|
(2,632,813
|
)
|
—
|
|
2,632,813
|
|
—
|
|
—
|
|
—
|
|
|
At 31 December 2017
|
|
5,055,696
|
|
736,100
|
|
6,873,473
|
|
389,799
|
|
699,467
|
|
13,754,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2015
|
|
$
|
—
|
|
$
|
—
|
|
$
|
76,596
|
|
$
|
36,929
|
|
$
|
26,414
|
|
$
|
139,939
|
|
|
Additions
|
|
—
|
|
—
|
|
62,266
|
|
68,545
|
|
56,169
|
|
186,980
|
|
|
At 31 December 2016
|
|
—
|
|
—
|
|
138,862
|
|
105,474
|
|
82,583
|
|
326,919
|
|
|
Additions
|
|
—
|
|
—
|
|
548,211
|
|
31,005
|
|
91,090
|
|
670,306
|
|
|
At 31 December 2017
|
|
—
|
|
—
|
|
687,073
|
|
136,479
|
|
173,673
|
|
997,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2016
|
|
$
|
2,632,813
|
|
$
|
—
|
|
$
|
483,793
|
|
210,991
|
|
395,501
|
|
3,723,098
|
|
|
At 31 December 2017
|
|
$
|
5,055,696
|
|
$
|
736,100
|
|
$
|
6,186,400
|
|
253,320
|
|
525,794
|
|
12,757,310
|
|
Property, plant and equipment are stated, in the statement of financial position, at cost less accumulated amortization and accumulated impairment losses. Assets in the course of construction are carried at cost, less any recognized impairment loss. Amortization of these assets commences when the assets are ready for their intended
14
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
use. The cost of property, plant and equipment includes directly attributed incremental costs incurred in their acquisition and installation.
Assets held under capital lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the relevant lease. The gain or loss arising on the disposal or retirement of an item of equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the Statement of Comprehensive Income. Amortization is charged so as to write off the cost of the asset over the estimated useful lives.
10)
Intangible assets
Details are as follows:
|
|
|
Website
|
|
Total
|
|
|
|
|
|
|
|
|
|
COST OR DEEMED COST
|
|
|
|
|
|
|
Balance at 31 December 2015
|
|
$
|
67,099
|
|
$
|
67,099
|
|
|
Additions
|
|
1,151
|
|
1,151
|
|
|
Balance at 31 December 2016
|
|
68,250
|
|
68,250
|
|
|
Additions
|
|
10,268
|
|
10,268
|
|
|
Balance at 31 December 2017
|
|
$
|
78,518
|
|
$
|
78,518
|
|
|
|
|
|
|
|
|
|
AMORTIZATION
|
|
|
|
|
|
|
Balance at 31 December 2015
|
|
$
|
10,087
|
|
$
|
10,087
|
|
|
Additions
|
|
11,517
|
|
11,517
|
|
|
Balance at 31 December 2016
|
|
21,604
|
|
21,604
|
|
|
Additions
|
|
16,356
|
|
16,356
|
|
|
Balance at 31 December 2017
|
|
$
|
37,960
|
|
$
|
37,960
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
|
|
At 31 December 2016
|
|
$
|
46,646
|
|
$
|
46,646
|
|
|
At 31 December 2017
|
|
$
|
40,558
|
|
$
|
40,558
|
|
11)
Bank loans payable
On 16 June 2016, the Company entered into a variable short-term business loan with Vancity Credit Union (the “Bank”). During the year ended 31 December 2017, the Company renegotiated the variable short-term business loan with the Bank and entered into a fixed rate term loan bearing interest at a fixed rate of 3.28% per annum, calculated semi-annually not in advance. As at 31 December 2017, the current balance of the fixed rate term loan is $1,215,870 (2016 - $1,329,524)
On 26 April 2017, the Company entered into a fixed rate mortgage agreement with the Bank. The mortgage was used to secure the purchase of land and building in which the Company operates (Note 9). The mortgage was obtained for $1,760,000 bearing interest at a fixed rate of 3.27% per annum, calculated semi-annually not in advance. As at 31 December 2017, the current balance of the mortgage payable was $1,717,976 (2016 - $nil).
On 20 October 2017, the Company entered into a variable rate term loan with the Bank. The term loan was obtained for $3,000,000 bearing interest at a rate of prime plus 2%, calculated semi-annually not in advance. As at 31 December 2017, the current balance of the variable rate term loan payable was $2,815,908 (2016 - $nil).
15
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
The loans are all due payable on demand, and are secured by corporate and personal guarantors, as well as a general security interest in all present and after acquired property registered (1
st
position) at the Personal Property Registry against the Company.
Pursuant to the loan agreements, the Company must maintain a Debt Service Coverage Ratio of a minimum of 1.35 and a Debt to Equity Ratio not exceeding 2:1 to be in effect at all times. Default occurs if breach of the above covenants are not corrected within 15 days of notice having been provided to the Company. As at 31 December 2017, the Company was not in breach of the financial reporting covenants.
In addition to the above covenants, the Company shall not, without prior written consent of the Bank, alter the ownership of any capital stock of the Company. During the year ended 31 December 2017, the Company issued shares from treasury; accordingly, the Company is in breach of this covenant and the bank loans have been classified as a current liability.
12)
Note payable
On 4 March 2015 the Company entered into a Binding Heads of Agreement (the “Agreement’) with Capital Mining Limited (“CMY”) whereby CMY agrees to acquire certain shares in the Company. Upon execution of the Agreement, CMY agrees to make a loan available to the Company in the amount of $500,000. The loan is unsecured, and bears no interest. On 4 March 2016, at the election of the Company, $250,000 of the loan shall be forgiven and the remaining $250,000 of the principal amount shall be repaid to CMY in cash; or, the principal amount will be converted into common shares of the Company at an issue price based on a valuation of all issued and allotted shares of the Company. During the year ended 31 December 2015, the Company elected to accept forgiveness of the $250,000 and repay the remaining $250,000. However, the Company did not repay the $250,000 on 4 March 2016 as required by the Agreement. Accordingly, CMY commenced legal proceedings against the Company to recover the full $500,000 note payable. In an effort to resolve the claim, the Company and CMY agreed to participate in mediation in the Court of Western Australia. On 24 March 2017, the Company and CMY entered into a deed of settlement and agreed to settle the note payable for $250,000.
During the year ended 31 December 2017, the Company entered into an agreement (the “Grass Roots Agreement”) with Grass Roots Pharmaceutical Inc. (“Grass Roots”) to define their respective rights and responsibilities with respect to developing and producing active ingredients for the development, production, and sale of cannabis softgels. Pursuant to the Grass Roots Agreement, Grass Roots shall invest not less than $1,500,000 in developing a production facility on land owned by the Company. The company shall supply bulk cannabis and other ingredients required for the production of cannabis softgels, to be produced by Grass Roots. The Company will also market, sell and deliver cannabis softgels to registered medicinal clients.
Grass Roots funded $250,000 during the year as the initial working capital. As per the Grass Roots Agreement, the Company is required to maintain a minimum cash balance of $250,000 for the life of the arrangement. As such, the cash advanced from Grass Roots is not available for general working capital purposes and is presented as restricted on the statements of financial position.
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Opening balance
|
|
$
|
250,000
|
|
$
|
242,808
|
|
|
Accretion of interest expense
|
|
—
|
|
7,192
|
|
|
Repayment of note payable to Capital Mining Limited
|
|
(250,000
|
)
|
—
|
|
|
Advances of note payable from Grass Roots Pharmaceuticals Inc.
|
|
250,000
|
|
—
|
|
|
Closing Balance
|
|
$
|
250,000
|
|
$
|
250,000
|
|
16
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
13)
Related party transactions
Transactions and balances with related parties not disclosed elsewhere in the financial statements are as follows for the years ended 31 December 2017 and 31 December 2016.
|
|
|
Year ended
|
|
Year ended
|
|
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Production costs
|
|
80,062
|
|
71,543
|
|
|
Salaries and wages of key management
|
|
257,490
|
|
230,281
|
|
|
Rental
|
|
50,778
|
|
152,519
|
|
|
Sub-contracts and consulting
|
|
51,051
|
|
33,518
|
|
|
Professional fees
|
|
38,471
|
|
27,780
|
|
These transactions were in the normal course of operations and are measured at their exchange amount, which is the amount of consideration established and agreed to by the related parties.
Included in accounts payable and accrued liabilities as at 31 December 2017, is $3,420 (2016 - $7,480) owing to related parties. Also included in accounts payable and accrued liabilities are amounts owing to directors of the Company and a company controlled by the Director of the Company of $nil (2016 - $111,943).
Pursuant to a promissory note dated 13 May 2016, the Company was advanced $350,000 from a company controlled by a director of the Company. The promissory note is unsecured and bears interest at a rate of 15% per annum, calculated and compounded monthly. On 16 November 2016, the Company entered into an assignment and novation agreement whereby the principal amount of the loan was assigned to a shareholder of the Company. On 17 November 2016, the promissory note was converted into common shares of the Company (Note 14).
On 1 June 2016, the Company entered into promissory notes with shareholders of the Company. The promissory notes have a principal balance of $175,000, are unsecured, and bear interest at a rate of 15% per annum. Interest totalling $24,345 was paid in connection with the promissory notes during the year ended 31 December 2016. On 17 November 2016, the Company repaid the principal balance of the notes.
14)
Share capital
a)
Authorized:
Unlimited common shares without par value.
Class “A”: Unlimited common voting, non-participating, shares without par value.
Class “C”: Unlimited common non-voting, participating, shares without par value.
Class “D”: Unlimited common non-voting, participating, shares without par value.
b)
Issued or allotted and fully paid:
On 1 November 2016, the Company issued 140 Class A voting common shares for services at a price of $211.67 per share for $29,634.
On 17 November 2016, the Company issued 3,660 Class A voting common shares at a price of $211.67 per share for proceeds of $774,718. As consideration for the shares, the Company received cash proceeds of $427,718 and forgiveness of a promissory note in the amount of $350,000.
17
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
On 31 March 2017, the Company issued 10,669 Class A voting common shares to a company controlled by the father of a director of the Company at a price of $211.42 per share in connection with the acquisition of land and buildings (Note 9).
On 15 May 2017, the Company issued 184 Class A voting common shares at a price of $1,357.71 per share for cash proceeds of $250,000 to an arms-length party.
c)
Summary of stock option and warrant activity
The Company has no stock options or warrants outstanding as at 31 December 2017 or 2016.
15)
Segmented disclosure
The Company operates in only one industry segment, the production and sale of medicinal marihuana, and holds assets only in Canada. All revenues are generated in Canada.
16)
Capital management
The Company’s capital consists of shareholders’ equity. The Company’s objective when managing capital is to maintain adequate levels of funding to support the development of its businesses and maintain the necessary corporate and administrative functions to facilitate these activities. This is done primarily through equity financing, selling assets, and incurring debt. The Company invests all capital that is surplus to its immediate operational needs in short-term, highly liquid, high-grade financial instruments. As at 31 December 2017 total managed capital was comprised of shareholder’s equity of $9,347,244. There were no changes to the Company’s approach to capital management during the period. The Company is not subject to externally imposed capital requirements.
17)
Income taxes
The following table reconciles the expected income taxes at the Canadian statutory income tax rates to the amounts recognized in the statements of financial position as at 31 December 2017 and 31 December 2016:
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Net income and comprehensive income for the year before income tax
|
|
$
|
4,181,732
|
|
$
|
2,254,462
|
|
|
Statutory tax rate
|
|
12.50
|
%
|
13.00
|
%
|
|
Expected income tax expense
|
|
522,717
|
|
293,080
|
|
|
Non-deductible items
|
|
8,464
|
|
515
|
|
|
Income tax paid above the small business limit
|
|
537,781
|
|
99,954
|
|
|
Other
|
|
29,881
|
|
179
|
|
|
Change in deferred tax liability
|
|
—
|
|
(128,821
|
)
|
|
Total income tax expense
|
|
$
|
1,098,843
|
|
$
|
264,907
|
|
Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax values. Deferred tax assets at 31 December 2017 and 31 December 2016 are comprised of the following:
18
BROKEN COAST CANNABIS LTD.
Canadian Dollars
NOTES TO THE FINANCIAL STATEMENTS
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Biological assets and inventory
|
|
$
|
(405,089
|
)
|
$
|
(180,028
|
)
|
|
Property, plant and equipment
|
|
(82,067
|
)
|
(17,718
|
)
|
|
Deferred tax liability
|
|
$
|
(487,156
|
)
|
$
|
(197,746
|
)
|
18)
Contingent liability
In 2014, the Company was named as defendant in a claim regarding an alleged trademark infringement in connection with the Company’s former name, Greenleaf Medicinals Ltd. the amount of the potential damages are unknown; accordingly, no provision has been recorded in these financial statements.
19)
Subsequent events
On 15 January 2018, the Company cancelled 2,000 common non-voting class C shares, and 1,000 common non-voting Class D shares.
On 4 February 2018, a minority shareholder of the Company gave notice to the Board of Directors and other shareholders’ of the Company that they were not given proper notice of the proposed sale transaction described below as per the shareholders’ agreement. Furthermore, the minority shareholder has claimed that had they been given notice they would have exercised a right to acquire Broken Coast. In their notice, the minority shareholder, has reserved all rights to pursue the recovery of damages against the parties to the shareholders’ agreement in connection with this claim. Management asserts that this is a baseless claim, the financial impact of which cannot be determined. Accordingly, no provision has been recorded in the financial statements.
Effective 1 February 2018, the Company was acquired by Aphria Inc. (“Aphria”) in a previously announced acquisition (the “Transaction”) acquiring 99.86% of all of the issued and outstanding Class A common shares of Broken Coast. The closing was effected pursuant to the terms of a definitive share purchase agreement (the “SPA”) dated 13 February 2018 by and among Aphria and the vendors party thereto (collectively, the “Vendors”). Pursuant to the SPA, Aphria has acquired the Class A common shares held by the Vendors for an aggregate purchase price of $217 million, subject to customary adjustments. The purchase price has been satisfied by Aphria issuing to the Vendors an aggregate of 14,373,675 common shares in the capital of Aphria.
20)
Comparative figures
Certain comparative figures have been reclassified to conform to the financial statement presentation for the current year.
19
Exhibit “C”
Audited Financial Statements of Cannan
(See attached)
CANNAN GROWERS INC.
FINANCIAL STATEMENTS
31 DECEMBER 2017 AND 31 DECEMBER 2016
Stated in Canadian Dollars
i
May 9, 2018
Independent Auditor’s Report
To the Shareholders of
Cannan Growers Inc.
We have audited the accompanying financial statements of Cannan Growers Inc., which comprise the statement of financial position as at December 31, 2017 and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers LLP
245 Ouellette Avenue, Suite 300, Windsor, Ontario, Canada N9A 7J4
T: +1 519 985 8900, F: +1 519 258 5457
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Cannan Growers Inc. as at December 31, 2017 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Restated Comparative Information
The financial statements of Cannan Growers Inc. for the year ended December 31, 2016 (prior to the restatement described in Note 4 to the financial statements) were audited by another auditor who expressed an unmodified opinion on those financial statements on February 15, 2018.
As part of our audit of the financial statements of Cannan Growers Inc., for the year ended December 31, 2017, we also audited the adjustments described in Note 4 that were applied to restate the financial statements for the year ended December 31, 2016. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the financial statements of Cannan Growers Inc. for the year ended December 31, 2016 other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the financial statements for the year ended December 31, 2016 taken as a whole.
The statement of financial position as at January 1, 2016 was not audited or reviewed.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Windsor, Ontario, Canada
CANNAN GROWERS INC.
Canadian Funds
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
As at
|
|
As at
|
|
As at
|
|
|
|
|
|
|
31 December
|
|
31 December
|
|
01 January
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
|
|
|
|
|
|
|
|
|
(restated
|
|
restated
|
|
|
|
|
|
|
|
|
note 4)
|
|
note 4)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
12,389
|
|
$
|
165
|
|
$
|
—
|
|
|
Accounts receivable
|
|
|
|
—
|
|
—
|
|
913
|
|
|
|
|
|
|
12,389
|
|
165
|
|
913
|
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
|
|
Investment in equity investee
|
|
(8)
|
|
4,136,359
|
|
3,045,459
|
|
1,783,962
|
|
|
Due from related parties
|
|
(9)
|
|
—
|
|
44,344
|
|
58,375
|
|
|
|
|
|
|
4,136,359
|
|
3,089,803
|
|
1,842,337
|
|
|
|
|
|
|
$
|
4,148,748
|
|
$
|
3,089,968
|
|
$
|
1,843,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
28,596
|
|
$
|
19,642
|
|
$
|
2,500
|
|
|
Due to shareholders
|
|
(9)
|
|
1,197,585
|
|
1,216,512
|
|
1,716,512
|
|
|
|
|
|
|
1,226,181
|
|
1,236,154
|
|
1,719,012
|
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
(12)
|
|
436,607
|
|
70,300
|
|
14,300
|
|
|
|
|
|
|
1,662,788
|
|
1,306,454
|
|
1,733,312
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
(10)
|
|
1,274,818
|
|
1,274,818
|
|
100
|
|
|
Retained earnings
|
|
|
|
1,211,142
|
|
508,696
|
|
109,838
|
|
|
|
|
|
|
2,485,960
|
|
1,783,514
|
|
109,938
|
|
|
|
|
|
|
$
|
4,148,748
|
|
$
|
3,089,968
|
|
$
|
1,843,250
|
|
|
Nature of operations
|
|
|
|
(1)
|
|
|
|
|
|
|
Basis of preparation - Statement of Compliance
|
|
|
|
(2)
|
|
|
|
|
|
The financial statements were approved by the board of directors on 8 May 2018 and were signed on its behalf by:
|
“Roberto Bresciani”
|
|
|
Roberto Bresciani, Director
|
|
The accompany notes form an integral part of these financial statements
1
CANNAN GROWERS INC.
Canadian Funds
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
Year ended
|
|
Year ended
|
|
|
|
|
|
|
31 December
|
|
31 December
|
|
|
|
|
Note
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
(restated
|
|
|
|
|
|
|
|
|
note 4)
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
Income from equity investee
|
|
(8)
|
|
1,090,900
|
|
486,779
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
Accounting fees
|
|
|
|
$
|
19,466
|
|
$
|
22,381
|
|
|
Legal Fees
|
|
|
|
2,615
|
|
9,467
|
|
|
Bank charges and interest
|
|
|
|
66
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
1,068,753
|
|
454,858
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
(12)
|
|
(366,307
|
)
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income and comprehensive income
|
|
|
|
$
|
702,446
|
|
$
|
398,858
|
|
The accompany notes form an integral part of these financial statements
2
CANNAN GROWERS INC.
Canadian Funds
STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
Retained
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
Amount
|
|
earnings
|
|
equity
|
|
|
|
|
|
|
|
|
(restated
|
|
(restated
|
|
|
|
|
|
|
|
|
note 4)
|
|
note 4)
|
|
|
BALANCE 01 JANUARY 2016
|
|
100
|
|
$
|
100
|
|
$
|
109,838
|
|
$
|
109,938
|
|
|
Share split
|
|
9,094
|
|
—
|
|
—
|
|
—
|
|
|
Shares for debt
|
|
2,029
|
|
1,274,718
|
|
—
|
|
1,274,718
|
|
|
Net income and comprehensive income
|
|
—
|
|
—
|
|
398,858
|
|
398,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE 31 DECEMBER 2016
|
|
11,223
|
|
$
|
1,274,818
|
|
$
|
508,696
|
|
$
|
1,783,514
|
|
|
Net income and comprehensive income
|
|
—
|
|
—
|
|
702,446
|
|
702,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE 31 DECEMBER 2017
|
|
11,223
|
|
$
|
1,274,818
|
|
$
|
1,211,142
|
|
$
|
2,485,960
|
|
The accompany notes form an integral part of these financial statements
3
CANNAN GROWERS INC.
Canadian Funds
STATEMENTS OF CASH FLOWS
|
|
|
Year Ended
|
|
Year Ended
|
|
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
(restated
|
|
|
|
|
|
|
note 4)
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income and comprehensive income for the year
|
|
$
|
702,446
|
|
$
|
398,858
|
|
|
|
|
|
|
|
|
|
Adjustments to determine cash flows:
|
|
|
|
|
|
|
Income from equity investee
|
|
(1,090,900
|
)
|
(486,779
|
)
|
|
Deferred income taxes
|
|
366,307
|
|
56,000
|
|
|
|
|
|
|
|
|
|
Net Change in Non-cash Working Capital
|
|
|
|
|
|
|
Amounts receivable
|
|
—
|
|
913
|
|
|
Amounts payable and accrued liabilities
|
|
8,954
|
|
17,141
|
|
|
|
|
|
|
|
|
|
|
|
(715,639
|
)
|
(412,725
|
)
|
|
|
|
|
|
|
|
|
Cash flow used by operations
|
|
(13,193
|
)
|
(13,867
|
)
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
Investment in equity investee
|
|
—
|
|
(424,718
|
)
|
|
|
|
—
|
|
(424,718
|
)
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Advances from related parties
|
|
44,344
|
|
58,376
|
|
|
Advances to related parties
|
|
—
|
|
(37,500
|
)
|
|
Advances from shareholder
|
|
—
|
|
417,874
|
|
|
Advances to shareholders
|
|
(18,927
|
)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
25,417
|
|
438,750
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash
|
|
12,224
|
|
165
|
|
|
Cash position — beginning of year
|
|
165
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash position — end of year
|
|
$
|
12,389
|
|
$
|
165
|
|
The accompany notes form an integral part of these financial statements
4
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
1)
Nature of operations
Cannan Growers Inc. (the Company) was incorporated on 29 August 2013 under the Business Corporations Act of British Columbia and its principle business is to hold investment funds in Canadian Controlled Private Corporations.
The address of the Company’s corporate and administrative office is located #3709 1st Avenue, Burnaby, BC, V5C 3V6 and its operations are within the Province of British Columbia.
2)
Basis of preparation — Statement of Compliance
These Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and related IFRS interpretations Committee (“IFRIC’s”) as issued by the International Accounting Standards Board (“IASB”).
These financial statements were approved by the board of directors and authorized for issue on 8 May 2018.
The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgements, and assumptions that affect that application of the Company’s accounting policies and reported amounts of assets and liabilities, profit and expenses. The areas involving a higher degree of judgements or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 5. The estimates and associated assumptions are based on current facts and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
3)
Summary of significant accounting policies
a)
Basis of measurement
These financial statements have been prepared in Canadian dollars on a historical cost basis. Historical cost is generally based upon the fair value of the consideration given in exchange for assets. These financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Company.
b)
Measurement uncertainty
The preparation of these financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.
The Company’s key estimates relate to the valuation for deferred tax assets and liabilities. Actual results may differ from these estimates.
The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. These estimates require the extensive use of judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
5
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
c)
Financial instruments
All financial instruments must be recognized, initially, at fair value on the statements of financial position. The Company has classified each financial instrument into the following categories: “fair value through profit or loss,” “loans and receivables,” and “other liabilities.” Subsequent measurement of the financial instruments is based on their respective classification. Unrealized gains and losses on fair value through profit or loss instruments are recognized in earnings. The other categories of financial instruments are recognized at amortized cost using the effective interest method. The Company has made the following classifications:
|
Financial Asset or Liability
|
|
Category
|
|
|
Cash and cash equivalents
|
|
Loans and receivables
|
|
|
Due from related parties
|
|
Loans and receivables
|
|
|
Accounts payable and accrued liabilities
|
|
Other liabilities
|
|
|
Due to shareholders
|
|
Other liabilities
|
|
d)
Income taxes
Income tax expense comprises current and deferred tax. Income tax is recognized in the statements of comprehensive income except to the extent it relates to items recognized in equity.
Current income tax
Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred taxes are the taxes expected to be payable or recoverable on the difference between the carrying amounts of assets in the statements of financial position and their corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences between the carrying amounts of assets and their corresponding tax bases. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities:
·
are generally recognized for all taxable temporary differences;
·
are recognized for taxable temporary differences arising on investments in subsidiaries except where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future; and
·
are not recognized on temporary differences that arise from goodwill which is not deductible for tax purposes.
6
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
Deferred tax assets:
·
are recognized to the extent it is probable that taxable profits will be available against which the deductible temporary differences can be utilized; and
·
are reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of an asset to be recovered.
e)
Investment in equity investees
The Company’s investment in Broken Coast Cannabis Ltd. is accounted for using the equity method in accordance with IAS 28. The investment is initially recognized at the historical cost of each purchase of shares and includes transaction costs. After initial recognition, the financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity investee equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of investment in equity investee is tested for impairment in accordance with the policy described below.
f)
Cash
Cash consists of cash deposited in a large Canadian credit union.
g)
Financial liabilities and equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expenses over the corresponding period. The effective interest rate is the rate that exactly discounts estimated future cash payments over the expected life of the financial liability, or, where appropriate, a shorter period.
The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire.
7
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
h)
Impairment of long-lived assets
At each financial position reporting date the carrying amounts of the Company’s long-lived assets are reviewed to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs to sell and value in use, which is the present value of future cash flows expected to be derived from the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in the profit or loss for the period.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.
4)
Restatement of previously reported financial statements
Subsequent to the issuance of the previously reported financial statements for the year ended December 31, 2016 (filed on SEDAR on March 1, 2018) management determined that the income from equity investee and deferred income tax expense should be considered operating income not other comprehensive income. Management also identified a loan which had been settled for shares was shown as a cash payment and receipt within the statements of cash flows.
The following table summarize the effects of the adjustments described above:
Line item on the amended and restated statement of financial position:
|
|
|
As at
|
|
|
|
As at
|
|
|
|
|
31 December
|
|
|
|
31 December
|
|
|
|
|
2016
|
|
Adjustment
|
|
2016
|
|
|
|
|
(previously
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
(restated)
|
|
|
Accumulated other comprehensive income
|
|
557,201
|
|
(557,201
|
)
|
—
|
|
|
Retained earnings
|
|
(48,505
|
)
|
557,201
|
|
508,696
|
|
|
|
|
As at
|
|
|
|
As at
|
|
|
|
|
31 December
|
|
|
|
31 December
|
|
|
|
|
2015
|
|
Adjustment
|
|
2015
|
|
|
|
|
(previously
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
(restated)
|
|
|
Accumulated other comprehensive income
|
|
140,722
|
|
(140,722
|
)
|
—
|
|
|
Retained earnings
|
|
(30,884
|
)
|
140,722
|
|
109,838
|
|
8
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
Line item of the amended and restated statement in changes of equity:
|
|
|
As at
|
|
|
|
As at
|
|
|
|
|
31 December
|
|
|
|
31 December
|
|
|
|
|
2015
|
|
Adjustment
|
|
2015
|
|
|
|
|
(previously
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
(restated)
|
|
|
Accumulated other comprehensive income
|
|
126,422
|
|
(126,422
|
)
|
—
|
|
|
Retained earnings
|
|
(16,584
|
)
|
126,422
|
|
109,838
|
|
Line item of the amended and restated statements of operations:
|
|
|
Year ended
|
|
|
|
Year ended
|
|
|
|
|
31 December
|
|
|
|
31 December
|
|
|
|
|
2016
|
|
Adjustment
|
|
2016
|
|
|
|
|
(previously
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
(restated)
|
|
|
Income
|
|
—
|
|
486,779
|
|
486,779
|
|
|
Income before income taxes
|
|
(31,921
|
)
|
486,779
|
|
454,858
|
|
|
Deferred income tax expense
|
|
—
|
|
(56,000
|
)
|
(56,000
|
)
|
|
Other comprehensive income
|
|
430,779
|
|
(430,779
|
)
|
—
|
|
Line item of the amended and restated statements of cash flows:
|
|
|
Year ended
|
|
|
|
Year ended
|
|
|
|
|
31 December
|
|
|
|
31 December
|
|
|
|
|
2016
|
|
Adjustment
|
|
2016
|
|
|
|
|
(previously
|
|
|
|
|
|
|
|
|
reported)
|
|
|
|
(restated)
|
|
|
Investment in equity investee
|
|
(754,718
|
)
|
350,000
|
|
(424,718
|
)
|
|
Advances from shareholders
|
|
767,874
|
|
(350,000
|
)
|
417,874
|
|
In 2016, the Company advanced amounts to Broken Coast Cannabis Ltd., an equity accounted investee for $350,000. The amounts lent were repaid through additional shares of Broken Coast Cannabis Ltd. shares and therefore represented a non-cash transaction.
5)
Critical accounting judgements and estimates
In the application of the Company’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amount and classification of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognized in the period in
9
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.
The following are the critical judgments and areas involving estimates, that management have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amount recognized in the financial statements.
a)
Key sources of estimation uncertainty
Income taxes
Provisions for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were originally recorded, such differences will affect the tax provisions in the period in which such determination is made.
6)
Accounting standards issued but not yet effective
The following accounting standards have been issued by the International Accounting Standards Board (“IASB”) but are not yet effective for the Company; both the effective date and the expected impact are noted, based on the information currently available.
a)
IFRS 9, Financial Instruments
IFRS 9 was initially issued by the IASB on 12 November 2009 and issued in its completed version in July 2014, and will replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 replaces the multiple rules in IAS 39 with a measurement model for debt instruments having three categories: amortized cost, fair value through OCI and fair value through profit and loss. 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. Financial assets that are equity instruments are measured at fair value through profit and loss unless irrevocably designated as fair value through OCI. The new standard also requires a single impairment method to be used, based on expected credit losses, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for financial years beginning on or after 1 January 2018.
7)
Financial instrument classification and measurement
Financial instruments of the Company carried on the statements of financial position are carried at amortized cost. There are no significant differences between the carrying value of financial instruments and their estimated fair values as at 31 December 2017.
a)
Fair values of financial assets and liabilities
The Company’s financial instruments include cash, due from related parties, accounts payable and accrued liabilities, and due to shareholders. As at 31 December 2017 and 2016, the carrying value of cash is fair value. Due from related parties, accounts payable and accrued liabilities, and due to shareholders equal their fair value due to their short-term nature.
b)
Credit risk
Credit risk arises from the potential that a counter party will fail to perform its obligations. The Company is not exposed to significant credit risk.
10
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
c)
Interest rate risk
Interest rate risk is the risk of losses that arise as a result of changes in contracted interest rates. The Company is not exposed to significant interest rate risk as all amounts are held through non-interest or fixed interest related party loans.
d)
Liquidity risk
Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. As the Company is a vehicle through which other investments are held, its strategy is to minimize the total amount of ongoing liquidity requirements to amounts that can be discharged and funded by related parties.
8)
Investment in Broken Coast Cannabis Ltd.
Broken Coast Cannabis Ltd. (“Broken Coast”), formerly Greenleaf Medicinals Ltd., was incorporated under the Canada Business Corporations Act of British Columbia on 21 February 2013.
The registered and records office of the Broken Coast is 4
th
Floor, 931 Fort Street, Victoria, BC, V8V 3K3.
Broken Coast is a licensed producer of medical marihuana based in Duncan, British Columbia, licensed under the Controlled Drugs and Substances Act (Canada). The principal activities of Broken Coast are the production and sale of medical marihuana as regulated by the Access to Cannabis for Medicinal Purposes Regulations (“ACMPR”).
Broken Coast produces separate financial statements that are prepared in compliance with IFRS. Broken Coast has 135,760 shares outstanding as at 31 December 2017 (31 December 2016 — 124,907) with 33,576 being owned by Cannan Growers Inc. (31 December 2016 — 33,576) for an 25.29% proportionate interest (31 December 2016 —27.54%). The Company purchased 8,510 shares of Broken Coast on March 2, 2015 at which point the Company had significant influence in Broken Coast and began recording it’s investment under the equity method, previously held at cost.
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Current assets
|
|
$
|
5,716,045
|
|
$
|
2,807,299
|
|
|
Non-current assets
|
|
12,797,868
|
|
3,769,744
|
|
|
Current liabilities
|
|
(8,679,513
|
)
|
(2,331,206
|
)
|
|
Non-current liabilities
|
|
(487,156
|
)
|
(197,746
|
)
|
|
Net assets
|
|
$
|
9,347,244
|
|
$
|
4,048,091
|
|
During the year ended 31 December 2017 Broken Coast reported revenue of $9,976,536 (2016 - $4,596,387) and net income of $2,793,479 (2016 - $1,860,735).
|
|
|
Year ended
|
|
Year ended
|
|
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Opening balance
|
|
$
|
3,045,459
|
|
$
|
1,783,962
|
|
|
Investment
|
|
—
|
|
774,718
|
|
|
Income from equity investee
|
|
1,090,900
|
|
486,779
|
|
|
Net income and comprehensive income
|
|
$
|
4,136,359
|
|
$
|
3,045,459
|
|
11
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
9)
Related party transactions
Included in due from related parties as at 31 December 2017, is $nil (2016 - $44,344) owing from related parties. Also included in due to shareholders as at 31 December 2017, is $1,197,585 (2016 - $1,216,512) owing to shareholders of the Company. These balances are non-interest bearing and have been repaid subsequent to year-end.
10)
Share capital
a)
Authorized
Unlimited common shares without par value.
b)
Issued or allotted and fully paid
On 29 August 2013 the company issued 100 shares at $1 for a total of $100.
On 24 February 2016 the company subdivided the shares outstanding 1:91.94 for a total of 9,194 shares.
On 24 February 2016 the company issued 2,029.40 shares at an average price per share of $628.13 in forgiveness of $1,274,718 of related party debt.
11)
Capital management
The Company’s capital consists of shareholders’ equity. The Company’s objective when managing capital is to maintain adequate levels of funding to support the development of its businesses and maintain the necessary corporate and administrative functions to facilitate these activities. This is done primarily through loans from shareholders and related parties. The Company maintains minimal additional capital over required minimum liquidity amounts. As at 31 December 2017 total managed capital was comprised of shareholder’s equity of $2,485,960. There were no changes to the Company’s approach to capital management during the period. The Company is not subject to externally imposed capital requirements.
12)
Income Taxes
The following table reconciles the expected income taxes at the Canadian statutory income tax rates to the amounts recognized in the statements of financial position as at 31 December 2017 and 31 December 2016:
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Net income
|
|
$
|
1,068,753
|
|
$
|
454,858
|
|
|
Statutory tax rate
|
|
26.50
|
%
|
26.50
|
%
|
|
Expected income tax expense
|
|
283,220
|
|
120,537
|
|
|
Other
|
|
77,218
|
|
(73,037
|
)
|
|
Change in deferred tax asset not recognized
|
|
5,869
|
|
8,500
|
|
|
Total income tax expense
|
|
$
|
366,307
|
|
$
|
56,000
|
|
12
CANNAN GROWERS INC.
Canadian Funds
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax values. Deferred tax liabilities at 31 December 2017 and 31 December 2016 are comprised of the following:
|
|
|
31 December
|
|
31 December
|
|
|
|
|
2017
|
|
2016
|
|
|
Non-capital losses carried forward
|
|
$
|
18,769
|
|
$
|
12,900
|
|
|
Temporary difference in investment in equity investee
|
|
(455,376
|
)
|
(83,200
|
)
|
|
Net deferred tax (liability)
|
|
$
|
(436,607
|
)
|
$
|
(70,300
|
)
|
The Company has non-capital loss carry forwards of approximately $70,652 (2016: $48,505) which may be carried forward to apply against future year income tax for Canadian income tax purposes, subject to the final determination by taxation authorities.
13)
Subsequent events
Effective 1 February 2018, the Company and equity investee Broken Coast were acquired by Aphria Inc. (“Aphria”) in a previously announced acquisition (the “Transaction”) acquiring 99.86% of all of the issued and outstanding Class A common shares of Broken Coast. This Transaction included the acquisition of 100% of all the issued and outstanding shares of the Company. The closing was effected pursuant to the terms of a definitive share purchase agreement (the “SPA”) effective 1 February 2018 by and among Aphria and the vendors party thereto (collectively, the “Vendors”). Pursuant to the SPA, Aphria has acquired the Class A common shares held by the Vendors for an aggregate purchase price of approximately $217 million, subject to customary adjustments. The purchase price has been satisfied by Aphria issuing to the Vendors an aggregate of 14,373,675 common shares in the capital of Aphria.
13
Exhibit 99.96
Form 51-102F4
Business Acquisition Report
Item 1 Identity of Company
1.1
Name and Address of Company
Aphria Inc. (the “
Company
” or “
Aphria
”)
245 Talbot St. W., Suite 103
Leamington, ON N8H 1N8
1.2
Executive Officer
For further information, please contact Carl Merton, Chief Financial Officer, by telephone at (519) 398-8800.
Item 2 Details of Acquisition
2.1
Nature of Business Acquired
On March 23, 2018, the Company and Nuuvera Inc. (“
Nuuvera
”) completed their previously announced arrangement (the “
Arrangement
”) under the provisions of the
Business Corporations Act
(Ontario), pursuant to which, among other things, the Company acquired all of the common shares of Nuuvera (the “
Nuuvera Shares
”) not already owned by it.
Under the terms of the Arrangement, each former Nuuvera shareholder is entitled to receive $0.62 in cash, plus 0.3546 of a common share in the capital of Aphria (each whole common share, a “
Common Share
”), for each Nuuvera Share held prior to the Arrangement. The Arrangement was effected by way of a court-approved plan of arrangement and pursuant to the terms of an arrangement agreement between Aphria and Nuuvera dated January 28, 2018, as amended by an arrangement agreement amending agreement dated February 19, 2018.
2.2
Acquisition Date
March 23, 2018.
2.3
Consideration
As consideration for the Arrangement, each former Nuuvera shareholder is entitled to receive $0.62 in cash, plus 0.3546 of a Common Share, for each Nuuvera Share held prior to the Arrangement. The total aggregate cash consideration issued was approximately $54,604,000, funded from cash on hand at Aphria and Nuuvera.
Under the Arrangement, an aggregate of (i) 31,226,910 Common Shares were issued to the former holders of Nuuvera Shares; (ii) 1,280,914 Common Shares were reserved for issuance to former option holders under the Nuuvera stock option plan;
and (iii) 1,668,231 Common Shares were reserved for issuance to the holders of certain common share purchase warrants of Nuuvera.
2.4
Effect on Financial Position
The expected effect of the acquisition on the Company’s financial position is outlined in the unaudited pro forma consolidated financial statements of the Company included with this Business Acquisition Report.
The Company does not have any current plans or proposals for material changes in its business affairs, or the affairs of Nuuvera, which would have a significant effect on the financial performance or position of the Company.
Upon completion of the Arrangement, Nuuvera became a wholly-owned subsidiary of Aphria. The business and operations of Nuuvera have been combined with those of Aphria and are managed concurrently.
2.5
Prior Valuations
To the knowledge of the Company, there has not been any valuation opinion obtained within the last 12 months by the Company or Nuuvera required by securities legislation or a Canadian exchange or market to support the consideration paid by Aphria in connection with the Arrangement.
However, the Company obtained a fairness opinion from Cormark Securities Inc. dated February 19, 2018 attesting to the fairness of the consideration offered by Aphria pursuant to the Arrangement, from a financial point of view. Nuuvera obtained a fairness opinion from Canaccord Genuity Corp. dated February 19, 2018 attesting to the fairness of the consideration received by Nuuvera shareholders (other than Aphria) pursuant to the Arrangement, from a financial point of view.
2.6
Parties to Transaction
Directors and officers of Aphria, together with their affiliates and associates, collectively, held approximately 720,000 shares of Nuuvera at the time of the Arrangement, representing less than 1% of the total issued and outstanding Nuuvera Shares.
Except as set forth above, the Arrangement was not with an “informed person” (as such term is defined in section 1.1 of National Instrument 51-102 -
Continuous Disclosure Obligations
), associate or affiliate of the Company.
2.7
Date of Report
May 30, 2018.
2
Item 3 Financial Statements and Other Information
The following financial statements are attached as schedules to this Business Acquisition Report and form an integral part of this Business Acquisition Report:
Exhibit A — Selected Unaudited Pro Forma Consolidated Financial Data
Attached as Exhibit A are the Unaudited Pro Forma Consolidated Financial Statements of Aphria for the year ended May 31, 2017 and nine month period ended February 28, 2018, by combining the actual results of Aphria with the constructed results of Nuuvera for the period from incorporation on January 30, 2017 to June 30, 2017 and the six months ended December 31, 2017.
The constructed statements of net income for Nuuvera have been constructed with a period from incorporation on January 30, 2017 to June 30, 2017. To arrive at this constructed period, Nuuvera’s six months ended December 31, 2017 were removed from the period from incorporation January 30, 2017 to December 31, 2017. Similarly, the constructed results for the nine month period ended February 28, 2018 were calculated by combining Aphria’s actual results from June 1, 2017 to February 28, 2018 with the constructed results for Nuuvera for the six months ended December 31, 2017.
All giving the effect to the successful completion of the Arrangement and all other significant acquisitions completed during the relevant period as if same occurred on June 1, 2016.
Exhibit B - Audited Financial Statements of Nuuvera
Attached as Exhibit B hereto are the audited financial statements of Nuuvera as at and for the period from incorporation on January 30, 2017 to December 31, 2017 and the notes thereto, together with the independent auditor’s report thereon.
Caution Regarding Unaudited Pro Forma Condensed Combined Financial Statements
This Business Acquisition Report contains the unaudited pro forma consolidated financial statements of the Company comprised of the pro forma consolidated statements of net income of the Company for the nine months ended February 28, 2018 and the year ended May 31, 2017, giving effect to the Arrangement and all other significant acquisitions completed during the relevant period.
Such unaudited pro forma condensed combined financial statements have been prepared using certain of the Company’s and Nuuvera’s respective historical financial statements as more particularly described in the notes to such unaudited pro forma consolidated financial statements. In preparing such unaudited pro forma consolidated financial statements, the Company has not independently verified the financial statements of Nuuvera that were used to prepare the unaudited pro forma condensed combined financial statements. The historical unaudited consolidated and historical audited consolidated financial information has been adjusted in the unaudited pro forma consolidated financial statements to give effect to events that are: (i) directly attributable to the pro forma events, for which there are
3
firm commitments and for which the complete financial effects are objectively determinable and (ii) with respect to the unaudited pro forma consolidated statements of earnings, expected to have a continuing impact on the combined company’s results. As such, the impact from merger-related expenses is not included in the unaudited pro forma condensed combined statements of earnings. The unaudited pro forma consolidated financial statements do not reflect any cost savings from operational efficiencies or synergies that could result from the Arrangement or for liabilities that may result from integration planning. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not necessarily reflect what the combined company’s financial condition and results of operations would have been had the Arrangement occurred on the dates indicated.
They also may not be useful in predicting the future financial condition and results of the operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The pro forma adjustments are based on preliminary estimates of the fair value of the consideration paid and the fair value of the assets acquired and liabilities assumed, currently available information and certain assumptions that the Company believes are reasonable in the circumstances, as described in the notes to the unaudited pro forma condensed combined financial statements. As a result of these factors, the actual adjustments will differ from the pro forma adjustments, and the differences may be material.
Forward-Looking Statements
This Business Acquisition Report may contain certain “forward-looking statements” or “forward-looking information” under applicable securities laws. Forward-looking terms such as “may,” “will,” “could,” “should,” “would,” “plan,” “potential,” “intend,” “anticipate,” “project,” “target,” “believe,” “estimate” or “expect” and other words, terms and phrases of similar nature are often intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and represent management’s best judgment based on facts and assumptions that management considers reasonable.
Any such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results and expectations to differ materially from the anticipated results or expectations expressed in this Business Acquisition Report. The Company cautions readers that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. You are referred to the risk factors described in the Company’s most recent annual Management’s Discussion and Analysis, Annual Information Form and other documents on file with the Canadian securities regulatory authorities, which are available online under the Company’s SEDAR profile at www.sedar.com or on the Company’s website at www.aphria.com. The forward-looking statements and information contained in this Business Acquisition Report represent the Company’s views only as of today’s date. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise, other than as
4
required by law, rule or regulation. You should not place undue reliance on forward-looking statements.
5
Exhibit “A”
Selected Unaudited Pro Forma Consolidated Financial Data
(See attached)
Aphria Inc.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MAY 31, 2017 AND NINE MONTHS ENDED FEBRUARY 28, 2018
(Expressed in Canadian Dollars, unless otherwise noted)
A
phria Inc.
Pro Forma Consolidated Statements of Financial Position
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
|
|
|
Aphria
|
|
Nuuvera
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
December 31,
|
|
|
|
Pro forma
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Note 5
|
|
adjustments
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,435
|
|
$
|
44,121
|
|
(k)
|
|
$
|
(35,000
|
)
|
$
|
122,597
|
|
|
|
|
|
|
|
|
(l)
|
|
48,645
|
|
|
|
|
|
|
|
|
|
|
(m)
|
|
(54,604
|
)
|
|
|
|
Marketable securities
|
|
54,248
|
|
—
|
|
|
|
—
|
|
54,248
|
|
|
Accounts receivable
|
|
4,362
|
|
—
|
|
|
|
—
|
|
4,362
|
|
|
Other current assets
|
|
10,133
|
|
1,087
|
|
|
|
—
|
|
11,220
|
|
|
Inventory
|
|
11,761
|
|
232
|
|
|
|
—
|
|
11,993
|
|
|
Biological assets
|
|
3,101
|
|
—
|
|
|
|
—
|
|
3,101
|
|
|
Due from related parties
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Land available for sale
|
|
40,851
|
|
—
|
|
|
|
—
|
|
40,851
|
|
|
Current portion of convertible notes receivable
|
|
1,921
|
|
—
|
|
|
|
—
|
|
1,921
|
|
|
Promissory note receivable
|
|
33,395
|
|
—
|
|
|
|
—
|
|
33,395
|
|
|
|
|
279,207
|
|
45,440
|
|
|
|
(40,959
|
)
|
283,688
|
|
|
Capital assets
|
|
236,504
|
|
3,008
|
|
|
|
—
|
|
239,512
|
|
|
Intangible assets
|
|
93,445
|
|
18,913
|
|
|
|
—
|
|
112,358
|
|
|
Convertible notes receivable
|
|
14,765
|
|
—
|
|
|
|
—
|
|
14,765
|
|
|
Interest in equity investee
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Long-term investments
|
|
86,789
|
|
—
|
|
(q)
|
|
(26,031
|
)
|
60,758
|
|
|
Deferred tax asset
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Goodwill
|
|
143,907
|
|
10,621
|
|
(j)
|
|
(10,621
|
)
|
583,485
|
|
|
|
|
|
|
|
|
(s)
|
|
439,578
|
|
|
|
|
|
|
$
|
854,617
|
|
$
|
77,982
|
|
|
|
$
|
361,967
|
|
$
|
1,294,566
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
22,495
|
|
$
|
3,075
|
|
|
|
$
|
—
|
|
25,570
|
|
|
Due to related parties
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Income taxes payable
|
|
2,719
|
|
—
|
|
|
|
—
|
|
2,719
|
|
|
Deferred revenue
|
|
4,100
|
|
—
|
|
|
|
—
|
|
4,100
|
|
|
Current portion of promissory note payable
|
|
555
|
|
—
|
|
|
|
—
|
|
555
|
|
|
Current portion of long-term debt
|
|
8,009
|
|
—
|
|
|
|
—
|
|
8,009
|
|
|
Current portion of derivative liability
|
|
6,740
|
|
—
|
|
|
|
—
|
|
6,740
|
|
|
Non-controlling interest liability
|
|
—
|
|
35,000
|
|
(k)
|
|
(35,000
|
)
|
—
|
|
|
|
|
44,618
|
|
38,075
|
|
|
|
(35,000
|
)
|
47,693
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
623
|
|
—
|
|
|
|
—
|
|
623
|
|
|
Long-term debt
|
|
29,473
|
|
—
|
|
|
|
—
|
|
29,473
|
|
|
Derivative liability
|
|
10,110
|
|
—
|
|
|
|
—
|
|
10,110
|
|
|
Deferred tax liability
|
|
23,898
|
|
2,978
|
|
|
|
—
|
|
26,876
|
|
|
|
|
108,722
|
|
41,053
|
|
|
|
(35,000
|
)
|
114,775
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
695,135
|
|
71,401
|
|
(g)
|
|
(71,401
|
)
|
1,106,393
|
|
|
|
|
|
|
|
|
(n)
|
|
411,258
|
|
|
|
|
Warrants
|
|
445
|
|
—
|
|
(p)
|
|
4,944
|
|
5,389
|
|
|
Share-based payment reserve
|
|
10,999
|
|
3,020
|
|
(h)
|
|
(3,020
|
)
|
25,512
|
|
|
|
|
|
|
|
|
(o)
|
|
14,513
|
|
|
|
|
Accumulated other comprehensive loss
|
|
(801
|
)
|
—
|
|
|
|
—
|
|
(801
|
)
|
|
Non-controlling interest
|
|
9,799
|
|
—
|
|
|
|
—
|
|
9,799
|
|
|
Retained earnings (deficit)
|
|
30,318
|
|
(37,492
|
)
|
(i)
|
|
37,492
|
|
33,499
|
|
|
|
|
|
|
|
|
(r)
|
|
3,181
|
|
|
|
|
|
|
745,895
|
|
36,929
|
|
|
|
396,967
|
|
1,179,791
|
|
|
|
|
$
|
854,617
|
|
$
|
77,982
|
|
|
|
$
|
361,967
|
|
$
|
1,294,566
|
|
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements
2
A
phria Inc.
Pro Forma Consolidated Statements of Net Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
Aphria
|
|
Broken Coast
|
|
Cannan
|
|
Nuuvera Inc.
|
|
|
|
|
|
|
|
|
|
|
nine months
|
|
six months
|
|
six months
|
|
six months
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
|
Pro forma
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2017
|
|
2017
|
|
Note 5
|
|
adjustments
|
|
Pro forma
|
|
|
Revenue
|
|
$
|
24,891
|
|
$
|
3,717
|
|
$
|
—
|
|
$
|
39
|
|
|
|
$
|
—
|
|
$
|
28,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
6,447
|
|
3,239
|
|
—
|
|
—
|
|
(f)
|
|
(1,749
|
)
|
7,937
|
|
|
Gross profit before fair value adjustments
|
|
18,444
|
|
478
|
|
—
|
|
39
|
|
|
|
1,749
|
|
20,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
7,250
|
|
—
|
|
—
|
|
—
|
|
(f)
|
|
1,749
|
|
8,999
|
|
|
Fair value adjustment on growth of biological assets
|
|
(11,481
|
)
|
(3,578
|
)
|
—
|
|
—
|
|
|
|
—
|
|
(15,059
|
)
|
|
Gross profit
|
|
22,675
|
|
4,056
|
|
—
|
|
39
|
|
|
|
—
|
|
26,770
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
6,502
|
|
1,187
|
|
1
|
|
7,231
|
|
|
|
—
|
|
14,921
|
|
|
Share-based compensation
|
|
10,668
|
|
—
|
|
—
|
|
2,404
|
|
|
|
—
|
|
13,072
|
|
|
Selling, marketing and promotion
|
|
7,758
|
|
350
|
|
—
|
|
137
|
|
|
|
—
|
|
8,245
|
|
|
Amortization
|
|
1,270
|
|
231
|
|
—
|
|
843
|
|
(b)
|
|
4,250
|
|
6,594
|
|
|
Research and development
|
|
280
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
280
|
|
|
|
|
26,478
|
|
1,768
|
|
1
|
|
10,615
|
|
|
|
4,250
|
|
43,112
|
|
|
|
|
(3,803
|
)
|
2,288
|
|
(1
|
)
|
(10,576
|
)
|
|
|
(4,250
|
)
|
(16,342
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
689
|
|
19
|
|
—
|
|
—
|
|
|
|
—
|
|
708
|
|
|
Foreign exchange gain
|
|
69
|
|
—
|
|
—
|
|
11
|
|
|
|
—
|
|
80
|
|
|
Loss on marketable securities
|
|
(2,193
|
)
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
(2,193
|
)
|
|
Loss on sale of capital assets
|
|
(191
|
)
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
(191
|
)
|
|
Gain on dilution of ownership in equity investee
|
|
7,535
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
7,535
|
|
|
Loss from equity investee
|
|
(9,281
|
)
|
—
|
|
744
|
|
—
|
|
(d)
|
|
(744
|
)
|
(9,281
|
)
|
|
Gain on sale of equity investee
|
|
26,347
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
26,347
|
|
|
Deferred gain on sale of intellectual property recognized
|
|
700
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
700
|
|
|
Finance income, net
|
|
3,533
|
|
(61
|
)
|
—
|
|
53
|
|
|
|
—
|
|
3,525
|
|
|
Unrealized gain on embedded derivatives
|
|
576
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
576
|
|
|
Gain on long-term investments
|
|
39,701
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
39,701
|
|
|
Unrealized loss on derivative liability
|
|
(16,850
|
)
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
(16,850
|
)
|
|
Transaction costs
|
|
(4,253
|
)
|
—
|
|
—
|
|
(3,080
|
)
|
|
|
—
|
|
(7,333
|
)
|
|
Change in fair value of non-controlling interest liability
|
|
—
|
|
—
|
|
—
|
|
(21,376
|
)
|
|
|
—
|
|
(21,376
|
)
|
|
|
|
46,382
|
|
(42
|
)
|
744
|
|
(24,392
|
)
|
|
|
(744
|
)
|
43,324
|
|
|
Income before income taxes
|
|
42,579
|
|
2,246
|
|
743
|
|
(34,968
|
)
|
|
|
(4,994
|
)
|
26,982
|
|
|
Income taxes
|
|
8,139
|
|
720
|
|
102
|
|
(548
|
)
|
(c)
|
|
(1,126
|
)
|
7,185
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
(102
|
)
|
|
|
|
Net income
|
|
$
|
34,440
|
|
$
|
1,526
|
|
$
|
641
|
|
$
|
(34,420
|
)
|
|
|
$
|
(3,766
|
)
|
$
|
19,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
147,274,372
|
|
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
192,874,957
|
|
|
|
|
|
|
|
|
|
|
|
|
(n)
|
|
31,226,910
|
|
|
|
|
Weighted average number of common shares - diluted
|
|
153,189,773
|
|
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
200,030,896
|
|
|
|
|
|
|
|
|
|
|
|
|
(n)
|
|
31,226,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(o)
|
|
1,240,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
Earnings per share - diluted
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements
3
A
phria Inc.
Pro Forma Consolidated Statements of Net Income
(Unaudited — In thousands of Canadian dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Nuuvera
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aphria
|
|
Broken Coast
|
|
Cannan
|
|
incorporation
|
|
Avanti
|
|
Avalon
|
|
|
|
|
|
|
|
|
|
|
year ended
|
|
year ended
|
|
year ended
|
|
January 30,
|
|
year ended
|
|
year ended
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
June 30,
|
|
June 30,
|
|
2017 to June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
Pro forma
|
|
|
|
|
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
Note 5
|
|
adjustments
|
|
Pro forma
|
|
|
Revenue
|
|
$
|
20,438
|
|
$
|
6,193
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
26,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
4,585
|
|
6,387
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(f)
|
|
(3,449
|
)
|
7,523
|
|
|
Gross profit before fair value adjustments
|
|
15,853
|
|
(194
|
)
|
—
|
|
—
|
|
13
|
|
—
|
|
|
|
3,449
|
|
19,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
3,561
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(f)
|
|
3,449
|
|
7,010
|
|
|
Fair value adjustment on growth of biological assets
|
|
(5,005
|
)
|
(6,387
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
(11,392
|
)
|
|
Gross profit
|
|
17,297
|
|
6,193
|
|
—
|
|
—
|
|
13
|
|
—
|
|
|
|
—
|
|
23,503
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
4,678
|
|
1,594
|
|
23
|
|
3,042
|
|
2,013
|
|
7
|
|
|
|
—
|
|
11,357
|
|
|
Share-based compensation
|
|
2,399
|
|
30
|
|
—
|
|
561
|
|
—
|
|
—
|
|
|
|
—
|
|
2,990
|
|
|
Selling, marketing and promotion
|
|
6,664
|
|
561
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
7,225
|
|
|
Amortization
|
|
956
|
|
395
|
|
—
|
|
—
|
|
269
|
|
—
|
|
(b)
|
|
8,500
|
|
10,120
|
|
|
Research and development
|
|
492
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
492
|
|
|
Impairment of intangible asset
|
|
3,500
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
3,500
|
|
|
|
|
18,689
|
|
2,580
|
|
23
|
|
3,603
|
|
2,282
|
|
7
|
|
|
|
8,500
|
|
35,684
|
|
|
|
|
(1,392
|
)
|
3,613
|
|
(23
|
)
|
(3,603
|
)
|
(2,269
|
)
|
(7
|
)
|
|
|
(8,500
|
)
|
(12,181
|
)
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
512
|
|
19
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
531
|
|
|
Foreign exchange gain
|
|
483
|
|
—
|
|
—
|
|
517
|
|
(10
|
)
|
—
|
|
|
|
—
|
|
990
|
|
|
Gain on marketable securities
|
|
209
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
209
|
|
|
Gain on sale of capital assets
|
|
11
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
11
|
|
|
Gain from equity investee
|
|
210
|
|
—
|
|
1,010
|
|
—
|
|
—
|
|
—
|
|
(d)
|
|
(1,010
|
)
|
210
|
|
|
Finance income, net
|
|
728
|
|
(128
|
)
|
—
|
|
14
|
|
(22
|
)
|
—
|
|
|
|
—
|
|
592
|
|
|
Gain on long-term investments
|
|
3,571
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(r)
|
|
3,181
|
|
6,752
|
|
|
|
|
5,724
|
|
(109
|
)
|
1,010
|
|
531
|
|
(32
|
)
|
—
|
|
|
|
2,171
|
|
9,295
|
|
|
Income before income taxes
|
|
4,332
|
|
3,504
|
|
987
|
|
(3,072
|
)
|
(2,301
|
)
|
(7
|
)
|
|
|
(6,329
|
)
|
(2,886
|
)
|
|
Income taxes
|
|
134
|
|
949
|
|
132
|
|
—
|
|
—
|
|
—
|
|
(c)
|
|
(2,252
|
)
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
|
(132
|
)
|
|
|
|
Net income
|
|
$
|
4,198
|
|
$
|
2,555
|
|
$
|
855
|
|
$
|
(3,072
|
)
|
$
|
(2,301
|
)
|
$
|
(7
|
)
|
|
|
$
|
(3,945
|
)
|
$
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
104,341,319
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
149,941,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(n)
|
|
31,226,910
|
|
|
|
|
Weighted average number of common shares - diluted
|
|
111,427,893
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
14,373,675
|
|
150,654,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(n)
|
|
31,226,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(t)
|
|
(6,373,905
|
)
|
|
|
|
Earnings per share - basic
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
Earnings per share - diluted
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements
4
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
1.
Basis of presentation
The accompanying unaudited pro forma consolidated financial statements are based on the historical financial statements of Aphria Inc. (“Aphria”), Nuuvera Corp. (“Nuuvera”), Broken Coast Cannabis Ltd. (“Broken Coast”), and Cannan Growers Inc. (“Cannan”), consolidated and adjusted to give effect to the acquisition by Aphria, of all of the issued and outstanding shares of Nuuvera, Cannan, and 99.86% of the issued and outstanding shares of Broken Coast (the “Acquisitions”). They are presented for illustrative purposes only and may not be indicative of the consolidated company’s financial position or results of operations that would have actually occurred had the Acquisitions been completed at or as of the dates indicated, nor is it indicative of our future operating results or financial position.
The unaudited pro forma consolidated statements of financial position as at February 28, 2018 assumes the Acquisition of Nuuvera was completed as of February 28, 2018. The historical statement of financial position of Aphria as at February 28, 2018 includes the effect of the acquistions of Broken Coast and Cannan. The unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 and the nine month period ended February 28, 2018 assumes that the Acquisitions took place at June 1, 2016, the beginning of the financial year.
The historical consolidated financial information has been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the Acquisitions, (2) objectively determinable, and (3) with respect to the statements of net income, expected to have a continuing impact on the consolidated results. The unaudited pro forma consolidated financial statements was based on and should be read in conjunction with the following historical financial statements and accompanying notes of Nuuvera, for the applicable periods, which are included elsewhere in the business acquisition report, and the financial statements of Aphria, Broken Coast and Cannan, which have been previously filed on SEDAR:
·
Historical audited consolidated financial statements of Aphria for the year ended May 31, 2017 and the related notes;
·
Historical audited financial statements of Nuuvera for the period from incorporation January 30, 2017 to December 31, 2017 and the related notes;
·
Historical audited financial statements of Broken Coast for the year ended December 31, 2017 and the related notes;
·
Historical audited financial statements of Cannan for the year ended December 31, 2017 and the related notes.
The unaudited pro forma consolidated financial statements is presented for informational purposes only. The unaudited pro forma consolidated financial statements may not be indicative of the financial position that would have prevailed and operating results that would have been obtained if the Acquisitions had been completed on those dates or for the periods presented, nor do they claim to project the financial position or operating results which may be obtained in the future. The unaudited pro forma consolidated financial statements are not forecast or projection of future results. The actual financial position and results of operation of Aphria for any period following the closing of the Acquisitions will vary from the amounts set forth in the unaudited pro forma consolidated financial statements and such variations may be material. Any potential integration gains that may be realized and integration costs that may be incurred upon completion of the Acquisitions, have been excluded from the unaudited pro forma consolidated financial statements.
5
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
In the opinion of management, the accounting policies used in the preparation of the unaudited pro forma consolidated financial position as at February 28, 2018, the unaudited pro forma consolidated interim statements of net income for the nine months ended February 28, 2018 and for the year ended May 31, 2017, include all the adjustments necessary for the fair presentation of the Acquisitions in accordance with the recognition and measurement principles of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and incorporate the significant accounting policies expected to be used to prepare Aphria’s consolidated financial statements. Certain financial statement line items included in Nuuvera, Broken Coast and Cannan’s historical presentation have been disaggregated or condensed to conform to corresponding financial statement line items included in Aphria’s historical presentation.
The unaudited pro forma consolidated financial statements have been prepared using the acquisition method of accounting in accordance with
IFRS 3, Business Combinations
(“IFRS 3”). Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets and liabilities assumed based on their estimated fair values. The pro forma adjustments related to the purchase price allocation in connection with the Acquisitions are preliminary and based upon information obtained to date and assumptions that we believe are reasonable. The actual purchase accounting adjustments described in the accompanying notes will be made after the closing of the Acquisitions and finalized as information becomes available, but limited to one year after the acquisition date, and may differ from those reflected in the unaudited pro forma consolidated financial statements presented below. The actual amounts that we record are based on our final allocation of the purchase price, after giving effect to the final purchase price adjustments at the closing date, and our final assessment of fair values may differ materially from those recorded in our unaudited pro forma consolidated financial statements. The unaudited pro forma consolidated statements of net income do not reflect any non-recurring charges or gains that we may record in connection with the Acquisitions.
The unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 has been derived as follows:
(i)
the consolidated statements of income and comprehensive income of Aphria for the year ended May 31, 2017 from the audited consolidated financial statements of Aphria as at May 31, 2017 and for the year then ended;
(ii)
the consolidated statement of loss and comprehensive loss for the period from incorporation January 30, 2017 to December 31, 2017, which was adjusted to remove the unaudited consolidated statement of loss and comprehensive loss for the six months ended December 31, 2017;
(iii)
the statement of comprehensive income of Broken Coast for the year ended December 31, 2016 from the audited financial statements of Broken Coast as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2016 and to add the unaudited financial statement of comprehensive income for the six month period ended June 30, 2017; and
(iv)
the statement of comprehensive income of Cannan for the year ended December 31, 2016 from the audited financial statements of Cannan as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2016 and to add the unaudited statement of comprehensive income for the six month period ended June 30, 2017.
The unaudited pro forma consolidated statements of net income for the nine month period ended February 28, 2018 has been derived as follows:
(i)
the unaudited condensed interim consolidated statements of income and comprehensive income of Aphria for the nine month period ended February 28, 2018 from the unaudited condensed interim consolidated financial statements of Aphria as at and for the periods ended February 28, 2018;
(ii)
the consolidated statement of loss and comprehensive loss for the six months ended December 31, 2017;
(i)
the statement of comprehensive income of Broken Coast for the year ended December 31, 2017 from the audited financial statements of Broken Coast as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2017; and
6
A
phria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
(ii)
the statement of comprehensive income of Cannan for the year ended December 31, 2017 from the audited financial statements of Cannan as at and for the year ended December 31, 2017, which was adjusted to remove the unaudited statement of comprehensive income for the six month period ended June 30, 2017.
The unaudited pro forma consolidated statements of net income for the year ended May 31, 2017 include the results Nuuvera for the period from incorporation January 30, 2017 to June 30, 2017, Broken Coast and Cannan for the year ended June 30, 2017. The unaudited pro forma consolidated statements of net income for the nine month period ended February 28, 2018 include the results Nuuvera, Broken Coast and Cannan for the six months ended December 31, 2017.
The unaudited pro forma consolidate financial statements are only a summary and are not necessarily indicative of the results of Aphria’s, Nuuvera, Broken Coast’s or Cannan’s future operations.
2.
Description of Transactions
Effective February 1, 2018, Aphria entered into a definitive purchase agreement and acquired 99.86% of the outstanding shares of Broken Coast, through a direct acquisition of 132,576.59 shares of Broken Coast and the acquisition of 100% of the shares of Cannan which owned the remaining 33,576 outstanding shares of Broken Coast. Pursuant to the terms and conditions set forth in the definitive agreement between Aphria, Broken Coast and Cannan that was entered into effective February 1, 2017 (the “Transaction”). The total consideration transferred was $216,899 to be paid in 14,373,675 Aphria shares issued at a deemed price of $15.09 representing the 20-day VWAP of Aphria at market close on the business day immediately prior to signing of the parties initial non-binding letter of intent.
On March 23, 2018, Aphria completed the previously announced definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which Aphria acquired, by way of a court-approved plan of arrangement unther the Business Corporations Act (Ontario) (the “Transaction”) all of the issued and outstanding common shares not already owned (on a fully diluted basis) of Nuuvera for a total consideration of $0.62 in cash plus 0.3546 of an Aphria share for each Nuuvera share held which. All of Nuuvera’s outstanding options were exchanged for an equivalent option granted pursuant to Aphria’s stock option plan (each, a “Replacement Option”) to purchase from Aphria the number of common shares (rounded to the nearest whole share) equal to: (i) the exchange ration multiplied by (ii) the number of Nuuvera shares subject to such Nuuvera Option. Each such Replacement Option shall provide for an exercise price per common share (rounded to the nearest whole cent) equal to: (i) the exercise price per Nuuvera share purchasable pursuant to such Nuuvera Option; divided by (ii) the exchange ratio.
3.
Significant accounting policies
The accounting policies used in preparing the unaudited pro forma consolidated financial statements are set out in Aphria’s audited consolidated financial statements for the year ended May 31, 2017 and as described in Aphria’s unaudited condensed interim consolidated financial statements for the three months and nine months ended February 28, 2018. The financial statements of Nuuvera, Broken Coast and Cannan (which form the basis of the unaudited pro forma consolidated financial statements) were prepared in accordance with IFRS.
The pro forma consolidated financial statements do not include all the information and disclosures required by IFRS for annual financial statements and should be read in conjunction with the financial statements of Aphria, Broken Coast, and Cannan, as weel as the financial statements of Nuuvera, that are included herein. These pro forma statements have been prepared in thousands of Canadian dollars unless otherwise noted.
7
A
phria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
4.
Fair value of consideration transferred in connection with the Acquisitions
The following table summarizes the purchase price for the Broken Coast and Cannan Acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Number of
|
|
|
|
preliminary fair
|
|
|
|
|
Note
|
|
shares
|
|
Share price
|
|
value
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
(i)
|
|
14,373,675
|
|
$
|
14.90
|
|
214,168
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
1,956
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
305
|
|
|
Other current assets
|
|
|
|
|
|
|
|
43
|
|
|
Inventory
|
|
|
|
|
|
|
|
2,149
|
|
|
Biological assets
|
|
|
|
|
|
|
|
767
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
12,938
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
11,730
|
|
|
Corporate website
|
|
|
|
|
|
|
|
39
|
|
|
Licence
|
|
|
|
|
|
|
|
6,320
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
1,930
|
|
|
Trademark & brands
|
|
|
|
|
|
|
|
72,490
|
|
|
Goodwill
|
|
|
|
|
|
|
|
142,707
|
|
|
Total assets
|
|
|
|
|
|
|
|
253,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
8,475
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
632
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
24,185
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
5,914
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
39,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
214,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
Share price based on the price of the shares on February 1, 2018.
8
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
The following table summarizes the purchase price for the Nuuvera Acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Number of
|
|
|
|
preliminary fair
|
|
|
|
|
Note
|
|
shares
|
|
Share price
|
|
value
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
54,604
|
|
|
Shares issued
|
|
(i)
|
|
31,226,910
|
|
$
|
13.17
|
|
411,258
|
|
|
Warrants outstanding
|
|
(ii)
|
|
1,345,866
|
|
|
|
4,944
|
|
|
Replacement options issued
|
|
(ii)
|
|
1,280,914
|
|
|
|
14,513
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
485,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of previously held investment
|
|
|
|
|
|
|
|
|
|
|
Shares held by Aphria
|
|
(i)
|
|
1,878,738
|
|
$
|
14.92
|
|
28,028
|
|
|
Warrants held by Aphria
|
|
(ii)
|
|
322,365
|
|
|
|
1,184
|
|
|
Total fair value of previously held investment
|
|
|
|
|
|
|
|
29,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
57,766
|
|
|
Other current assets
|
|
|
|
|
|
|
|
1,087
|
|
|
Inventory
|
|
|
|
|
|
|
|
232
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
3,008
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
18,913
|
|
|
Total assets
|
|
|
|
|
|
|
|
81,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
3,075
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
2,978
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
6,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
|
|
|
|
|
74,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
(iii)
|
|
|
|
|
|
$
|
439,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
Share price based on the price of the shares on March 23, 2018, shares held by Aphria include the cash consideration paid.
(ii)
Options and warrants valued using the Black Scholes option pricing model using the following assumptions: the risk-free rate of 2.19%; expected life 1 – 10 years; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and the exercise price of $2.52 – $20.30.
(iii)
A preliminary fair value estimate of $439,578 has been allocated to goodwill acquired, which primarily consisting of: supply agreements, customer list, and goodwill.
9
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
5.
Pro forma adjusments in connection with the Acquisitions
This note should be read in conjunction with Note 1
Basis of presentation
; Note 2
Description of transaction
; and Note 4
Fair value of consideration transferred in connection with the Acquisitions
. The following summarizes the pro forma adjustments in connection with the Acquisitions to give effect to the acquisitions as if it had occurred on February 28, 2018 for purposes of the pro forma consolidated statements of financial position, on June 1, 2016 for purposes of the pro forma consolidated statements of net income for the year ended May 31, 2017, and for the nine months ended February 28, 2018.
Broken Coast and Cannan
(a)
An increase in weighted average number of common shares basic and diluted to record the 14,373,675 shares issued for the Acquisitions.
(b)
An increase in amortization of $8,500 for the year ended May 31, 2017 and $4,250 for the nine months ended February 28, 2018 representing the amortization of the preliminary fair value of the intangible assets acquired from the Acquisitions.
(c)
A reduction in income tax expense of $2,252 for the year ended May 31, 2017 and $1,126 for the nine months ended February 28, 2018 representing the deferred tax impact of the the increase in amortization of the preliminary fair value of intangible assets acquired from the Acquisitions.
(d)
A reduction in the gain from equity investee of $1,010 for the year ended June 30, 2017 and $744 for the six months ended December 31, 2017 to eliminate Cannan’s share of the income of Broken Coast.
(e)
reduction in income tax expense of $132 for the year ended May 31, 2017 and $102 for the six months ended November 30, 2017 to eliminate the deferred tax expense recognized on Cannan’s share of the income in Broken Coast.
(f)
A reduction in production costs of $1,749 for the six months ended December 31, 2017 and $3,449 for the year ended June 30, 2017, with a corresponding increase in fair value adjustment on sale of inventory representing the expected fair value adjustment included in cost of inventory sold, to align the accounting presentation of Broken Coast with Aphria.
Nuuvera
(g)
A reduction in share capital of $71,401 to eliminate the historical share capital of Nuuvera.
(h)
A reduction in share-based payment reserve of $3,020 to eliminate the historical share-based payment reserve of Nuuvera.
(i)
An increase in retained earnings of $37,492 to eliminate the historical deficit of Nuuvera.
(j)
A reduction in goodwill of $10,621 to eliminate the historical goodwill from Nuuvea Acquisitions.
(k)
A reduction in non-controlling interest liability and cash and cash equivalents of $35,000 for the completion of the acquisition of Avanti by Nuuvera.
(l)
An increase in cash and cash equivalents of $48,645 representing the proceeds net of commission received from the closing of the Nuuvera bought deal, prior to completion of the Nuuvera Acquisition.
(m)
A reduction in cash of $54,604 to record the cash paid as part of the Nuuvera Acquisition. (n) An increase in share capital of $411,258 to record the 331,226,910 shares issued for the Nuuvera Acquisition.
(o)
An increase in share-based payment reserve of $14,513 to record the 1,280,914 replacement options issued for the Nuuvera Acquisition.
(p)
An increase in warrants of $4,944 to record the 1,345,866 replacement warrants issued for the Nuuvera Acquisition.
(q)
A reduction in long-term investments of $26,031 to remove the carrying value of the long-term investment in Nuuvera as at February 28, 2018.
(r)
An increase in retained earnings of $3,181 representing the fair value increase of the investment in Nuuvera as at the acquisition date.
10
Aphria Inc.
Notes to the unaudited pro forma consolidated financial statements
(Unaudited — in thousands of Canadian dollars, except share and per share amounts)
(s)
An increase in goodwill of $439,578 representing the preliminary fair value of the goodwill and intangible assets acquired from the Nuuvera Acquisition.
(t)
A decrease in weighted average number of common shares — diluted of 6,373,905 to remove the dilution effect of warrants and options, due to pro forma loss position, resulting in the impact being anti-dilutive for the year ended May 31, 2017.
6.
Pro forma net income per share
The pro forma basic and diluted earnings per share have been calculated as follows:
|
|
|
For the year
|
|
For the nine
|
|
|
|
|
ended
|
|
months ended
|
|
|
|
|
May 31,
|
|
February 28,
|
|
|
|
|
2017
|
|
2018
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Pro forma net income for the period
|
|
$
|
(
1,717
|
)
|
$
|
19,897
|
|
|
Average number of common shares outstanding during the period
|
|
149,941,904
|
|
192,874,957
|
|
|
Pro forma earnings per share - basic
|
|
$
|
(0.01
|
)
|
$
|
0.10
|
|
|
|
|
For the year
|
|
For the nine
|
|
|
|
|
ended
|
|
months ended
|
|
|
|
|
May 31,
|
|
February 28,
|
|
|
|
|
2017
|
|
2018
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Pro forma net income for the period
|
|
$
|
(
1,717
|
)
|
$
|
19,897
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding during the period
|
|
149,941,904
|
|
192,874,957
|
|
|
“In the money” warrants outstanding during the period
|
|
—
|
|
2,077,483
|
|
|
“In the money” options outstanding during the period
|
|
—
|
|
5,536,960
|
|
|
|
|
149,941,904
|
|
200,489,400
|
|
|
pro forma earnings per share - diluted
|
|
$
|
(0.01
|
)
|
$
|
0.10
|
|
11
Exhibit “B”
Audited Financial Statements of Nuuvera
(See attached)
Consolidated Financial Statements
(Expressed in Canadian dollars)
NUUVERA INC.
(formerly Mira IX Acquisition Corp.)
(INCORPORATED UNDER THE LAWS OF CANADA)
For the period from Incorporation on January 30, 2017 to December 31, 2017
INDEPENDENT AUDITOR’S REPORT
To the Directors of Nuuvera Inc.
We have audited the accompanying consolidated financial statements of Nuuvera Inc. and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2017 and the consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the period from incorporation, January 30, 2017, to December 31, 2017 and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s 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 is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Nuuvera Inc. and its subsidiaries, as at December 31, 2017, and the results of its operations and its cash flows for the period from incorporation, January 30, 2017, to December 31, 2017 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ RSM Canada LLP
Licensed Public Accountants
Chartered Professional Accountants
May 15, 2018
Toronto
THE POWER OF BEING UNDERSTOOD
AUDIT | TAX | CONSULTING
RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Visit rsmcanada.com/aboutus for more information regarding RSM Canada LLP and RSM International.
NUUVERA INC.
Consolidated Statement of Financial Position
(Expressed in Canadian dollars)
|
|
|
As at
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
Cash
|
|
$
|
44,121,265
|
|
|
Supplies
|
|
231,735
|
|
|
Prepaid expenses and other receivables (Note 8)
|
|
837,383
|
|
|
Total current assets
|
|
45,190,383
|
|
|
|
|
|
|
|
Deposit on capital asset
|
|
100,000
|
|
|
Loan receivable
|
|
150,000
|
|
|
Property and equipment (Note 4,5,10)
|
|
3,007,912
|
|
|
Intangibles assets (Notes 4,5,11)
|
|
18,912,623
|
|
|
Goodwill (Note 4)
|
|
10,621,414
|
|
|
|
|
$
|
77,982,332
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
3,075,568
|
|
|
Non-controlling interest liability (Note 17)
|
|
35,000,000
|
|
|
Total current liabilities
|
|
38,075,568
|
|
|
|
|
|
|
|
Deferred tax liabilities (Note 18)
|
|
2,978,151
|
|
|
Total Liabilities
|
|
41,053,719
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
Common shareholders’ equity
|
|
|
|
|
Capital stock (Note 13 (a))
|
|
71,400,986
|
|
|
Contributed surplus (Note 13 (b))
|
|
3,019,598
|
|
|
Deficit
|
|
(37,491,971
|
)
|
|
Total common shareholders’ equity
|
|
36,928,613
|
|
|
|
|
$
|
77,982,332
|
|
Commitment and contingencies (Note 19)
Subsequent events (Note 20)
See accompanying notes to the consolidated financial statements.
Approved by the Board of Directors on May 15, 2018
1
NUUVERA INC.
Consolidated Statement of Loss and Comprehensive Loss
The period from Incorporation January 30, 2017 to December 31, 2017
(Expressed in Canadian dollars)
|
Revenue
|
|
|
|
|
Service revenue
|
|
$
|
38,756
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Salaries and employee benefit expenses
|
|
2,274,547
|
|
|
Depreciation
|
|
842,648
|
|
|
Professional fees
|
|
2,719,334
|
|
|
Acquisition costs (Note 4, 5 and 10)
|
|
459,049
|
|
|
Transaction costs (Note 6)
|
|
2,621,357
|
|
|
Consulting fees
|
|
2,815,727
|
|
|
Service fees
|
|
98,135
|
|
|
Sales expenses
|
|
137,494
|
|
|
Office and administration
|
|
2,366,765
|
|
|
Stock based compensation
|
|
2,964,598
|
|
|
Finance costs (income):
|
|
|
|
|
Foreign exchange gain
|
|
(528,343
|
)
|
|
Interest income
|
|
(67,610
|
)
|
|
Change in fair value of non-controlling interest liability (Note 17)
|
|
21,375,550
|
|
|
Total expenses
|
|
38,079,251
|
|
|
|
|
|
|
|
Loss before tax
|
|
(38,040,495
|
)
|
|
|
|
|
|
|
Deferred income tax recovery (Note 18)
|
|
548,524
|
|
|
|
|
|
|
|
Net loss and comprehensive loss for the period
|
|
$
|
(37,491,971
|
)
|
|
|
|
|
|
|
Basic and diluted loss per share attributable to common shareholders (Note 16)
|
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
Basic and diluted
|
|
64,706,391
|
|
See accompanying notes to the consolidated financial statements.
2
NUUVERA INC.
Consolidated Statement of Changes in Equity
For the period from Incorporation on January 30, 2017 to December 31, 2017
(Expressed in Canadian dollars)
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
Share Capital
|
|
Contributed
|
|
Common
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Shareholders
|
|
Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 30, 2017
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Shares issued — Founders shares
|
|
20,000,000
|
|
20,000
|
|
—
|
|
—
|
|
20,000
|
|
|
Shares issued — Private placements
|
|
59,180,000
|
|
71,180,000
|
|
—
|
|
—
|
|
71,180,000
|
|
|
Shares and options issued — RTO
|
|
750,000
|
|
1,875,000
|
|
55,000
|
|
—
|
|
1,930,000
|
|
|
Cost of issuance of shares
|
|
—
|
|
(1,674,014
|
)
|
—
|
|
—
|
|
(1,674,014
|
)
|
|
Stock based compensation
|
|
—
|
|
—
|
|
2,964,598
|
|
—
|
|
2,964,598
|
|
|
Comprehensive loss for the period
|
|
—
|
|
—
|
|
—
|
|
(37,491,971
|
)
|
(37,491,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
79,930,000
|
|
$
|
71,400,986
|
|
$
|
3,019,598
|
|
$
|
(37,491,971
|
)
|
$
|
36,928,613
|
|
See accompanying notes to the consolidated financial statements.
3
NUUVERA INC.
Consolidated Statement of Cash Flows
The period from Incorporation January 30, 2017 to December 31, 2017
(Expressed in Canadian dollars)
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
Net loss for the period
|
|
$
|
(37,491,971
|
)
|
|
Adjustment for non-cash items:
|
|
|
|
|
Stock based compensation
|
|
2,964,598
|
|
|
Depreciation
|
|
846,472
|
|
|
Deferred income tax recovery
|
|
(548,524
|
)
|
|
Transaction costs (Note 6)
|
|
1,997,582
|
|
|
Change in fair value of non-controlling interest
|
|
21,375,550
|
|
|
Net changes in non-cash working capital:
|
|
|
|
|
Supplies
|
|
(231,735
|
)
|
|
Advances for purchase of capital assets
|
|
(100,000
|
)
|
|
Prepaid expenses and other receivables
|
|
(784,392
|
)
|
|
Accounts payable and accrued liabilities
|
|
2,909,741
|
|
|
Net cash used in operating activities
|
|
(9,062,679
|
)
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Cash acquired in reverse takeover
|
|
24,972
|
|
|
Additions to property and equipment (Note 10)
|
|
(1,000,606
|
)
|
|
Acquisition of subsidiary with NCI (Note 4), net of cash acquired
|
|
(13,250,860
|
)
|
|
Acquisition of group of assets (Note 5)
|
|
(3,000,000
|
)
|
|
Net cash provided by investing activities
|
|
(17,226,494
|
)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
Net proceeds on issuance of capital stock
|
|
69,525,988
|
|
|
Additional funding from NCI
|
|
884,450
|
|
|
Net cash provided by financing activities
|
|
70,410,438
|
|
|
|
|
|
|
|
Net change in cash during the period
|
|
44,121,265
|
|
|
Cash, beginning of period
|
|
—
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
44,121,265
|
|
See accompanying notes to the consolidated financial statements.
4
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
1.
Nature of operations:
Nuuvera Corp. was incorporated under the laws of the Province of New Brunswick on January 30, 2017. On March 8, 2017, the Corporation changed its jurisdiction and continued under the
Canada Business Corporations Act.
Subsequent to the completion of the transaction with Mira IX Acquisition Corp. (“Mira IX”) on December 29, 2017, Nuuvera Corp. changed its name to Nuuvera Holdings Ltd. (Note 6).
Nuuvera Inc. (“Nuuvera”), formerly named Mira IX, was incorporated under the Ontario Business Corporations Act on July 17, 2015. On December 29, 2017, Mira IX changed its name to Nuuvera Inc. Mira IX was initially classified as a Capital Pool Company (“CPC”), as defined in Policy 2.4 of the TSX Venture Exchange Inc. (the “Exchange”) Corporate Finance Manual. On December 29, 2017, Mira IX SubCo Inc. (“SubCo”), a wholly owned subsidiary of Mira IX, merged with Nuuvera Corp. The amalgamation was structured as a three-cornered amalgamation and as a result the amalgamated corporation became a wholly owned subsidiary of Mira IX (Note 6).
The transaction with Mira IX was accounted for as a reverse takeover that is not a business combination. Therefore, accounting for the transaction includes the carry forward of the assets, liabilities and operations of Nuuvera Corp. and Mira IX’s share capital, deficit, and contributed surplus have been eliminated. These consolidated financial statements include Nuuvera (from December 29, 2017) and its subsidiaries Nuuvera Holdings Ltd., Nuuvera Deutschland GbmH, Nuuvera Israel Ltd., 2589671 Ontario Inc., 2589671 Ontario Inc., Avalon Pharmaceuticals Inc., and ARA — Avanti Rx Analytics Inc., together referred to as the “Company”.
Nuuvera’s wholly owned subsidiary Nuuvera Deutschland GbmH was registered on April 28, 2017 in the Trade Register of Hamburg, under the Laws of Germany.
Nuuvera’s wholly owned subsidiary Nuuvera Green Israel Ltd was registered on July 19, 2017 in the State of Israel, under the Laws of Israel.
On August 1, 2017, Nuuvera through its holding company 2589671 Ontario Inc. completed the acquisition of 51% of the outstanding shares of ARA — Avanti Rx Analytics Inc. (“Avanti”) for cash consideration of $13,260,000 (Note 4).
On August 8, 2017, Nuuvera through its holding company 2589674 Ontario Inc. completed the acquisition of a group of assets of Avalon Pharmaceuticals Inc. (“Avalon”) for cash consideration of $3,000,000 (Note 5).
Nuuvera was founded to capitalize on the global secular trend towards the legalization of both medical and recreational cannabis. Nuuvera is focussed on low cost cultivation, innovative product development, high quality commercial production and global distribution of medical grade cannabis in legalized markets.
5
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
1
.
Nature of operations:
(Cont’d)
Nuuvera has operations in Canada and is currently exploring opportunities in several international markets. Nuuvera has no operations in the United States and does not plan to enter the US market.
The Company has not yet realized any revenue from its operations and is in the start up phase, executing on its business plan. There is uncertainty surrounding the Company’s ability to achieve profitable sustainable operations and the Company may require additional financing in order to successfully do so. Success is dependent upon such events as obtaining licenses, growing product, commencement of sales and market demand conditions. There is no assurance that any prospective project in the medical or recreational marijuana industry will be successfully initiated or completed.
The registered head office of the Company is 135 Devon Road, Brampton, Ontario, L6T 5A4.
2.
Basis of presentation:
Statement of compliance:
These consolidated financial statements have been 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”).
Basis of consolidation:
These financial statements include the accounts of Nuuvera and its subsidiaries. A subsidiary is an entity controlled by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. A subsidiary is included in the consolidated financial statements from the date control commences until the date control ceases. All intercompany balances, transactions, income, expenses, profits and losses, including unrealized gains and losses have been eliminated on consolidation.
6
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Basis of consolidation:
(Cont’d)
The following companies have been consolidated within these consolidated financial statements:
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
and voting
|
|
|
|
Functional
|
|
|
Company
|
|
Registered
|
|
rights
|
|
Principal activity
|
|
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuuvera Inc.
|
|
Canada
|
|
n/a
|
|
Corporate and holding
|
|
CDN
|
|
|
Nuuvera Holdings Ltd.
|
|
Canada
|
|
100
|
%
|
Holding
|
|
CDN
|
|
|
ARA — Avanti Rx Analytics Inc.
|
|
Canada
|
|
51
|
%
|
Operating and R&D
|
|
CDN
|
|
|
Avalon Pharmaceuticals Inc.
|
|
Canada
|
|
100
|
%
|
Operating
|
|
CDN
|
|
|
2589671 Ontario Inc.
|
|
Canada
|
|
100
|
%
|
Holding
|
|
CDN
|
|
|
2589674 Ontario Inc.
|
|
Canada
|
|
100
|
%
|
Holding
|
|
CDN
|
|
|
Nuuvera Israel Ltd
|
|
Israel
|
|
100
|
%
|
Holding
|
|
CDN
|
|
|
Nuuvera Deutschland GbmH
|
|
Germany
|
|
100
|
%
|
Operating
|
|
CDN
|
|
Basis of measurement:
These consolidated financial statements have been prepared primarily on the historical cost basis except for certain financial assets and liabilities which are measured at fair value, as described in the notes to these consolidated financial statements.
Business combinations:
The Company applies the acquisition method in accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the fair value of the consideration transferred over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Acquisition costs are expensed as incurred, unless they qualify to be treated as debt issue costs, or as cost of issuing equity securities.
Due to the put option over of the non-controlling interest in the Company arising from the Avanti shareholder agreement, the non-controlling interest was classified as a non-current liability on the consolidated statements of financial position. This non-controlling interest is measured at fair value at the end of each period with the gain or loss being charged to profit or loss in the consolidated statements of comprehensive income (loss).
7
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Functional and presentation currency:
The consolidated financial statements are presented in Canadian dollars (“CDN dollars”), which is the functional currency of the Company and its subsidiaries.
Foreign currency:
(i)
Foreign currency transactions and balances:
Transactions denominated in foreign currencies are translated into the functional currency of the Company and its subsidiaries as follows:
·
Monetary assets and liabilities are translated initially at exchange rate on the date of the transaction and subsequently translated at the rates of exchange at the reporting dates;
·
Non-monetary assets and liabilities are translated at historical exchange rates prevailing at each transaction date; and
·
Revenue and expenses are translated at monthly average exchange rates prevailing throughout the reporting period; and
·
Resulting gains / losses are recorded within foreign exchange (gain) loss on the consolidated statements of loss and comprehensive loss.
Financial instruments:
(i)
Financial Instruments - Recognition and Measurement - Financial Assets:
(a)
Initial recognition and measurement:
The Company initially recognizes financial assets on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Financial assets are initially measured at fair value. If the financial asset is not subsequently measured at fair value through profit or loss, then the initial measurement includes transaction costs that are directly attributable to the asset’s acquisition or origination.
The Company’s financial assets consist of cash, accounts receivable, advances for purchase of capital assets, and other receivables.
8
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Financial instruments: (Cont’d)
(i)
Financial Instruments - Recognition and Measurement - Financial Assets: (Cont’d)
(b)
Fair value through profit or loss (“FVTPL”):
This category comprises assets acquired or incurred for the purpose of selling or repurchasing it in the near future. The Company measures financial assets at FVTPL at fair value, recognizing any gains or losses arising from this measurement in the statement of loss and comprehensive loss.
Cash, advances for purchase of capital assets are classified as FVTPL.
(c)
Loans and receivables:
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate method (“EIR”), less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in interest expense, in the consolidated statements of loss and comprehensive loss. Losses relating to impairment of accounts receivables are also recognized in the consolidated statements of loss and comprehensive loss.
Accounts receivable and other receivables are classified as loans and receivables.
(d)
Derecognition:
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 in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
Any interest in such transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
9
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Financial instruments: (Cont’d)
(ii)
Financial Instruments - Recognition and Measurement - Financial Liabilities:
(a)
Initial recognition and measurement:
The Company’s financial liabilities are recognized initially on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company classifies all non-derivative financial liabilities as other financial liabilities. Such financial liabilities are recognized initially at fair value less any directly attributable transaction costs.
As of the reporting date, the Company has classified accounts payable and accrued liabilities as other financial liabilities.
The Company classifies all derivative financial liabilities as FVTPL. Financial liabilities at FVTPL are measured at fair value.
As of the reporting date, the Company has classified the non-controlling interest liability as FVTPL.
(b)
Subsequent measurement:
After initial recognition, other financial liabilities are subsequently measured at amortized cost using EIR method. Gains and losses are recognized in the consolidated statements of loss and comprehensive loss when the liabilities are derecognized.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance costs in the consolidated statements of loss and comprehensive loss.
Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on remeasurement recognized in the statement of operations.
(c)
Derecognition:
The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired.
10
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Financial instruments: (Cont’d)
(iii)
Offsetting of financial instruments:
Financial assets and financial liabilities are offset with the net amount reported in the consolidated statements of financial position only if there is a current enforceable legal right to offset the recognized amounts and intent to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
(iv)
Fair value of financial instruments:
Assets and liabilities for which fair value is measured in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
·
Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities;
·
Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and
·
Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is less observable, unavailable or where the observable data does not support a significant portion of the instrument’s fair value.
For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include:
·
Using recent arm’s-length market transactions;
·
Reference to the current fair value of another instrument that is substantially the same; and
·
A discounted cash flow analysis or other valuation models.
At December 31, 2017, financial instruments that are carried at fair value, consisting of cash and advances for purchase of capital assets have been classified as Level 1 within the fair value hierarchy. The non-controlling interest liability has been classified as Level 2 and the value as at the reporting date is based on a recent transaction. There were no transfers between levels during the period ended December 31, 2017.
All of the Company’s financial instruments such as cash, accounts receivable, advances for purchase of capital assets, and other receivables, accounts payable and accrued liabilities are of short-term duration. Their carrying values, therefore, approximate their fair values.
11
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Goodwill:
Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognised. Goodwill is carried at cost less accumulated impairment losses.
Goodwill is initially recognized at cost, being the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed at the date acquired, and is allocated to the cash generating unit (“CGU”) expected to benefit from the acquisition. A CGU is the smallest group of assets for which there are separately identifiable cash flows.
Subsequently, goodwill is not amortized but are assessed at the end of each reporting period for impairment and more frequently whenever events or circumstances indicate that their carrying value may not be fully recoverable. The annual impairment test requires comparing the carrying values of the Company’s CGU, including goodwill, to their recoverable amounts. The recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the 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. The Company determines the value in use using estimated future cash flows discounted at an after-tax rate that reflects the risk adjusted weighted-average cost of capital. Any excess of the carrying value amount of a CGU over the recoverable amount is expensed in the period the impairment is identified. An impairment loss recorded for goodwill is not reversed in a subsequent period.
Supplies:
The company values supplies at the lower of cost and net realizable value. Costs include the cost of purchases plus other costs, such as transportation, that are directly incurred to bring supplies to their present location and condition. The company estimates net realizable value as the amount that supplies are expected to be sold at less estimated costs necessary to make the sale. Supplies are written down to net realizable value when the cost of supplies is estimated to be unrecoverable due to obsolescence, damage or declining sales price.
Intangible assets:
Developed intellectual properties and licenses acquired in a business combination that qualify for separate recognition are recognised as intangible assets at their fair values at the acquisition date. Subsequent to initial recognition intangibles acquired in a business combination are recorded at cost less accumulated amortization and impairment. The licenses and developed IP are amortized on a straight-line basis over ten years.
12
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Property, plant and equipment:
Property, plant and equipment are carried at historical cost less any accumulated depreciation and impairment losses. Historical cost includes the acquisition cost or production cost as well as the costs directly attributable to bringing the asset to the location and condition necessary for its use in operations. When property and equipment include significant components with different useful lives, they are recorded and amortized separately. Amortization is computed using the straight-line and declining balance methods based on the estimated useful life of the assets. Amortization of assets commences once the asset is ready for use, which is defined as the condition in which the assets is capable of operating in the manner intended by management. Useful life is reviewed at the end of each reporting period.
Subsequent to initial recognition, the cost model is applied to property, plant and equipment. Where parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment.
The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognized in the income statement as an expense as incurred. Depreciation is provided at rates calculated to write off the cost of property, plant and equipment less their estimated residual value on the straight-line and declining balance methods, over the estimated useful lives, as follows:
|
Computer equipment
|
55% Declining balance
|
|
Furniture and fixtures
|
20% Declining balance
|
|
Lab equipment
|
20% Declining balance
|
|
Building and improvements
|
Straight line, over 50 years
|
|
Leasehold improvements
|
Straight line, over 10 years
|
|
Computer software
|
Straight line, over 3 years
|
Impairment testing of goodwill, intangible assets and property, plant and equipment:
For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of a related business combination and represent the lowest level within the Group at which management monitors goodwill.
Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
13
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Impairment testing of goodwill, intangible assets and property, plant and equipment: (Cont’d)
An impairment loss is recognised for the amount by which the asset’s (or cash-generating units) carrying amount exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each cash-generating unit and determines a suitable discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each cash-generating unit and reflect current market assessments of the time value of money and asset-specific risk factors.
Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro-rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment loss is reversed if the asset’s or cash-generating unit’s recoverable amount exceeds its carrying amount.
Property, plant and equipment is tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The recoverable amount is the higher of fair value less costs of disposal and value in use. 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. Costs of disposal are incremental costs directly attributable to disposal. Value in use is equal to the present value of future cash flows expected to be derived from the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”).
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds it recoverable amount. Impairment loss is recognized in profit or loss. Impairment losses, except those related to goodwill, 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 depreciation) that would have been determined had no impairment loss been recognized. A reversal of impairment loss is recognized in profit or loss.
Lease payments:
Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.
Revenue:
Revenue arises from the rendering of services. It is measured at the fair value of consideration received or receivable, excluding sales taxes, and reduced by any rebates and trade discounts allowed.
14
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Stock based compensation:
The stock option plan includes options for cashless exercises as well as the option to receive cash in lieu of shares, however both are subject to the sole and entire discretion of the Company. All stock options granted have been recognized using the equity method based on the assumption that they will be equity settled.
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are further discussed in Note 13 (b).
The grant-date fair value of equity-settled share-based payment awards is generally recognized as an expense, with a corresponding increase in contributed surplus, over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and nonmarket performance conditions at the vesting date.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. For cash-settled share-based payments, a liability is recognized for the goods or services acquired, measured initially at the fair value of the liability. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with any changes in fair value recognized in profit or loss for the year.
When the options are exercised, the Company issues new shares. The proceeds received, net of any directly attributable transaction costs plus amounts previously recognized as contributed surplus, are credited to share capital.
If the terms of an equity-settled award are modified, at a minimum an expense is recognized for the initial grant date fair value of the award. An additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification.
If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award is treated as if they were a modification of the original award, as described in the previous paragraph.
Share-based payment expense relating to cash-settled awards, is accrued over the vesting period of the units based on the quoted market value of the Company’s common shares. As these awards will be settled in cash, the expense and liability are adjusted each reporting period for changes in the underlying share price.
15
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Share issue costs:
The Company charges incremental costs incurred in respect of raising capital against the equity proceeds raised, including legal, accounting, agent and investment banking fees, net of income taxes.
Finance income and finance costs:
Finance income generally comprises interest income on funds invested, if any. Interest income is recognized, as it accrues, in the statement of loss and comprehensive loss, using the effective interest rate method.
Loss per share:
The Company presents basic and diluted loss per share relating to its common shares. Basic loss per share is calculated by dividing the loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by adjusting the loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive common shares. Dilutive common shares shall be deemed to have been converted into common shares at the beginning of the period or, if later, at the date of issue of the common shares. For the purpose of calculating diluted loss per share, the Company assumes the exercise of its dilutive options. The assumed proceeds from these instruments are regarded as having been received from the issue of common shares at the average market price of its shares during the period.
Significant accounting judgements and estimates:
The preparation of these financial statements requires management to make certain estimates, judgements and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These financial statements include estimates that, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the 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 future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
16
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Critical accounting estimates:
Significant assumptions about the future that management has made that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:
·
all inputs used in the Black-Scholes model for determining the fair value of share based payment transactions, including estimates related to discretionary vesting terms;
·
the assumptions used for determining the amount of deferred income taxes and deferred income tax assets and liabilities including future income tax rate;
·
useful life of property, plant and equipment and intangible assets;
·
recoverability of intangible assets and goodwill;
·
valuation of assets and liabilities acquired in business combination; and
·
fair value of non-controlling interest liability.
Critical accounting judgements:
·
the Company’s assumption of no material restoration, rehabilitation and environmental provisions, based on the facts and circumstances that existed during the period and at period end;
·
the determination of share based payments as equity settled, based on the Company’s intention;
·
determination of functional currency;
·
determination if the acquisition of a group of assets is considered to be a business combination or asset acquisition;
·
determining whether recognition criteria for intangible assets is met;
·
recognition of NCI as a financial liability; and
·
the recoverability of deferred income tax assets and liabilities.
Income taxes:
Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at period end.
17
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
2.
Basis of presentation:
(Cont’d)
Income taxes:
(Cont’d)
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 period that the rate changes.
Provisions:
Provisions are recognized when (a), the Company has a present obligation (legal or constructive) as a result of a past event, and (b), it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
3.
Future Changes in Accounting Policies:
The following standards have been issued but are not yet effective:
(a)
IFRS 9 — Financial Instruments (“IFRS 9”)
IFRS 9, Financial Instruments (“IFRS 9”,), was issued by the IASB in July 2014 and will replace IAS 39, Financial Instruments: Recognition and Measurement. (“IAS 39”). IFRS 9 utilized a single approach to determine whether a financial asset is measured at amortized cost or fair value and a new mixed measurement model for debt, instruments having only two categories” amortized cost and fair value. 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. Final amendments released in July 2014 also introduce a new expected loss impairment model and limited changed to the classification and measurement requirements for financial assets. The standard is effective for annual periods beginning on or after January 1, 2018.
(b)
IFRS 15 — Revenue from contracts with customers (“IFRS 15”)
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. Early adoption is permitted.
18
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
3.
Future Changes in Accounting Policies:
(Cont’d)
(c)
IFRS 16 — Leases (“IFRS 16”)
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 15 has also been adopted.
(d)
IFRIC 22 — Foreign Currency Transactions and Advance Consideration (“IFRIC22”)
IFRIC22 was issued in December 2016 and addresses foreign currency transactions or parts of transactions where there is consideration that is denominated in a foreign currency; a prepaid asset or deferred income liability is recognized in respect of that consideration, in advance of the recognition of the related asset, expense or income; and the prepaid asset or deferred income liability is non-monetary. The interpretation committee concluded that the date of the transaction, for purposes of determining the exchange rate, is the date of initial recognition of the non-monetary prepaid asset or deferred income liability. IFRIC22 is effective for annual periods beginning on or after January1, 2018. Earlier adoption is permitted.
The Company is currently evaluating the impact of the above standards on its financial performance and financial statement disclosures but expects that such impact will not be material.
4.
Acquisition of subsidiary:
On August 1, 2017, the Company completed the acquisition of 51% of the outstanding shares of ARA — Avanti Rx Analytics Inc. (“Avanti”). Avanti is a Good Manufacturing Practices (“GMP”) certified Licensed Dealer under the Office of Controlled Drugs and Substances and operates in the areas of cannabinoid analytical testing, commercial extraction and research & development. Through Avanti, the Company intends to process and sell oils derived from numerous strain varieties of cannabis in two main product lines; cannabis oils and other cannabis oil derivative products. The Company paid total cash consideration of $13,260,000 to acquire machinery and equipment, net working capital and intangible assets. $1,000,000 of the Avanti purchase price is being held in escrow for a period of 12 months to satisfy future indemnity claims which may arise under the Avanti Agreement.
At any time after the earlier of (a) August 1, 2021 and (ii) the date of termination of the non-controlling shareholders’ employment without cause, the non-controlling shareholder is entitled to require the Corporation to purchase all, but not less than all, of their shares and shareholder loans at a purchase price equal to: (i) in the case of shares, the fair market value and (ii) in the case of shareholder loans, the principal amount thereof, plus accrued interest. This put option means in substance that the non-controlling shareholder no longer has a present equity ownership in Avanti and instead the substantial majority of the benefits associated with that equity interest now accrue to the Company. Accordingly, the non-controlling interest in Avanti is accounted for as a liability rather than within equity.
19
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
4.
Acquisition of subsidiary:
(Cont’d)
At any time after August 1, 2020, in the event that the Company terminates or has terminated the non-controlling shareholders’ employment without cause and in all other circumstances, any time after August 1, 2021, the Company shall be entitled, on written notice (a “Call Notice”) to the Company and the non-controlling shareholder, to require the non-controlling shareholder to sell all, but not less than all, of the shares and shareholder loans held by him to Nuuvera at a purchase price equal to: (i) in the case of shares, the fair market value thereof at the date of delivery of the Call Notice; and (ii) in the case of shareholder loans, the principal amount thereof, plus accrued interest. Because this call option is exercisable at fair value, the fair value of the call option is $nil.
(a)
Consideration transferred
|
Purchase consideration
|
|
Amount
|
|
|
Cash
|
|
$
|
13,260,000
|
|
|
|
|
|
|
|
(b)
Assets acquired and liabilities assumed
|
|
|
Amount
|
|
|
Cash
|
|
$
|
9,140
|
|
|
Prepaid expenses
|
|
52,991
|
|
|
Loan receivable
|
|
150,000
|
|
|
Property, plant and equipment (Note 10)
|
|
2,165,445
|
|
|
Licenses (*)
|
|
14,600,000
|
|
|
Developed IP (**)
|
|
2,000,000
|
|
|
Deferred tax liability
|
|
(3,526,675
|
)
|
|
Trade and other payables
|
|
(72,315
|
)
|
|
Goodwill
|
|
10,621,414
|
|
|
Total fair value of net assets acquired, other than non-controlling interest
|
|
26,000,000
|
|
|
Non-controlling interest liability
|
|
(12,740,000
|
)
|
|
Consideration transferred
|
|
$
|
13,260,000
|
|
(*) Licenses:
The Company acquired the following licenses:
·
Drug Establishment License held pursuant to Health Canada’s Good Manufacturing Practices.
·
Dealer’s License from Health Canada/status of a Licensed Dealer under the Controlled Drugs and Substances Act.
·
Health Canada Site License
·
Health Canada Medical Establishment License.
(**) Developed IP:
The Developed IP includes all internally-developed methods, procedures and protocols as documented in Avanti’s standard operating procedures manuals.
20
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
4.
Acquisition of subsidiary:
(Cont’d)
(c)
Goodwill
Goodwill is primarily related to growth expectations, expected future profitability and the skill and expertise of Avanti workforce.
With respect to the consideration transferred to acquire Avanti, the Company does not expect any of the goodwill to be deductible for income tax purposes.
(d)
Transaction costs
In relation to this acquisition, the Company incurred the total of $194,881 in transaction costs.
Revenue and net loss of Avanti since the date of acquisition included in the consolidated statements of loss and comprehensive loss amounted to $29,770 and $1,512,494, respectively. Pro-forma revenue and net loss of the Company for the period ended December 31, 2017, assuming the acquisition of Avanti occurred on January 30, 2017, would amount to $65,494 and $335,487 respectively.
The Company performs its annual impairment test at September 30. The goodwill impairment analysis performed by the Company concluded there was no impairment to goodwill as the fair value of its CGUs exceeded its carrying value.
The Company concluded it has one CGU that is related to the goodwill as of September 30, 2017. The CGU’s recoverable amount was determined based on value in use using a 5 year discounted cash flow model. Key assumptions used in the discounted cash flow model are as follows: (a) projected revenue used in the forecast was estimated with a compounded annual rate of growth 24% and a 2% terminal growth to reflect the inflationary growth, (b) projected cost of sales and general and administrative expenses used in the forecast were estimated using current and historical results as a percentage of revenue with consideration to variable costs, with fixed costs estimated to remain fairly constant, and (c) selling and promotion, research and development expenses, working capital and capital expenditures were estimated considering industry benchmarks. The discount rate applied in the discounted cash flow model was 48.66%. The inputs used in determining their fair values are level 3 inputs.
5.
Acquisition of a group of assets:
On August 8, 2017, the Company completed the acquisition of a group of assets from Avalon Pharmaceuticals Inc. (“Avalon”) for cash consideration totalling $2,743,680. The Company also transferred $256,320 in exchange for the demand promissory note due from Avalon to the Company (eliminated on consolidation). Of the consideration paid, $300,000 was placed into escrow (“the Escrow amount”). The Escrow amount is a contingent payment and will be released to the vendor one year after the transaction date, or at the point in time at which Avalon receives approval as an LP from Health Canada, pursuant to the following conditions:
(a)
The payment requires that the Company’s current “Senior Person in Charge”/”Responsible Person in Charge” (as defined by the ACMPR) remains in place as a qualified individual under the ACMPR and continues to carry out this role for at least one year following the transaction.
21
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
5.
Acquisition of a group of assets:
(Cont’d)
(b)
The payment also requires that the Company’s current “Alternate Responsible Person in Charge” (as defined by the ACMPR) remains in place as a qualified individual under the CMPR and continues to carry out this role for at least one year following the transaction.
Avalon has applied to become a Licensed Producer of medical marijuana under the Access to Cannabis for Medical Purposes Regulations (“ACMPR”), Office of Medical Cannabis, Health Canada. Avalon is currently in the final stages of the Health Canada approval process for its Brampton cultivation facility, having received its Confirmation of Readiness notice from Health Canada. Avalon plans to amend its Site License for the Nuuvera cultivation facility which the Company plans to build in Leamington, Ontario.
Consideration transferred
|
Purchase consideration
|
|
Amount
|
|
|
|
|
|
|
|
Cash paid for 100% shares in a company
|
|
$
|
2,743,680
|
*
|
|
Cash transferred to Avalon in exchange for a promissory note
|
|
256,320
|
|
|
|
|
$
|
3,000,000
|
|
*$300,000 represents the Escrow amount
(a)
Identifiable assets acquired and liabilities assumed
|
|
|
Amount
|
|
|
Other current assets
|
|
$
|
227
|
|
|
ACMPR Application
|
|
3,000,956
|
|
|
Promissory note
|
|
(256,320
|
)
|
|
Trade and other payables
|
|
(1,183
|
)
|
|
|
|
|
|
|
Total fair value of identifiable net assets acquired
|
|
$
|
2,743,680
|
|
(b)
Transaction costs
In relation to this acquisition, the Company incurred the total of $99,693 in transaction costs which were expensed in the period ended December 31, 2017
6.
Going Public Transaction:
On December 29, 2017, SubCo, merged with Nuuvera Corp. In accordance with the amalgamation agreement dated November 17, 2017, the transaction was structured as a three-cornered amalgamation and as a result the amalgamated corporation became a wholly owned subsidiary of Mira IX.
22
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
6.
Going Public Transaction:
(Cont’d)
Prior to the completion of the transaction, the common shares of Mira IX were consolidated on the basis of 16.6666667 common shares outstanding prior thereto to one common share outstanding thereafter. Immediately prior to giving effect to the merger, Mira IX had 750,000 common shares issued and outstanding.
As a condition precedent to the completion of the merger, Nuuvera Corp. completed a private placement of 8,000,000 common shares at a price of $2.50 per shares for total gross proceeds of $20,000,000 (Note 13(a)(v)). After giving effect to the private placement, Nuuvera Corp. had 79,180,000 common shares issued and outstanding. To effect the merger, each issued and outstanding Nuuvera Corp. common shares were exchanged for one fully-paid and nonassessable Nuuvera Inc. common shares.
After the completion of the transaction, Nuuvera Inc. had 79,930,000 common shares issued and outstanding.
As a result of the transaction described above, the former shareholders of Nuuvera Corp. acquired control of the Company as they owned the majority of the outstanding shares of the Company upon completion of the merger transaction. This transaction resulted in a reverse takeover with Nuuvera Corp. being identified as the accounting acquirer and the net assets of Mira IX being recorded at fair value at the date of the transaction. Consequently, the historical results of operations are those of Nuuvera Corp.
The following summarizes the reverse take-over and the Mira IX assets acquired and liabilities assumed by Nuuvera Corp.:
Net liabilities assumed:
|
Cash
|
|
$
|
24,972
|
|
|
Accounts payable
|
|
(92,554
|
)
|
|
Net liabilities assumed
|
|
$
|
(67,582
|
)
|
|
|
|
|
|
|
Consideration paid:
|
|
|
|
|
|
|
|
|
|
Shares
(i)
|
|
$
|
1,875,000
|
|
|
Options
(ii)
|
|
55,000
|
|
|
|
|
|
|
|
Total consideration
|
|
1,930,000
|
|
|
Deemed listing cost
|
|
(1,997,582
|
)
|
|
|
|
$
|
(67,582
|
)
|
(i)
Upon the issuance of the financing, Mira IX shares deemed issued as consideration were measured using the market price of Nuuvera Corp. shares, which was determined by the value of the private placement completed concurrently with the merger being $2.50 on December 29, 2017.
23
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
6.
Going Public Transaction:
(Cont’d)
(ii)
Mira IX stock options were deemed re-issued as consideration to the former option holders of Mira IX and the estimated fair values of the options deemed re-issued to option holders of Mira IX were calculated using the Black-Scholes option pricing model. For more details see note 13(b)(viii)).
As the transaction was not considered to be a business combination, the excess of the fair value of the consideration over the net assets acquired in the amount of $1,997,582, together with $623,775 in fees incurred, are included as transaction costs on the consolidated statement of loss and comprehensive loss totaling $2,621,357.
7.
Segmented information:
The Company is currently in the development stage and has determined that there is only one operating segment as they build the company anticipating future markets, and establishing infrastructure and partnerships to research and eventually deliver medical-grade cannabis.
As at December 31, 2017 the Company’s non-current assets were located in the following countries:
|
Canada
|
|
$
|
31,966,629
|
|
|
Germany
|
|
575,320
|
|
|
|
|
$
|
32,541,949
|
|
8.
Prepaid expenses and other receivables:
|
|
|
December 31,
2017
|
|
|
Prepaid expenses
|
|
$
|
241,603
|
|
|
Tax refunds receivable
|
|
595,780
|
|
|
|
|
$
|
837,383
|
|
9.
Supplies:
The Company’s supplies consists of seeds and medical cannabis dry products. The inventory was purchased from Aphria Inc. for the total of $231,735. The supplies are used to create cannabis oils and oil-derivative products, to be sold to provincial agencies and Licensed Producers.
24
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
10.
Property, plant and equipment:
Cost
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
|
|
|
during
|
|
|
|
|
|
|
|
|
Balance,
|
|
business
|
|
|
|
Balance, as of
|
|
|
|
|
beginning of
|
|
combination
|
|
|
|
December 31,
|
|
|
|
|
period
|
|
(Note 4 (b))
|
|
Additions
|
|
2017
|
|
|
Land
|
|
$
|
—
|
|
$
|
—
|
|
$
|
86,214
|
|
$
|
86,214
|
|
|
Building and improvements
|
|
—
|
|
—
|
|
487,529
|
|
487,529
|
|
|
Leasehold improvements
|
|
—
|
|
1,196,633
|
|
109,636
|
|
1,306,269
|
|
|
Lab equipment
|
|
—
|
|
916,267
|
|
204,370
|
|
1,120,637
|
|
|
Furniture and fixtures
|
|
—
|
|
24,238
|
|
10,723
|
|
34,961
|
|
|
Computer equipment
|
|
—
|
|
28,307
|
|
13,084
|
|
41,391
|
|
|
Computer software
|
|
—
|
|
—
|
|
92,727
|
|
92,727
|
|
|
Total cost
|
|
$
|
—
|
|
$
|
2,165,445
|
|
$
|
1,004,282
|
|
$
|
3,169,728
|
|
Accumulated Depreciation
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
|
|
|
during
|
|
|
|
|
|
|
|
|
Balance,
|
|
business
|
|
|
|
Balance, as of
|
|
|
|
|
beginning of
|
|
combination
|
|
|
|
December 31,
|
|
|
|
|
period
|
|
(Note 4 (b))
|
|
Additions
|
|
2017
|
|
|
Land
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Building and improvements
|
|
—
|
|
—
|
|
809
|
|
809
|
|
|
Leasehold improvements
|
|
—
|
|
—
|
|
54,733
|
|
54,733
|
|
|
Lab equipment
|
|
—
|
|
—
|
|
93,386
|
|
93,386
|
|
|
Furniture and fixtures
|
|
—
|
|
—
|
|
2,913
|
|
2,913
|
|
|
Computer equipment
|
|
—
|
|
—
|
|
9,975
|
|
9,975
|
|
|
Computer software
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total accumulated depreciation
|
|
$
|
—
|
|
$
|
—
|
|
$
|
161,816
|
|
$
|
161,816
|
|
|
Net Book Value
|
|
$
|
—
|
|
$
|
2,165,445
|
|
$
|
1,238,491
|
|
$
|
3,007,912
|
|
Pursuant to an Agreement of Purchase and Sale with Aphria Inc. (“Aphria”) dated August 8, 2017, Nuuvera has agreed to acquire a property (“the Purchased Property”) in exchange for a cash payment of $4 million, of which Nuuvera has paid a deposit of $100,000. The deposit was refunded subsequent to year end upon acquisition by Aphria.
In relation to this agreement, the Company incurred the total of $164,475 in transaction costs which were expensed in the period ended December 31, 2017.
25
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
10.
Property, plant and equipment:
(Cont’d)
Closing of the Agreement of Purchase and Sale remains conditional on: (i) approval of the Purchased Property’s severance from the Mersea Property in compliance with the Planning Act (Ontario), on terms and conditions satisfactory and at the shared expense to both Nuuvera and Aphria and all appeal periods having lapsed without an appeal being filed, such that the Purchased Property is capable of being transferred as a standalone parcel; (ii) Aphria’s delivery of good and marketable title to the Purchased Property, free and clear of all encumbrances, save and except for those encumbrances agreed upon between Nuuvera and Aphria; (iii) performance of all covenants and agreements of the Agreement of Purchase and Sale by both Nuuvera and Aphria; (iv) all representations and warranties of the Agreement of Purchase and Sale by both Nuuvera and Aphria are true, accurate, complete and effective in all material respects as if made on the closing date; and (v) Nuuvera and Aphria having settled all collateral contracts in relation to the Purchased Property. If any of the closing conditions are not satisfied, the Agreement of Purchase and Sale may be terminated in accordance with its terms (Note 20(e)).
11.
Intangible Assets:
|
|
|
|
|
Developed
|
|
ACMPR
|
|
|
|
|
|
|
Licenses
|
|
IP
|
|
Application
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Acquired during acquisitions (Note 4 (a),(b))
|
|
14,600,000
|
|
2,000,000
|
|
3,000,956
|
|
19,600,956
|
|
|
Additions
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance, as of December 31, 2017
|
|
$
|
14,600,000
|
|
$
|
2,000,000
|
|
$
|
3,000,956
|
|
$
|
19,600,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Depreciation
|
|
605,000
|
|
83,333
|
|
—
|
|
688,333
|
|
|
Balance, as of December 31, 2017
|
|
$
|
605,000
|
|
$
|
83,333
|
|
$
|
—
|
|
$
|
688,333
|
|
|
Net Book Value as of December 31, 2017
|
|
$
|
13,995,000
|
|
$
|
1,916,667
|
|
$
|
3,000,956
|
|
$
|
18,912,623
|
|
12.
Related party transactions:
(a)
Compensation to key management is as follows:
Key management personnel include the directors and corporate officers who have authority and who are responsible for planning, directing and controlling the Company’s business activities. Their compensation for the period ended December 31, 2017 was as follows:
|
|
|
December 31,
2017
|
|
|
Salaries, bonuses and employee benefits
|
|
$
|
1,457,401
|
|
|
Stock based compensation granted
(i-iv)
|
|
2,610,949
|
|
|
|
|
$
|
4,068,350
|
|
26
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
12.
Related party transactions:
(Cont’d)
(a)
Compensation to key management is as follows: (Cont’d)
(i)
Stock based compensation granted was estimated using the fair value of the 1,275,000 options granted to the Company’s officers. The fair value was estimated based on the Black-Scholes option pricing model as described in note 13 (b)(i) which will be recognized in the statement of loss and comprehensive loss over the vesting period.
(ii)
Stock based compensation granted was estimated using the fair value of the 3,435,000 options granted to the Company’s officers and directors. The fair value was estimated based on the Black-Scholes option pricing model as described in note 13 (b)(iii) which will be recognized in the statement of loss and comprehensive over the vesting period.
(iii)
Stock based compensation granted was estimated using the fair value of the 2,221,364 options granted to the Company’s officers and directors. The fair value was estimated based on the Black-Scholes option pricing model as described in note 13 (b)(vi) which will be recognized in the statement of loss and comprehensive over the vesting period.
(iv)
Stock based compensation granted was estimated using the fair value of the 250,000 options granted to the Company’s officer. The fair value was estimated based on the Black-Scholes option pricing model as described in note 13 (b)(vii) which will be recognized in the statement of loss and comprehensive over the vesting period.
(b)
The Company reimbursed a company controlled by directors of Nuuvera for expenses related to a portion of the occupancy costs of its office space (rent, utilities and expenses), plus an allocation of staff costs for personnel performing services for Nuuvera. These charges represent an allocation of actual costs incurred, and were charged at a market rate. The total amount reimbursed for the period to December 31, 2017 was $199,909 and as of December 31, 2017 $24,418 was payable.
(c)
As of December 31, 2017, there are $138,342 of amounts payable to officers and directors of the Company.
(d)
As of December 31, 2017, $4,218 was owing to Avanti from its 49% shareholder for advances made during the period, who is also a manager of Avanti.
(e)
The Company incurred occupancy charges of $80,932 from a company controlled by a related party of the non-controlling interest. As of December 31, 2017, $nil was payable.
27
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
13.
Share capital:
(a)
Authorized and issued capital:
The Company has unlimited authorized common shares with no par value. The movement in the Company’s issued and outstanding common shares during the period is as follows:
|
|
|
Number
|
|
|
|
|
|
|
of shares
|
|
Amount
|
|
|
Balance, January 30, 2017
|
|
—
|
|
—
|
|
|
Shares issued for cash (i)
|
|
20,000,000
|
|
$
|
20,000
|
|
|
Shares issued in private placement (ii)
|
|
43,458,000
|
|
43,458,000
|
|
|
Shares issued in private placement (iii)
|
|
3,722,000
|
|
3,722,000
|
|
|
Shares issued in private placement (iv)
|
|
4,000,000
|
|
4,000,000
|
|
|
Shares issued in private placement (v)
|
|
8,000,000
|
|
20,000,000
|
|
|
Shares deemed issued on merger as exchange (vi)
|
|
750,000
|
|
1,875,000
|
|
|
Cost of issuance of shares
|
|
|
|
(1,674,014
|
)
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
79,9300,000
|
|
$
|
71,400,986
|
|
(i)
On January 30, 2017, the Company issued 20,000,000 founder’s shares for gross proceeds of $20,000.
(ii)
In March 2017, the Company completed a private placement of 43,458,000 common shares for total gross proceeds of $43,458,000.
(iii)
In May 2017, the Company completed a private placement of 3,722,000 common shares for total gross proceeds of $3,722,000.
(iv)
In August 2017, the Company completed a private placement of 4,000,000 common shares for total gross proceeds of $4,000,000.
(v)
In December 2017, the Company completed a private placement of 8,000,000 common shares for total gross proceeds of $20,000,000.
(vi)
On December 29, 2017, the common shares of Mira IX were consolidated on the basis of 16.6666667 common shares outstanding prior to the Amalgamation (Note 6) to one common share outstanding totalling 750,000 common shares. Shares deemed issued were measured using the market price of Nuuvera Corp. shares, which was determined by the value of the private placement completed concurrently with the merger being $2.50 per share (Note 6).
28
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
13.
Share capital:
(Cont’d)
(b)
Stock options:
Under the terms of the Company’s Stock Option Plan (the “Plan”), the maximum number of shares reserved for issuance under the Plan is 12,000,000. Options may be exercisable over periods of up to 10 years as determined by the Board of Directors of the Company and the exercise price shall not be less than the closing price of the shares on the day preceding the award date, subject to regulatory approval. The stock option plan includes options for cashless exercises as well as the option to receive cash in lieu of shares, however both are subject to the sole and entire discretion of the Company.
During the period ended December 31, 2017, the following stock options were granted to officers, directors and consultants of the company. The fair value of the options granted for the period ended December 31, 2017 was estimated based on the Black-Scholes option pricing model, using the following weighted average assumptions:
|
Number of options granted/re-issued
|
|
8,421,364
|
|
|
|
|
|
|
|
Weighted average exercise price
|
|
$1.54
|
|
|
Weighted average fair value per stock option granted
|
|
$1.09
|
|
|
Dividend yield
|
|
0%
|
|
|
Risk-free interest rate
|
|
0.70%~1.98%
|
|
|
Volatility (1)
|
|
69.27%~107.84%
|
|
|
Forfeiture Rate
|
|
5%
|
|
|
Expected term in years
|
|
1~5
|
|
(1)
Volatility was estimated by using the historical volatility of other companies that the Company considers comparable that have trading and volatility history.
The following table summarizes information about stock options outstanding as at December 31, 2017:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
average
|
|
average
|
|
remaining
|
|
|
|
|
Number of
|
|
exercise
|
|
grant-date
|
|
contractual
|
|
|
|
|
options
|
|
price
|
|
fair value
|
|
term
|
|
|
Options outstanding, January 30, 2017
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issued (i-vii)
|
|
8,346,364
|
|
$
|
1.54
|
|
$
|
1.09
|
|
9.65
|
|
|
Options deemed re-issued on Amalgamation (viii)
|
|
75,000
|
|
1.67
|
|
0.73
|
|
1.00
|
|
|
Options outstanding, December 31, 2017
|
|
8,421,364
|
|
$
|
1.54
|
|
$
|
1.09
|
|
9.57
|
|
29
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
13.
Share capital:
(Cont’d)
(b)
Stock options: (Cont’d)
(i)
On June 14, 2017, the Company granted a total of 1,275,000 stock options to its executive officers. Each option allows the holder to acquire one common share of the company for $1.00 for a period of 10 years, subject to vesting requirements. The initial vesting date of the options is May 1, 2017, at which point 50 per cent of the options of each holder vested, and the remainder of the options will vest on April 1, 2018. The fair value of these stock options of $914,091 was estimated at the grant date based on the Black-Scholes pricing model.
(ii)
On June 14, 2017, the Company granted a total of 100,000 stock options to a consultant. Each option allows the holder to acquire one common share of the company for $1.00 for a period of 10 years, subject to vesting requirements. The initial vesting date of the options is May 1, 2017, at which point 25,000 options are vested, 25,000 options to vest on April 1, 2018 and the remaining 50,000 options to vest at the discretion of the Board of Directors of the Company, which has been estimated to be May 1, 2019. The fair value of these stock options of $62,165 was estimated at the grant date based on the Black-Scholes pricing model.
(iii)
On July 13, 2017, the Company granted a total of 3,435,000 stock options to its executive officers and directors. Each option allows the holder to acquire one common share of the company for $1.00 for a period of 10 years, subject to vesting requirements. The vesting starts on August 13, 2017 on a monthly basis, over 36 months period. The fair value of these stock options of $2,440,911 was estimated at the grant date based on the Black-Scholes pricing model.
(iv)
On July 13, 2017, the Company granted a total of 450,000 stock options to its consultants. Each option allows the holder to acquire one common share of the company for $1.00 for a period of 10 years, subject to vesting requirements. The vesting starts on August 13, 2017 on a monthly basis, over 36 months period. The fair value of these stock options of $319,770 was estimated at the grant date based on the Black-Scholes pricing model.
(v)
On July 13, 2017, the Company granted a total of 100,000 stock options to a consultant. Each option allows the holder to acquire one common share of the company for $1.00 for a period of 10 years, subject to vesting requirements. The initial vesting date of the options is July 13, 2017, at which point 50 per cent of the options of are vested, and the remainder of the options will vest on April 21, 2018. The fair value of these stock options of $36,111 was estimated at the grant date based on the Black-Scholes pricing model.
30
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
13.
Share capital:
(Cont’d)
(b)
Stock options: (Cont’d)
(vi)
On November 10, 2017, the Company granted a total of 2,686,364 stock options to its officers and directors. Each option allows the holder to acquire one common share of the company for $2.50 for a period of 10 years, subject to vesting requirements. The vesting starts on December 10, 2017 on a monthly basis, over 36 months period. The fair value of these stock options of $4,799,140 was estimated at the grant date based on the Black-Scholes pricing model.
(vii) On December 29, 2017, the Company granted a total of 300,000 stock options to its officers. Each option allows the holder to acquire one common share of the company for $2.50 for a period of 10 years, subject to vesting requirements. The vesting starts on January 13, 2018 on a monthly basis, over 36 months period. The fair value of these stock options of $530,059 was estimated at the grant date based on the Black-Scholes pricing model;
(viii) As a part of the Amalgamation (Note 6), stock options of option holders of Mira IX were deemed re-issued. The estimated fair value of the 75,000 options deemed re-issued to option holders is $55,000 and was calculated using the Black-Scholes option pricing model using the following assumptions: volatility 100%, expected life 1 year, risk free rate of return 1.98%.
Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options. The following table reflects the actual stock options issued and outstanding as of December 31, 2017 (all options are exercisable into one common share of the Company):
|
|
|
|
|
|
|
Number of options
|
|
|
|
|
Option
|
|
Number of options
|
|
vested and
|
|
|
Expiry Date
|
|
price
|
|
outstanding
|
|
exercisable
|
|
|
June 14, 2027
|
|
$
|
1.00
|
|
1,375,000
|
|
662,500
|
|
|
July 13, 2027
|
|
$
|
1.00
|
|
3,985,000
|
|
589,583
|
|
|
November 10, 2027
|
|
$
|
2.50
|
|
2,686,384
|
|
74,621
|
|
|
December 13, 2027
|
|
$
|
2.50
|
|
300,000
|
|
—
|
|
|
December 29, 2018
|
|
$
|
1.67
|
|
75,000
|
|
75,000
|
|
|
Balance, December 31, 2017
|
|
|
|
8,421,364
|
|
1,401,704
|
|
31
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
14.
Capital management:
The Company’s objective when managing capital is to maintain its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. The Company includes equity, comprised of issued common shares, contributed surplus and deficit in the definition of capital. The Company may adjust the amount of dividends paid to stockholders, return capital to stockholders, issue new shares or debt instruments or sell assets to reduce any debt. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management team to sustain the future development of the business.
As at December 31, 2017, managed capital was $59,045,285. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. Neither the Company nor subsidiaries are subject to externally imposed capital requirements.
15.
Financial risk management:
Risk management framework:
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. Top management frequently meets to discuss early identification of those risks, if any, monitors its compliance with the policies and procedures and documents their follow-up.
The Board of Directors oversees how management monitors compliance with the Company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Company.
(a)
Credit risk:
Credit risk relates to cash and arises from the possibility that any counterparty to an instrument fails to perform. The Company thoroughly examines the various financial risks to which it is exposed and assesses the impact and likelihood of those risks. Where material, these risks are reviewed and monitored by the Board of Directors. As at December 31, 2017, the Company’s maximum exposure to credit risk was the carrying value of cash.
The Company has no significant concentration of credit risk arising from operations. The Company’s cash are either on deposit with one of the highly rated banking groups in Canada or invested in guaranteed investment certificates issued by one of the highly rated Canadian banking groups. Management believes that the credit risk with respect to financial instruments included in cash is remote.
32
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
15.
Financial risk management:
(Cont’d)
Risk management framework:
(Cont’d)
(a)
Credit risk: (Cont’d)
Financial instruments and cash deposits:
Credit risk from balances with banks and financial institutions is managed by the Company’s treasury function in accordance with the Company’s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counter party.
(b)
Liquidity risk:
The Company’s exposure to liquidity risk is dependent on its ability to raise funds to meet purchase commitments and to sustain operations. The Company controls its liquidity risk by managing working capital and cash flows. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at December 31, 2017, the Company had a cash balance of $44,121,265 to settle current financial liabilities of $3,075,568. All of the Company’s financial liabilities except for the non-controlling interest liability have contractual maturities of less than 12 months and are subject to normal trade terms. As a result, the Company has minimal liquidity risk.
Management believes that cash on hand will be sufficient to meet the Company’s future needs.
(c)
Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
33
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
15.
Financial risk management:
(Cont’d)
Risk management framework:
(Cont’d)
(c)
Market risk: (Cont’d)
Foreign exchange rates:
The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s transactions with parties located outside of Canada. The following table provides the impact on the net loss given a change in the indicated foreign exchange rates:
|
|
|
|
|
EUR
|
|
|
|
|
|
|
U.S. denominated
|
|
denominated (in
|
|
Total
|
|
|
|
|
(in CDN)
|
|
CDN)
|
|
(in CDN)
|
|
|
Cash
|
|
$
|
100,740
|
|
$
|
45,239
|
|
$
|
141,561
|
|
|
Prepaid expenses and other receivables
|
|
—
|
|
415,989
|
|
415,989
|
|
|
|
|
100,740
|
|
461,228
|
|
$
|
557,550
|
|
|
Accounts payable and accrued liabilities
|
|
(366,227
|
)
|
(510,779
|
)
|
(843,321
|
)
|
|
Net assets (liabilities) exposure
|
|
$
|
(265,487
|
)
|
$
|
(538,506
|
)
|
$
|
(285,771
|
)
|
Based on the above net exposures as at December 31, 2017, a 10% decrease or increase of the above currencies against the CDN dollar would result in an increase or decrease, respectively, in the net loss by $28,570. Management believes the carrying values of the financial assets and liabilities listed above approximate their fair values due to their short term nature.
Interest rates:
The Company’s current policy is to invest excess cash in investment grade short-term deposit certificates issued by banking institutions. The Company periodically monitors the investments it makes and is satisfied with the credit ratings of the banks. The Company does not have any interest bearing debt so the risk is minimal.
16.
Loss per share:
Loss per share has been calculated using the weighted average number of common shares and common share equivalents issued and outstanding during the period. The calculation of basic and diluted loss per share for the period ended December 31, 2017 was based on the loss attributable to common shareholders of $37,491,971 and the average weighted average number of capital stock outstanding of 64,706,391. Diluted loss per share did not include the effect of 8,421,364 stock options outstanding as they are anti-dilutive.
34
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
17.
Non-controlling interest liability:
The following table summarises the non-controlling interest 49% held in Avanti:
|
|
|
Amount, Total
|
|
|
NCI acquired on acquisition (Note 4)
|
|
$
|
12,740,000
|
|
|
Change in fair value of non-controlling interest liability
|
|
(741,122
|
)
|
|
Adjustment to NCI for subsequent acquisition
|
|
22,116,672
|
|
|
Additional contributions from NCI
|
|
884,450
|
|
|
Non-controlling interest liability
|
|
$
|
35,000,000
|
|
Subsequent to year end, the Company acquired the remaining 49-per-cent minority interest of ARA- Avanti Rx Analytics Inc., see Note 20(c).
18.
Income taxes:
(a)
Reconciliation of effective tax rate:
The reconciliation of income taxes at the combined Canadian federal and provincial statutory income tax rate of 26.5% to the Company’s reported taxes is as follows:
|
|
|
December 31, 2017
|
|
|
Loss before tax
|
|
$
|
(38,040,495
|
)
|
|
Statutory income tax rate
|
|
26.50
|
%
|
|
Expected income tax recovery
|
|
(10,080,731
|
)
|
|
Non-deductible stock based compensation
|
|
785,618
|
|
|
Transaction costs non-deductible for tax purposes
|
|
529,359
|
|
|
Non-deductible other costs
|
|
5,671,900
|
|
|
Change in deferred tax assets not recognized
|
|
2,545,330
|
|
|
Income tax expense (recovery)
|
|
$
|
(548,524
|
)
|
(b)
Unrecognized deferred tax assets:
Deferred tax assets have not been recognized in respect of the following items, because it is not probable that future taxable profit will be available against which the Company can use the benefits therefrom. $267,789 unrecognized deferred tax assets were acquired during business combinations in 2017.
|
|
|
Gross
|
|
2017
|
|
|
|
|
|
|
|
|
|
Deductible (taxable) temporary differences
|
|
$
|
1,339,211
|
|
$
|
354,891
|
|
|
Tax losses
|
|
9,276,333
|
|
2,458,228
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,615,545
|
|
$
|
2,813,119
|
|
35
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
18.
Income taxes:
(Cont’d)
(c)
Deferred tax liability:
|
|
|
|
|
Acquired during
|
|
Movement
|
|
|
|
|
|
|
Opening
|
|
business
|
|
during
|
|
|
|
|
|
|
balance
|
|
combination
|
|
period
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
—
|
|
$
|
54,365
|
|
$
|
44,850
|
|
$
|
99,215
|
|
|
Intangible assets
|
|
—
|
|
(4,396,000
|
)
|
179,408
|
|
(4,216,592
|
)
|
|
Non-capital losses
|
|
—
|
|
814,960
|
|
324,266
|
|
1,139,226
|
|
|
Balance, as of December 31, 2017
|
|
$
|
—
|
|
$
|
(3,526,675
|
)
|
$
|
548,524
|
|
$
|
(2,978,151
|
)
|
(d)
Non-capital losses:
The Company has non-capital losses of approximately $12,819,000 to apply against future taxable income. If not utilized, the non-capital losses will expire as follows:
|
2034
|
|
$
|
43,000
|
|
|
2035
|
|
197,000
|
|
|
2036
|
|
1,455,000
|
|
|
2037
|
|
9,482,000
|
|
|
No expiry
|
|
1,642,000
|
|
|
|
|
$
|
12,819,000
|
|
19.
Commitments and contingencies:
The Company subsidiary Avanti is committed to annual rental payments for an office in Brampton under a lease agreement that expires July 31, 2022. The total commitment associated with this lease is as follows:
|
Year ended
|
|
Annual lease payment
|
|
|
2018
|
|
$
|
237,326
|
|
|
2019
|
|
263,942
|
|
|
2020
|
|
290,558
|
|
|
2021
|
|
317,174
|
|
|
2022
|
|
200,544
|
|
|
Total
|
|
$
|
1,309,544
|
|
36
NUUVERA INC.
Notes to the Consolidated Financial Statements
(Expressed in Canadian dollars)
For the period from Incorporation on January 30, 2017 to December 31, 2017
20.
Subsequent events:
(a)
On January 31, 2018, Nuuvera acquired 100 per cent of Genoa based FL-Group (Italy) for the total of EUR996,635. With its acquisition of FL-Group secured, Nuuvera intends to import cannabis flower and introduce its branded cannabis oil to the Italian market. The purchase price consists of a payment of EUR846,634 due at completion, EUR100,000 is due on the second anniversary of the closing date, and EUR50,000 subject to an increase or decrease depending on the difference between the preliminary and final net financial position and to be paid 5 days after the final determination of the closing price which is to be determined within 45 days subject to shareholder approval of FL-Group (Italy). Nuuvera is working on completion of the initial accounting for the business combination which is expected to be completed at the end of May 2018.
(b)
On February 14, 2018, Nuuvera completed its bought deal short form prospectus offering of 9,409,090 units of the Company, which includes 1,227,270 units issued upon exercise of the overallotment option, at an issue price of $5.50 per unit for aggregate gross proceeds of $51,749,995. Each unit comprises one common share of the Company and one-half of one common share purchase warrant. Each warrant entitles the holder thereof to purchase one common share at a price of $7.20 for a period of 24 months following the date hereof. The Company paid the total of $3,105,000 in commission to underwriters Canaccord Genuity Corp., Clarus Securities Inc. and GMP Securities LP.
(c)
On February 21, 2018, the Company acquired the remaining 49-per-cent minority interest of ARA- Avanti Rx Analytics Inc., a subsidiary of the Company, from a single minority shareholder. Total consideration for the Avanti transaction was $35,000,000.
(d)
On February 26, 2018, Nuuvera acquired 100 percent of ASG Pharma, a high-capacity Maltese good manufacturing practice laboratory for the total of EUR1,000,000. ASG Pharma, one of the few GMP labs in Malta, is expected to be one of Nuuvera’s hubs for the production and distribution of oil-based medical cannabis products to the emerging European medical cannabis market. Nuuvera is working on completion of the initial accounting for the business combination which is expected to be completed at the end of May 2018.
(e)
In January 2018, Aphria Inc. and Nuuvera entered into a definitive arrangement agreement (as amended on March 23, 2018), pursuant to which Aphria acquired, by way of a court-approved plan of arrangement under the Business Corporations Act (Ontario), 100 per cent of the issued and outstanding common shares of Nuuvera. On March 23, 2018, the Company and Aphria Inc. completed the arrangement under the provisions of the Business Corporations Act (Ontario), pursuant to which, among other things, Aphria has acquired all of the common shares of Nuuvera not already owned by it. Under the terms of the arrangement, each former Nuuvera shareholder was entitled to receive $0.62 in cash plus 0.3546 of a common share of Aphria, for each Nuuvera share held prior to the arrangement. Following the acquisition, the Nuuvera shares were delisted from the TSX Venture Exchange as of the close of trading on March 27, 2018.
37
Exhibit 99.101
EXECUTION VERSION
UNDERWRITING AGREEMENT
June 12, 2018
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention: Vic Neufeld, President & Chief Executive Officer
Dear Mesdames/Sirs:
Clarus Securities Inc. (“
Clarus
”), as lead underwriter, Canaccord Genuity Corp., Cormark Securities Inc., Haywood Securities Inc. and INFOR Financial Inc. (collectively, the “
Underwriters
” and each individually, an “
Underwriter
”) hereby severally, and not jointly, nor jointly and severally, in their respective percentages set out in Section 18 below, offer to purchase from Aphria Inc. (the “
Corporation
”) and the Corporation hereby agrees to issue and sell to the Underwriters, 18,987,400 Common Shares of the Corporation (the “
Purchased Shares
”), on an underwritten basis, at the purchase price of $11.85 per Purchased Share (the “
Offering Price
”), for aggregate gross proceeds of $225,000,690.
The Underwriters may arrange for substituted purchasers (the “
Substituted Purchasers
”) for the Offered Shares (as defined below), where such Substituted Purchasers are resident in the Selling Jurisdictions (as defined below). Each Substituted Purchaser shall purchase the Offered Shares at the Offering Price, and to the extent that Substituted Purchasers purchase Offered Shares, the obligations of the Underwriters to do so will be reduced by the number of Offered Shares purchased by the Substituted Purchasers from the Corporation.
The Underwriters propose to distribute the Offered Shares in Canada pursuant to the Final Prospectus (as defined below) and may also distribute the Offered Shares to, or for the account or benefit of, persons in the United States (as defined below) in transactions that are exempt from the registration requirements of the U.S. Securities Act (as defined below) pursuant to the U.S. Private Placement Memorandum (as defined below), all in the manner contemplated by this Agreement.
Subject to applicable law, including applicable Securities Laws (as defined below) and the terms of this Agreement, the Offered Shares may also be distributed outside of Canada and the United States, in each jurisdiction as mutually agreed to by the Corporation and the Underwriters where they may be lawfully sold by the Underwriters without: (i) giving rise to any requirement under the laws of such jurisdiction to prepare and/or file a prospectus or document having similar effect; or (ii) creating any ongoing compliance or continuous disclosure obligations for the Corporation pursuant to the laws of such jurisdiction.
The Corporation hereby grants to the Underwriters an option (the “
Over-Allotment Option
”) to purchase up to an additional 2,848,110 Common Shares (the “
Over-Allotment Shares
”) at the Offering Price for additional gross proceeds of up to $33,750,104, upon the terms and conditions set forth herein for the purpose of covering over-allotments made in connection
with the Offering (as defined below) and for market stabilization purposes, if any. The Over-Allotment Option shall be exercisable, in whole or in part, and from time to time, by the Underwriters, for a period of 30 days from and including the Closing Date by giving written notice to the Corporation, as more particularly described in Section 12 hereof. Pursuant to such notice, the Underwriters shall purchase in their respective percentages set out in Section 18 below, and the Corporation shall deliver and sell, the number of Over-Allotment Shares indicated in such notice, in accordance with this Agreement.
The Purchased Shares and the Over-Allotment Shares are collectively referred to herein as the “
Offered Shares
” and the offering of the Offered Shares by the Corporation is hereinafter referred to as the “
Offering
”. The price of any Offered Shares sold under this Agreement shall be the Offering Price.
The Underwriters shall be entitled to appoint a selling group consisting of other registered dealers in accordance with applicable Securities Laws for the purposes of arranging for purchasers of the Offered Shares. Any investment dealer who is a member of any selling group formed by the Underwriters pursuant to the provisions of this Agreement or with whom any Underwriter has a contractual relationship with respect to the Offering, if any, shall agree with such Underwriter to comply with the covenants and obligations given by the Underwriters herein. The fee payable to any such investment dealer who is a member of any selling group shall be for the account of the Underwriters.
The Underwriters may offer the Offered Shares at a price less than the Offering Price as described in further detail in Section 18 below, in compliance with Canadian Securities Laws and, specifically, the requirements of NI 44-101 (as defined below) and the disclosure concerning the same contained in the Prospectus.
In consideration of the services to be rendered by the Underwriters in connection with the Offering, the Corporation agrees to pay to the Underwriters the Commission (as defined below) at the Closing Time (as defined below).
TERMS AND CONDITIONS
The following are additional terms and conditions of this Agreement between the Corporation and the Underwriters:
Section 1
Definitions and Interpretation
(1)
Where used in this Agreement or in any amendment hereto, the following terms have the following meanings, respectively:
“
ACMPR
” means the
Access to Cannabis for Medical Purposes Regulations
in effect since August 2016;
“
Agreement
” means this underwriting agreement, as it may be amended from time to time;
2
“
Applicable Laws
” means all applicable laws, rules, regulations, policies, statutes, ordinances, codes, orders, consents, decrees, judgments, decisions, rulings, awards, or guidelines, the terms and conditions of any Permits, including any judicial or administrative interpretation thereof, of any Governmental Authority, including without limitation the ACMPR;
“
associate
”, “
affiliate
”, “
insider
” and “
person
” have the respective meanings given to them in the Securities Act;
“
Business
” means the business of growing, cultivating, harvesting, storing, packaging, labelling, marketing, supplying, selling, shipping and disposing of, prescription medical marijuana;
“
Business Assets
” means all tangible and intangible property and assets owned (either directly or indirectly), leased, licensed, loaned, operated or used, including all real property, fixed assets, facilities, equipment, inventories and accounts receivable, by the Corporation and the Subsidiaries in connection with the Business;
“
Business Day
” means a day, other than a Saturday, a Sunday or statutory or civic holiday in the City of Toronto, Ontario;
“
Canadian Securities Laws
” means, collectively, all applicable securities laws of each of the Qualifying Jurisdictions and the respective rules and regulations under such laws together with applicable published instruments, notices and orders of the securities regulatory authorities in the Qualifying Jurisdictions, including the rules and policies of the TSX;
“
Claims
” has the meaning ascribed thereto in Section 13 of this Agreement
“
Clarus
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Closing
” means the completion of the sale of the Offered Shares and the purchase by the Underwriters of the Offered Shares pursuant to this Agreement;
“
Closing Date
” means June 28, 2018 or such earlier or later date as may be agreed to in writing by the Corporation and the Underwriters, each acting reasonably;
“
Closing Time
” means 8:30 a.m. (Toronto time) on the Closing Date, or such other time on the Closing Date as may be agreed to by the Corporation and the Underwriters;
“
Commission
” has the meaning ascribed thereto in Section 14 of this Agreement;
“
Common Shares
” means the common shares in the capital of the Corporation;
“
Corporation
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Debt Instrument
” means any and all loans, bonds, notes, debentures, indentures, promissory notes, mortgages, guarantees or other instruments evidencing indebtedness
3
(demand or otherwise) for borrowed money or other liability to which the Corporation or its Subsidiaries are a party or to which their respective property or assets are otherwise bound;
“
distribution
” means distribution or distribution to the public, as the case may be, for the purposes of Canadian Securities Laws or any of them;
“
Documents Incorporated by Reference
” means all financial statements, related management’s discussion and analysis, management information circulars, joint information circulars, (amended and restated) business acquisition reports, annual information forms, material change reports or other documents filed by the Corporation, whether before or after the date of this Agreement, that are required to be incorporated by reference into the Prospectus;
“
Employee Plans
” has the meaning ascribed thereto in Section 7(pp) of this Agreement;
“
Environmental Laws
” means all Applicable Laws relating to the environment or environmental issues (including air, surface, water and stratospheric matters), pollution or protection of human health and safety, including without limitation relating to the release, threatened release, manufacture, processing, blending, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials;
“
Final Prospectus
” means the (final) short form prospectus of the Corporation relating to the Offering, including all of the Documents Incorporated by Reference and any Supplementary Material thereto, prepared and to be filed by the Corporation with the Securities Commissions in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Final Receipt has been issued;
“
Final Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Final Prospectus in each of the Qualifying Jurisdictions;
“
Financial Statements
” means the audited consolidated financial statements for the 12 months ended May 31, 2017 and May 31, 2016, together with the notes thereto and the auditors’ report thereon and the condensed interim consolidated financial statements for the three months and nine months ended February 28, 2018 and February 28, 2017, together with the notes thereto;
“
Government Official
” means (a) any official, officer, employee, or representative of, or any person acting in an official capacity for or on behalf of, any Governmental Authority, (b) any salaried political party official, elected member of political office or candidate for political office, or (c) any company, business, enterprise or other entity owned or controlled by any person described in the foregoing clauses;
“
Governmental Authority
” means and includes, without limitation, any national or federal government, province, state, municipality or other political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or
4
administrative functions of or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing, including Health Canada;
“
Hazardous Materials
” means chemicals, fluids, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products;
“
IFRS
” means International Financial Reporting Standards as issued by the International Accounting Standards Board;
“
including
” means including but not limited to;
“
Indemnified Party
” or “
Indemnified Parties
” have the meanings ascribed thereto in Section 13 of this Agreement;
“
Indemnitor
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
Licences
” means (i) Licence No. 10 MM0065/2018 issued by Health Canada pursuant to Section 35 of the ACMPR and its regulations, with an effective date of March 23, 2018 and expiry date of September 25, 2019, granted to the Corporation (ii) Licence No. 10 MM0004/2018 issued by Health Canada pursuant to Section 35 of the ACMPR and its regulations, with an effective date of April 20, 2018 and expiry date of March 13, 2020, granted to Broken Coast Cannabis Ltd. (iii) Licence No. 2018/6931 issued by Health Canada pursuant to the Narcotic Control Regulations, with an effective date of January 1, 2018, granted to the Corporation; and, (iv) Licence No. 2018/6927 issued by Health Canada pursuant to the Narcotic Control Regulations, with an effective date of January 1, 2018, granted to ARA-Avanti RX Analytics Inc.; (v) Establishment Licence No. 3-002313-A, issued by Health Canada pursuant to the Food and Drug Regulations, with an effective date of June 7, 2017, granted to ARA-Avanti Rx Analytics Inc.; (vi) Medical Device Establishment Licence No. 7396, issued by Health Canada pursuant to the Medical Devices Regulations, with an effective date of April 12, 2017, granted to ARA-Avanti Rx Analytics Inc.; (vii) Site Licence No. 301860, issued by Health Canada pursuant to the Natural Health Products Regulations, with an effective date of January 3, 2018, granted to ARA-Avanti Rx Analytics Inc.;
“
Liens
” means any encumbrance or title defect of whatever kind or nature, regardless of form, whether or not registered or registrable and whether or not consensual or arising by law (statutory or otherwise), including any mortgage, lien, charge, pledge or security interest, whether fixed or floating, or any assignment, lease, option, right of pre-emption, privilege, encumbrance, easement, servitude, right of way, restrictive covenant, right of use or any other right or claim of any kind or nature whatever which affects ownership or possession of, or title to, any interest in, or right to use or occupy such property or assets;
“
Losses
” has the meaning ascribed thereto in Section 13 of this Agreement;
“
marketing materials
” has the meaning ascribed thereto in NI 41-101;
5
“
Marketing Material
” means the term sheet for the Offering dated June 6, 2018 as agreed to between the Corporation and Clarus;
“
Material Adverse Effect
” means any event, change, fact, or state of being which could reasonably be expected to have a significant and adverse effect on the business, affairs, capital, operation, properties, permits, assets, liabilities (absolute, accrued, contingent or otherwise) or condition (financial or otherwise) of the Corporation and its Subsidiaries considered on a consolidated basis;
“
Material Agreement
” means any and all contracts, commitments, agreements (written or oral), instruments, leases or other documents, including licences, sub-licenses, supply agreements, manufacturing agreements, distribution agreements, sales agreements, or any other similar type agreements, to which the Corporation or the Subsidiaries are a party or to which their respective Business Assets are otherwise bound, and which is material to the Corporation and the Subsidiaries on a consolidated basis;
“
material change
”, “
material fact
” and “
misrepresentation
” have the respective meanings ascribed thereto in the Securities Act;
“
MI 11-102
” means Multilateral Instrument 11-102 —
Passport System
;
“
NP 11-202
” means National Policy 11-202 —
Process for Prospectus Reviews in Multiple Jurisdictions
;
“
NI 41-101
” means National Instrument 41-101 —
General Prospectus Requirements
;
“
NI 44-101
” means National Instrument 44-101 -
Short Form Prospectus Distributions
;
“
NI 51-102
” means National Instrument 51-102 —
Continuous Disclosure Obligations
;
“
NI 52-109
” means National Instrument 52-109 —
Certification of Disclosure in Issuers’ Annual and Interim Filings
;
“
Offered Shares
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering
” has the meaning ascribed thereto in the sixth paragraph of this Agreement;
“
Offering Documents
” means the Preliminary Prospectus, the Final Prospectus, any Supplementary Material and, if applicable, the U.S. Private Placement Memorandum;
“
Offering Price
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Over-Allotment Option
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
6
“
Over-Allotment Shares
” has the meaning ascribed thereto in the fifth paragraph of this Agreement;
“
Passport System
” means the system for review of prospectus filings set out in MI 11-102 and NP 11-202;
“
person
” shall be broadly interpreted and shall include any individual, corporation, partnership, joint venture, association, trust or other legal entity;
“
Preliminary Prospectus
” means the preliminary short form prospectus of the Corporation dated June 12, 2018, including all of the Documents Incorporated by Reference and any Supplementary Material thereto, prepared and filed by the Corporation in accordance with the Passport System and NI 44-101 in the Qualifying Jurisdictions in respect of the Offering and for which a Preliminary Receipt will be issued no later than 5:00 p.m. (Toronto time) on June 13, 2018;
“
Preliminary Receipt
” means the receipt issued by the Principal Regulator, evidencing that a receipt has been, or has been deemed to be, issued for the Preliminary Prospectus in each of the Qualifying Jurisdictions;
“
Principal Regulator
” means the Ontario Securities Commission;
“
Prospectus
” means, collectively, the Preliminary Prospectus and the Final Prospectus;
“
provide
” in the context of sending or making available marketing materials to a potential investor of Offered Shares has the meaning ascribed thereto under Canadian Securities Laws, whether in the context of a “road show” (as defined in NI 41-101) or otherwise;
“
Public Disclosure Record
” means collectively, all of the documents which have been filed on www.sedar.com since June 1, 2017 by or on behalf of the Corporation with the Securities Commissions pursuant to the requirements of Canadian Securities Laws;
“
Purchased Shares
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
Purchasers
” means, collectively, each of the purchasers of Offered Shares arranged by the Underwriters, including the Substituted Purchasers, in connection with the Offering, including, if applicable, the Underwriters;
“
Qualified Institutional Buyers
” means “qualified institutional buyers” as such term is defined in Rule 144A(a)(1) of the U.S. Securities Act;
“
Qualifying Jurisdictions
” means all of the provinces of Canada, except for Québec;
“
Regulation D
” means Regulation D adopted by the SEC under the U.S. Securities Act;
“
Regulation S
” means Regulation S adopted by the SEC under the U.S. Securities Act;
7
“
Repayment Event
” means any event or condition which gives the holder of any Debt Instrument (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a material portion of such indebtedness by the Corporation or its subsidiaries;
“
Rule 144A
” means Rule 144A under the U.S. Securities Act;
“
SEC
” means the United States Securities and Exchange Commission;
“
Securities Act
” means the
Securities Act
(Ontario);
“
Securities Commissions
” means the securities regulatory authority in each of the Qualifying Jurisdictions;
“
Securities Laws
” means collectively, Canadian Securities Laws, U.S. Securities Laws and all applicable securities laws, rules, regulations, policies and other instruments promulgated by the Securities Regulators in any of the other Selling Jurisdictions;
“
Securities Regulators
” means collectively, the securities regulators or other securities regulatory authorities in the Selling Jurisdictions;
“
SEDAR
” means the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators;
“
Selling Jurisdictions
” means, collectively, each of the Qualifying Jurisdictions and may also include, the United States and any other jurisdictions outside of Canada and the United States as mutually agreed to by the Corporation and the Underwriters;
“
subsidiary
” or “
subsidiaries
” has the meaning ascribed thereto in the Securities Act;
“
Subsidiaries
” means all, any one or combination of (i) Pure Natures Wellness Inc., a corporation existing under the laws of Ontario; (ii) Aphria (Arizona) Inc., a corporation existing under the laws of Arizona; (iii) Broken Coast Cannabis Inc., a corporation existing under the laws of British Columbia; (iv) Cannan Growers Inc., a corporation existing under the laws of British Columbia, and (v) Nuuvera Inc., a corporation existing under the laws of Ontario;
“
Substituted Purchasers
” has the meaning ascribed thereto in the second paragraph of this Agreement;
“
Supplementary Material
” means, collectively, any amendment to the Preliminary Prospectus or the Final Prospectus, and any amendment or supplemental prospectus or ancillary materials that may be filed by or on behalf of the Corporation under Canadian Securities Laws relating to the distribution of the Offered Shares;
“
template version
” has the meaning ascribed thereto under NI 41-101 and includes any revised template version of marketing materials as contemplated by NI 41-101;
8
“
TSX
” means the Toronto Stock Exchange;
“
Underwriters
” has the meaning ascribed thereto in the first paragraph of this Agreement;
“
United States
” means the United States of America, its territories and possessions, any state of the United States and the District of Columbia;
“
U.S. Affiliates
” means the Underwriters’ respective United States registered broker dealer affiliates;
“
U.S. Private Placement Memorandum
” means the private placement offering memorandum in the event of an offering of the Offered Shares in the United States, which will include and supplement the Prospectus;
“
U.S. Exchange Act
” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations made under the United States Securities Exchange Act of 1934, as amended;
“
U.S. Securities Act
” means the United States Securities Act of 1933, as amended, and the rules and regulations made under the United States Securities Act of 1933, as amended; and
“
U.S. Securities Laws
” means all applicable securities legislation in the United States, including, without limitation, the U.S. Exchange Act and U.S. Securities Act;
(2)
Any reference in this Agreement to a section or subsection shall refer to a section or subsection of this Agreement.
(3)
All words and personal pronouns relating thereto shall be read and construed as the number and gender of the party or parties referred to in each case required and the verb shall be construed as agreeing with the required word and/or pronoun.
(4)
Any reference in this Agreement to $ or to “dollars” shall refer to the lawful currency of Canada, unless otherwise specified.
(5)
The following are the schedules to this Agreement, which schedules are deemed to be a part hereof and are hereby incorporated by reference herein:
Schedule “A” Subsidiaries
Schedule “B” Existing Rights
Schedule “C” Compliance with United States Securities Laws (if applicable)
Section 2
Attributes of the Offered Shares.
The Offered Shares to be sold by the Corporation hereunder shall have the rights, privileges, restrictions and conditions that conform in all material respects to the rights, privileges, restrictions and conditions set forth in the Offering Documents.
9
The Underwriters severally agree not to offer or sell the Offered Shares in such a manner as to require registration of any of them or the filing of a prospectus or any similar document under the laws of any jurisdiction outside the Qualifying Jurisdictions and to distribute or offer the Offered Shares only in the Qualifying Jurisdictions and in accordance with all applicable laws. However, the Corporation and each Underwriter acknowledge that, in the event of any U.S. sales, the U.S. Affiliates of the Underwriters may offer and resell the Offered Shares to, or for the account or benefit of, persons within the United States to Qualified Institutional Buyers pursuant to Rule 144A, all in accordance with Schedule “C”, provided that no such action on the part of the Underwriters or their U.S. Affiliates shall in any way oblige the Corporation to register any Offered Shares under the U.S. Securities Act or the securities laws of any state of the United States.
Any agreements between the Underwriters and the members of any selling group will contain restrictions which are substantially the same as those contained in this Section 2.
Notwithstanding the foregoing, an Underwriter will not be liable to the Corporation under this section or Schedule “C” with respect to a violation by another Underwriter or its U.S. Affiliate(s) of the provisions of this section or Schedule “C” if the former Underwriter or its U.S. Affiliate, as applicable, is not itself also in violation.
Section 3
Filing of Prospectus.
(1)
The Corporation shall:
(a)
not later than 11:59 p.m. (Toronto time) on the date hereof, have filed the Preliminary Prospectus pursuant to the Passport System with the Securities Commissions;
(b)
promptly (i) use commercially reasonable efforts to resolve all comments made and deficiencies raised in respect of the Preliminary Prospectus by the Principal Regulator, and (ii) file the Final Prospectus and obtain a Final Receipt not later than 5:00 p.m. (Toronto time) on June 22, 2018, and otherwise fulfill all legal requirements to qualify the Offered Shares for distribution to the public in the Qualifying Jurisdictions through the Underwriters or any other investment dealer or broker registered to transact such business in the applicable Qualifying Jurisdictions contracting with the Underwriters, and to qualify the grant of the Over-Allotment Option; and
(c)
until the date on which the distribution of the Offered Shares is completed, promptly take, or cause to be taken, all additional steps and proceedings that may from time to time be required under Canadian Securities Laws to continue to qualify the distribution of the Offered Shares for sale to the public and the grant of the Over-Allotment Option to the Underwriters or, in the event that the Offered Shares or the Over-Allotment Option have, for any reason, ceased to so qualify, to again so qualify the Offered Shares and the Over-Allotment Option.
(2)
Prior to the filing of the Offering Documents and thereafter, during the period of distribution of the Offered Shares, the Corporation shall have allowed the Underwriters to
10
participate fully in the preparation of, and to approve the form and content of, such documents and shall have allowed the Underwriters to conduct all due diligence investigations (which shall include the attendance of management of the Corporation and the current auditors of the Corporation at one or more due diligence sessions to be held) which they may reasonably require in order to fulfill their obligations as underwriters and in order to enable them to responsibly execute the certificate required to be executed by them at the end of the Prospectus.
(3)
It shall be a condition precedent to (i) the Underwriters’ execution of any certificate in any Prospectus, that the Underwriters be satisfied as to the form and substance of the document, and (ii) the delivery of each U.S. Private Placement Memorandum (if applicable) to any purchaser or prospective purchaser, that the Underwriters and their U.S. Affiliates be satisfied as to the form and substance of such document.
Section 4
Deliveries on Filing and Related Matters.
(1)
The Corporation shall deliver to each of the Underwriters:
(a)
prior to the time of each filing thereof, a copy of the Preliminary Prospectus and the Final Prospectus each manually signed on behalf of the Corporation, by the persons and in the form signed and certified as required by Canadian Securities Laws;
(b)
a copy of the preliminary U.S. Private Placement Memorandum or the final U.S. Private Placement Memorandum, if and as applicable;
(c)
prior to the time of filing thereof, a copy of any Supplementary Material, or other document required to be filed with or delivered to, the Securities Commissions by the Corporation under Canadian Securities Laws in connection with the Offering, including any Document Incorporated by Reference in the Final Prospectus (other than documents already filed publicly with a Securities Commission);
(d)
concurrently with the filing of the Final Prospectus with the Securities Commissions, a “long-form” comfort letter of PricewaterhouseCoopers LLP dated the date of the Final Prospectus (with the requisite procedures to be completed by such auditor within two Business Days of the date of such letter), in form and substance satisfactory to the Underwriters, acting reasonably, addressed to the Underwriters, the Corporation and the board of directors of the Corporation, with respect to the verification of financial and accounting information and other numerical data of a financial nature contained in the Final Prospectus (including all Documents Incorporated by Reference) and matters involving changes or developments since the respective dates as of which specific financial information is given therein which letter shall be in addition to the auditors’ consent letter and comfort letter (if any) addressed to the Securities Commissions; and
(e)
prior to the filing of the Final Prospectus with the Securities Commissions, a copy of the TSX conditional approval letter indicating that the application for the listing and posting for trading on the TSX of the Offered Shares has been
11
approved, subject only to satisfaction by the Corporation of the customary post-closing conditions as specified by the TSX.
Unless otherwise advised in writing, such deliveries shall also constitute the Corporation’s consent to the Underwriters’ use of the Offering Documents in connection with the distribution of the Offered Shares in compliance with this Agreement and Securities Laws.
(2)
The Corporation represents and warrants to the Underwriters with respect to the Offering Documents that as at their respective dates of delivery to the Underwriters as set out in Section 4(1) above:
(a)
all information and statements in such documents (including information and statements incorporated by reference to the extent they have not been superseded by the information and statements in the Offering Documents) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) are true and correct, in all material respects, and contain no misrepresentation and constitute full, true and plain disclosure of all material facts relating to the Corporation, the Offering and the Offered Shares, as required by Canadian Securities Laws;
(b)
no material fact or information in such documents (including information and statements incorporated by reference) (except information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus) has been omitted therefrom which is required to be stated in such disclosure or is necessary to make the statements or information contained in such disclosure not misleading in light of the circumstances under which they were made;
(c)
except with respect to information and statements relating solely to the Underwriters and furnished by them specifically for use in a Prospectus, the Prospectus and any Supplementary Material comply fully with the requirements of the Canadian Securities Laws.
(3)
The Corporation shall cause commercial copies of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum, as the case may be, to be delivered to the Underwriters without charge, in such quantities and in such cities as the Underwriters may reasonably request by written instructions to the printer of such documents as soon as possible after obtaining the Preliminary Receipt or the Final Receipt, as the case may be, but, in any event on or before noon (Toronto time) on the next Business Day (or for delivery locations outside of Toronto, on the second Business Day). Such deliveries shall constitute the consent of the Corporation to the Underwriters’ use of the Preliminary Prospectus, the Final Prospectus and the U.S. Private Placement Memorandum for the distribution of the Offered Shares in the Qualifying Jurisdictions in compliance with the provisions of this Agreement and Canadian Securities Laws and the offer and sale of the Offered Shares to, or for the account or benefit of, persons in the United States in compliance with the provisions of this Agreement (including, without limitation, Schedule “C” hereto) and U.S. Securities Laws. The Corporation shall
12
similarly cause to be delivered commercial copies of any Supplementary Material and hereby similarly consents to the Underwriters’ use thereof. The Corporation shall cause to be provided to the Underwriters, without cost, such number of copies of any Documents Incorporated by Reference as the Underwriters may reasonably request for use in connection with the distribution of the Offered Shares.
(4)
Each of the Corporation and the Underwriters have approved the Marketing Material, including any template version thereof which the Corporation has filed with the Securities Commissions and which is and will be incorporated by reference into the Prospectus, as the case may be. The Corporation and the Underwriters each covenant and agree that during the distribution of the Offered Shares, it will not provide any potential investor of Offered Shares with any marketing materials except for marketing materials that comply with, and have been approved in accordance with, NI 44-101. If requested by the Underwriter, in addition to the Marketing Materials, the Corporation will cooperate, acting reasonably, with the Underwriter in approving any other marketing materials to be used in connection with the Offering.
(5)
Subject to compliance with Securities Laws, during the period commencing on the date hereof and until completion of the distribution of the Offered Shares, the Corporation will promptly provide to the Underwriters drafts of any press releases of the Corporation for review by the Underwriters prior to issuance and shall obtain the prior approval of the Underwriters as to the content and form of any press release relating to the Offering prior to issuance, such approval not to be unreasonably withheld or delayed. If required by Securities Laws, any press release announcing or otherwise referring to the Offering disseminated in the United States shall comply with the requirements of Rule 135c under the U.S. Securities Act and any press release announcing or otherwise referring to the Offering disseminated outside the United States shall include an appropriate notation on each page as follows: “
Not for distribution to the U.S. news wire services, or dissemination in the United States
”.
(6)
Notwithstanding any provision hereof, nothing in this Agreement will create any obligation of the Corporation to file a registration statement or otherwise register or qualify the Offered Shares for sale or distribution outside of Canada.
Section 5
Material Change.
(1)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation covenants and agrees with the Underwriters that it shall promptly notify the Underwriters in writing with full particulars of:
(a)
any material change (actual, anticipated, contemplated or threatened) in respect of the Corporation and the Subsidiaries considered on a consolidated basis;
(b)
any material fact in respect of the Corporation which has arisen or has been discovered and would have been required to have been stated in any of the Offering Documents had the fact arisen or been discovered on, or prior to, the date of such document; and
13
(c)
any change in any material fact (which for the purposes of this Agreement shall be deemed to include the disclosure of any previously undisclosed material fact) contained in the Offering Documents which fact or change is, or may be, of such a nature as to render any statement in such Offering Document misleading or untrue in any material respect or which would result in a misrepresentation in the Offering Document or which would result in any of the Offering Documents not complying (to the extent that such compliance is required) with Securities Laws.
The Corporation shall promptly, and in any event within any applicable time limitation, comply, to the satisfaction of the Underwriters, acting reasonably, with all applicable filings and other requirements under Canadian Securities Laws and U.S. Securities Laws as a result of such fact or change; provided that the Corporation shall not file any Supplementary Material or other document without first providing the Underwriters with a copy of such Supplementary Material or other document and consulting with the Underwriters with respect to the form and content thereof. The Corporation shall in good faith discuss with the Underwriters any fact or change in circumstances (actual, anticipated, contemplated or threatened, financial or otherwise) which is of such a nature that there is or could be reasonable doubt whether written notice need be given under this Section 5.
(2)
If during the period of distribution of the Offered Shares there shall be any change in Canadian Securities Laws or other laws which results in any requirement to file Supplementary Material, the Corporation will promptly prepare and file such Supplementary Material with the appropriate Securities Commissions where such filing is required, provided that the Corporation shall have allowed the Underwriters and its counsel to participate in the preparation and review of any Supplementary Material.
(3)
During the period from the date of this Agreement to the completion of the distribution of the Offered Shares, the Corporation will notify the Underwriters promptly:
(a)
when any supplement to any of the Offering Documents or any Supplementary Material shall have been filed;
(b)
of any request by any Securities Commission to amend or supplement the Prospectus or for additional information;
(c)
of the suspension of the qualification of the Offered Shares or the Over-Allotment Option for offering, sale, issuance, or grant, as applicable, in any jurisdiction, or of any order suspending or preventing the use of the Offering Documents (or any Supplementary Material) or of the institution or, to the knowledge of the Corporation, threatening of any proceedings for any such purpose; and
(d)
of the issuance by any Securities Commission or any stock exchange of any order having the effect of ceasing or suspending the distribution of the Offered Shares or the trading in any securities of the Corporation, or of the institution or, to the knowledge of the Corporation, threatening of any proceeding for any such purpose. The Corporation will use its reasonable best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use
14
or such order ceasing or suspending the distribution of the Offered Shares or the trading in the shares of the Corporation and, if any such order is issued, to obtain the lifting thereof at the earliest possible time.
Section 6
Regulatory Approvals.
The Corporation will make all necessary filings, obtain all necessary consents and approvals (if any) and pay all filing fees required to be paid in connection with the transactions contemplated by this Agreement. The Corporation will cooperate with the Underwriters in connection with the qualification of the Offered Shares for offer and sale and the grant of the Over-Allotment Option, under the Canadian Securities Laws and in maintaining such qualifications in effect for so long as required for the distribution of the Offered Shares.
Section 7
Representations and Warranties of the Corporation.
The Corporation represents and warrants to each of the Underwriters, and acknowledges that each of them is relying upon such representations and warranties in connection with the purchase of the Offered Shares, that:
(a)
Good Standing of the Corporation
. The Corporation (i) is a corporation existing under the laws of Ontario and is and will at the Closing Time be current and up-to-date with all material filings required to be made and in good standing under the
Business Corporations Act
(Ontario), (ii) has all requisite corporate power and capacity to own, lease and operate its properties and assets, including its Business Assets, and to conduct its business as now carried on by it or proposed to be carried on by it as described in the Offering Documents, and (iii) has all requisite corporate power and authority to create, issue and sell the Offered Shares and to grant the Over-Allotment Option and to execute, deliver and perform its obligations under this Agreement.
(b)
Good Standing of Subsidiaries
. The Corporation’s only material, principal and direct subsidiaries are the Subsidiaries, as listed in Schedule “A” which schedule is true, complete and accurate in all respects. The Subsidiaries are corporations incorporated, organized and existing under the laws of the jurisdiction of incorporation set out in Schedule “A”, are current and up-to-date with all material filings required to be made and have all requisite corporate power and capacity to own, lease and operate their respective properties and assets, including their Business Assets, and to conduct their respective businesses as is now carried on by them or proposed to be carried on by them as described in the Offering Documents, and are duly qualified to transact business and are in good standing in each jurisdiction in which such qualification is required. Except as disclosed to the Underwriters, all of the issued and outstanding shares in the capital of the Subsidiaries have been duly authorized and validly issued, are fully paid and, are directly or indirectly beneficially owned by the Corporation, free and clear of any Liens, and none of the outstanding securities of the Subsidiaries were issued in violation of the pre-emptive or similar rights of any security holder of the Subsidiaries. Except as disclosed to the Underwriters, there exist no options,
15
warrants, purchase rights, or other contracts or commitments that could require the Corporation to sell, transfer or otherwise dispose of any securities of the Subsidiaries.
(c)
No Proceedings for Dissolution
. No act or proceeding has been taken by or against the Corporation or the Subsidiaries in connection with their liquidation, winding-up or bankruptcy, or to their knowledge are pending.
(d)
Share Capital of the Corporation
. The authorized and issued share capital of the Corporation consists of an unlimited number of Common Shares of which 210,169,924 Common Shares were issued and outstanding as at the close of business on June 11, 2018. The description of the attributes of the authorized and issued share capital of the Corporation as set out under the heading “Description of Securities Being Distributed” in the Prospectus is true and correct. Neither the Corporation nor the Subsidiaries are party to any agreement, nor is the Corporation aware of any agreement, which in any manner affects the voting control of any securities of the Corporation or its Subsidiaries.
(e)
Share Capital of Subsidiaries
. The authorized and issued share capital of the Subsidiaries as set forth in Schedule “A” hereto is true and correct.
(f)
Form of Share Certificates
. The form of certificate respecting the Common Shares has been approved and adopted by the board of directors of the Corporation and does not conflict with any applicable laws and complies with the rules and regulations of the TSX.
(g)
Common Shares are Listed
. The Common Shares are listed and posted for trading on the TSX, and neither the Corporation nor the Subsidiaries has taken any action which would reasonably be expected to result in the delisting or suspension of the Common Shares on or from the TSX.
(h)
TSX Compliance
. Except as disclosed to the Underwriters, the Corporation is, and will at the Closing Time be, in compliance in all material respects with the by-laws, policies, rules and regulations of the TSX existing on the date hereof.
(i)
No Cease Trade Orders
. No order ceasing or suspending trading in the securities of the Corporation or prohibiting the sale of securities by the Corporation has been issued by an exchange or securities regulatory authority, and no proceedings for this purpose have been instituted, or are, to the Corporation’s knowledge, pending, contemplated or threatened.
(j)
Reporting Issuer Status
. The Corporation is a “reporting issuer” in each of the provinces of Canada, other than Quebec, and is not currently in default of any requirement of the Canadian Securities Laws of such jurisdictions and the Corporation is not included on a list of defaulting reporting issuers maintained by any of the Securities Commissions.
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(k)
Offered Shares Validly Issued
. The Offered Shares have been, or prior to the Closing Time will be, duly and validly authorized for issuance and sale pursuant to this Agreement and when issued and delivered by the Corporation pursuant to this Agreement, against payment of the consideration therefor, will be validly issued as fully paid and non-assessable Common Shares.
(l)
Qualified Investments
. Subject to the qualifications and limitations described under “Eligibility for Investment” in the Final Prospectus, the Offered Shares will be qualified investments under the Income Tax Act (Canada) and the regulations thereunder for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans, a registered disability savings plan and tax free savings accounts.
(m)
Transfer Agent
. Computershare Investor Services Inc. at its offices in Toronto, Ontario has been duly appointed as the transfer agent and registrar for the Common Shares.
(n)
Absence of Rights
. As of June 11, 2018 no person has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other agreement or option, for the issue or allotment of any unissued shares of the Corporation or any other security convertible into or exchangeable for any such shares or to require the Corporation to purchase, redeem or otherwise acquire any of the issued and outstanding shares of the Corporation except for the Existing Rights set out in Schedule “B” to this Agreement and as otherwise disclosed to the Underwriters. The Offered Shares, upon issuance, will not be issued in violation of or subject to any pre-emptive rights or contractual rights to purchase securities issued by the Corporation.
(o)
Corporate Actions
. The Corporation has taken, or will have taken prior to the Closing Time, all necessary corporate action, (i) to authorize the execution, delivery and performance of this Agreement, (ii) to authorize the execution and filing, as applicable, of the Offering Documents, (iii) to validly issue and sell the Offered Shares as fully paid and non-assessable Common Shares, (iv) grant the Over-Allotment Option; and (v) issue the Over-Allotment Shares upon exercise of the Over-Allotment Option.
(p)
Valid and Binding Documents
. This Agreement has been duly authorized, executed and delivered by the Corporation and will constitute a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms, provided that enforcement thereof may be limited by laws affecting creditors’ rights generally, that specific performance and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction, and that the provisions relating to indemnity, contribution and waiver of contribution may be unenforceable and that enforceability is subject to the provisions of the
Limitation Act
(Ontario).
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(q)
No Consents, Approvals etc.
The execution and delivery of this Agreement and the fulfilment of the terms hereof by the Corporation and the issuance, sale and delivery of the Offered Shares to be issued and sold by the Corporation and the grant of the Over-Allotment Option do not and will not require the consent, approval, authorization, registration or qualification of or with any Governmental Authority, stock exchange or other third party (including under the terms of any Material Agreement or Debt Instrument), except: (i) those which have been obtained or those which may be required and shall be obtained prior to the Closing Time under the Securities Laws or the rules of the TSX, including in compliance with the Securities Laws regarding the distribution of the Offered Shares and the Over-Allotment Option in the Qualifying Jurisdictions, and (ii) such customary post-closing notices or filings required to be submitted within the applicable time frame pursuant to Securities Laws, as may be required in connection with the Offering.
(r)
Continuous Disclosure
. The Corporation is in compliance in all material respects with its timely and continuous disclosure obligations under Canadian Securities Laws, including insider reporting obligations, and, without limiting the generality of the foregoing, there has been no material fact or material change relating to the Corporation which has not been publicly disclosed and the information and statements in the Public Disclosure Record were true and correct as of the respective dates of such information and statements and at the time such documents were filed on SEDAR, do not contain any misrepresentations and no material facts have been omitted therefrom which would make such information materially misleading, and the Corporation has not filed any confidential material change reports which remain confidential as at the date hereof. There are no circumstances presently existing under which liability is or would reasonably be expected to be incurred under Part XXIII.1 —
Civil Liability for Secondary Market Disclosure
of the Securities Act and analogous provisions under Securities Laws in the other Qualifying Jurisdictions.
(s)
Forward-Looking Information
. With respect to forward-looking information contained in the Corporation’s public disclosure documents, including for certainty the Documents Incorporated by Reference:
(i)
the Corporation has a reasonable basis for the forward-looking information; and
(ii)
all material forward-looking information is identified as such, and all such documents cautions users of forward-looking information that actual results may vary from the forward-looking information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information; and accurately states the material factors or assumptions used to develop forward-looking information.
(t)
Financial Statements
. The Financial Statements;
18
(i)
present fairly, in all material respects, the financial position of the Corporation on a consolidated basis and the statements of operations, retained earnings, cash flow from operations and changes in financial information of the Corporation on a consolidated basis for the periods specified in such Financial Statements;
(ii)
have been prepared in accordance with IFRS, applied on a consistent basis throughout the periods involved; and
(iii)
do not contain any misrepresentations, with respect to the period covered by the Financial Statements.
(u)
Off-Balance Sheet Transactions
. There are no off-balance sheet transactions, arrangements, obligations or liabilities of the Corporation or its Subsidiaries whether direct, indirect, absolute, contingent or otherwise.
(v)
Accounting Policies
. There has been no change in accounting policies or practices of the Corporation or its Subsidiaries since May 31, 2017, other than as disclosed in the Financial Statements.
(w)
Liabilities
. Neither the Corporation nor the Subsidiaries have any liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, which are not disclosed or referred to in the Financial Statements, other than liabilities, obligations, or indebtedness or commitments: (i) incurred in the normal course of business; (ii) which would not, individually or in the aggregate, have a Material Adverse Effect; or (iii) are reflected in the unaudited pro forma financial statements of any Document Incorporated by Reference in the Prospectus.
(x)
Independent Auditors
. The auditors who reported on and certified the Financial Statements for the fiscal year ended May 31, 2017 were independent and the Corporation’s current auditors are independent with respect to the Corporation within the meaning of the rules of professional conduct applicable to auditors in Canada and there has never been a “reportable event” (within the meaning of National Instrument 51-102) with the current, or to the best knowledge of the Corporation any predecessor, auditors of the Corporation during the last three years.
(y)
Accounting Controls
. The Corporation maintains, and will maintain, a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain asset accountability, (iii) access to monies and investments is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
19
(z)
Purchases and Sales
. Except as disclosed to the Underwriters, neither the Corporation nor the Subsidiaries have approved, have entered into any agreement in respect of, or have any knowledge, as the case may be, of:
(i)
the purchase of any Business Assets or any interest therein, or the sale, transfer or other disposition of any Business Assets or any interest therein currently owned, directly or indirectly, by the Corporation or the Subsidiaries whether by asset sale, transfer of shares, or otherwise;
(ii)
a transaction which would result in the change of control (by sale or transfer of Common Shares or sale of all or substantially all of the assets of the Corporation or the Subsidiaries or otherwise) of the Corporation or the Subsidiaries; or
(iii)
a proposed or planned disposition of Common Shares by any shareholder who owns, directly or indirectly, 10% or more of the outstanding Common Shares or common shares of the Subsidiaries.
(aa)
Title to Business Assets
. The Corporation and the Subsidiaries have good, valid and marketable title to and have all necessary rights in respect of all of their Business Assets as owned, leased, licensed, loaned, operated or used by them or over which they have rights, free and clear of Liens, and no other rights or Business Assets are necessary for the conduct of the Business as currently conducted or as proposed to be conducted. The Corporation knows of no claim or basis for any claim that might or could have a Material Adverse Effect on the rights of the Corporation or the Subsidiaries to use, transfer, lease, license, operate, sell or otherwise exploit such Business Assets and neither the Corporation nor the Subsidiaries have any obligation to pay any commission, license fee or similar payment to any person in respect thereof, other than as disclosed in the Offering Documents and there are no outstanding rights of first refusal or other pre-emptive rights of purchase which entitle any person to acquire any of the rights, title or interests in the Business Assets.
(bb)
Compliance with Laws, Regulatory Approvals and Licences
. The Corporation is an approved licensed producer in the medical cannabis industry and all operations of the Corporation in respect of or in connection with the Business Assets have been and continue to be conducted in accordance with best industry practices and, to the knowledge of the Corporation, in material compliance with all Applicable Laws. The Corporation and the Subsidiaries have obtained and are in compliance with all Licences to permit them to conduct their Business as currently conducted or proposed to be conducted. All of the Licences issued to date are valid and in full force and effect and neither the Corporation nor the Subsidiaries have received any correspondence or notice from any Governmental Authority alleging or asserting material non-compliance with any Applicable Laws or Licences. Neither the Corporation nor the Subsidiaries have received any notice of proceedings or actions relating to the revocation, suspension, limitation or modification of any Licences or any notice advising of the refusal to grant any
20
Licence that has been applied for or is in process of being granted and has no knowledge or reason to believe that any such Governmental Authority is considering taking or would have reasonable ground to take any such action.
(cc)
Research and Development
. All product research and development activities, including quality assurance, quality control, testing, and research and analysis activities, conducted by the Corporation and the Subsidiaries in connection with their business is being conducted in compliance, in all material respects, with all industry, laboratory safety, management and training standards applicable to the Business and all such processes, procedures and practices required in connection with such activities are in place as necessary and are being complied with in all material respects.
(dd)
Business Relationships
. All agreements with third parties in connection with the Business have been entered into and are being performed by the Corporation and the Subsidiaries and, to the knowledge of the Corporation, by all other third parties thereto, in compliance with their terms. There exists no actual or, to the knowledge of the Corporation, threatened termination, cancellation or limitation of, or any material adverse modification or material change in, the business relationship of the Corporation or the Subsidiaries, with any supplier or customer, or any group of suppliers or customers whose business with or whose purchases or inventories/components provided to the business of the Corporation or the Subsidiaries are individually or in the aggregate material to the assets, business, properties, operations or financial condition of the Corporation or the Subsidiaries. All such business relationships are intact and mutually cooperative, and there exists no condition or state of fact or circumstances that would prevent the Corporation or the Subsidiaries from conducting such business with any such third parties in the same manner in all material respects as currently conducted or proposed to be conducted.
(ee)
Privacy Protection
. Each of the Corporation and the Subsidiaries, as applicable, have security measures and safeguards in place to protect personal information it collects from registered patients and customers and other parties from illegal or unauthorized access or use by its personnel or third parties or access or use by its personnel or third parties in a manner that violates the privacy rights of third parties. The Corporation and the Subsidiaries have complied, in all material respects, with all applicable privacy and consumer protection legislation and neither has collected, received, stored, disclosed, transferred, used, misused or permitted unauthorized access to any information protected by privacy laws, whether collected directly or from third parties, in an unlawful manner. The Corporation and the Subsidiaries have taken all reasonable steps to protect personal information against loss or theft and against unauthorized access, copying, use, modification, disclosure or other misuse.
(ff)
Intellectual Property
. The Corporation and the Subsidiaries own or possess the right to use all material patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions,
21
trade secrets and rights necessary for the conduct of their respective businesses, and the Corporation is not aware of any bona fide claim to the contrary or any challenge by any other person to the rights of the Corporation and the Subsidiaries with respect to the foregoing that would be excepted to result in a Material Adverse Effect. To the knowledge of the Corporation, the Corporation’s business, including that of the Subsidiaries, as now conducted does not, and as currently proposed to be conducted will not, infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any person. No bona fide claim has been made against the Corporation or the Subsidiaries alleging the infringement by the Corporation or the Subsidiaries of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person.
(gg)
Environmental and Workplace Laws
. Each of the Corporation and the Subsidiaries is currently in compliance, in all material respects, with all Environmental Laws, including all reporting and monitoring requirements thereunder, and there are no pending or, to the knowledge of the Corporation, any threatened, administrative, regulatory or judicial actions, suits, demands, claims, liens, notices of non-compliance or violation, investigation or proceedings relating to any Environmental Laws. Neither the Corporation nor the Subsidiaries have ever received any notice of any non-compliance in respect of Environmental Laws, there are no events or circumstances that might reasonably be expected to form the basis of an order for clean up or remediation under Environmental Laws or relating to any Hazardous Materials and there are no permits required under Environmental Laws for the conduct of the Business. The facilities and operations of the Corporation and the Subsidiaries are currently being conducted, and to the knowledge of the Corporation have been conducted, in all material respects in accordance with all applicable workers’ compensation and health and safety and workplace laws, regulations and policies.
(hh)
Insurance
. The Corporation and the Subsidiaries maintain insurance by insurers of recognized financial responsibility, against such losses, risks and damages to their Business Assets in such amounts that are customary for the business in which they are engaged and on a basis consistent with reasonably prudent persons in comparable businesses, and all of the policies in respect of such insurance coverage, fidelity or surety bonds insuring the Corporation, the Subsidiaries, and their respective directors, officers and employees, and the Business Assets, are in good standing and in full force and effect in all respects, and not in default. Each of the Corporation and the Subsidiaries are in compliance with the terms of such policies and instruments in all material respects and there are no material claims by the Corporation or the Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; the Corporation has no reason to believe that it will not be able to renew such existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue the Business at a cost that would not have a Material Adverse Effect, and
22
neither the Corporation nor the Subsidiaries have failed to promptly give any notice of any material claim thereunder.
(ii)
Material Agreements and Debt Instruments
. All Material Agreements and Debt Instruments have been described or disclosed in the Offering Documents and each Material Agreement and Debt Instrument is valid, subsisting, in good standing and in full force and effect, enforceable in accordance with the terms thereof. The Corporation and the Subsidiaries have, in all material respects, performed all obligations in a timely manner under, and are in compliance, in all material respects, with all terms and conditions (including any financial covenants) contained in each Material Agreement and Debt Instrument. Neither the Corporation nor the Subsidiaries are in material breach, violation or default nor has it received any notification from any party claiming that the Corporation or such Subsidiary is in material breach, violation or default under any Material Agreement or Debt Instrument and no other party, to the knowledge of the Corporation, is in material breach, violation or default of any term under any Material Agreement or Debt Instrument.
(jj)
No Material Changes
. Since May 31, 2017, other than as disclosed in the Prospectus (a) there has been no material change in the assets, liabilities, obligations (absolute, accrued, contingent or otherwise) business, condition (financial or otherwise), properties, capital or results of operations of the Corporation and the Subsidiaries considered as one enterprise, and (b) there have been no transactions entered into by the Corporation or the Subsidiaries, other than those in the ordinary course of business, which are material with respect to the Corporation and the Subsidiaries considered as one enterprise.
(kk)
Absence of Proceedings
. Except as disclosed to the Underwriters, there is no action, suit, proceeding, inquiry or investigation before or brought by any Governmental Authority, domestic or foreign, now pending or, to the knowledge of the Corporation, threatened against or affecting the Corporation, any Subsidiary or the Business Assets (including in respect of any product liability claims) which is required to be disclosed in the Offering Documents, and which if not so disclosed, or which if determined adversely, would have a Material Adverse Effect, or would materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Corporation of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Corporation or the Subsidiaries are a party or of which any of their respective property or assets is subject, which are not described in the Offering Documents would not reasonably be expected to result in a Material Adverse Effect.
(ll)
Absence of Defaults and Conflicts
. Neither the Corporation nor the Subsidiaries are in material violation, default or breach of, and the execution, delivery and performance of this Agreement, the Offering Documents and the consummation of the transactions and compliance by the Corporation with its obligations hereunder and thereunder, the sale of the Offered Shares and the grant of the
23
Over-Allotment Option do not and will not, whether with or without the giving of notice or passage of time or both, result in a material violation, default or breach of, or conflict with, or result in a Repayment Event or the creation or imposition of any Lien upon any property or assets of the Corporation, including the Business Assets, or the Subsidiaries under the terms or provisions of (i) any Material Agreements or Debt Instruments, (ii) the articles or by-laws or other constating documents or resolutions of the directors or shareholders of the Corporation or the Subsidiaries, (iii) any existing Applicable Laws, including Securities Laws, (iv) any judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Corporation, or the Subsidiaries or any of their assets, properties or operations.
(mm)
Labour Matters
. No material work stoppage, strike, lock-out, labour disruption, dispute grievance, arbitration, proceeding or other conflict with the employees of the Corporation or the Subsidiaries currently exists or, to the knowledge of the Corporation, is imminent or pending and the Corporation and its Subsidiaries are in material compliance with all provisions of all federal, national, regional, provincial and local laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours.
(nn)
Employment Standards
. There are no material complaints against the Corporation or the Subsidiaries before any employment standards branch or tribunal or human rights tribunal, nor any complaints or any occurrence which would reasonably be expected to lead to a complaint under any human rights legislation or employment standards legislation that would be material to the Corporation. There are no outstanding decisions or settlements or pending settlements under applicable employment standards legislation which place any material obligation upon the Corporation or the Subsidiaries to do or refrain from doing any act. The Corporation and the Subsidiaries are currently in material compliance with all workers’ compensation, occupational health and safety and similar legislation, including payment in full of all amounts owing thereunder, and there are no pending claims or outstanding orders of a material nature against either of them under applicable workers’ compensation legislation, occupational health and safety or similar legislation nor has any event occurred which may give rise to any such material claim.
(oo)
Collective Bargaining Agreements
. Neither the Corporation nor the Subsidiaries are party to any collective bargaining agreements with unionized employees. To the knowledge of the Corporation, no action has been taken or is being contemplated to organize or unionize any other employees of the Corporation or the Subsidiaries that would have a Material Adverse Effect.
(pp)
Employee Plans
. The Offering Documents disclose, to the extent required by applicable Canadian Securities Laws, each material plan for retirement, bonus, stock purchase, profit sharing, stock option, deferred compensation, severance or termination pay, insurance, medical, hospital, dental, vision care, drug, sick leave,
24
disability, salary continuation, legal benefits, unemployment benefits, vacation, incentive or otherwise contributed to, or required to be contributed to, by the Corporation for the benefit of any current or former director, officer, employee or consultant of the Corporation (the “
Employee Plans
”), each of which has been maintained in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Employee Plans.
(qq)
Taxes
. All tax returns, reports, elections, remittances and payments of the Corporation and the Subsidiaries required by applicable law to have been filed or made in any applicable jurisdiction, have been filed or made (as the case may be) and are true, complete and correct except where the failure to make such filing, election, or remittance and payment would not constitute a Material Adverse Effect, and all taxes of the Corporation and of the Subsidiaries have been paid or accrued in the Financial Statements (except as any extension may have been requested or granted and in any case in which the failure to file, pay or accrue such taxes would not result in a Material Adverse Effect). There are no examinations of any tax return of the Corporation or the Subsidiaries currently in progress and there are no issues or disputes outstanding with any governmental authority respecting any taxes that have been paid, or may be payable, by the Corporation or the Subsidiaries.
(rr)
Anti-Bribery Laws
. Neither the Corporation nor the Subsidiaries nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of the foregoing, has (i) violated any anti-bribery or anti-corruption laws applicable to the Corporation and the Subsidiaries, including
Canada’s Corruption of Foreign Public Officials Act
, or (ii) offered, paid, promised to pay, or authorized the payment of any money, or offered, given, promised to give, or authorized the giving of anything of value, that goes beyond what is reasonable and customary and/or of modest value: (X) to any Government Official, whether directly or through any other person, for the purpose of influencing any act or decision of a Government Official in his or her official capacity; inducing a Government Official to do or omit to do any act in violation of his or her lawful duties; securing any improper advantage; inducing a Government Official to influence or affect any act or decision of any Governmental Authority; or assisting any representative of the Corporation or the Subsidiaries in obtaining or retaining business for or with, or directing business to, any person; or (Y) to any person in a manner which would constitute or have the purpose or effect of public or commercial bribery, or the acceptance of or acquiescence in extortion, kickbacks, or other unlawful or improper means of obtaining business or any improper advantage. Neither the Corporation nor the Subsidiaries nor to the knowledge of the Corporation, any director, officer, employee, consultant, representative or agent of foregoing, has (i) conducted or initiated any review, audit, or internal investigation that concluded the Corporation, a Subsidiary or any director, officer, employee, consultant, representative or agent of the foregoing violated such laws or committed any material wrongdoing, or (ii) made a voluntary, directed, or involuntary disclosure
25
to any Governmental Authority responsible for enforcing anti-bribery or anti-corruption laws, in each case with respect to any alleged act or omission arising under or relating to non-compliance with any such laws, or received any notice, request, or citation from any person alleging non-compliance with any such laws.
(ss)
No Significant Acquisitions
. Except as disclosed to the Underwriters, the Corporation has not completed any “significant acquisition” (within the meaning of such term under NI 51-102) nor is it proposing any “probable acquisitions” (within the meaning of such term under NI 44-101F1) that would require the inclusion or incorporation by reference of any additional financial statements or pro forma financial statements in the Prospectus or the filing of a Business Acquisition Report pursuant to Canadian Securities Laws.
(tt)
Corporation Short Form Eligible
. The Corporation is eligible to file a short form prospectus in each of the Qualifying Jurisdictions pursuant to applicable Canadian Securities Laws and on the date of and upon filing of the Final Prospectus there will be no documents required to be filed under the Canadian Securities Laws in connection with the distribution of the Offered Shares that will not have been filed as required.
(uu)
Compliance with Laws
. The Corporation has complied, or will have complied, in all material respects with all relevant statutory and regulatory requirements required to be complied with prior to the Closing Time in connection with the Offering. Neither the Corporation nor the Subsidiaries are aware of any legislation or proposed legislation, which they anticipate will have a Material Adverse Effect.
(vv)
No Loans
. Except as disclosed in the Financial Statements, neither the Corporation nor the Subsidiaries have made any material loans to or guaranteed the material obligations of any person.
(ww)
Directors and Officers
. None of the directors or officers of the Corporation are now, or have ever been, subject to an order or ruling of any securities regulatory authority or stock exchange prohibiting such individual from acting as a director or officer of a public company or of a company listed on a particular stock exchange.
(xx)
Minute Books and Records
. The minute books and records of the Corporation and the Subsidiaries made available to counsel for the Underwriters in connection with their due diligence investigation of the Corporation for the periods requested to the date hereof are all of the minute books and material records of the Corporation and the Subsidiaries and contain copies of all material proceedings (or certified copies thereof or drafts thereof pending approval) of the shareholders, the directors and all committees of directors of the Corporation and the Subsidiaries, as the case may be, to the date of review of such corporate records and minute books and there have been no other meetings, resolutions or
26
proceedings of the shareholders, directors or any committees of the directors of the Corporation and the Subsidiaries to the date hereof not reflected in such minute books and other records, other than those which have been disclosed to the Underwriters or which are not material in the context of the Corporation and the Subsidiaries.
(yy)
No Dividends
. During the previous 12 months, the Corporation has not, directly or indirectly, declared or paid any dividend or declared or made any other distribution on any of its shares or securities of any class, or, directly or indirectly, redeemed, purchased or otherwise acquired any of its Common Shares or securities or agreed to do any of the foregoing. There are no restrictions upon or impediment to, the declaration or payment of dividends by the directors of the Corporation or the payment of dividends by the Corporation in the constating documents or in any Material Agreements or Debt Instruments.
(zz)
Fees and Commissions
. Other than the Underwriters (and their selling group members) pursuant to this Agreement, there is no other person acting at the request of the Corporation, or to the knowledge of the Corporation, purporting to act who is entitled to any brokerage, agency or other fiscal advisory or similar fee in connection with the Offering or transactions contemplated herein.
(aaa)
Entitlement to Proceeds
. Other than the Corporation, there is no person that is or will be entitled to demand any of the net proceeds of the Offering.
(bbb)
Related Parties
. Except as described or disclosed in the Offering Documents, none of the directors, officers or employees of the Corporation, any known holder of more than 10% of any class of securities of the Corporation or securities of any person exchangeable for more than 10% of any class of securities of the Corporation, or any known associate or affiliate of any of the foregoing persons or companies (as such terms are defined in the Securities Act), has had any material interest, direct or indirect, in any material transaction within the previous two years or any proposed material transaction which, as the case may be, materially affected or is reasonably expected to materially affect the Corporation and the Subsidiaries, on a consolidated basis. Neither the Corporation nor the Subsidiaries have any material loans or other indebtedness outstanding which has been made to any of its shareholders, officers, directors or employees, past or present, or any person not dealing at “arm’s length” (within the meaning of the Income Tax Act (Canada)) with them.
(ccc)
Sales by Insiders
. To the knowledge of the Corporation, no insider of the Corporation has a present intention to sell any securities of the Corporation held by it other than has been disclosed to the Underwriters.
27
Section 8
Covenants of the Corporation
The Corporation covenants and agrees with the Underwriters, and acknowledges that each of them is relying on such covenants in connection with the purchase of the Offered Shares, as follows:
(1)
Notification of Filings
. The Corporation will advise the Underwriters, promptly after receiving notice thereof, of the time when the Offering Documents have been filed and receipts, as applicable, therefor have been obtained and will provide evidence reasonably satisfactory to the Underwriters of each such filing and copies of such receipts.
(2)
Standstill
. The Corporation will not directly or indirectly, for a period commencing on the date of this Agreement and ending 90 days after the Closing Date, without the prior written consent of Clarus, on behalf of the Underwriters, such consent not to be unreasonably withheld or delayed, authorize, sell or issue or announce its intention to authorize, sell or issue, or negotiate or enter into an agreement to sell or issue, any securities of the Corporation (including those that are convertible or exchangeable into securities of the Corporation) other than (i) pursuant to the Offering; (ii) the issuance of non-convertible debt securities; (iii) upon the exercise of convertible securities, options or warrants of the Corporation outstanding as of the date hereof; (iv) pursuant to the Corporation’s stock option plan or any other share compensation arrangement of the Company; (v) pursuant to any acquisition of shares or assets of arm’s length persons, or (vi) in connection with any strategic transactions, investments or supply agreements between the Corporation and a third party, including any stock options that may be issued to any arm’s length persons in connection with such strategic transactions, investments or supply agreements.
(3)
Lock-Up Agreements
. The Corporation will cause each of the directors and officers of the Corporation who are directors or officers effective as of the Closing Date, to enter into lock-up agreements in a form satisfactory to the Corporation and Clarus, on behalf of the Underwriters, each acting reasonably pursuant to which each such person agrees, for a period of 90 days after the Closing Date, not to directly or indirectly, offer, sell, contract to sell, grant any option to purchase, make any short sale, or otherwise dispose of, or transfer, or announce any intention to do so, any Common Shares, whether now owned directly or indirectly, or under their control or direction, or with respect to which each has beneficial ownership, or enter into any transaction or arrangement that has the effect of transferring, in whole or in part, any of the economic consequences of ownership of Common Shares, whether such transaction is settled by the delivery of Common Shares, other securities, cash or otherwise other than pursuant to a take-over bid or any other similar transaction made generally to all of the shareholders of the Corporation.
(4)
Maintain Reporting Issuer Status
. The Corporation will use its commercially reasonable best efforts to maintain its status as a “reporting issuer” (or the equivalent thereof) not in default of the requirements of the Canadian Securities Laws in each of the provinces of Canada other than Quebec, and following the filing of the Final Prospectus in each of the Qualifying Jurisdictions, to the date that is at least 24 months following the Closing Date,
28
provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(5)
Maintain Stock Exchange Listing
. The Corporation will use its commercially reasonable best efforts to maintain the listing of the Common Shares (including those issuable pursuant to the Offering) on the TSX or such other recognized stock exchange or quotation system as the Underwriters may approve, acting reasonably, for a period of at least 24 months following the Closing Date, provided that the foregoing requirement is subject to the obligations of the directors to comply with their fiduciary duties to the Corporation.
(6)
Validly Issued Securities
. The Corporation will, provided it receives payment therefor, ensure that at the Closing Time the Offered Shares have been duly and validly issued as fully paid and non-assessable Common Shares.
(7)
Use of Proceeds
. The Corporation will use the proceeds of the Offering in the manner specified in the Prospectus under the heading “Use of Proceeds”.
(8)
Consents and Approvals
. The Corporation will have made or obtained, as applicable, using commercially reasonable best efforts at or prior to the Closing Time, all consents, approvals, permits, authorizations or filings as may be required by the Corporation under Securities Laws necessary for the consummation of the transactions contemplated herein, other than customary post-closing filings required to be submitted within the applicable time frame pursuant to Securities Laws and the rules of the TSX.
(9)
Closing Conditions
. The Corporation will have, at or prior to the Closing Time, fulfilled or caused to be fulfilled, each of the conditions set out in Section 10 hereof.
Section 9
Representations, Warranties and Covenants of the Underwriters
(1)
Each Underwriter hereby severally, and not jointly, nor jointly and severally, represents and warrants to the Corporation, the following:
(a)
Registration
. The Underwriters are, and will remain so, until the completion of the Offering, appropriately registered under applicable Canadian Securities Laws so as to permit it to lawfully fulfill its obligations hereunder;
(b)
Authority
. The Underwriters have good and sufficient right and authority to enter into this Agreement and complete the transactions contemplated under this Agreement on the terms and conditions set forth herein.
(c)
Marketing Materials
. Other than the Marketing Material, the Underwriters have not provided any marketing materials to any potential investors in connection with the Offering.
(2)
The Underwriters hereby severally, and not jointly, nor jointly and severally, covenant and agree with the Corporation, the following:
29
(a)
Jurisdictions and Offering Price
. During the period of distribution of the Offered Shares by or through the Underwriters, the Underwriters will offer and sell Offered Shares to the public only in the Selling Jurisdictions where they may lawfully be offered for sale upon the terms and conditions set forth in the Prospectus and this Agreement either directly or through other registered investment dealers and brokers. The Underwriters shall be entitled to assume that the Offered Shares are qualified for distribution in any Qualifying Jurisdiction where the Final Receipt shall have been obtained following the filing of the Prospectus.
(b)
Compliance with Securities Laws
. The Underwriters will comply with applicable Securities Laws in connection with the offer and sale and distribution of the Offered Shares.
(c)
U.S. Sales
. The Underwriters will not directly or indirectly, solicit offers to purchase or sell the Offered Shares or deliver any Offering Document to purchasers so as to require registration of the Offered Shares or the filing of a prospectus or registration statement with respect to the Offered Shares under the Laws of any jurisdiction other than the Qualifying Jurisdictions, including without limitation, the United States.
(d)
Completion of Distribution
. The Underwriters will use their commercially reasonable best efforts to complete the distribution of the Offered Shares as promptly as possible after the Closing Time. Clarus will notify the Corporation when the Underwriters have ceased the distribution of the Offered Shares, and, within thirty (30) days after the Closing Date, will provide the Corporation, in writing, with a breakdown of the number of Offered Shares distributed (i) in each of the Qualifying Jurisdictions, and (ii) in any other Selling Jurisdictions.
(e)
Liability on Default
. No Underwriter shall be liable to the Corporation under this Section with respect to a breach or default by the other Underwriter.
Section 10
Conditions of Closing
The Underwriters’ obligation to purchase the Offered Shares pursuant to this Agreement (including the obligation to complete the purchase of the Purchased Shares and the Over-Allotment Shares, as the case may be) shall be subject to the following conditions having been met at the Closing Time:
(1)
the Underwriters receiving favourable legal opinions from Stikeman Elliott LLP, counsel to the Corporation (who may rely, to the extent appropriate in the circumstances, on the opinions of local counsel acceptable to counsel to the Underwriters as to the qualification of the Offered Shares for sale to the public and as to other matters governed by the laws of jurisdictions in Canada other than the provinces in which they are qualified to practice and may rely, to the extent appropriate in the circumstances, as to matters of fact on certificates of officers, public and exchange officials or of the auditor or transfer agent of
30
the Corporation), substantially to the effect set forth below, subject to customary assumptions, qualifications and limitations:
(a)
the Corporation is a corporation validly incorporated and existing under the
Business Corporations Act
(Ontario) and has all requisite corporate power and capacity to carry on business, to own and lease properties and assets;
(b)
the Corporation has all necessary corporate power and authority to (i) execute, deliver and perform its obligations under this Agreement, (ii) to create, issue and sell the Offered Shares, and (iii) to grant the Over-Allotment Option;
(c)
the authorized and issued capital of the Corporation;
(d)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder and this Agreement has been duly executed and delivered by the Corporation and constitutes a legal, valid and binding obligation of the Corporation enforceable against it in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting the rights of creditors generally and subject to such other standard assumptions and qualifications including the qualifications that equitable remedies may be granted in the discretion of a court of competent jurisdiction and that enforcement of rights to indemnity, contribution and waiver of contribution set out in this Agreement may be limited by applicable law;
(e)
the execution and delivery of this Agreement and the fulfilment of the terms of this Agreement by the Corporation and the issuance, sale and delivery of the Offered Shares and the grant of the Over-Allotment Option, do not and will not result in a breach of or default under, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach of or default under, and do not and will not conflict with the articles and by-laws of the Corporation, any resolutions of the shareholders or directors of the Corporation, or any applicable corporate law or Securities Laws;
(f)
all necessary corporate action has been taken by the Corporation to authorize the execution and delivery of each of the Preliminary Prospectus and the Final Prospectus (and any Supplementary Material) and the filing thereof with the Securities Commissions in the Qualifying Jurisdictions;
(g)
the Offered Shares have been validly issued as fully paid and non-assessable shares in the capital of the Corporation;
(h)
all necessary documents have been filed, all necessary proceedings have been taken and all necessary authorizations, approvals, permits, consents and orders have been obtained under Canadian Securities Laws to qualify the distribution to the public of the Offered Shares in the Qualifying Jurisdictions by or through persons who are duly registered under the applicable Canadian Securities Laws
31
and who have complied with the relevant provisions of such applicable Canadian Securities Laws and to qualify the grant of the Over-Allotment Option;
(i)
subject to the qualifications and assumptions set out therein, the statements set forth in the Preliminary Prospectus and the Final Prospectus under the caption “Eligibility for Investment” and “Canadian Federal Income Tax Considerations”, insofar as they purport to describe the provisions of the laws referred to therein, are fair summaries of the matters discussed therein;
(j)
subject only to the standard listing conditions, the Offered Shares have been conditionally listed or approved for listing on the TSX; and
(k)
to such other matters as may reasonably be requested by the Underwriters no less than 48 hours prior to the Closing Time;
in form and substance acceptable to the Underwriters and their counsel, acting reasonably.
(2)
the Underwriters receiving favourable legal opinions from counsel to the Subsidiaries (other than Aphria (Arizona) Inc.) in form and substance acceptable to the Underwriters and their counsel, acting reasonably, substantially to the effect set out below:
(a)
such Subsidiary having been incorporated and existing under the laws of its jurisdiction;
(b)
such Subsidiary having the corporate capacity and power to own and lease its properties and assets and to conduct its business as described in the Prospectus; and
(c)
as to the authorized and issued share capital of such Subsidiary and to the ownership thereof;
(3)
if any of the Offered Shares are offered or sold in the United States, the Underwriters shall have received at the Closing Time a customary and favourable legal opinion dated the Closing Date of Dorsey & Whitney LLP in form and substance reasonably satisfactory to the Underwriters to the effect that no registration is required under the U.S. Securities Act in connection with the offer and sale of such Offered Shares under Rule 144A, provided, in each case, that such offer, sale and delivery of Offered Shares in the United States is made in compliance with this Agreement and the terms set out in Schedule “C” hereto and provided further that it being understood that no opinion is expressed as to any subsequent resale of any Offered Shares. In providing the foregoing opinion, such counsel may rely upon the covenants, representation and warranties of the Corporation and the Underwriters set forth in this Agreement and Schedule “C” hereto, and upon the covenants, representation and warranties of any purchasers in the United States;
(4)
the Underwriters having received certificates dated the Closing Date and signed by two senior officers of the Corporation as may be acceptable to the Underwriters, acting
32
reasonably, in form and substance satisfactory to the Underwriters, acting reasonably, with respect to:
(a)
the constating documents of the Corporation;
(b)
the resolutions of the directors of the Corporation relevant to the Offering Documents, the sale of the Offered Shares, the grant of the Over-Allotment Option, and the authorization of this Agreement and the transactions contemplated herein; and
(c)
the incumbency and signatures of signing officers for the Corporation;
(5)
the Underwriters receiving certificates of status and/or compliance, where issuable under applicable law, for the Corporation and the Subsidiaries (other than Aphria (Arizona) Inc.), each dated within one Business Day prior to the Closing Date;
(6)
the Underwriters receiving an auditors “bring down” comfort letter dated the Closing Date from PricewaterhouseCoopers LLP, in form and substance satisfactory to the Underwriters, acting reasonably, bringing forward to a date not more than two Business Days prior to the Closing Date the information contained in the comfort letter referred to in Section 4(1)(d) hereof;
(7)
the Underwriters receiving a certificate dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer or such other senior officer(s) of the Corporation as may be acceptable to the Underwriters, certifying for and on behalf of the Corporation and without personal liability, after having made due enquiries, that:
(a)
the representations and warranties of the Corporation contained in this Agreement, and in any certificates of the Corporation delivered pursuant to or in connection with this Agreement, are true and correct in all material respects as of the Closing Time as if such representations and warranties were made as at the Closing Time, after giving effect to the transactions contemplated hereby;
(b)
the Corporation has complied in all material respects with all the covenants and satisfied in all material respects all the terms and conditions of this Agreement on its part to be complied with and satisfied at or prior to the Closing Time;
(c)
no order, ruling or determination having the effect of suspending the sale or ceasing the trading or prohibiting the sale of the Offered Shares or any other securities of the Corporation (including the Common Shares) has been issued by any regulatory authority and is continuing in effect and no proceedings for that purpose have been instituted or are pending or, to the knowledge of such officers, contemplated or threatened by any regulatory authority;
(d)
since the respective dates as of which information is given in the Final Prospectus (A) there has been no material change (actual, anticipated, contemplated or threatened, whether financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise), prospects or capital of the Corporation
33
on a consolidated basis, and (B) no transaction has been entered into by the Corporation or the Subsidiaries which is material to the Corporation on a consolidated basis, other than as disclosed in the Final Prospectus or the Supplementary Material, as the case may be; and
(e)
there has been no change in any material fact (which includes the disclosure of any previously undisclosed material fact) contained in the Final Prospectus which fact or change is, or may be, of such a nature as to render any statement in the Final Prospectus misleading or untrue in any material respect or which would result in a misrepresentation in the Final Prospectus or which would result in the Final Prospectus not complying with applicable Canadian Securities Laws;
(8)
the Underwriters receiving the executed lock-up agreements from each director and executive officer of the Corporation (other than as contemplated by Section 8(3)) in favour of the Underwriters in a form satisfactory to the Underwriters as required pursuant to Section 8(3) of this Agreement;
(9)
the Underwriters receiving a certificate from Computershare Investor Services Inc. as to the number of Common Shares issued and outstanding as at the end of business day on the date prior to the Closing Date;
(10)
no order, ruling or determination having the effect of ceasing or suspending trading in any securities of the Corporation or prohibiting the sale of the Offered Shares or any of the Corporation’s issued securities being issued and no proceeding for such purpose being pending or, to the knowledge of the Corporation, threatened by any securities regulatory authority or the TSX;
(11)
the Corporation having delivered to the Underwriters evidence of the approval (or conditional approval) of the listing and posting for trading of the Offered Shares on the TSX, subject only to satisfaction by the Corporation of standard listing conditions;
(12)
the Corporation complying with all of its covenants and obligations under this Agreement required to be satisfied at or prior to the Closing Time;
(13)
the Underwriters not having exercised any rights of termination set forth herein; and
(14)
the Underwriters having received such further certificates, opinions of counsel and other documentation from the Corporation contemplated herein, provided, however, that the Underwriters or their counsel shall request any such certificate or document within a reasonable period prior to the Closing Time that is sufficient for the Corporation to obtain and deliver such certificate, opinion or document.
Section 11
Closing
(1)
Location of Closing
. The Offering will be completed at the offices of Stikeman Elliott LLP in Toronto, Ontario at the Closing Time.
34
(2)
Securities
. At the Closing Time, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters in Toronto, Ontario, the Offered Shares in electronic or certificated form against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Offered Shares being issued and sold hereunder to purchasers that are not President’s List purchasers by wire transfer or certified cheque, net of the Commission and expenses of the Underwriters payable by the Corporation as set out in this Agreement.
Section 12
Closing of the Over-Allotment Option
(1)
Written Notice of Exercise
. The Over-Allotment Option may be exercised for a period of 30 days from and including the Closing Date. Clarus, on behalf of the Underwriters, shall provide written notice to the Corporation of its election to exercise the Over-Allotment Option, which notice will set forth: (i) the aggregate number of Over-Allotment Shares to be purchased; and (ii) the closing date for the Over-Allotment Shares, provided that such closing date shall not be less than two Business Days and no more than seven Business Days following the date of such notice, and in any event not later than the 30
th
day following the Closing Date.
(2)
Closing
. The purchase and sale of the Over-Allotment Shares, if required, shall be completed at such time and place as the Underwriters and the Corporation may agree, and in accordance with Section 12(1) above.
(3)
Securities
. At the closing of the Over-Allotment Option, subject to the terms and conditions contained in this Agreement, the Corporation shall deliver to the Underwriters the Over-Allotment Shares, in electronic or certificated form, registered as directed by the Underwriters, against payment to the Corporation by the Underwriters of the aggregate Offering Price for the Over-Allotment Shares being issued and sold by wire transfer or certified cheque, net of the Commission and any expenses of the Underwriters payable by the Corporation as set out in this Agreement.
(4)
Deliveries
. The applicable terms, conditions and provisions of this Agreement (including the provisions of Section 10 relating to closing deliveries) shall apply
mutatis mutandis
to the Closing of the issuance of any Over-Allotment Shares pursuant to any exercise of the Over-Allotment Option.
(5)
Adjustments
. In the event that the Corporation shall subdivide, consolidate, reclassify or otherwise change its Common Shares during the period in which the Over-Allotment Option is exercisable, appropriate adjustments will be made to the Offering Price and to the number of Over-Allotment Shares issuable on exercise thereof such that the Underwriters are entitled to arrange for the sale of the same number and type of securities that the Underwriters would have otherwise arranged for had they exercised such Over-Allotment Option immediately prior to such subdivision, consolidation, reclassification or change.
35
Section 13
Indemnification and Contribution
(1)
The Corporation and the Subsidiaries, as the case may be (collectively, the “
Indemnitor
”) hereby agrees to indemnify and hold each of the Underwriters, and/or any of their respective affiliates and each of their respective directors, officers, employees, partners, agents, shareholders, each other person, if any, controlling the Underwriters or any of their subsidiaries (collectively, the “
Indemnified Parties
” and individually an “
Indemnified Party
”) harmless from and against any and all losses, claims (including shareholder actions, derivative or otherwise), actions, suits, proceedings, damages, liabilities or expenses of whatever nature or kind, joint or several, including the aggregate amount paid in reasonable settlement of any actions, suits, proceedings, investigations or claims, and the reasonable fees, expenses and taxes of one counsel to the Indemnified Parties taken as a whole (collectively, the “
Losses
”) that may be incurred in investigating or advising with respect to and/or defending or settling any action, suit, proceeding, investigation or claim that may be made or threatened against any Indemnified Party or in enforcing this indemnity (collectively, the “
Claims
”) or to which the Indemnified Parties may become subject or otherwise involved in any capacity insofar as such Claims relate to, are caused by, result from, arise out of or are based, directly or indirectly, upon the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder or otherwise in connection with the matters referred to in this Agreement, and to reimburse each Indemnified Party forthwith, upon demand, for any legal or other expenses reasonably incurred by such Indemnified Party in connection with any Claim. This indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses were solely caused by the negligence, wilful misconduct or fraud of the Indemnified Party.
(2)
If for any reason (other than a determination as to any of the events referred to above) the foregoing indemnity is unavailable to an Indemnified Party, or is insufficient to hold them harmless, then the Indemnitor shall contribute to the Losses paid or payable by such Indemnified Party as a result of such Claim in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnitor or its shareholders on the one hand and the Indemnified Party on the other hand but also the relative fault of the Indemnitor and the Indemnified Party as well as any relevant equitable considerations, provided that the Indemnitor shall in any event contribute to the Losses paid or payable by the Indemnified Party as a result of such Claim, in such amount that is in excess of the amount of the Commission actually received by the Underwriters pursuant to this Agreement. In the event that the Indemnitor may be entitled to contribution from the Indemnified Parties under the provisions of any statute or law, the Indemnitor shall be limited to contribution in any amount not exceeding the lesser of the portion of the Losses giving rise to such contribution for which the Underwriters are responsible and the amount of the Commission received by the Underwriters. However, no party shall be entitled to contribution under this subsection to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses for which contribution is being sought hereunder, were solely caused by the negligence, wilful misconduct or fraud of such party.
36
(3)
Promptly after receipt of notice of the commencement of any Claim against an Indemnified Party or after receipt of notice of the commencement of any investigation, which is based, directly or indirectly, upon any matter in respect of which indemnification may be sought from the Indemnitor hereunder, the Underwriters will notify the Corporation in writing of the commencement thereof and the Indemnitor will undertake the investigation and defence thereof on behalf of the Indemnified Parties, including the prompt employment of counsel of good standing acceptable to the Indemnified Parties, acting reasonably, and the payment of all expenses, reasonably incurred. The omission to so notify the Indemnitor shall not relieve the Indemnitor of any liability which the Indemnitor may have to an Indemnified Party except only to the extent that any such delay in giving or failure to give notice as herein required results in the forfeiture by the Indemnitor of substantive rights or defences. The Indemnitor shall throughout the course thereof provide copies of all relevant documentation to the Indemnified Party and will keep the Indemnified Party advised of all discussions and significant actions proposed in respect thereof.
(4)
Notwithstanding the foregoing paragraph, any Indemnified Party shall also have the right to employ separate counsel in any such Claim and participate in the defence thereof, and the fees and expenses of such counsel shall be borne by the Indemnified Party unless:
(a)
the employment of separate counsel has been authorized in writing by the Corporation;
(b)
the Corporation has not assumed the defence of the Claim within a reasonable period of time after receiving notice of the Claim;
(c)
the named parties to any such Claim include both the Indemnitor and the Indemnified Parties and the Indemnified Parties have been advised by their counsel that representation of both parties by the same counsel would be inappropriate due to an actual or a potential conflict of interest; or
(d)
there are one or more defences available to the Indemnified Parties which are different from or in addition to those available to the Indemnitor such that there may be a conflict of interest between the parties;
in which case such fees and expenses of such counsel to the Indemnified Parties shall be for the Indemnitor’s account.
(5)
The Indemnitor agrees that if any Claim shall be brought or commenced against the Indemnitor and/or any Indemnified Party and the personnel of such Indemnified Party shall be required to testify in connection therewith or shall be required to participate or respond to procedures designed to discover information regarding, in connection with, or by reason of the performance of professional services rendered to the Corporation by the Indemnified Parties hereunder, the Indemnified Party shall have the right to employ its own counsel in connection therewith, and the reasonable fees and expenses of such counsel as well as the reasonable costs (including an amount to reimburse the Indemnified Party monthly for time spent by its personnel in connection therewith at their
37
normal per diem rates together with such disbursements and reasonable out-of-pocket expenses incurred by the personnel of the Indemnified Party in connection therewith) shall be paid by the Corporation as they occur.
(6)
A party hereunder shall not, without the other party’s prior written consent, such consent not to be unreasonably withheld, conditioned or delayed, settle, compromise, consent to the entry of any judgment, or make an admission of liability with respect to any Claims or seek to terminate any Claims in respect of which indemnification may be sought hereunder.
(7)
The rights accorded to the Indemnified Parties hereunder shall be in addition to any rights an Indemnified Party may have at common law or otherwise.
(8)
The Indemnitor agrees to waive any right the Indemnitor may have of first requiring the Indemnified Party to proceed against or enforce any right, power, remedy, security or claim payment from any other person before claiming under this indemnity. The Indemnitor hereby acknowledges that the Underwriters are acting as trustees for each of the other Indemnified Parties of the Indemnitor’s covenants under this indemnity and the Underwriters agree to accept such trust and to hold and enforce such covenants on behalf of such persons.
(9)
The indemnity and contribution obligations of the Indemnitor shall be in addition to any liability which the Indemnitor may otherwise have, shall extend upon the same terms and conditions to the Indemnified Parties who are not signatories hereto and shall be binding upon and enure to the benefit of any successors, assigns, heirs and personal representatives of the Corporation and the Indemnified Parties.
Section 14
Compensation of the Underwriters
At the Closing Time, the Corporation shall pay to Clarus, on behalf of the Underwriters, a cash fee (the “
Commission
”) equal to 4.75% of the aggregate gross proceeds received from the sale of the Offered Shares (including for certainty on any exercise of the Over-Allotment Option) in consideration of the services to be rendered by the Underwriters in connection with the Offering. The Commission will be netted out of the gross proceeds of the Offering.
Section 15
Expenses
Whether or not the purchase and sale of the Offered Shares shall be completed, all costs and expenses of or incidental to the sale and delivery of the Offered Shares and of or incidental to all matters in connection with the transactions herein shall be borne by the Corporation, including, without limitation, all expenses of or incidental to the issue, sale or distribution of the Offered Shares, the fees and expenses of the Corporation’s counsel, auditors and independent experts, all costs incurred in connection with the preparation of documents relating to the Offering, and the reasonable expenses and fees incurred by the Underwriters which shall include the reasonable fees (to a maximum of $75,000 exclusive of disbursements and taxes, such amount not to be exceeded without the written approval of the Corporation, such approval not to be unreasonably withheld) and disbursements of the Underwriters’ counsel and applicable taxes thereon. The Underwriters’ expenses will be netted out of the gross proceeds of the Offering.
38
With the exception of legal expenses, the reimbursement by the Company of all other out-of-pocket expenses incurred by the Underwriters shall not exceed $25,000 in the aggregate and will be approved in writing by the Corporation in advance.
Section 16
All Terms to be Conditions
The Corporation agrees that the conditions contained in this Agreement will be complied with insofar as the same relate to acts to be performed or caused to be performed by the Corporation and each of the Corporation and the Underwriters will use its respective commercially reasonable efforts to cause all such conditions to be complied with. It is understood that the Underwriters may waive, in whole or in part, or extend the time for compliance with, any of such terms and conditions without prejudice to the rights of the Underwriters in respect of any such terms and conditions or any other or subsequent breach or non-compliance, provided that to be binding on the Underwriters any such waiver or extension must be in writing.
Section 17
Termination by Underwriters in Certain Events
(1)
Each Underwriter shall also be entitled to terminate its obligation to purchase the Offered Shares by written notice to that effect given to the Corporation at or prior to the Closing Time if:
(a)
Material Change Out
- there shall be any material change or change in a material fact, or there should be discovered any previously undisclosed material fact required to be disclosed in the Preliminary Prospectus, the Final Prospectus or any amendment thereto, in each case which, in the reasonable opinion of the Underwriters (or any of them), has or would be expected to have a significant adverse effect on the market price or value of the Common Shares, or any other securities of the Corporation;
(b)
Disaster Out
- there should develop, occur or come into effect or existence any event, action, state, condition (including without limitation, terrorism or accident) or major financial occurrence of national or international consequence or a new or change in any law or regulation which in the sole opinion of the Underwriters, or any one of them, seriously adversely affects or involves or may seriously adversely affect or involve the financial markets or the business, operations or affairs of the Corporation and its subsidiaries taken as a whole or the market price or value of the securities of the Corporation;
(c)
Regulatory Out
— there shall be (i) any inquiry, action, suit, proceeding or investigation (whether formal or informal) is commenced, announced or threatened in relation to the Corporation or any one of the officers or directors of the Corporation or any of its principal shareholders where wrong-doing is alleged or any order is made by any federal, provincial, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality including without limitation the TSX or Securities Commissions which involves a finding of wrong-doing; or (ii) any order, action or proceeding which cease trades
39
or otherwise operates to prevent or restrict the trading of the Common Shares or any other securities of the Corporation is made or threatened by a securities regulatory authority; or
(d)
Breach Out
- the Corporation is in breach of any material term, condition or covenant of this Agreement or any material representation or warranty given by the Corporation in this Agreement becomes or is false.
(2)
If this Agreement is terminated by any of the Underwriters pursuant to Section 17(1), there shall be no further liability on the part of such Underwriter or of the Corporation to such Underwriter, except in respect of any liability which may have arisen or may thereafter arise under Section 13 and Section 15.
(3)
The right of the Underwriters or any of them to terminate their respective obligations under this Agreement is in addition to such other remedies as they may have in respect of any default, act or failure to act of the Corporation in respect of any of the matters contemplated by this Agreement. A notice of termination given by one Underwriter under this Section 17 shall not be binding upon the other Underwriter.
Section 18
Obligations of the Underwriters to be Several
(1)
Subject to the terms and conditions hereof, the obligation of the Underwriters to purchase the Offered Shares shall be several and not joint. The percentage of the Offered Shares to be severally purchased and paid for by each of the Underwriters shall be as follows:
|
Clarus Securities Inc.
|
|
50%
|
|
|
|
|
|
Canaccord Genuity Corp.
|
|
22%
|
|
|
|
|
|
Cormark Securities Inc.
|
|
22%
|
|
|
|
|
|
Haywood Securities Inc.
|
|
3%
|
|
|
|
|
|
INFOR Financial Inc.
|
|
3%
|
(2)
If an Underwriter shall not complete the purchase and sale of its applicable percentage of the aggregate amount of the Offered Shares at the Closing Time for any reason whatsoever, including by reason of Section 17 hereof, the other Underwriter shall have the right, but shall not be obligated, to purchase the Offered Shares which would otherwise have been purchased by the Underwriter which fails to purchase. If, with respect to the Offered Shares, the non-defaulting Underwriter elects not to exercise such rights to assume the entire obligations of the defaulting Underwriter, then the Corporation shall have the right to either (i) proceed with the sale of the Offered Shares (less the defaulted Offered Shares) to the non-defaulting Underwriter; or (ii) terminate its obligations hereunder without liability except pursuant to the provisions of Section 13 and Section 15 in respect of the non-defaulting Underwriter.
40
(3)
Subject to compliance with Canadian Securities Laws, without affecting the firm obligation of the Underwriters to purchase from the Corporation 18,987,400 Offered Shares at the Offering Price in accordance with this Agreement, after the Underwriters have made reasonable effort to sell all of the Offered Shares at the Offering Price, the Offering Price may be decreased by the Underwriters and further changed from time to time to an amount not greater than the Offering Price specified herein. Such decrease in the Offering Price will not affect the Underwriters’ Commission ($0.5629 per Offered Share) to be paid by the Corporation to the Underwriters, and it will not decrease the amount of the net proceeds of the Offering to be paid by the Underwriters to the Corporation ($11.2871 per Offered Share), before deducting expenses of the Offering. The Underwriters will inform the Corporation if the Offering Price is decreased.
Section 19
Notices
Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered,
in the case of the Corporation, to:
Aphria Inc.
245 Talbot Street West
Suite 103
Leamington, ON N8H 1N8
Attention:
Christelle Gedeon, Chief Legal Officer
in the case of the Underwriters, to:
Clarus Securities Inc.
130 King Street West
Suite 3640
Toronto, ON M5X 1A9
Attention:
Robert Orviss
Fax:
(416) 343-2799
with a copy of any such notice to:
Borden Ladner Gervais LLP
Bay Adelaide Centre — East Tower
22 Adelaide Street West King Street West
Toronto, ON M5H 4E3
Attention:
Andrew Powers
Fax:
(416) 367-6749
The Corporation and the Underwriters may change their respective addresses for notices by notice given in the manner aforesaid. Any such notice or other communication shall be in
41
writing, and unless delivered personally to the addressee or to a responsible officer of the addressee, as applicable, shall be given by telecopy and shall be deemed to have been given when: (i) in the case of a notice delivered personally to a responsible officer of the addressee, when so delivered; and (ii) in the case of a notice delivered or given by telecopy on the first business day following the day on which it is sent.
Section 20
Miscellaneous
(a)
Actions of Underwriters
. Except with respect to Section 13, Section 17 and Section 18, all transactions and notices on behalf of the Underwriters hereunder or contemplated hereby may be carried out or given on behalf of the Underwriters by Clarus and the Underwriters shall in good faith discuss with each other the nature of any such transactions and notices prior to giving effect thereto or the delivery thereof, as the case may be.
(b)
Successors and Assigns
. This Agreement shall enure to the benefit of, and shall be binding upon, the Underwriters and the Corporation and their respective successors and legal representatives.
(c)
Governing Law
. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(d)
Time of the Essence
. Time shall be of the essence hereof and, following any waiver or indulgence by any party, time shall again be of the essence hereof.
(e)
Interpretation
. The words, “hereunder”, “hereof” and similar phrases mean and refer to the Agreement formed as a result of the acceptance by the Corporation of this offer by the Underwriters to purchase the Offered Shares.
(f)
Survival
. All representations, warranties, covenants and agreements of the Corporation and/or the Underwriters herein contained or contained in documents submitted pursuant to this Agreement and in connection with the transaction of purchase and sale herein contemplated shall survive for a period ending on the date that is two years following the Closing Date. Notwithstanding the preceding sentence, Section 13 shall survive the purchase and sale of the Offered Shares and the termination of this Agreement and shall continue in full force and effect for the benefit of the Underwriters or the Corporation, as the case may be, regardless of any subsequent disposition of the Offered Shares or any investigation by or on behalf of the Underwriters with respect thereto without limitation other than any limitation requirements of applicable law. The Underwriters and the Corporation shall be entitled to rely on the representations and warranties of the Corporation or the Underwriters, as the case may be, contained herein or delivered pursuant hereto notwithstanding any investigation which the Underwriters or the Corporation may undertake or which may be undertaken on their behalf.
(g)
Electronic Copies
. Each of the parties hereto shall be entitled to rely on delivery of a facsimile or PDF copy of this Agreement and acceptance by each such party
42
of any such facsimile or PDF copy shall be legally effective to create a valid and binding agreement between the parties hereto in accordance with the terms hereof.
(h)
Severability
. If one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein.
(i)
Counterparts
. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.
(j)
Several and Joint
. In performing their respective obligations under this Agreement, the Underwriters shall be acting severally and not jointly and severally. Nothing in this Agreement is intended to create any relationship in the nature of a partnership, or joint venture between the Underwriters.
(k)
Market Stabilization Activities
. In connection with the distribution of the Offered Shares, the Underwriters (or any of them) may effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which might otherwise prevail in the open market, but in each case as permitted by Canadian Securities Laws. Such stabilizing transactions, if any, may be discontinued by the Underwriters at any time.
(l)
No Fiduciary Duty
. The Corporation acknowledges that in connection with the Offering, the Underwriter: (i) have acted at arm’s length, are not agents of, and owe no fiduciary duties to, the Corporation or any other person, (ii) owe the Corporation only those duties and obligations set forth in this Agreement, and (iii) may have interests that differ from those of the Corporation. The Corporation waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the Offering.
(m)
Entire Agreement
. This Agreement constitutes the only agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations and understandings in respect of the Offering, including the engagement letter dated June 6, 2018. This Agreement may be amended or modified in any respect by written instrument only.
(n)
Further Assurances
. Each of the parties hereto shall do or cause to be done all such acts and things and shall execute or cause to be executed all such documents, agreements and other instruments as may reasonably be necessary or desirable for the purpose of carrying out the provisions and intent of this Agreement.
[Remainder of page intentionally left blank]
43
If this Agreement accurately reflects the terms of the transactions which we are to enter into and are agreed to by you, please communicate your acceptance by executing the enclosed copies of this Agreement where indicated and returning them to us.
Yours very truly,
|
CLARUS SECURITIES INC.
|
|
CANACCORD GENUITY CORP.
|
|
|
|
|
|
|
|
By:
|
(
signed
) “
Robert Orviss
”
|
|
By:
|
(
signed
) “
Steve Winokur
”
|
|
|
Robert Orviss
|
|
|
Steve Winokur
|
|
|
Managing Director
|
|
|
Managing Director
|
|
|
|
|
|
|
|
CORMARK SECURITIES INC.
|
|
HAYWOOD SECURITIES INC.
|
|
|
|
|
|
|
|
By:
|
(
signed
) “
Chris Shaw
”
|
|
By:
|
(
signed
) “
Campbell Becher
”
|
|
|
Chris Shaw
|
|
|
Campbell Becher
|
|
|
Managing Director
|
|
|
Managing Director
|
|
|
|
|
|
|
INFOR FINANCIAL INC.
|
|
|
|
|
|
|
|
|
By:
|
(
signed
) “
Ben Goldstein
”
|
|
|
|
|
Ben Goldstein
|
|
|
|
|
Principal
|
|
|
The foregoing is hereby accepted and agreed to by the undersigned as of the date first written above.
APHRIA INC.
|
By:
|
(
signed
) “
Carl Merton
”
|
|
|
|
|
Carl Merton
|
|
|
|
|
Chief Financial Officer
|
|
|
44
SCHEDULE “A”
SUBSIDIARIES
|
Name
|
|
Jurisdiction of
Incorporation
|
|
Authorized Share
Capital
|
|
Issued and Outstanding
Shares
|
|
|
Pure Natures Wellness Inc.
|
|
Ontario
|
|
Unlimited common shares
|
|
50,179,588
|
|
|
Aphria (Arizona) Inc.
|
|
Arizona
|
|
Unlimited common shares
|
|
100
|
|
|
Broken Coast Cannabis Inc.
|
|
British Columbia
|
|
Unlimited common shares
|
|
132,760.72
|
|
|
Cannan Growers Inc.
|
|
British Columbia
|
|
Unlimited common shares
|
|
11,223.40
|
|
|
Nuuvera Inc.
|
|
Ontario
|
|
Unlimited common shares
|
|
93,360,603
|
|
SCHEDULE “B”
EXISTING RIGHTS
(1)
9,307,573 options to acquire Common Shares pursuant to the Corporation’s stock option plan, with a weighted average exercise price of $3.28 and expiry dates ranging from October 2018 to October 2022.
(2)
1,261,269 warrants to acquire Common Shares at an exercise price of $1.50 and an expiry date of December 2, 2019.
(3)
36,002 warrants to acquire Common Shares at an exercise price of $1.75 and an expiry date of December 11, 2018.
(4)
200,000 warrants to acquire Common Shares at an exercise price of $3.14 and an expiry date of September 26, 2021.
(5)
4,704,547 warrants to acquire $0.62 in cash and 0.3546 Common Shares at an exercise price of $7.20 and an expiry date of January 18, 2020.
SCHEDULE “C”
COMPLIANCE WITH UNITED STATES SECURITIES LAWS
(In the event of any U.S. sales)
1.
Capitalized terms used in this Schedule “C” and not defined in this Schedule “C” shall have the meanings given in the Underwriting Agreement to which this Schedule “C” is annexed and the following terms shall have the meanings indicated:
“
Directed Selling Efforts
” means “directed selling efforts” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Offered Securities and shall include, without limitation, the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of any of such Offered Securities;
“
Foreign Issuer
” means a “
foreign issuer
” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule “C”, it means any issuer that is (a) the government of any country, or of any political subdivision of a country, other than the United States, or (b) a national of any country other than the United States, or (c) a corporation or other organization incorporated or organized under the laws of any country other than the United States, except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: (1) more than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States, and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States;
“
General Solicitation
” and “
General Advertising
” means “general solicitation” and “general advertising”, respectively, as used in Rule 502(c) of Regulation D, including, without limitation, advertisements, articles, notices or other communication published on the Internet or in any newspaper, magazine or similar media or broadcast over television, radio or on the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising or in any manner involving a public offering within the meaning of section 4(a)(2) of the U.S. Securities Act;
“
Offered Securities
” means the Common Shares offered and sold in the Offering, including any Common Shares issued pursuant to the Over-Allotment Option;
“
Offshore Transaction
” means “offshore transaction” as defined in Regulation S;
“
Selling Firms
” means the Underwriters together with other investment dealers and brokers which participate in the offer and sale of the Offered Securities under the terms of this Agreement, including this Schedule “C”;
“
Substantial U.S. Market Interest
” means “substantial U.S. market interest” as that term is defined in Regulation S; and
“
U.S. Purchaser
” means any purchaser of the Offered Securities that is, or is acting for the account or benefit of, a person in the United States, or any person offered the Offered Securities in the United States.
2.
The Corporation represents, warrants and covenants to the Underwriters and the U.S. Affiliates that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
(a)
the Corporation is a Foreign Issuer, and there is no Substantial U.S. Market Interest with respect to the Offered Securities or any other class of equity securities of the Corporation;
(b)
none of the Corporation, its affiliates (as defined in Rule 405 under the U.S. Securities Act) or any person acting on its or their behalf (except for the Underwriters, their respective U.S. Affiliates and any person acting on their behalf, as to whom no representation, warranty or covenant is made) (i) has engaged or will engage in any Directed Selling Efforts, (ii) has taken or will take any action that would cause the exemption afforded by Rule 144A to be unavailable for offers and sales of Offered Securities to, or for the account or benefit of, persons in the United States in accordance with this Schedule “C”, or the exclusion from registration afforded by Rule 903 of Regulation S to be unavailable for offers and sales of the Offered Securities in Offshore Transactions in accordance with the Underwriting Agreement, or (iii) has engaged in or will engage in any form of General Solicitation or General Advertising with respect to offers or sales of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
the Offered Securities satisfy the requirements set forth in Rule 144A(d)(3) under the U.S. Securities Act;
(d)
so long as any Offered Securities which have been sold to, or for the account or benefit of, persons in the United States in reliance upon Rule 144A are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the U.S. Securities Act, and if the Corporation is neither exempt from reporting pursuant to Rule 12g3-2(b) of the U.S. Exchange Act nor subject to and in compliance with Section 13 or 15(d) of the U.S. Exchange Act, the Corporation will furnish to any holder of such Offered Securities and any prospective purchaser of the Offered Securities designated by such holder, upon request of such holder, the information required to be delivered pursuant to Rule 144A(d)(4) under the U.S. Securities Act (so long as such requirement is necessary in order to permit holders of such Offered Securities to effect resales under Rule 144A);
(e)
except with respect to the offer and sale of the Offered Securities offered under this Agreement, the Corporation has not, within six months before the commencement of the offer and sale of the Offered Securities, and will not within six months after the latest of the Closing Date and any Over-Allotment Option
2
Closing Date, offer or sell any securities in a manner that would be integrated with the offer and sale of the Offered Securities and would cause the exemptions from registration pursuant to Rule 144A or the exclusion from registration set forth in Rule 903 of Regulation S to become unavailable with respect to the offer and sale of the Offered Securities;
(f)
except with respect to offers and resales of Offered Securities to Qualified Institutional Buyers in reliance on Rule 144A, pursuant to the terms of this Agreement, none of the Corporation, any of its affiliates, or any person acting on their behalf has made or will make (i) any offer to sell, or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, a person in the United States, or (ii) any sale of the Offered Securities unless, at the time the buy order was or will have been originated, the purchaser is outside the United States or the Corporation, its affiliates an any person acting on their behalf reasonably believe that the purchaser is outside the United States;
(g)
the Corporation is not, and after giving effect to the offer and sale of the Offered Securities and the application of the proceeds as described in the Prospectus, will not be, an “investment company” within the meaning of the United States Investment Company Act of 1940, as amended, registered or required to be registered under such Act;
(h)
none of the Corporation, any of its affiliates or any person acting on any of their behalf (other than the Underwriters, their respective U.S. Affiliates or any person acting on their behalf, as to whom no representation, warranty or covenant is made) has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with the offer or sale of the Offered Securities;
(i)
none of the Corporation or any of its predecessors or subsidiaries has had the registration of a class of securities under the U.S. Exchange Act revoked by the SEC pursuant to Section 12(j) of the U.S. Exchange Act and any rules or regulations promulgated under the U.S. Exchange Act; and
(j)
upon receipt of a written request from a purchaser that is, or is purchasing for the account or benefit of, a person in the United States, the Corporation shall make a determination if the Corporation is a “passive foreign investment company” (a “
PFIC
”) within the meaning of section 1297(a) of the United States Internal Revenue Code of 1986, as amended (the “
Code
”), during any calendar year following the purchase of Offered Securities by such purchaser, and if the Corporation determines that it is a PFIC during such year, the Corporation will provide to such purchaser, upon written request, all information that would be required to permit a United States shareholder to make an election to treat the Corporation as a “qualified electing fund” for the purposes of the Code.
3.
Each of the Underwriters, severally and not jointly, represents and warrants to the Corporation that, as of the date of this Agreement, the Closing Time and any Over-Allotment Option Closing Time:
3
(a)
it acknowledges that the Offered Securities have not been and will not be registered under the U.S. Securities Act or applicable state securities laws and may not be offered or sold to, or for the account or benefit of, persons in the United States, except pursuant to transactions exempt from or not subject to the registration requirements under the U.S. Securities Act and exemptions from registration under applicable state securities laws. Accordingly, it has offered and sold, and will offer and sell, the Offered Securities forming part of its allotment only (a) in an Offshore Transaction in accordance with Rule 903 of Regulation S or (b) as provided in paragraphs 3(b) through 3(l) below. None of it, its U.S. Affiliate or any person acting on its or their behalf, has made or will make (except as permitted in paragraphs 3(b) through 3(n) below): (i) any offer to sell or any solicitation of an offer to buy, any Offered Securities to, or for the account or benefit of, any person in the United States; or (ii) any sale of Offered Securities to any purchaser unless, at the time the buy order was or will have been originated, the purchaser was outside the United States, or it, its U.S. Affiliate or persons acting on their behalf reasonably believed that such purchaser was outside the United States. None of it, its U.S. Affiliate, or any persons acting on its or their behalf has engaged or will engaged in any Directed Selling Efforts;
(b)
it has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities, except with its U.S. Affiliate, any U.S. Affiliate of any Selling Firms or with the prior written consent of the Corporation. It shall require each Selling Firm and its U.S. Affiliate to agree, for the benefit of the Corporation, to be bound by and to comply with, and shall use its commercially reasonable efforts to ensure that each Selling Firm and its U.S. Affiliate complies with, the provisions of this Schedule “C” as if such provisions applied to such Selling Firm or affiliate;
(c)
all offers and sales of the Offered Securities by it to, or for the account or benefit of, persons in the United States have been and will be effected only by its U.S. Affiliate, and in all such cases in compliance with all applicable United States federal and state laws relating to the registration and conduct of securities brokers and dealers and all applicable state securities laws;
(d)
its U.S. Affiliate is, and will be on the date of each offer and sale of Offered Securities to, or for the account or benefit of, persons in the United States, duly registered as a broker-dealer under the U.S. Exchange Act and under all applicable state securities laws (unless exempt therefrom) and a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc.;
(e)
it and its affiliates have not solicited and will not solicit, either directly or through a person acting on its or their behalf, offers for, and have not offered to sell and will not offer to sell, Offered Securities to, or for the account or benefit of, persons in the United States by any form of General Solicitation or General Advertising;
(f)
immediately prior to soliciting any offerees of Offered Securities to, or for the account or benefit of, persons in the United States, the Underwriter, its U.S. Affiliate and any person acting on its or their behalf had reasonable grounds to
4
believe and did believe that each offeree solicited by it pursuant to Rule 144A was a Qualified Institutional Buyer with which it has a pre-existing relationship, and at the time of completion of each sale of Offered Securities to, or for the account or benefit of, such person in the United States, the Underwriter, its U.S. Affiliate, and any person acting on its or their behalf will have reasonable ground to believe and will believe, that each purchaser thereof is a Qualified Institutional Buyer;
(g)
each offeree of Offered Securities solicited by it that is, or is acting for the account or benefit of, a person in the United States shall be provided with a copy of the U.S. Private Placement Memorandum and each purchaser of Offered Securities from it that is, or is acting for the account or benefit of, a person in the United States shall be provided, prior to the time of its purchase of any Offered Securities, with a copy of the final U.S. Private Placement Memorandum and no other written material will be used in connection with the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(h)
at least one Business Day prior to the time of delivery, the Corporation and its transfer agent will be provided with a list of all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States solicited by it;
(i)
prior to any sale of Offered Securities to a U.S. Purchaser, it shall cause each such U.S. Purchaser that is a Qualified Institutional Buyer purchasing such Offered Securities pursuant to Rule 144A to execute a Qualified Institutional Buyer Letter in the form attached as Exhibit I to the final U.S. Private Placement Memorandum;
(j)
at the Closing, each Underwriter (together with its U.S. Affiliate) that participated in the offer of Offered Securities to, or for the account or benefit of, persons in the United States, will provide a certificate, substantially in the form of Appendix I to this Schedule “C”, relating to the manner of the offer and sale of the Offered Securities to, or for the account or benefit of, persons in the United States, or will be deemed to have represented that neither it nor its U.S. Affiliate offered or sold Offered Securities to, or for the account or benefit of, persons in the United States;
(k)
it will inform, and will cause its U.S. Affiliate to inform, all purchasers of the Offered Securities to, or for the account or benefit of, persons in the United States by delivery of the U.S. Private Placement Memorandum that the Offered Securities have not been and will not be registered under the U.S. Securities Act and are “restricted securities” as defined in Rule 144(a)(3) under the U.S. Securities Act and are being offered and sold to them without registration under the U.S. Securities Act in reliance upon an exemption from such registration pursuant to Rule 144A; and
(l)
none of the Underwriter, its affiliates, or any person acting on any of their behalf has taken or will take, directly or indirectly, any action in violation of Regulation
5
M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities.
6
APPENDIX I
TO SCHEDULE “C”
UNDERWRITERS’ CERTIFICATE
In connection with the private placement to, or for the account or benefit of, persons in the United States of Offered Securities of Aphria Inc. (the “
Corporation
”) pursuant to the underwriting agreement dated June 12, 2018, between the Corporation and the Underwriters named in the underwriting agreement (the “
Underwriting Agreement
”), each of the undersigned does hereby certify as follows:
(a)
the U.S. Affiliate is a duly registered broker or dealer with the United States Securities and Exchange Commission, and is a member of, and in good standing with, the Financial Industry Regulatory Authority, Inc. on the date of this certificate and on the date of each offer and sale of Offered Securities made by it, and all offers and sales of the Offered Securities to, or for the account or benefit of, persons in the United States have been effected by the U.S. Affiliate in accordance with all applicable U.S. broker-dealer requirements;
(b)
each purchaser of Offered Securities that is, or is acting for the account or benefit of, a person in the United States solicited by us was, prior to the sale of Offered Securities to such purchaser, provided with a copy of the final U.S. Private Placement Memorandum, and we and our U.S. Affiliates have not used and will not use any written material other than the U.S. Private Placement Memorandum in connection with the offering of the Offered Securities to, or for the account or benefit of, persons in the United States;
(c)
immediately prior to our transmitting the U.S. Private Placement Memorandum to offerees of Offered Securities to, or for the account or benefit of, persons in the United States, we had reasonable grounds to believe, and did believe, that each offeree was a Qualified Institutional Buyer with whom we have a pre-existing relationship, and on the date of this certificate we continue to believe that each purchaser of the Offered Securities purchasing from us through our U.S. Affiliate is a Qualified Institutional Buyer;
(d)
no form of General Solicitation or General Advertising was used by us or our U.S. Affiliate in connection with the offer or sale of the Offered Securities to, or for the account or benefit of, persons in the United States;
(e)
in connection with each sale of Offered Securities to U.S. Purchasers that are Qualified Institutional Buyers purchasing pursuant to Rule 144A solicited by us, we caused each such U.S. Purchaser to execute and deliver a Qualified Institutional Buyer Letter in the form of Exhibit I attached to the final U.S. Private Placement Memorandum;
(f)
we have not engaged and will not engage in any violation of Regulation M under the U.S. Exchange Act in connection with its offers or sales of the Offered Securities;
(g)
no Directed Selling Efforts were engaged in by us with respect to the offer or sale of the Offered Securities by us; and
(h)
the offering of the Offered Securities to, or for the account or benefit of, persons in the United States has been conducted by us in accordance with the Underwriting Agreement, including Schedule “C” to the Underwriting Agreement.
8
Capitalized terms used in this certificate and not defined in this certificate have the meanings ascribed thereto in the Underwriting Agreement (including the Schedule “C” to the Underwriting Agreement).
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DATED the day of , 2018.
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By:
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Name:
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Title:
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9
Exhibit 99.115
EXECUTION VERSION
APHRIA INC.
as Purchaser
and
SCYTHIAN BIOSCIENCES CORP.
as Vendor
SHARE PURCHASE AGREEMENT
JULY 17, 2018
TABLE OF CONTENTS
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ARTICLE 1
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INTERPRETATION
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Section 1.1
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Defined Terms
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1
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Section 1.2
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References and Usage
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8
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Section 1.3
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Headings, etc.
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9
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Section 1.4
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Knowledge
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9
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Section 1.5
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Schedules
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9
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ARTICLE 2
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PURCHASED SHARES AND PURCHASE PRICE
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Section 2.1
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Purchase and Sale
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9
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Section 2.2
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Date, Time and Place of Closing
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9
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Section 2.3
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Purchase Price
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10
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ARTICLE 3
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REPRESENTATIONS AND WARRANTIES OF THE VENDOR
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Section 3.1
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Representations and Warranties Regarding the Target Corporations
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10
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Section 3.2
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Representations and Warranties Regarding the Vendor
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22
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ARTICLE 4
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REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
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Section 4.1
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Representations and Warranties of the Purchaser
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24
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ARTICLE 5
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COVENANTS
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Section 5.1
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Conduct of Business Prior to Closing
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26
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Section 5.2
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Notice of Untrue Representation or Warranty
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27
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Section 5.3
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Actions to Satisfy Closing Conditions
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27
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Section 5.4
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Notices and Request for Consents
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27
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Section 5.5
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Additional Covenants
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28
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ARTICLE 6
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CONDITIONS OF CLOSING
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Section 6.1
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Conditions for the Benefit of the Purchaser
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28
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Section 6.2
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Conditions for the Benefit of the Vendor
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31
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ARTICLE 7
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TERMINATION
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Section 7.1
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Termination Rights
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32
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Section 7.2
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Effect of Termination
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33
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ARTICLE 8
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INDEMNIFICATION
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Section 8.1
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Survival
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33
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Section 8.2
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Indemnification in Favour of the Purchaser
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34
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Section 8.3
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Indemnification in Favour of the Vendor
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35
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Section 8.4
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Limitations on Indemnification
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35
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Section 8.5
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Exclusions to Limitations to Liability
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36
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Section 8.6
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Non-Exclusive Remedy
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37
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Section 8.7
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Notification of and Procedure for Claims
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37
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Section 8.8
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Adjustment to Purchase Price
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ARTICLE 9
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POST-CLOSING COVENANTS
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Section 9.1
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Access to Books and Records
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Section 9.2
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Confidentiality
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39
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Section 9.3
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Tax Matters
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40
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Section 9.4
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Further Assurances
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40
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ARTICLE 10
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MISCELLANEOUS
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Section 10.1
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Notices
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40
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Section 10.2
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Time of the Essence
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41
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Section 10.3
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Announcements
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41
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Section 10.4
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Third Party Beneficiaries
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42
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Section 10.5
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Expenses
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42
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Section 10.6
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Amendments
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42
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Section 10.7
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Waiver
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42
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Section 10.8
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Entire Agreement
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43
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Section 10.9
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Successors and Assigns
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43
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Section 10.10
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Severability
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43
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Section 10.11
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Governing Law
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43
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Section 10.12
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Counterparts
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44
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SCHEDULES
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Schedule “A”
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Pre-Closing Reorganization Steps
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Schedule “B”
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Pre-Closing and Non-Solicitation Covenants
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Schedule “C”
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ROFR/ROFO Agreement Terms
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Schedule “D”
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Third Party Claim Procedure
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Schedule “E”
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Form of Non-Competition and Confidentiality Agreement
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SHARE PURCHASE AGREEMENT
Share Purchase Agreement dated July 17, 2018 between Scythian Biosciences Corp. (the “
Vendor
” or “
Scythian
”) and Aphria Inc. (the “
Purchaser
” or “
Aphria
”).
ARTICLE 1
INTERPRETATION
Section 1.1
Defined Terms.
As used in this Agreement, the capitalized terms listed below shall have the corresponding meanings.
“
ABP
” means ABP S.A., a corporation existing under the laws of Argentina.
“
Accounts Receivable
” means all accounts receivables, notes receivables and other debts due or accruing due to any Target Corporation.
“
affiliate
” of a Person means any other Person that directly or indirectly controls, is controlled by or is under common control with such Person, where “control” means the possession, directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
“
Agreement
” means this share purchase agreement and all schedules and exhibits hereto, in each case as they may be amended or supplemented by the Parties.
“
Ancillary Agreements
” means all agreements, certificates and other instruments delivered or given pursuant to this Agreement, including for greater certainty the ROFR/ROFO Agreement.
“
Aphria
” means Aphria Inc., a corporation continued under the laws of the Province of Ontario.
“
Assets
” means all property and assets of each Target Corporation of every nature and kind and wheresoever situate.
“
Authorization
” means, with respect to any Person, any order, permit, approval, consent, waiver, licence or other authorization of any Governmental Entity having jurisdiction over the Person.
“
Books and Records
” means all information in any form relating to the Business, including books of account, financial, tax, business, marketing, personnel and research information and records, equipment logs, operating guides and manuals and all other documents, files, correspondence and other information.
“
Business
” means, in the case of:
(i) MMJ International, the business of operating pharmacy services and the distribution of pharmaceutical products in Argentina, including, without limiting the foregoing, the licensed importation of medical cannabis products into Argentina for medical research purposes;
(ii) Marigold Acquisitions, the business of cultivating, developing and distributing medical cannabis products on a retail basis in Jamaica; and
(iii) MMJ Colombia, the business of cultivating and developing medical cannabis products for Colombia and future export markets.
“
Business Day
” means any day of the year, other than a Saturday, Sunday or any day on which major Canadian chartered banks are closed for business in Toronto, Ontario.
“
Closing
” means the completion of the transaction of purchase and sale contemplated in this Agreement.
“
Closing Date
” means the later of (i) September 30, 2018 and (ii) the date that is five (5) Business Days after the satisfaction or waiver of the last of the closing conditions set out in this Agreement (other than those conditions in Section 6.1(a), Section 6.1(b), Section 6.1(1), Section 6.1(n), Section 6.2(a), Section 6.2(b), Section 6.2(d) and Section 6.2(e) that by their nature are to be (and will be) satisfied on Closing, but subject to the satisfaction or waiver of those conditions), provided that such date may not be later than the Outside Date.
“
Confidential Information
” has the meaning specified in Section 9.2.
“
Consideration Shares
” means the aggregate of 15,678,310 common shares in the capital of Aphria to be issued to the Vendor in satisfaction, in part, of the Purchase Price.
“
Contract
” means any agreement, contract, lease, licence, undertaking, engagement or commitment of any nature, whether written or oral.
“
Colcanna
” means Colcanna SAS, a corporation existing under the laws of Colombia.
“
Corporate Records
” has the meaning specified in Section 3.1(I)(i).
“
Corporation
” means LATAM Holdings Inc., a corporation incorporated under the laws of the Province of British Columbia.
“
Damages
” means any losses (other than loss of profits), liabilities, damages (other than consequential damages, unless such consequential damages have been determined by a court of competent jurisdiction to be reasonably foreseeable and a natural and probable consequence of the related breach) or expenses (including legal fees and expenses) whether resulting from an action, suit, proceeding, arbitration,
2
claim or demand that is instituted or asserted by a third party, including a Governmental Entity, or a cause, matter, thing, act, omission or state of facts not involving a third party.
“
Data Room
” means the materials contained in the virtual “Dropbox” folder(s) located at the following URL: https://www.dropbox.com/home/Scythian%20-%20Cormark, and established by the Vendor as at 5:00 p.m. on July 15, 2018, and includes, for greater certainty, materials available in the Public Record and all other information communicated by the Persons identified in Section 1.4 to the Purchaser or its advisors in writing.
“
Employee Plans
” means all the employee benefit, fringe benefit, supplemental unemployment benefit, bonus, incentive, profit sharing, termination, change of control, pension, retirement, savings, stock option, stock purchase, stock appreciation, health, welfare, medical, dental, disability, life insurance and similar plans, programmes, arrangements or practices relating to any current or former employees, officers or directors of any of the Target Corporations maintained, sponsored, contributed to or funded by any Target Corporation or under which any Target Corporation may have any liability contingent or otherwise other than benefit plans established pursuant to statute.
“
Employment Contracts
” means Contracts, other than Employee Plans, relating to
and
[NAMES OF EMPLOYEES]
“
Environmental Laws
” means all applicable Laws and agreements with Governmental Entities and all other statutory requirements relating to public health or the protection of the environment and all Authorizations issued pursuant to such Laws, agreements or statutory requirements.
“
Financial Statements
” means (i) the audited annual financial statements of ABP for the year ended December 31, 2017; (ii) the unaudited management financial statements of MMJ International for the period ended May 7, 2018; (iii) the unaudited financial statements of Marigold Acquisitions for the period ended June 30, 2018 (iv) the unaudited management financial statements of Marigold for the period ended May 31, 2018; (v) the unaudited management financial statements of MMJ Colombia for the period ended July 13, 2018; and (vi) the unaudited management financial statements of Colcanna for the period ended June 30, 2018.
“
Forecast
” means the financial forecast prepared by Scythian in respect of the Target Corporations and the operation of the Business and delivered to the Purchaser and Cormark Securities Inc. on July, 2018.
“
Fundamental Representations of the Purchaser
” has the meaning specified in Section 8.4(2)(a).
“
Fundamental Representations of the Vendor
” has the meaning specified in Section 8.4(1)(a).
3
“
GAAP
” means generally accepted accounting principles as set out in the CPA Canada Handbook — Accounting Standards for Private Enterprises, as applicable, at the relevant time applied on a consistent basis.
“
Governmental Entity
” means: (i) any governmental or public department, central bank, court, minister, governor-in-council, cabinet, commission, tribunal, board, bureau, agency, commissioner or instrumentality, whether international, multinational, national, federal, provincial, state, county, municipal, local, or other; (ii) any subdivision or authority of any of the above; (iii) any stock exchange; and (iv) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above.
“
IFRS
” means the International Financial Reporting Standards as adopted by the International Accounting Standards Board, at the relevant time, applied on a consistent basis.
“
Indemnified Person
” means a Person with indemnification rights or benefits under this Agreement including pursuant to Article 8.
“
Indemnifying Party
” means a Party against which a claim may be made for indemnification under this Agreement, including pursuant to Article 8.
“
Intellectual Property
” means domestic and foreign: (i) patents, provisional patent applications, applications for patents and reissues, divisions, continuations, renewals, extensions and continuations-in-part of patents or patent applications; (ii) proprietary and non-public business information, including inventions (whether patentable or not), invention disclosures, improvements, discoveries, trade secrets, confidential information, know-how, methods, processes, designs, technology, technical data, schematics, formulae and customer lists, and documentation relating to any of the foregoing; (iii) copyrights, copyright registrations and applications for copyright registration; (v) designs, design registrations, design registration applications; (vi) trade names, business names, corporate names, domain name registrations, website names and world wide web addresses, common law trade-marks, trade-mark registrations, trade mark applications, trade dress and logos, and the goodwill associated with any of the foregoing; and (vii) any other intellectual property and industrial property.
“
Interim Period
” means the period between the close of business on the date of this Agreement and the Closing.
“
Laws
” means any principle of common law and all applicable (i) laws, constitutions, treaties, statutes, codes, ordinances, orders, decrees, rules, regulations and by-laws, (ii) judgments, orders, writs, injunctions, decisions, awards and directives of any Governmental Entity and (iii) to the extent that they have the force of law, standards, policies, guidelines, notices and protocols of any Governmental Entity.
4
“
Leases
” means all oral and written leases and all amendments, extensions, assignments and variations thereof or any guarantee or security agreements therefor, of the properties leased by any Target Corporation.
“
Lien
” means any mortgage, charge, pledge, hypothec, security interest, assignment, lien (statutory or otherwise), easement, title retention agreement or arrangement, conditional sale, deemed or statutory trust, restrictive covenant or other encumbrance of any nature which, in substance, secures payment or performance of an obligation.
“
Marigold
” means Marigold Projects Jamaica Limited, a corporation existing under the laws of Jamaica.
“
Marigold Acquisitions
” means Marigold Acquisitions Inc., a corporation existing under the laws of the Province of British Columbia.
“
Material Adverse Change
” means any event, change, development or occurrence that, individually or together with any other event, change, effect, state of facts, circumstance, development, or occurrence, is or could reasonably be expected to be materially adverse to the current or future business, condition (financial or otherwise), assets, operations, results of operations, or liabilities (contingent or otherwise) of the Target Corporations, as the case may be,
provided
that a Material Adverse Change shall not include an adverse change resulting from a change:
(i)
that arises out of a matter that has been publicly disclosed prior to the date of this Agreement or otherwise disclosed in writing by a Party to the other Party prior to the date of this Agreement;
(ii)
that results from conditions affecting the medical cannabis market generally in Canada, the United States, Argentina, Jamaica and Colombia, including changes in laws, government policies or programs or taxes;
(iii)
that results from general economic, financial, currency exchange, interest rate or securities market conditions in Canada, the United States, Argentina, Jamaica or Colombia; or
(iv)
that is a direct result of any matter permitted by this Agreement or consented to in writing by the applicable Party,
provided further
, however, that with respect to clauses (ii) through to and including (iv), such matter does not have a materially disproportionate effect on the Target Corporations, taken as a whole, relative to other comparable companies and entities operating in the industry in which the Target Corporations operate; provided, however that this does not include any currency fluctuations of the Argentinian peso against the US or Canadian dollar.
“
Material Authorizations
” has the meaning specified in Section 3.1(I)(m)(i).
5
“
MI 61-101
” means Multilateral Instrument 61-101 —
Protection of Minority Security Holders in Special Transactions.
“
MMJ Colombia
” means MMJ Colombia Partners Inc., a corporation existing under the laws of Colombia.
“
MMJ International
” means MMJ International Investments Inc., a corporation existing under the laws of the Province of British Columbia.
“
Notice
” has the meaning specified in Section 10.1.
“
Ordinary Course
” means, with respect to an action taken by a Person, that such action is consistent with the past practices of the Person and is taken in the ordinary course of the normal day-to-day operations of the Person.
“
Outside Date
” means December 31, 2018.
“
Parties
” means the Vendor and the Purchaser and any other Person who may become a party to this Agreement and “
Party
” means any one of them.
“
Permitted Liens
” means (i) Liens for Taxes not yet due and delinquent, (ii) easements, encroachments and other minor imperfections of title which do not, individually or in the aggregate, detract from the value of or impair the use or marketability of any real property, and (iii) Liens listed and described in the Data Room but only to the extent such Liens conform to their description in the Data Room.
“
Person
” means an individual, partnership, limited partnership, limited liability partnership, corporation, limited liability company, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or Governmental Entity, and pronouns have a similarly extended meaning.
“
Pre-Closing Reorganization
” means the matters contained in the structuring memorandum of MNP LLP dated July, 2018 entitled “International Acquisition Structuring” pursuant to which Scythian will, prior to the Closing Date, indirectly acquire each of the Target Corporations, together with the other procedural steps and mechanics outlined in Schedule “A” hereto.
“
Pre-Closing Tax Period
” means a taxation year or other fiscal period (or the portion thereof) that ends on or before the Closing Date.
“
Public Record
” means all documents publicly filed under the profile of the Vendor on the System for Electronic Document Analysis Retrieval (SEDAR) since July 4, 2017.
“
Purchase Price
” has the meaning specified in Section 2.2.
“
Purchased Shares
” has the meaning specified in Section 2.1.
6
“
Purchaser
” means Aphria.
“
Regulatory Authority
” has the meaning specified in Section 3.1(I)(m)(i).
“
Related Party
” means (i) any affiliate of a Target Corporation; (ii) the Vendor; (iii) any affiliate of the Vendor; and (iv) any director, officer, or employee of a Target Corporation and, if applicable, the Vendor or any third Person in which any of the foregoing Persons owns, directly or indirectly, more than five percent (5%) of the voting securities or partnership or other ownership interests.
“
ROFR/ROFO Agreement
” means the proposed right of first refusal / right of first option agreement for Aphria to purchase, in two separate tranches, up to 90.0% of the issued and outstanding common shares (or such other voting equity securities, as applicable) of an entity in Brazil from the Vendor, on the terms provided for in Schedule “C”.
“
Scythian
” means Scythian Biosciences Corp., a corporation existing under the laws of the Province of Ontario.
“
Subsidiaries
” means collectively, ABP, MMJ International, Marigold Acquisitions, Marigold, MMJ Colombia and Colcanna.
“
Target Corporations
” means, collectively, the Corporation and the Subsidiaries and a “
Target Corporation
” shall mean any one of the Corporation or any one of the Subsidiaries, as the context may require.
“
Tax Act
” means the
Income Tax Act
, R.S.C. 1985 (5th Supp.) c.1.
“
tax assessment period
” has the meaning described in Section 8.4(1)(b).
“
Tax Returns
” means any and all returns, reports, declarations, elections, notices, forms, designations, filings, and other documents (including estimated tax returns and reports, withholding tax returns and reports, and information returns and reports) filed or required to be filed in respect of Taxes.
“
Taxes
” means (i) any and all taxes, duties, fees, excises, premiums, assessments, imposts, levies, rates, withholdings, dues, contributions and other charges, collections or assessments of any kind whatsoever, imposed by any Governmental Entity; (ii) all interest, penalties, fines, additions to tax or other additional amounts imposed by any Governmental Entity on or in respect of amounts of the type described in clause (i) above or this clause (ii); (iii) any liability for the payment of any amounts of the type described in clauses (i) or (ii) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period; and (iv) any liability for the payment of any amounts of the type described in clauses (i) or (ii) or (iii) as a result of any express or implied obligation to indemnify any other Person or as a result of being a transferee or successor in interest to any party.
7
“
Third Party Claim
” means any action, suit, proceeding, arbitration, claim or demand that is instituted or asserted by a third party, including a Governmental Entity, against an Indemnified Person which entitles the Indemnified Person to make a claim for indemnification under this Agreement.
“
TSX
” means the Toronto Stock Exchange.
“
TSXV
” means the TSX Venture Exchange.
“
Vendor
” means Scythian.
Section 1.2
References and Usage.
Unless expressly stated otherwise, in this Agreement:
(a)
reference to a gender includes all genders;
(b)
the singular includes the plural and vice versa;
(c)
“or” is used in the inclusive sense of “and/or”;
(d)
“any” means “any and all”;
(e)
the words “including”, “includes” and “include” mean “including (or includes or include) without limitation”;
(f)
the phrase “the aggregate of”, “the total of”, “the sum of”, or a phrase of similar meaning means “the aggregate (or total or sum), without duplication, of”;
(g)
“
$
”
or dollars refers to the Canadian currency unless otherwise specifically indicated;
(h)
accounting terms not specifically defined in this Agreement are to be interpreted in accordance with GAAP;
(i)
a statute includes all rules and regulations made under it, if and as amended, re-enacted or replaced from time to time;
(j)
a Person includes its heirs, administrators, executors, legal representatives, predecessors, successors and permitted assigns;
(k)
the term “
notice
” refers to oral or written notices except as otherwise specified;
(l)
the term “
Agreement
” and any reference in this Agreement to this Agreement or any other agreement or document includes, and is a reference to, this Agreement or such other agreement or document as it may have been, or may from time to time be amended, restated, replaced, supplemented or
8
novated and all schedules to it, except as otherwise provided in this Agreement; and
(m)
whenever payments are to be made or an action is to be taken on a day which is not a Business Day, such payment will be required to be made or such action will be required to be taken on or not later than the next succeeding Business Day and in the computation of periods of time, unless otherwise stated, the word “from” means “from and excluding” and the words “to” and “until” each mean “to and including.
Section 1.3
Headings, etc.
The use of headings (e.g. Article, Section, etc.) in this Agreement is reference only and is not to affect the interpretation of this Agreement. References in the Agreement to Article, Section etc., unless otherwise specified, shall mean the applicable Article, Section, etc. of this Agreement.
Section 1.4
Knowledge.
Where any representation or warranty contained in this Agreement is expressly qualified by reference to the knowledge of the Vendor, it will be deemed to refer to the knowledge of
and
, in each case after due and diligent inquiry of such Person. [NAMES OF INDIVIDUALS WITH KNOWLEDGE]
Section 1.5
Schedules.
The schedules attached to this Agreement form an integral part of this Agreement for all purposes of it.
ARTICLE 2
PURCHASED SHARES AND PURCHASE PRICE
Section 2.1
Purchase and Sale.
Subject to the terms and conditions of this Agreement, the Vendor agrees to sell, assign and transfer to the Purchaser and the Purchaser agrees to purchase from the Vendor on the Closing Date, all (but not less than all) of the issued and outstanding shares of the Corporation (collectively, the “
Purchased Shares
”), which represents all of the issued and outstanding shares in the capital of the Corporation.
Section 2.2
Date, Time and Place of Closing.
Closing will take place at the offices of Stikeman Elliott LLP, Suite 5300, Commerce Court West, Toronto, Ontario, at 10:00 a.m. (Toronto time) on the Closing Date or at such other place, on such other date and at such other time as may be agreed upon in writing between the Vendor and the Purchaser.
9
Section 2.3
Purchase Price.
(1)
The consideration payable by the Purchaser to the Vendor for the Purchased Shares at Closing shall be an amount equal to $193,000,000 and US$1,000,000 (collectively, the “
Purchase Price
”).
(2)
The Purchase Price shall be paid and satisfied as follows:
(a)
the assumption of an aggregate of US$1,000,000 in outstanding debts of MMJ International, Marigold Acquisitions and MMJ Colombia owing to the Vendor;
(b)
as to the balance of the Purchase Price, by the issuance to the Vendor of an aggregate of 15,678,310 Consideration Shares, to be issued, registered and delivered as so directed by the Vendor in writing. The Consideration Shares shall be issued at a deemed share price of $12.31, being the volume weighted average price of the common shares of Aphria as traded on the facilities of the TSX for the 20 trading days immediately preceding the date of this Agreement.
(3)
Purchaser hereby agrees that it will jointly elect with the Vendor, upon request by the Vendor, under subsection 85(1) of the Tax Act (and any corresponding provincial provision), in respect of the transfer of the Purchased Shares pursuant to this Agreement for consideration that includes the Consideration Shares. In the event the Vendor wishes to make such an election, Vendor will prepare the election form(s) and Purchaser agrees to provide Vendor all necessary information to complete the election form(s) on a timely basis. Vendor will provide the Purchaser with a properly completed election form(s) for execution within 120 days after the Closing Date, and the Purchaser shall, within 30 days after receiving the completed election form(s), sign and return the election form(s) to the Vendor for filing with the Canada Revenue Agency. The Vendor shall be responsible for filing such form in accordance with subsection 85(6) of the Tax Act. The Vendor shall be entitled to determine the “elected amount” within the limits set out by the Tax Act. The Vendor shall be solely responsible for the correct completion and proper filing of such election form, and Purchaser shall have no any responsibility or liability in this regard. Notwithstanding the foregoing, any failure on the part of the Vendor to provide a completed election form(s) to Purchaser within 120 days after the Closing Date shall not constitute a waiver of Vendor’s intent to file a section 85(1) election or of Purchaser’s obligation to assist with the completion of such election form on a timely basis.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE VENDOR
Section 3.1
Representations and Warranties Regarding the Target Corporations.
The Vendor represents and warrants as follows to the Purchaser with respect to the Business and Target Corporations and acknowledges and agrees that the Purchaser is
10
relying upon the representations and warranties in connection with its purchase of the Purchased Shares.
I.
In respect of each Target Corporation, the Vendor represents and warrants as follows:
(a)
Incorporation and Qualification.
Each Target Corporation is a corporation incorporated and existing under the laws of its formation and has the corporate power to own and operate its property, carry on its business and enter into and perform its obligations under this Agreement and each of the Ancillary Agreements to which it is a party. Each Target Corporation is qualified, licensed or registered to carry on business in the jurisdictions disclosed in the Data Room. The Data Room includes reference to all jurisdictions in which the nature of the Assets or the Business makes such qualification necessary or where any Target Corporation owns or leases any material Assets or conducts any material business.
(b)
No Conflict.
Except for the filings, notifications, consents approvals, waivers and Authorizations described in the Data Room, the performance and consummation of any transaction contemplated by this Agreement and each of the Ancillary Agreements by any Target Corporation:
(i)
do not and will not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) constitute or result in a violation or breach of, or conflict with, or allow any Person to exercise any rights under, any of the terms or provisions of any Target Corporation’s constating documents or by-laws;
(ii)
do not and will not (or would not with the giving of notice, the lapse of time or the happening or any other event or condition) constitute or result in a breach or violation of, or conflict
with
or allow any Person to exercise any rights under, any of the terms or provisions of any Contracts, Leases or instruments to which it or any Target Corporation is a party or pursuant to which any Target Corporation’s assets or property may be affected;
(iii)
do not and will not result in a breach of, or cause the termination or revocation of, any Authorization held by any Target Corporation or the operation of the Business; and
(iv)
do not and will not result in the violation of any Law.
(c)
Required Authorizations.
Except as disclosed in the Data Room, there is no requirement to make any filing with, give any notice to, or obtain any Authorization of, any Governmental Entity as a condition to the lawful completion of the transactions contemplated by this Agreement, except for the filings, notifications and Authorizations described in the Data Room or
11
that relate solely to the identity of the Purchaser or the nature of the business carried on by the Purchaser prior to Closing.
(d)
Required Consents.
Except as disclosed in the Data Room, there is no requirement to obtain any consent, approval or waiver of a party under any Lease or Contract to which any Target Corporation is a party to any of the transactions contemplated by this Agreement, except for the consents, approvals and waivers described in the Data Room.
(e)
Authorized and Issued Capital.
The Data Room sets out (i) the authorized share capital and (ii) the issued and outstanding share capital of each Target Corporation as of the date hereof, all of which (A) to the knowledge of the Vendor, have been duly issued and are currently outstanding as fully paid and non-assessable, and (B) at the Closing Date, will have been duly issued and outstanding as fully paid and non-assessable. None of the Target Corporations is a reporting issuer (as such term is defined under applicable securities Laws) and there is no published market for any of the Purchased Shares.
(f)
Subsidiaries.
Except as disclosed in the Data Room, all of the issued and outstanding shares of each Subsidiary are owned by one or more of the Target Corporations, as the registered and beneficial owner with a good title, free and clear of all Liens, except for Permitted Liens and those restrictions on transfer, if any, contained in the constating documents of such Subsidiary.
(g)
No Other Agreements to Purchase.
To the knowledge of the Vendor, no Person has any Contract, option or warrant or any right or privilege (whether by Law, pre-emptive or contractual granted by the Corporation) capable of becoming such for the purchase, subscription, allotment or issuance of any of the unissued securities of any Target Corporation.
(h)
Dividends and Distributions.
Aside from ABP, which declared and paid a dividend prior to April 8, 2018, none of the Target Corporations has ever, directly or indirectly, declared or paid any dividends or declared or made any other distribution on any of its shares of any class and has, directly or indirectly, redeemed, purchased or otherwise acquired any of its shares of any class or agreed to do so.
(i)
Corporate Records.
The corporate records of the Target Corporations, including all constating documents and by-laws, minute books, registers, share certificate books and all other similar documents and records (collectively, the “
Corporate Records
”) are, to the knowledge of the Vendor, complete and accurate in all material respects. Each Target Corporation has obtained or will obtain before Closing all requisite consents and/or waivers under all applicable unanimous shareholders agreements to consummate the transaction of purchase and sale contemplated by this Agreement and all such unanimous shareholders agreements of the Target Corporations (or equivalent governing documents) are disclosed in the Data Room.
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(j)
Ordinary Course.
The Business has been carried on in the Ordinary Course since, in the case of MMJ International, May 11, 2018, in the case of Marigold Acquisitions, March 20, 2018 and in the case of MMJ Colombia, April 8, 2018. Without limiting the generality of the foregoing, except as disclosed in the Data Room, no Target Corporation has:
(i)
increased its indebtedness for borrowed money or made any loan or advance, or assumed, guaranteed or otherwise became liable with respect to the liabilities or obligation of any Person, aside from the US$1,000,000 of indebtedness referred to in Section 2.3(2)(a);
(ii)
removed or received a notice of resignation from any auditor or director or terminated any officer or other senior employee;
(iii)
entered into any Contract with any Person with whom it does not deal at arm’s length within the meaning of the Tax Act;
(iv)
cancelled or waived any material claims or rights; or
(v)
made any change in any method of accounting or auditing practice, except as required by either GAAP or IFRS, or amended or approved any amendment to its constating documents, by-laws or capital structure;
(k)
No Material Adverse Change.
There has not been any Material Adverse Change, and to the knowledge of the Vendor, no event has occurred or circumstance exists which could reasonably be expected to result in such a Material Adverse Change since, in the case of MMJ International, May 11, 2018, in the case of Marigold Acquisitions, March 20, 2018 and in the case of MMJ Colombia, April 8, 2018.
(l)
Compliance with Laws.
Except as set out in the Data Room, each Target Corporation is conducting and has always conducted the Business and any past business in compliance with all applicable Laws, other than acts of non-compliance which, individually or in the aggregate, are not material.
(m)
Authorizations.
(i)
Each of the Target Corporations holds all necessary licenses, certificates, approvals and permits from all federal, provincial, state, foreign and other regulatory authorities, including but not limited to Argentina’s National Council for Scientific and Technical Research, the National Institute of Agriculture Technology and the National Administration of Drugs, Foods and Medical Devices, Jamaica’s Cannabis Licensing Authority and Colombia’s Ministry of Health and Social Protection and the Ministry of Justice and Law, or such other foreign regulatory authorities performing functions similar to those performed by each of the foregoing entities (collectively, a
13
“
Regulatory Authority
”), that are material to the conduct of the Business , all of which are valid and in good standing, in full force and effect. All such licenses, certificates, approvals and permits that are material to any Target Corporation or the Business are listed in the Data Room (the “
Material Authorizations
”). For greater certainty, the Parties acknowledge that, in respect of Marigold, certain licences are conditional and, in respect of Colcanna, such licenses do not permit or otherwise contemplate the production of THC.
(ii)
There are no actions, suits, proceedings, grievance, arbitration, investigation, audit, or other alternative dispute resolution process involving any Target Corporation, pending, or, to the knowledge of the Vendor, threatened, against any Target Corporation which may cause any Material Authorization to be withdrawn, revoked, terminated, suspended, not renewed or result of any other impairment of the rights granted under such licence, certificate, approval or permit. None of the Target Corporations are subject to any obligation arising under an administrative or regulatory action, inspection, warning letter, notice of violation letter, or other written notice, response or commitment made to or with a Regulatory Authority or any other regulatory authority, and, to the knowledge of the Vendor, no such proceedings have been threatened.
(iii)
Except for ordinary course inquiries by a Regulatory Authority, no Regulatory Authority is presently alleging or asserting, or, to the Vendors’ knowledge, threatening to allege or assert, noncompliance with any applicable legal requirement or registration in respect of any of the Target Corporations’ conduct relating to the Business.
(iv)
No reports, documents, records, filing or submission to a Regulatory Authority or any other regulatory body, that was or is intended to be the basis for any approval of any of the Target Corporations’ conduct relating to the Business, to the knowledge of the Vendor, contains any omission or false information.
(n)
Sufficiency of Assets.
The Business is the only business operation carried on by the Target Corporations. The Assets will include, as at the Closing Date, all rights and property necessary to enable each of the Target Corporations to conduct the Business after the Closing as reflected and disclosed in the Forecast and in this Agreement, including without limiting the foregoing, Section 5.1(5).
(o)
Title to the Assets.
(i)
Each Target Corporation owns (with good title) all of the properties and assets that it purports to own that are material to the conduct of the Business including all the properties and assets reflected as being
14
owned by such Target Corporation in its financial Books and Records and as of the Closing Date;
(ii)
Each Target Corporation has legal and beneficial ownership of its Assets free and clear of all Liens, except for Permitted Liens or as otherwise set out in the Data Room; and
(iii)
No other Person owns any property or assets which are being used in the Business except for the Leased Properties, the personal property leased by the Corporation pursuant to the Material Contracts and the Intellectual Property licensed to the Corporation and disclosed in the Data Room.
(p)
No Options, etc. to Purchase Assets.
To the knowledge of the Vendor, no Person has any Contract, option, understanding, or any right or privilege capable of becoming such for the purchase or other acquisition from any Target Corporation of any Assets, other than (i) Assets which are obsolete and which individually or in the aggregate do not exceed $100,000; (ii) inventory to be sold in the Ordinary Course; or (iii) as disclosed in the Data Room.
(q)
Condition of Tangible Assets.
To the knowledge of the Vendor, none of the buildings, plants, structures, vehicles, equipment or other property of the Target Corporations are in need of maintenance or repairs except for routine maintenance and repairs in the Ordinary Course that are
not material in nature or
cost.
(r)
Material Contracts.
Except for the Contracts listed in the Data Room (collectively, the “
Material Contracts
”), to the knowledge of the Vendor, no Target Corporation is a party to or bound by:
(i)
any trust indenture, mortgage, promissory note, loan agreement or other Contract for the borrowing of money, any currency exchange, interest rate, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP or IFRS;
(ii)
any confidentiality, secrecy, non-disclosure or exclusivity Contract or any Contract limiting the freedom of any Target Corporation to engage in any line of business, set the material terms of its Contracts, compete with any other Person, solicit any Persons for any purpose or otherwise to conduct its business;
(iii)
any Contract with any Person with whom any Target Corporation or any Vendor does not deal at arm’s length within the meaning of the Tax Act; or
(iv)
any Contract that is material to the Business.
15
(s)
No Breach of Material Contracts.
To the knowledge of the Vendor;
(i)
each Target Corporation has performed all of the material obligations required to be performed by it and is entitled to all benefits under the Material Contracts to which it is a party;
(ii)
no Target Corporation is alleged to be in material default of any Material Contract to which it is a party;
(iii)
each of the Material Contracts is in full force and effect, unamended, and there exists no material default or event of default or event, occurrence, condition or act (including the transactions contemplated herein) which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default of any Target Corporation or its counterparty under any Material Contract; and
(iv)
true, correct and complete copies of all Material Contracts have been delivered to the Purchaser.
(t)
Books and Records.
(i)
All accounting and financial Books and Records of the Target Corporations have been fully, properly and accurately kept and completed in all material respects; and
(ii)
Such Books and Records and other data and information are not recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which will not be available in the Ordinary Course.
(u)
Financial Statements.
The Financial Statements have been prepared by management of each respective Target Corporation in accordance with GAAP or IFRS, applied on a basis consistent with those of previous fiscal years and each presents fairly the financial position of the applicable Target Corporation as at the date of such Financial Statements and the results of its operations for the period then ended in accordance with GAAP or IFRS. True, correct and complete copies of the Financial Statements are disclosed in the Data Room.
(v)
No Material Undisclosed Liabilities.
No Target Corporation has any material liability or obligation of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) other than (i) liabilities or obligations to the extent shown on the Financial Statements; or (ii) current liabilities incurred in the Ordinary Course since, in the case of MMJ International, May 11, 2018, in the case of Marigold Acquisitions, March 20, 2018 and in the case of MMJ Colombia, April 8, 2018.
16
(w)
Employees.
(i)
There is no unfair labour practice complaint, grievance or arbitration proceeding pending or in progress or, to the knowledge of the Vendor, threatened against any Target Corporation;
(ii)
To the knowledge of the Vendor, all amounts due or accrued due for all salary, wages, bonuses, commissions, vacation with pay, sick days and benefits under the Employee Plans have either been paid or are accurately reflected in the Books and Records; and
(iii)
To the knowledge of the Vendor, current and complete copies of all Employment Contracts have been delivered or made available or described to the Purchaser.
(x)
Insurance.
The Data Room contains a correct and complete list of insurance policies to which any Target Corporation is a party, an insured or a beneficiary or under which such Target Corporation or any officer or director of the Target Corporation is covered, setting out, in respect of each policy, the type of policy, the name of insurer, the coverage allowance, the expiration date, the annual premium and any pending claims. None of the Target Corporations is in material default with respect to any of the provisions contained in the insurance policies.
(y)
Anti-Corruption.
(i)
No Target Corporation and no representative, or Person acting on behalf, of any Target Corporation in its capacity as such has violated the anti-bribery or anti-corruption Laws of any jurisdiction applicable to the Target Corporations; and
(ii)
The Target Corporations have at all times complied with all Laws relating to export control and trade sanctions or embargoes applicable to the Target Corporations.
(z)
Money Laundering.
The Business has been conducted in compliance with financial record-keeping and reporting requirements of applicable Laws relating to money laundering, including the Proceeds of Crime (Money Laundering) and Terrorism Financing Act (Canada) or any similar legislation.
(aa)
Taxes.
(i)
Each Target Corporation has paid all Taxes which are due and payable within the time required by applicable Law, and has paid all assessments and reassessments it has received in respect of Taxes. Each Target Corporation has provided full and adequate provision in accordance with IFRS in the Financial Statements for all Taxes for
17
periods to which they relate which are not yet due and payable. Since the date of such financials, no material liability in respect of Taxes not reflected in such statements or otherwise provided for has been assessed, proposed to be assessed, incurred or accrued. No Target Corporation has received any refund of Taxes to which it is not entitled.
(ii)
Each Target Corporation has filed or caused to be filed with the appropriate Governmental Entity, within the times and in the manner prescribed by applicable Law, all Tax Returns which are required to be filed by or with respect to it. The information contained in such Tax Returns is correct and complete and such Tax Returns reflect accurately all liability for Taxes of each Target Corporation for the periods covered thereby.
(iii)
There are no outstanding agreements, arrangements, waivers or objections extending the statutory period or providing for an extension of time with respect to the assessment or reassessment of Taxes or the filing of any Tax Return by, or any payment of Taxes by, any Target Corporation.
(iv)
To the knowledge of the Vendor, there are no claims, actions, suits, audits, proceedings, investigations or other actions pending or threatened against any Target Corporation in respect of Taxes and, to the knowledge of the Vendor, there is no reason to expect that any such claim, action, suit, audit, proceeding, investigation or other action may be asserted against any Target Corporation by a Governmental Entity. No Target Corporation is negotiating any final or draft assessment or reassessment in respect of Taxes with any Governmental Entity and no Target Corporation has received any indication from any Governmental Entity that an assessment or reassessment is proposed or may be proposed in respect of any Taxes for any period ending on or prior to the Closing Date.
(v)
Each Target Corporation has withheld and collected all amounts required by applicable Law to be withheld or collected by it on account of Taxes and has remitted all such amounts to the appropriate Governmental Entity within the time prescribed under any applicable Law.
(vi)
No claim has ever been made by a Governmental Entity in respect of Taxes in a jurisdiction where any Target Corporation does not file Tax Returns that such Target Corporation is or may be subject to Tax by that jurisdiction.
(vii)
The terms and conditions made or imposed in respect of every transaction (or series of transactions) between any Target Corporation and any Person that is (x) a non-resident of Canada for purposes of
18
the Tax Act, and (y) not dealing at arm’s length with such Target Corporation, as the case may be, for purposes of the Tax Act, do not differ from those that would have been made between persons dealing at arm’s length for purposes of the Tax Act, and all documentation or records as required by applicable Law has been made or obtained in respect of such transactions (or series of transactions).
(viii)
No Target Corporation is party to or bound by any tax sharing agreement, tax indemnity obligation in favour of any Person or similar agreement in favour of any Person with respect to Taxes (including any advance pricing agreement or other similar agreement relating to Taxes with any Governmental Entity).
(ix)
There are no circumstances existing which could result in the application to any Target Corporation of sections 17, 78, 80, 80.01, 80.02, 80.03, 80.04 of the Tax Act or any analogous provision of any comparable Law of any province or territory of Canada.
(x)
No Target Corporation has acquired property from a Person not dealing at arm’s length (for purposes of the Tax Act) with it in circumstances that would result in such Target Corporation becoming liable to pay Taxes of such Person, including under subsection 160(1) of the Tax Act or any analogous provision of any comparable Law of any province or territory of Canada.
(xi)
No Target Corporation is subject to any joint venture, partnership or other arrangement or contract that is treated as a partnership for income tax purposes in any jurisdiction.
(bb)
Related Party Transactions
.
(i)
Except as disclosed in the Data Room, there are no accounts payable, accounts receivable or other obligations, transactions, Contracts or liabilities of any nature whatsoever between any Target Corporation, on the one hand, and any Related Party, on the other hand, excluding (A) any obligation of such Target Corporation incurred in the Ordinary Course to pay wages, salaries or fees for service to any Related Party in connection with such Related Party’s services as an employee of such Target Corporation; or (B) any intercompany liabilities as between the Target Corporations incurred in the Ordinary Course.
(ii)
No Related Party owns or has any proprietary, financial or other interests (direct or indirect) in any Authorization or Asset which any Target Corporation owns, possesses or uses in the operation of the Business as now or previously conducted.
19
(cc)
No Brokers
. No Target Corporation, nor any of their respective representatives, has incurred any liability or obligation to any broker, agent, investment bank or other intermediary for any fee, commission or other similar payment in connection with the transactions contemplated by this Agreement.
(dd)
Full Disclosure
. Neither this Agreement nor any Ancillary Agreement (i) contains any untrue statement of a material fact in respect of the affairs, operations or condition of the Target Corporations, the Assets, the Business or the transactions contemplated herein, or (ii) to the knowledge of the Vendor, omits any statement of a material fact necessary in order to make the statements in respect of, the affairs, operations or condition of any Target Corporation, the Assets, the Business or the transactions contemplated by the Agreement contained herein or therein not misleading. There is no fact known to the Vendor which materially and adversely affects the affairs, operations or condition of any Target Corporation, the Assets, the Business or the transactions contemplated herein which has not been set forth in this Agreement or in the Data Room.
II.
In respect of ABP, the Vendor represents and warrants as follows
:
(a)
Leases
. The Data Room sets out a complete and accurate list, in all material respects, of all Leases to which ABP is a party and a complete and accurate list of all real property (by municipal address) which are the subject of the Leases (collectively, the “
ABP Leased Properties
”). The rental payments under each applicable Lease (including any prepaid rental payments and specifying any breakdown of base rent and additional rents), any rights of renewal and the term thereof, and any restrictions on assignment or change of control pertaining to such Lease are disclosed in the Data Room. Each Lease creates a good and valid leasehold estate in the ABP Leased Properties thereby demised and is in full force and effect without amendment.
(b)
Intellectual Property
.
(i)
The Data Room sets out all material Intellectual Property of third parties used by ABP in the Business in Argentina (“
ABP Third Party Intellectual Property
”). Except as disclosed in the Data Room, ABP uses the ABP Third Party Intellectual Property only pursuant to valid, effective written license agreements (collectively, the “
ABP Third Party Licenses
”) and ABP has not exercised any rights, including without limitation any use, reproduction, distribution or derivative work rights, outside the scope of any ABP Third Party Licenses.
(ii)
Except as disclosed in the Data Room, the ABP Third Party Intellectual Property constitutes all material Intellectual Property used by ABP.
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(c)
Clinical Trials etc
. Nothing has come to the attention of the Vendor that has caused the Vendor to believe that the completed studies, tests, preclinical studies and clinical trials conducted by or on behalf of ABP were not and are not currently conducted, in all material respects, in accordance with Good Clinical Practices, experimental protocols approved by an institutional Research Ethics Board.
(d)
Banking Relationships
. Except as disclosed in the Data Room, ABP has
bona fide
banking relationships and one or more registered banking accounts with a recognized financial institution in Argentina. All such banking relationships comply with applicable Laws.
III.
In respect of Colcanna, the Vendor represents and warrants as follows
:
(a)
Ordinary Course
. Except as disclosed in the Data Room, Colcanna has not compromised or settled any litigation, proceeding or other governmental action relating to the Assets or the Business in Colombia.
(b)
Material Contracts
. Except as disclosed in the Data Room, Colcanna is not a party to or bound by any Contract for capital expenditures in excess of $100,000 in the aggregate.
(c)
Environmental Laws
. Colcanna is in compliance with all applicable Environmental Laws in all material respects. To the knowledge of the Vendor, there are no contaminants located in the ground or in groundwater under any of the cultivation facilities for Colcanna.
(d)
Inventories
. To the knowledge of the Vendor, the inventory levels of “mother plants” of Colcanna have been maintained at levels sufficient for the continuation of the Business in Colombia in the Ordinary Course.
(e)
Banking Relationships
. Except as disclosed in the Data Room, Colcanna has
bona fide
banking relationships and one or more registered banking accounts with a recognized financial institution in Colombia. All such banking relationships comply with applicable Laws.
IV.
In respect of Marigold, the Vendor represents and warrants as follows
:
(a)
Ordinary Course
. Except as disclosed in the Data Room, Marigold has not permitted any of its facilities to be shut down for any period of time in excess of one week.
(b)
Leases
. The Data Room sets out a complete and accurate list, in all material respects, of all Leases to which Marigold is a party and a complete and accurate list of all real property (by municipal address) which are the subject of the Leases (collectively, the “
Marigold Leased Properties
”). The rental payments under each applicable Lease (including any prepaid rental payments and specifying any breakdown of base rent and additional rents),
21
any rights of renewal and the term thereof, and any restrictions on assignment or change of control pertaining to such Lease are disclosed in the Data Room. Each Lease creates a good and valid leasehold estate in the Marigold Leased Properties thereby demised and is in full force and effect without amendment.
(c)
Material Contracts
. Except as disclosed in the Data Room, to the knowledge of the Vendor, Marigold is not a party to or bound by any Contract for capital expenditures in excess of $100,000 in the aggregate.
(d)
Intellectual Property
.
(i)
The Data Room sets out all material Intellectual Property of third parties used by Marigold in the Business in Jamaica (“
Marigold Third Party Intellectual Property
”). Except as disclosed in the Data Room, Marigold uses the Marigold Third Party Intellectual Property only pursuant to valid, effective written license agreements (collectively, the “
Marigold Third Party Licenses
”) and Marigold has not exercised any rights, including without limitation any use, reproduction, distribution or derivative work rights, outside the scope of any Marigold Third Party Licenses.
(ii)
Except as disclosed in the Data Room, the Marigold Third Party Intellectual Property constitutes all material Intellectual Property used by Marigold.
(e)
Environmental Laws
. Marigold is in compliance with all applicable Environmental Laws in all material respects. To the knowledge of the Vendor, there are no contaminants located in the ground or in groundwater under any of the cultivation facilities for Marigold.
(f)
Inventories
. To the knowledge of the Vendor, the inventory levels of “mother plants” of Marigold have been maintained at levels sufficient for the continuation of the Business in Jamaica in the Ordinary Course.
Section 3.2
Representations and Warranties Regarding the Vendor
.
The Vendor represents and warrants to the Purchaser and acknowledges and confirms that the Purchaser is relying upon the representations and warranties in connection with the purchase by the Purchaser of the Purchased Shares:
(a)
Incorporation and Qualification
. The Vendor is incorporated and existing under the laws of the jurisdiction of its organization and has the corporate power and authority to enter into and perform its obligations under this Agreement and each of the Ancillary Agreements to which it is a party.
(b)
Corporate Authorization
. The execution, delivery of and performance by the Vendor of this Agreement and each of the Ancillary Agreements to which it
22
is a party and the consummation of the transactions contemplated by it have been duly authorized by all necessary corporation action on the part of the Vendor.
(c)
No Conflict
. The execution, delivery and performance by the Vendor of this Agreement and the consummation of the transaction of purchase and sale contemplated by this Agreement and each of the Ancillary Agreements to which it is a party:
(i)
do not and will not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) constitute or result in a violation or breach of, or conflict with, or allow any other Person to exercise any rights under, any of the terms or provisions of the Vendor’s constating documents or by-laws;
(ii)
do not and will not (or would not with the giving of notice, the lapse of time or the happening or any other event or condition) constitute or result in a breach or violation of, or conflict with or allow any other Person to exercise any rights under, any of the terms or provisions of any Contracts to which the Vendor is a party or pursuant to which any of its assets or property may be affected;
(iii)
do not and will not result in a breach of, or cause the termination or revocation of, any Authorization held by the Vendor in connection with the ownership of the Purchased Shares or the operation of the Business; and
(iv)
do not and will not result in the violation of any Law.
(d)
Required Consents
. There is no requirement to obtain any Authorization of a party under any Lease or any Contract to which the Vendor is a party to any of the transactions contemplated by this Agreement.
(e)
Execution and Binding Obligation
. This Agreement and each of the Ancillary Agreements to which it is a party has been duly executed and delivered by the Vendor and constitutes a legal, valid and binding obligation of the Vendor enforceable against it in accordance with its terms subject only to any limitation under applicable Laws relating to (i) bankruptcy, winding-up, insolvency, arrangement and other Laws of general application affecting the enforcement of creditors’ rights, and (ii) the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction.
(f)
No Other Agreements to Purchase
. Except for the Purchaser’s right under this Agreement, no Person has any Contract, option or warrant or any right or privilege (whether by Law, pre-emptive or contractual) capable of becoming such for the purchase or acquisition from the Vendor of any Purchased Shares.
23
(g)
Title to Purchased Shares
. The Vendor owns the Purchased Shares as the registered and beneficial owner with a good title, free and clear of all Liens other than those restrictions on transfer, if any, contained in the articles of the Corporation. Upon completion of the transaction contemplated by this Agreement, the Vendor will have transferred to the Purchaser good and valid title to such Purchased Shares, free and clear of all Liens other than (i) those restrictions on transfer, if any, contained in the articles of the Corporation, and (ii) Liens granted by the Purchaser.
(h)
No Action
. The Vendor is not aware of any action, suit or proceeding, at law or at equity, for or by any court or any federal, provincial, municipal or other governmental department, commission, board, agency or instrumentality which would prevent or materially adversely affect the transactions contemplated by this Agreement or any Ancillary Agreement to which it is a party.
(i)
Residence
. The Vendor is not a non-resident of Canada within the meaning of the Tax Act.
(j)
No Brokers
. Except for the fees payable to Haywood Securities Inc. and Clarus Securities Inc. as advisors to the Vendor in respect of the proposed sale and purchase of the Purchased Shares, neither the Vendor nor any of its representatives has incurred any liability or obligation to any broker, agent, investment bank or other intermediary for any fee, commission or other similar payment in connection with the transactions contemplated by this Agreement or any Ancillary Agreement to which it is a party.
(k)
Formal Valuation
. The Vendor has received a formal valuation report in respect of the sale of the Purchased Shares to the Purchaser from an independent valuator in accordance with the requirements of MI 61-101 for related party transactions.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Section 4.1
Representations and Warranties of the Purchaser
.
The Purchaser represents and warrants as follows to the Vendor and acknowledges and agrees that the Vendor is relying on such representations and warranties in connection with the sale of the Purchased Shares:
(a)
Organization and Status
. The Purchaser is a corporation incorporated, continued, amalgamated or otherwise formed and is existing under the laws of its jurisdiction of organization and has the corporate power and authority to enter into and perform its obligations under this Agreement;
(b)
Authority
. The execution, delivery of and performance by the Purchaser of this Agreement and the consummation of the transactions contemplated
24
herein have been duly authorized by all necessary corporation action on the part of the Purchaser.
(c)
No Violation or Breach
. The execution and delivery of and performance by the Purchaser of this Agreement:
(i)
will not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) result in a breach or violation of or a conflict with, or allow any other person to exercise any rights under, any of the terms or provisions of the Purchaser’s constating documents or by-laws;
(ii)
will not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) result in a breach or violation of or a conflict with, or allow any other person to exercise any rights under any contracts or instruments to which the Purchaser is a party; and
(iii)
will not result in the violation of any Law.
(d)
Execution and Binding Obligation
. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding agreement of the Purchaser enforceable against it in accordance with its terms subject only to any limitation under applicable laws relating to (i) bankruptcy, winding-up, insolvency, arrangement and other laws of general application affecting the enforcement of creditors’ rights, and (ii) the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction;
(e)
Consideration Shares
. The Consideration Shares to be issued pursuant to this Agreement have been duly authorized for issuance by all necessary action on the part of the Purchaser and, when issued and delivered pursuant to this Agreement, will (i) have been validly issued and outstanding as fully paid and non-assessable shares; and (ii) have been issued in compliance with all applicable Laws, including applicable securities Laws and the rules and regulations of the TSX.
(f)
Authorized and Issued Capital
. The authorized capital of the Purchaser consists of an unlimited number of common shares, of which as at the close of trading on the last Business Day immediately preceding the date of this Agreement, 232,382,569 common shares are issued and are outstanding as fully paid and non-assessable.
(g)
Investment Canada Act
. The Purchaser is not a non-Canadian within the meaning of the
Investment Canada Act
(Canada).
(h)
No Brokers
. Neither the Purchaser nor any of its representatives has incurred any liability or obligation to any broker, agent, investment bank or other
25
intermediary for any fee, commission or other similar payment in connection with the transactions contemplated by this Agreement.
(i)
Public Record
. The Purchaser has filed on SEDAR all documents required to be filed by the Purchaser under applicable Canadian securities Laws. The Purchaser’s documents publicly filed on SEDAR do not contain any material misrepresentations or omissions. The Purchaser has complied with all applicable Canadian securities Laws regarding the disclosure of material changes and has no confidential material change reports outstanding.
ARTICLE 5
COVENANTS
Section 5.1
Conduct of Business Prior to Closing.
(1)
During the Interim Period, the Vendor shall complete the Pre-Closing Reorganization.
(2)
The Vendor shall use its commercially reasonable best efforts to cause each Target Corporation to conduct the Business in the Ordinary Course until the Closing Date, subject to any exceptions expressly consented to by the Purchaser in writing.
(3)
The Vendor shall use its commercially reasonable efforts (i) to not cause or permit to exist a breach of any representations and warranties of the Vendor contained in this Agreement; and (ii) to cause the Business to be conducted in such a manner that on the Closing Date such representations and warranties will be true, correct and complete as if they were made on and as of such date.
(4)
The Vendor shall use its commercially reasonable efforts to ensure that all capital expenditures, operating expenditures and any other expenditures relating to the Target Corporations and the operation of the Business are made in strict compliance with the Forecast and that any deviations therefrom and first approved in writing by the Purchaser, provided however that in respect of the aggregate of $US15,000,000 of capital expenditures required in respect of Colcanna (and as reflected in the Forecast): (a) the Vendor shall pay or otherwise satisfy US$2,000,000 of such amount on or prior to the Closing Date; and (b) the remaining US$13,000,000 of such capital expenditures shall be borne by the Purchaser.
(5)
In respect of the additional US$5,000,000 outstanding liability owing to Colcanna, the Vendor shall (a) pay or otherwise satisfy US$2,000,000 of such amount on or prior to the Closing Date; and (b) cause the remaining US$3,000,000 to be delivered into a trust account of the Purchaser or the Purchaser’s counsel, to be held and released on such terms as the Purchaser may elect. For greater certainty, if any amount of the US$3,000,000 comes due prior to the Closing Date, the Vendor shall have made such payment, and the amount to be deposited into the trust account shall be reduced by such amount.
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Section 5.2
Notice of Untrue Representation or Warranty
.
(1)
The Vendor shall promptly notify the Purchaser, and the Purchaser shall promptly notify the Vendor, upon any representation or warranty made by it contained in this Agreement becoming untrue or incorrect during the Interim Period. Each representation and warranty will be deemed to be given at and as of all times during the Interim Period. Any such notification must set out the particulars of the untrue, incorrect or inaccurate representation or warranty and details of any actions being taken by the Vendor or the Purchaser, as the case may be, to rectify that state of affairs (the “
Interim Notice
”).
(2)
Where any of the closing conditions set out in Section 6.1 would not be satisfied without an amendment to the Data Room to qualify the representations and warranties with respect to any matter or thing that did not exist on or prior to the date hereof and did not arise or occur as a result of, or in connection with, any breach of this Agreement, the Purchaser may:
(a)
terminate this Agreement immediately in the case where the Purchaser delivers the Interim Notice, or within 5 Business Days following receipt of the Interim Notice delivered by the Vendor; or
(b)
permit the Vendor to supplement the Data Room, which supplement does not cure any breach of the representation and warranty and waive the Purchaser’s termination right set out in Section 5.2(2)(a) arising in connection with such amendment and any corresponding closing condition in favour of the Purchaser in Section 6.1, provided that such waiver does not limit or otherwise affect any remedies available to the Purchaser.
Section 5.3
Actions to Satisfy Closing Conditions
.
(1)
The Vendor shall use its reasonable best efforts to take or cause to be taken all such actions so as to ensure compliance with all of the conditions set forth in Section 6.1.
(2)
The Purchaser shall use its reasonable best efforts to take or cause to be taken all such actions so as to ensure compliance with all of the conditions set forth in Section 6.2.
Section 5.4
Notices and Request for Consents
.
(1)
The Vendor shall use its reasonable best efforts to obtain or cause to be obtained prior to Closing, all consents, approvals and waivers that are required by the terms of the Leases and the Contracts to which any Target Corporation is a party in order to complete the transactions contemplated by this Agreement, including the consents, approvals and waivers described in the Data Room. Such consents, approvals and waivers will be upon such terms as are acceptable to the Purchaser, acting reasonably. The Purchaser shall, at the expense of the Vendor, reasonably co-operate in obtaining such consents, approvals and waivers.
27
(2)
The Vendor shall provide notices (in form and substance acceptable to the Purchaser, acting reasonably) that are required by the terms of the Leases and the Contracts to which any Target Corporation is a party in connection with the transactions contemplated by this Agreement.
Section 5.5
Additional Covenants.
Not in limitation of the general interim closing covenants provided in Section 5.1 or any other provision of this Agreement, the Vendor and the Purchaser, as applicable, covenants and agrees that during the Interim Period, they shall perform or cause to be performed, as applicable, the additional pre-closing and non-solicitation covenants provided for in Schedule “B” to this Agreement.
ARTICLE 6
CONDITIONS OF CLOSING
Section 6.1
Conditions for the Benefit of the Purchaser.
The purchase and sale of the Purchased Shares is subject to the following conditions being satisfied on or prior to the Closing Date, which conditions are for the exclusive benefit of the Purchaser and may be waived, in whole or in part, by the Purchaser in its sole discretion:
(a)
Truth of Representations and Warranties
. The representations and warranties of the Vendor contained in this Agreement are true and correct as of the date of this Agreement, provided that, to the extent any such representations and warranties of the Vendor contain any materiality qualification, such representations and warranties are accurate in all respects, with the same force and effect as if such representations and warranties had been made on and as of such date and the Vendor shall have executed and delivered a certificate of a senior officer to that effect.
(b)
Performance of Covenants
. The Vendor shall have fulfilled or complied with all covenants contained in this Agreement required to be fulfilled or complied with by the Vendor at or prior to the Closing, and the Vendor shall have executed and delivered a certificate of a senior officer to that effect. Not in limitation of the foregoing, the Vendor shall have executed and delivered a certificate of a senior officer to the effect that it has complied with the provisions of the Forecast.
(c)
Consents and Authorizations
. All filings, notices, Authorizations, consents, approvals, including applicable regulatory approvals for the respective jurisdictions of the Target Corporation, as applicable, and waivers required to be obtained prior to Closing (and as disclosed in the Data Room) will have been obtained on terms acceptable to the Purchaser, acting reasonably. All such filings, notices, Authorizations, consents, approvals and waivers will be in force and will not have been modified or rescinded.
28
(d)
Deliveries
. The Vendor shall deliver or cause to be delivered to the Purchaser the following in form and substance satisfactory to the Purchaser acting reasonably:
(i)
share certificates representing the Purchased Shares, free and clear of all Liens, held by the Vendor duly endorsed in blank for transfer, or accompanied by irrevocable security transfer powers of attorney duly executed in blank, in either case by the holders of record, together with evidence satisfactory to the Purchaser that the Purchaser has been entered upon the books of the Corporation as the holder of the Purchased Shares;
(ii)
certified copies of (i) the charter documents and by laws of the Vendor and each Target Corporation, (ii) all resolutions of the shareholders and the board of directors of the Vendor and each Target Corporation approving the entering into and completion of the transaction contemplated by this Agreement and the Ancillary Agreements, and (iii) a list of the directors and officers of each Target Corporation authorized to sign agreements together with their specimen signatures;
(iii)
a certificate of status, compliance, good standing or like certificate with respect to the Vendor and each Target Corporation issued by appropriate government officials of their respective jurisdictions of incorporation and, in the case of the Target Corporations, of each jurisdiction in which such Target Corporation carries on its business;
(iv)
a duly executed copy of the ROFR/ROFO Agreement on terms and conditions mutually satisfactory to the Parties, acting reasonably, consistent with the heads of terms provided in Schedule “C”;
(v)
a transitional services agreement for a term up to but not exceeding three months duly executed by the Vendor in respect of payroll and benefits matters for certain United States employees of the Vendor and/or the Target Corporations, in form and substance satisfactory to the Purchaser;
(vi)
a three-year non-competition and confidentiality agreement in the form attached hereto as Schedule “E”, duly executed by the Vendor and such other Persons as the Purchaser may reasonably request;
(vii)
an employment and/or consulting agreement duly executed by such employees and consultants of the Target Corporations as the Purchaser may determine and identify to the Vendor in writing no less than 15 Business Days prior to Closing, in form and substance satisfactory to the Parties;
29
(viii)
subject to applicable residency requirements in the jurisdictions of the Target Corporations, a duly executed resignation effective as at the Closing of each director of each Target Corporation as the Purchaser may specify in writing at least three (3) Business Days prior to Closing, in form and substance satisfactory to the Purchaser, acting reasonably.
(e)
Pre-Closing Reorganization.
The Purchaser shall have received evidence satisfactory to it, acting reasonably, of the completion of the Pre-Closing Reorganization.
(f)
Marigold Banking Relationships.
The Purchaser shall have received satisfactory evidence that Marigold has secured
bona fide
banking relationships and one or more registered banking accounts with a recognized financial institution in its applicable jurisdiction and that all such banking relationships comply with applicable Laws.
(g)
Hampstead Royalty.
The Purchaser shall have received satisfactory evidence that Hampstead Holdings Ltd. (“
Hampstead
”) has been exported or continued from Bermuda to a corporate domicile satisfactory to the Purchaser and/or that the exclusive royalty agreement between Hampstead and Marigold has been assigned to an entity satisfactory to the Purchaser, in each case at the sole expense of the Vendor.
(h)
Colcanna Real Property.
The Purchaser shall have received satisfactory evidence that Colcanna has secured good and valid fee simple title to certain real property located in Colombia, free and clear of all Liens, other than Permitted Liens.
(i)
Colcanna Payments.
The Purchaser shall have received satisfactory evidence that the payments required to be made by the Vendor in respect of Colcanna under Section 5.1(4)(a) and Section 5.1(5) have been made.
(j)
TSX Approval.
The Purchaser shall have received receipt of conditional approval from the TSX for the transactions contemplated by this Agreement.
(k)
Proceedings.
All proceedings to be taken in connection with the transactions contemplated by this Agreement and any Ancillary Agreement are reasonably satisfactory in form and substance to the Purchaser, acting reasonably, and the Purchaser shall have received copies of all instruments and other evidence as it may reasonably request in order to establish the consummation of such transactions and the taking of all necessary proceedings in connection therewith.
(l)
No Material Adverse Change.
There shall not have occurred any Material Adverse Change since, in the case of MMJ International, May 11, 2018, in the case of Marigold Acquisitions, March 20, 2018 and in the case of MMJ Colombia, April 8, 2018.
30
(m)
Shareholder Approval.
The Vendor shall have obtained shareholder approval, including majority of the minority shareholder approval, of the sale of the Purchased Shares to the Purchaser in accordance with the requirements of MI 61-101 for related party transactions.
(n)
No Legal Action.
No action or proceeding will be pending or threatened by any Person (other than the Purchaser), and there is no order or notice from any Governmental Entity, to (or seeks to) enjoin, restrict or prohibit, on a temporary or permanent basis any of the transactions contemplated by this Agreement or imposing any terms or conditions on the transactions contemplated by this Agreement, the Business or the business of the Purchaser or otherwise limiting the right of the Purchaser to conduct its business or the Business after Closing.
Section 6.2
Conditions for the Benefit of the Vendor.
The purchase and sale of the Purchased Shares is subject to the following conditions being satisfied on or prior to the Closing Date, which conditions are for the exclusive benefit of the Vendor and may be waived, in whole or in part, by the Vendor in its sole discretion.
(a)
Truth of Representations and Warranties.
The representations and warranties of the Purchaser contained in this Agreement are true and correct as of the date of this Agreement, provided that, to the extent any such representations and warranties contain any materiality qualification, such representations and warranties are accurate in all respects.
(b)
Performance of Covenants.
The Purchaser shall have fulfilled or complied with all covenants contained in this Agreement required to be fulfilled or complied with by it at or prior to Closing and the Purchaser shall have executed and delivered a certificate of a senior officer to that effect.
(c)
Deliveries.
The Purchaser shall deliver or cause to be delivered to the Vendor the following in form and substance satisfactory to the Vendor, acting reasonably:
(i)
share certificates representing the Consideration Shares together with evidence satisfactory to the Vendor that the Vendor has been entered upon the books of the Purchaser as the holder of the Consideration Shares;
(iii)
certified copies of (i) the charter documents and extracts from the by-laws of the Purchaser relating to the execution of documents, (ii) all resolutions of the shareholders and the board of directors of the Purchaser approving the entering into and completion of the transactions contemplated by this Agreement and the Ancillary Agreements, and (iii) a list of its officers and directors authorized to sign agreements together with their specimen signatures; and
31
(iv)
a certificate of status, compliance, good standing or like certificate with respect to the Purchaser issued by appropriate government official of the jurisdiction of its incorporation.
(d)
Proceedings.
All proceedings to be taken in connection with the transactions contemplated in this Agreement and any Ancillary Agreement are reasonably satisfactory in form and substance to the Vendor, acting reasonably, and the Vendor shall have received copies of all the instruments and other evidence as it may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith.
(e)
No Legal Action.
No action or proceeding will be pending or threatened by any Person (other than the Vendor, the Purchaser or the Corporation) and there is no order or notice from any Governmental Entity, to (or seeks to) enjoin, restrict or prohibit, on a temporary or permanent basis any of the transactions contemplated by this Agreement or imposing any terms or conditions on the transactions contemplated by this Agreement.
(f)
Exchange Approval.
The Vendor shall have received receipt of conditional approval from the TSXV (or such other Canadian marketplace on which the common shares of the Vendor are listed for trading if not the TSXV) for the transactions contemplated by this Agreement including, for greater certainty, the acquisitions of each of MMJ International, Marigold Acquisitions and MMJ Colombia in accordance with the Pre-Closing Re-Organization.
(g)
Pre-Closing Reorganization.
The acquisitions of MMJ International, Marigold Acquisitions and MMJ Colombia by the Vendor substantially in accordance with the Pre-Closing Reorganization shall have been completed.
(h)
Shareholder Approval.
The Vendor shall have obtained shareholder approval, including majority of the minority shareholder approval, of the sale of the Purchased Shares to the Purchaser in accordance with the requirements of MI 61-101 for related party transactions.
ARTICLE 7
TERMINATION
Section 7.1
Termination Rights.
This Agreement may, by notice in writing given on or prior to the Closing Date, be terminated:
(a)
by mutual consent of the Vendor and the Purchaser;
(b)
by the Vendor or the Purchaser if the Closing has not occurred by 5:00 pm (Toronto time) on the Outside Date, provided that such Party may not terminate this Agreement under this Section 7.1(b) if it has failed to perform
32
any one or more of its obligations or covenants under this Agreement required to be performed at or prior to Closing and the Closing has not occurred because of such failure; or
(c)
by the Purchaser, if:
(i)
there has been a material breach of this Agreement by the Vendor and such breach has not been waived by the Purchaser;
(ii)
any of the conditions in Section 6.1 have not been satisfied or it becomes reasonably apparent that any of such conditions will not be satisfied by the Closing Date (other than as result of the failure of the Purchaser to perform any of its material obligations) and the Purchaser has not waived such condition in writing at or prior to Closing; or
(iii)
there has occurred a Material Adverse Change.
(d)
by the Vendor, if:
(i)
there has been a material breach of this Agreement by Purchaser and such breach has not been waived by the Vendor; or
(ii)
any of the conditions in Section 6.2 have not been satisfied or it becomes reasonably apparent that any of such conditions will not be satisfied by the Closing Date (other than as result of the
failure of the Vendor to perform any of its material obligations) and the Vendor has not waived such condition at or prior to Closing.
Section 7.2
Effect of Termination.
The Vendor’s right of termination under this Article 7
and/or the Purchaser’s rights of termination under this Article 7 are in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination by a Party will not constitute an election of remedies. If this
Agreement is terminated pursuant to Article 7, this Agreement will be of no further force or effect; provided, however, that (i) Section 9.2 (Confidentiality), this Section 7.2, and Article 10 (Miscellaneous) and provisions that by their nature should survive, will survive the termination of this Agreement, and (ii) the termination of this Agreement will not relieve any Party frorn any liability for any breach of this Agreement occurring prior to termination.
ARTICLE 8
INDEMNIFICATION
Section 8.1
Survival.
All provisions of this Agreement and of any certificate, instrument or document to be delivered pursuant to or in connection with this Agreement shall not merge on Closing
33
and shall survive the Closing, the execution and delivery of any certificate, instrument or document delivered pursuant to or in connection with this Agreement and the payment of the Purchase Price.
Section 8.2
Indemnification in Favour of the Purchaser.
(1)
The Vendor shall indemnify and save the Purchaser and its shareholders, directors, officers, employees, agents and representatives harmless of and from, and shall pay for, any Damages suffered by, imposed upon or asserted against it as a result of, in respect of, connected with, or arising out of, under, or pursuant to:
(a)
any breach or inaccuracy of any representation or warranty given by the Vendor in this Agreement (whether in respect of the Target Corporations in Section 3.1 or in respect of the Vendor in Section 3.2);
(b)
any failure of the Vendor to perform or fulfil any of their covenants or obligations under this Agreement;
(c)
any Taxes required to be paid, by any Target Corporation in respect of (i) a Pre-Closing Tax Period, or (ii) in the case of a taxation period that begins before and ends after the time of Closing, the portion of such period ending at the time of Closing (determined in accordance with Section 8.2(2) hereof);
(d)
any action, suit, claim, proceeding, grievance, arbitration, investigation, audit or alternative dispute resolution involving any Target Corporation at any time on or prior to the Closing Date or in which it becomes involved after the Closing Date arising from facts or circumstances related to any Target Corporation that existed at any time on or prior to the Closing Date; and
(e)
the Pre-Closing Reorganization.
(2)
For purposes of paragraph 8.2(1)(c) hereof, in the case of a taxation period that begins before and ends after the time of Closing, Taxes shall be allocated to the portion of such period ending at the Closing Time in the following manner:
(a)
In the case of Taxes imposed on a periodic basis (such as real or personal property Taxes), the amount of such Taxes for the entire period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction, the numerator of which is the number of calendar days in the relevant tax period up to and including the Closing Date and the denominator of which is the number of calendar days in the entire relevant Tax period; and
(b)
In the case of Taxes not described in (a) above (such as franchise Taxes, Taxes that are based upon or related to income or receipts, or Taxes that are based upon occupancy or imposed in connection with any sale or other transfer or assignment of property), the amount of any such Taxes shall be determined as if such taxable period ended at the time of Closing.
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Section 8.3
Indemnification in Favour of the Vendor.
The Purchaser shall indemnify and save the Vendor and its shareholders, directors, officers, employees, agents and representatives harmless of and from, and shall pay for, any Damages suffered by, imposed upon or asserted against it or any of them as a result of, in respect of, connected with, or arising out of, under or pursuant to:
(a)
any breach or inaccuracy of any representation or warranty given by the Purchaser contained in this Agreement; and
(b)
any failure of the Purchaser to perform or fulfil any of its covenants or obligations under this Agreement.
Section 8.4
Limitations on Indemnification.
(1)
The Purchaser shall not be entitled to recover Damages from the Vendor pursuant to Section 8.2(1)(a) unless a written notice of claim is delivered by the Purchaser to the Vendor:
(a)
at any time after Closing in respect of Section 3.1(I)(a) (Incorporation and Qualification), Section 3.1(I)(b) (No Conflict), Section 3.1(I)(c) (Required Authorizations), Section 3.1(I)(d) (Required Consents), Section 3.1(I)(e) (Authorized and Issued Capital), Section 3.1(I)(f) (Subsidiaries), Section 3.1(I)(g) (No Other Agreements to Purchase), Section 3.1(I)(m)(i) (Authorizations), Section 3.1(I)(bb) (Related Party Transactions), (Section 3.2(a) (Incorporation and Qualification), Section 3.2(b) (Corporate Authorization), Section 3.2(c) (No Conflict), Section 3.2(d) (Required Consents), Section 3.2(e) (Execution and Binding Obligation), Section 3.2(f) (No Other Agreements to Purchase), Section 3.2(g) (Title to Purchased Shares) and Section 3.2(i) (Residence) (collectively, the “
Fundamental Representations of the Vendor
”);
(b)
at any time on or before the date that is 6 months after the expiration of the period (having regard to any consent, waiver, agreement or other document that extends the period) (the “
tax assessment period
”) during which any tax assessment may be issued by a Governmental Entity in respect of any taxation year in respect of Section 3.1(I)(aa) (Taxes). A tax assessment includes any assessment, reassessment or other form of recognized document assessing liability for Taxes under applicable Law, excluding any items related to Taxes disclosed to the Purchaser in the Data Room; or
(c)
at any time on or before the date that is 18 months after the Closing Date in respect of all other representations and warranties in respect of the Target Corporations or the Vendor.
(2)
The Vendor shall not be entitled to recover any Damages from the Purchaser pursuant to Section 8.3(a) unless a written notice of claim is delivered by the Vendor to the Purchaser:
35
(a)
at any time after Closing in respect of Section 4:1(a) (Organization and Status), Section 4.1(b) (Authority), Section 4.1(c) (No Violation or Breach), Section 4.1(d) (Execution and Binding Obligation), Section 4.1(e) (Consideration Shares) and Section 4.1(h) (No Brokers) (collectively, the “
Fundamental Representations of the Purchaser
”); or
(b)
at any time on or before the date that is 18 months after Closing in respect of all other representations and warranties of the Purchaser.
(3)
The Parties agree that the statutory limitations period shall commence on the filing of the written notice of claim by the Indemnified Person and any applicable limitations period is extended or varied to the fullest extent permitted by applicable Law to give effect to this Section 8.4(3).
(4)
Subject to Section 8.5, the Vendor has no obligation to make any payment for Damages for a breach of a representation or warranty pursuant to Section 8.2(1)(a) until the total of all Damages arising pursuant to Section 8.2(1)(a) exceeds $2,000,000, being approximately 1.0% of the aggregate Purchase Price (the “
Basket Amount
”). Once the total of all Damages arising pursuant to Section 8.2(1)(a) exceeds the Basket Amount, the Vendor shall be fully liable for all such Damages, both below and above such Basket Amount, up to an aggregate maximum of 50% of the Purchase Price.
(5)
Subject to Section 8.5, the Purchaser has no obligation to make any payment for Damages for a breach of a representation or warranty pursuant to Section 8.3(a) until the total of all Damages arising from such indemnification obligation exceeds the Basket Amount. Once the total of all Damages arising pursuant to Section 8.3(a) exceeds the Basket Amount, the Purchaser shall be fully liable for all such Damages, both below and above such Basket Amount, up to an aggregate maximum of 50% of the Purchase Price.
(6)
For purposes of determining whether a threshold in Section 8.4(4) and Section 8.4(5) has been met, Damages in respect of claims by a Party for indemnification or otherwise which have not been asserted will be included and nothing will preclude or prevent such Party from entering into evidence in connection with any claim the amount of such Damages.
Section 8.5
Exclusions to Limitations to Liability.
(1)
The monetary thresholds and limits set out in Section 8.4 will not apply to Damages with respect to:
(a)
any claims for indemnification by the Purchaser (i) for a breach of the Fundamental Representations of the Vendor; (ii) the representations set out in Section 3.1(I)(aa) (Taxes); or (iii) pursuant to Section 8.2(1)(b) to Section 8.2(1)(e); or
(b)
any claims for indemnification by a Vendor (i) for a breach of Fundamental Representations of the Purchaser; or (ii) pursuant to Section 8.3(b).
36
(2)
Notwithstanding any provision in this Agreement, nothing herein shall limit the time to make a claim or the liability of the Vendor for any claim involving fraud occurring on or prior to the Closing Date.
Section 8.6
Non-Exclusive Remedy.
(1)
Notwithstanding any provision in this Agreement to the contrary, the rights and remedies of the Parties under this Agreement (including the indemnification rights of the Purchaser under this Article 8 are cumulative and are without prejudice and in addition to any rights or remedies a Party may have at law or in equity.
(2)
Notwithstanding Section 8.6(1), to the extent that the Purchaser recovers any amount of Damages pursuant to this Article 8 from any Person other than the Vendor, such amount will be used to offset against any amounts paid or payable by the Vendor to the Purchaser in accordance with the indemnity provisions of this Article 8.
Section 8.7
Notification of and Procedure for Claims.
(1)
If a Third Party Claim is instituted or asserted against an Indemnified Person, the Indemnified Person shall promptly notify the Indemnifying Party in writing of the Third Party Claim.
(2)
The omission to notify the Indemnifying Party shall not relieve the Indemnifying Party from any obligation to indemnify the Indemnified Person, unless the notification occurs after the expiration of the specified period set out in Section 8.4 or (and only to that extent that) the omission to notify materially prejudices the ability of the Indemnifying Party to exercise its right to defend provided in this Section 8.7.
(3)
Subject to the terms of this Section 8.7 and Section 10.11(2) upon receiving notice of a Third Party Claim, the Indemnifying Party may participate in the investigation and defence of the Third Party Claim and may also elect to assume the investigation and defence of the Third Party Claim.
(4)
The Indemnifying Party may not assume the investigation and defence of a Third Party Claim if:
(a)
the Indemnifying Party is also a party to the Third Party Claim and the Indemnified Person determines in good faith that joint representation would be inappropriate;
(b)
the Indemnifying Party fails to provide reasonable assurance to the Indemnified Person of its financial capacity to defend the Third Party Claim and provide indemnification with respect to the Third Party Claim;
(c)
in the reasonable judgement of the Indemnified Person, the estimated amount of likely Damages in connection with such claim is greater than the unused portion of the maximum liability the Indemnifying Party is liable for as set out in Section 8.4;
37
(d)
subject to Section 8.7(6), the Third Party Claim is in respect of Taxes unless the assessment or reassessment relates solely to a Pre-Closing Tax Period;
(e)
the Indemnifying Party does not acknowledge in writing its obligation to indemnify and hold the Indemnified Person harmless with respect to the Third Party Claim; or
(f)
the Third Party Claim seeks relief against the Indemnified Person other than monetary damages or the Indemnified Person determines in good faith that there is a reasonable probability that the Third Party Claim may adversely affect it or its affiliates and the Indemnified Person has notified the Indemnifying Party that it will exercise its exclusive right to defend, compromise or settle the Third Party Claim.
(5)
In order to assume the investigation and defence of a Third Party Claim, the Indemnifying Party must give the Indemnified Person written notice of its election within 15 days of Indemnifying Party’s receipt of notice of the Third Party Claim and shall comply with the procedures set out in Schedule “D”.
(6)
In addition to the foregoing, if the Third Party Claim is in respect of Taxes, the following additional rules shall also apply:
(a)
if the Indemnifying Person is entitled to and elects to assume the investigation and defence of a Third Party Claim in respect of Taxes then the Indemnifying Person shall provide to the Indemnified Person in a timely manner (x) any proposed written communications and other documents to be submitted to the relevant Governmental Entity or filed with a court in respect of any assessment or reassessment for review by the Indemnified Person and (y) copies of any correspondence received from the Governmental Entity relating to such Third Party Claim. The Indemnifying Person shall consult with the Indemnified Person with respect to the materials provided pursuant to (x) above prior to the submission or filing thereof;
(b)
notwithstanding anything in this Article 8 or the procedures set out in Schedule “D”, if the Indemnified Person has assumed control of the investigating and defence of a Third Party Claim in respect of Taxes, the concurrence of the Indemnifying Person to any compromise or settlement of such Third Party Claim shall not be required and, notwithstanding Section 3 of Schedule “D”, the Indemnifying Person shall be bound by any such compromise and settlement;
(c)
to the extent payment has not already been made by the Indemnifying Person to the Indemnified Person, should the Indemnified Person be required by the relevant assessing authority to pay any amount in respect of such Third Party Claim, forthwith upon request therefor, the Indemnifying Person will pay to the Indemnified Person the amount that the Indemnified Person is required to pay to such Governmental Entity. Should the Indemnifying Person fail to pay such amount within 30 days after receipt of written request from the
38
Indemnified Person to do so, the right of the Indemnifying Person to control the contesting of such Third Party Claim will cease; and
(d)
Within 10 days of a final determination of such Third Party Claim in respect of Taxes, the Indemnifying Person will pay to the Indemnified Person the full amount owing to Indemnified Person, to the extent that such amounts have not been previously paid to Indemnified Person.
Section 8.8
Adjustment to Purchase Price.
Any payment made by the Vendor as an Indemnifying Party pursuant to this Article 8 will constitute a dollar-for-dollar decrease of the Purchase Price and any payment made by the Purchaser as an Indemnifying Party pursuant to this Article 8 will constitute a dollar-for-dollar increase of the Purchase Price.
ARTICLE 9
POST-CLOSING COVENANTS
Section 9.1
Access to Books and Records.
For a period of six (6) months from the Closing Date, the Purchaser shall use reasonable commercial efforts to retain all original Books and Records relating to the Target Corporations that are part of the Books and Records existing on the Closing Date that relate to the three (3) year period prior to the Closing Date. So long as any such Books and Records are retained by the Purchaser pursuant to this Agreement, the Vendor shall have the reasonable right to inspect and to make copies (at its own expense) of them at any time upon reasonable request during normal business hours and upon reasonable written notice for any proper purpose and without undue interference to the business operations of the Target Corporations. The Purchaser shall have the right to have its representatives present during any such inspection.
Section 9.2
Confidentiality.
The Vendor hereby acknowledges that it is or may become in possession of proprietary information in connection with the Business, the Assets and each Target Corporation (“
Confidential Information
”). The Vendor shall and shall cause its affiliates and representatives to keep confidential and shall not use for any improper purpose or disclose to any other Person any Confidential Information, unless such information is or becomes generally available to the public other than as a result of a disclosure in violation of this Agreement. In the event the Vendor is required by Law to disclose any Confidential Information, the Vendor shall, to the extent not prohibited by applicable Law, provide the Purchaser with prompt notice of such requirements so that the Purchaser may seek a protective order or other appropriate remedy or waive compliance with the provisions of this Section 9.2. The Vendor agrees that such obligation of confidentiality continues after the Closing Date and after the Closing, it shall return to Purchaser or cause to be destroyed all Confidential Information in its possession or control.
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Section 9.3
Tax Matters.
(1)
The Purchaser shall cause the Target Corporations to prepare and file any Tax Returns of the Target Corporations for any Pre-Closing Tax Period which are required to be filed after the Closing Date. Such returns shall be prepared and filed on a basis consistent with applicable Laws and the past practices and procedures of the relevant entity provided that no reserve, deduction or credit may be claimed if any amount could be included in the income of the Target Corporations for any period ending after the Closing Date. The Parties acknowledge that, at the option of the Purchaser, an election under subsection 256(9) of the Tax Act will be made in respect of the taxation year of the Target Corporations ending (or otherwise ending) on or immediately prior to the Closing Date.
(2)
The Vendor and the Purchaser will co-operate fully and assist each other and make available to each other in a timely fashion all data and other information as may reasonably be required for the preparation and filing of all Tax Returns of the Target Corporations and will preserve that data and other information until the expiration of any applicable limitation period for maintaining books and records under any applicable Tax Law with respect to such Tax Returns.
(3)
All Tax Returns prepared pursuant to this section shall be provided to the Vendor in advance of filing for review and comment.
Section 9.4
Further Assurances.
From time to time after the Closing Date, each Party shall, at the request of any other Party, execute and deliver such additional conveyances, transfers and other assurances as may be reasonably required to effectively transfer the Purchased Shares to the Purchaser and carry out the intent of this Agreement and any Ancillary Agreement.
ARTICLE 10
MISCELLANEOUS
Section 10.1
Notices.
Any notice, direction or other communication given regarding the matters contemplated by this Agreement (each a “
Notice
”) must be in writing, sent by personal delivery or courier and addressed:
(a)
to the Purchaser at:
103-245 Talbot Street West
Leamington, Ontario
N8H 1N8
Attention:
Chief Financial Officer
Email:
carlm@aphria.com
40
with a copy to:
Christelle Gedeon
Chief Legal Officer, Aphria Inc.
Christelle.gedeon@aphria.com
(b)
to the Vendor at:
100 King Street West
Suite 5600
Toronto, Ontario
M5X 1C9
Attention:
Chief Executive Officer
Email:
rreid@scythianbio.com
with a copy to:
Gowling WLG (Canada) LLP
Suite 1600, 1 First Canadian Place
100 King Street West
Toronto ON M5X 1G5
Attention:
Peter Simeon
E-mail:
peter.simeon@gowlingwlg.com
A Notice is deemed to be given and received if sent by personal delivery or courier, on the date of delivery if it is a Business Day and the delivery was made prior to 4:00 p.m. (local time in place of receipt) and otherwise on the next Business Day. A Party may change its address for service from time to time by providing a Notice in accordance with the foregoing. Any subsequent Notice must be sent to the Party at its changed address. Any element of a Party’s address that is not specifically changed in a Notice will be assumed not to be changed. Sending a copy of a Notice to a Party’s legal counsel as contemplated above is for information purposes only and does not constitute delivery of the Notice to that Party. The failure to send a copy of a Notice to legal counsel does not invalidate delivery of that Notice to a Party.
Section 10.2
Time of the Essence.
Time is of the essence in this Agreement.
Section 10.3
Announcements.
No press release, public statement or announcement or other public disclosure with respect to this Agreement or the transactions contemplated in this Agreement may be made prior to Closing except with the prior written consent and joint approval of both the Vendor and the Purchaser, or if required by Law or a Governmental Entity. Where such disclosure
41
is required by Law or a Governmental Entity, the Party required to make such disclosure will use its commercially reasonable efforts to obtain the approval of the other Party as to its form, nature and extent of the disclosure. After the Closing, any disclosure by the Vendor may be made only with the prior written consent and approval of the Purchaser unless such disclosure is required by Law or a Governmental Entity, in which case the Vendor shall use its commercially reasonable efforts to obtain the approval of the Purchaser as to the form, nature and extent of the disclosure.
Section 10.4
Third Party Beneficiaries.
(1)
Except as otherwise provided in this Agreement, including Section 8.2 and Section 8.3:
(a)
the Vendor and the Purchaser intend that this Agreement will not benefit or create any right or cause of action in favour of any Person, other than the Parties; and
(b)
no Person, other than the Parties, is entitled to rely on the provisions of this Agreement in any action, suit, proceeding, hearing or other forum.
(2)
The Vendor acknowledges to each Indemnified Person in respect of the Purchaser his/her direct rights against it under Article 8 of this Agreement and the Purchaser acknowledges to each Indemnified Person in respect of the Vendor his/her direct rights against it under Article 8 of this Agreement. To the extent required by law to give full effect to these direct rights, the Vendor and the Purchaser agree and acknowledge that they are acting as agent of their respective Indemnified Persons. The Parties reserve their right to vary or rescind the rights at any time and in any way whatsoever, if any, granted by or under this Agreement to any Person who is not a Party, without notice to or consent of that Person, including any Indemnified Person.
Section 10.5
Expenses.
Except as otherwise expressly provided in this Agreement, including the provisions of Schedule “B”, each Party will pay for its own costs and expenses (including the fees and expenses of legal counsel, accountants and other advisors) incurred in connection with this Agreement or any Ancillary Agreements and the transactions contemplated by them.
Section 10.6
Amendments.
This Agreement may only be amended, supplemented or otherwise modified by written agreement signed by the Vendor and the Purchaser.
Section 10.7
Waiver.
No waiver of any of the provisions of this Agreement or any Ancillary Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the Party to be bound by the waiver. A Party’s
42
acceptance of any certificate delivered on Closing or failure or delay in exercising any right under this Agreement will not operate as a waiver of that. A single or partial exercise of any right will not preclude a Party from any other or further exercise of that right or the exercise of any other right.
Section 10.8
Entire Agreement.
This Agreement together with the Ancillary Agreements (i) constitutes the entire agreement between the Parties; (ii) supersedes all prior agreements or discussions of the Parties; and (iii) sets forth the complete and exclusive agreement between the Parties, in all cases, with respect to the subject matter herein.
Section 10.9
Successors and Assigns.
(1)
Upon execution of the Agreement by the Parties, it will be binding upon and enure to the benefit of the Vendor, the Purchaser and their respective heirs, administrators, executors, legal representatives, successors and permitted assigns.
(2)
Except as provided in this Section 10.9, neither this Agreement nor any of the rights or obligations under this Agreement may be assigned or transferred, in whole or in part, by any Party without the prior written consent of the other Party. Upon giving notice to the Vendor, the Purchaser may assign this Agreement or any of its rights and/or obligations under this Agreement to:
(a)
any of its affiliates, provided that such affiliate and the Purchaser shall be jointly and severally liable with respect to all of the obligations of the Purchaser, including the representations, warranties, covenants, indemnities and agreements of the Purchaser; or
(b)
to any Person that acquires all or substantially all of the assets of the Purchaser.
Section 10.10
Severability.
If any provision of this Agreement is determined to be illegal, invalid or unenforceable by an arbitrator or any court of competent jurisdiction, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect.
Section 10.11
Governing Law.
(1)
This Agreement is governed by and will be interpreted and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
(2)
Except in connection with any Third Party Claim brought against an Indemnified Person, each Party irrevocably attorns and submits to the exclusive jurisdiction of the Ontario courts situated in the City of Toronto (and appellate courts therefrom) and
43
waives objection to the venue of any proceeding in such court or that such court provides an inappropriate forum.
Section 10.12
Counterparts.
This Agreement may be executed (including by electronic means) in any number of counterparts, each of which (including any electronic transmission of an executed signature page), is deemed to be an original, and such counterparts together constitute one and the same Agreement.
[
Remainder of page intentionally left blank
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IN WITNESS WHEREOF
the Parties have executed this Share Purchase Agreement.
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VENDOR:
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SCYTHIAN BIOSCIENCES CORP.
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By:
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(signed) “
Rob Reid
”
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Rob Reid
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Chief Executive Officer
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PURCHASER
:
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APHRIA INC.
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By:
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(signed)
“Carl Merton”
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Carl Merton
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Chief Financial Officer
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SCHEDULE “A”
PRE-CLOSING REORGANIZATION STEPS
[Restructuring memorandum of MNP LLP]
[Intentionally deleted.]
SCHEDULE “B”
PRE-CLOSING AND NON-SOLICIATION COVENANTS
See attached.
ARTICLE 1
INTERPRETATION
Section 1.1
Defined Terms.
For purposes of this Schedule, the following terms have the following meanings. Capitalized terms used in this Schedule and not otherwise defined have the meaning ascribed to such terms in the Agreement:
“
Acquisition Proposal
” means, other than the transactions contemplated by the Agreement and other than any transaction involving the Vendor, the Corporation and/or one or more of the other Target Corporations and/ or their shareholders, any offer, proposal or inquiry (written or oral) from any Person or group of Persons other than the Purchaser (or any affiliate of the Purchaser) after the date of the Agreement relating to: (i) any sale, disposition, alliance or joint venture (or any lease, long-term supply agreement or other arrangement having the same economic effect as the foregoing), direct or indirect, in a single transaction or a series of related transactions, of assets representing 20% or more of the consolidated assets or contributing 20% or more of the consolidated revenue of the Vendor, the Corporation and/or the other Target Corporations or of 20% or more of the voting or equity securities of the Vendor, the Corporation and/or the other Target Corporations (or rights or interests in such voting or equity securities); (ii) any direct or indirect take-over bid, exchange offer, treasury issuance or other transaction that, if consummated, would result in such Person or group of Persons beneficially owning 20% or more of the voting or equity securities of the Vendor, the Corporation and/or the other Target Corporations (including securities convertible or exercisable or exchangeable for voting or equity securities of the Vendor, the Corporation and/or the other Target Corporations); (iii) any plan of arrangement, merger, amalgamation, consolidation, share exchange, business combination, reorganization, recapitalization, liquidation, dissolution, winding up or exclusive license involving the Vendor, the Corporation or any of the other Target Corporations; or (iv) any other similar transaction or series of transactions involving the Vendor, the Corporation or any of the other Target Corporations.
“
Board
” means the board of directors of the Vendor as constituted from time to time.
“
Board Recommendation
” has the meaning specified in Section 2.2(2).
“
Change in Recommendation
” has the meaning specified in Section 4.1(1)(b).
“
Fairness Opinion
” means an opinion of Clarus Securities Inc. to the effect that, as of the date of such opinion, the Purchase Price to be received by the Vendor is fair, from a financial point of view, to the Vendor.
“
Formal Valuation
” means the formal valuation for the Transaction prepared by Haywood Securities Inc. in accordance with MI 61-101.
“
Matching Period
” has the meaning specified in Section 3.4(1)(e).
“
MI 61
-
101
” means Multilateral Instrument 61-101
Protection of Minority Shareholders in Special Transactions.
“
Misrepresentation
” means an untrue statement of a material fact or an omission to state a material fact required or necessary to make the statements contained therein not misleading in light of the circumstances in which they are made.
“
Required Approval
” means, in respect of the votes cast by Vendor Shareholders at the Vendor Meeting for purposes of considering the Transaction Resolution: (i) not less than a majority of the votes cast by Vendor Shareholders present in person or represented by proxy and entitled to vote at the Vendor Meeting; and (ii) a simple majority of the votes cast by Vendor Shareholders present in person or represented by proxy and entitled to vote at the Vendor Meeting excluding for this purpose votes attached to Vendor Shares held by persons described in items (a) through (d) of section 8.1(2) of MI 61-101.
“
Securities Authority
” means the Ontario Securities Commission and any other applicable securities commissions or securities regulatory authority of a province or territory of Canada.
“
Securities Laws
” means the
Securities Act
(Ontario) and any other applicable provincial securities Laws.
“
Superior Proposal
” means any unsolicited
bona fide
written Acquisition Proposal from Person(s) who are an arm’s length third party or parties, made after the date of the Agreement to acquire not less than all of the outstanding Vendor Shares (or the Purchased Shares) or all or substantially all of the assets of the Vendor, the Corporation and/or the Target Corporations that:
(a)
complies with Securities Laws and did not result from or involve a breach of the Agreement or any other agreement between the Person making the Acquisition Proposal and the Vendor or the Target Corporations;
(b)
is reasonably capable of being completed without undue delay relative to the Agreement, taking into account, all financial, legal, regulatory and other aspects of such proposal and the Person making such proposal;
(c)
is not subject to any financing contingency and in respect of which adequate arrangements have been made to ensure that the required consideration will be available to effect payment in full for all of the Vendor Shares or Purchased Shares, as the case may be;
(d)
is not subject to any due diligence or access condition;
(e)
the Board determines, in its good faith judgment, after receiving the advice of its outside legal and financial advisors and after taking into account all the terms and conditions of the Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Acquisition Proposal and the
party making such Acquisition Proposal, would, if consummated in accordance with its terms, but without assuming away the risk of non-completion, result in a transaction which is more favourable, from a financial point of view, to the Vendor, than the transactions contemplated by the Agreement; and
(f)
in the event that the Vendor does not have the financial resources to pay the Termination Fee, the terms of such Acquisition Proposal provide that the Person making such Superior Proposal shall advance or otherwise provide the Vendor the cash required for the Vendor to pay the Termination Fee and such amount shall be advanced or provided on or before the date such Termination Fee becomes payable.
“
Superior Proposal Notice
” has the meaning specified in Section 3.4(1)(c).
“
Support and Voting Agreements
” means, collectively, the support and voting agreements between the Purchaser and each of the Vendor Locked-up Shareholders, substantially in the form of Exhibit “A”, which,
inter alia,
may not be terminated by the Vendor Locked-up Shareholders in the event of a Superior Proposal.
“
Termination Fee
” has the meaning specified in Section 5.1.
“
Termination Fee Event
” has the meaning specified in Section 5.1.
“
Transaction Resolution
” means the resolution of Vendor Shareholders approving the transactions contemplated by the Agreement to be considered at the Vendor Meeting.
“
Vendor Circular
” means the notice of the Vendor Meeting and accompanying management information circular, including all schedules, appendices and exhibits to, and information incorporated by reference in, such management information circular, to be sent to the Vendor Shareholders in connection with the Vendor Meeting, as amended, supplemented or otherwise modified from time to time in accordance with the terms of this Schedule.
“
Vendor Locked-up Shareholders
” means each of the Vendor Shareholders who have entered into Support and Voting Agreements and all of the directors and senior officers of the Vendor.
“
Vendor Meeting
” means the special meeting of Vendor Shareholders, including any adjournment or postponement of such special meeting in accordance with the terms of the Agreement, to be called and held to consider the transactions contemplated by the Agreement
“
Vendor Shareholders
” means the registered or beneficial holders of the Vendor Shares, as the context requires.
“
Vendor Shares
” means the common shares in the capital of the Vendor.
Section 1.2
Exhibits.
The exhibits attached to this Schedule form an integral part of this Schedule (and the Agreement) for all purposes of it.
ARTICLE 2
COVENANTS CONCERNING THE VENDOR MEETING
Section 2.1
The Vendor Meeting
During the Interim Period, the Vendor shall:
(a)
convene and conduct the Vendor Meeting in accordance with the Vendor’s constating documents and applicable Law as soon as practical and, in any event, on or before September 15, 2018 (or such later date as may be agreed to by the Parties in writing) and not adjourn, postpone or cancel (or propose the adjournment, postponement or cancellation of) the Vendor Meeting without the prior written consent of the Purchaser, except:
(A)
in the case of an adjournment, as required for quorum purposes (in which case the Vendor Meeting shall be adjourned and not cancelled);
(B)
as required by Law or by a Governmental Entity; or
(C)
as required or permitted under Section 3.4(5).
(b)
use its commercially reasonable efforts to solicit proxies, in accordance with the Law, in favour of the approval of the Transaction Resolution and against any resolution submitted by any Vendor Shareholder that is inconsistent with the Transaction Resolution and the completion of any of the transactions contemplated by the Agreement, including, if so requested by the Purchaser, at the Purchaser’s expense, using dealer and proxy solicitation services firms and cooperating with any Persons engaged, with the consent of the Vendor, by the Purchaser to solicit proxies in favour of the approval of the Transaction Resolution;
(c)
provide the Purchaser with copies of or access to information regarding the Vendor Meeting generated by any transfer agent, dealer or proxy solicitation services firm, as reasonably requested in writing from time to time by the Purchaser;
(d)
permit the Purchaser at its expense to, on behalf of the management of the Vendor, directly or through a soliciting dealer approved in writing by the Vendor, actively solicit proxies in favour of the Transaction Resolution on behalf of management of the Vendor in compliance with applicable Law and disclose in the Vendor Circular that the Purchaser may make such solicitations;
(e)
consult with the Purchaser in fixing the record date for the Vendor Meeting and the date of the Vendor Meeting, give notice to the Purchaser of the Vendor Meeting and allow the Purchaser’s representatives and legal counsel to attend the Vendor Meeting;
(f)
promptly advise the Purchaser, at such times as the Purchaser may reasonably request in writing and at least on a daily basis on each of the last ten (10) Business Days prior to the date of the Vendor Meeting, as to the aggregate tally of the proxies received by the Vendor in respect of the Transaction Resolution;
(g)
promptly advise the Purchaser of receipt by the Vendor of any communication (written or oral) from any Vendor Shareholder or other securityholder of the Vendor in opposition to the Transaction Resolution, and provide the Purchaser with an opportunity to review and comment upon any written communications sent by or on behalf of the Vendor to any such Person and to participate in any discussions, negotiations or proceedings involving any such Person;
(h)
not change the record date for the Vendor Shareholders entitled to vote at the Vendor Meeting in connection with any adjournment or postponement of the Vendor Meeting, unless required by applicable Law;
(i)
at the reasonable written request of the Purchaser from time to time, provide the Purchaser with a list (in both written and electronic form) of (i) the registered Vendor Shareholders, together with their addresses and respective holdings of Vendor Shares, (ii) the names, addresses and holdings of all Persons having rights issued by the Vendor to acquire Vendor Shares, and (iii) participants and book-based nominee registrants such as CDS & Co., CEDE & Co. and DTC, and non-objecting beneficial owners of Vendor Shares, together with their addresses and respective holdings of Vendor Shares; and
(j)
notwithstanding the receipt by the Vendor of a Superior Proposal in accordance with Article 3, unless otherwise agreed to in writing by the Purchaser, continue to take all reasonable steps necessary to hold the Vendor Meeting and to cause the Transaction Resolution to be voted on at the Vendor Meeting and not propose to adjourn or postpone the Vendor Meeting other than as permitted or required by Section 2.1(a).
Section 2.2
The Vendor Circular
(1)
The Vendor shall promptly prepare and complete, in consultation with the Purchaser, the Vendor Circular together with any other documents required by Law in connection with the Vendor Meeting and the Transaction Resolution and the Vendor shall cause the Vendor Circular and such other documents to be filed and sent to each Vendor Shareholder and any other Person as required by Law, in each
case so as to permit the Vendor Meeting to be held by the date specified in Section 2.1(a).
(2)
The Vendor shall ensure that the Vendor Circular complies in material respects with Law, does not contain any Misrepresentation (other than in respect to any written information with respect to the Purchaser that is furnished in writing by or on behalf of the Purchaser for inclusion in the Vendor Circular) and provides the Vendor Shareholders with sufficient information to permit them to form a reasoned judgement concerning the matters to be placed before the Vendor Meeting. Without limiting the generality of the foregoing, the Vendor Circular must include: (i) a copy of the Fairness Opinion; (ii) a copy of the Formal Valuation; (iii) a statement that the Board has received the Fairness Opinion and Formal Valuation, and has unanimously determined (with directors abstaining or recusing themselves as required), after receiving legal and financial advice: (A) the entering into of the Agreement is in the best interests of the Vendor; and (B) that the Board (with directors abstaining or recusing themselves as required) recommends that the Vendor Shareholders vote in favour of the Transaction Resolution (collectively, the “
Board Recommendation
”), and (iii) a statement that each of the Vendor Locked-up Shareholders have entered into Support and Voting Agreements pursuant to which they intend to vote all of their Vendor Shares in favour of the Transaction Resolution and against any resolution submitted by any Vendor Shareholder that is inconsistent therewith and which cannot be terminated in the event of a Superior Proposal.
(3)
The Vendor shall give the Purchaser and its legal counsel a reasonable opportunity to review and comment on drafts of the Vendor Circular and other related documents, and shall give reasonable consideration to any comments made by the Purchaser and its legal counsel, and agrees that all information relating solely to the Purchaser for inclusion in the Vendor Circular and any information describing the terms of the Agreement or the Target Corporations must be in a form and content satisfactory to the Purchaser, acting reasonably. The Vendor shall provide the Purchaser with a final copy of the Vendor Circular prior to its mailing to the Vendor Shareholders.
(4)
Each Party shall promptly notify the other Party if it becomes aware that the Vendor Circular contains a Misrepresentation, or otherwise requires an amendment or supplement. The Parties shall, in a manner consistent with this Section 2.2, co-operate in the preparation of any such amendment or supplement as required or appropriate, and the Vendor shall promptly mail, file or otherwise publicly disseminate any such amendment or supplement to the Vendor Shareholders and, if required by Law, file the same with the Securities Authorities or any other Governmental Entity as required.
ARTICLE 3
ADDITIONAL COVENANTS REGARDING NON-SOLICITATION
Section 3.1
Non-Solicitation
(1)
Except as expressly provided in this Article 3, the Vendor and the Corporation shall not, directly or indirectly, through any officer, director, employee, representative (including any financial or other adviser) or agent of the Vendor or the Corporation (collectively “
Representatives
”), or otherwise, and shall not permit any such Person to:
(a)
solicit, assist, initiate, encourage or otherwise facilitate, (including by way of furnishing or providing copies of, access to, or disclosure of, any confidential information, books or records of the Vendor, the Corporation and/or the Target Corporations in the Vendor’s possession or entering into any form of agreement, arrangement or understanding) any inquiry, proposal or offer that constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal;
(b)
enter into or otherwise engage or participate in any discussions or negotiations with any Person (other than the Purchaser) regarding any inquiry, proposal or offer that constitutes or may reasonably be expected to constitute or lead to, an Acquisition Proposal, it being acknowledged and agreed that the Vendor may communicate with any Person for purposes of advising such Person of the restrictions in the Agreement or advising such Person that their Acquisition Proposal does not constitute a Superior Proposal or is not reasonably expected to constitute or lead to a Superior Proposal; or
(c)
make a Change in Recommendation.
(2)
The Vendor shall, and shall cause the Corporation and its Representatives to, immediately cease and terminate, and cause to be terminated, any solicitation, encouragement, discussion, negotiations, or other activities commenced prior to the date of the Agreement with any Person (other than the Purchaser) with respect to any inquiry, proposal or offer that constitutes, or may reasonably be expected to constitute or lead to, an Acquisition Proposal, and in connection therewith the Vendor shall discontinue access to and disclosure of confidential information, books and records relating to the Target Corporations in its possession, including the Data Room.
Section 3.2
Notification of Acquisition Proposals
(1)
If after the date of the Agreement, the Vendor or the Corporation or any of their respective Representatives, receives or otherwise becomes aware of any inquiry, proposal or offer that constitutes or could reasonably be expected to constitute or lead to an Acquisition Proposal, or any request for copies of, access to, or disclosure of, confidential information relating to the Vendor or the Target Corporations,
including but not limited to information, access, or disclosure relating to the books or records of the Vendor or the Target Corporations in the Vendor’s possession, the Vendor shall promptly notify the Purchaser, at first orally, and then, and in any event within 48 hours in writing, of such Acquisition Proposal, inquiry, proposal, offer or request, including a description of its material terms and conditions, the identity of all Persons making the Acquisition Proposal, inquiry, proposal, offer or request, and shall provide the Purchaser with copies of all documents, correspondence or other material received in respect of, from or on behalf of any such Person and such other details of such Acquisition Proposal, inquiry, proposal, offer or request as the Purchaser may reasonably request in writing.
(2)
The Vendor shall keep the Purchaser reasonably informed on a current basis of the status of developments and negotiations with respect to any Acquisition Proposal, inquiry, proposal, offer or request, including any changes, modifications or other amendments to any such Acquisition Proposal, inquiry, proposal, offer or request and shall provide to the Purchaser copies of all material or substantive correspondence if in writing or electronic form, and if not in writing or electronic form, a description of the material terms of such correspondence sent or communicated to the Vendor by or on behalf of any Person making such Acquisition Proposal, inquiry, proposal, offer or request.
(3)
The Vendor represents and warrants that the Vendor has not waived any confidentiality, standstill or similar agreement or restriction to which the Vendor or any of the Target Corporations is a party relating to an Acquisition Proposal, and covenants and agrees that (i) the Vendor shall take all necessary action to enforce each confidentiality, standstill, use, business purpose or similar agreement or restriction to which the Vendor or any of the Target Corporation is a party, and (ii) neither the Vendor, nor the Corporation nor any of their respective Representatives will, without the prior written consent of the Purchaser (which may be withheld or delayed in the Purchaser’s sole and absolute discretion), release any Person from, or waive, amend, suspend or otherwise modify such Person’s obligations respecting the Vendor, or any of the Target Corporations, under any confidentiality, standstill, use, business purpose or similar agreement or restriction to which the Vendor or any Target Corporation is a party.
Section 3.3
Responding to an Acquisition Proposal
(1)
Notwithstanding Section 3.1, if at any time, prior to obtaining the Required Approval, the Vendor receives an unsolicited written Acquisition Proposal, the Vendor may engage in or participate in discussions or negotiations with such Person regarding such Acquisition Proposal and may provide copies of, access to or disclosure of confidential information, books or records relating to the Vendor, the Corporation and/or the Target Corporations in its possession, if and only if:
(a)
the Board first determines in good faith, after consultation with its financial advisors and its outside legal counsel, that such Acquisition Proposal constitutes or could reasonably be expected to constitute or lead to a Superior Proposal, and, after consultation with its outside legal counsel, that the
failure to engage in such discussions or negotiations would be inconsistent with its fiduciary duties;
(b)
such Person was not restricted from making such Acquisition Proposal pursuant to an existing confidentiality, standstill, non-disclosure, use, business purpose or similar restriction with the Vendor or the Target Corporations;
(c)
the Acquisition Proposal did not arise, directly or indirectly, as a result of a violation by the Vendor of this Article 3;
(d)
the Vendor enters into a confidentiality and standstill agreement with such Person on customary terms, provided that such confidentiality and standstill agreement may allow such Person to make an Acquisition Proposal confidentially to the Board that constitutes, or could reasonably be expected to constitute or lead to, a Superior Proposal; and
(e)
the Vendor promptly provides the Purchaser with;
(i)
prior written notice stating the Vendor’s intention to participate in such discussions or negotiations and to provide such copies, access or disclosure;
(ii)
prior to providing any such copies, access or disclosure or engaging or partaking in any such discussions or negotiations, a true, complete and final executed copy of the confidentiality and standstill agreement referred to in Section 3.3(l)(d); and
(iii)
any non-public information concerning the Vendor or the Target Corporations provided to such other Person which was not previously provided to the Purchaser.
(2)
Nothing contained in this Schedule shall prevent the Board from complying with Section 2.17 of National Instrument 62-104 —
Takeover Bids and Issuer Bids
and similar provisions under Securities Laws relating to the provision of a directors’ circular.
Section 3.4
Right to Match
(1)
If the Vendor receives an Acquisition Proposal that constitutes a Superior Proposal prior to obtaining the Required Approval, the Board may make a Change in Recommendation and authorize the Vendor to enter into a definitive agreement with respect to such Superior Proposal, if and only if:
(a)
the Person making the Superior Proposal was not restricted from making such Superior Proposal pursuant to an existing confidentiality, standstill use, business purpose or similar restriction;
(b)
the Acquisition Proposal, inquiry, proposal, offer or request did not arise, directly or indirectly, as a result of a violation by the Vendor of this Article 3;
(c)
the Vendor has delivered to the Purchaser a written notice of the determination of the Board that such Acquisition Proposal constitutes a Superior Proposal and of the intention of the Board enter into such definitive agreement, together with a written notice from the Board regarding the value and financial terms that the Board, in consultation with its financial advisors, has determined should be ascribed to any non-cash consideration offered under such Acquisition Proposal (the “
Superior Proposal Notice
”);
(d)
the Vendor or its Representatives has provided the Purchaser a copy of the proposed definitive agreement for the Superior Proposal;
(e)
at least five (5) Business Days (the “
Matching Period
”) have elapsed from the date that is the later of the date on which the Purchaser received the Superior Proposal Notice and a copy of the proposed definitive agreement for the Superior Proposal from the Vendor;
(f)
during any Matching Period, the Purchaser has had the opportunity (but not the obligation), in accordance with Section 3.4(2), to offer to amend the Agreement in order for such Acquisition Proposal to cease to be a Superior Proposal;
(g)
if the Purchaser has offered to amend the Agreement under Section 3.4(2), the Board has determined in good faith, after consultation with its outside legal counsel and financial advisors, that such Acquisition Proposal continues to constitute a Superior Proposal (and, if applicable, compared to the terms of the Agreement as proposed to be amended by the Purchaser under Section 3.4(2)); and
(h)
the Board has determined, in good faith, after consultation with the Vendor’s outside legal counsel that it is
necessary for the Board to enter into a definitive agreement with respect to such Superior Proposal in order to satisfy their fiduciary duties to the Vendor; and
(i)
such Superior Proposal does not require the Vendor or any other Person to seek to interfere with the attempted successful completion of the transactions contemplated by the Agreement or any alternative transaction pursued by the Purchaser pursuant to the terms of the Support and Voting Agreements (including requiring the Vendor to delay, adjourn, postpone or cancel the Vendor Meeting) or provide for the payment of any break, termination or other fees or expenses or confer any rights or options to acquire assets or securities of the Vendor or the Target Corporations to any Person in the event that the Vendor completes the transactions contemplated by the Agreement or any other similar transaction with the Purchaser that was agreed to prior to the termination of the Agreement or pursuant to the Support and Voting Agreements.
(2)
During the Matching Period, or such longer period as the Vendor may approve in writing for such purpose: (a) the Board shall review any offer made by the Purchaser under Section 3.4(1)(f) to amend the terms of the Agreement in good faith, after consultation with the Vendor’s outside legal counsel and financial advisers, in order to determine whether such proposal would, upon acceptance, result in the Acquisition Proposal previously constituting a Superior Proposal ceasing to be a Superior Proposal; and (b) the Vendor shall, and shall cause its Representatives to, negotiate in good faith with the Purchaser to make such amendments to the terms of the Agreement as would enable the Purchaser to proceed with the transactions contemplated by the Agreement on such amended terms. If the Board determines that such Acquisition Proposal would cease to be a Superior Proposal, the Vendor shall promptly so advise the Purchaser and the Vendor and the Purchaser shall amend the Agreement to reflect such offer made by the Purchaser, and shall take and cause to be taken all such actions as are necessary to give effect to the foregoing.
(3)
Each successive amendment or modification to any Acquisition Proposal that results in an increase in, or modification of, the consideration (or value of such consideration) to be received by the Vendor or other material terms or conditions thereof shall constitute a new Acquisition Proposal for the purposes of this Section 3.4, and the Purchaser shall be afforded a new five (5) Business Day Matching Period from the later of the date on which the Purchaser received the Superior Proposal Notice and the date on which the Purchaser received a copy of the proposed definitive agreement for the new Superior Proposal from the Vendor.
(4)
The Board shall promptly reaffirm the Board Recommendation by press release after any Acquisition Proposal which is not determined to be a Superior Proposal is publicly announced or the Board determines that a proposed amendment to the terms of the Agreement as contemplated under Section 3.4(2) would result in an Acquisition Proposal no longer being a Superior Proposal. The Vendor shall provide the Purchaser and its outside legal with a reasonable opportunity to review the form and content of any such press release and shall make all reasonable amendments to such press release as requested by the Purchaser and its legal counsel.
(5)
If the Vendor provides a Superior Proposal Notice to the Purchaser after a date that is less than 10 Business Days before the Vendor Meeting, the Vendor shall either proceed with or shall postpone or adjourn the Vendor Meeting, as directed by the Purchaser acting reasonably, to a date that is not more than 10 Business Days after the scheduled date of the Vendor Meeting, but in any event to a date that is not less than five Business Days prior to the Outside Date, to the extent permitted by Law.
(6)
Nothing contained in this Section 3.4 shall limit in any way the obligation of the Vendor to convene and hold the Vendor Meeting in accordance with Section 2.1 hereof while the Agreement remains in force.
Section 3.5
Breach by the Corporation and Representatives
Without limiting the generality of the foregoing, the Vendor shall advise the Corporation and their respective Representatives of the prohibitions set out in this Article 3
and any violation of the restrictions set forth in this Article 3 by the Vendor, the Corporation or their respective Representatives is deemed to be a breach of this Article 3 by the Vendor.
ARTICLE 4
TERMINATION
Section 4.1
Termination
(1)
In addition to the termination rights set forth in Article 7 of the Agreement, the Agreement may be terminated prior to the Closing Date by:
(a)
either the Vendor or the Purchaser, if the Required Approval is not obtained at the Vendor Meeting, provided that a Party may not terminate the Agreement pursuant to this Section 4.1(1)(a)(i) if the failure to obtain the Required Approval has been caused by, or is a result of, a breach by such Party of any of its representations or warranties or the failure of such Party to perform any of its covenants or agreements under the Agreement; or
(b)
the Purchaser if the Board or any committee of the Board (A) fails to unanimously recommend or withdraws, amends, modifies or qualifies, or publicly proposes or states an intention to withdraw, amend, modify or qualify, the Board Recommendation, (B) accepts, approves, endorses or recommends, or publicly proposes to accept, approve, endorse or recommend or takes no position or a neutral position, in each case with respect to a publicly announced, or otherwise publicly disclosed, Acquisition Proposal for more than five Business Days (or beyond the third Business Day prior to the date of the Vendor Meeting, if sooner), (C) accepts, approves, endorses, recommends or executes or enters into (other than a confidentiality and standstill agreement permitted by and in accordance with Section 3.3) or publicly proposes to accept, approve, endorse, recommend or execute or enter into any agreement, letter of intent, understanding or arrangement relating to an Acquisition Proposal or any proposal or offer that could reasonably be expected to lead to an Acquisition Proposal; (D) fails to publicly reaffirm the Board Recommendation (without qualification) within five Business Days after having been requested in writing by the Purchaser to do so (collectively, a “
Change in Recommendation
”), or (E) the Vendor breaches Article 3 in any material respect.;
(2)
The Party desiring to terminate the Agreement pursuant to this Section 4.1 shall give written notice of such termination to the other Party, specifying in reasonable detail the basis for such Party’s exercise of its termination right.
ARTICLE 5
GENERAL PROVISIONS
Section 5.1
Termination Fees
(1)
Despite any other provision in the Agreement relating to the payment of fees and expenses, including the payment of brokerage fees, if a Termination Fee Event occurs, the Vendor shall pay the Purchaser the Termination Fee in accordance with 0.
(2)
For the purposes of the Agreement, ‘‘
Termination Fee
” means $5,800,000 and “
Termination Fee Event
” means the termination of the Agreement:
(a)
by the Purchaser, pursuant to Section 4.1(1)(b) [
Change in Recommendation or Brench of Article
3];
(b)
pursuant to any subsection of Section 4.1 if at such time the Purchaser is entitled to terminate this Agreement pursuant to Section 4.1(1)(b) [
Change in Recommendation or Breach of Article 3
];
(c)
by the Vendor or the Purchaser pursuant to Section 4.1(1)(a)
[Failure of Shareholders to Approve]
if:
(i)
prior to such termination, an Acquisition Proposal is made or publicly announced or otherwise publicly disclosed by any Person (other than the Purchaser or any of its affiliates) or any Person (other than the Purchaser or any of its affiliates) shall have publicly announced an intention to make an Acquisition Proposal; and
(ii)
within nine (9) months following the date of such termination, (A) an Acquisition Proposal (whether or not such Acquisition Proposal is the same Acquisition Proposal referred to in clause (i) above) is consummated, or (B) the Vendor, directly or indirectly, in one or more transactions, enters into a contract in respect of an Acquisition Proposal (whether or not such Acquisition Proposal is the same Acquisition Proposal referred to in clause (i) above) and such Acquisition Proposal is later consummated (whether or not within nine (9) months after such termination).
For purposes of the foregoing, the term “Acquisition Proposal” shall have the meaning assigned to such term in Section 1.1, except that references to “20% or more” shall be deemed to be references to 50% or more.
(3)
The Termination Fee shall be paid by the Vendor to the Purchaser as follows, by wire transfer of immediately available funds to an account designated by the Purchaser, if a Termination Fee Event occurs due to:
(a)
a termination of the Agreement described in Section 5.1(2)(a) or Section 5.1(2)(b) within two (2) Business Days of the occurrence of such Termination Fee Event; and
(b)
a termination of the Agreement described in Section 5.1(2)(b), on or prior to consummation of
the
Acquisition Proposal referred to in Section 5.1(2)(b).
(4)
The Vendor acknowledges that the agreements contained in this Section 5.1 are an integral part of the transactions contemplated by the Agreement, and that without these agreements the Purchaser would not enter into the Agreement, and that the amounts set out in this Section 5.1 represent liquidated damages which are a genuine pre-estimate of the damages, including opportunity costs, which the Purchaser will suffer or incur as a result of the event giving rise to such damages and resultant termination of the Agreement, and is not a penalty. The Vendor irrevocably waives any right it may have to raise as a defence that any such liquidated damages are excessive or punitive.
Section 5.2
Expense Reimbursement.
In addition to the rights of the Purchaser under Section 5.1(2), if the Agreement is terminated by the Purchaser pursuant to Section 5.1(2)(c) [
Failure of Shareholders to Approve
] then the Vendor shall, within two (2) Business Days of such termination, pay or cause to be paid to the Purchaser by wire transfer of immediately available funds an expense reimbursement fee of $2,000,000.
EXHIBIT “A”
FORM OF SUPPORT AND VOTING AGREEMENT
See attached.
VOTING SUPPORT AGREEMENT
THIS AGREEMENT
is made as of July , 2018
AMONG
:
(the “
Shareholder
”)
- and -
Aphria Inc., a corporation existing under the laws of Ontario (the “
Purchaser
”)
RECITALS
:
WHEREAS
, in connection with a share purchase agreement between the Purchaser and Scythian Biosciences Corp. (the “
Company
”) dated the date hereof (as may be amended, modified or supplemented from time to time in accordance with its terms, the “
Purchase Agreement
”), the Purchaser proposes to acquire from the Company (the “
Transaction
”) all of the issued and outstanding common shares (“
Holdco Shares
”) of a wholly-owned subsidiary of the Company (“
Holdco
”), which proposes to acquire shares of certain other companies (the “
Target Corporations
”) with businesses in Argentina, Colombia and Jamaica, and subject to the terms and conditions set forth in the Purchase Agreement;
WHEREAS
, pursuant to the Purchase Agreement, the Company shall convene a meeting (the “
Company Meeting
”) of holders of common shares in the capital of the Company (the “
Common Shares
”) in order to consider and, if thought advisable, to pass resolutions approving the Transaction;
WHEREAS
, the Shareholder is the beneficial owner, directly or indirectly, of the Subject Securities listed in Schedule A hereto; and
WHEREAS
, this Agreement sets out the terms and conditions of the agreement of the Shareholder to abide by the covenants in respect of the Subject Securities and the other restrictions and covenants set forth herein;
NOW THEREFORE
, in consideration of the mutual covenants and agreements set forth in this Agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged) the Parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
1.1
Definitions
In this Agreement including the recitals:
“
Acquisition Proposal
” means, other than the transactions contemplated by the Purchase Agreement and other than any transaction involving the Company, Holdco and/or one or more of the other Target Corporations and/or their shareholders, any offer, proposal or inquiry (written or oral) from any Person or group of Persons other than the Purchaser (or any affiliate of the Purchaser) after the date of this Agreement relating to: (i) any sale, disposition, alliance or joint venture (or any lease, long-term supply agreement or other arrangement having the same economic effect as the foregoing), direct or indirect, in a single transaction or a series of related transactions, of assets representing 20% or more of the consolidated assets or contributing 20% or more of the consolidated revenue of the Company, Holdco and/ or the other Target Corporations or of 20% or more of the voting or equity securities of the Company, Holdco and/or the other Target Corporations (or rights or interests in such voting or equity securities); (ii) any direct or indirect take-over bid, exchange offer, treasury issuance or other transaction that, if consummated, would result in such Person or group of Persons beneficially owning 20% or more of the voting or equity securities of the Company, Holdco and/or the other Target Corporations (including securities convertible or exercisable or exchangeable for voting or equity securities of the Company, Holdco and/or the other Target Corporations); (iii) any plan of arrangement, merger, amalgamation, consolidation, share exchange, business combination, reorganization, recapitalization, liquidation, dissolution, winding up or exclusive license involving the Company, Holdco or any of the other Target Corporations; or (iv) any other similar transaction or series of transactions involving the Company, Holdco or any of the other Target Corporations;
“
affiliate
” of any Person means, at the time such determination is being made, any other Person controlling, controlled by or under common control with such first Person, in each case, whether directly or indirectly, and “
control
” and any derivation thereof means the holding of voting securities of another entity sufficient to elect a majority of the board of directors (or the equivalent) of such entity;
“
Agreement
” means this voting support agreement dated as of the date hereof between the Shareholder and the Purchaser, as it may be amended, modified or supplemented from time to time in accordance with its terms;
“
Business Day
” means any day of the year, other than a Saturday, Sunday or any day on which major Canadian chartered banks are closed for business in Toronto, Ontario;
“
Common Shares
” has the meaning ascribed thereto in the recitals hereof;
“
Company
” has the meaning ascribed thereto in the recitals hereof;
2
“
Company Circular
” has the meaning ascribed thereto in Section 3.1(b);
“
Company Meeting
” has the meaning ascribed thereto in the recitals hereof;
“
Governmental Entity
” means: (i) any governmental or public department, central bank, court, minister, governor-in-council, cabinet, commission, tribunal, board, bureau, agency, commissioner or instrumentality, whether international, multinational, national, federal, provincial, state, county, municipal, local, or other; (ii) any subdivision or authority of any of the above; (iii) any stock exchange; and (iv) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above;
“
Holdco
” has the meaning ascribed thereto in the recitals hereof;
“
Holdco Shares
” has the meaning ascribed thereto in the recitals hereof;
“
Notice
” has the meaning ascribed thereto in Section 4.8;
“
Parties
” means the Shareholder and the Purchaser and “
Party
” means any one of them;
“
Person
” means an individual, partnership, limited partnership, limited liability partnership, corporation, limited liability company, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or Governmental Entity, and pronouns have a similarly extended meaning;
“
Purchase Agreement
” has the meaning ascribed thereto in the recitals hereof;
“
Purchaser
” has the meaning ascribed thereto in the preamble hereof;
“
Shareholder
” has the meaning ascribed thereto in the preamble hereof;
“
Subject Securities
” means the Common Shares and other securities of the Company listed on Schedule A hereto and any Common Shares acquired by the Shareholder or any of its affiliates subsequent to the date hereof, and includes all securities which such Subject Securities may be converted into, exchanged for or otherwise changed into;
“
Superior Proposal
” means any unsolicited
bona fide
written Acquisition Proposal from Person(s) who are an arm’s length third party or parties, made after the date of the Agreement, to acquire not less than all of the outstanding Common Shares (or Holdco Shares) or all or substantially all of the assets of the Company, Holdco and/or the Target Corporations that;
(a)
complies with Securities Laws (as defined in the Purchase Agreement) and did not result from or involve a breach of the Purchase Agreement or any other agreement between the Person making the Acquisition Proposal and the Company or the Target Corporations;
3
(b)
is reasonably capable of being completed without undue delay relative to the Purchase Agreement, taking into account, all financial, legal, regulatory and other aspects of such proposal and the Person making such proposal;
(c)
is not subject to any financing contingency and in respect of which adequate arrangements have been made to ensure that the required consideration will be available to effect payment in full for all of the Common Shares or Holdco Shares, as the case may be;
(d)
is not subject to any due diligence or access condition;
(e)
the board of directors of the Company determines, in its good faith judgment, after receiving the advice of its outside legal and financial advisors and after taking into account all the terms and conditions of the Acquisition Proposal, including all legal, financial, regulatory and other aspects of such Acquisition Proposal and the party making such Acquisition Proposal, would, if consummated in accordance with its terms, but without assuming away the risk of non-completion, result in a transaction which is more favourable, from a financial point of view, to the Company, than the transactions contemplated by the Purchase Agreement; and
(f)
in the event that the Company does not have the financial resources to pay the Termination Fee (as defined in the Purchase Agreement), the terms of such Acquisition Proposal provide that the Person making such Superior Proposal shall advance or otherwise provide the Company the cash required for the Company to pay the Termination Fee and such amount shall be advanced or provided on or before the date such Termination Fee becomes payable;
“
Target Corporations
” has the meaning ascribed thereto in the recitals hereof;
“
Transaction
” has the meaning ascribed thereto in the recitals hereof;
“
Transaction Resolutions
” has the meaning ascribed thereto in Section 3.1(b); and
“
Voting Support Outside Date
” means December 31, 2018.
1.2
Gender and Number
Any reference to gender includes all genders. Words importing the singular number only include the plural and vice versa.
1.3
Currency
All references to dollars or to $ are references to Canadian dollars.
1.4
Headings.
The division of this Agreement into Articles, Sections and Schedules and the insertion of the recitals and headings are for convenient reference only and do not affect the construction or
4
interpretation of this Agreement and, unless otherwise stated, all references in this Agreement or in the Schedules hereto to Articles, Sections and Schedules refer to Articles, Sections and Schedules of and to this Agreement or of the Schedules in which such reference is made, as applicable.
1.5
Date for any Action
A period of time is to be computed as beginning on the day following the event that began the period and ending at 4:30 p.m. (Toronto Time) on the last day of the period, if the last day of the period is a Business Day, or at 4:30 p.m. (Toronto Time) on the next Business Day if the last day of the period is not a Business Day. If the date on which any action is required or permitted to be taken under this Agreement by a Person is not a Business Day, such action shall be required or permitted to be taken on the next succeeding Business Day.
1.6
Governing Law
This Agreement will be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. Each Party irrevocably attorns and submits to the non-exclusive jurisdiction of the courts of the Province of Ontario and waives objection to the venue of any proceeding in such court or that such court provides an inconvenient forum.
1.7
Incorporation of Schedules
Schedule A attached hereto, for all purposes hereof, forms an integral part of this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1
Representations and Warranties of the Shareholder
The Shareholder represents and warrants to the Purchaser (and acknowledges that the Purchaser is relying on these representations and warranties in completing the transactions contemplated hereby and by the Purchase Agreement) that:
(a)
The Shareholder, if the Shareholder is not a natural person, is a corporation or other entity validly existing under the laws of the jurisdiction of its incorporation.
(b)
The Shareholder, if the Shareholder is not a natural person, has the requisite corporate power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly executed and delivered by the Shareholder and constitutes a legal, valid and binding agreement of the Shareholder enforceable against the Shareholder in accordance with its terms subject only to any limitation under bankruptcy, insolvency or other applicable laws affecting the enforcement of creditors’ rights generally and the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction.
5
(c)
The Shareholder exercises control or direction over all of the Subject Securities set forth opposite its name in Schedule A hereto. Other than the Subject Securities, neither the Shareholder nor any of its affiliates, beneficially own, or exercise control or direction over any additional securities, or any securities convertible or exchangeable into any additional securities, of the Company or any of its affiliates.
(d)
The Shareholder has the sole right to sell and vote or direct the sale and voting of the Subject Securities to the extent they may be voted or sold.
(e)
No Person has any agreement or option, or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an agreement or option, for the purchase, acquisition or transfer of any of the Subject Securities or any interest therein or right thereto.
(f)
No material consent, approval, order or authorization of, or declaration or filing with, any Person is required to be obtained by the Shareholder in connection with the execution and delivery of this Agreement by the Shareholder and the performance by it of its obligations under this Agreement.
(g)
None of the Subject Securities is subject to any proxy, voting trust, vote pooling or other agreement with respect to the right to vote, call meetings of any of the Company’s securityholders or give consents or approvals of any kind, except this Agreement.
(h)
None of the execution and delivery by the Shareholder of this Agreement or the completion of the transactions contemplated hereby or the compliance by the Shareholder with its obligations hereunder will violate, contravene, result in any breach of, or be in conflict with, or constitute a default under, or create a state of facts which after notice or lapse of time or both would constitute a default under, any term or provision of: (i) any constating documents of the Shareholder (if the Shareholder is not a natural person); (ii) any contract to which the Shareholder is a party or by which the Shareholder is bound; or (iii) any judgment, decree, order or award of any Governmental Entity.
2.2
Representations and Warranties of the Purchaser
The Purchaser represents and warrants to the Shareholder (and acknowledges that the Shareholder is relying on these representations and warranties in completing the transactions contemplated hereby and by the Purchase Agreement) that:
(a)
The Purchaser is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to enter into and perform its obligations under this Agreement. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms subject only to any limitation under bankruptcy, insolvency or other applicable laws affecting the enforcement
6
of creditors’ rights generally and the discretion that a court may exercise in the granting of equitable remedies such as specific performance and injunction.
(b)
None of the execution and delivery by the Purchaser of this Agreement or the compliance by the Purchaser with the Purchaser’s obligations hereunder will violate, contravene, result in any breach of, or be in conflict with, or constitute a default under, or create a state of facts which after notice or lapse of time or both would constitute a default under, any term or provision of: (i) any constating documents of the Purchaser; (ii) any contract to which the Purchaser is a party or by which the Purchaser is bound; (iii) any judgment, decree, order or award of any Governmental Entity or (iv) any applicable law.
(c)
No material consent, approval, order or authorization of, or declaration or filing with, any Governmental Entity is required to be obtained by the Purchaser in connection with the execution and delivery of this Agreement, the performance by it of its obligations under this Agreement and the consummation by the Purchaser of the Transaction, other than those which are contemplated by the Purchase Agreement.
(d)
There are no claims, actions, suits, audits, proceedings, investigations or other actions pending against, or, to the knowledge of the Purchaser, threated against or affecting the Purchaser or any of its respective properties that, individually or in the aggregate, could reasonably be expected to have a material and adverse effect on the Purchaser’s ability to execute and deliver this Agreement and to perform its obligations contemplated by this Agreement or the Purchase Agreement.
ARTICLE 3
COVENANTS
3.1
Covenants of the Shareholder
The Shareholder hereby covenants with the Purchaser that from the date of this Agreement until the termination of this Agreement in accordance with its terms:
(a)
The Shareholder will not, without having first obtained the prior written consent of the Purchaser:
(i)
sell, transfer, gift, assign, convey, pledge, hypothecate, encumber, option or otherwise dispose of any right or interest in any of the Subject Securities or enter into any agreement, arrangement, commitment or understanding in connection therewith, other than (A) any exercise of share purchase warrants, incentive stock options or other convertible securities of the Company in accordance with their terms, or (B) to one or more corporations directly or indirectly wholly owned by the Shareholder without affecting beneficial ownership or control or direction over the Subject Securities, provided that in each such case and for greater certainty, any Common Shares acquired as a result
7
thereof shall be Subject Securities and subject to the terms and conditions of this Agreement;
(ii)
other than as set forth herein, grant or agree to grant any proxies or powers of attorney, deposit any Subject Securities into a voting trust or pooling agreement, or enter into a voting agreement, commitment, understanding or arrangement, oral or written, with respect to the voting of any Subject Securities; or
(iii)
requisition or join in the requisition of any meeting of any of the securityholders of the Company for the purpose of considering any resolution.
(b)
The Shareholder hereby covenants, undertakes and agrees to cause to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the Subject Securities (to the extent that they carry a right to vote) at the Company Meeting (or, if applicable, in any action by written consent of the securityholders of the Company) in favour of the approval, consent, ratification and adoption of the resolutions approving the Transaction and the transactions contemplated by the Purchase Agreement (and any actions required for the consummation of the transactions contemplated by the Purchase Agreement) (collectively, the “
Transaction Resolutions
”). In connection with the foregoing, subject to this Section 3.1(b), the Shareholder hereby agrees to deposit a proxy, or voting instruction form, as the case may be, duly completed and executed in respect of all of its Subject Securities (to the extent that they carry the right to vote) as soon as practicable following the mailing of the Company’s management information circular in respect of the Company Meeting (the “
Company Circular
”) and in any event at least 10 calendar days prior to the Company Meeting, voting all such Subject Securities (to the extent that they carry the right to vote) in favour of the Transaction Resolutions. The Shareholder hereby agrees that it will not take, nor permit any Person on its behalf to take, any action to withdraw, revoke, amend or invalidate any proxy or voting instruction form deposited pursuant to this Agreement notwithstanding any statutory or other rights or otherwise which the Shareholder might have unless this Agreement has at such time been previously terminated in accordance with Section 4.1.
(c)
The Shareholder hereby covenants, undertakes and agrees to cause to be counted as present for purposes of establishing quorum and to vote (or cause to be voted) all of the Subject Securities (to the extent that they carry the right to vote) against any proposed action by the Company or any other Person: (i) in respect of any Acquisition Proposal or Superior Proposal that requires the approval of the shareholders of the Company under applicable law, other than the Transaction; (ii) which would reasonably be regarded as being directed towards or likely to prevent or delay the successful completion of the Transaction, including without limitation any amendment to the articles or by-laws of the Company, Holdco and/or the Target Corporations or their respective corporate structures or capitalization; or (iii) any action or agreement that would result in a breach of
8
any representation, warranty, covenant or other obligation of the Company under the Purchase Agreement.
(d)
The Shareholder hereby covenants, undertakes and agrees in the event that any Acquisition Proposal or Superior Proposal that requires the approval of the shareholders of the Company under applicable law, other than the Transaction, is presented prior to the closing date for the Transaction for approval of, or acceptance by, the shareholders of the Company (whether or not it may be recommended by the board of directors of the Company) not to directly or indirectly, accept, assist or otherwise further the successful completion of such transaction or purport to tender or deposit into any such transaction any of the Subject Securities.
(e)
Subject to Section 4.5, the Shareholder will not, and will ensure that its affiliates do not, directly or indirectly, through any officer, director, employee, representative or agent or otherwise:
(i)
solicit proxies or become a participant in a solicitation in opposition to or competition with the Purchaser’s proposed purchase of the Holdco Shares as contemplated by the Transaction;
(ii)
assist any Person in taking or planning any action that would compete with, restrain or otherwise serve to interfere with or inhibit the Purchaser’s proposed purchase of the Holdco Shares as contemplated by the Transaction;
(iii)
act jointly or in concert with others with respect to voting securities of the Company for the purpose of opposing or competing with the Purchaser’s proposed purchase of the Holdco Shares as contemplated by the Transaction;
(iv)
solicit, initiate, encourage or otherwise facilitate (including by way of furnishing or providing copies of, access to, or disclosure of, any confidential information, books or records of the Company, Holdco and/or the Target Corporations in the Company’s possession or entering into any form of agreement, arrangement or understanding) any inquiry, proposal or offer that constitutes or would reasonably be expected to constitute or lead to, an Acquisition Proposal;
(v)
participate in any discussions or negotiations with any Person (other than the Purchaser) regarding any inquiry, proposal or offer that constitutes or would reasonably be expected to constitute or lead to an Acquisition Proposal;
(vi)
accept or enter into, or publicly propose to accept or enter into, any letter of intent, agreement, arrangement or understanding regarding any Acquisition Proposal; or
9
(vii)
cooperate in any way with, assist or participate in, knowingly encourage or otherwise facilitate or encourage any effort or attempt by any other Person to do or seek to do any of the foregoing.
(f)
The Shareholder will not (i) contest in any way the approval of the Transaction by any Governmental Entity; or (ii) take any other action of any kind, in each case which would reasonably be regarded as likely to reduce the success of, or materially delay or interfere with the completion of, the transactions contemplated by the Purchase Agreement.
(g)
The Shareholder will, and will cause each of its affiliates and will instruct each of its representatives to, immediately cease and terminate, and cause to be terminated, any solicitation, encouragement, discussion, negotiations, or other activities commenced prior to the date of this Agreement with any Person (other than the Purchaser or an affiliate thereof) with respect to any inquiry, proposal or offer that constitutes, or may reasonably be expected to constitute or lead to, an Acquisition Proposal.
(h)
At the request of the Purchaser, the Shareholder will, and will cause its applicable affiliates and representatives to, use all commercially reasonable efforts in its capacity, and their capacities, as a shareholder of the Company to assist the Company and the Purchaser to successfully complete the Transaction and the other transactions contemplated by the Purchase Agreement and this Agreement, including without limitation cooperating with the Purchaser and the Company to make all requisite regulatory filings, provided that the Shareholder shall not be obligated to incur any expense in providing such cooperation, including by participating in any claim, action, suit, proceeding or investigation whether civil, criminal, administrative, or investigative, unless the Purchaser reimburses the Shareholder for such expenses.
(i)
The Shareholder hereby consents to:
(i)
details of this Agreement being set out in any press release or information circular, including the Company Circular, or other document produced by the Company, the Purchaser or any of their respective affiliates in connection with the transactions contemplated by this Agreement and the Purchase Agreement; and
(ii)
this Agreement being made publicly available, including by filing on the System for Electronic Document Analysis and Retrieval (SEDAR).
(j)
Except as required by applicable law or stock exchange requirements, the Shareholder will not, and will ensure that their affiliates and representatives do not, make any public announcement with respect to the transactions contemplated herein or pursuant to the Purchase Agreement without the prior written approval of the Purchaser.
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3.2
Covenants of the Purchaser
Subject to Section 4.1, the Purchaser will take all steps required of it under the Purchase Agreement to cause the Transaction to occur in accordance with the terms of and subject to the conditions set forth in the Purchase Agreement.
ARTICLE 4
GENERAL
4.1
Termination
This Agreement will terminate and be of no further force or effect upon the earliest to occur of:
(a)
the mutual agreement in writing of the Shareholder and the Purchaser;
(b)
the valid termination of the Purchase Agreement by the Company in accordance with its terms;
(c)
the completion of the acquisition by the Purchaser of the Holdco Shares; and
(d)
the Voting Support Outside Date.
4.2
Time of the Essence
Time is of the essence in this Agreement.
4.3
Effect of Termination
If this Agreement is terminated in accordance with the provisions of Section 4.1, no Party will have any further liability to perform its obligations under this Agreement except as expressly contemplated by this Agreement, and provided that neither the termination of this Agreement nor anything contained in Section 4.1 will relieve any Party from any liability for any breach by it of this Agreement, including from any inaccuracy in its representations and warranties and any non-performance by it of its covenants made herein.
4.4
Equitable Relief
The Parties agree that irreparable harm would occur for which money damages would not be an adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to injunctive and other equitable relief to prevent breaches of this Agreement, and to enforce compliance with the terms of this Agreement without any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or other equitable relief, this being in addition to any other remedy to which the Parties may be entitled at law or in equity.
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4.5
Fiduciary Duty
Notwithstanding anything to the contrary herein, nothing herein shall restrict or limit any director or officer of the Company from taking any action required to be taken in the discharge of his or her fiduciary duty as a director or officer of the Company that is otherwise permitted by, and done in compliance with, the terms of the Purchase Agreement. The Purchaser further hereby agrees that the Shareholder is not making any agreement or understanding herein in any capacity other than in the capacity as beneficial owner of the Subject Securities.
4.6
Waiver; Amendment
Each Party hereto agrees and confirms that any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by all of the Parties or in the case of a waiver, by the Party against whom the waiver is to be effective. No waiver of any of the provisions of this Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the Party to be bound by the waiver. A Party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a Party from any other or further exercise of that right or the exercise of any other right. No waiver of any of the provisions of this Agreement will be deemed to constitute a waiver of any other provision (whether or not similar).
4.7
Entire Agreement
This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the Parties with respect thereto.
4.8
Notices
Any notice, or other communication given regarding the matters contemplated by this Agreement (each a “
Notice
”) must be in writing, sent by personal delivery, courier or facsimile and addressed:
(a)
if to the Purchaser at:
Aphria Inc.
103-245 Talbot Street West
Leamington, Ontario
N8H 1N8
Attention:
Chief Financial Officer
Facsimile:
(416) 947-0866
with a copy (which shall not constitute notice) to:
Christelle Gedeon
12
Chief Legal Officer, Aphria Inc.
Christelle.gedeon@aphria,com
(b)
to the Shareholder, at the address set out at Schedule B hereto.
Any Notice is deemed to be given and received (i) if sent by personal delivery or same day courier, on the date of delivery if it is a Business Day and the delivery was made prior to 4:30 p.m. (local time in place of receipt) and otherwise on the next Business Day, (ii) if sent by overnight courier, on the next Business Day, or (iii) if sent by facsimile, on the Business Day following the date of confirmation of transmission by the originating facsimile. A Party may change its address for service from time to time by providing a Notice in accordance with the foregoing. Any subsequent Notice must be sent to the Party at its changed address. Any element of a Party’s address that is not specifically changed in a Notice will be assumed not to be changed. Sending a copy of a Notice to a Party’s legal counsel as contemplated above is for information purposes only and does not constitute delivery of the Notice to that Party. The failure to send a copy of a Notice to legal counsel does not invalidate delivery of that Notice to a Party.
4.9
Severability
If any provision of this Agreement is determined to be illegal, invalid or unenforceable by an arbitrator or any court of competent jurisdiction, that provision will be severed from this Agreement and the remaining provisions shall remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible.
4.10
Successors and Assigns
The provisions of this Agreement will be binding upon and enure to the benefit of the Parties hereto and their respective heirs, administrators, executors, legal representatives, successors and permitted assigns, provided that no Party may assign, delegate or otherwise transfer any of its rights, interests or obligations under this Agreement without the prior written consent of the other Party hereto, provided that the Purchaser may assign all or part of its rights under this Agreement to, and its obligations under this Agreement may be assumed by, any of its affiliates, provided that if such assignment and/or assumption takes place, the Purchaser shall continue to be liable jointly and severally with such affiliate for all of its obligations hereunder.
4.11
Independent Legal Advice
Each of the Parties hereby acknowledges that it has been afforded the opportunity to obtain independent legal advice and confirms by the execution and delivery of this Agreement that they have either done so or waived their right to do so in connection with the entering into of this Agreement.
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4.12
Further Assurances
The Parties hereto will, with reasonable diligence, do all things and provide all such reasonable assurances as may be required to consummate the transactions contemplated by this Agreement, and each Party will provide such further documents or instruments required by the other Party as may be reasonably necessary or desirable to effect the purpose of this Agreement and carry out its provisions, whether before or after the closing date for the Transaction.
4.13
Counterparts
This Agreement may be executed in any number of counterparts (including counterparts by facsimile) and all such counterparts taken together shall be deemed to constitute one and the same instrument. The Parties shall be entitled to rely upon delivery of an executed facsimile or similar executed electronic copy of this Agreement, and such facsimile or similar executed electronic copy shall be legally effective to create a valid and binding agreement between the Parties.
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IN WITNESS OF WHICH
the Parties have executed this Agreement as at the date first above written.
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(Corporation name, if applicable)
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By:
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Name:
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Title (if applicable):
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Aphria Inc.
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By:
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Name:
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Title:
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SCHEDULE A
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Number and description of other
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Subject Securities (e.g. option,
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Owner
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Number of Common Shares
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warrants)
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SCHEDULE B
Shareholder Address for Notice
SCHEDULE “C”
ROFR/ROFO AGREEMENT TERMS
The ROFR/ROFO Agreement, which shall be delivered as a condition to Closing, and the definitive terms of which shall be agreed between the Parties, shall be structured as a right of first refusal and right of first offer (collectively, the “
Rights
”) with Scythian for the acquisition of a majority interest in an entity in Brazil, as determined by the Parties (“
BrazilCo
”).
The Rights shall be structured as follows:
(a)
The initial grant of the Rights to Aphria on the Closing Date shall be issued for nominal consideration;
(b)
In the event that Scythian successfully negotiates any transaction (which for greater certainty may include a non-binding letter of intent) for the acquisition of BrazilCo, and upon receipt by BrazilCo of a cannabis licence from the Brazilian Cannabis Licensing Authority (or equivalent regulatory authority) permitting the cultivation, processing and distribution of cannabis in Brazil, Scythian must first offer to Aphria the right to acquire, in one more tranches, up to 90.0% of the issued and outstanding common shares of BrazilCo (on a fully-diluted basis);
(c)
In the event the Rights are triggered, 50.1% of the issued and outstanding common shares of BrazilCo shall be purchased for an aggregate exercise price (the “
Exercise Price
”) of $US24.0 million. The remaining 20% - 39.9% of the issued and outstanding equity of BrazilCo will be sold at the fair market value of such shares at the time of such purchase;
(d)
If at any time following the successful negotiation of a transaction by Scythian with BrazilCo, Scythian receives an offer to purchase BrazilCo (or any portion thereof) from a third party (a “
Third Party Offer
”), Scythian must first notify Aphria and make such offer to Aphria at the same consideration and on the same terms and conditions as contained in the Third Party Offer. Aphria shall have 15 days to notify Scythian of its intention to accept the terms of the Third Party Offer, failing which it may be consummated with such third party;
(c)
The Exercise Price shall be satisfied by the issuance to Scythian (or such affiliate or subsidiary as the Parties may agree) of common shares in the capital of Aphria (the “
Aphria Shares
”) at a price per Aphria Share that is equal to the volume weighted average trading price of the Aphria Shares on the TSX for the 20 trading days immediately preceding the closing of the acquisition of the 50.1% of the common shares of BrazilCo; and
(e)
Provided the acquisition of the Purchased Shares has closed in accordance with the terms of the Agreement, the grant of the Rights Scythian to Aphria shall occur concurrently on the Closing Date.
SCHEDULE “D”
THIRD PARTY CLAIM PROCEDURE
(1)
If the Indemnifying Party assumes the investigation and defence of a Third Party Claim:
(a)
the Indemnifying Party shall pay for all reasonable costs and expenses of the investigation and defence of the Third Party Claim except that the Indemnifying Party shall not, so long as it diligently conducts such defence, be liable to the Indemnified Person for any fees of other counsel or any other expenses with respect to the defence of the Third Party Claim, incurred by the Indemnified Person after the date the Indemnifying Party validly exercised its right to assume the investigation and defence of the Third Party Claim;
(b)
the Indemnifying Party shall reimburse the Indemnified Person for all costs and expenses incurred by the Indemnified Person in connection with the investigation and defence of the Third Party Claim prior to the date the Indemnifying Party validly exercised its right to assume the investigation and defence of the Third Party Claim;
(c)
the Indemnified Person shall not, other than with respect to Third Party Claims in respect of taxes, contact or communicate with the Person making the Third Party Claim without the prior written consent of the Indemnifying Party, unless required by applicable Law;
(d)
legal counsel chosen by the Indemnifying Party to defend the Third Party Claim must be satisfactory to the Indemnified Person, acting reasonably; and
(e)
the Indemnifying Party may not compromise and settle or remedy, or cause a compromise and settlement or remedy, of a Third Party Claim without the prior written consent of the Indemnified Person, which consent may not be unreasonably withheld or delayed.
(2)
If
the
Indemnifying
Party
(i)
is
not
entitled
to
assume
the
investigation
and
defence
of
a
Third
Party
Claim
under
Section
8.7(4)
of the Agreement, (ii) does not elect to assume the investigation and defence of a Third Party Claim, or (iii) assumes the investigation and defence of a Third Party Claim but fails to diligently pursue such defence, or the Indemnified Person concludes that the Third Party Claim is not being defended to its satisfaction, acting reasonably, the Indemnified Person has the right (but not the obligation) to undertake the defence of the Third Party Claim. In the case where the Indemnifying Party fails to diligently pursue the defence of the Third Party Claim or the Indemnified Person concludes that the Third Party Claim is not being defended to its satisfaction, acting reasonably, the Indemnified Person may not assume the defence of the Third Party Claim unless the Indemnified Person gives the Indemnifying Party written demand to diligently pursue the defence and the Indemnifying Party fails to do so within 14 days after receipt of the demand, or such
shorter period as may be required to respond to any deadline imposed by a court, arbitrator or other tribunal.
(3)
If, under Section 8.7(5) of the Agreement, the Indemnified Person undertakes the investigation and defence of a Third Party Claim, the Indemnified Person may compromise and settle the Third Party claim but the Indemnifying Party shall not be bound by any compromise or settlement of the Third Party Claim effected without its consent (which consent may not be unreasonably withheld or delayed).
(4)
The Indemnified Person and the Indemnifying Party agree to keep each other fully informed of the status of any Third Party Claim and any related proceedings and to use their reasonable efforts to minimize Damages with respect to any Third Party Claim. If the Indemnifying Party assumes the investigation and defence of a Third Party Claim, the Indemnified Person shall, at the request and expense of the Indemnifying Party, use its reasonable efforts to make available to the Indemnifying Party, on a timely basis, those employees whose assistance, testimony or presence is necessary to assist the Indemnifying Party in investigating and defending the Third Party Claim. The Indemnified Person shall, at the request and expense of the Indemnifying Party, make available to the Indemnifying Party, or its representatives, on a timely basis all documents, records and other materials in the possession, control or power of the Indemnified Person, reasonably required by the Indemnifying Party for its use solely in defending any Third Party Claim which it has elected to assume the investigation and defence of. The Indemnified Person shall cooperate on a timely basis with the Indemnifying Party in the defence of any Third Party Claim.
SCHEDULE “E”
FORM OF NON-COMPETITION AND CONFIDENTIALITY AGREEMENT
See attached.
FORM OF NON-COMPETITION AGREEMENT
Non-competition agreement (the “
Agreement
”) dated [
·
], 2018 between Scythian Biosciences Corp. (the “
Vendor
”), [
LATAM Holdings Inc.
] (the “
Corporation
”) and Aphria Inc. (the “
Purchaser
”).
RECITALS:
(a)
Pursuant to a share purchase agreement (the “
Purchase Agreement
”) dated as of July
17,
2018 between the Purchaser and the Vendor, the Vendor has agreed to sell, assign and transfer to the Purchaser and the Purchaser has agreed to purchase from the Vendor on the Closing Date, all (but not less than all) of the issued and outstanding shares of the Corporation.
(b)
The Corporation is or will be immediately prior to the closing of the transactions contemplated by the Purchase Agreement the direct or indirect owner of the Target Corporations (as defined herein).
(c)
The Vendor acknowledges that the Purchaser and its affiliates, including the Corporation upon closing of the transactions contemplated in the Purchase Agreement, expend and will continue to expend substantial time, money, effort and resources to develop its goodwill, customers, vendors, business sources and relationships in connection with its operation of the Business going forward and, as such, have a legitimate business interest in protecting same; and
(d)
It is a condition of the closing of the transactions contemplated by the Purchase Agreement that the Vendor executes and delivers this Agreement, and the covenants and agreements set forth in this Agreement were a material and integral inducement to the Purchaser to enter into the Purchase Agreement and to perform its obligations thereunder, and but for the execution and delivery of this Agreement by the Vendor, the Purchaser would not have entered into the Purchase Agreement and completed the transactions contemplated therein.
In consideration of the above and for other good and valuable consideration, the parties agree as follows:
Section 1
Defined Terms.
As used in this Agreement, the following terms have the following meanings:
“
Business
” means: (i) the business of operating pharmacy services and the distribution of pharmaceutical products in Argentina, including, without limiting the foregoing, the licensed importation of medical cannabis products into Argentina for medical research purposes; (ii) the business of cultivating, developing and distributing medical cannabis products on a retail basis in Jamaica; and (iii) the
business of cultivating and developing medical cannabis products for Colombia and future export markets.
“
Business Day
” means any day of the year, other than a Saturday, Sunday or any day on which Canadian chartered banks are closed for business in Toronto, Ontario.
“
Customers
”
means all Persons who are at this date or were at any time during the two (2) year period prior to the date of this Agreement customers of the Corporation (or the Target Corporations) in respect of any part of the Business.
“
Indemnified Party
”
has the meaning specified in Section 9.
“
Interest
”
has the meaning specified in Section 8.
“
Notice
”
has the meaning specified in Section 14.
“
Parties
”
means the Vendor, the Purchaser, the Corporation and any other Person who becomes a party to this Agreement.
“
Person
” means an individual, partnership, limited partnership, limited liability partnership, corporation, limited liability company, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or governmental entity, and pronouns have a similarly extended meaning.
“
Prospective Customers
”
means all Persons canvassed or solicited at any time during the two (2) year period prior to the date of this Agreement in connection with the Business.
“
Target Corporations
”
means, collectively: (i) ABP S.A., a corporation existing under the laws of Argentina; (ii) Colcanna SAS, a corporation existing under the laws of Colombia; (iii) Marigold Jamaica Products Ltd., a corporation existing under the laws of Jamaica; (iv) Marigold Acquisitions Inc., a corporation existing under the laws of the Province of British Columbia; (v) MMJ Colombia Partners Inc., a corporation existing under the laws of Colombia; and (vi) MMJ International Investments Inc., a corporation existing under the laws of the Province of British Columbia.
“
Term
” has the meaning specified in Section 3.
“
Territory
”
means Colombia, Argentina and Jamaica, collectively.
Section 2
Interpretation.
Any reference in this Agreement to gender includes all genders. Words importing the singular number only include the plural and vice versa. The division of this Agreement into Sections and the insertion of headings are for convenient reference only and do not affect its interpretation and the expression “Section” and other subdivision followed by a number mean and refer to the specified Section or other subdivision of this Agreement. In
2
this Agreement the words “including”, “includes” and “include” mean “including (or includes or include) without limitation”.
Section 3
Term of Agreement.
The term of this Agreement starts on the date hereof and ends on the third anniversary of this Agreement (the “
Term
”). Section 9 of this Agreement survives the expiration or other termination of this Agreement.
Section 4
Non-Competition.
During the Term, the Vendor shall not, on its own behalf or on behalf of or in connection with any Person, directly or indirectly, in any capacity whatsoever including as an employer, employee, principal, agent, joint venturer, partner, shareholder or other equity holder, independent contractor, licensor, licensee, franchiser, franchisee, distributor, consultant, supplier or trustee or by and through any Person or otherwise carry on, be engaged in, have any financial or other interest in or be otherwise commercially involved in any endeavour, activity or business in all or any part of the Territory which is substantially the same as or is in competition with the Business. Notwithstanding the foregoing, the Vendor shall be permitted to: (i) supply and distribute, directly or indirectly, medical cannabis products developed or manufactured by Isodiol International Inc. (“
Isodiol
”), a company existing under the laws of the Province of British Columbia, in the Territory in accordance with the terms and conditions of an existing license agreement between the Vendor and Isodiol; and (ii) maintain or increase its security holdings in Isodiol up to a maximum of 3% of the issued and outstanding common shares of Isodiol, on a partially diluted basis, provided that the Vendor holds such interest only as a passive investor.
Section 5
Non-Solicitation of Customers.
(1)
During the Term, the Vendor shall not, on its own behalf or on behalf of or in connection with any other Person, directly or indirectly, in any capacity whatsoever including as an employer, employee, principal, agent, joint venturer, partner, shareholder or other equity holder, independent contractor, licensor, licensee, franchiser, franchisee, distributor, consultant, supplier or trustee or by or through any Person or otherwise:
(a)
canvass or solicit the business of, or procure or assist the canvassing or soliciting of the business of, any Customer or Prospective Customer;
(b)
accept, or procure or assist the acceptance of, any business from any Customer or Prospective Customer; or
(c)
supply, or procure or assist the supply of, any goods or services to any Customer or Prospective Customer.
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Section 6
Non-Solicitation of Employees
(1)
During the Term, the Vendor shall not, on its own behalf or on behalf of or in connection with any other Person, directly or indirectly, in any capacity whatsoever including as an employer, employee, principal, agent, joint venturer, partner, shareholder or other equity holder, independent contractor, licensor, licensee, franchiser, franchisee, distributor, consultant, supplier or trustee or by and through any Person or otherwise:
(a)
employ, offer employment to or solicit the employment or engagement of or otherwise entice away from the employment of the Corporation, the Target Corporations or the Purchaser any individual who is employed by the Corporation, the Target Corporations or the Purchaser whether or not such individual would commit any breach of his contract or terms of employment by leaving the employ of the Corporation, the Target Corporations or the Purchaser, in the Territory;
(b)
employ, offer employment to or solicit the employment or engagement of any individual who has resigned from the Corporation, the Target Corporations or the Purchaser within three months prior to such employment, offer of employment, solicitation or engagement, in the Territory; or
(c)
procure or assist any Person to employ, offer employment or solicit the employment or engagement of or otherwise entice away from the employment of the Corporation, the Target Corporations or the Purchaser any such individual, in the Territory.
Section 7
Non-interference.
The Vendor shall not on its own behalf or on behalf of or in connection with any other Person, directly or indirectly, in any capacity whatsoever including as an employer, employee, principal, agent, joint venturer, partner, shareholder or other equity holder, independent contractor, licensor, licensee, franchiser, franchisee, distributor, consultant, supplier or trustee or by and through any Person or otherwise, interfere or attempt to interfere with the Business or persuade or attempt to persuade any Customer, Prospective Customer, employee or supplier of the Corporation, the Target Corporations or the Purchaser to discontinue or alter such Person’s relationship with the Corporation, the Target Corporations or the Purchaser.
Section 8
Portfolio Exception.
The Vendor is not in default under this Agreement by virtue of holding (i) securities (regardless of percentage) in the Purchaser or (ii) not more than three percent (3%) (including securities held by any Persons acting jointly or in concert with the Vendor) of the issued and outstanding securities of a Person (the
“
Interest”
), the securities of which are listed on a recognized stock exchange and with which Person the Vendor has no connection
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whatsoever other than the Interest, provided that the Vendor holds such Interest as a passive investor.
Section 9
Indemnification.
The Vendor shall indemnify and save each of the Corporation and the Purchaser and their respective shareholders, directors, officers, employees, agents and representatives (each, an “
Indemnified Party
”) harmless of and from and will pay for any claim, demand, action, cause of action, judgment, loss, liability, damage (including incidental and consequential damage) or expense suffered by, imposed upon or asserted against the Indemnified Party as a result of, in connection with or arising out of any violation, contravention or breach of this Agreement by the Vendor.
Section 10
Reasonableness.
The Vendor expressly acknowledges that this Agreement is reasonable and valid in all respects and irrevocably waives (and irrevocably agrees not to raise) as a defence any issue of reasonableness (including the reasonableness of the Territory or the duration and scope of this Agreement) in any proceeding to enforce any provision of this Agreement, the intention of the Parties being to provide for the legitimate and reasonable protection of the interests of the Purchaser and the Corporation by providing, without limitation, for the broadest scope, the longest duration and the widest territory allowable by law.
Section 11
Enforcement of Covenants.
The Vendor shall, at its own expense, take all lawful actions, including legal proceedings, to prevent or stop any violation, contravention or breach of this Agreement. In the absence of such action by the Vendor, the Purchaser may take such action in its own name or otherwise at the expense of the Vendor.
Section 12
Notification.
The Vendor shall immediately notify the Purchaser of any violation, contravention or breach of this Agreement as soon as it becomes aware of any such event.
Section 13
Equitable Remedies.
In the event of a violation, contravention, breach or threatened breach of this Agreement by the Vendor, the Purchaser and the Corporation are entitled to both temporary and permanent injunctive relief. The right of the Purchaser and the Corporation to injunctive relief is in addition to any and all other remedies available to them and will not prevent either of them from pursuing, either consecutively or concurrently, any and all other legal or equitable remedies available to them including the recovery of monetary damages.
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Section 14
Notices.
Any notice, direction or other communication given pursuant to this Agreement (each a “
Notice
”) must be in writing, sent by personal delivery, courier or facsimile and addressed :
(i)
to the Purchaser at:
103-245 Talbot Street West
Leamington, Ontario
N8H 1N8
Attention:
Chief Financial Officer
Email:
carlm@aphria.com
with a copy to:
Christelle Gedeon
Chief Legal Officer, Aphria Inc.
Christelle.gedeon@aphria.com
(ii)
to the Vendor at:
100 King Street West
Suite 5600
Toronto, Ontario
M5X 1C9
Attention:
Chief Executive Officer
Email:
rreid@scythianbio.com
with a copy to:
Gowling WLG (Canada) LLP
Suite 1600, 1 First Canadian Place
100 King Street West
Toronto ON M5X 1G5
Attention:
Peter Simeon
E-mail:
peter.simeon@gowlingwlg.com
A Notice is deemed to be given and received (i) if sent by personal delivery or courier, on the date of delivery if it is a Business Day and the delivery was made prior to 4:00 p.m. (local time in place of receipt) and otherwise on the next Business Day, or (ii) if sent by facsimile, on the Business Day following the date of confirmation of transmission by the originating facsimile. A Party may change its address for service from time to time by providing a Notice in accordance with the foregoing. Any subsequent Notice must be sent
6
to the Party at its changed address. Any element of a Party’s address that is not specifically changed in a Notice will be assumed not to be changed.
Section 15
Miscellaneous.
(1)
Time.
Time is of the essence in this Agreement.
(2)
Third Parties.
Except as provided in Section 9, each Party to this Agreement intends that this Agreement will not benefit or create any right or cause of action in favour of, or on behalf of, any Person, other than the Parties to it, and no Person, other than the Parties to this Agreement, is entitled to rely on the provisions of this Agreement in any action, suit, proceeding, hearing or other forum.
(3)
Amendment.
This Agreement may only be amended, supplemented or otherwise modified by written agreement signed by all of the Parties.
(4)
Waiver.
No waiver of any of the provisions of this Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the Party to be bound by the waiver. A Party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a Party from any other or further exercise of that right or the exercise of any other right it may have.
(5)
Non-Merger.
Except as otherwise expressly provided in this Agreement, the covenants, representations and warranties will not merge upon and will survive the closing of the transaction contemplated under the Purchase Agreement and, notwithstanding such closing, or any investigation made by or on behalf of any Party, continue in full force and effect. Such closing will not prejudice any right of one Party against any other Party in respect of anything done or omitted under this Agreement or in respect of any right to damages or other remedies.
(6)
Entire Agreement.
This Agreement constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties in such connection. There are no representations, warranties, conditions or other agreements, express or implied, statutory or otherwise, between the Parties in connection with the subject-matter of this Agreement except as specifically set out in this Agreement.
(7)
Successors and Assigns.
This Agreement becomes effective when executed by all of the Parties. After that time, it will be binding upon and enure to the benefit of the Parties and their respective heirs, executors, administrators and legal representatives, successors and permitted assigns. Neither this Agreement nor any of the rights or obligations under this Agreement, including any right to payment, may be assigned or transferred, in whole or in part, by any Party without the prior written consent of the other Parties.
7
(8)
Severance.
If any provision of this Agreement is determined to be illegal, invalid or unenforceable, by an arbitrator or any court of competent jurisdiction from which no appeal exists or is taken, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect. The intention of the Parties is to provide for the legitimate and reasonable protection of the interests of the Purchaser and the Corporation by providing, without limitation, for the broadest scope, the longest duration and the widest territory allowable by law.
(9)
Governing Law.
This Agreement is governed by, and will be interpreted and construed in accordance with, the laws of the Province of Ontario and the federal laws of Canada applicable therein. Each Party irrevocably attorns and submits to the non-exclusive jurisdiction of the Ontario courts situated in the City of Toronto, and waives objection to the venue of any proceeding in such court or that such court provides an inconvenient forum.
(10)
Counterparts.
This Agreement may be executed in any number of counterparts, each of which is deemed to be an original, and such counterparts together constitute one and the same instrument. Transmission of an executed signature page by facsimile, email or other electronic means is as effective as a manually executed counterpart of this Agreement.
[
Remainder of page intentionally left blank
.]
8
The Parties have executed this Agreement.
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SCYTHIAN BIOSCIENCES CORP.
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By:
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Authorized Signing Officer
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[
LATAM HOLDINGS INC.
]
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By:
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Authorized Signing Officer]
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APHRIA INC.
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By:
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Authorized Signing Officer
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Signature Page to Vendor Non-Competition Agreement
9
Exhibit 99.136
NOTICE OF MEETING
AND
MANAGEMENT INFORMATION CIRCULAR
FOR THE
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
to be held on November 2, 2018
September 24, 2018
APHRIA INC.
NOTICE OF ANNUAL AND SPECIAL SHAREHOLDER MEETING
NOTICE AND ACCESS
NOTICE IS HEREBY GIVEN that an annual and special meeting (the “
Meeting
”) of shareholders of Aphria Inc. (“
Aphria
” or the “
Company
”) will be held on Friday, November 2, 2018 at 2:00 p.m. (Eastern Daylight Time) at 199 Bay St., Suite 5300, Toronto, ON, M5L 1B9, Ontario for the following purposes:
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1.
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to receive the annual audited financial statements of the Company for the financial year ended May 31, 2018, together with the report of the auditor thereon;
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2.
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to elect directors of the Company to hold office until the close of the next annual meeting of the shareholders of the Company or until their successors shall be elected or appointed;
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3.
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to appoint the auditor of the Company, to hold office until the close of the next annual meeting of the shareholders of the Company or until a successor is appointed, and to authorize the directors of the Company to fix the remuneration of the auditor;
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4.
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to consider and, if thought fit, approve a new Omnibus Long-Term Incentive Plan for the Company;
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5.
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considering other business that may properly come before the Meeting or any adjournment thereof.
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As a shareholder of Aphria, it is very important that you read this material carefully and then vote your common shares, either by proxy or in person at the Meeting. The voting procedure is explained in detail in the accompanying management’s information circular in respect of the Meeting to be held on November 2, 2018 (the “
Circular
”).
This Notice of Meeting, and the Circular and the annual financial statements for the year ended May 31, 2018, along with the related management discussion and analysis (the “
Financial Statements and MD&A
”) have been posted on the Company’s website at https://aphria.com/investors/documents and on Aphria’s profile on www.SEDAR.com. In lieu of mailing the Notice of Meeting and Circular and our Financial Statements and MD&A, we are using the notice-and-access mechanism under National Instrument 54-101 —
Communications with Beneficial Owners of Securities of a Reporting Issuer
(“
NI 54-101
”) to provide access to an electronic copy of these documents to registered holders and beneficial owners of Aphria’s common shares by posting them on the websites noted above. Notice-and-access allows issuers to post electronic versions of proxy-related materials (such as proxy circulars and annual financial statements) on-line, via the System for Electronic Data Analysis and Retrieval (“
SEDAR
”) and one other website, rather than mailing paper copies of such materials to shareholders. Shareholders who have previously provided standing instructions will receive a paper copy of these documents.
Shareholders with questions about notice-and-access can call the Company’s transfer agent Computershare Investor Services Inc. (“
Computershare
”) toll free at 1-866-962-0498. Shareholders may also obtain paper copies of this Circular, the Financial Statements and MD&A free of charge by contacting Computershare at the same toll-free number or upon request to the Corporate Secretary of the Company. A request for paper copies which are required in advance of the Meeting should be sent so that they are received by Computershare or the Company, as applicable, by Friday October 25, 2018, in order to allow sufficient time for Shareholders to receive their paper copies and to return a) their form of proxy to Computershare or the Company, or b) their voting instruction form to their intermediaries by its due date.
The record date for determining the shareholders entitled to receive notice of and vote at the Meeting, is the close of business (5:00 p.m. (EDT) on September 19, 2018 (the “
Record Date
”). Only shareholders whose names have been entered in the register of Aphria shareholders as of close of business on the Record Date are entitled to receive notice of and vote at the Meeting.
Registered shareholders may attend the Meeting in person or may be represented by proxy. Shareholders who are unable to attend the Meeting, or any adjournment or postponement thereof, in person are requested to date, sign
and return the accompanying form of proxy for use at the Meeting or any adjournment or postponement thereof. To be effective, the form of proxy must be received by Aphria’s transfer agent Computershare Investor Services Inc. at its offices at 100 University Avenue, 8
th
Floor, North Tower, Toronto, ON, M5J 2Y1 (according to the instructions on the proxy), not less than forty-eight (48) hours (other than a Saturday, Sunday or holiday) immediately preceding the date of the Meeting (as it may be adjourned or postponed from time to time).
If you are a nonregistered holder of common shares and have received these materials through your broker or through another intermediary, please follow the instructions set out in the voting instruction form or other instructions received from the financial intermediary to ensure that your common shares will be voted at the Meeting.
Dated this 24
th
day of September 2018.
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BY ORDER OF THE BOARD OF DIRECTORS
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“Vic Neufeld”
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Vic Neufeld
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Chief Executive Officer and Chair of the Board of Directors
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TABLE OF CONTENTS
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MANAGEMENT INFORMATION CIRCULAR
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2
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PROXY RELATED MATTERS
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2
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NON-IFRS MEASURES
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5
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
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5
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BUSINESS OF THE MEETING
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Election of Directors
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Appointment of Auditors
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Approval of Omnibus Incentive Plan
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DIRECTOR NOMINEES
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15
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COMPENSATION DISCUSSION AND ANALYSIS
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26
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Executive Compensation Components
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29
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Option Based Awards and Share Based Awards
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37
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Employment Agreements, Termination and Change of Control Benefits
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41
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Compensation of Directors
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Securities Authorized for Issuance
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48
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STATEMENT OF CORPORATE GOVERNANCE PRACTICES
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48
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ADDITIONAL INFORMATION
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55
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APPROVAL
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Exhibit “A”
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A-1
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Exhibit “B”
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B-1
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Exhibit “C”
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C-1
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1
MANAGEMENT INFORMATION CIRCULAR
In this document, “
you
” and “
your
” refer to the shareholder. “
We
”, “
us
”, “
our
”, the “
Company
” and “
Aphria
” refer to Aphria Inc. The information in this document is presented on September
24
, 2018, unless otherwise indicated.
This management information circular (this “
Circular
”) is for the annual and special meeting (the “
Meeting
”) of shareholders of Aphria (“
Shareholders
”) to be held on Friday, November 2, 2018 at 2:00 pm (Eastern Daylight Time) at 199 Bay St., Suite 5300 Toronto, Ontario. Provided you are a Shareholder as of the Record Date (defined below) you have the right to vote the common shares of the Company (the “
Common Shares
”) for the approval of the Company’s Annual Consolidated Financial Statements, appointment of auditors, election of directors, the approval of an Omnibus Long-Term Incentive Plan of Aphria, and any other items that may properly come before the Meeting or any adjournment of the Meeting.
To help you make an informed decision, please read this Circular and our financial statement and Management’s Discussion & Analysis for the year ended May 31, 2018. This Circular gives you valuable information about the Company and the matters to be dealt with at the Meeting. Financial information is provided in our comparative annual financial statements and related management discussions and analysis for the financial year ended May 31, 2018. All currency amounts referred to in this Circular are expressed in Canadian dollars, unless stated otherwise.
Record date and quorum
The record date for determining the shareholders entitled to receive notice of and vote at the Meeting is the close of business (5:00 p.m. (EDT) on September 19, 2018 (the “
Record Date
”). If you held Common Shares as of the close of business on the Record Date, you have the right to cast one vote per Common Share on any resolution to be voted upon at the Meeting.
Pursuant to the by-laws of Aphria, subject to the OBCA in respect of a majority shareholder, a quorum for the transaction of business at any meeting of Shareholders is two persons present in person or representing by proxy, at least 10% of the issued and outstanding Common Shares entitled to vote at the Meeting.
PROXY RELATED MATTERS
Solicitation of proxies
This Circular is provided in connection with the solicitation of proxies by the management of Aphria for use at the Meeting for the purposes set forth in the accompanying Notice of Meeting and the associated costs will be borne by the Company. The solicitation of proxies will be conducted primarily by mail. However, directors, officers and regular employees of Aphria may also solicit proxies by telephone, facsimile, e-mail or in person without special compensation.
Appointment of proxies
Shareholders who are unable to attend the Meeting and vote in person may still vote by appointing a proxyholder. The enclosed form of proxy names Vic Neufeld, Chief Executive Officer of the Company and Cole Cacciavillani, Co-Founder and Vice-President — Growing Operations of the Company.
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A Shareholder has the right to appoint a person or company (who need not be a Shareholder) other than the persons designated in the form of proxy provided by Aphria to represent the Shareholder at the Meeting. To exercise this right, the Shareholder should strike out the names of management designees in the enclosed form of proxy and insert the name of the desired representative in the blank space provided in the form of proxy or submit another appropriate form of proxy. Make sure that the person you appoint is aware that he or she has been appointed and attends the meeting. In order to be effective, Shareholders must send their proxy to Aphria’s registrar and transfer agent, Computershare Investor Services Inc. (“
Computershare
”) at its offices at 100 University Avenue, 8
th
Floor, Toronto, ON, M5J 2Y1 or by telephone at 1-866-732-8683 (according to the instructions on the proxy), not less than forty-eight (48) hours (excluding Saturdays, Sundays and holidays) before the time fixed for the Meeting, being Friday, November 2, 2018 (subject to any adjournment or postponement). The chair of the Meeting may waive this cut-off at his discretion without notice but proxies will not be accepted by the chair at the Meeting. The proxy shall be in writing and executed by the respective Shareholder or such Shareholder’s attorney authorized in writing, or if such Shareholder is a Company, under its corporate seal or by a duly authorized officer or attorney.
Revocation of Proxy
A Registered Shareholder who has submitted a proxy may revoke it at any time prior to the exercise thereof. If a Registered Shareholder who has given a proxy attends the meeting in person at which such proxy is to be voted, such person may revoke the proxy and vote in person. In addition to revocation in any other manner permitted by law, a proxy may be revoked by instrument in writing executed by the Registered Shareholder or his attorney authorized in writing or, if the Registered Shareholder is a Company, under its corporate seal or by an officer or attorney thereof duly authorized and deposited either at the head office of the Company at any time up to and including the last business day preceding the day of the meeting, or any adjournment thereof, at which the proxy is to be used, or with the Chairman of the meeting on the day of the meeting, or any adjournment thereof, and upon either of such deposits, the proxy is revoked.
If you are a beneficial Shareholder, please contact your intermediary for instructions on how to revoke your voting instructions.
Persons making the Solicitation
The solicitation is made on behalf of management of the Company. The costs incurred in the preparation and mailing of the proxy-related materials for the meeting will be borne by the Company. In addition to solicitation by mail, proxies may be solicited by personal interviews, telephone or other means of communication and by officers and employees of the Company, who will not be specifically remunerated therefor.
Voting of Proxies
The Common Shares represented by an effective proxy will be voted or withheld from voting in accordance with the instructions specified therein on any ballot that may be called.
Where no choice is specified, the Common Shares will be voted in favour of the matters set forth therein.
The enclosed form of proxy confers discretionary authority in respect of amendments or variations to matters identified in the Notice of Meeting and with respect to other matters which may properly come before the Meeting, or any adjournment or postponement thereof. As at the date of this Circular, management is not aware of any amendments, variations, or other matters which may be brought before the Meeting. If such
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should occur, the persons designated by management will vote in accordance with their best judgment, exercising discretionary authority.
Advice to Nonregistered Shareholders
You are a “
nonregistered shareholder
” if your shares are registered in the name of a nominee, such as a brokerage firm, through which you purchased the shares; a bank, trust company, trustee or administrator of self-administered RRSP’s, RRIF’s, RESP’s and similar plans. In Canada, the vast majority of such shares held by nonregistered shareholders are registered under the name of CDS & Co., the registration name for The Canadian Depository for Securities Inc., which company acts as a nominee of many Canadian brokerage firms. Shares held by brokers or their nominees can only be voted for or against resolutions upon the instructions of the nonregistered shareholder. Without specific instructions, brokers/nominees are prohibited from voting shares for their clients. The directors and officers of Aphria do not know for whose benefit the Common Shares registered in the name of CDS & Co. are held.
Applicable regulatory policy requires intermediaries/brokers to seek voting instructions from nonregistered shareholders in advance of shareholders’ meetings. Every intermediary/broker has its own mailing procedures and provides its own return instructions, which should be carefully followed by nonregistered shareholders in order to ensure that their shares are voted at the Meeting. Often the form of proxy supplied to a nonregistered shareholder by its broker is identical to the form of proxy provided by Aphria to the registered shareholders. However, its purpose is limited to instructing the registered shareholder how to vote on behalf of the nonregistered shareholder. Many brokers delegate responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. (“
Broadridge
”). Broadridge will mail the voting instruction forms or proxy forms to the nonregistered shareholders and asks the nonregistered shareholders to return the proxy of voting instruction forms to Broadridge. Broadridge then tabulates the results of all instructions received and provides appropriate instructions respecting the voting of shares to be represented at the Meeting. A nonregistered shareholder receiving a proxy or voting instruction form from Broadridge cannot use that proxy to vote shares directly at the Meeting - the proxy must be returned to Broadridge well in advance of the Meeting in order to have the shares voted.
If you are a nonregistered shareholder and wish to vote in person at the Meeting, please contact your broker or agent well in advance of the Meeting to determine how you can do so.
Notice and Access
The use of the Notice-and-Access Provisions reduces paper waste and mailing costs to the Company. In order for the Company to utilize the Notice-and-Access Provisions to deliver proxy-related materials by posting the Circular electronically on a website that is not SEDAR, the Company must send a notice to shareholders, including nonregistered shareholders, indicating that the Circular has been posted and explaining how a shareholder can access it or obtain a paper copy of the Circular from the Company. This Circular has been posted in full on the Company’s website at
https://aphria.ca/investors-3/documents-2/
and under the Company’s SEDAR profile at www.sedar.com.
The Company has determined that those registered and beneficial shareholders with existing instructions on their account to receive printed materials will receive a printed copy of the Circular together with the Notice of Meeting and form of proxy or voting instruction form.
4
The Company will deliver copies of the applicable proxy-related materials directly to registered shareholders and non-objecting beneficial owners, through the services of its registrar and transfer agent, Computershare Investor Services Inc. The Company does not intend to pay for the intermediaries to deliver these materials to objecting beneficial owners.
Any registered shareholder who wishes to receive a paper copy of the Circular must contact the Company’s transfer agent, Computershare Investor Services Inc., toll-free, within North America - 1-866-962-0498 or direct, from Outside of North America - (514) 982-8716 and entering your 15-digit control number as indicated on your Voting Instruction Form or Proxy. Any beneficial shareholder who wishes to receive a paper copy of the Circular must contact Broadridge, toll-free, within North America - 1-877-907-7643 or direct, from Outside of North America - (905) 507-5450 and entering your 16-digit control number as indicated on your Voting Instruction Form. In order to ensure that a paper copy of the Circular can be delivered to a requesting shareholder in time for such shareholder to review the Circular and return a proxy or voting instruction form prior to the deadline to receive proxies, it is strongly suggested that a shareholder ensure their request is received no later than October 25, 2018.
NON-IFRS MEASURES
In this Circular, reference is made to adjusted gross profit and EBITDA, neither of which are measures of financial performance under IFRS. The Company calculates gross profit before fair value adjustments and adjusted EBITDA as follows:
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS;
·
Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment of intangible assets, plus transaction costs, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (gain) from equity investee, minus deferred gain recognized, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on embedded derivatives, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
Further information on the Company’s reconciliation of these non-IFRS measures are included in its management’s discussion and analysis for the fiscal year ended May 31, 2018 available on SEDAR.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Company consists of an unlimited number of Common Shares. There were 233,776,032 Common Shares of the Company outstanding as of the Record Date, each share carrying the
5
right to one vote. Each shareholder of record at the close of business on the Record Date is entitled to vote at the Meeting the shares registered in his or her name on that date.
The Company is not aware of any persons who, to the knowledge of the directors or officers, directly or indirectly, had beneficial ownership or control over, as of the Record Date, more than 10% of the Common Shares.
BUSINESS OF THE MEETING
Receipt of financial statements and auditors report
The audited consolidated financial statements of the Aphria for the financial year ended May 31, 2018 and the report of the auditors thereon will be placed before the Meeting. Approval of the Shareholders is not required in relation to the financial statements.
Election of directors
The articles of the Company provide that the board of directors (the “
Board
”) shall consist of a minimum of 3 directors and a maximum of 15, with the actual number to be determined from time to time by the Board. The Board has determined that, at the present time, the number of directors seated on the Board shall be increased from 7 directors to 9 directors.
Directors appointed at the Meeting will serve, subject to the by-laws of the Company and applicable corporate law, until the end of the next annual shareholder meeting or until their successor is elected or appointed, unless their office is earlier vacated. Phillip Waddington has chosen not to stand as a director of the Board and Shlomo Bibas, Tom Looney and Michael Serruya are new nominees in fiscal 2019.
The Board recommends that Shareholders vote
FOR
the election of the nominees whose names are set forth below.
If you do not specify how you want your shares voted, the directors named as proxyholders in the enclosed proxy form intend to cast the votes represented by proxy at the Meeting FOR the election as directors of the nominee directors in this circular.
Management does not anticipate that any of the nominees for election as a director will be unable to serve as a director, but if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy reserve the right to vote for another nominee in their discretion.
This Circular sets forth certain information regarding the nominees, including a brief biography, their position with the Company, their principal occupation or employment during the last five years, date first elected or appointed as a director of the Company, Board and Committee attendance, Board compensation for the previous fiscal year, the number of Common Shares and other Aphria securities beneficially owned, controlled or directed, indirectly or directly by each nominee, the total value of the securities as at the Company’s year-end date and whether or not they met the requirements of the Company’s minimum stock ownership guidelines. See “
Director Nominees
”.
If, for any reason, any of the proposed nominees does not stand for election or is unable to serve as such, the management designees named in the form of proxy reserve the right to vote for any other nominee in their sole discretion unless the shareholder has specified therein that its Common Shares are to be withheld from voting on the election of directors.
6
As part of its ongoing review of corporate governance practices and in accordance with the provisions of the TSX Company Manual (the “
Manual
”), the Board has adopted a majority voting policy providing that in an uncontested election of directors, any nominee who receives a greater number of votes ‘‘withheld’’ than votes ‘‘for’’ shall tender his or her resignation to the Chair of the Board promptly following the Shareholders’ meeting. The Compensation, Nominating and Governance Committee (the “
CNG Committee
”) will consider the offer of resignation and will make a recommendation to the Board on whether to accept such offer. In considering whether or not to accept the resignation, the CNG Committee will consider all factors deemed relevant by the members of the CNG Committee. The CNG Committee will be expected to recommend acceptance of the resignation except in situations where “exceptional circumstances” (as provided in the TSX Company Manual and issued by the Toronto Stock Exchange (the “
TSX
”)) would warrant the applicable director continuing to serve on the Board. The Board will make the final decision as to whether or not to accept the recommendation and announce it in a press release, a copy of which shall be concurrently delivered to the TSX, within ninety (90) days following the date of the Shareholders’ meeting. Should the Board decline to accept the resignation, such press release will state the reasons for the Board’s decision. The resignation of a director will be effective when accepted by the Board. A director who tenders his or her resignation pursuant to this policy will not participate in any meeting of the Board or the CNG Committee at which his or her resignation is considered.
Notwithstanding a director’s election at the Meeting, the election of any director is subject to regulatory approval. Any director that does not obtain the necessary regulatory approval shall tender his or her resignation to the Chair of the Board.
The Board unanimously recommends that the shareholders vote
FOR
the election of each of the director nominees and unless instructed otherwise, the persons named in the form of proxy will vote FOR the election of each of the director nominees.
Each nominee has confirmed his or her eligibility and willingness to serve as a Director if elected and, in the opinion of the Board and management of Aphria, the proposed nominees are qualified to act as directors of the Company.
Appointing auditors
The Board, on the advice of the audit committee, recommends that the Shareholders vote FOR PricewaterhouseCoopers LLP to be appointed as auditors of Aphria until the next annual meeting of Shareholders. PricewaterhouseCoopers LLP has been the auditors of Aphria since October 27, 2016.
The persons named in the enclosed form of proxy intend to cast the votes to which the shares represented by such proxy are entitled
FOR
the appointment of PricewaterhouseCoopers LLP as auditors of Aphria for the term expiring with the next annual meeting of Shareholders, and to authorize the Board to fix their remuneration.
Unless specifically instructed to vote against the approval of the auditors, the persons named in the form of proxy accompanying the Notice of Meeting intend to vote
FOR
the approval of the auditors. In order to be effected, this ordinary resolution must be approved by a majority of the votes cast in respect thereof.
The following table sets forth, by category, the fees for all services rendered by PricewaterhouseCoopers LLP for the financial year ended May 31, 2017 and May 31, 2018, are as set out below (including estimates).
7
|
|
|
May 2017
|
|
May 2018
|
|
|
Audit Fees
(1)
|
|
$
|
99,000
|
|
$
|
285,000
|
|
|
Audit Related Fees
(2)
|
|
$
|
61,200
|
|
$
|
179,872
|
|
|
Tax Fees
(3)
|
|
—
|
|
—
|
|
|
All Other Fees
|
|
$
|
107,500
|
|
$
|
464,872
|
|
Notes:
(1)
Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
(2)
Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.
(3)
Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
Approval of an Omnibus Incentive Plan
At the Meeting, Shareholders will be asked to consider and if thought fit, approve a resolution in the form attached as Exhibit “A” hereto, approving a new Omnibus Long-Term Incentive Plan (the “
Omnibus Incentive Plan
”). A copy of the Omnibus Incentive Plan is attached hereto as Schedule “A-1” to Exhibit “A”. Capitalized terms used herein in this section and not otherwise defined shall have the meanings given to them in the Omnibus Incentive Plan.
Omnibus Incentive Plan
Under the Omnibus Incentive Plan, directors, officers, employees of the Company and/or its affiliates (“
Aphria Personnel
”) are eligible to receive a variety of equity-based awards that provide different types of incentives. The Omnibus Incentive Plan will facilitate granting of common share purchase options (“
Options
”), restricted share units (“
RSUs
”) and deferred share units (“
DSUs
” and collectively with the Options and RSUs, the “
Awards
”), representing the right to receive one Common Share in accordance with the terms of the Omnibus Incentive Plan. The following discussion is qualified in its entirety by the text of the Omnibus Incentive Plan.
The Omnibus Incentive Plan is considered an “evergreen” plan, since the Common Shares covered by grants which have been exercised shall be available for subsequent grants under the Omnibus Incentive Plan and the number of Common Shares available to grant increases as the number of issued and outstanding Common Shares increases.
The Company’s existing compensation program (prior to giving effect to the adoption of the Omnibus Incentive Plan) provided for total compensation for Aphria Personnel in various roles that comprised of base salary (fixed cash amount), short-term performance incentives (variable cash award) and long-term equity-based incentives (stock options and deferred share units). The ability to issue restricted share units (including performance-based restricted share units) is the primary differentiating factor between the two compensation programs.
Under the Omnibus Incentive Plan, the maximum number of shares issuable from treasury pursuant to Awards shall not exceed 10% of the total outstanding Common Shares from time to time less the number of Common Shares issuable pursuant to all other security-based compensation arrangements of
8
the Company (consisting of (i) the existing Amended and Restated Stock Option Plan (the “
Existing Option Plan
”) and the existing Amended and Restated DSU Plan (the “
Existing DSU Plan
”), each approved at the Company’s annual general meeting in 2017); and (ii) legacy options issuable in connection with Company’s acquisition of Nuuvera Inc. (“
Nuuvera
”) in March of this year)).
The number of Common Shares issuable to insiders, at any time, under all security-based compensation arrangements of the Company, may not exceed 10% of the Company’s issued and outstanding shares; and the number of Common Shares issued to insiders within any one-year period, under all security based compensation arrangements of the Company, may not exceed 10% of the Company’s issued and outstanding Common Shares.
“
Eligible Directors
” (defined as any Board member who, at the time of execution of a grant agreement, and at all times thereafter while they continue to serve as a member of the Board, are not officers, senior executives or other employees of the Company or consultants or service providers providing ongoing services to the Company and its affiliates) shall not be entitled to any grant or issuance of Options pursuant to the Omnibus Incentive Plan. No more than one percent (1%) of the total issued and outstanding Common Shares (on a non-diluted basis) from time to time, shall be reserved and available for grant and issuance pursuant to Awards to the Eligible Directors. The aggregate equity value of all Awards that are eligible to be settled in Common Shares granted to an Eligible Director, within a one-year period, pursuant to all security-based compensation arrangements of the Company shall not exceed $150,000.
The Compensation, Nomination and Governance Committee may provide the circumstances in which Awards shall be exercised, vested, paid or forfeited in the event a participant ceases to provide service to the Company or any affiliate prior to the end of a performance period or exercise or settlement of such Award.
The Omnibus Incentive Plan will provide that appropriate adjustments, if any, will be made by the Board in connection with a reclassification, reorganization or other change of Common Shares, consolidation, distribution, merger or amalgamation, in the Common Shares issuable or amounts payable to preclude a dilution or enlargement of the benefits under the Omnibus Incentive Plan.
In connection with a change of control of the Company, the Board will take such steps as are reasonably necessary or desirable to cause the conversion or exchange or replacement of outstanding Awards into, or for, rights or other securities of substantially equivalent (or greater) value in the continuing entity. The Board may, in its sole discretion, change the Performance Criteria (as defined in the Omnibus Incentive Plan) or accelerate the vesting and/or the expiry date of any or all outstanding Awards to provide that, notwithstanding the Performance Criteria and/or vesting provisions of such Awards, such designated outstanding Awards shall be fully performed and/or vested and conditionally exercisable upon (or prior to) the completion of the change of control provided that the Board shall not, in any case, authorize the exercise of Awards beyond the expiry date of the Awards.
The following table describes the impact of certain events upon the rights of holders of Awards under the Omnibus Incentive Plan, including termination for cause, termination other than for cause and death, subject to the terms of a Participant’s employment agreement:
9
|
Event
|
|
Provisions
|
|
Termination for cause
|
|
Immediate forfeiture of all vested and unvested Awards.
|
|
Resignation
|
|
Forfeiture of all unvested Awards and the earlier of the original expiry date and 90 days after resignation to exercise vested Awards or such longer period as the Board may determine in its sole discretion.
|
|
Termination other than for cause
|
|
Subject to the terms of the grant or as determined by the Board, upon a participant’s termination without cause the number of Awards that may vest is subject to pro-ration over the applicable performance or vesting period.
|
|
Retirement
|
|
Upon the retirement of a participant’s employment with the Company, any unvested Awards held by the participant as at the termination date will continue to vest in accordance with its vesting schedule, and all vested Awards held by the participant at the termination date may be exercised until the earlier of the expiry date of the Awards or three years following the termination date, provided that if the participant breaches any post-employment restrictive covenants in favour of the Company (including non-competition or non-solicitation covenants), then any Awards held by such participant, whether vested or unvested, will immediately expire and the participant shall pay to the Company any “in-the-money” amounts realized upon exercise of Awards following the termination date.
|
|
Death
|
|
All unvested Awards will vest and may be exercised within 180 days after death.
|
The Board may amend the Omnibus Incentive Plan or any Award at any time without the consent of a Participant provided that such amendment shall (i) not adversely alter or impair any Award previously granted except as permitted by the terms of the Omnibus Incentive Plan, (ii) be in compliance with applicable law and subject to any regulatory approvals including, where required, the approval of the TSX, and (iii) be subject to shareholder approval, where required by law, the requirements of the TSX or the Omnibus Incentive Plan, provided however that shareholder approval shall not be required for the following amendments and the Board may make any changes which may include but are not limited to: (i) amendments of a general housekeeping or clerical nature that, among others, clarify, correct or rectify any ambiguity, defective provision, error or omission in the Omnibus Incentive Plan; (ii) changes that alter, extend or accelerate the terms of vesting or settlement applicable to any Award; and (iii) a change to the Eligible Participants under the Omnibus Incentive Plan.
As described further in the Omnibus Incentive Plan, the Board shall be required to obtain shareholder approval to make the following amendments:
(a)
any change to the maximum number of Common Shares issuable from treasury under the Plan,
(b)
any amendment which reduces the exercise price of any Award, as applicable, after such Awards have been granted or any cancellation of an Award and the substitution of that Award by a new Award with a reduced price;
(c)
any amendment which extends the expiry date of any Award, or the restriction period of any RSU beyond the original expiry date;
10
(d)
any amendment which would have the potential of broadening or increasing participation by insiders;
(e)
any amendment which would permit any Award granted under the Plan to be transferable or assignable by any Participant other than as expressly permitted;
(f)
any amendment which increases the maximum number of Shares that may be (i) issuable to insiders and associates of such insiders at any time; or (ii) issued to insiders and associates of such insiders and any other proposed or established share compensation arrangement in a one-year period; or
(g)
any amendment to the amendment provisions of the Omnibus Incentive Plan.
provided that Common Shares held directly or indirectly by insiders benefiting from the amendments in sections (b) and (c) above shall be excluded when obtaining such shareholder approval.
The Board may, subject to regulatory approval, discontinue the Omnibus Incentive Plan at any time without the consent of the Participants provided that such discontinuance shall not materially and adversely affect any Awards previously granted to a Participant under the Omnibus Incentive Plan.
The Board (or the designate committee of the Board) may, by resolution, but subject to applicable regulatory approvals, decide that any of the provisions of the Omnibus Incentive Plan concerning the effect of termination of the Participant’s employment shall not apply for any reason acceptable to the Board (or a committee thereof).
Subject to TSX approval and shareholder approval, the Omnibus Incentive Plan will replace the Company’s existing stock option plan (the “
Existing Option Plan
”), as well as the Company’s existing deferred share unit plan (the “
Existing DSU Plan
”) and will be supplemental to any cash-based incentive compensation arrangements. The Existing Option Plan and Existing DSU Plan will remain in effect but no further Awards will be issued thereunder.
It is a condition of each grant of an Award that if the Company’s financial statements (the “
Original Statements
”) are required to be restated (other than as a result of a change in accounting policy by the Company or under International Financial Reporting Standards applicable to the Company) within three years following which such Original Statements were received by shareholders at the Company’s then most recent annual general meeting of shareholders, and such restated financial statements (the “
Restated Statements
”) disclose, in the opinion of the Board, acting reasonably, materially worse financial results than those contained in the Original Statements, then the Board may, in its sole discretion, to the full extent permitted by governing law and to the extent it determines that such action is in the best interest of the Company, and in addition to any other rights that the Company may have, take any or all of the following actions, as applicable): (i) require the Participant to reimburse the Company for any amount paid to the Participant in respect of an Award in cash in excess of the amount that should otherwise have been paid in respect of such Award had the determination of such compensation been based upon the Restated Statements, less, in any event, the amount of taxes withheld in respect of the amount paid in cash in the year of payment; (ii) cancel and terminate any one or more unvested Awards on or prior to the applicable maturity or vesting dates, or cancel or terminate any outstanding Awards which have vested in the twelve (12) months prior to the date on which the Board determines that the Original Statements are required to be restated (a “
Relevant Equity Recoupment Date
”); and/or (iii) require payment to the Company of the value of any Common Shares of the Company acquired by the Participant pursuant to an Award granted in the twelve (12) months prior
11
to a Relevant Equity Recoupment Date (less any amount paid by the Participant) to acquire such Common Shares and less the amount of taxes withheld in respect of such Common Shares.
Except as set forth in the Omnibus Incentive Plan, Awards are not transferable. Awards may only be exercised: (a) by the Participant to whom the Awards were granted; (b) with the Company’s prior written approval and subject to such conditions as the Company may stipulate; (c) upon the Participant’s death, by the legal representative of the Participant’s estate; or (d) upon the Participant’s incapacity, the legal representative having authority to deal with the property of the Participant.
Options
The Board shall determine, at the time of granting the particular Option, the period during which the Option is exercisable, commencing on the date such Option is granted to the Participant and ending as specified in the Omnibus Incentive Plan or in the underlying option agreement, but in no event shall an Option expire on a date which is later than ten (10) years from the date the Option is granted. Unless otherwise determined by the Board, all unexercised Options shall be cancelled at the expiry of such Options. The exercise price for Common Shares that are the subject of any Option shall be fixed by the Board when such Option is granted, but shall not be less than the “Market Value” (as defined in the Omnibus Incentive Plan) of such Common Shares at the time of the grant.
An Option is an option granted by the Company to a Participant entitling such Participant to acquire, for each Option issued, one Common Share from treasury at the exercise price.
Should the expiration date for an Option fall within a “Black-Out Period” (as defined in the Omnibus Incentive Plan) or within nine (9) business days following the expiration of a Black-Out Period, such expiration date shall be automatically extended without any further act or formality to that date which is the tenth business day after the end of the Black-Out Period, such tenth business day to be considered the expiration date for such Option for all purposes under the Omnibus Incentive Plan. The ten (10) business day period may not be extended by the Board.
In order to facilitate the payment of the exercise price of the Options, the Omnibus Incentive Plan has a cashless exercise feature pursuant to which a Participant may elect to undertake either a broker assisted “cashless exercise” or a “net exercise” subject to the procedures set out in the Omnibus Incentive Plan, including the consent of the Board, where required.
In particular, a Participant may, by surrendering an Option (“
Surrender
”) with a properly endorsed notice of Surrender (a “
Surrender Notice
”), elect to receive that number of Common Shares calculated using the following formula:
X = Y * (A-B) / A
Where:
X =
the number of Common Shares to be issued to the Participant
Y =
the number of Common Shares underlying the Options to be Surrendered
A =
the Market Value (as defined in the Omnibus Incentive Plan) of the Shares as at the date of the Surrender
B =
the exercise price of such Options
12
DSUs
A DSU is an Award of phantom share units to an Eligible Director, subject to restrictions and conditions as the Board may determine at the time of grant. Each Eligible Director shall receive his or her annual retainer fee in the form of a grant of DSUs in each fiscal year. The number of DSUs shall be calculated as the Eligible Director’s annual retainer fee divided by the Market Value (as defined in the Omnibus Incentive Plan). At the discretion of the Board, fractional DSUs will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
Unless otherwise set forth in an underlying DSU Agreement, each DSU shall vest as to 50% on the sixth month anniversary of the date of grant and 50% on the anniversary of the date of grant. Subject to vesting and other conditions and provisions set forth in the Omnibus Incentive Plan and in an underlying DSU Agreement, each DSU awarded to an Eligible Director shall entitle the Eligible Director to redeem such DSU in exchange for one (1) Common Share issued from treasury.
Each Eligible Director shall be entitled to redeem his or her DSUs during the period commencing on the business day immediately following the date of termination (the “
Termination Date
”) and ending on the date that is two years following such termination date, or a shorter such redemption period set out in the relevant DSU Agreement, by providing a written notice of settlement to the Company setting out the number of DSUs to be settled and the particulars regarding the registration of the Common Shares issuable upon settlement (the “
DSU Redemption Notice
”).
If a DSU Redemption Notice is not received by the Company on or before the 90th day following the date of termination, the Eligible Director shall be deemed to have delivered a DSU Redemption Notice and the Company shall redeem all of the Eligible Director’s DSUs in exchange for Common Shares to be delivered to the Eligible Director, administrator or liquidator of the estate of the Eligible Director, as applicable.
Notwithstanding any other provision of the Omnibus Incentive Plan, in the event that (i) a DSU Redemption Notice is received during a Black-Out Period or other trading restriction imposed by the Company; or (ii) the Eligible Director has not delivered a DSU Redemption Notice and the 90th day following the Termination Date falls during a Black-Out Period or other trading restriction imposed by the Company, then settlement of the applicable DSUs shall be automatically extended to the tenth (10th) business day following the date that such Black-Out Period or other trading restriction is lifted, terminated or removed.
RSUs
An RSU is an Award entitling the recipient to acquire Common Shares, at such purchase price (which may be zero) as determined by the Board, subject to such restrictions and conditions as the Board may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives.
For each award of RSUs, the Board shall establish the period in which any “Performance Criteria” (as defined in the Omnibus Incentive Plan) and other vesting conditions must be met in order for a Participant to be entitled to receive Common Shares in exchange for all or a portion of the RSUs held by such Participant (the “
Performance Period
”), provided that such Performance Period may be no longer than three (3) years after the calendar year in which the Award was granted.
13
Unless otherwise set forth in an underlying RSU Agreement, each RSU shall vest as to 1/3 on each of the first, second and third anniversary of the date of grant. Subject to the vesting and other conditions and provisions set forth in the Omnibus Incentive Plan and in an underlying RSU Agreement, the Board shall determine whether each RSU awarded to a Participant shall entitle the Participant: (i) to receive one Common Share issued from treasury; (ii) to receive the “Cash Equivalent” of one Common Share; or (iii) to elect to receive either one Common Share from treasury, the Cash Equivalent of one Common Share or a combination of cash and Common Shares.
The vesting determination date means the date on which the Board determines if the Performance Criteria and/or other vesting conditions with respect to a RSU have been met (the “
RSU Vesting Determination Date
”), and as a result, establishes the number of RSUs that become vested, if any.
Except as otherwise provided in an underlying RSU Agreement, in the event that the vesting conditions, the Performance Criteria and Performance Period, if applicable, of an RSU are satisfied, all of the vested RSUs covered by a particular grant may, subject to the provisions for Black-Out Periods (described below), be settled at any time beginning on the first business day following their RSU Vesting Determination Date but no later than the date that is five (5) years from their RSU Vesting Determination Date (the “
RSU Settlement Date
”).
Settlement of RSUs shall take place promptly following the RSU Settlement Date and take the form set out in an RSU settlement notice through: (a) in the case of settlement of RSUs for their Cash Equivalent, delivery of a cheque to the Participant representing the Cash Equivalent; (b) in the case of settlement of RSUs for Common Shares, delivery of a share certificate to the Participant or the entry of the Participant’s name on the share register for the Common Shares; or (c) in the case of settlement of the RSUs for a combination of Common Shares and the Cash Equivalent, a combination of (a) and (b).
Notwithstanding any other provision of the Omnibus Incentive Plan, in the event that an RSU Settlement Date falls during a Black-Out Period or other trading restriction imposed by the Company and the Participant has not delivered an RSU settlement notice, then such RSU Settlement Date shall be automatically extended to the tenth (10th) business day following the date that such Black-Out Period or other trading restriction is lifted, terminated or removed.
The Omnibus Incentive Plan serves several purposes for the Company. One purpose is to develop the interests of Aphria Personnel in the growth and development of the Company by providing such persons with the opportunity to acquire a proprietary interest in the Company. All Aphria Personnel are considered eligible to be selected to receive an Award under the Omnibus Incentive Plan, other than Eligible Directors who may not receive an issuance or grant of Options. Another purpose is to attract and retain key talent and valuable Aphria Personnel, who are necessary to the Company’s success and reputation, with a competitive compensation mechanism.
As of May 31, 2018 (the last fiscal year end of the Company), there was an aggregate of 8,118,481 Options outstanding and unexercised under the Existing Option Plan; an aggregate of 168,460 DSUs outstanding under the Existing DSU Plan; and an aggregate of 837,714 legacy options issued in connection with the Company’s acquisition of Nuuvera.
If the Omnibus Incentive Plan is approved at the Meeting, an additional 11,892,337 shares will be reserved for issuance under the Omnibus Incentive Plan which, together with the shares underlying the
14
outstanding and unexercised options currently outstanding represents 10% of the total outstanding shares. The Omnibus Incentive Plan is administered by the Board or a committee of the Board. The Omnibus Incentive Plan must be renewed every three years according to the TSX rules.
Vote Required
At the Meeting, Shareholders of the Company will be asked to consider, and if thought fit, approve a motion to approve the Omnibus Incentive Plan. The resolution (the “
Omnibus Plan Resolution
”) which will be put forward to the Shareholders of the Company for approval at the Meeting is attached hereto as Exhibit “A”.
The Board recommends that Shareholders vote
FOR
the Omnibus Plan Resolution, as set out in Exhibit “A”.
Unless specifically instructed to vote against the Omnibus Plan Resolution, the persons named in the form of proxy accompanying the Notice of Meeting intend to vote
FOR
the approval of the Omnibus Plan. In order to be effected, this ordinary resolution must be approved by a majority of the votes cast in respect thereof.
Director Nominees
The following pages set out the director nominees, including a brief summary of their experience and qualifications together with their age, place of primary residence, principal occupation, year first elected or appointed as a Director, membership on Committees of the Board as at the Record Date, attendance at Board and Committee meetings during fiscal 2018, as well as past and current directorships of other public and private entities. Also indicated for each director nominee is the number of Common Shares and other securities beneficially owned, or controlled or directed, directly or indirectly, on the Record Date, and, as at such date, the value of such Common Shares.
The Board has determined that the following director nominees are independent within the meaning of National Instrument 52-110 Audit Committees (“
NI 52-110
”) Shawn Dym, Renah Persofsky, Tom Looney, John Herhalt, Shlomo Bibas and Michael Serruya. In addition, the Board has determined that the following director nominees are non-independent — Vic Neufeld, Cole Cacciavillani and John Cervini within the meaning of NI 52-110.
15
VIC NEUFELD
|
|
Chair of the Board and Chief Executive Officer (“CEO”) of Aphria
Age: 64
Lakeshore, Ontario
Director since 2014
Independent Director: NO
|
Mr. Neufeld is the Chief Executive Officer and Chair of the Board of Aphria Inc. Mr. Neufeld was formerly a Partner with Ernst & Young LLP, formerly the CEO of Jamieson Laboratories, Canada’s largest manufacturer and distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. He currently sits as the Chair of Enwin Utilities Ltd., a local energy provider and sits on the board of WFCU Credit Union.
Strategic qualifications:
·
20+ years as CEO of Canada’s largest neutraceutical player
·
20+ years building and develop brands
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
20 of 22
|
|
|
|
Annual General Meeting
|
|
1 of 1
|
|
|
|
Organizational Board Meeting
|
|
1 of 1
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
Liberty Health Sciences Ltd.
|
|
Enwin Utilities Ltd.
|
|
|
|
|
|
WFCU Credit Union
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
Common shares - 1,925,342
|
|
(1)
$ 37,120,594
|
|
|
|
DSUs — 67,000
|
|
1,291,760
|
|
|
|
|
|
Total - $ 38,412,354
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
96.0 x
|
|
TARGET MET
|
16
COLE CACCIAVILLANI
|
|
Co-Founder and Vice-President — Growing Operations
Age: 63
Leamington, Ontario
Director since 2014
Independent Director: NO
|
Mr. Cacciavillani, a Co-Founder, is Vice-President — Growing Operations and a director of Aphria Inc. Mr. Cacciavillani is an industrial engineer with 35 years of experience in the agricultural and greenhouse industry. Mr. Cacciavillani is the Secretary/Treasurer of Cacciavillani and F.M Farms Ltd. and the Chief Executive Officer of CF Industrial Inc. Mr. Cacciavillani is the Co-Chair of Fundraising for the Erie Shores Campus Hospice and he is a recipient of the Queen Elizabeth II Diamond Jubilee Medal.
Strategic qualifications:
·
35+ years experience in commercial agricultural space, specializing in greenhouses
·
Founding vision of Aphria
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
21 of 22
|
|
|
|
Annual General Meeting
|
|
1 of 1
|
|
|
|
Organizational Board Meeting
|
|
1 of 1
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
Erie Shores Campus Hospice
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
(3)
Common shares - 5,371,706
|
|
(1) $ 103,566,492
|
|
|
|
DSUs — 18,000
|
|
347,020
|
|
|
|
|
|
Total - $ 103,913,532
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
451.8 x
|
|
TARGET MET
|
17
JOHN CERVINI
|
|
Co-Founder and Vice- President — Infrastructure & Technology
Age: 48
Leamington, Ontario
Director since 2014
Independent Director: NO
|
Mr. Cervini, a Co-Founder, is Vice-President — Infrastructure & technology and a director of Aphria. Mr. Cervini is a fourth-generation greenhouse grower with hydroponic agricultural experience. Together with his father and brother, John helped established Lakeside Produce, one of North America’s leading sales and marketing companies selling fresh produce from Canada to multinational retailers throughout North America. John is a leading innovator in greenhouse growing technology and has also overseen greenhouse expansion to Carpentaria, California and Guadalajara, Mexico.
Strategic qualifications:
·
20+ years of commercial agricultural experience, specializing in greenhouse growing technology
·
Founding vision of Aphria
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
22 of 22
|
|
|
|
Annual General Meeting
|
|
1 of 1
|
|
|
|
Organizational Board Meeting
|
|
1 of 1
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
None
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
(4)
Common shares - 9,683,118
|
|
(1) $186,690,515
|
|
|
|
DSUs — 18,000
|
|
347,020
|
|
|
|
|
|
Total - $187,037,535
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
813.0 x
|
|
TARGET MET
|
18
RENAH PERSOFSKY
|
|
DIRECTOR
Age: 59
Toronto, ON
Director since: 2017
Independent Director: YES
|
Ms. Persofsky is a widely-respected entrepreneur, strategist, innovator and change agent with a distinguished track record of success in creating 27 start-up companies.
She has a rich history of investing in early stage companies where she helps mentor CEOs in the art of bringing MVP products to market, and growing their business exponentially. She serves as Board Chair for mobile on-demand senior care and child care start- up BookJane, advises award winning payment card and platform technology firm Dynamics Inc., and is a board member for retail/QSR automation software specialty firm MeazureUp Inc. She is presently an executive consultant in the Innovation Group at CIBC.
Strategic qualifications:
·
Strategic vision and entrepreneur expertise
·
Capital markets and Schedule 1 banking experience
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
18 of 20
|
|
|
|
Audit
|
|
5 of 5
|
|
|
|
Compensation, Nominating & Governance
|
|
5 of 5
|
|
|
|
Annual General Meeting
|
|
0 of 1
|
|
|
|
Organizational Board Meeting
|
|
0 fo 1
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
BookJAne
|
|
|
|
|
|
MeazureUP Inc.
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
Common shares - 7,662
|
|
$ 147,723
|
|
|
|
DSUs — 16,769
|
|
323,306
|
|
|
|
|
|
Total - $ 471,029
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
11.8x
|
|
TARGET MET
|
19
SHAWN DYM
|
|
DIRECTOR
Age: 38
Toronto, ON
Director since: 2017
Independent Director: YES
|
Mr. Dym is a managing director at York Plains Investment Corp. a private investment vehicle focused on maximizing absolute returns by investing in a wide array of asset classes, including successful cannabis related investments. He currently serves on the board of advisors for Green Acre Capital, Canada’s first private investment fund focused on the cannabis industry.
He has extensive experience managing companies with high growth both at York Plains and as an entrepreneur.
He currently serves on the board of directors at Wellpoint Health, Eddy Solutions and Minus Global Holdings. He graduated from York University and holds an MBA from Harvard Business School.
Strategic qualifications:
·
Extensive capital market expertise
·
Early cannabis investor with strong overview of the industry
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
19 of 20
|
|
|
|
Audit
|
|
5 of 5
|
|
|
|
Annual General Meeting
|
|
1 of 1
|
|
|
|
Organizational Board Meeting
|
|
1 of 1
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
Wellpoint Health
|
|
|
|
|
|
Eddy Solutions
|
|
|
|
|
|
Minus Global Holdings
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
DSUs — 16,769
|
|
$ 323,306
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
8.1 x
|
|
TARGET MET
|
20
JOHN M. HERHALT — NEW NOMINEE
|
|
New Nominee
Age: 61
Toronto, ON
Director since: N/A
Independent Director: YES
|
MR. Herhalt is a FCPA (FCA) and a retired partner from KPMG and has over 39 years of experience providing a wide variety of advisory and audit services to a range of clients. He has worked across several industry sectors including automotive manufacturing, consumer products, infrastructure, power and utilities and the public sector. During his time with KPMG, Mr. Herhalt served as Canada’s national advisory leader, national public sector leader, and KPMG International’s global head of infrastructure, government and health care sectors — providing subject matter advice and support to various KPMG member firms and their clients on a variety of projects in the Americas, Europe, Middle East and Asia. After retiring from KPMG LLP, he has continued to provide management consulting services on a part-time basis and serves as a director on several boards.
Strategic qualifications:
·
Significant financial literacy tied to Big Four experience
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
N/A
|
|
|
|
Audit
|
|
N/A
|
|
|
|
Compensation, Nominating & Governance
|
|
N/A
|
|
|
|
Annual General Meeting
|
|
N/A
|
|
|
|
Organizational Board Meeting
|
|
N/A
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
Fengate Infrastructure Fund (Advisory Board)
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
Nil
|
|
$ Nil
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
0.0%
|
|
October 2023
|
21
MICHAEL SERRUYA — NEW NOMINEE
|
|
New Nominee
Age: 54
Toronto, ON
Director since: N/A
Independent Director: YES
|
Mr. Serruya serves as Managing Director of Serruya Private Equity Inc. (“SPE”). Mr. Serruya began his career at age twenty, as one of the co-founders of Yogen Früz
®
. Mr. Serruya co-founded CoolBrands International Inc., where he served as Chairman and CEO. CoolBrands was a leading consumer packaged goods company, which included brands such as Weight Watchers, Eskimo Pie, Tropicana and Godiva Ice Cream. More recently, Mr. Serruya was Chairman and CEO of Kahala Brands, a multinational Franchisor to global QSR brands including Cold Stone Creamery, Taco Time and Blimpie Subs.
Mr. Serruya has also participated on the Boards of Directors of a number of both publicly and privately traded companies including Jamba Juice Inc., The Second Cup LTD., and The ONE Group Hospitality Inc.
Strategic qualifications:
·
Extensive capital market expertise
·
Early cannabis investor with strong overview of the industry
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
N/A
|
|
|
|
Audit
|
|
N/A
|
|
|
|
Compensation, Nominating & Governance
|
|
N/A
|
|
|
|
Annual General Meeting
|
|
N/A
|
|
|
|
Organizational Board Meeting
|
|
N/A
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
The ONE Group
|
|
The Baycrest Foundation
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
Nil
|
|
$ Nil
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
0.0%
|
|
October 2023
|
22
SCHLOMO BIBAS — NEW NOMINEE
|
|
New Nominee
Age: 48
Toronto, ON
Director since: N/A
Independent Director: YES
|
Mr. Bibas joined Celestica’s executive team, as Senior Vice President and Global Chief Information Officer with the mandate to drive the Digital agenda of the company. Prior to joining Celestica, Mr. Bibas served as Senior Vice President of Global Operations and Chief Information Officer for the Apotex Group of Companies since 2012. In this capacity, he had global accountability for all IT operations, risk management, customer care, innovation, business enablement, legal services, business services, and indirect procurement functions. As Corporate Officer and member of Apotex’ Executive Committee, he was part of the senior leadership team responsible for strategy development, governance, and global execution of the company.
Prior to joining Apotex, Mr. Bibas was a Partner at Accenture, where he spent 18 years of his career providing IT and management consulting services to Fortune 500 companies.
Strategic qualifications:
·
Significant experience in the Pharmaceutical industry
·
Extensive corporate management experience
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
N/A
|
|
|
|
Audit
|
|
N/A
|
|
|
|
Compensation, Nominating & Governance
|
|
N/A
|
|
|
|
Annual General Meeting
|
|
N/A
|
|
|
|
Organizational Board Meeting
|
|
N/A
|
|
Current Board Directorships
|
|
Public Boards
|
|
Cayuse Technologies
|
|
|
|
None
|
|
Cayuse Technologies
|
|
|
|
|
|
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
1,000
|
|
$ 19,280
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
24.1%
|
|
October 2023
|
23
TOM LOONEY — NEW NOMINEE
|
|
New Nominee
Age: 55
Toronto, ON
Director since: N/A
Independent Director: YES
|
Mr. Looney recently retired as President of Diageo US Spirits & Canada. In this position, he had full responsibility for the growth and development of the company’s spirits business in the United States & Canada including brands such as Smirnoff, Crown Royal, Baileys, Johnnie Walker, Captain Morgan and Ketel One. He was also a member of Diageo’s North American Executive Team.
Prior to his current role, Mr. Looney held the position of President, Diageo Beer Company overseeing US sales, finance, marketing and innovation teams. Prior to that, he was Chief Commercial Officer where he oversaw the pricing strategy, business analytics and commercial marketing functions across spirits, beer and wine for North America. He has also held a variety of roles in finance, customer marketing and strategy roles, including SVP of global business support. Mr. Looney also had responsibility for new business development in North America where his responsibilities included M&A work and route to consumer strategy development.
Strategic qualifications:
·
Significant experience in the Spirits Industry
·
Extensive corporate management experience
|
|
Board Committee Membership
|
|
Membership
|
|
Meeting attendance
|
|
|
|
Board
|
|
N/A
|
|
|
|
Audit
|
|
N/A
|
|
|
|
Compensation, Nominating &
|
|
N/A
|
|
|
|
Governance
|
|
|
|
|
|
Annual General Meeting
|
|
N/A
|
|
|
|
Organizational Board Meeting
|
|
N/A
|
|
Current Board Directorships
|
|
Public Boards
|
|
Private Boards
|
|
|
|
None
|
|
None
|
|
Equity holdings as at September 24, 2018 (# & $)
|
|
Number
|
|
Value
|
|
|
|
750
|
|
$ 14,460
|
|
Shareholding requirements
|
|
% of shareholding requirements
(2)
|
|
Target Date to Meet Requirement
|
|
|
|
18.1%
|
|
October 2023
|
Notes:
(1)
As at September 24, 2018.
(2)
The percentage of shareholding requirements are in accordance with the Company’s Minimum Share Ownership Policy as further discussed below under the heading “Compensation Discussion and Analysis — Minimum Share Ownership Policy”.
(3)
Does not include 1,727,777 shares held indirectly in The Cacciavillani Family Trust.
(4)
Includes 8,900,001 shares held directly through ownership of Fulfill Holdings Inc.
24
Cease trade orders, bankruptcies, penalties or sanctions
To the knowledge of the Company, none of the nominees for election as Director of the Company is as at the date hereof, or within 10 years before the date hereof:
·
is, or has been a director, CEO or chief financial officer (“
CFO
”) of any Company that was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant Company access to any exemption under applicable securities legislation, that was in effect for a period of more than 30 consecutive days (an “
Order
”), which Order was issued while the director executive officer was acting in the capacity as director, CEO or CFO;
·
was subject to an Order that was issued after the director executive officer ceased to be a director, CEO or CFO and which resulted from an event that occurred while that person was acting in the capacity as director, CEO or CFO;
·
is, or has been a director or executive officer of any Company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
·
has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
Furthermore, to the knowledge of the Company, no nominee has been subject to (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; and (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for a nominee.
25
COMPENSATION DISCUSSION AND ANALYSIS
Overview
The purpose of this Compensation Discussion and Analysis is to provide information about the Company’s executive compensation philosophy, objectives, and processes and to discuss compensation decisions relating to the Company’s executive officers, in particular, the five identified named executive officers (collectively, the “
NEOs
” and each an “
NEO
”), namely, Vic Neufeld, Chief Executive Officer (“
CEO
”), Carl Merton, Chief Financial Officer (“
CFO
”), Cole Cacciavillani, Co-Founder and Vice-President — Growing Operations, John Cervini, Co-Founder and Vice President — Infrastructure & Technology and Megan McCrae, Vice President of Marketing for the fiscal year ended May 31, 2018.
The CNG Committee, in consultation with the CEO is responsible for reviewing, establishing and overseeing the compensation policies of the Company and compensation of the NEOs. Historically, the CEO has made recommendations to the CNG Committee with respect to the compensation of the NEOs, and the CNG Committee reviews such recommendations with a view to determining whether to recommend to the Board any changes to the compensation for such senior executives. Moreover, the CNG Committee reviews, on an annual basis, the compensation of the CEO and makes recommendations to the Board in respect thereto.
Objectives of Compensation Program
The Company’s executive compensation practices are based on a pay-for-performance philosophy that is designed to attract, motivate and retain high performing senior executives, encourage and reward superior performance, and align our executives’ interests with those of the Company’s shareholders by:
·
Providing the opportunity for total direct compensation (base salary plus short-term target annual incentive plus target annual long-term equity-based incentive) that is competitive with the compensation received by senior executives employed at a reference group of comparable publicly-traded companies;
·
Ensuring that a significant proportion of executive compensation is linked to the Company’s financial and operational performance through the Company’s variable compensation plan as well as effective risk management;
·
Providing senior executives with long-term equity-based incentive plans, such as stock options, which also help to ensure that senior executives meet or exceed minimum share ownership requirements; and
·
Exercising informed judgement in regard to the nature and criticality of the senior executive’s role, as well as applying performance and market context to the comparator peer group data with input from the CEO to ensure the entirety of a senior executive’s contribution is recognized.
26
In order to implement our compensation philosophy and achieve our objectives, we have adopted a number of governing compensation practices, including:
Key Features of our Compensation Program
·
Annual incentive awards subject to achievement of pre-established performance goals tied to financial objectives
·
Significant proportion of senior executives’ total annual target compensation is considered to be “at-risk”
·
Significant proportion of senior executives’ total annual target compensation is in the form of stock options as part of the long-term incentive plan (LTIP)
·
Engaged an independent consultant Hugessen Consulting Inc. (“
Hugessen
”) to assist with the assessment and determination of appropriate senior executive compensation for fiscal 2018
Compensation, Nominating & Governance Committee
In order to assist the Board in fulfilling its oversight responsibilities with respect to compensation and governance matters, the Board has established the CNG Committee. For more information on the CNG Committee see
“Statement of Corporate Governance Practices”.
The primary role of the CNG Committee is to carry out the Board’s overall responsibility for executive compensation at the Company. Under its mandate, the CNG Committee is responsible for monitoring senior executives’ performance assessment, succession planning and overall compensation. The CNG Committee is consulted in regard to the appointment of senior executives, including the terms and conditions of their appointment and termination, and reviews the evaluation of the performance of the Company’s senior executives, and may make recommendations in respect thereto including recommending their compensation. The CNG Committee also oversees the existence of appropriate policies and compensation structures so that the Company can attract, motivate and retain senior executives who exhibit high standards of integrity, competence and performance. Finally, the CNG Committee is responsible for developing a compensation philosophy and objectives that reward the creation of shareholder value while reflecting an appropriate balance between the short-term and longer-term performance of the Company.
Aphria’s compensation practices are designed to attract, motivate and retain high performing senior executives, encourage and reward superior performance and align our senior executives’ interests with those of the Company’s shareholders. We believe that the actual compensation our executives receive should have a direct connection to their contribution to the Company’s financial performance and overall long-term success. Accordingly, our compensation program strongly links executive compensation to the actual performance of the company and aligns compensation with shareholder value by combining short and long-term cash and equity incentives. It also seeks to reward the achievement of corporate and individual performance objectives, and to align senior executives’ incentives with shareholder value creation by having a significant proportion of each senior executive’s total annual target compensation considered to be “at-risk”. Our senior executives’ short-term incentive plan (“
STIP
”) payout is conditional
27
upon the attainment of or exceeding certain Company financial metrics, in particular annual targets related to gross sales and adjusted EBITDA as set forth in the budget. The Board seeks to tie individual goals to the area of the executive officer’s primary responsibility. These goals may include the achievement of specific financial or business development goals. The Board also seeks to set company performance goals that reach across all business areas and include achievements in finance/business development and corporate development.
At the end of the most recently completed fiscal year, May 31, 2018, the CNG Committee was comprised of three directors, namely Renah Persofsky, Dennis Staudt and Philip Waddington, (the “
Independent Directors
”) all of whom are independent within the meaning of NI 52-110. The CNG Committee members have all had executive or senior roles in corporations or professional firms and/or board positions where they were required to make or were involved in decisions and determinations related to executive compensation, and the Board believes that the CNG Committee collectively has the knowledge, experience and background required to fulfill its mandate. For more detail please refer to their respective biographies under “Business of the meeting — Election of Directors” in this Circular.
Minimum Share Ownership Policy
The Board believes that it is in the best interests of the Company and its shareholders to align the economic interests of the Company’s senior executives and Independent Directors with those of the Company’s shareholders. To achieve this, the CNG Committee has recommended and the Board has adopted the following Minimum Share Ownership Policy.
The Policy is applicable to all of the senior executives and the Independent Directors of the Company pursuant to which each senior executive and the Independent Directors is expected to establish over a period of five (5) years, ownership of a prescribed number of Common Shares and/or DSUs which have a value which is equivalent to the following multiples of the senior executive’s base salary or, in the case of an Independent Director, the base annual cash retainer paid to such Independent Director by the Company (based on the market value of the Common Shares on the TSX) and subsequently maintain such minimum ownership position for the duration of his or her tenure:
|
Position
|
|
Share Ownership Guideline
|
|
Chief Executive Officer
|
|
3 x base salary
|
|
Independent Directors
|
|
2 x base annual cash retainer
|
|
Chief Financial Officer
|
|
1 x base salary
|
|
Other Officers
|
|
0.5 x base salary
|
The following may be used in determining share ownership:
1.
Shares owned directly (including through open market purchases);
2.
Shares owned jointly or separately by the individual’s spouse;
3.
Shares held in trust for the benefit of the officer or director, their spouse and/or children residing at the same residence; and,
4.
Vested DSUs.
28
Unexercised stock options (whether vested or not vested), convertible debt and warrants do not count toward meeting these guidelines until they have been converted or exercised into Common Shares.
The value of the ownership requirement is based upon the senior executive’s then current base salary or Independent Director’s base annual cash retainer at the end of May of each year and will be based on the closing price of the Company’s Shares on the TSX on May 31 of the same fiscal year.
The level of ownership is expected to be satisfied by each officer or director within five (5) years after first becoming subject to these guidelines, the original policy required officers of the Company to purchase a minimum of 25,000 Common Shares within the first year of their hire and each director was to possess a minimum of 25,000 Common Shares prior to the record date of the Annual General Meeting, in which he/she is to be first elected. Once the officer’s or director’s level of ownership satisfies the applicable guideline, such ownership levels are expected to be maintained for as long as the officer or director remains in their role with the Company. In the event of an increase in an officer’s base salary or a director’s base annual cash retainer, such individual will have five (5) years from the time of the increase to acquire any additional Shares required to meet these guidelines if necessary. Until such time that each individual officer meets the level of ownership of the guideline, that officer shall be awarded one-half (½) of their annual bonus in DSUs.
Executive Compensation Components
The Company’s executive compensation program is comprised of fixed and variable components. The variable components include equity and non-equity incentive plans. Each compensation component has a different function, but all elements are designed to work in concert to maximize Company and individual performance and provide financial incentives to senior executives based on the level of achievement of specific operational and financial objectives.
The compensation of the NEOs includes three major elements: (a) base salary, (b) short-term incentive plan consisting of an annual, discretionary cash bonus, and (c) long-term equity incentives, consisting of stock options granted under the Omnibus Incentive Plan and any other equity plan that may be approved by the Board. These three principal elements of compensation are described in more detail below.
29
The following table summarizes the compensation components of the Company’s executive compensation program, including the objectives of each component and the criteria impacting each component’s value:
|
Component
|
|
Key Feature
|
|
Form
|
|
Criteria
|
|
Objectives
|
|
Performance Link
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
·
Fixed Pay Rate
·
Individual salary recommendations based on competitive assessment and economic outlook, leadership, retention and succession candidates
·
Performance period: 1 year
|
|
·
Cash
|
|
·
Reference Group data
·
Individual contribution and performance
|
|
·
Attract and retain top talent Recognize level of responsibilities, individual experience and contribution to the Company’s performance
|
|
·
None
|
|
Short-Term Incentive (STIPS)
|
|
·
Annual award based on achievement of pre-determined corporate annual targets
·
Performance period: 1 year
|
|
·
Cash
|
|
·
Board approved balanced scorecard
|
|
·
Motivate executives to attain and exceed the Company’s annual goals and financial targets
|
|
·
Payout conditional upon achievement of pre-determined financial metrics
|
|
Long-Term Incentives (LTIP)
|
|
·
Stock options
·
Vesting over variable time horizons up to 5 years
|
|
·
Stock options
|
|
·
Time-based
·
Share price
|
|
·
Align executives with shareholder value creation Support retention with vesting conditions
|
|
·
Requires shareholder value creation to generate compensation value
|
Base salary
Base salaries are intended to provide an appropriate level of fixed compensation that will assist in employee retention and recruitment. Base salaries will be determined on an individual basis, taking into consideration the past, current and potential contribution to our success, the position and responsibilities of each senior executive and competitive industry benchmarks for other medical cannabis companies of comparable size and other companies of similar size in comparable industries. Base salaries are set and adjusted to reflect the scope of an executive’s responsibility and prior experience.
30
Short-Term Incentive Plan (STIP)
The Company’s short-term incentive plan aims to enhance the link between pay and performance by:
·
Aligning the financial interests and motivations of the Company’s senior executives and employees with the annual financial performance and returns of the Company;
·
Motivating senior executives and employees to work towards common annual performance objectives; and
·
Providing total cash compensation that is at or higher than the median of the Reference Group in cases where superior financial performance and returns in excess of target objectives are attained;
The following table shows the percentage breakdown of STIPs for the fiscal year ended May 31, 2018:
|
Name
|
|
Position
|
|
Maximum annual
bonus
(1)
|
|
|
|
|
|
|
|
Vic Neufeld
|
|
Chief Executive Officer
|
|
50%
|
|
Carl Merton
|
|
Chief Financial Officer
|
|
40%
|
|
Cole Cacciavillani
|
|
Co-Founder and Vice-President — Growing Operations
|
|
35%
|
|
John Cervini
|
|
Co-Founder and Vice-President — Infrastructure & Technology
|
|
35%
|
|
Megan McCrae
|
|
Vice President of Marketing
|
|
30%
|
(1)
As a percentage of base salary. Maximum annual bonuses for the NEOs were revised for fiscal 2019. For further disclosure see “Changes to Compensation for fiscal 2019.”
|
Category
|
|
Percentage weighting
|
|
Sales
|
|
35
|
|
Adjusted EBITDA
|
|
15
|
|
Incremental headcount
|
|
15
|
|
Patients eligible to order
|
|
15
|
|
Operational metrics
|
|
20
|
Performance Measures and Targets
Performance measures, targets and payout levels for STIP are reviewed and approved annually by the Board on the recommendation of the CNG Committee. For fiscal 2018, in January 2018 the Board approved elimination of the original bonus plan and substitution of a balanced scorecard comprised of the following financial measures to be achieved for all employees:
·
Annual gross sales (“
AGS
”) measured against budgeted AGS target;
·
Annual adjusted EBITDA as measured against budgeted adjusted EBITDA target;
·
Incremental employee headcount;
·
Year-end patients eligible to order; and,
·
Achievement of certain operational targets measured on a board approved scale.
For each of the financial measures, the percentage portion represented by such measure is the maximum that may be received.
In consideration of this year’s achievements, our bonus-eligible employees all received annual incentive payout at 62.5% of targets, based on the Board approved balanced scorecard. We believe that these
31
performance measures, which are based on internal budgets, continue to be appropriate as they ensure that goals are sufficiently challenging but attainable without encouraging short-term risk-taking at the expense of long-term results.
Long-Term Incentive Plan (LTIP)
The purpose of the equity incentive component of the Company’s executive compensation program, namely the long-term incentive plan (the “
Long-Term Incentive Plan
” or “
LTIP
”), is to assist and encourage senior executives and key employees of the Company and its subsidiaries to work towards and participate in the growth and development of the Company and to assist the Company in attracting, retaining and motivating its senior executives and key employees. The LTIP is designed to:
·
Recognize and reward the impact of longer-term strategic actions undertaken by senior executives and key employees;
·
Align the interests of the Company’s senior executives and key employees with its shareholders;
·
Focus senior executives and key employees on developing and successfully implementing the continuing growth strategy of the Company;
·
Foster the retention of senior executives and key management personnel; and
·
Attract talented individuals to the Company.
Types of Equity Incentives Awarded
The LTIP allows the Board to grant to senior executives DSUs, stock options and, beginning in fiscal 2019 such other awards as further set out in the Omnibus Incentive Plan of the Company, assuming the Omnibus Incentive Plan is approved at the AGM.
Performance Measures and Weightings
The LTIP awards help to achieve the Company’s compensation objectives by bringing the total compensation received by the Company’s senior executives to the median to 75
th
percentile of the Reference Group if the Company achieves its goals. Through the use of time vesting for long-term compensation, the LTIP awards help to achieve the Company’s objective of ensuring the retention of senior executives.
To encourage a long-term view of performance and to align the interests of senior executives with the interests of shareholders, Options granted to senior executives have different terms of years and variable time horizon vesting periods. The Board also has the ability to award RSUs and DSUs as further described in the Omnibus Incentive Plan to Eligible Participants, at its discretion, and subject to TSX rules, assuming the Omnibus Incentive Plan is approved at the AGM.
The Company does not have any equity compensation plans, under which equity securities are authorized for issuance, not previously approved by shareholders.
Pension Benefits and Nonqualified Deferred Compensation
The senior executives do not benefit from pension plan participation as the Company does not currently have a company-sponsored pension plan. Moreover, none of the senior executives participate in a
32
nonqualified deferred compensation plan. The Company does not have any equity compensation plans, under which equity securities are authorized for issuance, not previously approved by shareholders.
Other Perquisites and Benefits
While the senior executives receive a car allowance and some receive a gas allowance, perquisite and personal benefits are not a significant element of the compensation awarded to senior executives.
Employment Agreements
Aphria currently has employment agreements in place with each of its NEOs, each of which is discussed further below under the heading “Employment Agreements, Termination and Change of Control Benefits”. As noted below under the heading “Termination and Change of Control Benefits” there are certain circumstances that trigger payments or the provision of other benefits to an NEO upon termination and change of control.
Competitive Compensation Review
The CNG Committee reviews the individual salaries of the senior executives and makes adjustments when required to ensure that compensation remains market competitive and reflects individual performance, competencies, responsibilities and experience. The Committee also takes into account the senior executive’s value to the Company and retention risk. Other than the CEO, any increases in base salary for the senior executives, are at the sole discretion of the CEO with significant input from the CNG Committee. The compensation of the CEO is at the sole discretion of the Board, with significant input from the CNG Committee.
Benchmarking Practices
To meet the Company’s objectives of providing market competitive compensation opportunities, the Company’s senior executive compensation plans are benchmarked against market compensation data gathered from organizations of comparable size, complexity and geographical scope, as well as other companies with which the Company competes for executive talent.
As part of this benchmarking process, the CNG Committee reviews compensation data gathered from proxy circulars of other publicly-traded companies (the “
Reference Group
”). This involved the determination of an appropriate market compensation group composed of 12 companies, including appropriate benchmarking with reference to a relevant range of revenue, market cap and total enterprise value, and analysis of the senior executives’ total compensation, including an analysis of the Company’s short-term and long-term incentive plans, and an overview of current and emerging governance and executive compensation trends. Hugessen also provided analytical and advisory support on other matters related to executive compensation.
In addition, the Committee considers information gathered from annual compensation planning surveys from outside consulting firms related to determining annual salary increases for senior executives. As provided in its mandate, the CNG Committee has the authority to retain and obtain advice from independent compensation consultants with regards to executive compensation and approve their fees. Following the graduation of the Company to the TSX on March 22, 2017, and as the Company has
33
continued to grow rapidly in size and complexity, to the Board continues to engage outside independent compensation consultants to assist with the assessment of and compilation of appropriate benchmarking data in connection with the establishment of appropriate compensation for the senior executives for fiscal 2019 and thereafter.
The Chair of the CNG Committee, in consultation with the CFO, identified the following companies as being part of the Reference Group:
|
Company
|
|
HQ
|
|
Industry
|
|
Corcept Therapeutics Incorporated
|
|
Menlo Park, CA
|
|
Pharmaceuticals
|
|
Canopy Growth Corporation
|
|
Smith Falls, ON
|
|
Medical Marijuana
|
|
MGP Ingredients, Inc.
|
|
Atchison, KS
|
|
Distillers and Vintners
|
|
MedReleaf Corp.
|
|
Markham, ON
|
|
Pharmaceuticals (MMJ)
|
|
Amplify Snack Brands, Inc.
|
|
Austin, TX
|
|
Packaged Foods and Meats
|
|
Clearwater Seafoods Incorporated
|
|
Bedford, NS
|
|
Packaged Foods and Meats
|
|
Corby Spirit and Wine Limited
|
|
Toronto, ON
|
|
Distillers and Vintners
|
|
Andrew Peller Limited
|
|
Grimsby, ON
|
|
Distillers and Vintners
|
|
Merus Labs International Inc.
|
|
Toronto, ON
|
|
Pharmaceuticals
|
|
Cipher Pharmaceuticals Inc.
|
|
Mississauga, ON
|
|
Pharmaceuticals
|
|
Village Farms International, Inc.
|
|
Delta, BC
|
|
Agricultural Products
|
|
Ten Peaks Coffee Company Inc.
|
|
Burnaby, BC
|
|
Packaged Foods and Meats
|
The industry sector is considered relevant in the selection of companies comprising the Reference Group, as the Company may be in competition with these organizations for customers, revenue, executive talent and capital. Market cap and revenue size, which are used as a proxy for the level of complexity, job scope and responsibility associated with senior executive positions, are also considered relevant in selecting the companies in the Reference Group given the correlation between pay level and company size.
In 2017, the Company engaged the Hugessen group to determine certain criteria for establishing the Reference Group, and the same criteria have been upheld for fiscal 2018, although the companies included therein have changed. As part of the assessment of a Reference Group by the Company, the following criteria were considered:
·
In recognition of the lack of publicly traded, revenue-generating and profit generating medical cannabis companies, the Reference Group included companies that are in related, but not directly comparable, industries (e.g., pharmaceuticals, distillers and vintners, packaged foods)
34
·
The region where the Company primarily conducts business and competes for talent is in Canada, such that the companies comprising the Reference Group were headquartered primarily in Canada and listed on a Canadian stock exchange, however, a few examples of U.S.-listed companies were included to provide balance to the group from a company size perspective, with the goal of having the Company’s size positioned near median relative to the Reference Group
·
The main factors that were assessed in arriving at an appropriate mix of companies were revenue, ability (or lack thereof) to generate profit, market capitalization and enterprise value, generally in range of 50% to 200% of the Company’s, which in the case of revenue was estimated on a pro forma basis as at fiscal year 2020 to recognize the significant expected growth in the medical cannabis industry in the coming years.
·
Companies with comparable compensation structures vis-à-vis the compensation elements that make up total compensation.
Risk management principles of compensation programs
In terms of assessing and managing risk the role of the CNG Committee includes reviewing each of the components of an executive’s compensation to ensure there is an overall balance among long-term and short-term incentives commensurate with Aphria’s corporate strategy and goals. The mandate of the CNG Committee includes an annual review of Aphria’s compensation policies and practices to confirm that they remain aligned with Aphria’s risk management principles and to ensure that they do not encourage inappropriate or excessive risk. Aphria’s compensation policies and practices incorporate features, including significant weighting on long-term incentives that seek to mitigate risk related to encouraging the achievement of short-term goals, at the potential expense of long-term sustainability and shareholder value, without diminishing the incentive nature of the compensation, and to encourage and reward prudent business judgment and appropriate risk-taking over the long term to increase shareholder value. The variable elements of the compensation program (short-term and long-term incentives) represent a significant proportion of overall compensation that is sufficient to motivate senior executives to produce superior short-term and long-term corporate results, while the fixed compensation element (base salary) is high enough to discourage senior executives from taking unnecessary or excessive risks. The long-term incentive plan vesting conditions are designed to encourage a long-term view of performance and to align the interests of senior executives with shareholder interests, by being valuable only if the Company’s stock price increases over time. The vesting of stock options over various time horizons mitigates against taking short-term risks and aligns senior executives with longer-term shareholder interests.
The CNG Committee may adjust the relevant weighting of various components of an executive’s compensation based on its review, and, if required, amend or supplement specific components as appropriate. Finally, the Chairs of the Audit Committee and the CNG Committee each is a member of the other’s committee to ensure the alignment of policies for the assessment of risks.
Performance Graph
The graph below compares the performance of Aphria since inception in 2014 (with all dividends and distributions reinvested) to the S&P/TSX Composite Index, each starting with an investment of $100 at the beginning of fiscal 2014:
35
The Company’s total shareholder return since inception has shown a significant upward trend. For the fiscal year ended May 31, 2018, the CNG Committee desire is to base more of the compensation of the senior executives on long-term performance to align their interests with those of the shareholders.
The CNG Committee will continue to use discretion and judgement when determining actual compensation levels. In this regard, individual compensation may be positioned at, above or below median of the Reference Group, based on individual experience and performance or other criteria deemed important by the CNG Committee. Relative to the Reference Group, for fiscal 2019 the Company’s senior executives’ total direct compensation opportunity was positioned to be at or above the market median.
Total compensation may fluctuate year over year, not always following the trend in total shareholder returns, due to the following factors:
·
Senior executives’ base salary adjustments are generally made to remain competitive with the Reference Group and to reflect any changes in the scope of the executives’ responsibilities;
·
Short-term incentive payouts are not directly linked to total shareholder return but rather they are based on underlying financial measures (i.e. the balanced scorecard); and,
·
While long-term incentive grants are typically made at market-competitive target levels, occasional one-time stock option grants may cause significant year-over-year fluctuations in total compensation. That said, the value ultimately realized from the long-term incentive awards depends on share price performance.
36
Option-based Awards and Share-based Awards
The Omnibus Incentive Plan
The Omnibus Incentive Plan is intended to provide senior executives with the promise of longer term rewards which appreciate in value with the favourable future performance of the Company. The Board believes that the Omnibus Incentive Plan provides a method of retention and motivation for the senior executives of the Company and also aligns senior management’s objectives with long-term stock price appreciation.
For more information on the Omnibus Incentive Plan see “Business of the Meeting — Approval of Omnibus Incentive Plan”.
Changes to Compensation for Fiscal 2018
Effective June 1, 2018, the following adjustments to executive compensation were made:
|
NEO
|
|
Base salary
|
|
STIP — Base
|
|
LTIP
|
|
|
|
|
|
|
|
|
|
Vic Neufeld
CEO and Director
|
|
Base salary of $400,000
(1)
|
|
Target bonus of 50%
|
|
To be determined by the CNG Committee prior to the AGM
|
|
Carl Merton
CFO
|
|
Base salary increased to $275,000
|
|
Target bonus of 40%
|
|
To be determined by the CNG Committee prior to the AGM
|
|
Cole Cacciavillani
Co-Founder & VP — Growing Operations and Director
|
|
Base salary increased to $230,000
|
|
No change
|
|
To be determined by the CNG Committee prior to the AGM
|
|
John Cervini
Co-Founder & VP — Infrastructure & Technology and Director
|
|
Base salary increased to $230,000
|
|
No change
|
|
To be determined by the CNG Committee prior to the AGM
|
|
Megan. McCrae
Director of Marketing
|
|
Base salary increased to $200,000
|
|
No change
|
|
No change
|
Commitment to Competitive Compensation
Looking ahead to fiscal 2019, we plan to continue to build on our strong foundation of sound and effective practices in executive compensation. We will continue to conduct periodic compensation
37
analyses and monitor the evolution of best practices, and implement those which enable and encourage superior performance. We will continue to benchmark our executive compensation program against our peers in the Reference Group and elsewhere to ensure that we provide competitive compensation to our senior executives.
Summary compensation table
The following table provides a summary of the compensation earned by the NEOs for services rendered in all capacities during the three most recent fiscal years.
|
|
|
Fiscal
year
|
|
Salary,
consulting
fee,
retainer or
commission
|
|
Share-based
awards
|
|
Option-
based
awards
(9)
|
|
Non-equity incentive plan
compensation
|
|
|
|
|
|
|
Name and principal
position
|
Annual
Incentive
Plan
(10)
|
|
Long-Term
Incentive
Plans
(12)
|
|
All other
compensation
|
|
Total
compensation
|
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
(1)
|
|
2018
|
|
360,168
|
|
1,450,550
|
|
860,967
|
|
118,733
|
|
—
|
|
34,500
|
(13)
|
2,824,918
|
|
|
CEO and Director
|
|
2017
|
|
235,385
|
|
—
|
|
1,895,000
|
|
108,000
|
|
—
|
|
84,500
|
(14)
|
2,322,884
|
|
|
|
|
2016
|
|
174,415
|
(5)
|
—
|
|
65,000
|
|
26,462
|
|
—
|
|
18,768
|
(15)
|
284,645
|
|
|
CARL MERTON
(2)
CFO
|
|
2018
|
|
225,138
|
|
476,300
|
|
308,528
|
|
94,060
|
(11)
|
—
|
|
—
|
|
1,104,026
|
|
|
|
2017
|
|
210,000
|
|
—
|
|
265,000
|
|
63,000
|
|
—
|
|
5,125
|
|
543,125
|
|
|
|
2016
|
|
120,048
|
(6)
|
—
|
|
170,000
|
|
11,359
|
|
—
|
|
—
|
|
301,407
|
|
|
COLE CACCIAVILLANI
(3)
Co-Founder & VP — Growing Operations and Director
|
|
2018
|
|
199,407
|
|
389,700
|
|
369,506
|
|
39,375
|
|
—
|
|
—
|
|
997,988
|
|
|
|
2017
|
|
139,231
|
|
—
|
|
265,000
|
|
42,000
|
|
—
|
|
14,500
|
(16)
|
460,731
|
|
|
|
2016
|
|
139,115
|
(7)
|
—
|
|
26,000
|
|
13,912
|
|
—
|
|
—
|
|
179,027
|
|
|
JOHN CERVINI
(4)
Co-Founder & VP —Infrastructure & Technology and Director
|
|
2018
|
|
187,407
|
|
389,700
|
|
369,506
|
|
39,375
|
|
—
|
|
12,000
|
(17)
|
1,009,988
|
|
|
|
2017
|
|
139,231
|
|
—
|
|
265,000
|
|
42,000
|
|
—
|
|
14,500
|
(16)
|
460,731
|
|
|
|
2016
|
|
139,115
|
(7)
|
—
|
|
26,000
|
|
13,912
|
|
—
|
|
—
|
|
179,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Megan McCrae — VP
—
Marketing
|
|
2018
|
|
178,127
|
|
—
|
|
744,394
|
|
19,521
|
|
—
|
|
—
|
|
942,042
|
|
|
|
2017
|
|
107,692
|
(8)
|
—
|
|
219,400
|
|
20,073
|
|
—
|
|
—
|
|
347,435
|
|
|
|
2016
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Notes:
(1)
Mr. Neufeld was appointed President and Chief Executive Officer on June 3, 2014. Mr. Neufeld did not receive any compensation in his role as a director. The Board approved an increase to Mr. Neufeld’s base salary, effective December 1, 2017 to an annual salary of $400,000.
(2)
Mr. Merton was elected as a Director on December 2, 2014. Mr. Merton resigned as a Director on December 15, 2015. Mr. Merton was appointed Chief Financial Officer on December 15, 2015. The Board approved an increase to Mr. Merton’s base salary, effective December 1, 2017 to $240,000 per annum.
(3)
Mr. Cacciavillani did not receive any compensation in his role as a director.
(4)
Mr. Cervini did not receive any compensation in his role as a director.
(5)
Mr. Neufeld received a $1,000 signing bonus for executing employment agreement in fiscal 2016.
(6)
Mr. Merton received $6,462 as director fees prior to resigning as a director. Mr. Merton received a $1,000 signing bonus for executing employment agreement in fiscal 2016.
(7)
Mr. Cacciavillani and Mr. Cervini each received a $1,000 signing bonus for executing employment agreement in fiscal 2016.
(8)
Ms. McCrae received a $5,000 signing bonus for executing employment agreement in fiscal 2017.
(9)
The Company values Options using Black-Scholes option pricing method as described in the Company’s audited financial statements for the year ended May 31, 2018. These amounts represent the fair value of the Options at the grant date.
38
(10)
All annual incentive amounts related to any fiscal year will be paid in the following fiscal year, unless otherwise noted.
(11)
Mr. Merton received a $50,000 special bonus at the discretion of the CEO during fiscal 2018 in to his entitlement under the 2018 corporate bonus plan.
(12)
All LTIP awards to our NEOs were in the form of deferred share units.
(13)
Represents cash cost to Company of Mr. Neufeld’s leased corporate vehicle and insurance.
(14)
Represents cash cost to Company of Mr. Neufeld’s leased corporate vehicle and insurance and $50,000 retroactive payment for wages received in fiscal 2017 that related to fiscal 2016.
(15)
Represents cash cost to Company of Mr. Neufeld’s leased corporate vehicle and insurance.
(16)
Represents cash cost to Company of Mr. Cacciavillani and Mr. Cervini’s retroactive wages paid in fiscal 2017 that relate to fiscal 2016.
(17)
Represents cash cost to Company of Mr. Cervini’s leased corporate vehicle and insurance.
Outstanding Share-Based Awards and Option-Based Awards Table
The following table discloses the particulars of the option-based awards granted to NEOs of the Company during the fiscal year-ended May 31, 2018.
|
|
|
Option Based Awards
|
|
Share-based Awards
(2)
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Market or
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
payout value
|
|
|
|
|
|
|
underlying
|
|
|
|
|
|
Value of
|
|
shares or
|
|
payout value
|
|
of vested
|
|
|
|
|
|
|
unexercised
|
|
|
|
|
|
Unexercised
|
|
units of
|
|
of share-
|
|
share-based
|
|
|
|
|
Date of
|
|
options and
|
|
Option
|
|
Option
|
|
In-The-
|
|
shares that
|
|
based awards
|
|
awards not
|
|
|
Name and
|
|
issue or
|
|
percentage
|
|
exercise
|
|
expiration
|
|
Money
|
|
have not
|
|
that have not
|
|
paid out or
|
|
|
position
|
|
grant
|
|
of class
|
|
price
|
|
date
|
|
Options
(1)
|
|
vested
|
|
Vested
(1)
|
|
distributed
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
($)
|
|
(#)
|
|
|
|
($)
|
|
|
VIC NEUFELD
|
|
06/01/17
|
|
100,000
|
|
5.44
|
|
06/01/22
|
|
608,000
|
|
—
|
|
—
|
|
—
|
|
|
CEO and Director
|
|
07/11/17
|
|
250,000
|
|
5.24
|
|
07/11/20
|
|
1,570,000
|
|
|
|
|
|
|
|
|
CARL MERTON
|
|
06/01/17
|
|
50,000
|
|
5.44
|
|
06/01/22
|
|
304,000
|
|
—
|
|
—
|
|
—
|
|
|
CFO
|
|
07/11/17
|
|
75,000
|
|
5.24
|
|
07/11/20
|
|
471,000
|
|
|
|
|
|
|
|
|
COLE CACCIAVILLANI
|
|
06/01/17
|
|
50,000
|
|
5.44
|
|
06/01/22
|
|
304,000
|
|
—
|
|
—
|
|
—
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
07/11/17
|
|
100,000
|
|
5.24
|
|
07/11/20
|
|
628,000
|
|
|
|
|
|
|
|
|
JOHN CERVINI
|
|
06/01/17
|
|
50,000
|
|
5.44
|
|
06/01/22
|
|
304,000
|
|
—
|
|
—
|
|
—
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
07/11/17
|
|
100,000
|
|
5.24
|
|
07/11/20
|
|
628,000
|
|
|
|
|
|
|
|
|
MEGAN MCCRAE
|
|
07/17/17
|
|
35,000
|
|
5.24
|
|
07/17/20
|
|
219,800
|
|
—
|
|
—
|
|
—
|
|
|
VP — MARKETING
|
|
12/18/17
|
|
100,000
|
|
14.06
|
|
12/18/20
|
|
—
|
|
|
|
|
|
|
|
Notes:
(1)
Based on the closing price for the Common Shares on the TSX Exchange of $11.52 on May 31, 2018.
(2)
All LTIP awards to our NEOs in the form of stock options and disclosed under the column “Option-based awards” and all LTIP awards in the form of deferred share units were disclosed under the column “Share-based Awards”.
39
Incentive Plan Awards — Value Vested or Earned During the Year — NEOs
Exercise of stock options by NEOs
During the year, the NEOs exercised the following vested options:
|
EXERCISE OF COMPENSATION SECURITIES BY NEOS
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
|
|
|
|
|
Difference
|
|
|
|
|
|
|
securities issued
|
|
|
|
|
|
|
|
between exercise
|
|
|
|
|
|
|
upon exercise of
|
|
|
|
|
|
|
|
price and closing
|
|
|
|
|
|
|
outstanding
|
|
|
|
Date of
|
|
Closing price on
|
|
price on date of
|
|
Total value on
|
|
|
Name and position
|
|
options
|
|
Exercise price
|
|
exercise
|
|
date of exercise
|
|
exercise
|
|
exercise date
|
|
|
|
|
(#)
|
|
($)
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
CEO and Director
|
|
|
|
CARL MERTON
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
CFO
|
|
|
COLE CACCIAVILLANI
|
|
500,000
|
|
0.60
|
|
01/16/18
|
|
21.65
|
|
21.05
|
|
10,825,000
|
|
|
Co-Founder & VP — Growing Operations and Director
|
|
20,000
|
|
1.30
|
|
01/16/18
|
|
21.65
|
|
20.35
|
|
433,000
|
|
|
|
33,333
|
|
1.40
|
|
01/16/18
|
|
21.65
|
|
20.25
|
|
721.659
|
|
|
|
33,333
|
|
3.90
|
|
01/16/18
|
|
21.65
|
|
17.75
|
|
721.659
|
|
|
|
16,666
|
|
5.44
|
|
01/16/18
|
|
21.65
|
|
16.21
|
|
360,819
|
|
|
|
100,000
|
|
5.24
|
|
01/16/18
|
|
21.65
|
|
16.41
|
|
2,165,000
|
|
|
JOHN CERVINI
|
|
500,000
|
|
0.60
|
|
01/16/18
|
|
21.65
|
|
21.05
|
|
10,825,000
|
|
|
Co-Founder & VP — Infrastructure & Technology and Director
|
|
20,000
|
|
1.30
|
|
01/16/18
|
|
21.65
|
|
20.35
|
|
433,000
|
|
|
|
33,333
|
|
1.40
|
|
01/16/18
|
|
21.65
|
|
20.25
|
|
721,659
|
|
|
|
33,333
|
|
3.90
|
|
01/16/18
|
|
21.65
|
|
17.75
|
|
721,659
|
|
|
|
|
16,666
|
|
5.44
|
|
01/16/18
|
|
21.65
|
|
16.21
|
|
360,819
|
|
|
|
|
100,000
|
|
5.24
|
|
01/16/18
|
|
21.65
|
|
16.41
|
|
2,165,000
|
|
|
MEGAN MCCRAE
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
VP - Marketing
|
|
40
NEO Share Ownership
The table below summarizes the NEO’s share ownership levels as at May 31, 2018, based on fiscal 2019 compensation. All of the NEOs are currently in compliance with the ownership requirement of the Minimum Share Ownership Policy described in this Circular on page 28:
|
|
|
|
|
Actual Ownership
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
($/#)
|
|
Ownership
|
|
|
|
|
|
|
|
|
Annual Base
Salary
|
|
Deferred Share
|
|
Common Shares
Beneficially
|
|
Total
|
|
as a
Multiple
|
|
Ownership
|
|
Meets
|
|
|
Name
|
|
($)
|
|
Units
|
|
Owned
|
|
Ownership
|
|
Base Salary
|
|
Requirements
|
|
Requirement
|
|
|
VIC NEUFELD CEO and Director
|
|
400,000
|
|
771,840/67,000
|
|
22,1791,940/1,925,342
|
|
22,951,780/1,992,342
|
|
57.4 x
|
|
3 x
|
|
Yes
|
|
|
CARL MERTON CFO
|
|
275,000
|
|
253,440/22,000
|
|
860,890/ 74,730
|
|
1,114,330/ 96,730
|
|
4.1 x
|
|
1.0 x
|
|
Yes
|
|
|
COLE CACCIAVILLANI VP — Growing Operations and Director
|
|
225,000
|
|
207,360/18,000
|
|
81,734,204/7,094,983
|
|
81,941,564/7,112,983
|
|
364.2 x
|
|
0.5 x
|
|
Yes
|
|
|
JOHN CERVINI VP — Infrastructure & Technology and Director
|
|
225,000
|
|
207,360/18,000
|
|
111,549,519/9,683,118
|
|
111.756.879/9,701,118
|
|
496.7 x
|
|
0.5 x
|
|
Yes
|
|
|
MEGAN MCCRAE, Director of Marketing
|
|
200,000
|
|
Nil
|
|
Nil
|
|
Nil
|
|
0 x
|
|
N/A
|
|
N/A
|
|
NEOs subject to the Minimum Share Ownership Policy are expected to retain Common Shares acquired under the Company’s Long-Term Incentive Plan until the share ownership requirement is achieved, except as required to cover the tax liability associated with the exercise of Options.
Employment agreements, Termination and Change of Control Benefits
Aphria currently has employment agreements in place with each of its NEOs.
Mr. Neufeld — Chief Executive Officer
On June 1, 2016 the Company entered into a new employment agreement with Mr. Neufeld for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary, currently in the amount of $240,000 per annum, a monthly car allowance of $1,500, a monthly gas allowance of up to $250, annual bonus of up to 45% of his base salary, to be approved by the Board, and stock options pursuant to the Company’s Option Plan or any other equity plan as may be approved by the Board. Mr. Neufeld’s employment agreement also includes, among other things, provisions regarding
41
confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Neufeld is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Neufeld is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective December 1, 2018, the Board approved an increase in base salary to $400,000 per annum and an increase in bonus to 50% of his base salary.
Mr. Merton — Chief Financial Officer
On June 1, 2016 the Company entered into a new employment agreement with Mr. Merton for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $210,000 per annum, a monthly car allowance of $1,000, a monthly gas allowance of up to $500, annual bonus of up to 40% of his base salary, to be approved by the Board, and stock options pursuant to the Company’s Option Plan or any other equity plan as may be approved by the Board. Mr. Merton’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Merton is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Merton is terminated without cause within two years following a Change of Control (as defined in his employment agreement), or one year following a change in the position of the CEO, he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2018, Mr. Merton’s base salary increased to $275,000 per annum.
Mr. Cacciavillani — Co-Founder and Vice-President — Growing Operations
On June 1, 2016 the Company entered into a new employment agreement with Mr. Cacciavillani for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $140,000 per annum, a monthly car allowance of $750, annual bonus of up to 35% of his base salary, to be approved by the Board, and stock options pursuant to the Company’s Option Plan or any other equity plan as may be approved by the Board. Mr. Cacciavillani’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Cacciavillani is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Cacciavillani is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2018, Mr. Cacciavillani’s base salary increased to $225,000 per annum.
42
Mr. Cervini — Co-Founder and Vice-President — Infrastructure & Technology
On June 1, 2016 the Company entered into a new employment agreement with Mr. Cervini for an indefinite term setting forth the terms and conditions of his employment, which provides for his base salary in the amount of $140,000 per annum, a monthly car allowance of $750, annual bonus of up to 35% of his base salary, to be approved by the Board, and stock options pursuant to the Company’s Option Plan or any other equity plan as may be approved by the Board. Mr. Cervini’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition and non-solicitation as well as eligibility for the Company’s benefit plans. In the event that Mr. Cervini is terminated without cause, he will be entitled to a payment equal to nine months’ base salary, plus one additional month per year of service, up to eighteen months’ base salary. In the event Mr. Cervini is terminated without cause within two years following a Change of Control (as defined in his employment agreement), he will be entitled to receive a lump sum payment equal to two times (2x) his nine months’ base salary, plus one additional month per year of service, up to eighteen months base salary and two times (2x) the amount of annual bonus, if any, paid in the immediately preceding fiscal year. Effective June 1, 2018, Mr. Cervini’s base salary increased to $225,000 per annum.
Ms. McCrae — Vice President of Marketing
On August 1, 2016, the Company entered into an employment agreement with Ms. McCrae for an indefinite term setting forth the terms and conditions of her employment, which provides for her base salary in the amount of $140,000 per annum, a monthly car allowance of $750, annual bonus of up to 35% of her base salary, to be approved by the Company. Ms. McCrae’s employment agreement also includes, among other things, provisions regarding confidentiality, non-competition, and non-solicitation as well as eligibility for the Company’s benefit plans. In the event Ms. McCrae is terminated without cause, she will be entitled to a payment equal to six months’ notice, using a combination of Base Salary and average bonus earnings based on a three year average. Ms. McCrae is not entitled to any additional compensation in the event of a change in control. Effective June 1, 2018, Ms. McCrae’s base salary increased to $200,000 per annum.
Summary of Termination Benefits
The following table provides details regarding the estimated incremental payments from the Company to each of the NEOs in the event of a change of control, termination without cause and assuming the event took place as of the date hereof:
43
|
|
|
|
|
Base Salary
(1)
|
|
Bonus
|
|
Total
|
|
|
Name
|
|
Triggering Event
|
|
($)
|
|
($)
|
|
($)
|
|
|
VIC NEUFELD
|
|
Termination without cause
(2)
|
|
433,000
|
|
216,500
|
|
649,500
|
|
|
CEO and Director
|
|
Termination following a Change of Control
|
|
866,000
|
|
433,000
|
|
1,299,000
|
|
|
CARL MERTON
|
|
Termination without cause
(3)
|
|
275,000
|
|
110,000
|
|
385,000
|
|
|
CFO
|
|
Termination following a Change of Control
|
|
550,000
|
|
220,000
|
|
770,000
|
|
|
|
|
Termination without cause (new CEO)
|
|
550,000
|
|
220,000
|
|
770,000
|
|
|
COLE CACCIAVILLANI
|
|
Termination without cause
(4)
|
|
262,500
|
|
92,000
|
|
354,500
|
|
|
VP — Growing Operations
and Director
|
|
Termination following a Change of Control
|
|
525,000
|
|
184,000
|
|
709,000
|
|
|
JOHN CERVINI
|
|
Termination without cause
(4)
|
|
262,500
|
|
92,000
|
|
354,500
|
|
|
VP — Infrastructure &
Technology and Director
|
|
Termination following a Change of Control
|
|
525,000
|
|
184,000
|
|
709,000
|
|
|
MEGAN MCCRAE, Vice-
|
|
Termination without cause
(5)
|
|
133,000
|
|
40,000
|
|
173,000
|
|
|
President of Marketing
|
|
Termination following a Change of Control
|
|
133,000
|
|
40,000
|
|
173,000
|
|
(1) Calculation of Termination Benefits are based on the base salaries, annual bonuses and years of service for fiscal 2019.
(2) Mr. Neufeld, on termination without cause in 2019, would be entitled to 13 months compensation.
(3) Mr. Merton, on termination without cause in 2019, would be entitled to 12 months compensation.
(4) Mr. Cacciavillani and Mr. Cervini, on termination without cause in 2019, would be entitled to 14 months compensation.
(5) Ms. McCrae, on termination without cause in 2019, would be entitled to 8 months compensation.
COMPENSATION OF DIRECTORS
The Company’s director compensation program is designed (i) to attract and retain highly qualified individuals to serve on the Board and its committees, (ii) to align the interests of the directors with the long-term interests of the Company’s shareholders, and (iii) to provide appropriate compensation having regard to the risks and responsibilities related to being an effective director.
The compensation of the directors, which is only paid to Independent Directors, includes three elements: (a) annual retainer and committee fees, as applicable; and, (b) long-term equity incentives, consisting of DSUs issued under the Omnibus Incentive Plan and any other equity plan that may be approved by the Board. These principal elements of compensation are described below.
Annual retainer
The Board, with assistance from the CNG Committee, reviews Aphria’s approach to director compensation. The CNG Committee considers many factors, including whether compensation fairly reflects the responsibilities and risks involved. The review of Aphria’s director compensation includes benchmarking against other medical marijuana companies in Canada and other similar or comparable companies with respect to Total Enterprise Value (TEV), market cap and revenue. Annual retainers have been intended to provide an appropriate level of fixed compensation that will assist in director retention and recruitment. The CNG Committee retained an independent external consultant to provide data and advice to the CNG Committee in regard to the appropriateness of its director compensation policy as well as the different levels of compensation, particularly in light of the number of meetings and the amount of time required to be spent by the directors to fulfill their board and committee obligations. The CNG
44
Committee engaged Hugessen to advise in regard to the directors’ compensation for fiscal 2018 and the Board has approved increased compensation for Directors in fiscal 2018 and fiscal 2019 as further described below.
Annual retainers were paid in fiscal 2018 to the Independent Directors on the following basis:
|
Type of Compensation
|
|
Annual Compensation
|
|
|
Board Retainer
|
|
40,000
|
(1)
|
|
Deferred share units
|
|
32,000
|
(1)
|
|
Audit Committee Chair Retainer
|
|
15,000
|
(1)
|
|
CNG Committee Chair Retainer
|
|
15,000
|
(1)
|
|
Member of more than one committee
|
|
7,500
|
(1)
|
|
Per meeting fee for more than 10 Board meetings (to a maximum of 10 additional meetings)
|
|
1,500
|
(1)
|
(1) Annual cash retainers were effective December 1, 2017.
Independent Directors are reimbursed for travel and other out-of-pocket expenses incurred in attending Board or committee meetings as well as annual shareholders’ meetings.
Currently, the Directors do not benefit from pension plan participation. Perquisites and personal benefits are not available to the Directors. The CNG Committee, has established an appropriate comparator group for purposes of setting the future compensation of the Directors.
Minimum Share Ownership Requirements
The Independent Directors are also subject to the Minimum Share Ownership Policy as further discussed above on page 28 of this Circular.
Director Compensation Table
The following table provides information regarding compensation earned by the Company’s Independent Directors for the fiscal year ended May 31, 2018
|
|
|
|
|
Committee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Base Cash
|
|
Committee
|
|
Share
|
|
Option-
|
|
Non-equity
|
|
|
|
|
|
|
Name and
|
|
Retainer &
|
|
Chair Cash
|
|
Based
|
|
based
|
|
incentive plan
|
|
All other
|
|
Total
|
|
|
principal position
|
|
Committee fees
|
|
Retainer
|
|
Awards
|
|
awards
|
|
compensation
|
|
compensation
|
|
compensation
|
|
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
DENNIS STAUDT
|
|
55,231
|
|
30,000
|
|
203,171
|
|
—
|
|
—
|
|
—
|
|
288,402
|
|
|
PHILIP WADDINGTON
|
|
48,384
|
|
—
|
|
203,171
|
|
—
|
|
—
|
|
—
|
|
251,555
|
|
|
RENAH PERSOFSKY
(1)
|
|
37,106
|
|
12,000
|
|
189,193
|
|
149,199
|
|
—
|
|
—
|
|
387,498
|
|
|
SHAWN DYM
(1)
|
|
28,202
|
|
—
|
|
189,193
|
|
149,199
|
|
—
|
|
—
|
|
366,594
|
|
45
Notes:
(1)
Ms. Persofsky and Mr. Dym joined the Board on October 25, 2017 and their compensation is pro-rated for the year from their start date.
Outstanding Share-Based Awards and Option-Based Awards Table
The following table discloses the particulars of the option-based awards granted to the Independent Directors of the Company during the fiscal year-ended May 31, 2018.
|
|
|
Option Based Awards
|
|
Share-based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
payout value
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Value of
|
|
shares or
|
|
payout value
|
|
of vested
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
Unexercised
|
|
units of
|
|
of share-
|
|
share-based
|
|
|
|
|
Date of
|
|
underlying
|
|
Option
|
|
Option
|
|
In-The-
|
|
shares that
|
|
based awards
|
|
awards not
|
|
|
Name and
|
|
issue or
|
|
unexercised
|
|
exercise
|
|
expiration
|
|
Money
|
|
have not
|
|
that have not
|
|
paid out or
|
|
|
position
|
|
grant
|
|
options
|
|
price
|
|
date
|
|
Options
(1)
|
|
vested
|
|
vested
|
|
distributed
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
($)
|
|
(#)
|
|
|
|
($)
|
|
|
DENNIS STAUDT
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
92,160
|
|
|
PHILIP
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
92,160
|
|
|
WADDINGTON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RENAH
|
|
10/25/17
|
|
37,000
|
|
6.90
|
|
10/25/22
|
|
170,940
|
|
—
|
|
—
|
|
92,160
|
|
|
PERSOFSKY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAWN DYM
|
|
10/25/17
|
|
37,000
|
|
6.90
|
|
10/25/22
|
|
170,940
|
|
—
|
|
—
|
|
92,160
|
|
Notes:
(1)
Based on the closing price for the Common Shares on the TSX Exchange of $11.52 on May 31, 2018.
Exercise of stock options by Independent Directors
The following tables sets forth information concerning the exercise of vested options by the Independent Directors during the fiscal year-ended May 31, 2018, including:
·
The number of securities to be issued upon the exercise of outstanding options, warrants and rights;
·
The weighted-average exercise price of such outstanding options, warrants and rights; and,
·
The number of securities remaining available for future issuance under the applicable plan, other than securities to be issued upon the exercise of such outstanding options, warrants and rights.
|
EXERCISE OF COMPENSATION SECURITIES BY INDEPENDENT DIRECTORS
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
|
|
|
|
|
Difference
|
|
|
|
|
|
|
issued upon
|
|
|
|
|
|
|
|
between exercise
|
|
|
|
|
|
|
exercise of
|
|
|
|
|
|
Closing price
|
|
price and closing
|
|
Total value on
|
|
|
|
|
outstanding
|
|
Exercise price
|
|
Date of
|
|
date of exercise
|
|
price on date of
|
|
exercise date
|
|
|
Name and position
|
|
options (#)
|
|
($)
|
|
exercise
|
|
($)
|
|
exercise ($)
|
|
($)
|
|
|
DENNIS STAUDT
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
PHILIP WADDINGTON
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
RENAH PERSOFSKY
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
46
|
EXERCISE OF COMPENSATION SECURITIES BY INDEPENDENT DIRECTORS
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
|
|
|
|
|
Difference
|
|
|
|
|
|
|
issued upon
|
|
|
|
|
|
|
|
between exercise
|
|
|
|
|
|
|
exercise of
|
|
|
|
|
|
Closing price
|
|
price and closing
|
|
Total value on
|
|
|
|
|
outstanding
|
|
Exercise price
|
|
Date of
|
|
date of exercise
|
|
price on date of
|
|
exercise date
|
|
|
Name and position
|
|
options (#)
|
|
($)
|
|
exercise
|
|
($)
|
|
exercise ($)
|
|
($)
|
|
|
SHAWN DYM
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Notes: none
Directors’ and Officers’ Liability Insurance
The Company maintains directors’ and officers’ liability insurance (“
D&O Insurance
”) for its directors and officers. The D&O Insurance insures the Company and its directors and officers against liability arising from wrongful acts of the Company’s directors and officers in their capacity as directors and officers of the Company, subject to limitations, if any, contained in the
Business Corporations Act
(Ontario), and has an aggregate policy limit of $50,000,000. No portion of the D&O Insurance is directly paid by any director or officer of the Company.
Indebtedness of directors and officers
No individual who is, or at any time during the most recently completed fiscal year of the Company was, a director or executive officer of the Company, nor any proposed nominee for election as a director of the Company, nor any associate of any of the foregoing is, or at any time since the beginning of the most recently completed fiscal year of the Company has been, indebted to the Company or any of its subsidiaries (other than in respect of amounts which would constitute routine indebtedness) or was indebted to another entity, which such indebtedness is, or was at any time since the beginning of the most recently completed fiscal year of the Company, the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of its subsidiaries, except for Mr. Gary Leong in the amount of $170,000, for a period of three months.
47
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following sets forth information in respect of securities authorized for issuance under the Company’s equity compensation plan as at May 31, 2018 (the last fiscal year end of the Company):
|
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
Weighted-average exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans
|
|
|
Equity compensation plans approved by Shareholders
|
|
9,124,655
|
(1)
|
$
|
7.46
|
|
11,892,337
|
|
|
Equity compensation plans not approved by Shareholders
|
|
—
|
|
$
|
—
|
|
—
|
|
|
Total
|
|
9,124,655
|
|
$
|
7.46
|
|
11,892,337
|
|
Notes:
(1)
Includes an aggregate of 8,118,481 Options outstanding and unexercised under the Existing Option Plan (or 3.86% of the issued and outstanding Common Shares as of May 31, 2018); an aggregate of 168,460 DSUs outstanding under the Existing DSU Plan (or 0.08% of the issued and outstanding Common Shares as of May 31, 2018); and an aggregate of 837,714 legacy options issued in connection with the Company’s acquisition of Nuuvera (or 0.40% of the issued and outstanding Common Shares as of May 31, 2018).
STOCK OPTION OVERHANG, DILUTION AND BURN RATES
|
|
|
2018
(4)
|
|
2017
|
|
2016
|
|
|
Burn Rate
(1)
|
|
4.27
|
%
|
2.16
|
%
|
0.97
|
%
|
|
Dilution
(2)
|
|
4.14
|
%
|
4.27
|
%
|
7.10
|
%
|
|
Overhang
(3)
|
|
9.92
|
%
|
9.98
|
%
|
10.00
|
%
|
Notes:
(1)
The number of Options and DSUs granted in a fiscal year, expressed as a percentage of the weighted average number of Common Shares - basic outstanding for the fiscal year.
(2)
Total number of Options and DSUs outstanding expressed as a percentage of the total number of Common Shares outstanding as at May 31
st
of each year.
(3)
Total number of Options and DSUs outstanding plus Options available for issue, expressed as a percentage of the total number of Common Shares outstanding as at May 31
st
of each year.
(4)
Includes all legacy options available for issuance in connection with the Company’s acquisition of Nuuvera.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
General
The Board and management believe that sound and effective corporate governance is essential to Aphria’s performance. Aphria has adopted certain practices and procedures to ensure that effective corporate governance practices are followed and that the Board functions independently of management. In addition, the CNG Committee reviews the Company’s corporate governance practices and procedures on a regular basis to ensure that they address significant issues of corporate governance. To comply with these various standards and achieve best practices, we have adopted comprehensive corporate governance policies and procedures. Our key policies and documents include the following:
48
·
Mandate of the Board
·
Charters of the Board Committees
·
Audit Committee
·
CNG Committee
·
Code of Business Conduct and Ethics
·
Whistleblower Policy
·
Corporate Disclosure Policy
·
Insider Trading Policy
·
Delegation of Authority Policy
The following sections set out a description of Aphria corporate governance practices as approved by the Board and in accordance with the requirements set forth in NI 58-101 — Disclosure of Corporate Governance Practices. A copy of our Board Mandate is attached to this Circular as Exhibit “B”.
Board of Directors
Independence
The Board is currently comprised of 7 directors, 3 of whom are independent. Independence is determined in accordance with NI 52-110. For fiscal 2018, the Board has determined that returning directors Shawn Dym and Renah Persofsky are independent within the meaning of NI 52-110 as well as newly nominated directors John Herhalt, Shlomo Bibas and Tom Looney. In addition, the Board has determined that the following director nominees are non-independent — Vic Neufeld, Cole Cacciavillani and John Cervini as a result of their senior management positions with the Company.
Common board memberships
The board has not adopted a policy limiting the number of directors who sit on the board of another public company but believes disclosure of common board memberships is important, See:
“Statement of Corporate Governance Practices - Other Public Company Directorships Held”.
Meetings of independent directors
Our Board believes that given its size and structure, it is able to facilitate independent judgment in carrying out its responsibilities. However, to further enhance such independent judgment, the Independent Directors may meet in the absence of senior executive officers or any non-independent directors. As a result of Dennis Staudt’s resignation, the independent directors will appoint a Lead Director after the AGM who is independent of management. The Lead Director in conjunction with the independent directors have opportunities to meet without management present, as required.
During the fiscal year ended May 31, 2018, the Board and the committees met as follows:
|
|
|
Meetings
held
|
|
Board
|
|
25
|
|
Audit Committee
|
|
5
|
|
CNG Committee
|
|
5
|
49
Attendance
The attendance record of each director is set out below:
|
Director
|
|
Board
meetings
attended
|
|
Audit
committee
meetings
attended
|
|
CNG
committee
meetings
attended
|
|
Annual
General and
Special
Meeting
|
|
Organizational
Meeting
|
|
Vic Neufeld
(1)
|
|
20
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
Cole Cacciavillani
|
|
21
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
John Cervini
|
|
22
|
|
N/A
|
|
N/A
|
|
1
|
|
1
|
|
Dennis Staudt
(2)
|
|
21
|
|
5
|
|
5
|
|
1
|
|
1
|
|
Philip Waddington
|
|
22
|
|
N/A
|
|
5
|
|
1
|
|
1
|
|
Renah Persofsky
|
|
18
|
|
5
|
|
5
|
|
0
|
|
0
|
|
Shawn Dym
|
|
19
|
|
5
|
|
N/A
|
|
1
|
|
1
|
Notes:
(1)
Chair of the Board.
(2)
Lead Director and Chair of the Audit Committee, until his resignation on September 14, 2018.
Chairman of the Board
Mr. Neufeld, serve as Chairman of the Board (the “
Chairman
”), and is not considered independent due to his position as CEO. The primary functions of the Chairman are to facilitate the operations and deliberations of the Board and the satisfaction of the Board’s responsibilities under its mandate. The Chair’s key responsibilities include duties relating to setting Board meeting agendas, chairing Board and Shareholder meetings, director development, providing input on potential director candidates and communicating with Shareholders and regulators.
Other public company directorships held
The following table sets out the directors and officers of the Company that are, or have been within the last five years, directors, officers or promoters of other reporting issuers:
50
|
Name of director,
officer or promoter
|
|
Name and
jurisdiction of
reporting issuer
|
|
Name of
exchange
|
|
Position
|
|
Period
|
|
Vic Neufeld
|
|
Reko International Group Inc.
|
|
TSX-V
|
|
Director
|
|
December 2004 — December 2016
|
|
|
|
Neptune Technologies & Bioresources Inc.
|
|
TSX
|
|
Director
|
|
July 12, 2016 — August 2017
|
|
|
|
Liberty Health Science
|
|
CSE
|
|
Director
|
|
July 2017 - present
|
|
Carl Merton
|
|
Reko International Group Inc.
|
|
TSX-V
|
|
Chief Financial Officer
|
|
October 2007 — November 2015
|
|
|
|
Tetra Bio-Pharma Inc.
|
|
TSX-V
|
|
Director
|
|
July 2017 — Present
|
|
John Cervini
|
|
Liberty Health Sciences
|
|
CSE
|
|
Director
|
|
July 2017 - present
|
Board Tenure
Aphria has not adopted a policy which imposes term limits for directors. We believe that it is crucial that directors understand our industry and our business and this requires a certain length of tenure on the Board. Long-term directors accumulate extensive company knowledge while new directors bring new experience and perspectives to the Board. It is important to achieve an appropriate balance of both to ensure an effective Board.
Board and Executive Management Diversity
Aphria recognizes the importance and benefit of having a Board and senior management comprised of individuals who are highly qualified based on their talents and experience, and embrace the benefits of diversity in perspective and background that enhance our Board’s and Aphria’s performance. Aphria does not differentiate by race, colour, ethnicity, religion, gender, sexual orientation, or any other aspect.
While the primary objectives of the CNG Committee are to ensure consideration of individuals who are highly qualified, based on their talents, experience, functional expertise, as well as personal skills, character, and qualities, the CNG Committee will follow a balanced approach in identifying the factors to be considered as new members are added to the team. In particular, the CNG Committee shall consider the level of representation of women and other diverse candidates on the Board when making recommendations for nominees to the Board and monitor the level of female representation on our Board and in senior management positions, with a view to continuing to broaden recruiting efforts to attract and interview qualified female candidates. This commitment extends to, and committing to retention and training to, ensure that our most talented employees are promoted from within our organization.
Currently, Aphria has one woman on the Board, representing approximately 11% of its proposed nine members. Also, while in Fiscal 2018 none of our senior executive officers are women, our full senior management team comprises one-third female representation. As the Company has been successful in
51
recruiting and retaining qualified female senior management members under its existing policies and processes, Aphria has not adopted any specific targets, but will promote its objectives through the initiatives set out in this policy with a view to identifying and fostering the development of a suitable pool of candidates for nomination or appointment over time. The Company shall select candidates that represent a diversity of business understanding, personal attributes, abilities and experience. The CNG Committee will also engage in periodic evaluation of individual Board members to identify strengths and areas for improvements, take measures to ensure that the nominee recruitment and identification process fosters progression of diverse candidates, and make recommendations in respect of diverse representation on the Board.
Assessments
The Board is in the process of developing a peer assessment process for its individual board members. This is an initiative of the CNG Committee for the upcoming year.
Mandate of the Board of Directors
The Board is responsible for supervising the management of Aphria business and affairs and has adopted the written mandate set forth in Exhibit “B”. The Board’s principal responsibilities relate to the stewardship of management and are summarized below:
·
Strategic planning
- the Board reviews and approves Aphria’s strategic planning process and annual strategic plan in light of Management’s assessment of emerging trends, the competitive environment, risk issues and significant business practices and products;
·
Risk management
- the Board reviews management reports on material risks associated with our businesses and operations, the implementation by Management of systems to manage these risks and material deficiencies in the operation of these systems;
·
Human resources management
- the Board with assistance from the CNG Committee reviews Aphria’s approach to human resource management and executive compensation, the extent to which senior management fosters a culture of integrity and succession planning for the Chief Executive Officer and key senior management positions;
·
Financial corporate governance
- the Board with assistance from the CNG Committee reviews Aphria’s approach to corporate governance, director independence, Aphria’s code of ethics and conduct, and policies relating to reputation and legal risk;
·
Financial information
- the Board with assistance from the Audit Committee reviews Aphria’s internal controls relating to financial information, management reports on material deficiencies relating to those controls and the integrity of Aphria’s financial information and systems;
·
Communications
- the Board reviews Aphria’s overall communications strategy, measures for receiving shareholder feedback and compliance with Aphria’s disclosure policy;
·
Board Committees
- the Board establishes committees and their mandates and requires committee chairs to present a report to the board on material matters considered by the committee at the next board meeting;
52
The mandate of the Board is reviewed and considered by the Board for approval each year.
Position Descriptions
Our Board has adopted a written position description for the Chairman, which sets out the Chair of the Board’s key responsibilities, including, among others, duties relating to setting Board meeting agendas, chairing Board and shareholder meetings, director development and communicating with shareholders and regulators.
Our Board has also adopted a written position description for our lead director. See “Meetings of Independent Directors” above. Our Board has adopted a written position description for the chair of the CNG Committee and the chair of the Audit Committee, each which sets such chair’s key responsibilities, including, among others, duties relating to setting committee meeting agendas, chairing committee meetings and working with the respective committee and management to ensure, to the greatest extent possible, the effective functioning of the committee.
The primary functions of the CEO are to lead the management of Aphria’s business and affairs and lead the implementation of the resolutions and policies of the Board, which include strategic planning, the operational direction of the Company and communicating with Shareholders. Our Board is in the process of developing a written position description for the CEO. This is an initiative of the Board for the upcoming year.
Orientation and continuing education
Aphria does not currently have an orientation or continuing education program for new directors but shall provide an orientation and education program to new Board members and continuing education as necessary.
Nomination of directors
Aphria has a standing CNG Committee which oversees the nomination of directors. Each of the three directors who comprise the CNG Committee in the prior year were independent within the meaning of NI 52-110.
Board committees
The Board had two committees in the fiscal year, Audit Committee and the CNG Committee (each alternatively a
“Committee”
and collectively, the
“Committees”
).
The CNG Committee shall review with the Board on an annual basis the current composition of the Board with a view to ensuring that the members of the Board have the independence, expertise, experience, personal qualities and ability to make the necessary time commitment to Aphria in light of the opportunities and risks facing Aphria.
The CNG Committee shall propose to the Board nominees they believe to be qualified to be directors and, in doing so, shall consider both the opportunities and risks facing Aphria and the independence, expertise, experience, personal qualities and ability to make the necessary time commitment of a proposed nominee in order to add value to Aphria.
53
Audit committee
The Audit Committee in fiscal 2018 consisted of Dennis Staudt, Shawn Dym and Renah Persofsky all of whom were considered “independent”, and all of whom are “financially literate” within the meaning of NI 52-110. Each of the Audit Committee members has an understanding of the accounting principles used to prepare Aphria’s financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting.
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of Aphria’s financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring Aphria’s compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of Aphria’s internal auditors, if any. The Audit Committee has specific responsibilities relating to Aphria’s financial reports; the external auditor; the internal audit function, if any; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on Aphria; and Aphria’s whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in
“Business of the Meeting — Election of Directors”
in the prior year’s Management Information Circular. The full text of the Audit Committee’s charter is disclosed in Exhibit “C”.
CNG committee
The fiscal 2018 CNG Committee consisted of Dennis Staudt, Philip Waddington and Renah Persofsky, all of whom were consider “independent” within the meaning of NI 52-110. The CNG Committee is charged with reviewing, overseeing and evaluating the governance and nominating policies and the compensation policies of Aphria. In addition, the CNG Committee is responsible for: (i) assessing the effectiveness of the Board, each of its committees and individual directors; (ii) overseeing the recruitment and selection of candidates as directors of the Company; (iii) organizing orientation and education programs for new directors and coordinating continuing director development programs; (iv) considering and approving proposals by the directors to engage outside advisers on behalf of the Board as a whole or on behalf of the independent directors; (v) reviewing and making recommendations to the Board concerning any change in the number of directors composing the Board; (vi) administering any stock option or purchase plan of the Company or any other compensation incentive programs; (vii) assessing the performance of the officers and other members of the executive management team of the Company; and (viii) reviewing and making recommendations to the Board concerning the level and nature of the compensation payable, if any, to the directors and officers of the Company.
Ethical Business Conduct
The Board has adopted a written Code of Conduct and Ethics applicable to all members of the Company, including directors, officers, employees, consultants and contractors, which has been filed with the Canadian securities regulatory authorities under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website under the Investors — Corporate Governance section. Each director, officer,
54
employee, consultant and contractor of the Company must provide an annual certification of compliance with the Code of Conduct and Ethics, confirming compliance with all laws, rules and regulations of the jurisdictions where they carry out their duties and where the Company is conducting its business activities, as well as compliance with all Company policies.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS
There is no indebtedness nor has there been any indebtedness outstanding from Directors or officers of the Company to the Company in fiscal 2018, except as elsewhere disclosed.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
There were no other material interests, direct or indirect, of Directors or officers of the Company, nominees for Director of the Company, any Shareholder who owns more than ten per cent of the Common Shares of the Company (or any Director or executive officer of any such Shareholder), or any known associate or affiliate of such persons, in any transaction during fiscal 2018 or in any proposed transaction which has materially affected or would materially affect the Company or any of their subsidiaries other than as disclosed herein.
INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE ACTED UPON
Management of the Company is not aware of any material interest of any Director, senior officer, or nominee for Director of the Company, or of any associate or affiliate of any of the foregoing, in respect of any matter to be acted on at the Meeting except as disclosed herein.
ADDITIONAL INFORMATION
The Company will provide to any person or Company, upon request, one copy of any of the following documents: (i) this Circular; (ii) the Company’s most recently filed consolidated annual financial statements, together with the accompanying report of the auditor; and (iii) any interim financial statements of the Company that have been filed for any period after the end of the Company’s most recently completed financial year.
Copies of the above documents will be provided, upon request, by the corporate secretary or investor relations at 245 Talbot St W, Suite 103, Leamington, ON N8H 1N8. Copies of these documents and other information relating to the Company are available on SEDAR at www.sedar.com and on the Company’s website at www.aphria.com. All our news releases are also available on our website.
55
APPROVAL
The contents and delivery of this management information circular has been approved by the board of directors and a copy has been sent to each shareholder who is eligible to receive notice of and vote his or her shares at the Meeting, as well as to each director and to the auditors.
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On behalf of the board of directors,
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“Vic Neufeld”
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Vic Neufeld
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Chair of the Board of Directors and Chief Executive Officer
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56
Exhibit “A”
Omnibus Incentive Plan Resolution
RESOLUTION APPROVING
THE OMNIBUS INCENTIVE PLAN
OF THE COMPANY
WHEREAS:
1.
The Board of Directors of Aphria Inc. (the “
Company
”) has adopted, effective as of September 24, 2018, an omnibus long-term incentive plan (the “
Omnibus Plan
”), as set out in Schedule “A-1” to Exhibit “A” of the Management Information Circular of the Company dated September 24, 2018 prepared for the purpose of the annual and special meeting of shareholders held on November 2, 2018, which Omnibus Plan does not have a fixed maximum number of common shares issuable;
2.
The rules of Toronto Stock Exchange (“
TSX
”) provide that all unallocated options, rights or other entitlements under a security based compensation arrangement which does not have a fixed number of maximum securities issuable, be approved every three (3) years;
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
All unallocated options and other incentive awards under the Omnibus Plan be and are hereby approved;
2.
The Company has the ability to continue granting options and other awards under the Omnibus Plan until November 2, 2021, which is the date that is three (3) years from the date of the shareholder meeting at which shareholder approval is being sought;
3.
the total number of Common Shares issuable pursuant to the Omnibus Plan, together with all other share based compensation arrangements of the Company shall be 10% of the issued shares outstanding at the time of any option or other award grant, subject to adjustment as set forth in the Omnibus Plan, and further subject to the applicable rules and regulations of all regulatory authorities to which the Company is subject, including the TSX;
4.
any officer or director of the Company be, and each is hereby, authorized and directed, for and on behalf of the Company, to sign and execute all documents, to conclude any agreements and to do and perform all acts and things deemed necessary or advisable in order to give effect to this resolution; and
5.
the Board of Directors of the Company be, and it is hereby, authorized to cause all measures to be taken, such further agreements to be entered into and such further documents to be executed as may be deemed necessary or advisable to give effect to and fully carry out the intent of this resolution.
A-
1
Exhibit “A”
Schedule “A-1”
See attached.
A-
2
APHRIA INC.
OMNIBUS LONG-TERM INCENTIVE PLAN
A-
3
TABLE OF CONTENTS
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Article 1 — DEFINITIONS
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5
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Section 1.1
|
Definitions
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5
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Article 2 — PURPOSE AND ADMINISTRATION OF THE PLAN; GRANTING OF AWARDS
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8
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Section 2.1
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Purpose of the Plan
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8
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Section 2.2
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Implementation and Administration of the Plan
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9
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Section 2.3
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Eligible Participants
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9
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Section 2.4
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Shares Subject to the Plan
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10
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Section 2.5
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Granting of Awards
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11
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Article 3 — OPTIONS
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11
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Section 3.1
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Nature of Options
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11
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Section 3.2
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Option Awards
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11
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Section 3.3
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Option Price
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11
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Section 3.4
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Option Term
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12
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Section 3.5
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Exercise of Options
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12
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Section 3.6
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Method of Exercise and Payment of Purchase Price
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12
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Section 3.7
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Option Agreements
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13
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Article 4 — DEFERRED SHARE UNITS
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14
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Section 4.1
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Nature of DSUs
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14
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Section 4.2
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DSU Awards
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14
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Section 4.3
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Redemption of DSUs
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14
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Section 4.4
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DSU Agreements
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15
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Article 5 — RESTRICTED SHARE UNITS
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15
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Section 5.1
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Nature of RSUs
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15
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Section 5.2
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RSU Awards
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15
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Section 5.3
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Restriction Period
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16
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Section 5.4
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Performance Criteria and Performance Period
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16
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Section 5.5
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RSU Vesting Determination Date
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17
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Section 5.6
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Settlement of RSUs
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17
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Section 5.7
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Determination of Amounts
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18
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Section 5.8
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RSU Agreements
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18
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Article 6 — GENERAL CONDITIONS
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18
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Section 6.1
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General Conditions applicable to Awards
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18
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Section 6.2
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General Conditions applicable to Awards
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19
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Section 6.3
|
Unfunded Plan
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21
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Article 7 — ADJUSTMENTS AND AMENDMENTS
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21
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Section 7.1
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Adjustment to Shares Subject to Outstanding Awards
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21
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Section 7.2
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Amendment or Discontinuance of the Plan
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22
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Section 7.3
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Change in Control
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23
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Article 8 — MISCELLANEOUS
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25
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Section 8.1
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Use of an Administrative Agent and Trustee
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25
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Section 8.2
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Tax Withholding
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25
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Section 8.3
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Reorganization of the Corporation
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25
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Section 8.4
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Governing Laws
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26
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Section 8.5
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Severability
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26
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Section 8.6
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Effective Date of the Plan
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26
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A-
4
APHRIA INC.
OMNIBUS LONG-TERM INCENTIVE PLAN
Aphria Inc. (the “
Corporation
”) hereby establishes an Omnibus Long-Term Incentive Plan for certain qualified directors, officers, employees, consultants and service providers providing ongoing services to the Corporation and its Affiliates (as defined herein) that can have a significant impact on the Corporation’s long-term results.
ARTICLE 1 — DEFINITIONS
Section 1.1
Definitions.
Where used herein or in any amendments hereto or in any communication required or permitted to be given hereunder, the following terms shall have the following meanings, respectively, unless the context otherwise requires:
“
Affiliates
” has the meaning given to this term in the Securities Act (Ontario), as such legislation may be amended, supplemented or replaced from time to time;
“
Associate
”, where used to indicate a relationship with a Participant, means (i) any partner of that Participant and (ii) the spouse of that Participant and that Participant’s children, as well as that Participant’s relatives and that Participant’s spouse’s relatives, if they share that Participant’s residence;
“
Awards
” means Options, RSUs, DSUs granted to a Participant pursuant to the terms of the Plan;
“
Black-Out Period
” means a period of time when pursuant to any policies of the Corporation, any securities of the Corporation may not be traded by certain persons designated by the Corporation;
“
Board
” has the meaning ascribed thereto in Section 2.2(1) hereof;
“
Business Day
” means a day other than a Saturday, Sunday or statutory holiday, when banks are generally open for business in Toronto, Ontario, Canada, for the transaction of banking business;
“
Cash Equivalent
” means the amount of money equal to the Market Value multiplied by the number of vested RSUs in the Participant’s Account, net of any applicable taxes in accordance with Section 8.2, on the RSU Settlement Date;
“
Change in Control
” means the occurrence of any of the following events: (i) the acquisition, directly or indirectly, by any Person or group of Persons acting jointly or in concert, within the meaning of National Instrument 62-104 - Takeover Bids and Issuer Bids (or any successor instrument thereto), of a beneficial interest in voting or equity securities of the Corporation, together with all voting or equity securities of the Corporation at the time held beneficially, directly or indirectly by such person or persons acting jointly or in concert, equal to more than 50% of the votes associated with the outstanding voting securities of the Corporation; (ii) a merger, consolidation, plan of
A-
5
arrangement or reorganization of the Corporation that results in the beneficial, direct or indirect transfer of more than 50% of the total voting power of the resulting entity’s outstanding securities to a person, or group of persons acting jointly and in concert, who are different from the person(s) that have, beneficially, directly or indirectly, more than 50% of the total voting power prior to such transaction; (iii) any sale, lease, exchange or other transfer (in one transaction or series of related transactions) of all or substantially all of the Corporation’s property and assets, or (iv) the Corporation’s shareholders approving any plan or proposal for the liquidation or dissolution of the Corporation
;
“
Code of Conduct
” means any code of conduct adopted by the Corporation, as modified from time to time;
“
Committee
” has the meaning ascribed thereto in Section 2.2(1) hereof;
“
Corporation
” means Aphria Inc., a corporation existing under the Business Corporations Act (Ontario), as amended from time to time;
“
DSU
” means a deferred share unit, which is a bookkeeping entry equivalent in value to a Share credited to a Participant’s Account in accordance with Article 4 hereof;
“
DSU Agreement
” means a written letter agreement between the Corporation and a Participant evidencing the grant of DSUs and the terms and conditions thereof, substantially in the form of Appendix “B”;
“
DSU Redemption Notice
” has the meaning ascribed thereto in Section 4.3(1) hereof;
“
Eligible Director
” means members of the Board who, at the time of execution of a Grant Agreement, and at all times thereafter while they continue to serve as a member of the Board, are not officers, senior executives or other employees of the Corporation or a Subsidiary, consultants or service providers providing ongoing services to the Corporation and its Affiliates;
“
Eligible Participants
” has the meaning ascribed thereto in Section 2.3(1) hereof;
“
Employment Agreement
” means, with respect to any Participant, any written employment agreement between the Corporation or an Affiliate and such Participant;
“
Exercise Notice
” means a notice in writing signed by a Participant and stating the Participant’s intention to exercise a particular Award, if applicable;
“
Grant Agreement
” means an agreement evidencing the grant to a Participant of an Award, including an Option Agreement, a DSU Agreement, a RSU Agreement or an Employment Agreement;
“
Insider
” has the meaning given to the term in Part I of the TSX Company Manual, as same may be amended, supplemented or replaced from time to time;
“
Market Value
” means at any date when the market value of Shares of the Corporation is to be determined, the closing price of the Shares on the Trading Day prior to the date of grant on the principal stock exchange on which the Shares are listed, or if the Shares
A-
6
of the Corporation are not listed on any stock exchange, the value as is determined solely by the Board, acting reasonably and in good faith;
“
Option
” means an option granted to the Corporation to a Participant entitling such Participant to acquire a designated number of Shares from treasury at the Option Price, but subject to the provisions hereof;
“
Option Agreement
” means a written letter agreement between the Corporation and a Participant evidencing the grant of Options and the terms and conditions thereof, substantially in the form set out in Appendix “A”;
“
Option Price
” has the meaning ascribed thereto in Section 3.3 hereof;
“
Option Term
” has the meaning ascribed thereto in Section 3.4 hereof;
“
Participants
” means Eligible Participants that are granted Awards under the Plan;
“
Participant’s Account
” means an account maintained for each Participant’s participation in DSUs and/or RSUs under the Plan;
“
Performance Criteria
” means criteria established by the Board which, without limitation, may include criteria based on the Participant’s personal performance and/or the financial performance of the Corporation and/or of its Affiliates, and that may be used to determine the vesting of the Awards, when applicable;
“
Performance Period
” means the period determined by the Board pursuant to Section 5.3 hereof;
“
Person
” means an individual, corporation, company, cooperative, partnership, trust, unincorporated association, entity with juridical personality or governmental authority or body, and pronouns which refer to a Person shall have a similarly extended meaning;
“
Plan
” means this Omnibus Long-Term Incentive Plan, as amended and restated from time to time;
“
Restriction Period
” means the period determined by the Board pursuant to Section 5.3 hereof;
“
RSU
” means a right awarded to a Participant to receive a payment in the form of Shares as provided in Article 4 hereof and subject to the terms and conditions of this Plan;
“
RSU Agreement
” means a written letter agreement between the Corporation and a Participant evidencing the grant of RSUs and the terms and conditions thereof, substantially in the form of Appendix “C”;
“
RSU Settlement Date
” has the meaning determined in Section 5.6(1)(a);
“
RSU Settlement Notice
” means a notice by a Participant to the Corporation electing the desired form of settlement of vested RSUs.
A-
7
“
RSU Vesting Determination Date
” has the meaning described thereto in Section 5.5 hereof;
“
Share Compensation Arrangement
” means a stock option, stock option plan, employee stock purchase plan, long-term incentive plan or any other compensation or incentive mechanism involving the issuance or potential issuance of Shares to one or more full-time employees, directors, officers, insiders, service providers or consultants of the Corporation or a Subsidiary including a share purchase from treasury by a full-time employee, director, officer, insider, service provider or consultant which is financially assisted by the Corporation or a Subsidiary by way of a loan, guarantee or otherwise;
“
Shares
” means the common shares in the capital of the Corporation;
“
Subsidiary
” means a corporation, company, partnership or other body corporate that is controlled, directly or indirectly, by the Corporation;
“
Successor Corporation
” has the meaning ascribed thereto in Section 7.1(3) hereof;
“
Surrender
” has the meaning ascribed thereto in Section 3.6(3);
“
Surrender Notice
” has the meaning ascribed thereto in Section 3.6(3);
“
Tax Act
” means the Income Tax Act (Canada) and its regulations thereunder, as amended from time to time.
“
Termination Date
” means the date on which a Participant ceases to be an Eligible Participant;
“
Trading Day
” means any day on which the TSX is opened for trading;
“
TSX
” means the Toronto Stock Exchange; and
“
Vested Awards
” has the meaning described thereto in Section 6.2(2) hereof.
ARTICLE 2 — PURPOSE AND ADMINISTRATION OF THE PLAN; GRANTING OF AWARDS
Section 2.1
Purpose of the Plan.
(1)
The purpose of the Plan is to permit the Corporation to grant Awards to Eligible Participants, subject to certain conditions as hereinafter set forth, for the following purposes:
(a)
to increase the interest in the Corporation’s welfare of those Eligible Participants, who share responsibility for the management, growth and protection of the business of the Corporation or a Subsidiary;
(b)
to provide an incentive to such Eligible Participants to continue their services for the Corporation or a Subsidiary and to encourage such Eligible Participants
A-
8
whose skills, performance and loyalty to the objectives and interests of the Corporation or a Subsidiary are necessary or essential to its success, image, reputation or activities;
(c)
to reward the Participants for their performance of services while working for the Corporation or a Subsidiary; and
(d)
to provide a means through which the Corporation or a Subsidiary may attract and retain able Persons to enter its employment.
Section 2.2
Implementation and Administration of the Plan.
(1)
The Plan shall be administered and interpreted by the Board or, if the Board by resolution so decides, by a committee appointed by the Board (the “Committee”) and consisting of not less than three (3) members of the Board. If a Committee is appointed for this purpose, all references to the term “Board” will be deemed to be references to the Committee.
(2)
The Board may, from time to time, as it may deem expedient, adopt, amend and rescind rules and regulations for carrying out the provisions and purposes of the Plan, subject to any applicable rules of the TSX. Subject to the provisions of the Plan, the Board is authorized, in its sole discretion, to make such determinations under, and such interpretations of, and take such steps and actions in connection with, the proper administration of the Plan as it may deem necessary or advisable. The interpretation, construction and application of the Plan and any provisions hereof made by the Board shall be final and binding on all Eligible Participants.
(3)
No member of the Board or of the Committee shall be liable for any action or determination taken or made in good faith in the administration, interpretation, construction or application of the Plan or any Award granted hereunder.
(4)
Any determination approved by a majority of the Board shall be deemed to be a determination of that matter by the Board.
Section 2.3
Eligible Participants.
(1)
The Persons who shall be eligible to receive Awards (“Eligible Participants”) shall be the directors, officers, senior executives and other employees of the Corporation or a Subsidiary, consultants and service providers providing ongoing services to the Corporation and its Affiliates, who the Board may determine from time to time, in its sole discretion, to hold key positions in the Corporation or a Subsidiary. In determining Awards to be granted under the Plan, the Board shall give due consideration to the value of each Eligible Participant’s present and potential future contribution to the Corporation’s success. For greater certainty, a Person whose employment with the Corporation or a Subsidiary has ceased for any reason, or who has given notice or been given notice of such cessation, whether such cessation was initiated by such employee, the Corporation or such Subsidiary, as the case may be, shall cease to be eligible to receive Awards hereunder as of the date on which such Person provides notice to the Corporation or the Subsidiary, as the case may be, in writing or verbally, of such
A-
9
cessation, or on the Termination Date for any cessation of a Participant’s employment initiated by the Corporation.
(2)
Participation in the Plan shall be entirely voluntary and any decision not to participate shall not affect an Eligible Participant’s relationship or employment with the Corporation.
(3)
Notwithstanding any express or implied term of this Plan to the contrary, the granting of an Award pursuant to the Plan shall in no way be construed as a guarantee of employment by the Corporation to the Participant.
Section 2.4
Shares Subject to the Plan.
(1)
Subject to adjustment pursuant to provisions of Article 7 hereof, the total number of Shares reserved and available for grant and issuance pursuant to Awards shall not exceed ten percent (10%) of the total issued and outstanding Shares of the Corporation (on a non-diluted basis) from time to time, less the number of Shares reserved for issuance under all other Share Compensation Arrangements of the Corporation. Every three years after the effective date of the Plan, all unallocated Awards under the Plan shall be submitted for approval to the Board and the shareholders of the Corporation. No more than one percent (1%) of the total issued and outstanding Shares of the Corporation (on a non-diluted basis) from time to time, shall be reserved and available for grant and issuance pursuant to Awards to the Eligible Directors. For greater certainty, the Shares reserved and available for grant and issuance to the Eligible Directors, shall be included in the total number of Shares generally available for grant and issuance pursuant to Awards pursuant to this Section 2.4(1).
(2)
This Plan is considered an “evergreen” plan, since the Shares covered by grants which have been exercised shall be available for subsequent grants under the Plan and the number of Shares available to grant increases as the number of issued and outstanding Shares increases.
(3)
Shares in respect of which an Award is granted under the Plan, but not exercised prior to the termination of such Award or not vested or delivered prior to the termination of such Award due to the expiration, termination or lapse of such Award, shall be available for Awards to be granted thereafter pursuant to the provisions of the Plan. All Shares issued pursuant to the exercise or the vesting of the Awards granted under the Plan shall be so issued as fully paid and non-assessable Shares.
(4)
Subject to adjustment pursuant to provisions of Article 7 hereof, the aggregate number of Shares (i) issued to Insiders under the Plan or any other proposed or established Share Compensation Arrangement within any one-year period and (ii) issuable to Insiders at any time under the Plan or any other proposed or established Share Compensation Arrangement, shall in each case not exceed ten percent (10%) of the total issued and outstanding Shares of the Corporation (on a non-diluted basis) from time to time.
(5)
Eligible Directors shall not be entitled to any grant or issuance of Options pursuant to this Plan. The aggregate equity value of all Awards that are eligible to be settled in Shares granted to an Eligible Director, within a one-year period, pursuant to all Share
A-
10
Compensation Arrangements (including, for greater certainty, the Plan) shall not exceed $150,000.
Section 2.5
Granting of Awards.
(1)
Any Award granted under the Plan shall be subject to the requirement that, if at any time counsel to the Corporation shall determine that the listing, registration or qualification of the Shares subject to such Award, if applicable, upon any securities exchange or under any law or regulation of any jurisdiction, or the consent or approval of any securities exchange or any governmental or regulatory body, is necessary as a condition of, or in connection with, the grant or exercise of such Award or the issuance or purchase of Shares thereunder, if applicable, such Award may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board. Nothing herein shall be deemed to require the Corporation to apply for or to obtain such listing, registration, qualification, consent or approval.
(2)
Any Award granted under the Plan shall be subject to the requirement that, the Corporation has the right to place any restriction or legend on any securities issued pursuant to this Plan including, but in no way limited to placing a legend to the effect that the securities have not been registered under the United States Securities Act of 1933 and may not be offered or sold in the United States unless registration or an exemption from registration is available.
ARTICLE 3 — OPTIONS
Section 3.1
Nature of Options.
An Option is an option granted by the Corporation to a Participant entitling such Participant to acquire, for each Option issued, one Share from treasury at the Option Price, but subject to the provisions hereof.
Section 3.2
Option Awards.
Subject to the provisions set forth in this Plan and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive Options under the Plan, (ii) fix the number of Options, if any, to be granted to each Eligible Participant and the date or dates on which such Options shall be granted, (iii) determine the price per Share to be payable upon the exercise of each such Option (the “
Option Price
”) and the relevant vesting provisions (including Performance Criteria, if applicable) and Option Term, the whole subject to the terms and conditions prescribed in this Plan, in any Option Agreement and any applicable rules of the TSX.
Section 3.3
Option Price.
The Option Price for Shares that are the subject of any Option shall be fixed by the Board when such Option is granted, but shall not be less than the Market Value of such Shares at the time of the grant.
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Section 3.4
Option Term.
(1)
The Board shall determine, at the time of granting the particular Option, the period during which the Option is exercisable, commencing on the date such Option is granted to the Participant and ending as specified in this Plan, or in the Option Agreement, but in no event shall an Option expire on a date which is later than ten (10) years from the date the Option is granted (“Option Term”). Unless otherwise determined by the Board, all unexercised Options shall be cancelled at the expiry of such Options.
(2)
Should the expiration date for an Option fall within a Black-Out Period or within nine (9) Business Days following the expiration of a Black-Out Period, such expiration date shall be automatically extended without any further act or formality to that date which is the tenth Business Day after the end of the Black-Out Period, such tenth Business Day to be considered the expiration date for such Option for all purposes under the Plan. Notwithstanding Section 7.2 hereof, the ten (10) Business Day-period referred to in this Section 3.4 may not be extended by the Board.
Section 3.5
Exercise of Options.
(1)
Subject to the provisions of this Plan, a Participant shall be entitled to exercise an Option granted to such Participant at any time prior to the expiry of the Option Term, subject to vesting limitations which may be imposed by the Board at the time such Option is granted.
(2)
Prior to its expiration or earlier termination in accordance with the Plan, each Option shall be exercisable as to all or such part or parts of the optioned Shares and at such time or times and/ or pursuant to the achievement of such Performance Criteria and/ or other vesting conditions as the Board at the time of granting the particular Option, may determine in its sole discretion. For greater certainty, no Option shall be exercised by a Participant during a Black-Out Period.
Section 3.6
Method of Exercise and Payment of Purchase Price.
(1)
Subject to the provisions of the Plan and the alternative exercise procedures set out herein, an Option granted under the Plan may be exercisable (from time to time as provided in Section 3.5 hereof) by the Participant (or by the liquidator, executor or administrator, as the case may be, of the estate of the Participant) by delivering a fully completed Exercise Notice to the Corporation at its registered office to the attention of the Corporate Secretary of the Corporation (or the individual that the Corporate Secretary of the Corporation may from time to time designate), together with a bank draft, certified cheque or other form of payment acceptable to the Corporation in an amount equal to the aggregate Option Price of the Shares to be purchased pursuant to the exercise of the Options.
(2)
Pursuant to the Exercise Notice and subject to the approval of the Board, a Participant may choose to undertake a “cashless exercise” with the assistance of a broker in order to facilitate the exercise of such Participant’s Options. The “cashless exercise” procedure may include a sale of such number of Shares as is necessary to raise an amount equal to the aggregate Option Price for all Options being exercised by that Participant under an Exercise Notice. Pursuant to the Exercise Notice, the Participant may authorize the broker to sell Shares on the open market by means of a short sale and forward the
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proceeds of such short sale to the Corporation to satisfy the Option Price, promptly following which the Corporation shall issue the Shares underlying the number of Options as provided for in the Exercise Notice.
(3)
In addition, in lieu of exercising any vested Option in the manner described in this Section 3.6, and pursuant to the terms of this Article 3, a Participant may, by surrendering an Option (“Surrender”) with a properly endorsed notice of Surrender to the Secretary of the Corporation, substantially in the form of Exhibit “C” to the Option Agreement (a “Surrender Notice”), elect to receive that number of Shares calculated using the following formula:
X = Y * (A-B) / A
Where:
X = the number of Shares to be issued to the Participant
Y = the number of Shares underlying the Options to be Surrendered
A = the Market Value of the Shares as at the date of the Surrender
B = the Option Price of such Options
(4)
Where Shares are to be issued to the Participant pursuant to the terms of this Section 3.6, as soon as practicable following the receipt of the Exercise Notice and, if Options are exercised only in accordance with the terms of Section 3.6(1), the required bank draft, certified cheque or other acceptable form of payment, the Corporation shall duly issue such Shares to the Participant as fully paid and non-assessable.
(5)
Upon the exercise of an Option pursuant to Section 3.6(1) or Section 3.6(3), the Corporation shall, as soon as practicable after such exercise but no later than ten (10) Business Days following such exercise, forthwith cause the transfer agent and registrar of the Shares to either:
(a)
deliver to the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) a certificate in the name of the Participant representing in the aggregate such number of Shares as the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall have then paid for and as are specified in such Exercise Notice; or
(b)
in the case of Shares issued in uncertificated form, cause the issuance of the aggregate number of Shares the Participant (or the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall have then paid for and as are specified in such Exercise Notice to be evidenced by a book position on the register of the shareholders of the Corporation to be maintained by the transfer agent and registrar of the Shares.
Section 3.7
Option Agreements.
Options shall be evidenced by an Option Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 3 and Article 6 hereof be included therein. The Option Agreement shall contain such terms that may be considered necessary in order that the
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Option will comply with any provisions respecting options in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 4 — DEFERRED SHARE UNITS
Section 4.1
Nature of DSUs.
A DSU is an Award of phantom share units to an Eligible Director, subject to restrictions and conditions as the Board may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/ or achievement of pre-established vesting and performance goals and objectives.
Section 4.2
DSU Awards.
(1)
Each Eligible Director shall receive his or her annual retainer fee in the form of a grant of DSUs in each fiscal year. The number of DSUs shall be calculated as the Eligible Director’s annual retainer fee divided by the Market Value. At the discretion of the Board, fractional DSUs will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
(2)
Unless otherwise set forth in the DSU Agreement, each DSU shall vest as to 50% on the sixth month anniversary of the date of grant and 50% on the anniversary of the date of grant.
(3)
The DSUs are structured so as to be considered to be a plan described in section 7 of the Tax Act or any successor to such provision.
(4)
Subject to vesting and other conditions and provisions set forth herein and in the DSU Agreement, each DSU awarded to an Eligible Director shall entitle the Eligible Director to redeem such DSU in exchange for one (1) Share issued from treasury.
Section 4.3
Redemption of DSUs.
(1)
Each Eligible Director shall be entitled to redeem his or her DSUs during the period commencing on the Business Day immediately following the Termination Date and ending on the date that is two years following the Termination Date, or a shorter such redemption period set out in the relevant DSU Agreement, by providing a written notice of settlement to the Corporation setting out the number of DSUs to be settled and the particulars regarding the registration of the Shares issuable upon settlement (the “DSU Redemption Notice”). In the event of the death of an Eligible Director, the Notice of Redemption shall be filed by the administrator or liquidator of the estate of the Eligible Director.
(2)
If a DSU Redemption Notice is not received by the Corporation on or before the 90
th
day following the Termination Date, the Eligible Director shall be deemed to have delivered a DSU Redemption Notice and the Corporation shall redeem all of the Eligible Director’s DSUs in exchange for Shares to be delivered to the Eligible Director, administrator or liquidator of the estate of the Eligible Director, as applicable.
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(3)
For the purposes of determining the number of Shares from treasury to be issued and delivered to an Eligible Director upon redemption of DSUs pursuant to Section 4.3, such calculation will be made on the date the Corporation receives, or is deemed to receive, the DSU Redemption Notice and be the whole number of Shares equal to the whole number of DSUs then recorded in the Eligible Director’s Account which the Eligible Director requests or is deemed to request to redeem pursuant to the DSU Redemption Notice. Shares issued from treasury will be issued in consideration for the past services of the Eligible Director to the Corporation and the entitlement of the Eligible Director under this Plan shall be satisfied in full by such issuance of Shares.
(4)
Subject to Section 4.3(5), settlement of DSUs shall take place promptly following the Corporation’s receipt or deemed receipt of the DSU Redemption Notice through delivery of a share certificate to the Eligible Director or the entry of the Eligible Director’s name on the share register for the Shares.
(5)
Notwithstanding any other provision of this Plan, in the event that (i) a DSU Redemption Notice is received during a Black-Out Period or other trading restriction imposed by the Corporation; or (ii) the Eligible Director has not delivered a DSU Redemption Notice and the 90
th
day following the Termination Date falls during a Black-Out Period or other trading restriction imposed by the Corporation, then settlement of the applicable DSUs shall be automatically extended to the tenth (10
th
) Business Day following the date that such Black-Out Period or other trading restriction is lifted, terminated or removed.
Section 4.4
DSU Agreements.
DSUs shall be evidenced by a DSU Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 4 and Article 6 hereof be included therein. The DSU Agreement shall contain such terms that may be considered necessary in order that the DSU will comply with any provisions respecting deferred share units in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 5 — RESTRICTED SHARE UNITS
Section 5.1
Nature of RSUs.
A RSU is an Award entitling the recipient to acquire Shares, at such purchase price (which may be zero) as determined by the Board, subject to such restrictions and conditions as the Board may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/ or achievement of pre-established performance goals and objectives.
Section 5.2
RSU Awards.
(1)
Subject to the provisions herein set forth and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive RSUs under the Plan, (ii) fix the number of RSUs, if any, to be granted to each Eligible Participant and the date or dates on which such RSUs shall be granted, and (iii) determine the relevant
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conditions and vesting provisions (including the applicable Performance Period and Performance Criteria, if any) and Restriction Period of such RSUs, the whole subject to the terms and conditions prescribed in this Plan and in any RSU Agreement.
(2)
Unless otherwise set forth in the RSU Agreement, each RSU shall vest as to 1/3 on each of the first, second and third anniversary of the date of grant.
(3)
The RSUs are structured so as to be considered to be a plan described in section 7 of the Tax Act or any successor to such provision.
(4)
Subject to the vesting and other conditions and provisions set forth herein and in the RSU Agreement, the Board shall determine whether each RSU awarded to a Participant shall entitle the Participant: (i) to receive one Share issued from treasury; (ii) to receive the Cash Equivalent of one Share; or (iii) to elect to receive either One Share from treasury, the Cash Equivalent of One Share or a combination of cash and Shares.
(5)
RSUs shall be settled by the Participant at any time beginning on the first Business Day following their RSU Vesting Determination Date but no later than the RSU Settlement Date.
Section 5.3
Restriction Period.
The applicable restriction period in respect of a particular RSU award shall be determined by the Board but in all cases shall end no later than December 31 of the calendar year which is three (3) years after the calendar year in which the Award is granted (“
Restriction Period
”). For example, the Restriction Period for a grant made in June 2018 shall end no later than December 31, 2021. Subject to the Board’s determination, any vested RSUs with respect to a Restriction Period will be paid to Participants in accordance with Article 5, no later than the end of the Restriction Period. Unless otherwise determined by the Board, all unvested RSUs shall be cancelled on the RSU Vesting Determination Date (as such term is defined in Section 5.5) and, in any event, no later than the last day of the Restriction Period.
Section 5.4
Performance Criteria and Performance Period.
(1)
For each award of RSUs, the Board shall establish the period in which any Performance Criteria and other vesting conditions must be met in order for a Participant to be entitled to receive Shares in exchange for all or a portion of the RSUs held by such Participant (the “Performance Period”), provided that such Performance Period may not expire after the end of the Restriction Period, being no longer than three (3) years after the calendar year in which the Award was granted. For example, a Performance Period determined by the Board to be for a period of three (3) financial years will start on the first day of the financial year in which the award is granted and will end on the last day of the second financial year after the year in which the grant was made. In such a case, for a grant made on January 4, 2018, the Performance Period will start on January 1, 2018 and will end on December 31, 2020.
(2)
For each award of RSUs, the Board shall establish any Performance Criteria and other vesting conditions which must be met during the Performance Period in order for a Participant to be entitled to receive Shares in exchange for his or her RSUs.
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Section 5.5
RSU Vesting Determination Date.
The vesting determination date means the date on which the Board determines if the Performance Criteria and/or other vesting conditions with respect to a RSU have been met (the “
RSU Vesting Determination Date
”), and as a result, establishes the number of RSUs that become vested, if any. For greater certainty, the RSU Vesting Determination Date must fall after the end of the Performance Period, if any, but no later than the last day of the Restriction Period. Unless otherwise specified in the RSU Agreements, one-third of RSUs awarded pursuant to a RSU Agreement shall vest on each of the first three anniversaries of the date of grant.
Section 5.6
Settlement of RSUs.
(1)
Except as otherwise provided in the RSU Agreement, in the event that the vesting conditions, the Performance Criteria and Performance Period, if applicable, of an RSU are satisfied:
(a)
all of the vested RSUs covered by a particular grant may, subject to Section 5.6(4), be settled at any time beginning on the first Business Day following their RSU Vesting Determination Date but no later than the date that is five (5) years from their RSU Vesting Determination Date (the “
RSU Settlement Date
”); and
(b)
a Participant is entitled to deliver to the Corporation, on or before the RSU Settlement Date, an RSU Settlement Notice in respect of any or all vested RSUs held by such Participant.
(2)
Subject to Section 5.6(4), settlement of RSUs shall take place promptly following the RSU Settlement Date and take the form set out in the RSU Settlement Notice through:
(a)
in the case of settlement of RSUs for their Cash Equivalent, delivery of a cheque to the Participant representing the Cash Equivalent;
(b)
in the case of settlement of RSUs for Shares, delivery of a share certificate to the Participant or the entry of the Participant’s name on the share register for the Shares; or
(c)
in the case of settlement of the RSUs for a combination of Shares and the Cash Equivalent, a combination of (a) and (b) above.
(3)
If an RSU Settlement Notice is not received by the Corporation on or before the RSU Settlement Date, settlement shall take the form of Shares issued from treasury as set out in Section 5.7(2).
(4)
Notwithstanding any other provision of this Plan, in the event that an RSU Settlement Date falls during a Black-Out Period or other trading restriction imposed by the Corporation and the Participant has not delivered an RSU Settlement Notice, then such RSU Settlement Date shall be automatically extended to the tenth (10
th
) Business Day following the date that such Black-Out Period or other trading restriction is lifted, terminated or removed.
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Section 5.7
Determination of Amounts.
(1)
Cash Equivalent of RSUs
.
For purposes of determining the Cash Equivalent of RSUs to be made pursuant to Section 5.6, such calculation will be made on the RSU Settlement Date and shall equal the Market Value on the RSU Settlement Date multiplied by the number of vested RSUs in the Participant’s Account which the Participant desires to settle in cash pursuant to the RSU Settlement Notice.
(2)
Payment in Shares; Issuance of Shares from Treasury
. For the purposes of determining the number of Shares from treasury to be issued and delivered to a Participant upon settlement of RSUs pursuant to Section 5.6, such calculation will be made on the RSU Settlement Date and be the whole number of Shares equal to the whole number of vested RSUs then recorded in the Participant’s Account which the Participant desires to settle pursuant to the RSU Settlement Notice. Shares issued from treasury will be issued in consideration for the past services of the Participant to the Corporation and the entitlement of the Participant under this Plan shall be satisfied in full by such issuance of Shares.
Section 5.8
RSU Agreements.
RSUs shall be evidenced by a RSU Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 4 and Article 6 hereof be included therein. The RSU Agreement shall contain such terms that may be considered necessary in order that the RSU will comply with any provisions respecting restricted share units in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 6 — GENERAL CONDITIONS
Section 6.1
General Conditions applicable to Awards.
Each Award, as applicable, shall be subject to the following conditions:
(1)
Employment
- The granting of an Award to a Participant shall not impose upon the Corporation or a Subsidiary any obligation to retain the Participant in its employ in any capacity. For greater certainty, the granting of Awards to a Participant shall not impose any obligation on the Corporation to grant any awards in the future nor shall it entitle the Participant to receive future grants.
(2)
Rights as a Shareholder
- Neither the Participant nor such Participant’s personal representatives or legatees shall have any rights whatsoever as shareholder in respect of any Shares covered by such Participant’s Awards until the date of issuance of a share certificate to such Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) or the entry of such person’s name on the share register for the Shares. Without in any way limiting the generality of the foregoing, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such share certificate is issued or entry of such person’s name on the share register for the Shares.
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(3)
Conformity to Plan —
In the event that an Award is granted or a Grant Agreement is executed which does not conform in all particulars with the provisions of the Plan, or purports to grant Awards on terms different from those set out in the Plan, the Award or the grant of such Award shall not be in any way void or invalidated, but the Award so granted will be adjusted to become, in all respects, in conformity with the Plan.
(4)
Non-Transferability —
Except as set forth herein, Awards are not transferable. Awards may be exercised only by:
(a)
the Participant to whom the Awards were granted; or
(b)
with the Corporation’s prior written approval and subject to such conditions as the Corporation may stipulate, such Participant’s family or retirement savings trust or any registered retirement savings plans or registered retirement income funds of which the Participant is and remains the annuitant; or
(c)
upon the Participant’s death, by the legal representative of the Participant’s estate; or
(d)
upon the Participant’s incapacity, the legal representative having authority to deal with the property of the Participant;
provided that any such legal representative shall first deliver evidence satisfactory to the Corporation of entitlement to exercise any Award. A person exercising an Award may subscribe for Shares only in the person’s own name or in the person’s capacity as a legal representative.
Section 6.2
General Conditions applicable to Awards.
Each Award shall be subject to the following conditions:
(1)
Termination for Cause
. Upon a Participant ceasing to be an Eligible Participant for “cause”, all unexercised vested or unvested Awards granted to such Participant shall terminate on the effective date of the termination as specified in the notice of termination. For the purposes of the Plan, the determination by the Corporation that the Participant was discharged for cause shall be binding on the Participant. “Cause” shall include, among other things, gross misconduct, theft, fraud, breach of confidentiality or breach of the Corporation’s Code of Conduct and any reason determined by the Corporation to be cause for termination.
(2)
Retirement
. In the case of a Participant’s retirement, any unvested Awards held by the Participant as at the Termination Date will continue to vest in accordance with their vesting schedules, and all vested Awards held by the Participant at the Termination Date may be exercised until the earlier of the expiry date of the Awards or three (3) years following the Termination Date, provided that if the Participant is determined to have breached any post-employment restrictive covenants in favour of the Corporation, then any Awards held by the Participant, whether vested or unvested, will immediately expire and the Participant shall pay to the Corporation any ‘‘in-the-money’’ amounts realized upon exercise of Awards following the Termination Date.
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(3)
Resignation
. In the case of a Participant ceasing to be an Eligible Participant due to such Participant’s resignation, subject to any later expiration dates determined by the Board, all Awards shall expire on the earlier of ninety (90) days after the effective date of such resignation, or the expiry date of the Award, to the extent such Awards were vested and exercisable by the Participant on the effective date of such resignation and all unexercised unvested Awards granted to such Participant shall terminate on the effective date of such resignation.
(4)
Termination or Cessation
. In the case of a Participant ceasing to be an Eligible Participant for any reason (other than for “cause”, resignation or death) the number of Awards that may vest is subject to pro ration over the applicable vesting or performance period and shall expire on the earlier of ninety (90) days after the effective date of the Termination Date, or the expiry date of the Awards. For greater certainty, the pro ration calculation referred to above shall be net of previously vested Awards.
(5)
Death
. If a Participant dies while in his or her capacity as an Eligible Participant, all unvested Awards will immediately vest and all Awards will expire one hundred eighty (180) days after the death of such Participant.
(6)
Change in Control
. If a Participant is terminated without “cause” or resigns for good reason during the 12 month period following a Change in Control, or after the Corporation has signed a written agreement to effect a change of control but before the change of control is completed, then any unvested Awards will immediately vest and may be exercised within thirty (30) days of such date.
(7)
Clawback
. It is a condition of each grant of an Award that if the Corporation’s financial statements (the “
Original Statements
”) are required to be restated (other than as a result of a change in accounting policy by the Corporation or under International Financial Reporting Standards applicable to the Corporation) within three years following which such Original Statements were received by shareholders at the Corporation’s then most recent annual general meeting of shareholders, and such restated financial statements (the “
Restated Statements
”) disclose, in the opinion of the Board, acting reasonably, materially worse financial results than those contained in the Original Statements, then the Board may, in its sole discretion, to the full extent permitted by governing law and to the extent it determines that such action is in the best interest of the Corporation, and in addition to any other rights that the Corporation or an Affiliate may have at law or under any agreement, take any or all of the following actions, as applicable): (i) require the Participant to reimburse the Corporation for any amount paid to the Participant in respect of an Award in cash in excess of the amount that should otherwise have been paid in respect of such Award had the determination of such compensation been based upon the Restated Statements, less, in any event, the amount of tax withheld pursuant to the Tax Act or other relevant taxing authority in respect of the amount paid in cash in the year of payment; (ii) cancel and terminate any one or more unvested Awards on or prior to the applicable maturity or vesting dates, or cancel or terminate any outstanding Awards which have vested in the twelve (12) months prior to the date on which the Board determines that the Corporation’s Original Statements are required to be restated (a “
Relevant Equity Recoupment Date
”); and/or (iii) require payment to the Corporation of the value of any Shares of the Corporation acquired by the Participant pursuant to an Award granted in the twelve (12) months prior to a Relevant Equity
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Recoupment Date (less any amount paid by the Participant) to acquire such Shares and less the amount of tax withheld pursuant to the Tax Act or other relevant taxing authority in respect of such Shares).
Section 6.3
Unfunded Plan.
Unless otherwise determined by the Board, this Plan shall be unfunded. To the extent any Participant or his or her estate holds any rights by virtue of a grant of Awards under this Plan, such rights (unless otherwise determined by the Board) shall be no greater than the rights of an unsecured creditor of the Corporation. Notwithstanding the foregoing, any determinations made shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations, adopted under the Income Tax Act (Canada) or any successor provision thereto.
ARTICLE 7 — ADJUSTMENTS AND AMENDMENTS
Section 7.1
Adjustment to Shares Subject to Outstanding Awards.
(1)
In the event of any subdivision of the Shares into a greater number of Shares at any time after the grant of an Award to a Participant and prior to the expiration of the term of such Award, the Corporation shall deliver to such Participant, at the time of any subsequent exercise or vesting of such Award in accordance with the terms hereof, in lieu of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award, but for the same aggregate consideration payable therefor, such number of Shares as such Participant would have held as a result of such subdivision if on the record date thereof the Participant had been the registered holder of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award.
(2)
In the event of any consolidation of Shares into a lesser number of Shares at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Corporation shall deliver to such Participant at the time of any subsequent exercise or vesting of such Award in accordance with the terms hereof in lieu of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award, but for the same aggregate consideration payable therefor, such number of Shares as such Participant would have held as a result of such consideration if on the record date thereof the Participant had been the registered holder of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award.
(3)
If at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Shares shall be reclassified, reorganized or otherwise changed, otherwise than as specified in Section 7.1(1) or Section 7.1(2) hereof or, subject to the provisions of
Error! Reference source not found.
hereof, the Corporation shall consolidate, merge or amalgamate with or into another corporation (the corporation resulting or continuing from such consolidation, merger or amalgamation being herein called the “Successor Corporation”), the Participant shall be entitled to receive upon the subsequent exercise or vesting of Award, in accordance with the terms hereof and shall accept in lieu of the number of Shares then subscribed for but for the same aggregate consideration payable therefor, the aggregate number of shares of the appropriate class
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or other securities of the Corporation or the Successor Corporation (as the case may be) or other consideration from the Corporation or the Successor Corporation (as the case may be) that such Participant would have been entitled to receive as a result of such reclassification, reorganization or other change of shares or, subject to the provisions of
Error! Reference source not found.
hereof, as a result of such consolidation, merger or amalgamation, if on the record date of such reclassification, reorganization or other change of shares or the effective date of such consolidation, merger or amalgamation, as the case may be, such Participant had been the registered holder of the number of Shares to which such Participant was immediately theretofore entitled upon such exercise or vesting of such Award.
(4)
If, at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Corporation shall make a distribution to all holders of Shares or other securities in the capital of the Corporation, or cash, evidences of indebtedness or other assets of the Corporation (excluding an ordinary course dividend in cash or shares, but including for greater certainty shares or equity interests in a subsidiary or business unit of the Corporation or one of its subsidiaries or cash proceeds of the disposition of such a subsidiary or business unit), or should the Corporation effect any transaction or change having a similar effect, then the price or the number of Shares to which the Participant is entitled upon exercise or vesting of Award shall be adjusted to take into account such distribution, transaction or change. The Board shall determine the appropriate adjustments to be made in such circumstances in order to maintain the Participants’ economic rights in respect of their Awards in connection with such distribution, transaction or change.
Section 7.2
Amendment or Discontinuance of the Plan.
(1)
The Board may amend the Plan or any Award at any time without the consent of the Participants provided that such amendment shall:
i.
not adversely alter or impair any Award previously granted except as permitted by the provisions of Article 7 hereof;
ii.
be in compliance with applicable law and subject to any regulatory approvals including, where required, the approval of the TSX; and
iii.
be subject to shareholder approval, where required by law, the requirements of the TSX or the provisions of the Plan, provided that shareholder approval shall not be required for the following amendments and the Board may make any changes which may include but are not limited to:
(i)
amendments of a general “housekeeping” or clerical nature that, among others, clarify, correct or rectify any ambiguity, defective provision, error or omission in the Plan;
(ii)
changes that alter, extend or accelerate the terms of vesting or settlement applicable to any Award; and
(iii)
a change to the Eligible Participants under the Plan.
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The Committee may, by resolution, but subject to applicable regulatory approvals, decide that any of the provisions hereof concerning the effect of termination of the Participant’s employment shall not apply for any reason acceptable to the Committee.
(2)
Notwithstanding Section 7.2(1)(c), the Board shall be required to obtain shareholder approval to make the following amendments:
(a)
any change to the maximum number of Shares issuable from treasury under the Plan, except such increase by operation of Section 2.4 and in the event of an adjustment pursuant to Article 7;
(b)
any amendment which reduces the exercise price of any Award, as applicable, after such Awards have been granted or any cancellation of an Award and the substitution of that Award by a new Award with a reduced price, except in the case of an adjustment pursuant to Article 7;
(c)
any amendment which extends the expiry date of any Award, or the Restriction Period of any RSU beyond the original expiry date, except in case of an extension due to a Black-Out Period;
(d)
any amendment which would have the potential of broadening or increasing participation by Insiders;
(e)
any amendment which would permit any Award granted under the Plan to be transferable or assignable by any Participant other than as allowed by Section 6.1(4);
(f)
any amendment which increases the maximum number of Shares that may be (i) issuable to Insiders and Associates of such Insiders at any time; or (ii) issued to Insiders and Associates of such Insiders under the Plan and any other proposed or established Share Compensation Arrangement in a one-year period, except in case of an adjustment pursuant to Article 7; or
(g)
any amendment to the amendment provisions of the Plan,
provided that Shares held directly or indirectly by Insiders benefiting from the amendments in Sections (b) and (c) shall be excluded when obtaining such shareholder approval.
(3)
The Board may, subject to regulatory approval, discontinue the Plan at any time without the consent of the Participants provided that such discontinuance shall not materially and adversely affect any Awards previously granted to a Participant under the Plan.
Section 7.3
Change in Control
(1)
Notwithstanding anything else in this Plan or any Grant Agreement, the Board has the right to provide for the conversion or exchange of any outstanding Awards into or for options, rights, units or other securities of substantially equivalent (or greater) value in any entity participating in or resulting from a Change in Control.
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(2)
Upon the Corporation entering into an agreement relating to a transaction which, if completed, would result in a Change in Control, or otherwise becoming aware of a pending Change in Control, the Corporation shall give written notice of the proposed Change in Control to the Participants, together with a description of the effect of such Change in Control on outstanding Awards, not less than seven (7) days prior to the closing of the transaction resulting in the Change in Control.
(3)
The Board may, in its sole discretion, change the Performance Criteria or accelerate the vesting and/or the expiry date of any or all outstanding Awards to provide that, notwithstanding the Performance Criteria and/or vesting provisions of such Awards or any Grant Agreement, such designated outstanding Awards shall be fully performed and/or vested and conditionally exercisable upon (or prior to) the completion of the Change in Control provided that the Board shall not, in any case, authorize the exercise of Awards pursuant to this Section 7.3(3) beyond the expiry date of the Awards. If the Board elects to change the Performance Criteria or accelerate the vesting and/or the expiry date of the Awards, then if any of such Awards are not exercised within seven (7) days after the Participants are given the notice contemplated in Section 7.3(2) (or such later expiry date as the Board may prescribe), such unexercised Awards shall, unless the Board otherwise determines, terminate and expire following the completion of the proposed Change in Control. If, for any reason, the Change in Control does not occur within the contemplated time period, the satisfaction of the Performance Criteria, the acceleration of the vesting and the expiry date of the Awards shall be retracted and vesting shall instead revert to the manner provided in the Grant Agreement.
(4)
To the extent that the Change in Control would also result in a capital reorganization, arrangement, amalgamation or reclassification of the share capital of the Corporation and the Board does not change the Performance Criteria or accelerate the vesting and/or the expiry date of Awards pursuant to Section 7.3(3), the Corporation shall make adequate provisions to ensure that, upon completion of the proposed Change in Control, the number and kind of shares subject to outstanding Awards and/or the Option Price per share of Options shall be appropriately adjusted (including by substituting the Awards for awards to acquire securities in any successor entity to the Corporation) in such manner as the Board considers equitable to prevent substantial dilution or enlargement of the rights granted to Participants. The Board may make changes to the terms of the Awards or the Plan to the extent necessary or desirable to comply with any rules, regulations or policies of any stock exchange on which any securities of the Corporation may be listed, provided that the value of previously granted Awards and the rights of Participants are not materially adversely affected by any such changes.
(5)
Notwithstanding anything else to the contrary herein, in the event of a potential Change in Control, the Board shall have the power, in its sole discretion, to modify the terms of this Plan and/or the Awards (including, for greater certainty, to cause the vesting of all unvested Awards) to assist the Participants to tender into a take-over bid or other transaction leading to a Change in Control. For greater certainty, in the event of a take-over bid or other transaction leading to a Change in Control, the Board shall have the power, in its sole discretion, to permit Participants to conditionally exercise their Awards, such conditional exercise to be conditional upon the take-up by such offeror of the Shares or other securities tendered to such take-over bid in accordance with the terms of such take-over bid (or the effectiveness of such other transaction leading to a
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Change in Control). If, however, the potential Change in Control referred to in this Section 7.3(5) is not completed within the time specified therein (as the same may be extended), then notwithstanding this Section 7.3(5) or the definition of “Change in Control”: (i) any conditional exercise of vested Awards shall be deemed to be null, void and of no effect, and such conditionally exercised Awards shall for all purposes be deemed not to have been exercised, (ii) Shares which were issued pursuant to the exercise of awards which vested pursuant to this Section 7.3 shall be returned by the Participant to the Corporation and reinstated as authorized but unissued Shares, and (iii) the original terms applicable to Awards which vested pursuant to this Section 7.3 shall be reinstated.
ARTICLE 8 — MISCELLANEOUS
Section 8.1
Use of an Administrative Agent and Trustee.
The Board may in its sole discretion appoint from time to time one or more entities to act as administrative agent to administer the Awards granted under the Plan and to act as trustee to hold and administer the assets that may be held in respect of Awards granted under the Plan, the whole in accordance with the terms and conditions determined by the Board in its sole discretion. The Corporation and the administrative agent will maintain records showing the number of Awards granted to each Participant under the Plan.
Section 8.2
Tax Withholding.
(1)
Notwithstanding any other provision of this Plan, all distributions, delivery of Shares or payments to a Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) under the Plan shall be made net of applicable source deductions. If the event giving rise to the withholding obligation involves an issuance or delivery of Shares, then, the withholding obligation may be satisfied by (a) having the Participant elect to have the appropriate number of such Shares sold by the Corporation, the Corporation’s transfer agent and registrar or any trustee appointed by the Corporation pursuant to Section 8.1 hereof, on behalf of and as agent for the Participant as soon as permissible and practicable, with the proceeds of such sale being delivered to the Corporation, which will in turn remit such amounts to the appropriate governmental authorities, or (b) any other mechanism as may be required or appropriate to conform with local tax and other rules.
(2)
Notwithstanding the first paragraph of this Section 8.2, the applicable tax withholdings may be waived where the Participant directs in writing that a payment be made directly to the Participant’s registered retirement savings plan in circumstances to which regulation 100(3) of the regulations of the Tax Act apply.
Section 8.3
Reorganization of the Corporation.
The existence of any Awards shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation’s capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Corporation or any
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sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
Section 8.4
Governing Laws.
The Plan and all matters to which reference is made herein shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
Section 8.5
Severability.
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from the Plan.
Section 8.6
Effective Date of the Plan.
The Plan was approved by the Board and shall take effect on September 24, 2018.
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APPENDIX “A”
FORM OF OPTION AGREEMENT
APHRIA INC.
OPTION AGREEMENT
This Stock Option Agreement (the “
Option Agreement”
) is entered into between Aphria Inc. (the “
Corporation
”), and the optionee named below (the “
Optionee
”) pursuant to and on the terms and subject to the conditions of the Corporation’s Omnibus Long-Term Incentive Plan (the “
Plan
”). Capitalized terms used and not otherwise defined in this Option Agreement shall have the meanings set forth in the Plan.
The terms of the option (the “
Option
”), in addition to those terms set forth in the Plan, are as follows:
1.
Optionee
. The Optionee is [
·
] and the address of the Optionee is currently [
·
].
2.
Number of Shares
. The Optionee may purchase up to [
·
] Shares of the Corporation (the “
Option Shares
”) pursuant to this Option, as and to the extent that the Option vests and becomes exercisable as set forth in section 6 of this Option Agreement.
3.
Option Price
. The exercise price is Cdn $ [
·
] per Option Share (the “
Option Price”
).
4.
Date Option Granted
. The Option was granted on [
·
].
5.
Term of Option
. The Option terminates on [
·
]. (the “
Expiry Date
”).
6.
Vesting
. The Option to purchase Option Shares shall vest and become exercisable as follows:
[
·
]
7.
Exercise of Options
. In order to exercise the Option, the Optionee shall notify the Corporation in the form annexed hereto as Schedule “A”, whereupon the Corporation shall use reasonable efforts to cause the Optionee to receive a certificate representing the relevant number of fully paid and non-assessable Shares in the Corporation.
8.
Transfer of Option
. The Option is not-transferable or assignable except in accordance with the Plan.
9.
Inconsistency
. This Option Agreement is subject to the terms and conditions of the Plan and, in the event of any inconsistency or contradiction between the terms of this Option Agreement and the Plan, the terms of the Plan shall govern.
10.
Severability
. Wherever possible, each provision of this Option Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Option Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or
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unenforceability shall not affect any other provision or any other jurisdiction, but this Option Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
11.
Entire Agreement
. This Option Agreement and the Plan embody the entire agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.
12.
Successors and Assigns
. This Option Agreement shall bind and enure to the benefit of the Optionee and the Corporation and their respective successors and permitted assigns.
13.
Time of the Essence
. Time shall be of the essence of this Agreement and of every part hereof.
14.
Governing Law
. This Agreement and the Option shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
15.
Counterparts
. This Option Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
[
Remainder of this page left intentionally blank; Signature page follows
]
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By signing this Agreement, the Optionee acknowledges that the Optionee has been provided a copy of and has read and understands the Plan and agrees to the terms and conditions of the Plan and this Option Agreement.
IN WITNESS WHEREOF the parties hereof have executed this Option Agreement as of the day of , 20 .
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APHRIA INC.
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By:
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Name:
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Title:
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Witness
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[Insert Participant’s Name]
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SCHEDULE “A”
ELECTION TO EXERCISE STOCK OPTIONS
TO:
APHRIA INC. (the “Corporation”)
The undersigned Optionee hereby elects to exercise Options granted by the Corporation to the undersigned pursuant to a Grant Agreement dated , 20 under the Corporation’s Omnibus Long-Term Incentive Plan (the “
Plan
”), for the number Shares set forth below. Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Plan.
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Number of Shares to be Acquired:
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Option Price (per Share):
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$
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Aggregate Purchase Price:
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$
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Amount enclosed that is payable on account of any source deductions relating to this Option exercise (contact the Corporation for details of such amount):
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$
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o
Or check here if alternative arrangements have been made with the Corporation;
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and hereby tenders a certified cheque, bank draft or other form of payment confirmed as acceptable by the Corporation for such aggregate purchase price, and, if applicable, all source seductions, and directs such Shares to be registered in the name of .
[Remainder of this page left intentionally blank; Signature page follows]
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I hereby agree to file or cause the Corporation to file on my behalf, on a timely basis, all insider reports and other reports that I may be required to file under applicable securities laws. I understand that this request to exercise my Options is irrevocable.
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DATED
this day of , .
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Signature of Participant
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Name of Participant (Please Print)
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SCHEDULE “B”
SURRENDER NOTICE
TO:
APHRIA INC.
(the “
Corporation
”)
The undersigned Optionee hereby elects to surrender Options granted by the Corporation to the undersigned pursuant to a Grant Agreement dated , 20 under the Corporation’s Omnibus Long-Term Incentive Plan (the “
Plan
”) in exchange for Shares as calculated in accordance with Section 3.6(3) of the Plan. Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Plan.
Please issue a certificate or certificates representing the Shares in the name of .
I hereby agree to file or cause the Corporation to file on my behalf, on a timely basis, all insider reports and other reports that I may be required to file under applicable securities laws. I understand that this request to exercise my Options is irrevocable.
DATED
this day of , .
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Signature of Participant
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Name of Participant (Please Print)
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APPENDIX “B”
FORM OF DSU AGREEMENT
APHRIA INC.
DEFERRED SHARE UNIT AGREEMENT
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Name:
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[name of DSU Participant]
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Award Date
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[insert date ]
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Aphria Inc. (the “
Corporation
”) has adopted the Omnibus Long Term Incentive Plan (the “
Plan
”). Your award is governed in all respects by the terms of the Plan, and the provisions of the Plan are hereby incorporated by reference. For greater certainty, the provisions set out in Article 4 and Article 6 of the Plan applicable to DSUs shall be deemed to form part of this DSU Agreement
mutatis mutandis
. Capitalized terms used and not otherwise defined in this DSU Agreement shall have the meanings set forth in the Plan. If there is a conflict between the terms of this DSU Agreement and the Plan, the terms of the Plan shall govern.
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Your Award
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The Corporation hereby grants to you
[
·
]
DSUs.
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PLEASE SIGN AND RETURN A COPY OF THIS DSU AGREEMENT TO THE CORPORATION.
By your signature below, you acknowledge that you have received a copy of the Plan and have reviewed, considered and agreed to the terms of this DSU Agreement and the Plan.
On behalf of the Corporation:
APHRIA INC.
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APPENDIX “C”
FORM OF RSU AGREEMENT
APHRIA INC.
RESTRICTED SHARE UNIT AGREEMENT
This restricted share unit agreement (“
RSU Agreement
”) is entered into between Aphria Inc. (the “
Corporation
”) and the Participant named below (the “
Recipient
”) of the restricted share units (“
RSUs
”) pursuant to the Corporation’s Omnibus Long-Term Incentive Plan (the “
Plan
”). Capitalized terms used and not otherwise defined in this RSU Agreement shall have the meanings set forth in the Plan.
The terms of the RSUs, in addition to those terms set forth in the Plan, are as follows:
1.
Recipient
. The Recipient is [
·
] and the address of the Recipient is currently [
·
].
2.
Grant of RSUs
. The Recipient is hereby granted [
·
] RSUs.
3.
Settlement
. The RSUs shall be settled as follows:
(Select one of the following three options):
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(a)
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o
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One Share issued from treasury per RSU.
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(b)
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o
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Cash Equivalent of one Share per RSU.
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(c)
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o
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Either (a), (b), or a combination thereof, at the election of the Recipient.
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4.
Restriction Period
. In accordance with Section 5.3 of the Plan, the restriction period in respect of the RSUs granted hereunder, as determined by the Board, shall commence on [
·
] and terminate on [
·
].
5.
Performance Criteria
. [
·
].
6.
Performance Period
. [
·
].
7.
Vesting
. The RSUs will vest as follows:
[
·
].
8.
Transfer of RSUs
. The RSUs granted hereunder are not-transferable or assignable except in accordance with the Plan.
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9.
Inconsistency
. This RSU Agreement is subject to the terms and conditions of the Plan and, in the event of any inconsistency or contradiction between the terms of this RSU Agreement and the Plan, the terms of the Plan shall govern.
10.
Severability
. Wherever possible, each provision of this RSU Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this RSU Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this RSU Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
11.
Entire Agreement
. This RSU Agreement and the Plan embody the entire agreement and understanding among the parties and supersede and pre-empt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.
12.
Successors and Assigns
. This RSU Agreement shall bind and enure to the benefit of the Recipient and the Corporation and their respective successors and permitted assigns.
13.
Time of the Essence
. Time shall be of the essence of this Agreement and of every part hereof.
14.
Governing Law
. This RSU Agreement and the RSUs shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
15.
Counterparts
. This RSU Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
[Remainder of page left intentionally blank; Signature page follows]
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By signing this RSU Agreement, the Participant acknowledges that he or she has been provided with, has read and understands the Plan and this RSU Agreement.
IN WITNESS WHEREOF the parties hereof have executed this RSU Agreement as of the day of , 20 .
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APHRIA INC.
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By:
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Name:
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Title:
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Witness
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[Insert Participant’s Name]
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Exhibit “B”
Board Mandate
1.0
Introduction
The board of directors (the “
Board
”) of Aphria Inc. (“
Aphria
”) is elected by the shareholders of Aphria and is responsible for the stewardship of Aphria. The purpose of this mandate is to describe the principal duties and responsibilities of the Board, as well as some of the policies and procedures that apply to the Board in discharging its duties and responsibilities.
2.0
Chairman of the Board
The Chairman of the Board (“
Chairman
”) will be appointed by the Board, after considering the recommendation of the Board, for such term as the Board may determine.
3.0
Independence
A majority of the Board will be comprised of directors who are “independent” per the standards and requirements promulgated by all governmental and regulatory bodies exercising control over Aphria as may be in effect from time to time, including Section 303A.02 of the NYSE Listed Company Manual and relevant rules of any other stock exchanges on which Aphria’s shares are listed.
4.0
Role and Responsibilities of the Board
The role of the Board is to represent the shareholders of Aphria, enhance and maximize shareholder value and conduct the business and affairs of Aphria ethically and in accordance with the highest standards of corporate governance. The Board is ultimately accountable and responsible for providing independent, effective leadership in supervising the management of the business and affairs of Aphria. The responsibilities of the Board include:
·
adopting a strategic planning process;
·
review and approve annual operating plans and budgets;
·
corporate social responsibility, ethics and integrity;
·
succession planning, including the appointment, training and supervision of management;
·
delegations and general approval guidelines for management;
·
monitoring financial reporting and management;
·
monitoring internal control and management information systems;
·
corporate disclosure and communications;
·
adopting measures for receiving feedback from stakeholders; and
·
adopting key corporate policies designed to ensure that Aphria, its directors, officers and employees comply with all applicable laws, rules and regulations and conduct their business ethically and with honesty and integrity.
Meetings of the Board will be held at least quarterly, with additional meetings to be held depending on the state of Aphria’s affairs and in light of opportunities or risks which Aphria faces. In addition, separate, regularly scheduled meetings of the independent directors of the Board may be held at which members of management are not present.
The Board will delegate responsibility for the day-to-day management of Aphria’s business and affairs to Aphria’s senior officers and will supervise such senior officers appropriately.
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The Board may delegate certain matters it is responsible for to Board committees, presently consisting of the Audit Committee and the Compensation, Nominating and Governance Committee. The Board will, however, retain its oversight function and ultimate responsibility for these matters and all delegated responsibilities.
5.0
Strategic Planning Process and Risk Management
The Board will adopt a strategic planning process to establish objectives and goals for Aphria’s business and will review, approve and modify as appropriate the strategies proposed by senior management to achieve such objectives and goals. The Board will review and approve, at least on an annual basis, a strategic plan which takes into account, among other things, the opportunities and risks of Aphria’s business and affairs.
The Board, in conjunction with management, will identify the principal risks of Aphria’s business and oversee management’s implementation of appropriate systems to effectively monitor, manage and mitigate the impact of such risks.
6.0
Corporate Social Responsibility, Ethics and Integrity
The Board will provide leadership to Aphria in support of its commitment to corporate social responsibility, set the ethical tone for Aphria and its management and foster ethical and responsible decision making by management. The Board will take all reasonable steps to satisfy itself of the integrity of the Chief Executive Officer and management and satisfy itself that the Chief Executive Officer and management create a culture of integrity throughout the organization.
7.0
Succession Planning, Appointment and Supervision of Management
The Board will approve the succession plan for Aphria, including the selection, appointment, supervision and evaluation of the Chief Executive Officer and the other senior officers of Aphria, and will also approve the compensation of the Chief Executive Officer pursuant to the recommendation of the Compensation, Nominating and Governance Committee Charter.
8.0
Delegations and Approval Authorities
The Board will delegate to the Chief Executive Officer and senior management authority over the day-to-day management of the business and affairs of Aphria. This delegation of authority will be subject to specified financial limits and any transactions or arrangements in excess of general authority guidelines will be reviewed by and subject to the prior approval of the Board.
9.0
Monitoring of Financial Reporting and Management
The Board will approve all regulatory filings, including the annual audited financial statements, interim financial statements, the notes and management discussion and analysis accompanying such financial statements, quarterly and annual reports, management proxy circulars, annual information forms, prospectuses, registration statements and all capital investments as deemed necessary, equity financings, borrowings and all annual operating plans and budgets.
The Board will adopt procedures that seek to: ensure the integrity of internal controls and management information systems; ensure compliance with all applicable laws, rules and regulations; and prevent violations of applicable laws, rules and regulations relating to financial reporting and disclosure, violation of Aphria’s code of business conduct and ethics and fraud against shareholders.
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2
10.0
Corporate Disclosure and Communications
The Board will seek to ensure that all corporate disclosure complies with all applicable laws, rules and regulations and the rules and regulations of the stock exchanges upon which Aphria’s securities are listed. In addition, the Board will adopt procedures that seek to ensure the Board receives feedback from security holders on material issues.
11.0
Corporate Policies
The Board will adopt and annually review policies and procedures designed to ensure that Aphria, its directors, officers and employees comply with all applicable laws, rules and regulations and conduct Aphria’s business ethically and with honesty and integrity. Principal policies consist of:
·
Compensation, Nominating and Governance Committee Charter
·
Audit Committee Charter
·
Corporate Disclosure Policy;
·
Board Mandate;
·
Insider Trading Policy;
·
Mandate for the Chair of the Audit Committee; and
·
Mandate for the Chair of the Board of Directors.
12.0
Review of Mandate
The Board will annually review and assess the adequacy of this mandate and recommend any proposed changes to the Board for consideration.
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Dated:
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September 19, 2018
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Approved by:
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Board of Directors
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3
Exhibit “C”
Audit Committee Charter
This charter (the “
Charter
”) sets forth the purpose, composition, responsibilities and authority of the Audit Committee (the “
Committee
”) of the Board of Directors (the “
Board
”) of Aphria Inc. (“
Aphria
”).
1.0
Purpose
The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities with respect to:
·
financial reporting and disclosure requirements;
·
ensuring that an effective risk management and financial control framework has been implemented and tested by management of Aphria;
·
external and internal audit processes, including the independent auditors’ qualifications and independence and the performance of Aphria’s internal audit function, if and when engaged, and independent auditors; and,
·
compliance with legal and regulatory requirements.
2.0
Composition and Membership
(a)
The Board will appoint the members (“
Members
”) of the Committee. The Members will be appointed to hold office until the next annual general meeting of shareholders of Aphria or until their successors are appointed. The Board may remove a Member at any time and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will automatically cease to be a Member upon ceasing to be a director.
(b)
The Committee will consist of at least three directors. Each Member will meet the criteria for financial literacy established by applicable laws and the rules of any stock exchanges upon which Aphria’s securities are listed, including National Instrument 52-110 — Audit Committees. At least one Member must satisfy the definition of “financial expert” as set out in Item 407 of Regulation S-K under the United States Securities Act of 1933, as amended. The majority of Members will meet the criteria for independence and audit committee composition requirements established by the aforementioned laws and rules, including Rule 10A-3 of the United States Securities Exchange Act of 1934, as amended and Section 303A.02 of the NYSE Listed Company Manual. In addition, each director will be free of any relationship which could, in the view of the Board, reasonably interfere with the exercise of a Member’s independent judgment.
(c)
The Board will appoint one of the Members to act as the chairman of the Committee (the “
Chairman
”). The Executive Administrator of Aphria (the “
secretary
”) will be the secretary of all meetings and will maintain minutes of all meetings and deliberations of the Committee. If the secretary is not in attendance at any meeting, the Committee will
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1
appoint another person who may, but need not, be a Member to act as the secretary of that meeting.
3.0
Meetings
(a)
Meetings of the Committee will be held at such times and places as the Chairman may determine, but in any event not less than four (4) times per year. Twenty-four (24) hours advance notice of each meeting will be given to each Member orally, by telephone, by facsimile or email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by telephone.
(b)
At the request of the external auditors of Aphria, the Chief Executive Officer or the Chief Financial Officer of Aphria or any Member, the Chairman will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.
(c)
The Chairman, if present, will act as the chairman of meetings of the Committee. If the Chairman is not present at a meeting of the Committee the Members in attendance may select one of the members to act as chairman of the meeting.
(d)
A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority. The Chairman will not have a deciding or casting vote in the case of an equality of votes. Powers of the Committee may also be exercised by written resolutions signed by all Members.
(e)
The Committee may invite from time to time such persons as it sees fit to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee. The Committee may meet in camera without members of management in attendance for a portion of each meeting of the Committee, as the Committee deems appropriate.
(f)
In advance of every regular meeting of the Committee, the Chairman, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chairman, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Aphria to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.
(g)
The Committee will meet separately, periodically, with management, with internal auditors (or other personnel responsible for the internal audit function) and with external auditors.
4.0
Duties and Responsibilities
The duties and responsibilities of the Committee as they relate to the following matters, are as follows:
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2
4.1
With respect to Financial Reporting and Disclosure
(a)
review and recommend to the Board for approval, the audited annual financial statements, including the auditors’ report thereon, the quarterly financial statements, management discussion and analysis, financial reports, and any guidance with respect to earnings per share to be given, prior to the public disclosure of such information, with such documents to indicate whether such information has been reviewed by the Board or the Committee;
(b)
review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual report to shareholders, management proxy circular, material change disclosures of a financial nature and similar disclosure documents prior to the public disclosure of such information;
(c)
review with management of Aphria, and with external auditors, significant accounting principles and disclosure issues and alternative treatments under International Financial Reporting Standards (“IFRS”), with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Aphria’s financial position and the results of its operations in accordance with IFRS, as applicable;
(d)
seek to ensure that adequate procedures are in place for the review of Aphria’s public disclosure of financial information extracted or derived from Aphria’s financial statements, periodically assess the adequacy of those procedures and recommend any proposed changes to the Board for consideration;
(e)
review the minutes from each meeting of the Responsible Parties, established pursuant to Aphria’s corporate disclosure policy, since the last meeting of the Committee;
4.2
With respect to Internal Controls and Audit
(a)
review the adequacy and effectiveness of Aphria’s system of internal control and management information systems through discussions with management and the external auditor to ensure that Aphria maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Aphria’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statement and for detecting control weaknesses or fraud. From time to time the Committee shall assess whether it is necessary or desirable to establish a formal internal audit department having regard to the size and stage of development of Aphria at any particular time;
(b)
satisfy itself that management has established adequate procedures for the review of Aphria’s disclosure of financial information extracted or derived directly from Aphria’s financial statements;
(c)
satisfy itself, through discussions with management, that the adequacy of internal controls, systems and procedures has been periodically assessed in order to ensure compliance with regulatory requirements and recommendations;
(d)
review and discuss Aphria’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities;
(e)
review, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Aphria’s risk management policies and procedures with
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3
regard to identification of Aphria’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Aphria; and,
(f)
as applicable recommend the appointment, or if necessary, the dismissal of the head of Aphria’s internal audit process;
4.3
With respect to External Audit
(a)
be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the external auditor regarding financial reporting) for the purposes of preparing or issuing an audit report or performing other audit, review or attest services for Aphria, and each such registered public accounting firm must report directly to the Committee;
(b)
ensure the external auditors report directly to the Committee on a regular basis;
(c)
review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;
(d)
review and recommend to the Board the fee, scope and timing of the audit and other related services rendered by the external auditors;
(e)
review the audit plan of the external auditors prior to the commencement of the audit;
(f)
establish and maintain a direct line of communication with Aphria’s external and internal auditors;
(g)
meet in camera with only the auditors, with only management, and with only the members of the Committee at every Committee meeting where, and to the extent that, such parties are present and the Committee deems appropriate;
(h)
oversee the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors’ team;
(i)
oversee the work of the external auditors appointed by the shareholders of Aphria with respect to preparing and issuing an audit report or performing other audit, review or attest services for Aphria, including the resolution of issues between management of Aphria and the external auditors regarding financial disclosure;
(j)
review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used, any alternative treatments of financial information that have been discussed with management of Aphria, the ramifications of their use as well as any other material changes. Review a report describing all material written communication between management and the auditors such as management letters and schedule of unadjusted differences;
(k)
discuss with the external auditors their perception of Aphria’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;
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4
(l)
discuss with the external auditors their perception of Aphria’s identification and management of risks, including the adequacy or effectiveness of policies and procedures implemented to mitigate such risks;
(m)
review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board;
(n)
review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues, and (to assess the auditor’s independence) all relationships between the external auditor and Aphria; and,
(o)
review with the external auditor any audit problems or difficulties and management’s response.
4.4
With respect to Additional Responsibilities
(a)
set, review and approve Aphria’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of Aphria;
(b)
discuss Aphria’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;
(c)
establish procedures for (i) receipt, retention, and treatment of complaints received by Aphria regarding accounting, internal accounting controls, or auditing matters and (ii) the confidential, anonymous submission by employees of Aphria of concerns regarding questionable accounting or auditing matters.
4.5
With respect to Non-Audit Services
(a)
pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but pre-approval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
5.0
Oversight Function
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that Aphria’s financial statements are complete and accurate or comply with IFRS and other applicable requirements. These are the responsibilities of Management and the external auditors. The Committee, the Chairman and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Aphria, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is
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5
based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Aphria’s financial information or public disclosure.
6.0
Reporting
The Chairman will report to the Board at each Board meeting on the Committee’s activities since the last Board meeting. The Committee will annually review and approve the Committee’s report for inclusion in the Annual Information Form. The minutes of each meeting of the Committee will be available to the members of the Board, at their request.
7.0
Access to Information and Authority
The Committee will be granted unrestricted access to all information regarding Aphria that is necessary or desirable to fulfill its duties and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Aphria’s expense, independent legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities, including sole authority to retain and to approve any such firm’s fees and other retention terms without prior approval of the Board. The Committee also has the authority to communicate directly with internal and external auditors.
8.0
Review of Charter and Committee’s Performance
The Committee will annually review and assess the adequacy of this Charter, to evaluate the performance of the Committee and recommend any proposed changes to the Board for consideration.
|
Dated:
|
July 30, 2018
|
|
Approved by:
|
Audit Committee
|
|
|
Board of Directors
|
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6
Exhibit 99.142
Aphria Inc.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2018 AND AUGUST 31, 2017
(Unaudited, expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited - in thousands of Canadian dollars)
|
|
|
Note
|
|
August 31,
2018
|
|
May 31,
2018
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
273,087
|
|
$
|
59,737
|
|
|
Marketable securities
|
|
4
|
|
40,895
|
|
45,062
|
|
|
Accounts receivable
|
|
|
|
3,237
|
|
3,386
|
|
|
Other current assets
|
|
5
|
|
16,657
|
|
14,384
|
|
|
Inventory
|
|
6
|
|
34,752
|
|
22,150
|
|
|
Biological assets
|
|
7
|
|
6,633
|
|
7,331
|
|
|
Assets held for sale
|
|
13
|
|
16,496
|
|
40,620
|
|
|
Current portion of convertible notes receivable
|
|
12
|
|
26,424
|
|
1,942
|
|
|
|
|
|
|
418,181
|
|
194,612
|
|
|
Capital assets
|
|
9
|
|
360,864
|
|
303,151
|
|
|
Intangible assets
|
|
10
|
|
235,291
|
|
226,444
|
|
|
Convertible notes receivable
|
|
12
|
|
—
|
|
16,129
|
|
|
Interest in equity investees
|
|
13
|
|
10,187
|
|
4,966
|
|
|
Long-term investments
|
|
14
|
|
76,675
|
|
46,028
|
|
|
Goodwill
|
|
11
|
|
524,512
|
|
522,762
|
|
|
|
|
|
|
$
|
1,625,710
|
|
$
|
1,314,092
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
$
|
35,134
|
|
$
|
31,517
|
|
|
Income taxes payable
|
|
|
|
3,396
|
|
3,584
|
|
|
Deferred revenue
|
|
|
|
2,096
|
|
2,607
|
|
|
Current portion of promissory note payable
|
|
17
|
|
585
|
|
610
|
|
|
Current portion of long-term debt
|
|
18
|
|
3,349
|
|
2,140
|
|
|
Current portion of derivative liability
|
|
13
|
|
10,376
|
|
3,396
|
|
|
|
|
|
|
54,936
|
|
43,854
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
18
|
|
52,015
|
|
28,337
|
|
|
Derivative liability
|
|
13
|
|
—
|
|
9,055
|
|
|
Deferred tax liability
|
|
15
|
|
58,322
|
|
59,253
|
|
|
|
|
|
|
165,273
|
|
140,499
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
19
|
|
1,370,477
|
|
1,113,981
|
|
|
Warrants
|
|
20
|
|
1,375
|
|
1,375
|
|
|
Share-based payment reserve
|
|
|
|
21,726
|
|
22,006
|
|
|
Accumulated other comprehensive loss
|
|
|
|
(801
|
)
|
(801
|
)
|
|
Non-controlling interest
|
|
22
|
|
18,821
|
|
9,580
|
|
|
Retained earnings
|
|
|
|
48,839
|
|
27,452
|
|
|
|
|
|
|
1,460,437
|
|
1,173,593
|
|
|
|
|
|
|
$
|
1,625,710
|
|
$
|
1,314,092
|
|
Nature of operations (Note 1)
Commitments (Note 30)
Subsequent events (Note 31)
|
Approved on behalf of the Board:
|
|
|
|
“John Cervini”
|
|
“Cole Cacciavillani”
|
|
Signed: Director
|
|
Signed: Director
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
2
Aphria Inc.
Condensed Interim Consolidated Statements of Income and Comprehensive Income
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
|
|
|
|
|
For the three months ended
|
|
|
|
|
|
|
August 31,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Revenue
|
|
|
|
$
|
13,292
|
|
$
|
6,120
|
|
|
Production costs
|
|
6
|
|
4,441
|
|
1,346
|
|
|
Other costs of sales
|
|
|
|
393
|
|
—
|
|
|
Gross profit before fair value adjustments
|
|
|
|
8,458
|
|
4,774
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
4,205
|
|
1,136
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(9,511
|
)
|
(4,265
|
)
|
|
Gross profit
|
|
|
|
13,764
|
|
7,903
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
23
|
|
8,851
|
|
1,735
|
|
|
Share-based compensation
|
|
24
|
|
6,122
|
|
2,509
|
|
|
Selling, marketing and promotion
|
|
|
|
4,741
|
|
1,948
|
|
|
Amortization
|
|
|
|
3,274
|
|
239
|
|
|
Research and development
|
|
|
|
262
|
|
90
|
|
|
Transaction costs
|
|
|
|
865
|
|
—
|
|
|
|
|
|
|
24,115
|
|
6,521
|
|
|
|
|
|
|
(10,351
|
)
|
1,382
|
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Consulting revenue
|
|
|
|
—
|
|
293
|
|
|
Foreign exchange loss
|
|
|
|
(59
|
)
|
(151
|
)
|
|
Loss on marketable securities
|
|
4
|
|
(167
|
)
|
(1,746
|
)
|
|
Loss on sale of capital assets
|
|
9
|
|
—
|
|
(7
|
)
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
2,210
|
|
7,551
|
|
|
Loss from equity investees
|
|
13
|
|
(247
|
)
|
(8,840
|
)
|
|
Gain on sale of equity investee
|
|
13
|
|
9,880
|
|
—
|
|
|
Deferred gain on sale of intellectual property
|
|
|
|
233
|
|
234
|
|
|
Finance income, net
|
|
25
|
|
1,059
|
|
466
|
|
|
Unrealized gain on convertible notes receivable
|
|
12
|
|
295
|
|
547
|
|
|
Gain on long-term investments
|
|
26
|
|
22,700
|
|
19,082
|
|
|
Unrealized loss on derivative liability
|
|
13
|
|
(415
|
)
|
—
|
|
|
|
|
|
|
35,489
|
|
17,429
|
|
|
Income before income taxes
|
|
|
|
25,138
|
|
18,811
|
|
|
Income taxes
|
|
15
|
|
3,962
|
|
3,770
|
|
|
Net income
|
|
|
|
21,176
|
|
15,041
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Other comprehensive loss from equity investee
|
|
13
|
|
—
|
|
(1,321
|
)
|
|
Net comprehensive income
|
|
|
|
$
|
21,176
|
|
$
|
13,720
|
|
|
Total comprehensive income is attributable to:
|
|
|
|
|
|
|
|
|
Owners of Aphria Inc.
|
|
|
|
21,387
|
|
13,720
|
|
|
Non-controlling interest
|
|
22
|
|
(211
|
)
|
—
|
|
|
|
|
|
|
$
|
21,176
|
|
$
|
13,720
|
|
|
Weighted average number of common shares - basic
|
|
|
|
225,659,684
|
|
138,711,674
|
|
|
Weighted average number of common shares - diluted
|
|
|
|
230,366,310
|
|
145,731,500
|
|
|
Earnings per share - basic
|
|
27
|
|
$
|
0.09
|
|
$
|
0.11
|
|
|
Earnings per share - diluted
|
|
27
|
|
$
|
0.09
|
|
$
|
0.10
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
3
Aphria Inc.
Condensed Interim Consolidated Statements of Changes in Equity
(Unaudited - in thousands of Canadian dollars, except share amounts)
|
|
|
Number of
common shares
|
|
Share capital
(Note 19)
|
|
Warrants
(Note 20)
|
|
Share-based
payment
reserve
|
|
Accumulated
other
comprehensive
loss
|
|
Non-
controlling
interest
(Note 22)
|
|
Retained
earnings
(deficit)
|
|
Total
|
|
|
Balance at May 31, 2017
|
|
138,628,704
|
|
$
|
274,317
|
|
$
|
445
|
|
$
|
3,230
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4,123
|
)
|
$
|
273,869
|
|
|
Share issuance - warrants exercised
|
|
228,467
|
|
344
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
344
|
|
|
Share issuance - options exercised
|
|
31,419
|
|
38
|
|
—
|
|
(20
|
)
|
—
|
|
—
|
|
—
|
|
18
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
2,440
|
|
—
|
|
—
|
|
—
|
|
2,440
|
|
|
Share issuance costs incurred
|
|
—
|
|
(14
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(14
|
)
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
|
Shares held in escrow for services not yet earned
|
|
—
|
|
112
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
112
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,321
|
)
|
—
|
|
15,041
|
|
13,720
|
|
|
Balance at August 31, 2017
|
|
138,888,590
|
|
$
|
274,801
|
|
$
|
445
|
|
$
|
5,650
|
|
$
|
(1,321
|
)
|
$
|
—
|
|
$
|
10,918
|
|
$
|
290,493
|
|
|
|
|
Number of
common shares
|
|
Share capital
(Note 19)
|
|
Warrants
(Note 20)
|
|
Share-based
payment
reserve
|
|
Accumulated
other
comprehensive
loss
|
|
Non-
controlling
interest
(Note 22)
|
|
Retained
earnings
|
|
Total
|
|
|
Balance at May 31, 2018
|
|
210,169,924
|
|
$
|
1,113,981
|
|
$
|
1,375
|
|
$
|
22,006
|
|
$
|
(801
|
)
|
$
|
9,580
|
|
$
|
27,452
|
|
$
|
1,173,593
|
|
|
Share issuance - June 2018 bought deal
|
|
21,835,510
|
|
245,925
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
245,925
|
|
|
Additional share issuance - Broken Coast acquisition
|
|
19,963
|
|
297
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
297
|
|
|
Share issuance - warrants exercised
|
|
10,000
|
|
18
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
18
|
|
|
Share issuance - options exercised
|
|
565,371
|
|
6,857
|
|
—
|
|
(4,455
|
)
|
—
|
|
—
|
|
—
|
|
2,402
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,399
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,399
|
|
|
Share-based payments
|
|
—
|
|
—
|
|
—
|
|
4,175
|
|
—
|
|
—
|
|
—
|
|
4,175
|
|
|
Non-controlling interest
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9,452
|
|
—
|
|
9,452
|
|
|
Net comprehensive income for the period
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(211
|
)
|
21,387
|
|
21,176
|
|
|
Balance at August 31, 2018
|
|
232,600,768
|
|
$
|
1,370,477
|
|
$
|
1,375
|
|
$
|
21,726
|
|
$
|
(801
|
)
|
$
|
18,821
|
|
$
|
48,839
|
|
$
|
1,460,437
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
4
Aphria Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited - in thousands of Canadian dollars)
|
|
|
|
|
For the threemonths ended
|
|
|
|
|
|
|
August 31,
|
|
|
|
|
Note
|
|
2018
|
|
2017
|
|
|
Cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
|
|
$
|
21,176
|
|
$
|
15,041
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Future income taxes
|
|
15
|
|
2,468
|
|
3,405
|
|
|
Fair value adjustment on sale of inventory
|
|
6
|
|
4,205
|
|
1,136
|
|
|
Fair value adjustment on growth of biological assets
|
|
7
|
|
(9,511
|
)
|
(4,265
|
)
|
|
Loss on marketable securities
|
|
4
|
|
167
|
|
1,746
|
|
|
Unrealized foreign exchange gain
|
|
|
|
(25
|
)
|
(8
|
)
|
|
Amortization
|
|
9,10
|
|
4,706
|
|
628
|
|
|
Loss on sale of capital assets
|
|
9
|
|
—
|
|
7
|
|
|
Unrealized gain on convertible notes receivable
|
|
12
|
|
(295
|
)
|
(547
|
)
|
|
Gain on dilution of ownership in equity investee
|
|
13
|
|
(2,210
|
)
|
(7,551
|
)
|
|
Loss from equity investees
|
|
13
|
|
247
|
|
8,840
|
|
|
Gain on sale of equity investee
|
|
13
|
|
(9,880
|
)
|
—
|
|
|
Deferred gain recognized
|
|
|
|
(511
|
)
|
(234
|
)
|
|
Consulting revenue
|
|
17
|
|
—
|
|
(293
|
)
|
|
Other non-cash items
|
|
|
|
4
|
|
4
|
|
|
Share-based compensation
|
|
24
|
|
6,122
|
|
2,509
|
|
|
Gain on long-term investments
|
|
26
|
|
(22,700
|
)
|
(19,082
|
)
|
|
Unrealized loss on derivative liability
|
|
13
|
|
415
|
|
—
|
|
|
Change in non-cash working capital
|
|
28
|
|
(8,693
|
)
|
(5,137
|
)
|
|
|
|
|
|
(14,315
|
)
|
(3,801
|
)
|
|
Cash provided by financing activities:
|
|
|
|
|
|
|
|
|
Share capital issued, net of cash issuance costs
|
|
|
|
245,925
|
|
(14
|
)
|
|
Share capital issued on warrants and options exercised
|
|
|
|
2,420
|
|
362
|
|
|
Advances from related parties
|
|
8
|
|
915
|
|
1,583
|
|
|
Repayment of amounts due to related parties
|
|
8
|
|
(915
|
)
|
(1,087
|
)
|
|
Proceeds from long-term debt
|
|
18
|
|
24,927
|
|
—
|
|
|
Repayment of long-term debt
|
|
18
|
|
(44
|
)
|
(187
|
)
|
|
|
|
|
|
273,228
|
|
657
|
|
|
Cash used in investing activities:
|
|
|
|
|
|
|
|
|
Investment in marketable securities
|
|
4
|
|
—
|
|
(5,000
|
)
|
|
Proceeds from disposal of marketable securities
|
|
4
|
|
4,000
|
|
10,099
|
|
|
Investment in capital and intangible assets, net of shares issued
|
|
9,10
|
|
(57,763
|
)
|
(23,704
|
)
|
|
Proceeds from disposal of capital assets
|
|
9
|
|
—
|
|
200
|
|
|
Notes advanced
|
|
10
|
|
—
|
|
(833
|
)
|
|
Convertible notes advances
|
|
12
|
|
(10,000
|
)
|
(14,001
|
)
|
|
Repayment of convertible notes receivable
|
|
|
|
1,942
|
|
—
|
|
|
Investment in long-term investments and equity investees
|
|
|
|
(15,317
|
)
|
(5,297
|
)
|
|
Proceeds from disposal of long-term investments and equity investees
|
|
|
|
35,626
|
|
—
|
|
|
Net cash paid on investment in CannInvest Africa Ltd.
|
|
|
|
(4,051
|
)
|
—
|
|
|
|
|
|
|
(45,563
|
)
|
(38,536
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
213,350
|
|
(41,680
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
59,737
|
|
79,910
|
|
|
Cash and cash equivalents, end of period
|
|
|
|
$
|
273,087
|
|
$
|
38,230
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements
5
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
1.
Nature of operations
Aphria Inc. (the “Company” or “Aphria”) was continued in Ontario and is licensed to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). In February 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”) (Note 11). Broken Coast is licensed to produce and sell medical cannabis under the provision of the
Access to Cannabis for Medical Purposes Regulations
(“ACMPR”). In March 2018, the Company acquired Nuuvera Inc. (“Nuuvera”) (Note 11). Nuuvera is an international organization with a focus on building a global cannabis brand, with operations in Germany, Italy, Spain, Malta, and Lesotho. In July 2018, Aphria Inc. and its wholly-owned subsidiary, Pure Natures Wellness Inc. (o/a Aphria) amalgamated.
1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms. Aphria Diamond has applied for its cultivation licence under the provisions of the ACMPR.
The registered office of the Company is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“TSX”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
These condensed interim consolidated financial statements were approved by the Company’s Board of Directors on October 11, 2018.
2.
Basis of preparation
(a)
Statement of compliance
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2018, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.
(b)
Basis of measurement
These condensed interim consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
(c)
Functional currency
The Company and its subsidiaries’ functional currency, as determined by management, is Canadian dollars. These condensed interim consolidated financial statements are presented in Canadian dollars.
(d)
Foreign currency translation
All figures presented in the condensed interim consolidated financial statements are reflected in Canadian dollars, which is the functional currency of the Company and all of its subsidiaries.
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the foreign exchange rate applicable at the statement of financial position date. Realized and unrealized exchange gains and losses are recognized through profit and loss.
The assets and liabilities of foreign operations, including marketable securities, long-term investments and promissory notes payable, are translated in Canadian dollars at period-end exchange rates. Income and expenses, and cash flows of foreign
6
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity.
(e)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases.
|
Subsidiaries
|
|
Jurisdiction of incorporation
|
|
Ownership interest
(1)
|
|
|
Aphria (Arizona) Inc.
|
|
Arizona, United States
|
|
100
|
%
|
|
Cannan Growers Inc.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Nuuvera Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Holdings Ltd.
|
|
Ontario, Canada
|
|
100
|
%
|
|
ARA — Avanti Rx Analytics Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Avalon Pharmaceuticals Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589671 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589674 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Israel Ltd.
|
|
Israel
|
|
100
|
%
|
|
Nuuvera Deutschland GmbH
|
|
Germany
|
|
100
|
%
|
|
Aphria Italy S.p.A.
|
|
Italy
|
|
100
|
%
|
|
FL-Group
|
|
Italy
|
|
100
|
%
|
|
Broken Coast Cannabis Ltd.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Goodfields Supply Co. Ltd.
|
|
United Kingdom
|
|
100
|
%
|
|
Nuuvera Malta Ltd.
|
|
Malta
|
|
90
|
%
|
|
ASG Pharma Ltd.
|
|
Malta
|
|
90
|
%
|
|
QSG Pharma Ltd.
|
|
Malta
|
|
90
|
%
|
|
1974568 Ontario Ltd.
|
|
Ontario, Canada
|
|
51
|
%
|
|
CannInvest Africa Ltd.
|
|
South Africa
|
|
50
|
%
|
|
Verve Dynamics Incorporated (Pty) Ltd.
|
|
Lesotho
|
|
30
|
%
|
(1)
The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Ownership of some subsidiaries are held through other subsidiaries, which the Company controls.
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
(e)
Amalgamation
Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
Effective July 23, 2018, Pure Natures Wellness Inc. (o/a Aphria). (“PNW”), a wholly-owned subsidiary of the Company, was amalgamated with Aphria Inc. The Company has historically presented all balances and activities of PNW as a fully consolidated entity for financial statement presentation purposes. There are no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.
7
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
(f)
Interest in equity investees
The Company’s interest in equity investees is comprised of its interest in Althea Company Pty Ltd. (“Althea”).
In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.
Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the condensed interim consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The carrying amount of equity investments is tested for impairment in accordance with the policy described in Note 3(j).
3.
Significant accounting policies
These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2018.
New standards applicable during the reporting period
IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets.
Under IFRS 9, financial instruments are initially measured at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. Subsequently, all assets within scope of IFRS 9 are measured at:
(i)
Amortized cost;
(ii)
Fair value through other comprehensive income (“FVOCI”); or
(iii)
Fair value through profit or loss (“FVTPL”).
The classification is based on whether the contractual cash flows give rise to payments on specified dates that are solely payments of principal and interest (the “SPPI test”), and the objective of the Company’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (the “Business Model test”). Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date.
The impairment requirements under IFRS 9 are based on an expected credit loss model, replacing the IAS 39 incurred loss model. The expected credit loss model applies to debt instruments recorded at amortized cost or at FVOCI, such as loans debt securities and trade receivables, lease receivables and most loan commitments and financial guarantee contracts.
8
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The following table summarizes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets and financial liabilities:
|
Financial assets/liabilities
|
|
IAS 39 Classification
|
|
IFRS 9 Classification
|
|
Cash and cash equivalents
|
|
FVTPL
|
|
FVTPL
|
|
Marketable securities
|
|
FVTPL
|
|
FVTPL
|
|
Accounts receivable
|
|
loans and receivables
|
|
amortized cost
|
|
Other receivables
|
|
loans and receivables
|
|
amortized cost
|
|
Convertible notes receivable
|
|
AFS
|
|
FVTPL
|
|
Long-term investments
|
|
FVTPL
|
|
FVTPL
|
|
Accounts payable and accrued liabilities
|
|
other financial liabilities
|
|
other financial liabilities
|
|
Income taxes payable
|
|
other financial liabilities
|
|
other financial liabilities
|
|
Promissory note payable
|
|
other financial liabilities
|
|
other financial liabilities
|
|
Long-term debt
|
|
other financial liabilities
|
|
other financial liabilities
|
|
Derivative liability
|
|
derivative financial instruments
|
|
FVTPL
|
IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, specifies how and when to recognize revenue, based on a five-step model, and enhances relevant disclosures to be applied to all contracts with customers.
The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is as follows:
To recognize revenue under IFRS 15, the Company applies the following five steps:
1.
Identify the contract(s) with a customer
2.
Identify the performance obligations in the contract
3.
Determine the transaction price
4.
Allocate the transaction price to the performance obligations in the contract
5.
Recognize revenue when or as the Company satisfies a performance obligation
Revenue from the direct sale of cannabis to medical customers for a fixed price is recognized when the company transfers control of the good to the customer
New standards and interpretations issued but not yet adopted
IFRS 16 — Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Early adoption is permitted if IFRS 15 has also been adopted. Based on its current assets, interests and investments and review of existing lease arrangements, no significant impact is anticipated from the new standard.
There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.
The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.
9
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
4.
Marketable securities
Marketable securities are classified as fair value through profit or loss, and are comprised of:
|
|
|
S&P rating at
|
|
Interest
|
|
Maturity
|
|
August 31,
|
|
May 31,
|
|
|
|
|
purchase
|
|
rate
|
|
date
|
|
2018
|
|
2018
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.700
|
%
|
8/02/18
|
|
$
|
—
|
|
$
|
1,015
|
|
|
Sobeys Inc.
|
|
BB+
|
|
3.520
|
%
|
8/08/18
|
|
—
|
|
3,040
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.077
|
%
|
1/14/19
|
|
1,511
|
|
1,528
|
|
|
Sun Life Financial Inc.
|
|
A
|
|
2.770
|
%
|
5/13/19
|
|
3,033
|
|
3,018
|
|
|
Ford Motor Credit Co. LLC
|
|
BBB
|
|
3.140
|
%
|
6/14/19
|
|
5,049
|
|
5,101
|
|
|
Canadian Western Bank
|
|
A-
|
|
3.463
|
%
|
12/17/19
|
|
1,013
|
|
1,025
|
|
|
Laurentian Bank of Canada
|
|
BBB
|
|
2.500
|
%
|
1/23/20
|
|
2,984
|
|
3,003
|
|
|
Enercare Solutions Inc.
|
|
BBB
|
|
4.600
|
%
|
2/03/20
|
|
3,905
|
|
3,974
|
|
|
Enbridge Inc.
|
|
BBB+
|
|
4.530
|
%
|
3/09/20
|
|
5,233
|
|
5,203
|
|
|
Choice Properties REIT
|
|
BBB
|
|
3.600
|
%
|
4/20/20
|
|
5,119
|
|
5,091
|
|
|
Westcoast Energy Inc.
|
|
BBB+
|
|
4.570
|
%
|
7/02/20
|
|
5,199
|
|
5,293
|
|
|
Citigroup Inc. (USD)
|
|
BBB+
|
|
2.050
|
%
|
12/17/18
|
|
3,931
|
|
3,914
|
|
|
Royal Bank of Canada (USD)
|
|
AA-
|
|
1.625
|
%
|
4/15/19
|
|
3,918
|
|
3,857
|
|
|
|
|
|
|
|
|
|
|
$
|
40,895
|
|
$
|
45,062
|
|
The cost of marketable securities as at August 31, 2018 was $41,770 (May 31, 2018 — $45,863). During the three months ended August 31, 2018, the company divested of certain marketable securities for proceeds of $4,000 (2017 - $10,099), resulting in a loss on disposal of $55 (2017 - $131), and re-invested $nil (2017 - $5,000). During the three months ended August 31, 2018, the Company recognized a loss of $167 (2017 - $1,746) on its marketable securities portfolio, of which $112 (2017 - $1,615) represented unrealized fair value adjustments.
5.
Other current assets
Other current assets are comprised of:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
HST receivable
|
|
$
|
12,763
|
|
$
|
10,840
|
|
|
Accrued interest
|
|
988
|
|
831
|
|
|
Credit card receivable
|
|
168
|
|
170
|
|
|
Prepaid assets
|
|
2,701
|
|
1,720
|
|
|
Other
|
|
37
|
|
823
|
|
|
|
|
$
|
16,657
|
|
$
|
14,384
|
|
10
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
6.
Inventory
Inventory is comprised of:
|
|
|
Capitalized
|
|
Fair value
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
cost
|
|
adjustment
|
|
|
2018
|
|
2018
|
|
|
Harvested cannabis
|
|
$
|
7,321
|
|
$
|
11,497
|
|
|
$
|
18,818
|
|
$
|
12,331
|
|
|
Harvested cannabis trim
|
|
831
|
|
1,449
|
|
|
2,280
|
|
2,277
|
|
|
Cannabis oil
|
|
3,122
|
|
5,289
|
|
|
8,411
|
|
6,578
|
|
|
Distillate
|
|
1,252
|
|
1,582
|
|
|
2,834
|
|
—
|
|
|
Softgel capsules
|
|
124
|
|
175
|
|
|
299
|
|
—
|
|
|
Packaging and supplies
|
|
2,110
|
|
—
|
|
|
2,110
|
|
964
|
|
|
|
|
$
|
14,760
|
|
$
|
19,992
|
|
|
$
|
34,752
|
|
$
|
22,150
|
|
During the three months ended August 31, 2018, the Company recorded $4,441 (2017 - $1,346) of production costs. Included in production costs for the three months ended August 31, 2018 is $147 of cannabis oil conversion costs (2017 - $41), $65 related to the cost of accessories (2017 - $37), and amortization of $513 (2017 - $389). The Company also included $919 of amortization which remains in inventory for the three months ended August 31, 2018 related to capital assets utilized in production. During the three months ended August 31, 2018, the Company expensed $4,205 (2017 —$1,136) of fair value adjustments on the growth of its biological assets included in inventory sold.
During the quarter, the Company also disposed of 13,642 plants prior to harvest. Included in production costs is $979 of accumulated costs relating to these plants which were not harvested.
The Company holds 4,893.7 kilograms of harvested cannabis (May 31, 2018 — 3,221.3 kgs), 699.7 kilograms of harvested cannabis trim (May 31, 2018 — 702.0 kgs), 9,295.6 litres of cannabis oils or 2,065.7 kilograms equivalent (May 31, 2018 — 7,724.7 litres or 1,716.6 kilograms equivalent), 3,026.1 litres of distillate or 672.5 kilograms equivalent and 316.9 litres (May 31, 2018 — nil) of softgel capsules or 70.4 kilograms equivalent (May 31, 2018 — nil) at August 31, 2018.
7.
Biological assets
Biological assets are comprised of:
|
|
|
Amount
|
|
|
Balance at May 31, 2018
|
|
$
|
7,331
|
|
|
Changes in fair value less costs to sell due to biological transformation
|
|
9,511
|
|
|
Production costs capitalized
|
|
7,667
|
|
|
Transferred to inventory upon harvest
|
|
(17,876
|
)
|
|
Balance at August 31, 2018
|
|
$
|
6,633
|
|
The Company values medical cannabis plants at fair value. Management determined cost approximates fair value from the date of initial clipping from mother plants until half way through the flowering cycle of the plants. Measurement of the biological transformation of the plant at fair value less costs to sell begins in the fourth week prior to harvest and is recognized evenly until the point of harvest. The number of weeks in the growing cycle is between twelve and sixteen weeks from propagation to harvest. The Company has determined the fair value less costs to sell of harvested cannabis and harvested cannabis trim to be $3.75 and $3.00 per gram respectively, upon harvest for greenhouse produced cannabis and $4.25 and $3.50 per gram respectively, upon harvest for indoor produced cannabis.
The effect of the fair value less cost to sell over and above historical cost was an increase in non-cash value of biological assets and inventory of $9,511 during the three months ended August 31, 2018 (2017 — $4,265).
The fair value of biological assets is determined using a valuation model to estimate expected harvest yield per plant applied to the estimated price per gram less processing and selling costs. Only when there is a material change from the expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the period, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.
11
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
In determining the fair value of biological assets, management has made the following estimates in this valuation model:
·
The harvest yield is between 40 grams and 80 grams per plant;
·
The selling price is between $2.50 and $10.00 per gram;
·
Processing costs include drying and curing, testing, post-harvest overhead allocation, packaging and labelling costs between $0.30 and $0.80 per gram;
·
Selling costs include shipping, order fulfilment, patient acquisition and patient maintenance costs between $0.00 and $3.00 per gram;
Sales price used in the valuation of biological assets is based on the historical average selling price of all cannabis products and can vary based on different strains being grown as well as the proportion of sales derived from wholesale compared to retail. Selling costs vary depending on methods of selling and are considered based on the expected method of selling and the determined additional costs which would be incurred. Expected yields for the cannabis plant is also subject to a variety of factors, such as strains being grown, length of growing cycle, and space allocated for growing. Management reviews all significant inputs, at each reporting period, based on historical information obtained as well as based on planned production schedules.
Management has quantified the sensitivity of the inputs and determined the following:
·
Selling price per gram — a decrease in the average selling price per gram by 5% would result in the biological asset value decreasing by $187 (May 31, 2018 - $267) and inventory decreasing by $1,657 (May 31, 2018 - $1,040)
·
Harvest yield per plant — a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $125 (May 31, 2018 - $179)
These inputs are level 3 on the fair value hierarchy, and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
8.
Related party transactions
The Company funds a portion of the Canadian operating costs of Liberty Health Sciences Inc. (“Liberty”), for which Liberty reimburses the Company quarterly. Additionally, the Company purchases certain electrical generation equipment from and pays rent to a company owned by a director. These parties are related as they are corporations that are controlled by certain officers and directors of the Company.
During the three months ended August 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $85 (2017 - $39). Included in this amount was rent of $4 charged during the three months ended August 31, 2018 (2017 - $8).
|
|
|
Amount
|
|
|
Balance due to (from) related parties as at May 31, 2018
|
|
$
|
—
|
|
|
Related party charges in the period
|
|
85
|
|
|
Payments to related parties in the period
|
|
(85
|
)
|
|
Payments made on behalf of related parties in the period
|
|
(830
|
)
|
|
Repayments made by related parties in the period
|
|
830
|
|
|
Balance at August 31, 2018
|
|
$
|
—
|
|
Key management personnel compensation for the three months ended August 31, 2018 and 2017 was comprised of:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Salaries
|
|
$
|
788
|
|
$
|
306
|
|
|
Short-term employment benefits (included in office and general)
|
|
27
|
|
18
|
|
|
Share-based compensation
|
|
1,980
|
|
1,758
|
|
|
|
|
$
|
2,795
|
|
$
|
2,082
|
|
12
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Directors and officers of the Company control 8.13% or 18,902,125 of the voting shares of the Company.
9.
Capital assets
|
|
|
|
|
Production
|
|
|
|
Leasehold
|
|
Construction
|
|
Total capital
|
|
|
|
|
Land
|
|
Facility
|
|
Equipment
|
|
improvements
|
|
in process
|
|
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
10,829
|
|
$
|
16,170
|
|
$
|
5,340
|
|
$
|
262
|
|
$
|
42,159
|
|
$
|
74,760
|
|
|
Business acquisitions
|
|
854
|
|
6,992
|
|
2,860
|
|
1,388
|
|
5,947
|
|
18,041
|
|
|
Additions
|
|
12,716
|
|
47,149
|
|
4,759
|
|
15
|
|
151,899
|
|
216,538
|
|
|
Transfers
|
|
105
|
|
29,338
|
|
2,990
|
|
—
|
|
(32,433
|
)
|
—
|
|
|
Disposals
|
|
—
|
|
(207
|
)
|
—
|
|
—
|
|
(415
|
)
|
(622
|
)
|
|
At May 31, 2018
|
|
24,504
|
|
99,442
|
|
15,949
|
|
1,665
|
|
167,157
|
|
308,717
|
|
|
Additions
|
|
2,217
|
|
1,251
|
|
6,771
|
|
—
|
|
49,324
|
|
59,563
|
|
|
Transfers
|
|
—
|
|
1,389
|
|
1,194
|
|
(1,389
|
)
|
(1,194
|
)
|
—
|
|
|
At August 31, 2018
|
|
$
|
26,721
|
|
$
|
102,082
|
|
$
|
23,914
|
|
$
|
276
|
|
$
|
215,287
|
|
$
|
368,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
983
|
|
$
|
1,260
|
|
$
|
62
|
|
$
|
—
|
|
$
|
2,305
|
|
|
Amortization
|
|
—
|
|
1,517
|
|
1,697
|
|
47
|
|
—
|
|
3,261
|
|
|
At May 31, 2018
|
|
—
|
|
2,500
|
|
2,957
|
|
109
|
|
—
|
|
5,566
|
|
|
Amortization
|
|
—
|
|
833
|
|
1,009
|
|
8
|
|
—
|
|
1,850
|
|
|
At August 31, 2018
|
|
$
|
—
|
|
$
|
3,333
|
|
$
|
3,966
|
|
$
|
117
|
|
$
|
—
|
|
$
|
7,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
10,829
|
|
$
|
15,187
|
|
$
|
4,080
|
|
$
|
200
|
|
$
|
42,159
|
|
$
|
72,455
|
|
|
At May 31, 2018
|
|
$
|
24,504
|
|
$
|
96,942
|
|
$
|
12,992
|
|
$
|
1,556
|
|
$
|
167,157
|
|
$
|
303,151
|
|
|
At August 31, 2018
|
|
$
|
26,721
|
|
$
|
98,749
|
|
$
|
19,948
|
|
$
|
159
|
|
$
|
215,287
|
|
$
|
360,864
|
|
During the three months ended August 31, 2018, the Company sold assets that were not yet in use with a cost of $nil (2017 - $207) and a net book value of $nil (2017 - $207), for proceeds of $nil (2017 - $200), resulting in a loss (gain) on sale of capital assets of $nil (2017 - $7).
13
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
10.
Intangible assets
|
|
|
Customer
relationships
|
|
Corporate
website
|
|
Licences,
permits &
applications
|
|
Non-compete
agreements
|
|
Tokyo Smoke
licensing
agreement
|
|
Intellectual
property,
trademarks &
brands
|
|
Total
intangible
assets
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
218
|
|
$
|
1,250
|
|
$
|
—
|
|
$
|
459
|
|
$
|
4,428
|
|
$
|
6,355
|
|
|
Business acquisitions
|
|
11,730
|
|
39
|
|
137,920
|
|
1,930
|
|
—
|
|
76,190
|
|
227,809
|
|
|
Additions
|
|
—
|
|
152
|
|
—
|
|
—
|
|
—
|
|
9
|
|
161
|
|
|
At May 31, 2018
|
|
11,730
|
|
409
|
|
139,170
|
|
1,930
|
|
459
|
|
80,627
|
|
234,325
|
|
|
Additions
|
|
—
|
|
—
|
|
11,703
|
|
—
|
|
—
|
|
—
|
|
11,703
|
|
|
At August 31, 2018
|
|
$
|
11,730
|
|
$
|
409
|
|
$
|
150,873
|
|
$
|
1,930
|
|
$
|
459
|
|
$
|
80,627
|
|
$
|
246,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
156
|
|
$
|
153
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,155
|
|
$
|
4,464
|
|
|
Amortization
|
|
1,274
|
|
100
|
|
124
|
|
314
|
|
92
|
|
1,513
|
|
3,417
|
|
|
At May 31, 2018
|
|
1,274
|
|
256
|
|
277
|
|
314
|
|
92
|
|
5,668
|
|
7,881
|
|
|
Amortization
|
|
986
|
|
30
|
|
332
|
|
243
|
|
23
|
|
1,242
|
|
2,856
|
|
|
At August 31, 2018
|
|
$
|
2,260
|
|
$
|
286
|
|
$
|
609
|
|
$
|
557
|
|
$
|
115
|
|
$
|
6,910
|
|
$
|
10,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017
|
|
$
|
—
|
|
$
|
62
|
|
$
|
1,097
|
|
$
|
—
|
|
$
|
459
|
|
$
|
273
|
|
$
|
1,891
|
|
|
At May 31, 2018
|
|
$
|
10,456
|
|
$
|
153
|
|
$
|
138,893
|
|
$
|
1,616
|
|
$
|
367
|
|
$
|
74,959
|
|
$
|
226,444
|
|
|
At August 31, 2018
|
|
$
|
9,470
|
|
$
|
123
|
|
$
|
150,264
|
|
$
|
1,373
|
|
$
|
344
|
|
$
|
73,717
|
|
$
|
235,291
|
|
11.
Business Acquisitions
Acquisition of Broken Coast Cannabis Ltd.
On February 13, 2018, the Company entered into a share purchase agreement to purchase all of the shares of Cannan Growers Inc. (“Cannan”), a holding company owning shares of Broken Coast Cannabis Ltd. (“Broken Coast”), and to acquire the remaining shares, for a combined total of 99.86%, of the issued and outstanding shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate 14,373,675 common shares. The share purchase agreement entitled the Company to control Broken Coast effective on February 1, 2018, which became the effective acquisition date. During the quarter, the Company came to terms with the holder of the remaining 0.14% of the issued and outstanding shares of Broken Coast, accordingly the Company set aside 19,963 shares to be issued for the remaining 0.14%. Subsequent to quarter-end these shares were issued.
The table below summarizes the fair value of the assets acquired and the liabilities assumed at the acquisition date:
14
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
|
|
|
Note
|
|
Number of shares
|
|
Share price
|
|
Amount
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
(i)
|
|
14,373,675
|
|
$
|
14.90
|
|
$
|
214,168
|
|
|
Shares to be issued
|
|
(i)
|
|
19,963
|
|
$
|
14.90
|
|
297
|
|
|
Total consideration paid
|
|
|
|
|
|
|
|
$
|
214,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
2,007
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
299
|
|
|
Other current assets
|
|
|
|
|
|
|
|
43
|
|
|
Inventory
|
|
|
|
|
|
|
|
2,572
|
|
|
Biological assets
|
|
|
|
|
|
|
|
826
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
13,298
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
11,730
|
|
|
Corporate website
|
|
|
|
|
|
|
|
39
|
|
|
Licences, permits & applications
|
|
|
|
|
|
|
|
6,320
|
|
|
Non-competition agreements
|
|
|
|
|
|
|
|
1,930
|
|
|
Intellectual property, trademarks & brands
|
|
|
|
|
|
|
|
72,490
|
|
|
Goodwill
|
|
|
|
|
|
|
|
146,091
|
|
|
Total assets
|
|
|
|
|
|
|
|
257,645
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
10,455
|
|
|
Income taxes payable
|
|
|
|
|
|
|
|
922
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
25,889
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
5,914
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
43,180
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
214,465
|
|
(i)
Share price based on the price of the shares on February 1, 2018.
Net income and comprehensive net income for the Company would have been higher by approximately $567 for the three months ended August 31, 2017, if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $1,643.
Acquisition of Nuuvera Corp.
On March 23, 2018, the Company completed a previously announced definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which the Company acquired, by way of a court-approved plan of arrangement, under the Business Corporations Act (Ontario) (the “Transaction”), 100% of the issued and outstanding common shares (on a fully diluted basis) of Nuuvera for a total consideration of $0.62 in cash plus 0.3546 of an Aphria share for each Nuuvera share held. All of Nuuvera’s outstanding options were exchanged for an equivalent option granted pursuant to Aphria’s stock option plan (each, a “Replacement Option”) to purchase from Aphria the number of common shares (rounded to the nearest whole share) equal to: (i) the exchange ratio multiplied by (ii) the number of Nuuvera shares subject to such Nuuvera Option. Each such Replacement Option shall provide for an exercise price per common share (rounded to the nearest whole cent) equal to: (i) the exercise price per Nuuvera share purchasable pursuant to such Nuuvera Option; divided by (ii) the exchange ratio.
The table below summarizes the fair value of the assets acquired and the liabilities assumed at the effective acquisition date:
15
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
|
|
|
Note
|
|
Number of shares
|
|
Share price
|
|
Amount
|
|
|
Consideration paid
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
$
|
54,604
|
|
|
Shares issued
|
|
(i)
|
|
31,226,910
|
|
$
|
13.17
|
|
411,258
|
|
|
Warrants outstanding
|
|
(ii)
|
|
1,345,866
|
|
|
|
1,015
|
|
|
Replacement options issued
|
|
(Ii)
|
|
1,280,330
|
|
|
|
12,133
|
|
|
|
|
|
|
|
|
|
|
479,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of previously held investment
|
|
|
|
|
|
|
|
|
|
|
Shares held by Aphria
|
|
(i)
|
|
1,878,738
|
|
$
|
14.92
|
|
28,028
|
|
|
Warrants held by Aphria
|
|
(ii)
|
|
322,365
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
28,271
|
|
|
Total fair value of consideration
|
|
|
|
|
|
|
|
$
|
507,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
35,033
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
464
|
|
|
Other current assets
|
|
|
|
|
|
|
|
1,142
|
|
|
Inventory
|
|
|
|
|
|
|
|
401
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
|
|
Capital assets
|
|
|
|
|
|
|
|
4,743
|
|
|
Intellectual property, trademarks & brands
|
|
|
|
|
|
|
|
3,700
|
|
|
Licences, permits & applications
|
|
|
|
|
|
|
|
131,600
|
|
|
Goodwilll
|
|
|
|
|
|
|
|
377,221
|
|
|
Total assets
|
|
|
|
|
|
|
|
554,304
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
11,000
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
36,023
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
47,023
|
|
|
Total net assets acquired
|
|
|
|
|
|
|
|
$
|
507,281
|
|
(i)
Share price based on the price of the shares on March 23, 2018; shares held by Aphria include the cash consideration paid.
(ii)
Options and warrants are valued using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 2.19%; expected life of 1- 10 years; volatility of 30% based on volatility used for similar instruments on the open market; forfeiture rate of nil; dividend yield of nil; and the exercise price of $2.52 - $20.30.
Net income and comprehensive net income for the Company would have been lower by approximately $4,902 for the three months ended August 31, 2017, if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $3,439.
Goodwill is comprised of:
|
CannWay goodwill
|
|
$
|
1,200
|
|
|
Broken Coast goodwill
|
|
146,091
|
|
|
Nuuvera goodwill
|
|
377,221
|
|
|
Total goodwill
|
|
$
|
524,512
|
|
16
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
12.
Convertible notes receivable
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Copperstate Farms Investors, LLC
|
|
$
|
—
|
|
$
|
1,942
|
|
|
HydRx Farms Ltd. (d/b/a Scientus Pharma)
|
|
16,284
|
|
16,129
|
|
|
Fire & Flower Inc.
|
|
10,140
|
|
—
|
|
|
|
|
26,424
|
|
18,071
|
|
|
Deduct - current portion
|
|
(26,424
|
)
|
(1,942
|
)
|
|
|
|
$
|
—
|
|
$
|
16,129
|
|
Copperstate Farms Investors, LLC
On May 15, 2018, the Company entered into an amendment agreement with Copperstate Farms Investors, LLC (“CSF”) which extended the maturity date and automatic conversion date to June 30, 2018, which was subsequently extended into July. As at August 31, 2018, this note was paid in full.
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria purchased $11,500 in secured convertible debentures of Scientus Pharma (“SP”). The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days. The Company maintains a first charge on all assets of SP. Subsequent to quarter-end, the Company agreed to share its first charge on all assets of SP with a third party on a pari passu basis.
During the period, the Company’s note receivable from SP increased by $155, representing the change in fair value on the note. As at August 31, 2018, the convertible note receivable totalled $16,284.
Fire & Flower Inc.
On July 26, 2018, Aphria purchased $10,000 in unsecured convertible debentures of Fire & Flower Inc. (“F&F”). The convertible debentures bear interest at 8% per annum compounded, accrued and paid semi-annually in arrears (the “Debentures”). The Debentures mature on the earlier of a public liquidity event or July 31, 2019 at which point they automatically convert into common shares of F&F at the rate of $1.15. The Debentures may also be converted into a loan on July 31, 2019 bearing interest at 12%, at the holder’s option.
During the period, the Company’s note receivable from F&F increased by $140, representing the change in fair value on the note. As at August 31, 2018, the convertible note receivable totalled $10,140.
During the period, the Company purchased a total of $10,000 in convertible notes. The unrealized gain on convertible notes receivable recognized in the results of operations amounts to $295 (2017 - $547).
The fair value for the was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 0.85-1.15%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
17
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
13.
Interest in equity investees
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Associated company
|
|
|
|
|
|
|
Althea Company Pty Ltd.
|
|
$
|
10,187
|
|
$
|
4,966
|
|
|
|
|
$
|
10,187
|
|
$
|
4,966
|
|
Liberty Health Sciences Inc.
In February 2018, the Company entered into a call/put obligation (“Obligation Agreement”) for the remaining shares held in Liberty, which were subject to CSE mandatory escrow requirements. As each new tranche of shares becomes freely trading, the Obligation Agreement resulted in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price.
The Obligation Agreement included an opt-out for Aphria’s benefit, in the event that the Toronto Stock Exchange amended their regulations such that it permitted investments by Canadian companies in U.S. based cannabis businesses, and in such instance, the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agreed to pay the buyers a $2,500 termination fee.
Based on the terms of the Obligation Agreement, the Company determined that the remaining shares held in Liberty met the requirements under IFRS 5 and were reclassified from interest in equity investees to assets held for sale. The Company ceased accounting for the investment as an equity investment as of November 30, 2017 and transferred the carrying value to assets held for sale.
In July 2018, 16,029,615 shares were released from escrow and sold as part of the Obligation Agreement. The Company received gross proceeds of $11,514 and recognized a gain on sale of equity investee of $9,880. As part of the transaction, the Company paid $480 in exchange for an option to buy back the shares at $1.00 a share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25. The option to repurchase the shares is subject to the following conditions (collectively, the enumerated conditions (1) through (5), the “
Conditions
”):
(1)
Cannabis becoming legalized federally in the United States; and
One or more of the following conditions have been satisfied:
(2)
The TSX has provided its approval for the re-purchase of the Liberty shares;
(3)
The TSX revises its rules such that it no longer has a prohibition against its listed companies having an interest in US assets which are involved in the cannabis business;
(4)
The common shares of the Company are voluntarily or involuntarily delisted from the TSX; and/or
(5)
The Company is acquired by another entity, provided that the common shares of the Company will be delisted from the TSX upon the change of control.
This option has been included in long-term investments (Note 14).
As at August 31, 2018, there were 64,118,462 Liberty shares held in escrow (May 31, 2018 — 80,148,077) with a carrying value of $16,496 (May 31, 2018 - $20,620), which remains in assets held for sale. Also included in assets held for sale is $nil of long-term investments (May 31, 2018 - $20,000). The Company maintained a derivative liability of $10,376 (May 31, 2018 - $12,451) and during the three months ended August 31, 2018, recognized an unrealized loss on derivative liability of $415 (2017 - $nil) as a result of the 18% discount to the market price of Liberty, based on Liberty’s 10 day volume weighted trading price in the Obligation Agreement.
During the three months ended August 31, 2017, the Company reported a total gain on dilution of ownership in equity investee of $7,551. For the four months ended August 31, 2017, Liberty reported a net loss of $23,493 and a net comprehensive loss of $27,001. In accordance with the equity method, the Company recorded a loss of $8,840 and other comprehensive loss of $1,321.
18
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The Company used a Monte-Carlo simulation to estimate the fair value of the derivative liability, using the following assumptions: risk-free rate of 1%; expected life of 0.4 — 2.4 years; volatility of 60% based on comparable companies; forfeiture rate of 0%; and, dividend yield of nil.
Subsequent to quarter-end, the Company secured an exemption from the CSE allowing it to have the remaining Liberty shares released from the CSE mandated escrow. Subsequent to the release from escrow, the Company entered into a share purchase agreement to divest of the remaining 64,118,462 Liberty shares in exchange for consideration in the form of a promissory note in the amount of $59,098, bearing interest at a rate of 12% due in 5 years. As a security for the promissory note, the Liberty shares have been placed in trust with an escrow agent. The purchaser is able to remove the Liberty shares from the escrow at any time by paying off the promissory note. In the event that the Company enforces the security, the escrow agent will return the shares to the Company, provided that the Conditions are met. In the event they are not met, the escrow agent will transfer the securities to a third-party investment for liquidation, with the proceeds of liquidation delivered to the Company. Simultaneously with this sale, the Company entered into an option agreement to repurchase the Liberty shares for the amount of the promissory note. The Company will pay an annual fee equal to 12.975% of the face value of the promissory note to maintain this option. The option to repurchase the shares is subject to the Conditions described above. In exchange for the early termination of the Obligation Agreement, the Company paid a $1,000 termination fee.
Althea Company Pty Ltd. (“Althea”)
As at August 31, 2018 the Company held 50,750,000 common shares of Althea (May 31, 2018 - 4,500) representing an ownership interest of 25% (May 31, 2018 - 37.5%).
The following table summarizes, in aggregate, the financial information of the Company’s associate as included in their own financial statements.
|
|
|
June 30,
|
|
March 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Current assets
|
|
$
|
3,102
|
|
$
|
3,857
|
|
|
Non-current assets
|
|
—
|
|
3
|
|
|
Current liabilities
|
|
(154
|
)
|
(14
|
)
|
|
Non-current liabilities
|
|
—
|
|
—
|
|
|
Net assets
|
|
$
|
2,948
|
|
$
|
3,846
|
|
For the period from April 1 to June 30, 2018 the investee, Althea, reported a net loss of $766 AUD on its financial statements. In accordance with the equity method, the Company recorded a loss of $247, for the three months ended August 31, 2018, from its investee relative to its ownership of the outstanding common shares at the time.
During the three months ended August 31, 2018, Althea completed a share split of 7,500 shares for each existing share. Althea also issued 101,310,000 common shares for total proceeds of $19,650 AUD during the quarter. The Company participated in the financing of Althea contributing $3,400 AUD ($3,258 CAD) of the total $19,650 AUD raised. This additional raise reduced the Company’s ownership interest in Althea from 37.5% to 25% and accordingly, the Company recognized a gain on dilution of $2,210.
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Reconciliation to carrying amount:
|
|
|
|
|
|
|
Opening balance
|
|
$
|
4,966
|
|
$
|
—
|
|
|
Transfer from long-term investments
|
|
—
|
|
2,483
|
|
|
Cash contributions, net of share issuance costs
|
|
3,258
|
|
2,497
|
|
|
Gain on account of dilution of ownership
|
|
2,210
|
|
—
|
|
|
Share of reported net (loss) income
|
|
(247
|
)
|
(14
|
)
|
|
Closing balance
|
|
$
|
10,187
|
|
$
|
4,966
|
|
19
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
14.
Long-term investments
|
|
|
Cost
|
|
|
Fair value
|
|
|
|
|
|
|
Subtotal
|
|
|
|
Fair value
|
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
Divesture/
|
|
|
August 31,
|
|
Change in
|
|
August 31,
|
|
|
|
|
2018
|
|
|
2018
|
|
Investment
|
|
Transfer
|
|
|
2018
|
|
fair value
|
|
2018
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp.
|
|
$
|
1,500
|
|
|
$
|
3,765
|
|
$
|
—
|
|
$
|
(3,765
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
MassRoots, Inc.
|
|
304
|
|
|
164
|
|
—
|
|
(164
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Tetra Bio-Pharma Inc.
|
|
2,300
|
|
|
6,800
|
|
—
|
|
—
|
|
|
6,800
|
|
4,200
|
|
11,000
|
|
|
Hiku Brands Company Ltd.
|
|
9,775
|
|
|
13,558
|
|
—
|
|
—
|
|
|
13,558
|
|
13,558
|
|
27,116
|
|
|
Scythian Biosciences Corp.
|
|
9,349
|
|
|
8,603
|
|
298
|
|
—
|
|
|
8,901
|
|
(1,561
|
)
|
7,340
|
|
|
National Access Cannabis Corp.
|
|
1,093
|
|
|
710
|
|
5,481
|
|
—
|
|
|
6,191
|
|
186
|
|
6,377
|
|
|
|
|
24,321
|
|
|
33,600
|
|
5,779
|
|
(3,929
|
)
|
|
35,450
|
|
16,383
|
|
51,833
|
|
|
Level 2 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiku Brands Company Ltd.
|
|
2,336
|
|
|
1,906
|
|
—
|
|
—
|
|
|
1,906
|
|
5,209
|
|
7,115
|
|
|
Scythian Biosciences Corp.
|
|
3,153
|
|
|
661
|
|
—
|
|
—
|
|
|
661
|
|
(661
|
)
|
—
|
|
|
US legalization options
|
|
—
|
|
|
—
|
|
480
|
|
—
|
|
|
480
|
|
—
|
|
480
|
|
|
|
|
5,489
|
|
|
2,567
|
|
480
|
|
—
|
|
|
3,047
|
|
4,548
|
|
7,595
|
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC
|
|
1,755
|
|
|
5,300
|
|
—
|
|
(5,300
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Copperstate Farms Investors, LLC
|
|
9,407
|
|
|
14,700
|
|
—
|
|
(14,700
|
)
|
|
—
|
|
—
|
|
—
|
|
|
Resolve Digital Health Inc.
|
|
718
|
|
|
3,300
|
|
—
|
|
—
|
|
|
3,300
|
|
—
|
|
3,300
|
|
|
Resolve Digital Health Inc.
|
|
282
|
|
|
1,916
|
|
—
|
|
—
|
|
|
1,916
|
|
253
|
|
2,169
|
|
|
Green Acre Capital Fund
|
|
1,600
|
|
|
2,042
|
|
400
|
|
—
|
|
|
2,442
|
|
1,321
|
|
3,763
|
|
|
Green Tank Holdings Corp.
|
|
650
|
|
|
647
|
|
—
|
|
—
|
|
|
647
|
|
6
|
|
653
|
|
|
IBBZ Krankenhaus GmbH
|
|
1,956
|
|
|
1,956
|
|
—
|
|
—
|
|
|
1,956
|
|
6
|
|
1,962
|
|
|
Rapid Dose Therapeutics Inc.
|
|
—
|
|
|
—
|
|
5,400
|
|
—
|
|
|
5,400
|
|
—
|
|
5,400
|
|
|
|
|
16,368
|
|
|
29,861
|
|
5,800
|
|
(20,000
|
)
|
|
15,661
|
|
1,586
|
|
17,247
|
|
|
Deduct - assets held for sale
|
|
(11,162
|
)
|
|
(20,000
|
)
|
—
|
|
20,000
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
35,016
|
|
|
$
|
46,028
|
|
$
|
12,059
|
|
$
|
(3,929
|
)
|
|
$
|
54,158
|
|
$
|
22,517
|
|
$
|
76,675
|
|
The fair value attached to warrants in both Level 2 and Level 3 were determined using the Black-Scholes option pricing model using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 1 and 2 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective warrant.
CannaRoyalty Corp. (“CR”)
During the period, the Company sold its remaining 750,000 shares of CR for proceeds of $4,111, resulting in an accounting gain of $346 (Note 26). The Company notes that as measured against the original cost of the shares, the Company recorded a total gain of $2,611 on its investment in CR.
MassRoots, Inc.
During the period, the Company sold its remaining 500,000 common shares in MassRoots, Inc. for proceeds of $1, resulting in a loss of $163 (Note 26).
Tetra Bio-Pharma Inc.
The Company owns 10,000,000 common shares at a cost of $2,300, with a fair value of $11,000 as at August 31, 2018.
Hiku Brands Company Ltd. (“Hiku”)
The Company holds 9,824,590 common shares and 7,993,605 common share purchase warrants in Hiku at a cost of $12,111, with a fair value of $34,231 as at August 31, 2018. Each common share purchase warrant is exercisable at $2.10 per warrant expiring in January 2020.
20
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Subsequent to quarter-end, all the issued and outstanding common shares of Hiku were acquired by a third party. The Company maintains the supply agreements identified previously. Further, the Company liquidated its ownership interest in the third party, for gross proceeds of $30,542.
Scythian Biosciences Inc. (“Scythian”)
During the period the Company purchased 123,800 common shares of Scythian at a total cost of $298. The Company holds 2,812,300 common shares and 672,125 common share purchase warrants in Scythian at a cost of $12,800, with a fair value of $7,340 as at August 31, 2018. Each common share purchase warrant is exercisable to purchase four common shares at a price of $22.00 per warrant expiring February 2020.
National Access Cannabis Corp.
During the period, the Company purchased 4,850,000 common shares of National Access Cannabis Corp. at a total cost of $5,481. The Company owns 5,850,000 common shares in National Access Cannabis Corp. at a cost of $6,574, with a fair value of $6,377 as at August 31, 2018.
US legalization options
During the period, the Company purchased an option to acquire 16,029,615 Liberty shares at $1.00 a share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25. The option to repurchase the shares is subject to the Conditions described in note 13.
Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”)
During the period, the Company received the $20,000 from the sale of the shares of Copperstate and CSF, which were previously held as available for sale.
Resolve Digital Health Inc. (“Resolve”)
The Company owns 2,200,026 common shares and 2,200,026 warrants in Resolve at a total cost of $1,000, with a fair value of $5,469 as at August 31, 2018. The Company determined the fair value of its investment based on Resolve’s most recent financing. Each warrant is exercisable at $0.65 per warrant expiring December 1, 2021.
Green Acre Capital
The Company committed $2,000 to Green Acre Capital Fund I and, as of the balance sheet date, has funded the full $2,000. During the period, the Company committed to a $15,000 investment in Green Acre Capital Fund II to be launched before December 2018. The Company determined that the fair value of its investments, based on its proportionate share of net assets, was $3,763 as at August 31, 2018. Subsequent to quarter-end, the Company received a dividend of $700 from its investment.
Subsequent to quarter-end, the Company transferred assets with a fair value of $30,542 to GA Opportunities Corp. in exchange for a promissory note, bearing interest at 12% per annum due in 5 years. Simultaneously with this transfer, the Company entered into an option agreement to repurchase the assets acquired by GA Opportunities Corp. for the value of the promissory note. The Company will pay an annual fee equal to 12.3% of the face value of the promissory note to maintain this option. In the event that the assets acquired by GA Opportunities Corp. qualify as US cannabis assets, the option to repurchase the shares is subject to the same Conditions described in note 13.
Green Tank Holdings Corp. (“Green Tank”)
The Company owns 98,425 preferred shares in Green Tank for a total cost of $500 USD ($650 CAD). The Company determined the fair value of its investment, based on Green Tank’s most recent financing at the same price, is equal to its carrying value. The Company recognized a gain from the change in fair value of $6 due to changes in the foreign exchange rate.
IBBZ Krankenhaus GmbH Klinik Hygiea (“Krankenhaus”)
The Company owns 25.1% of Krankenhaus, which is the owner and operator of Berlin-based Schöneberg Hospital, for €1,294 ($1,956 CAD). Through this investment, the Company is entitled to 5% of the net income (loss) for the years 2018 to 2021, and 10% of the net income (loss) for the period thereafter. The Company determined that the fair value of its investment, based on Krankenhaus’ most recent financing at the same price, is equal to its carrying value. The Company recognized a gain from the change in fair value of $6 due to changes in the foreign exchange rate.
21
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Rapid Dose Therapeutics Inc. (“RDT”)
In August 2018, the Company entered into a subscription agreement with RDT for the purchase of 7,200,000 common shares, for a total cost of $5,400. The Company determined that the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value.
15.
Income taxes and deferred income taxes
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Income before income taxes
|
|
$
|
25,138
|
|
$
|
18,811
|
|
|
Statutory rate
|
|
26.5
|
%
|
26.5
|
%
|
|
|
|
|
|
|
|
|
Expected income tax expense at combined basic federal and provincial tax rate
|
|
6,662
|
|
4,985
|
|
|
|
|
|
|
|
|
|
Effect on income taxes of:
|
|
|
|
|
|
|
Non-deductible share-based compensation and other expenses
|
|
1,631
|
|
(1,195
|
)
|
|
Non-taxable portion of losses (gains)
|
|
(4,571
|
)
|
—
|
|
|
Other
|
|
196
|
|
(20
|
)
|
|
Tax assets not recognized
|
|
44
|
|
—
|
|
|
|
|
$
|
3,962
|
|
$
|
3,770
|
|
|
|
|
|
|
|
|
|
Income tax expense is comprised of:
|
|
|
|
|
|
|
Current
|
|
$
|
1,494
|
|
$
|
365
|
|
|
Future
|
|
2,468
|
|
3,405
|
|
|
|
|
$
|
3,962
|
|
$
|
3,770
|
|
The following table summarizes the components of deferred tax:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Non-capital loss carry forward
|
|
$
|
6,070
|
|
$
|
4,567
|
|
|
Capital loss carry forward
|
|
—
|
|
405
|
|
|
Share issuance and financing fees
|
|
8,240
|
|
5,443
|
|
|
Unrealized loss
|
|
—
|
|
916
|
|
|
Other
|
|
6
|
|
27
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Net book value in excess of undepreciated capital cost
|
|
(941
|
)
|
(1,017
|
)
|
|
Intangible assets in excess of tax costs
|
|
(63,530
|
)
|
(64,120
|
)
|
|
Unrealized gain
|
|
(2,078
|
)
|
(1,097
|
)
|
|
Biological assets and inventory in excess of tax costs
|
|
(6,089
|
)
|
(4,377
|
)
|
|
Net deferred tax (liabilities) assets
|
|
$
|
(58,322
|
)
|
$
|
(59,253
|
)
|
16.
Bank indebtedness
The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the August 31, 2018, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.
22
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
17.
Promissory note payable
During the prior year, the Company entered into a promissory note with Althea for $700 AUD ($686), as part of the purchase of Althea common shares. The note is due and payable on December 31, 2020. The Company reached an agreement with Althea where the promissory note amount will be used by Althea to purchase products from the Company in connection with a supply agreement entered into in September 2017.
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Note payable to Althea Company Pty Ltd - $700 AUD ($686), opening balance, non-interest bearing, due and payable on December 31, 2020
|
|
$
|
610
|
|
$
|
686
|
|
|
Reduction of Promissory note payable balance with respect to products provided
|
|
—
|
|
(63
|
)
|
|
Foreign exchange (gain) loss
|
|
(25
|
)
|
(13
|
)
|
|
Balance remaining
|
|
585
|
|
610
|
|
|
Deduct - principal portion included in current liabilities
|
|
(585
|
)
|
(610
|
)
|
|
|
|
$
|
—
|
|
$
|
—
|
|
18.
Long-term debt
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Term loan - $25,000 - Canadian Five Year Bond interest rate plus 2.73% with a minimum 4.50%, 5 year term, with a 15-year amortization, repayable in blended monthly payments sufficient to repay the loan by July 2033
|
|
$
|
24,906
|
|
$
|
—
|
|
|
Term loan - $25,000 - 3.95%, compounded monthly, 5 year term with a 15-year amortization, repayable in equal monthly instalments of $188 including interest, due in April 2022
|
|
24,354
|
|
24,107
|
|
|
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021
|
|
1,030
|
|
1,057
|
|
|
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021
|
|
3,482
|
|
3,515
|
|
|
Vendor take-back mortgage owed to related party - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021
|
|
1,732
|
|
1,869
|
|
|
|
|
55,504
|
|
30,548
|
|
|
Deduct - unamortized financing fees
|
|
(140
|
)
|
(71
|
)
|
|
- principal portion included in current liabilities
|
|
(3,349
|
)
|
(2,140
|
)
|
|
|
|
$
|
52,015
|
|
$
|
28,337
|
|
Total long-term debt repayments are as follows:
|
Next 12 months
|
|
|
|
$
|
3,349
|
|
|
2 years
|
|
|
|
3,506
|
|
|
3 years
|
|
|
|
3,562
|
|
|
4 years
|
|
|
|
3,149
|
|
|
Thereafter
|
|
|
|
41,938
|
|
|
Balance of obligation
|
|
|
|
$
|
55,504
|
|
The term loan of $24,906 was entered into on July 27, 2018 and is secured by a first charge on the property at 223, 231, 239, 265, 269, 271 and 275 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in March 2018.
23
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The term loan of $24,354 was entered into on May 9, 2017 and is secured by a first charge on the property at 265 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in March 2018.
The term loan of $1,030 and mortgage payable of $3,482 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot Street West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of $1,732, owed to a director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot Street West. The mortgage is secured by a second charge on the property at 265 Talbot Street West, Leamington, Ontario.
The Company acquired term loans of $3,000 and $1,201, and a mortgage payable of $1,713 as part of the acquisition of Broken Coast (Note 11). These loans and mortgages were paid in full during the prior year.
19.
Share capital
The Company is authorized to issue an unlimited number of common shares. As at August 31, 2018, the Company has 232,580,805 shares issued and outstanding and 19,963 shares to be issued, of which 1,777,971 shares were held and subject to various escrow agreements.
|
|
|
Number of
|
|
|
|
|
Common Shares
|
|
shares
|
|
Amount
|
|
|
Balance at May 31, 2018
|
|
210,169,924
|
|
$
|
1,113,981
|
|
|
June 2018 bought deal, net of cash issuance costs
|
|
21,835,510
|
|
245,925
|
|
|
Broken Coast acquisition
|
|
19,963
|
|
297
|
|
|
Warrants exercised
|
|
10,000
|
|
18
|
|
|
Options exercised
|
|
565,371
|
|
6,857
|
|
|
Income tax recovery on share issuance costs
|
|
—
|
|
3,399
|
|
|
|
|
232,600,768
|
|
$
|
1,370,477
|
|
a)
Throughout the period, 10,000 warrants with exercise price of $1.75 were exercised for a value of $18 including any cash consideration.
b)
Throughout the period, 565,371 shares were issued from the exercise of stock options with exercise prices ranging from $1.40 to $9.05 for a value of $6,857, including any cash consideration.
c)
In June 2018, the Company closed a bought deal financing in which it issued 21,835,510 common shares at a purchase price of $11.85 per share for $245,925 net of cash issuance costs.
d)
During the period, the Company agreed to terms to acquire the remaining 0.14% of Broken Coast (Note 11) and accordingly, the Company agreed to issue 19,963 shares. These shares were released subsequent to quarter-end.
e)
During the period, the Company recognized a $3,399 income tax recovery on share issuance costs.
24
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
20.
Warrants
The warrant details of the Company are as follows:
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
|
|
Type of warrant
|
|
Expiry date
|
|
warrants
|
|
average price
|
|
Amount
|
|
|
Warrant
|
|
December 11, 2018
|
|
26,003
|
|
1.75
|
|
$
|
—
|
|
|
Warrant
|
|
December 2, 2019
|
|
1,261,269
|
|
1.50
|
|
—
|
|
|
Warrant
|
|
September 26, 2021
|
|
200,000
|
|
3.14
|
|
360
|
|
|
Nuuvera warrant
|
|
February 14, 2020
|
|
1,345,866
|
|
20.30
|
|
1,015
|
|
|
|
|
|
|
2,833,138
|
|
$
|
10.55
|
|
$
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
May 31, 2018
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
warrants
|
|
average price
|
|
warrants
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
2,843,138
|
|
$
|
10.52
|
|
3,885,908
|
|
$
|
1.61
|
|
|
Issued during the period
|
|
—
|
|
—
|
|
1,345,866
|
|
20.30
|
|
|
Exercised during the period
|
|
(10,000
|
)
|
1.75
|
|
(2,388,636
|
)
|
1.54
|
|
|
Outstanding, end of the period
|
|
2,833,138
|
|
$
|
10.55
|
|
2,843,138
|
|
$
|
10.52
|
|
In March 2018, the Company completed the acquisition of Nuuvera (Note 11) in which it reserved 1,345,866 common shares for issuance to the holders of certain common share purchase warrants of Nuuvera (“Nuuvera Warrants”). There are 3,795,450 Nuuvera Warrants, exercisable for Nuuvera shares at an exercise price of $7.20 per share, the Nuuvera shares would convert to 0.3546 Aphria shares and $0.62 cash.
21.
Stock options
The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.
The Company recognized a share-based compensation expense of $4,175 during the three months ended August 31, 2018 (2017 - $2,440). The total fair value of options granted during the period was $7,089 (2017 - $3,104).
|
|
|
August 31, 2018
|
|
May 31, 2018
|
|
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
|
|
options
|
|
average price
|
|
options
|
|
average price
|
|
|
Outstanding, beginning of the period
|
|
8,956,195
|
|
$
|
7.60
|
|
5,926,001
|
|
$
|
1.99
|
|
|
Exercised during the period
|
|
(598,649
|
)
|
4.76
|
|
(2,637,363
|
)
|
2.30
|
|
|
Issued during the period
|
|
1,070,000
|
|
11.80
|
|
6,703,330
|
|
11.12
|
|
|
Cancelled during the period
|
|
(86,036
|
)
|
9.26
|
|
(1,035,773
|
)
|
11.77
|
|
|
Outstanding, end of the period
|
|
9,341,510
|
|
$
|
8.24
|
|
8,956,195
|
|
$
|
7.60
|
|
|
Exercisable, end of the period
|
|
4,986,123
|
|
$
|
5.57
|
|
3,919,542
|
|
$
|
1.36
|
|
In June 2018, the Company issued 250,000 stock options at an exercise price of $11.78 per share, exercisable for 3 years to officers of the company. 83,331 vested immediately and the remainder vest over 2 years.
In July 2018, the Company issued 820,000 stock options at an exercise price between $11.51 and $11.85 per share, exercisable for 5 years to employees of the company. Nil vested immediately and the remainder vest over 3 years.
25
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The outstanding option details of the Company are as follows:
|
Expiry date
|
|
Weighted
average exercise
Price
|
|
Number of
options
|
|
Vested and
exercisable
|
|
|
October 2018
|
|
$
|
1.17
|
|
20,000
|
|
20,000
|
|
|
April 2019
|
|
$
|
1.67
|
|
30,000
|
|
30,000
|
|
|
June 2019
|
|
$
|
0.60
|
|
1,480,000
|
|
1,480,000
|
|
|
September 2019
|
|
$
|
3.00
|
|
42,365
|
|
42,365
|
|
|
October 2019
|
|
$
|
3.47
|
|
7,400
|
|
733
|
|
|
November 2019
|
|
$
|
3.90
|
|
820,352
|
|
504,010
|
|
|
December 2019
|
|
$
|
1.30
|
|
20,000
|
|
20,000
|
|
|
December 2019
|
|
$
|
5.25
|
|
500,000
|
|
133,332
|
|
|
January 2020
|
|
$
|
5.72
|
|
20,668
|
|
5,667
|
|
|
April 2020
|
|
$
|
7.92
|
|
90,000
|
|
51,666
|
|
|
June 2020
|
|
$
|
5.44
|
|
216,668
|
|
133,333
|
|
|
July 2020
|
|
$
|
5.24
|
|
717,144
|
|
571,463
|
|
|
September 2020
|
|
$
|
0.85
|
|
185,000
|
|
185,000
|
|
|
October 2020
|
|
$
|
6.90
|
|
367,667
|
|
94,330
|
|
|
November 2020
|
|
$
|
9.05
|
|
250,000
|
|
63,333
|
|
|
November 2020
|
|
$
|
9.28
|
|
50,000
|
|
16,666
|
|
|
December 2020
|
|
$
|
14.06
|
|
100,000
|
|
33,333
|
|
|
January 2021
|
|
$
|
21.70
|
|
10,000
|
|
3,333
|
|
|
January 2021
|
|
$
|
22.89
|
|
150,000
|
|
43,330
|
|
|
January 2021
|
|
$
|
22.08
|
|
50,000
|
|
16,666
|
|
|
March 2021
|
|
$
|
14.39
|
|
36,667
|
|
23,332
|
|
|
March 2021
|
|
$
|
11.40
|
|
300,000
|
|
100,000
|
|
|
March 2021
|
|
$
|
9.98
|
|
200,000
|
|
66,666
|
|
|
March 2021
|
|
$
|
12.39
|
|
50,000
|
|
16,666
|
|
|
April 2021
|
|
$
|
11.40
|
|
730,000
|
|
193,330
|
|
|
April 2021
|
|
$
|
11.45
|
|
100,000
|
|
33,333
|
|
|
May 2021
|
|
$
|
20.19
|
|
1,000,000
|
|
333,333
|
|
|
June 2021
|
|
$
|
1.40
|
|
191,669
|
|
191,669
|
|
|
June 2021
|
|
$
|
11.78
|
|
250,000
|
|
83,331
|
|
|
August 2021
|
|
$
|
1.64
|
|
110,000
|
|
69,993
|
|
|
October 2022
|
|
$
|
6.90
|
|
74,000
|
|
74,000
|
|
|
July 2023
|
|
$
|
11.51
|
|
100,000
|
|
—
|
|
|
July 2023
|
|
$
|
11.85
|
|
720,000
|
|
—
|
|
|
July 2027
|
|
$
|
2.52
|
|
101,218
|
|
101,218
|
|
|
November 2027
|
|
$
|
6.29
|
|
91,522
|
|
91,522
|
|
|
March 2028
|
|
$
|
12.29
|
|
119,378
|
|
119,378
|
|
|
March 2028
|
|
$
|
14.38
|
|
39,792
|
|
39,792
|
|
|
Outstanding, end of the period
|
|
$
|
8.24
|
|
9,341,510
|
|
4,986,123
|
|
The Company used the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 2.00-2.08% on the date of grant; expected life of 3 — 5 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.
26
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
22.
Non-controlling interest
The following tables summarise the information relating to the Company’s subsidiaries, 1974568 Ontario Ltd. (“Aphria Diamond”), CannInvest Africa Ltd. and Verve Dynamics Incorporated (Pty) Ltd. before intercompany eliminations.
|
|
|
Aphria Diamond
|
|
CannInvest
Africa Ltd.
|
|
Verve Dynamics
Incorporated
(Pty) Ltd.
|
|
August 31,
2018
|
|
|
Current assets
|
|
$
|
15,067
|
|
$
|
39
|
|
$
|
—
|
|
$
|
15,106
|
|
|
Non-current assets
|
|
112,934
|
|
—
|
|
13,503
|
|
126,437
|
|
|
Current liabilities
|
|
(13,740
|
)
|
(40
|
)
|
—
|
|
(13,780
|
)
|
|
Non-current liabilities
|
|
(95,139
|
)
|
—
|
|
—
|
|
(95,139
|
)
|
|
Net assets
|
|
19,122
|
|
(1
|
)
|
13,503
|
|
32,624
|
|
|
Non-controlling interest %
|
|
49
|
%
|
50
|
%
|
70
|
%
|
|
|
|
Non-controlling interest
|
|
$
|
9,370
|
|
$
|
(1
|
)
|
$
|
9,452
|
|
$
|
18,821
|
|
|
|
|
Aphria Diamond
|
|
CannInvest
Africa Ltd.
|
|
Verve Dynamics
Incorporated
(Pty) Ltd.
|
|
August 31,
2018
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Total expenses
|
|
429
|
|
1
|
|
—
|
|
430
|
|
|
Net loss and comprehensive loss
|
|
(429
|
)
|
(1
|
)
|
—
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest %
|
|
49
|
%
|
50
|
%
|
70
|
%
|
|
|
|
|
|
$
|
(210
|
)
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
(211
|
)
|
|
|
|
Aphria Diamond
|
|
CannInvest
Africa Ltd.
|
|
Verve Dynamics
Incorporated
(Pty) Ltd.
|
|
May 31,
2018
|
|
|
Current assets
|
|
$
|
7,313
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,313
|
|
|
Non-current assets
|
|
83,207
|
|
—
|
|
—
|
|
83,207
|
|
|
Current liabilities
|
|
(10,085
|
)
|
—
|
|
—
|
|
(10,085
|
)
|
|
Non-current liabilities
|
|
(60,884
|
)
|
—
|
|
—
|
|
(60,884
|
)
|
|
Net assets
|
|
19,551
|
|
—
|
|
—
|
|
19,551
|
|
|
Non-controlling interest %
|
|
49
|
%
|
0
|
%
|
0
|
%
|
|
|
|
Non-controlling interest
|
|
$
|
9,580
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9,580
|
|
23.
General and administrative expenses
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
835
|
|
$
|
306
|
|
|
Consulting fees
|
|
931
|
|
94
|
|
|
Office and general
|
|
1,807
|
|
554
|
|
|
Professional fees
|
|
1,562
|
|
217
|
|
|
Salaries and wages
|
|
3,092
|
|
408
|
|
|
Travel and accommodation
|
|
471
|
|
136
|
|
|
Rent
|
|
153
|
|
20
|
|
|
|
|
$
|
8,851
|
|
$
|
1,735
|
|
27
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
24.
Share-based compensation
Share-based compensation is comprised of:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Amounts charged to share-based payment reserve in respect of share-based compensation
|
|
$
|
4,175
|
|
$
|
2,440
|
|
|
Share-based compensation accrued in the prior period
|
|
—
|
|
(44
|
)
|
|
Share-based compensation issued on behalf of a related party
|
|
—
|
|
(32
|
)
|
|
Shares for services compensation
|
|
—
|
|
113
|
|
|
Deferred share units expensed in the period
|
|
1,947
|
|
32
|
|
|
|
|
$
|
6,122
|
|
$
|
2,509
|
|
During the period, the Company issued 15,884 deferred share units to certain directors of the Company under the terms of the Company’s Deferred Share Unit Plan. In May 2018, directors and officers of the Company forfeited 312,000 deferred share units which were granted during the prior year.
As at August 31, 2018, the Company had 229,344 deferred share units outstanding.
25.
Finance income, net
Finance income, net, is comprised of:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Interest income
|
|
$
|
1,492
|
|
$
|
802
|
|
|
Interest expense
|
|
(433
|
)
|
(336
|
)
|
|
|
|
$
|
1,059
|
|
$
|
466
|
|
26.
Gain on long-term investments
Gain on long-term investments for the three months ended August 31, 2018 is comprised of:
|
|
|
|
|
Opening fair
|
|
|
Gain (loss) on
|
|
Change in fair
|
|
|
|
|
|
Investment
|
|
Proceeds
|
|
value / cost
|
|
|
disposal
|
|
value
|
|
|
Total
|
|
|
Level 1 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CannaRoyalty Corp. - shares
|
|
$
|
4,111
|
|
$
|
3,765
|
|
|
$
|
346
|
|
$
|
—
|
|
|
$
|
346
|
|
|
MassRoots, Inc. - shares
|
|
1
|
|
164
|
|
|
(163
|
)
|
—
|
|
|
(163
|
)
|
|
Level 3 on fair value hierarchy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperstate Farms, LLC - shares
|
|
5,300
|
|
5,300
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Copperstate Farms Investors, LLC - shares
|
|
14,700
|
|
14,700
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Long-term investments (Note 14)
|
|
—
|
|
—
|
|
|
—
|
|
22,517
|
|
|
22,517
|
|
|
Three months ended August 31, 2018
|
|
$
|
24,112
|
|
$
|
23,929
|
|
|
$
|
183
|
|
$
|
22,517
|
|
|
$
|
22,700
|
|
28
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
27.
Earnings per share
The calculation of earnings per share for the three months ended August 31, 2018 was based on the net income attributable to common shareholders of $21,176 (2017 — $15,041) and a weighted average number of common shares outstanding of 225,659,684 (2017 — 138,711,674) calculated as follows:
|
|
|
2018
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
21,176
|
|
$
|
15,041
|
|
|
Average number of common shares outstanding during the period
|
|
225,659,684
|
|
138,711,674
|
|
|
Earnings per share - basic
|
|
$
|
0.09
|
|
$
|
0.11
|
|
|
|
|
2018
|
|
2017
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
21,176
|
|
$
|
15,041
|
|
|
Average number of common shares outstanding during the period
|
|
225,659,684
|
|
138,711,674
|
|
|
“In the money” warrants outstanding during the period
|
|
1,285,099
|
|
2,552,470
|
|
|
“In the money” options outstanding during the period
|
|
3,421,527
|
|
4,467,356
|
|
|
|
|
230,366,310
|
|
145,731,500
|
|
|
Earnings per share - diluted
|
|
$
|
0.09
|
|
$
|
0.10
|
|
28.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
|
|
|
For the three months ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Decrease (increase) in accounts receivable
|
|
$
|
149
|
|
$
|
(436
|
)
|
|
Decrease (increase) in other current assets
|
|
(2,273
|
)
|
(2,828
|
)
|
|
Decrease (increase) in inventory, net of fair value adjustment
|
|
(5,352
|
)
|
(3,217
|
)
|
|
Decrease (increase) in biological assets, net of fair value adjustment
|
|
(1,246
|
)
|
2,194
|
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
217
|
|
(1,215
|
)
|
|
Increase (decrease) in income taxes payable
|
|
(188
|
)
|
365
|
|
|
|
|
$
|
(8,693
|
)
|
$
|
(5,137
|
)
|
29.
Financial risk management and financial instruments
Financial instruments
The Company has classified its cash and cash equivalents, marketable securities, convertible notes receivable, long-term investments, and derivative liability as fair value through profit or loss (“FVTPL”), accounts receivable and other current assets as amortized cost, and accounts payable and accrued liabilities, income taxes payable, promissory notes payable, and long-term debt as other financial liabilities.
The carrying values of accounts receivable and other current assets, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $55,503 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at August 31, 2018 was $53,643.
29
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
Level 1
quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2
inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
Level 3
inputs for assets and liabilities not based upon observable market data
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
August 31,
2018
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
273,087
|
|
$
|
—
|
|
$
|
—
|
|
$
|
273,087
|
|
|
Marketable securities
|
|
40,895
|
|
—
|
|
—
|
|
40,895
|
|
|
Convertible notes receivable
|
|
—
|
|
—
|
|
26,424
|
|
26,424
|
|
|
Long-term investments
|
|
51,833
|
|
7,595
|
|
17,247
|
|
76,675
|
|
|
Outstanding, end of the period
|
|
$
|
365,815
|
|
$
|
7,595
|
|
$
|
43,671
|
|
$
|
417,081
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31,
2018
|
|
|
Financial assets at FVTPL
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
59,737
|
|
$
|
—
|
|
$
|
—
|
|
$
|
59,737
|
|
|
Marketable securities
|
|
45,062
|
|
—
|
|
—
|
|
45,062
|
|
|
Convertible notes receivable
|
|
—
|
|
—
|
|
18,071
|
|
18,071
|
|
|
Long-term investments
|
|
33,600
|
|
2,567
|
|
29,861
|
|
66,028
|
|
|
Outstanding, end of the period
|
|
$
|
138,399
|
|
$
|
2,567
|
|
$
|
47,932
|
|
$
|
188,898
|
|
The following table presents the changes in level 3 items for the three months ended August 31, 2018:
|
|
|
Unlisted
equity
securities
|
|
Trading
derivatives
|
|
Total
|
|
|
Closing balance May 31, 2018
|
|
$
|
29,861
|
|
$
|
18,071
|
|
$
|
47,932
|
|
|
Acquisitions
|
|
5,800
|
|
10,000
|
|
15,800
|
|
|
Disposals
|
|
(20,000
|
)
|
(1,942
|
)
|
(21,942
|
)
|
|
Unrealized gain on fair value
|
|
1,586
|
|
295
|
|
1,881
|
|
|
Closing balance August 31, 2018
|
|
$
|
17,247
|
|
$
|
26,424
|
|
$
|
43,671
|
|
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
(a)
Credit risk
The maximum credit exposure at August 31, 2018 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable and other current assets and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions. Marketable securities are placed with major Canadian investment banks and are represented by investment grade corporate bonds.
30
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.
|
|
|
Total
|
|
0-30 days
|
|
31-60 days
|
|
61-90 days
|
|
90+ days
|
|
|
Trade receivables
|
|
$
|
3,237
|
|
$
|
1,319
|
|
$
|
1,214
|
|
$
|
369
|
|
$
|
335
|
|
|
|
|
|
|
41
|
%
|
38
|
%
|
11
|
%
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Liquidity risk
As at August 31, 2018, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which have contractual maturity dates within one-year, promissory note payable, which have a contractual maturity within 15 months and long-term debt, which have contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at August 31, 2018, management regards liquidity risk to be low.
(c)
Currency rate risk
As at August 31, 2018, a portion of the Company’s financial assets and liabilities held in United States Dollars (“USD”) and Euros consist of cash and cash equivalents, marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.
The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. A 1% change in the USD foreign exchange rate would result in an unrealized gain or loss of approximately $18. A 1% change in the Euro foreign exchange rate would result in an unrealized gain or loss of approximately $52.
(d)
Interest rate price risk
The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.
31
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2018 and August 31, 2017
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
30.
Commitments
The Company has a lease commitment until December 31, 2018 for rental of office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. The Company has lease commitments for the use of two motor vehicles expiring September 2019 and August 2020 in the amounts payable of $9 and $20, respectively. In April of 2017, the Company indemnified the landlord of the office space leased by Liberty with annual rent from $180 to $190 expiring June 2023. The Company has agreed to contribute $15,000 to Green Acre Capital Fund II to be launched before December 2018. The Company has a lease for rental office space from December 2018 until November 30, 2028. The Company has committed purchase orders outstanding at August 31, 2018 related to capital asset expansion of $15,737, all of which are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:
|
|
|
Years ending May 31,
|
|
|
2019
|
|
$
|
31,061
|
|
|
2020
|
|
328
|
|
|
2021
|
|
325
|
|
|
2022
|
|
331
|
|
|
2023
|
|
347
|
|
|
|
|
$
|
32,392
|
|
31.
Subsequent events
Subsequent to quarter-end, the Company entered into a strategic partnership with Schroll Medical, a subsidiary of prominent European flower producer, Schroll Flowers. The Company paid €100 and will provide cannabis genetics, strains and proprietary growing IP for a 15% interest in Schroll Medical.
Subsequent to quarter-end, the Company secured an exemption from the CSE allowing it to have the remaining Liberty shares released from the CSE mandated escrow. Subsequent to the release from escrow, the Company entered into a share purchase agreement to divest of the remaining 64,118,462 Liberty shares in exchange for a promissory note in the amount of $59,098, bearing interest at a rate of 12% due in 5 years. As a security for the promissory note, the Liberty shares have been placed in trust with an escrow agent. The purchaser is able to remove the Liberty shares from the escrow at any time by paying off the promissory note. In the event that the Company enforces the security, the escrow agent will return the shares to the Company, provided that the Conditions are met. In the event they are not met, the escrow agent will transfer the securities to a third-party investment for liquidation, with the proceeds of liquidation delivered to the Company. Simultaneously with this sale, the Company entered into an option agreement to repurchase the Liberty shares for the value of the promissory note. The Company will pay an annual fee equal to 12.975% of the face value of the promissory note to maintain this option. The option to repurchase the shares is subject to the Conditions described above. In exchange for the early termination of the Obligation Agreement, the Company paid a $1,000 termination fee.
Subsequent to quarter-end, the Company signed a supply agreement to supply Emblem Corp. with 175,000 kg of cannabis over a five-year period starting May 2019.
Subsequent to quarter-end, the Company closed the acquisition of assets in Latin America and the Caribbean from Scythian. The Company issued 15,678,310 shares and assumed $1,000 USD of existing debt as part of the acquisition.
Subsequent to quarter-end, the Company transferred assets with a fair value of $30,542 to GA Opportunities Corp. in exchange for a promissory note, bearing interest at 12% per annum due in 5 years. Simultaneously with this transfer, the Company entered into an option agreement to repurchase the assets acquired by GA Opportunities Corp. for the value of the promissory note. The Company will pay an annual fee equal to 12.3% of the face value of the promissory note to maintain this option. In the event that the assets acquired by GA Opportunities Corp. qualify as US cannabis assets, the option to repurchase the shares is subject to the same Conditions described above.
32
Exhibit 99.143
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
APHRIA INC.
MANAGEMENT’S DISCUSSION & ANALYSIS
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the three months ended August 31, 2018. It is supplemental to, and should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes for the period ended August 31, 2018, as well as the audited financial statements and MD&A for the year ended May 31, 2018. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphria.ca or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to gram equivalents, “all-in” cost of sales, cash costs to produce, gross profit before fair value adjustments, adjusted gross margin, adjusted EBITDA, adjusted EBITDA from ACMPR operations, adjusted EBITDA from Aphria International, strategic investments, capital and intangible asset expenditures — wholly owned subs, and capital and intangible asset expenditures — majority owned subs which are not measures of financial performance under IFRS. The Company calculates each as follows:
·
“Gram equivalents” include both grams of dried cannabis as well as grams of cannabis oil as derived using the an ‘equivalency factor’ of 1 gram per 4.5 mL of cannabis oil, prior period ‘equivalency factor’ of 1 gram per 4.5 mL of cannabis oil. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
·
“All-in” cost of sales of dried cannabis per gram is equal to production costs less the costs of accessories less cannabis oil conversion costs (“cost of sales of dried cannabis”) plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. This measure provides the cost per gram of dry cannabis and gram equivalent of oil sold before the packaging and post harvesting processing costs to create oil or other ancillary products.
·
Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization and packaging costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash and post production expenses tied to our growing costs and provides a benchmark of the Company against its competitors.
·
Gross profit before fair value adjustments is equal to gross profit less the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted gross margin is gross profit before fair value adjustments divided by revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
·
Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery) plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment of intangible assets, plus transaction costs, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (gain) from equity investee, minus deferred gain on sale of intellectual property, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on convertible notes receivable, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.
·
Adjusted EBITDA from ACMPR operations is calculated based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements; Aphria Inc, Cannan Growers Inc., Broken Coast Cannabis Ltd., and 1974568 Ontario Ltd. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s operations in the ACMPR regulated industry.
·
Adjusted EBITDA from Aphria International is Adjusted EBITDA minus Adjusted EBITDA from ACMPR operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by the Company’s international operations.
·
Strategic investments are the total cash out flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - wholly owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for wholly owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
·
Capital and intangible asset expenditures - majority owned subs are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for majority owned subsidiaries. Management believes this measure provides useful information as it helps provide indication of the use of capital raised by the Company outside of its operating activities.
These measures are not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.
This MD&A is prepared as of October 11, 2018.
1
COMPANY OVERVIEW
Aphria Inc. (“
Aphria
”), a company amalgamated under the laws of the province of Ontario, is licensed to produce and sell medical cannabis under the provisions of the
Access to Cannabis for Medical Purposes Regulations
(“
ACMPR
”). Aphria received its licence to produce and sell medical cannabis on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. Aphria’s operations are based in Leamington, Ontario. The original Leamington greenhouse facility (“
Aphria One
”) provides Aphria with the opportunity to be a scalable low-cost producer of medical cannabis. The Company’s common shares are listed under the symbol “APH” on the Toronto Stock Exchange (“
TSX
”) and under the symbol “APHQF” on the United States OTCQB Venture Market exchange.
Nuuvera Inc. (“
Aphria International
”) is a subsidiary of the Company acquired in March 2018. Aphria International is an international organization with a focus on building a global cannabis brand, through its subsidiaries ARA — Avanti Rx Analytics Inc., Avalon Pharmaceuticals Inc., 2589671 Ontario Inc., 2586974 Ontario Inc., Nuuvera Israel Ltd., Nuuvera Deutschland GmbH, Nuuvera Malta Ltd., sASG Pharma Ltd., QSG Pharma Ltd. and FL-Group. Through these subsidiaries, Aphria International has operations in Canada, Germany, Italy, Malta and Lesotho.
Broken Coast Cannabis Ltd. (“
Broken Coast
”), a subsidiary of the Company acquired in February 2018, is licensed to produce and sell medical cannabis under the provisions of the ACMPR. Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with ‘B.C. Bud’ and is a leading premium cannabis brand.
1974568 Ontario Ltd. (“
Aphria Diamond
”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms (“
DD
”). Aphria Diamond has applied for a second site cultivation licence under the provisions of the ACMPR.
Throughout this MD&A, Aphria will refer to its original Leamington campus as “Aphria One”.
The Company’s majority and wholly-owned subsidiaries are as follows:
|
Subsidiaries
|
|
Jurisdiction of incorporation
|
|
Ownership interest
(1)
|
|
|
Aphria (Arizona) Inc.
|
|
Arizona, United States
|
|
100
|
%
|
|
Cannan Growers Inc.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Nuuvera Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Holdings Ltd.
|
|
Ontario, Canada
|
|
100
|
%
|
|
ARA — Avanti Rx Analytics Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Avalon Pharmaceuticals Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589671 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
2589674 Ontario Inc.
|
|
Ontario, Canada
|
|
100
|
%
|
|
Nuuvera Israel Ltd.
|
|
Israel
|
|
100
|
%
|
|
Nuuvera Deutschland GmbH
|
|
Germany
|
|
100
|
%
|
|
Aphria Italy S.p.A.
|
|
Italy
|
|
100
|
%
|
|
FL-Group
|
|
Italy
|
|
100
|
%
|
|
Broken Coast Cannabis Ltd.
|
|
British Columbia, Canada
|
|
100
|
%
|
|
Goodfields Supply Co. Ltd.
|
|
United Kingdom
|
|
100
|
%
|
|
LATAM Holdings Inc.
|
|
British Columbia, Canada
|
|
100
|
%
(2)
|
|
MMJ Colombia Partners Inc.
|
|
Ontario, Canada
|
|
100
|
%
(2)
|
|
Marigold Acquisitions Inc.
|
|
British Columbia, Canada
|
|
100
|
%
(2)
|
|
Hamsted Holdings Ltd.
|
|
Bermuda
|
|
100
|
%
(2)
|
|
MMJ International Investments Inc.
|
|
Ontario, Canada
|
|
100
|
%
(2)
|
|
ABP, S.A.
|
|
Argentina
|
|
100
|
%
(2)
|
|
Marigold Projects Jamaica Limited
|
|
Jamaica
|
|
95
|
%
(2)(3)
|
|
Nuuvera Malta Ltd.
|
|
Malta
|
|
90
|
%
|
|
ASG Pharma Ltd.
|
|
Malta
|
|
90
|
%
|
2
|
ColCanna S.A.S.
|
|
Colombia
|
|
90
|
%
(2)
|
|
1974568 Ontario Ltd.
|
|
Ontario, Canada
|
|
51
|
%
|
|
CannInvest Africa Ltd.
|
|
South Africa
|
|
50
|
%
|
|
Verve Dynamics Incorporated (Pty) Ltd.
|
|
South Africa
|
|
30
|
%
|
(1)
The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Ownership of some subsidiaries are held through other subsidiaries, which the Company controls.
(2)
These entities were acquired subsequent to quarter-end.
(3)
The Company is entitled to 95% of the net income of this entity; however, the Company only holds 49% of the legal ownership.
STRATEGY AND OUTLOOK
Aphria, a leading global cannabis company, is setting the standard for the low-cost production of safe, clean and pure pharmaceutical grade cannabis at scale, grown in the most natural conditions possible. The Company, one of the first cannabis companies in Canada and the first Canadian cannabis company to fully embrace and grow exclusively in a greenhouse, has shown the ability to grow at scale and generate a profit from operations in a growing new industry. The Company continues to drive value for shareholders through its international expansion where Aphria is taking its experience and knowledge in the Canadian cannabis industry and applying it to new federal legal markets. Aphria drives sustainable long-term shareholder value through a diversified approach to innovation, strategic partnerships and global expansion, with a presence in more than 10 countries across 5 continents.
ACMPR Operations
ACMPR Operations include the results of: (i) the parent Aphria; (ii) Canadian subsidiaries which hold investments and have no other operations (Cannan Growers Inc.); (iii) companies which are applicants and are expected to become ACMPR licensed producers of medical cannabis (Aphria Diamond); and, (iv) companies which actively produce and sell medical cannabis under the ACMPR license (Broken Coast).
As the Company continues its planned expansions using the latest automation technologies, Aphria is committed to bringing breakthrough innovation to the global cannabis market.
Canadian medical market brands
Since 2014, the Aphria brand has been a leading choice for patients seeking safe, clean, and pure pharmaceutical grade medical cannabis. Notwithstanding the launch of the adult-use market, the Company will continue to focus and invest in the Canadian medical market. This will be achieved through an unrelenting focus on product innovation, patient-centric service and a commitment to accountability.
The Company plans to continue offering ‘B.C. Bud’ as a medical product under the Broken Coast brands.
Canadian adult-use market brands
The Company continues to invest significant capital and resources to prepare for the launch of the adult-use market in Canada. These efforts are focused on brand development, product innovation, marketing, sales, education and research and will set the stage for the Company to be a sizeable player in the Canadian adult-use market.
Aphria has been thoughtfully and diligently preparing for the adult-use market by thoroughly researching existing and emerging consumer segments and developing a portfolio of brands designed to specifically meet the needs of those segments across a range of brands, prices and products. The suite of brands created by the Company for Canada’s adult-use market opening October 17, 2018 include Solei, Broken Coast, RIFF, Good Supply and Goodfields. Each brand is unique to a specific offering of products representing various target demographics, described below:
3
Solei Sungrown Cannabis (“Solei”)
is designed for current and novice users and pairs an assortment of carefully curated strains and product formats with different experiences.
RIFF
is a community and cannabis brand that is co-created by the Co.LAB, a collective of creators and artists who love a good joint effort. The brand will have high potency offerings available for experienced users.
Good Supply
is a value-priced brand without the frills, designed for the everyday cannabis user.
Goodfields
is for current and new cannabis users interested in quality cannabis from a trusted source, cultivated with care.
Complementing Aphria’s in-house brands, the Company’s subsidiary Broken Coast Cannabis Ltd. (“
Broken Coast
”) is a multi-award-winning craft grower that delivers a premium product and provides consumers with an opportunity to access a brand synonymous with the legacy of B.C.-bud. Broken Coast’s craft cannabis is grown on the shores of the Salish Sea in small batches by choice, using single-strain growing rooms. All flower is hand-trimmed and slow-cured ensuring the optimal cannabis experience.
Product development
The Canadian government has committed to regulating the sale of cannabis infused products in 2019. Based on existing legal markets, cannabis infused products typically represent more than 50% of the total cannabis market. Aphria continues to commit significant resources to drive product innovation in anticipation of these new emerging categories. As a part of its ongoing R&D efforts, the Company is investing in the capability to not only extract to scale using different methods, but also in isolation of terpenes, cannabinoids and other cannabis compounds, the development of distillates, water solubility, as well as insuring bio-availability in all of its applications, in order to develop consistent and unique formulations that can be used in our end-products. There is continued focus on ensuring product actives are both faster acting and have increased bio-availability to enhance medical applications and user experience. The Company’s focus is on developing a suite of edibles, RDTs (ready-to-drink), concentrates, topicals, additional medical delivery systems and vapes. These new value-added products will be available across a range of brands and will be available for sale once permitted by law.
The Company signed a letter of intent to form a joint venture with Perennial Inc., a subsidiary of DATA Communications Management Corp. (“
DCM
”), to collaborate on the development of new product brands and product categories. The Company will leverage DCM and Perennial’s proven track record of bringing other customers go-to market strategies, managing multimedia campaigns, marketing and customer loyalty programs. This experience and knowledge will allow Aphria to continue to develop new consumer-centric brands and product categories in the medical market and the adult-use markets. This strategic partnership will help deliver meaningful connections with the consumers for each new brand and product category developed through the joint venture.
Distribution
The exclusive distribution agreement signed with Great North Distributors Inc. (“
Great North Distributors
”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits (“
Southern Glazer’s
”), provides the Company with the sales force and access to unparalleled knowledge of the sales strategy currently used to retail to the same government bodies responsible for retail cannabis to be used in the adult-use market. The Company leveraged this knowledge and capabilities by signing an agreement with We Grow BC Ltd. (“
We Grow
”), a Vancouver-based licensed producer of premium cannabis, to become We Grow’s exclusive sales representatives across Canada.
The Company has signed supply agreements with all the provinces and the Yukon Territory in Canada, representing access to 99.8% of Canadians, showing the Company’s commitment to becoming the leader in the upcoming adult-use market. The Company is one of a handful of licensed producers which has agreements with every province in Canada.
Based on the initial orders placed by the above provincial bodies, the Company has secured purchase orders for over 5,000 kgs of gram equivalents cannabis and cannabis products, annualized would represent over 30,000 kgs. The Company believes these orders will serve as an entrance into a larger market, as the demand continues to grow for the Company’s various brands and product offerings throughout all of Canada.
4
In addition to the above new distribution agreements for the adult-use market, the Company is expanding their distribution in the medical cannabis market with its five-year supply agreement with Shoppers Drug Mart.
Aphria One
The Company’s original flagship greenhouse location continues with the planned expansions and represents over 90% of the Company’s current production. This location serves as the basis on which the Company continues to innovate and develop techniques in cultivation, extraction and processing low-cost cannabis at scale.
The Company currently has 300,000 square feet of licensed production space at Aphria One capable of producing 30,000 kgs annually. The Company has allocated a portion of its space from the Part III expansion to mother and vegetative plants which will be used as the initial growing crops in the Part IV and Part V expansions. This has effectively lowered Aphria One’s functional capacity in this quarter, to 20,000 kgs per annum, but will ensure Part IV can commence growing operations without delay upon approval from Health Canada. With the fully capitalized Part IV and Part V expansions, the Company will be poised to have over 1,100,000 sq. ft. of state-of-the-art greenhouse facilities in January 2019, subject to Health Canada approvals. This temporary lower functional capacity has resulted in an increase in the “all-in” cost of sales of dried cannabis per gram and the cash costs to produce dried cannabis per gram. Upon full crop rotation being completed in the Part IV expansion, the Company anticipates production quantities of 110,000 kgs per year, producing high quality cannabis at a cost level commensurate with its industry leading cost producer status.
The Company at this time is slightly over budget with its Part IV and Part V expansions. As of August 31, 2018, the Company spent approximately $120 million of its expected cost of $150 million, an increase of $3 million from the original combined budget.
With the Part IV and Part V expansions, the Company is positioned to be the first licensed producer to bring in this level of technology into the cultivation of cannabis within a greenhouse environment. This cutting-edge technology will automate the following functions of the plant growing cycle:
·
Transplanting cuttings through various stages into the final pots for flowering;
·
Aiding in evaluation of the health and quality of plants to ensure plants meet the Company’s stringent quality standards throughout the many stages of the growing cycle;
·
Monitoring and providing the necessary water and vital nutrients to the plants during the growing cycle; and
·
Transporting plants through different areas in the greenhouse including to the processing room once harvested.
Once this innovative technology has been implemented, the only human interaction to occur will be at the initial phase of taking the cuttings and throughout the plants’ growth cycle, to trim and prune the plants, which will occur in work bays outside of the greenhouse.
Additional state-of-the-art automation, already operational by the Company, is employed during the processing of the cannabis. The Company is bringing best-in-class innovative technologies to:
·
Cutting the plants, and transferring them to be processed;
·
Automating the de-budding and trimming of plants;
·
Disposing of waste produced in the cutting, de-budding and trimming phased of production; and
·
Distributing the buds into trays in a drying rack to evenly dry and cure the harvested product.
The automation of the aforementioned processes will further permit Aphria to not only preserve but enhance its industry leading low-cost production standard within the cannabis industry.
The Company is installing a power co-generation plant that utilizes natural gas to generate its own electricity and as a by-product of this process, hot and cold water and CO
2
. This combined-cycle process will not only generate electricity to be used in the greenhouse to operate the lights and air conditioners, but also the hot and cold water produced will be employed to
5
effectively control the temperature and humidity for the plants. The residual gas emissions created by this process will be directed through a catalytic converter to create CO2 which will be used during the growing cycle of the plants. At the same time, the Company installed state-of-the-art power switching in all equipment allowing it to switch power between the electrical grid and the power co-generation equipment at a moment’s notice to ensure it is constantly using the most cost-effective energy available.
In addition, a system will be instituted that will recycle the water used for the irrigation of the plants. The ‘used’ water will be sterilized through a pasteurization process which will allow the Company to re-use the water to irrigate the plants thereby reducing the amount and cost of water usage.
Not only will Aphria be the first cannabis producer to bring this level of technology and generate its own electricity, but also it will effectively make the Company’s power co-generation project net carbon neutral.
Aphria Diamond
Through the 51% owned subsidiary, the Company has partnered with DD, a leader with multi-generational expertise in the commercial greenhouse industry. This partnership not only allows Aphria to gain access to a large talent base of growers and operators of greenhouses at scale but will also allow the Company to significantly increase its production.
Bringing the knowledge and experience from the Company’s current operations at Aphria One, the Company anticipates a quick ramp-up and transition for its Aphria Diamond site. As a result of Aphria Diamond, the Company will have access to a further 140,000 kgs of cannabis annually upon completion of the retrofits in time for its first sale in January 2019, subject to Health Canada approval. A portion of the infrastructure associated with Aphria Diamond was delayed by a Ministry of Transportation approval, as a result of the facility being located on the border of a provincial highway. The delay was approximately 2 months. Despite the delay, the Company anticipates that the infrastructure will be complete in time for the first harvest from the Aphria Diamond greenhouse. In the event, the infrastructure is not complete, the Company has sufficient capacity at Aphria One to handle the overflow for a short-term period.
The Company provided $10,200 of initial capital with DD contributing $9,800. Aphria Diamond acquired 100 acres of land, including almost 32 acres of greenhouses for $42,389, and spent an additional $70,544 as at August 31, 2018 on the retrofit. The Company expects the project to cost an additional $8,000 to complete. All funds above the initial seed capital are currently being funded by the Company and will be repaid in full by Aphria Diamond.
Aphria Diamond is implementing similar levels of automation, as described above in Aphria One, for its location.
All production from Aphria Diamond will be sold to Aphria at an agreed upon transfer price, allowing Aphria to recognize 100% of the remaining profit from any further processing into derivative, and 100% of the wholesale margin from branding on all product from Aphria Diamond.
Broken Coast
Broken Coast is the Company’s premium brand of indoor-grown high-margin, low-cost cannabis. Broken Coast not only provides the Company access to the quality associated with ‘B.C. Bud’ but also allows access to an award-winning genetic bank of cannabis, which in turn can be produced at scale through the Company’s Aphria One and Aphria Diamond facilities. Broken Coast will continue the development of new premium strains and continue to represent what is the highest level of premium cannabis grown through their state-of-the-art custom-built indoor facilities.
Extraction Centre of Excellence
The Company’s $55 million state-of-the-art Extraction Centre of Excellence was subject to the same delay as a portion of Aphria Diamond’s infrastructure. The Company currently anticipates that the Extraction Centre of Excellence will be available for use in May 2019, a two-month delay, subject to Health Canada approval.
6
This facility will provide the necessary production capacity to process over 200,000 kgs per year. It will build off the Company’s currently developed extraction technologies and further expand on the latest extraction technologies and techniques, creating new and innovative product offerings for the adult-use market as they become legal to sell in Canada. The facility will be equipped to conduct a wide range of cannabis extractions, including CO2, butane, ethanol, and produce world-class cannabis concentrates, including fractionated distillates.
To this point in the development of the Canadian cannabis market, the sale of cannabis has been about the sale of cannabis as a product, in forms like flower or bud, shake or trim, and cannabis oil in its many forms, including tinctures, softgel capsules, oral sprays and intimacy products. The Company believes that as the global cannabis industry evolves, this focus on cannabis as a product will morph into cannabis as an ingredient. The Extraction Centre of Excellence is designed around demonstrating Aphria’s leadership in the concept of cannabis as an ingredient.
Licences
The Company holds two ACMPR licences: Aphria One and Broken Coast. The Company also has submitted an application for a second site license for Aphria Diamond. Additionally, the Company maintains a Dealer Licence from Health Canada to export medical cannabis oil and resin to international markets.
The ACMPR licence provides the Company with the ability to cultivate, process and sell cannabis within Canada. The Dealer Licence provides the Company with the opportunity to possess, sell and transport medical cannabis oil and resin produced in Canada to other countries where cannabis is federally legal. On October 17, 2018, the Dealer Licence will no longer be required, as all elements of the Dealer Licence will be covered through the Company’s Cannabis Licence. The Company anticipates relinquishing its Dealer Licence as part of the transition to
The Cannabis Act.
Aphria International
The Company continues to focus on new and emerging federally legal cannabis markets, and continued growth for the Company and its shareholders. The Company’s international strategy will focus on medical cannabis markets that are developing stringent regulatory rules, markets with limited license opportunities and stable economic environments.
Through the acquisition of Aphria International and the conditional acquisition of LATAM Holdings Inc., which closed subsequent to period-end, the Company secured access to key international markets, management team bench strength with a proven knowledge and high levels of executional success within the industries and jurisdictions in which they operate. The Company believes that with its significant experience in the highly regulated Canadian ACMPR market, it will be able to export its industry leading knowledge and practices to its global subsidiaries.
As part of its international strategy, the Company is developing regional hubs in Pan-Asia, the European Union, South America, North America, the Caribbean and Africa. These hubs will represent key countries for investment and will aid in the flow of cannabis goods across the globe. The Company chose Australia as its Pan-Asian hub and is currently exploring opportunities in New Zealand and Thailand. The Company chose Malta as its hub for the European Union and Colombia for South America, where it continues to pursue opportunities in Brazil, Argentina, Peru and Chile. The Company chose Jamaica as its hub for the Caribbean and Lesotho as its hub for Africa.
The Company has international operations in Australia, Argentina, Colombia, Denmark, Germany, Italy, Jamaica, Lesotho, Malta and Portugal and maintains an option for entry into Brazil. With these markets still in their infancy, and the regulatory environment around them still being formed, these countries are looking to Canada as a leader in developing the regulatory environment. The Company provides a unique opportunity to bring the experience from working within Canada during the development of the cannabis regulations, to provide this expertise and knowledge to develop these global cannabis markets.
Export facility from Canada
Through the acquisition of Aphria International, the Company acquired ARA - Avanti RX Analytics Inc. (“
Avanti
”), which currently holds four licences: (i) Dealer Licence; (ii) Establishment Licence; (iii) Site Licence; and, (iv) Medical Device Establishment Licence.
7
These licences allow the Company to possess and handle cannabis and cannabis derivative products and allow Avanti to engage in the possession, production, packaging, sale, transportation and delivery and testing of codeine, morphine, cocaine, cannabis and related cannabinoids. The Company is also able to complete testing/analysis of active pharmaceutical ingredients.
The Company is currently in the process of securing Good Manufacturing Practice from the European Medicines Agency (“
EU-GMP
”) certification on the Avanti lab, which will then be used as the Canadian staging site for international bound GMP certified products. The Company’s EU-GMP certification will cover the extraction, post processing, testing, packaging and shipping process.
Pan-Asia
Australia
The Australian market is very similar to the Canadian medical cannabis market three years ago. The Company has access to the Australian medical cannabis market through a 25% equity investment in Althea Company Pty Ltd., and a supply agreement with Althea until they are able to complete construction of their new facility and fulfill their own production requirements.
Althea currently holds a licence to cultivate and manufacture cannabis-derivative medications issued by the Office of Drug Control (“
ODC
”). Althea previously had secured import permits from the ODC. Aphria obtained the related export permit from Health Canada and Aphria has shipped product to Althea in Australia. The products sold by Althea in Australia are co-branded with Aphria.
Aphria International also maintains relationships in Australia with two companies conducting medical cannabis clinically trials. Medlab Pty Ltd. is currently in Phase 2b of a clinical trial related to oncology pain using an Aphria proprietary blend of cannabis strains oil, subsequently converted in Australia into a nanocell mucosol spray. CannPal Pty Ltd., is currently in Phase 2a of a clinical trial related to animal pain in cats and dogs, using Aphria strains.
European Union
Germany
The German market is considered to be one of the most highly sought-after medical cannabis markets in the world. German law currently permits import of cannabis only. The German government recently re-launched its tender process to award licences for in-country cultivation. Aphria International, through its German wholly-owned subsidiary Nuuvera Deutschland GmbH (“
Deutschland
”), participated in the previous tender process, which was stopped by the German courts on a technicality related to the bid rules, and will participate in the current tender process being launched by the German government. Germany currently allows cannabis and cannabis extracts in pharmacies. These cannabis-based products are also required by German law to be covered by insurance companies. This coverage provides a greater number of medical cannabis patients with access to the full use and benefits of these products.
The Company’s approach in Germany is a three-pronged approach covering: demand; supply; and, distribution.
Demand
Through the acquisition of a 25.1% interest in Berlin-based Schöneberg Hospital, the Company has access to doctors and patients, to support the education of the benefits of medical cannabinoids. The Company also plans to build and operate pain treatment centers including the new possibilities of digital health care throughout Germany, which will further provide access to patients. The Company has partnered with a leading company in digital apps and medical software to build a modern, patient centric clinic for telemedicine.
8
Supply
As previously discussed, the Company will, through imports and participation in the German tender process, supply products into the German market. The Company entered into a strategic partnership with a prominent European flower producer, Schroll Flowers, to obtain access to EU GMP-certified organic medical cannabis. This agreement ensures the Company will have further access to cannabis for distribution throughout the EU.
Distribution
Through the acquisition of Aphria International, the Company obtained a letter of intent to supply 1,200 kgs of cannabis products through CC Pharma GmbH, a leading distributor of pharmaceutical products. To secure a constant delivery of imported cannabis for German patients, the Company is building one of the biggest state-of-the-art GMP certified cannabis vaults in Bad Bramstedt in northern Germany with a storage capacity of 5,000 kgs.
Malta
Through majority-owned subsidiary ASG Pharma Ltd. (“
ASG
”), the Company received the first import certificate for medical cannabis issued by the Government of Malta’s Ministry of Health. The Company intends on using the Malta facility to import cannabis resin and dried flower for processing, packaging and distribution of EU-GMP certified cannabis products throughout large parts of Europe.
This Malta facility will provide the Company with the ability to bring low-cost production of cannabis product from outside of Europe into an EU-GMP certified facility for further processing and distribution throughout Europe.
Through majority-owned subsidiary QSG Pharma Ltd. (“
QSG
”), the Company will pursue the health and wellness market with CBD based products. These products will not have the THC component found in cannabis, and will focus on diversifying the Company’s product offerings throughout Europe.
Italy
The Company’s wholly owned subsidiary FL-Group is authorized for the distribution of pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies, FL-Group holds one of only seven cannabis import licenses in Italy. The FL-Group acts as the Company’s distributor to the Italian cannabis market. The Company maintains a partial ownership interest in a separate subsidiary, Aphria Italy S.p.A., in Italy.
Portugal
Identified as one of the primary areas for cultivation in the European Union, Aphria International is currently pursuing strategic partners to begin operations in Portugal.
Africa
Lesotho
The Company entered into a new venture in CannInvest Africa Ltd. (“
CannInvest
”), a South African corporation. Aphria’s partner in CannInvest is the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years experience in phytoextraction of African medicinal plants. Through this transaction, the Company obtained a controlling interest in Verve Dynamics Inc. (PTY) Ltd. (“
Verve
”). Verve holds a licence in Lesotho for prohibited drug operations, which allows Verve to cultivate, manufacture, supply, distribute, store, export and import cannabis and cannabis resin for medical purposes or scientific use.
The Company also entered into a supply agreement with Verve, where Verve will supply cannabis THC and CBD extract from its planned EU-GMP certified facility. This is expected to provide the Company with access to low-cost GMP certified extract for distribution into South Africa and other federally legal markets, including the European Union.
The Company has contributed $4,051 to the new venture. Construction of a new extraction and processing facility is underway. Upon completion, the Company will apply for EU-GMP certification which will allow all product from the Lesotho site to be distributed within the EU.
9
South America
Colombia
The Company signed an exclusive supply agreement with Colcanna S.A.S. (“
Colcanna
”), a Colombia-based pharmaceutical import and distribution company, which is licensed to import, sell and distribute medical cannabis, medical products and derivatives in Colombia. Under the terms of the agreement, Aphria will be the exclusive supplier of cannabis products to Colcanna for the Colombian market.
Argentina
In March 2018, the Company signed an exclusive supply agreement with ABP, S.A. (“
ABP
”), an Argentina-based pharmaceutical import and distribution company, which is licensed to import CBD oil into Argentina for a clinical drug trial studying epilepsy in children. Under the terms of the agreement, Aphria is the exclusive supplier of cannabis oil to ABP for the Argentinian market and ABP will purchase medical cannabis products from Aphria exclusively.
LATAM Holdings Inc.
Subsequent to period-end, the Company completed the acquisition of LATAM Holdings Inc. (“
LATAM
”). The acquisition of LATAM provides the Company with immediate access to the high profile, attractive countries in South America and the Caribbean, including Colombia, Argentina, Jamaica and potentially Brazil.
Colombia
The acquisition of LATAM provides the Company with 90% ownership of Colcanna. This ownership provides the Company with the ability to further develop the global Aphria brand with Aphria branded products distributed to patients in Colombia. Upon Colcanna developing its 34 acres of land for the cultivation of cannabis, which is expected to provide 50,000 kgs annually, the Company will maintain the control of the cultivation and distribution of cannabis in Colombia. Until the emerging Colombian market demand grows to match the Company’s Colombian production, the Company will be able to utilize its export licence to distribute the excess production globally.
Argentina
The acquisition of LATAM provides the Company with sole ownership of APB, providing the Company with a significant first-mover advantage, as APB is the first company with an in-country medical cannabis research licence. The Company also continues to work with Hospital Garrahan, a leading pediatric hospital in Buenos Aires. The Company believes that, once the Argentinian government approves medical cannabis, in-country cultivation opportunities will be attractive.
Jamaica
The acquisition of LATAM provides the Company with a 49% ownership interest in Marigold Projects Jamaica Limited (“
Marigold
”), through multiple subsidiaries and a 95% royalty on profits through an Intellectual Property agreement. This acquisition will provide the Company with several key licences including a Tier 3 cultivation licence, a conditional Tier 2 herb house licence, as well as conditional licences for import, export and research purposes.
Brazil
Finally, the acquisition of LATAM provides the Company with an option to purchase 50.1% of a Brazilian entity for $24 million (USD), once it secures a medical cannabis licence from the Brazilian government and a right of first offer and refusal on another 20-39% of the Brazilian entity. This right of first refusal provides the Company with lower risk at a fixed price to enter into the Brazilian cannabis market pending the Brazilian Company obtaining a licence.
Strategic Investments and Acquisitions
The Company continues to invest in companies to advance its corporate strategic goals. These investments allow the Company access into ancillary markets within the cannabis industry, in which the Company is otherwise not active, leading to supply or purchasing agreements or other relationships to further these corporate strategic goals.
10
Green Acre Capital Fund
Aphria agreed to invest $2,000 and $15,000 in Green Acre Capital Fund I and Green Acre Capital Fund II respectively (“
Green Acre
”), of which $2,000 had been invested by August 31, 2018. Green Acre is a private investment fund dedicated exclusively to the Canadian medical and recreational cannabis industry. The fund invests in sectors across the cannabis value chain including production, research, consumer products and retail.
Subsequent to quarter-end, the Company also transferred assets worth $30,542 to GA Opportunities Corp. (the “
Fund
”), in exchange for a promissory note, bearing interest at 12% per annum, due in 5 years. In addition, the Company secured an option to purchase the assets of the Fund for the value of the promissory note. The option is for a 5-year period, at the annual cost of 12.3%, and in the event the assets are considered to be US cannabis assets, the option to repurchase the shares is subject to the following conditions (collectively, the enumerated conditions (1) through (5), the “
Conditions
”):
(1)
Cannabis becoming legalized federally in the United States; and
One or more of the following conditions have been satisfied:
(2)
The TSX has provided its approval for the re-purchase of the Liberty shares;
(3)
The TSX revises its rules such that it no longer has a prohibition against its listed companies having an interest in US assets which are involved in the cannabis business;
(4)
The common shares of the Company are voluntarily or involuntarily delisted from the TSX; and/or
(5)
The Company is acquired by another entity, provided that the common shares of the Company will be delisted from the TSX upon the change of control.
These investments provide the Company a way of recognizing a share of the growth of the ancillary markets of the cannabis industry in which it is not currently active. The investment also serves to assist in identifying new technology and innovations, which the Company may participate in directly, or acquire. These opportunities are identified and analyzed by the management team of Green Acre, without any further costs to the Company.
Hiku Brands Company Ltd.
The Company held investments in Hiku Brands Company Ltd. (“Hiku”) with a cost of $12,111 and a fair value of $34,231 as at August 31, 2018. Subsequent to quarter-end, the Company agreed to transfer this investment to GA Opportunities Corp.
National Access Cannabis Corp.
The Company made a strategic investment in National Access Cannabis Corp. (“
NAC
”). The Company made this investment to share in the retail portion of the adult-use cannabis market.
Divesture of equity investment in passive US assets
During the year, the Company fully divested of its holdings in Copperstate and CSF. The total cost of the investments in Copperstate and CSF is $11,162 and the investment was recorded in the Company’s financial statements at its fair value of $20,000, resulting in a realized gain of $8,838 on the sale of the asset.
The Company completed the sale of 16,029,615 of its shares in Liberty for $11,514 during the period and sold the remaining 64,118,462 shares for $59,098 subsequent to quarter-end. The Company retained options to repurchase 80,148,077 shares in Liberty, subject to the same Conditions as described above. The Company expects that, in the battle for market share once cannabis becomes legalized federally in the United States, the cost to acquire an interest in the United States cannabis market will significantly increase. These option agreements allow the Company an access point into the United States cannabis market at a price fixed before any increase arising from cannabis becoming a federally legal substance.
Equity Financing Activities
During the period, the Company closed a bought deal financing for net proceeds of over $245,000.
11
The Company has sufficient capital to fund its current international activities from the development stage through to production where they are expected to generate cash independently. There are also sufficient funds to complete the existing expansion of the ACMPR operations including capital investments for the build out of the Company’s Aphria One, Aphria Diamond and Broken Coast facilities. The Company may require additional funds for any additional expansion, acquisitions or adjustments to the current planned activities.
INVESTOR HIGHLIGHTS
|
|
|
Q1 - 2019
|
|
Q4 - 2018
|
|
|
Revenue
|
|
$
|
13,292
|
|
$
|
12,026
|
|
|
Kilograms equivalents sold
|
|
1,778.2
|
|
1,312.6
|
|
|
Production costs
|
|
$
|
4,441
|
|
$
|
2,245
|
|
|
Cash cost to produce dried cannabis / gram
1
|
|
$
|
1.30
|
|
$
|
0.95
|
|
|
“All-in” cost of sales of dried cannabis / gram
1
|
|
$
|
1.83
|
|
$
|
1.60
|
|
|
Adjusted gross margin
1
|
|
63.6
|
%
|
78.7
|
%
|
|
Adjusted EBITDA from ACMPR operations
1
|
|
$
|
(828
|
)
|
$
|
2,227
|
|
|
Cash and cash equivalents & marketable securities
|
|
$
|
313,982
|
|
$
|
104,799
|
|
|
Working capital
|
|
$
|
363,245
|
|
$
|
150,758
|
|
|
Capital and intangible asset expenditures - wholly owned subsidiaries
1
|
|
$
|
28,036
|
|
$
|
39,042
|
|
|
Capital and intangible asset expenditures - majority owned subsidiaries
1
|
|
$
|
29,727
|
|
$
|
24,052
|
|
|
Strategic investments
1
|
|
$
|
29,368
|
|
$
|
5,946
|
|
1
— Non-GAAP measure
·
On June 21, 2018, Bill C-45, the
Cannabis Act,
reached Royal Assent, to come into force October 17, 2018
·
Current production capacity 34,500 kgs (annualized)
·
Mid-term capacity upgrade to 255,000 kgs (annualized) production capability expected by November 2018, with a further 5,000 kgs (annualized) within one year thereafter
·
Signed LOI with Perennial to establish joint venture to develop new, consumer-centric, cannabis-infused product categories and brands
·
Final full quarter of inventory build for adult-use market in Canada and International opportunities
·
Entered into a representative agreement to be the exclusive sales representative for We Grow BC Ltd.
·
Launched the Company’s portfolio of adult-use brands: Solei Sungrown Cannabis, RIFF, Good Supply, and Good Fields
·
Signed agreements to supply every Canadian province and the Yukon Territory, securing access to 99.8% of Canadians
·
Successfully divested of all US cannabis assets subsequent to quarter-end
·
Bought deal closed during the period for net proceeds of over $245,000
·
Strong executive team
·
20+ years of Pharmaceutical experience
·
35+ years of potted plant greenhouse growing experience
·
30+ years of vegetable greenhouse growing experience
·
10+ years of tobacco sales and marketing experience
·
30+ years of spirit sales and marketing experience
12
FAIR VALUE MEASUREMENTS
Impact of fair value metrics on biological assets and inventory
In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth for Aphria One and ninth week of growth for Broken Coast. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation of the fair value of the plant. At the time of harvest, the Company increases the carrying value of the harvested produce to its full fair value less costs to sell.
As at August 31, 2018, the Company’s harvested cannabis and cannabis oil, as detailed in Note 6, and biological assets, as detailed in Note 7 of its financial statements, are as follows:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Harvested cannabis - at cost
|
|
$
|
7,321
|
|
$
|
4,111
|
|
|
Harvested cannabis - fair value increment
|
|
11,497
|
|
8,220
|
|
|
Harvested cannabis trim - at cost
|
|
831
|
|
810
|
|
|
Harvested cannabis trim - fair value increment
|
|
1,449
|
|
1,467
|
|
|
Cannabis oil - at cost
|
|
3,122
|
|
2,660
|
|
|
Cannabis oil - fair value increment
|
|
5,289
|
|
3,918
|
|
|
Distillate - at cost
|
|
1,252
|
|
—
|
|
|
Distillate - fair value incrrement
|
|
1,582
|
|
—
|
|
|
Softgel capsules - at cost
|
|
124
|
|
—
|
|
|
Softgel capsules - fair value increment
|
|
175
|
|
—
|
|
|
Biological assets - at cost
|
|
4,091
|
|
3,708
|
|
|
Biological assets - fair value increment
|
|
2,542
|
|
3,623
|
|
|
Cannabis products - at fair value
|
|
$
|
39,275
|
|
$
|
28,517
|
|
In an effort to increase transparency, Aphria One’s biological assets are carried at cost plus fair value increments of $0.59, $1.18, $1.77 and $2.36 per gram for weeks 13, 14, 15 and 16, respectively. Broken Coast’s biological assets are carried at cost plus fair value increments of $0.72, $1.44, $2.16 and $2.89 per gram for weeks 10, 11, 12 and 13 respectively. Harvested cannabis and harvested cannabis trim are carried at fair values of $3.75 per gram and $3.00 per gram, respectively for greenhouse produced cannabis. Harvested cannabis and harvested cannabis trim are carried at fair values of $4.25 per gram, $3.50 per gram, respectively for indoor produced cannabis. Cannabis oil, distillate, and softgel capsules include the relative fair value based on the amount of harvested cannabis or harvested cannabis trim is used in the production of each product. The individual components of fair values are as follows:
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
Harvested cannabis - at cost - per gram
|
|
$
|
1.50
|
|
$
|
1.28
|
|
|
Harvested cannabis - fair value increment - per gram
|
|
$
|
2.35
|
|
$
|
2.55
|
|
|
Harvested cannabis trim - at cost - per gram
|
|
$
|
1.19
|
|
$
|
1.15
|
|
|
Harvested cannabis trim - fair value increment - per gram
|
|
$
|
2.07
|
|
$
|
2.09
|
|
|
Cannabis oil - at cost - per mL
|
|
$
|
0.34
|
|
$
|
0.34
|
|
|
Cannabis oil - fair value increment - per mL
|
|
$
|
0.57
|
|
$
|
0.51
|
|
|
Distillate - at cost - per mL
|
|
$
|
0.41
|
|
$
|
—
|
|
|
Distillate - fair value increment - per mL
|
|
$
|
0.52
|
|
$
|
—
|
|
|
Softgel capsules - at cost - per mL
|
|
$
|
0.39
|
|
$
|
—
|
|
|
Softgel capsules - fair value increment - per mL
|
|
$
|
0.55
|
|
$
|
—
|
|
13
The recognized a temporary increase in the harvested cannabis and harvested cannabis trim cost per gram as a result of the increase in overhead and other growing costs associated with the Part III expansion being intentionally utilized with lower functional production. This temporary lower functional production is a result of the Company allocating additional space from the Part III expansion to mother and vegetative plants which will be required for the Part IV and Part V expansions. This temporary increase in costs over lower production has been done to ease the ramp-up in our newest expansions immediately upon obtaining Health Canada approval. The impact of these costs over lower production increased the cost per gram by an estimated $0.25 per gram of harvested cannabis and $0.14 per gram of harvested cannabis trim until Part IV and Part V have received Health Canada approval.
COST PER GRAM
Calculation of “all-in” costs of sales of dried cannabis per gram
The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
$
|
4,441
|
|
$
|
2,245
|
|
|
Less:
|
|
|
|
|
|
|
Cost of accessories
|
|
$
|
(65
|
)
|
$
|
(67
|
)
|
|
Cannabis oil conversion costs
|
|
$
|
(147
|
)
|
$
|
(84
|
)
|
|
Disposal of plants
|
|
$
|
(979
|
)
|
$
|
—
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
3,250
|
|
$
|
2,094
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,778,232
|
|
1,312,571
|
|
|
|
|
|
|
|
|
|
“All-in” cost of sales of dried cannabis per gram
|
|
$
|
1.83
|
|
$
|
1.60
|
|
In prior quarters the Company recorded adjustments to “All-in” cost of sales of dried cannabis per gram, for increases in plant inventory. This adjustment was made as a result of the Company using a standard cost method and allocating additional costs to plant inventory, when as part of a planned expansion, there was a significant increase in the number of plants, while the incremental costs with the new capacity have not materialized. The increase in number of plants before the corresponding increase in costs, led to the Company allocating more costs than incurred to date, to biological assets resulting in over absorbed overhead. To maintain comparability of this figure from quarter to quarter, the Company determined it was appropriate to normalize this item as part of the above calculation. This adjustment is subjective, and requires management to make significant assumptions as to whether the increase in cost included in biological assets, is a result of improved operations, a result of an expansion or a result of other factors.
During the quarter, the Company also disposed of 13,642 plants prior to harvest. During the quarter, the Company was unable to fill all of the open greenhouse positions due to a lack of qualified local labour, which left it with insufficient staff to harvest the levels of production produced in the Aphria One greenhouse. As a result of the lower staff levels, one week’s crop rotation outgrew its optimal harvest period. In an effort to maintain the highest quality for its patients, the Company disposed of the plants associated with the one week of production to ensure the next week’s harvest was grown in optimal conditions. Included in production costs is $979 of accumulated costs relating to these plants which were not harvested. Subsequent to the quarter, Aphria doubled the size of the greenhouse staff in Leamington. Automation, as part of the Part IV expansion, is also expected to be fully operational by the end of the next quarter, which will further permit Aphria to not only preserve but enhance its industry leading low-cost production standards within the cannabis industry.
The Company recognized a temporary increase in the “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram as a result of the allocation of production space in the Part III expansion to mother and vegetative plants for the Part IV and Part V expansions increasing the “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram by an estimated $0.20. The Company also recognized lower yields in the quarter due to moving plants into the Part III expansion prior to all automation, and temperature control equipment being fully operational. These pieces of automation and temperature control equipment which are also part of the Part IV expansion
14
are expected to be fully operational by the end of the next quarter. The lower yield increased the current quarter “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram by an estimated $0.22.
Calculation of cash costs to produce dried cannabis per gram
The Company calculates cash costs to produce dried cannabis per gram as follows:
|
|
|
Three months ended
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
Cash costs to produce dried cannabis per gram
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
Adjusted “All-in” cost of sales of dried cannabis
|
|
$
|
3,250
|
|
$
|
2,094
|
|
|
Less:
|
|
|
|
|
|
|
Amortization
|
|
$
|
(513
|
)
|
$
|
(353
|
)
|
|
Packaging costs
|
|
$
|
(423
|
)
|
$
|
(493
|
)
|
|
Cash costs to produce dried cannabis
|
|
$
|
2,314
|
|
$
|
1,248
|
|
|
|
|
|
|
|
|
|
Gram equivalents sold during the quarter
|
|
1,778,232
|
|
1,312,571
|
|
|
|
|
|
|
|
|
|
Cash costs to produce per gram
|
|
$
|
1.30
|
|
$
|
0.95
|
|
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended August 31, 2018 was $13,292 versus $6,120 in the same period of the prior year and $12,026 in the fourth quarter of fiscal 2018, representing an increase of 117.2% from the prior year and an 10.5% increase from the prior quarter.
The increase in revenue during the quarter from the prior quarter was related to:
·
Broken Coast contributed 347,716 gram equivalents sold in the quarter;
·
Continued patient onboarding, including sales of 164,623 gram equivalents to patients on-boarded in the quarter;
·
Continued growth of sales to existing patients, including sales of 953,870 gram equivalents to patients on-boarded prior to the quarter; and,
·
Increase in wholesale orders during the quarter from 32,452 gram equivalents to 312,023 gram equivalents. Included within this amount is 110,227 gram equivalents delivered to partners conducting clinical drug trials and 201,796 gram equivalents to other Licensed Producers primarily composed of cannabis trim.
These factors were partially offset by:
·
A minor decrease in the average retail selling price (excluding wholesale) during the quarter from $9.25 to $8.99.
·
Although there was an increase in the percentage of cannabis oil sold for retail sales from 29.2% to 39.1% based on gram equivalents. The oil sold during the quarter was sold with a lower equivalency factor of 1 gram per 4.5mL of cannabis oil, compared to 1 gram per 6mL of cannabis oil in the prior quarter sales.
Gross profit and gross margin
The gross profit for the three months ended May 31, 2018 was $13,764, compared to $7,903 in the same quarter in the prior year and $18,212 in the previous quarter. The increase in gross profit from the prior year is consistent with the much larger patient base over the prior year, the acquisition of Broken Coast, and the increase in the net fair value adjustment for biological assets. The decrease from the previous quarter is due to the lower fair value adjustment on growth of biological assets and increase in production costs for the quarter.
15
|
|
|
Three months ended
|
|
|
|
|
August 31,
|
|
May 31,
|
|
|
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,292
|
|
$
|
12,026
|
|
|
Production costs
|
|
4,441
|
|
2,245
|
|
|
Other costs of sales
|
|
393
|
|
313
|
|
|
|
|
|
|
|
|
|
Gross profit before fair value adjustments
|
|
8,458
|
|
9,468
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on sale of inventory
|
|
4,205
|
|
3,077
|
|
|
Fair value adjustment on growth of biological assets
|
|
(9,511
|
)
|
(11,821
|
)
|
|
|
|
(5,306
|
)
|
(8,744
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
13,764
|
|
$
|
18,212
|
|
|
Gross margin
|
|
103.6
|
%
|
151.4
|
%
|
Cost of sales currently consist of three main categories: (i) production costs and, (ii) fair value adjustment on sale of inventory and (iii) fair value adjustment on growth of biological assets:
(i) Production costs include all direct and indirect costs of production, related to the medical cannabis sold. This includes costs relating to growing, cultivation and harvesting costs, stringent quality assurance and quality control, cannabis oil processing costs, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of medical cannabis. All medical cannabis shipped and sold by Aphria has been grown and produced by the Company.
(ii) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of inventory sold in the period.
(iii) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of biological assets (medical cannabis) produced in the period. In an effort to increase transparency, inventory of harvested cannabis (Note 6 — Consolidated financial statements for the three months ended August 31, 2018) consists of harvested cannabis and harvested cannabis trim to be $3.75 and $3.00 per gram respectively, for greenhouse produced cannabis and $4.25 and $3.50 per gram respectively, for indoor produced cannabis.
Management believes that the use of non-cash IFRS adjustments in calculating gross profit and gross margin can be confusing due to the large value of non-cash fair value metrics required. Accordingly, management believes the use of gross profit before fair value adjustments and adjusted gross margin provides a better representation of performance by excluding non-cash fair value metrics required by IFRS.
Gross profit before fair value adjustments and adjusted gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.
16
The following is the Company’s gross profit before fair value adjustments and adjusted gross margin as compared to IFRS for the three months ended August 31, 2018:
|
|
|
Three months ended
|
|
|
|
Three months ended
|
|
|
|
|
August 31, 2018
|
|
|
|
August 31, 2018
|
|
|
|
|
(IFRS)
|
|
Adjustments
|
|
(Adjusted)
|
|
|
Revenue
|
|
$
|
13,292
|
|
$
|
—
|
|
$
|
13,292
|
|
|
Production costs
|
|
4,441
|
|
—
|
|
4,441
|
|
|
Other costs of sales
|
|
393
|
|
—
|
|
393
|
|
|
Fair value adjustment on sale of inventory
|
|
4,205
|
|
(4,205
|
)
|
—
|
|
|
Fair value adjustment on biological assets
|
|
(9,511
|
)
|
9,511
|
|
—
|
|
|
|
|
(472
|
)
|
5,306
|
|
4,834
|
|
|
Gross profit
|
|
$
|
13,764
|
|
$
|
(5,306
|
)
|
$
|
8,458
|
|
|
Gross margin
|
|
103.6
|
%
|
|
|
63.6
|
%
|
The Company recognized a decline in adjusted gross profit and adjusted gross margin this quarter as a result of the previously discussed one-time disposal of plants increasing production costs by $979. If the Company were to add back the cost of disposed of plants in the quarter, the Company would have realized an adjusted gross profit of $9,437 and adjusted gross margin of 71%.
Other factors affecting the lower adjusted gross profit and adjusted gross margin were:
·
the temporary increase in production costs as a result of the allocation of production space in the Part III expansion to mother and vegetative plants for the Part IV and Part V expansion; and
·
the lower yields due to moving plants into the Part III expansion prior to all automation, and temperature control equipment being fully operational.
Selling, general and administrative costs
|
|
|
For the three months
|
|
|
|
|
ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
General and administrative
|
|
$
|
8,851
|
|
$
|
1,735
|
|
|
Share-based compensation
|
|
6,122
|
|
2,509
|
|
|
Selling, marketing and promotion
|
|
4,741
|
|
1,948
|
|
|
Amortization
|
|
3,274
|
|
239
|
|
|
Research and development
|
|
262
|
|
90
|
|
|
Transaction costs
|
|
865
|
|
—
|
|
|
|
|
$
|
24,115
|
|
$
|
6,521
|
|
Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development and transaction costs. These costs increased by $17,594 to $24,115 from $6,521 in the same quarter in the prior year.
17
General and administrative costs
|
|
|
For the three months
|
|
|
|
|
ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Executive compensation
|
|
$
|
835
|
|
$
|
306
|
|
|
Consulting fees
|
|
931
|
|
94
|
|
|
Office and general
|
|
1,807
|
|
554
|
|
|
Professional fees
|
|
1,562
|
|
217
|
|
|
Salaries and wages
|
|
3,092
|
|
408
|
|
|
Travel and accomondation
|
|
471
|
|
136
|
|
|
Rent
|
|
153
|
|
20
|
|
|
|
|
$
|
8,851
|
|
$
|
1,735
|
|
The increase in general and administrative costs during the quarter was largely related to an increase in:
·
Executive compensation increased as a result of the increase in executive headcount over the same period in the prior year;
·
Salaries and wages, office and general, and travel and accommodation as a result of the first full quarter since the acquisition of Nuuvera, increased headcount and other activity within the business over the same period in the prior year;
·
Professional fees, predominantly comprised of legal costs associated with various negotiations and reviews of current and potential business relationships necessary to sustain the growth of the Company, including recurring costs related to our listing on the TSX. The increase is due to an increase in number of closed and potential transactions as well as the first full quarter since the acquisition of Nuuvera.
Share-based compensation
The Company recognized share-based compensation expense of $6,122 for the three months ended August 31, 2018 compared to $2,509 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is a result of an increase in deferred share units (“
DSUs
”), stock options vesting, as well as an increase in stock price used in the valuation of DSUs and options issued in the current period. The Company issued 15,884 DSUs and 1,070,000 stock options in the current period compared, to 4,680 DSUs and 1,265,000 stock options in the same period of the prior year. Of the stock options granted in the quarter, 83,331 vested in the quarter.
Selling, marketing and promotion costs
For the three months ended August 31, 2018, the Company incurred selling, marketing and promotion costs of $4,741, or 35.7% of revenue versus $1,948 or 31.8% of revenue in the comparable prior period. These costs relate to patient acquisition and ongoing patient maintenance, the Company’s call center operations, shipping costs, marketing department, as well as the development of promotional and information materials. Patient acquisition and ongoing patient maintenance costs include payments to individual clinics to perform medical studies as well as reimbursement of operating costs incurred by clinics on the Company’s behalf. The increase in selling, marketing and promotion cost is correlated with the increase in patient and sales volumes over the comparable period. During the quarter, the Company also increased marketing costs related to the upcoming adult-use market.
Amortization
The Company incurred non-production related amortization charges of $3,274 for the three months ended August 31, 2018 compared to $239 for the same period in the prior year. The increase in amortization charges are a result of the assets that have been transferred into use from the capital expenditures incurred in the current and prior fiscal year.
18
Research and development
Research and development costs of $262 were expensed during the three months ended August 31, 2018 compared to $90 in same period last year. These relate to costs associated with the development of new cannabis products. Although the Company spends a significant amount on research and development, the majority of these costs remain in production costs, as the Company does not reclassify costs performing R&D on product which can still be sold.
Transaction costs
Transaction costs of $865 were expensed during the three months ended August 31, 2018 compared to $nil in same period last year. These relate to costs associated with the completed acquisitions and various other potential acquisitions the Company has considered and abandoned, or is still considering.
Non-operating items
|
|
|
For the three months
|
|
|
|
|
ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Consulting revenue
|
|
$
|
—
|
|
$
|
293
|
|
|
Foreign exchange loss
|
|
(59
|
)
|
(151
|
)
|
|
Loss on marketable securities
|
|
(167
|
)
|
(1,746
|
)
|
|
Loss on sale of capital assets
|
|
—
|
|
(7
|
)
|
|
Gain on dilution of ownership in equity investee
|
|
2,210
|
|
7,551
|
|
|
Loss from equity investees
|
|
(247
|
)
|
(8,840
|
)
|
|
Gain on sale of equity investee
|
|
9,880
|
|
—
|
|
|
Deferred gain on sale of intellectual property
|
|
233
|
|
234
|
|
|
Finance income, net
|
|
1,059
|
|
466
|
|
|
Unrealized gain on convertible notes receivable
|
|
295
|
|
547
|
|
|
Gain on long-term investments
|
|
22,700
|
|
19,082
|
|
|
Unrealized loss on derivative liability
|
|
(415
|
)
|
—
|
|
|
|
|
$
|
35,489
|
|
$
|
17,429
|
|
During the quarter ended August 31, 2018, the Company recognized a gain on long-term investment of $22,700. This gain relates largely to unrealized gains on the Company’s portfolio of long-term investments. The Company also recognized a realized gain of $9,880 on the partial sale of the shares held in Liberty, and an unrealized loss on derivative liability of $415 for the quarter ended August 31, 2018 as a result of the 18% discount on market price of Liberty, based on Liberty’s 10-day volume weighted trading price in the Obligation Agreement. Subsequent to quarter-end, the Company sold the remaining shares held in Liberty in exchange for a promissory note of $59,098. The carrying value of the investment ,net of the derivative liability, was $6,120 as at August 31, 2018.
Net income
The Company recorded net income for the three months ended August 31, 2018 of $21,176 or $0.09 per share as opposed to net income of $15,041 or $0.11 per share in the prior year.
19
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA from operations as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance income, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment of intangible assets, plus transaction costs, plus (minus) loss (gain) on disposal of capital assets, plus (minus) loss (gain) on foreign exchange, plus (minus) loss (gain) on marketable securities, plus (minus) loss (gain) from equity investee, minus deferred gain on sale of intellectual property, plus (minus) loss (gain) on dilution of ownership in equity investee, plus (minus) unrealized loss (gain) on convertible notes receivable, plus (minus) loss (gain) on long-term investments and certain one-time non-operating expenses, as determined by management, all as follows:
|
|
|
For the three months
|
|
|
|
|
ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Net income
|
|
$
|
21,176
|
|
$
|
15,041
|
|
|
Income taxes
|
|
3,962
|
|
3,770
|
|
|
Finance income, net
|
|
(1,059
|
)
|
(466
|
)
|
|
Amortization
|
|
4,706
|
|
628
|
|
|
Share-based compensation
|
|
6,122
|
|
2,509
|
|
|
Fair value adjustment on growth of biological assets
|
|
(9,511
|
)
|
(4,265
|
)
|
|
Fair value adjustment on sale of inventory
|
|
4,205
|
|
1,136
|
|
|
Transaction costs
|
|
865
|
|
—
|
|
|
Loss on sale of capital assets
|
|
—
|
|
7
|
|
|
Foreign exchange loss
|
|
59
|
|
151
|
|
|
Loss on marketable securities
|
|
167
|
|
1,746
|
|
|
Loss from equity investees
|
|
247
|
|
8,840
|
|
|
Deferred gain on sale of intellectual property
|
|
(233
|
)
|
(234
|
)
|
|
Gain on dilution of ownership in equity investee
|
|
(2,210
|
)
|
(7,551
|
)
|
|
Unrealized gain on convertible notes receivable
|
|
(295
|
)
|
(547
|
)
|
|
Unrealized loss on derivative liability
|
|
415
|
|
—
|
|
|
Gain on long-term investments
|
|
(22,700
|
)
|
(19,082
|
)
|
|
Gain on sale of equity investee
|
|
(9,880
|
)
|
—
|
|
|
Adjusted EBITDA from Aphria International
|
|
3,136
|
|
—
|
|
|
Adjusted EBITDA from ACMPR operations
|
|
$
|
(828
|
)
|
$
|
1,683
|
|
|
|
|
For the three months
|
|
|
|
|
ended
|
|
|
|
|
August 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Adjusted EBITDA from ACMPR operations
|
|
$
|
(828
|
)
|
$
|
1,683
|
|
|
Adjusted EBITDA from Aphria International
|
|
(3,136
|
)
|
—
|
|
|
Adjusted EBITDA
|
|
$
|
(3,964
|
)
|
$
|
1,683
|
|
Last year, the Company reported adjusted EBITDA of $873 for the three months ended August 31, 2017. In a prior quarter, the company re-assessed the definition of adjusted EBITDA, particularly as it related to presenting a repeatable proxy for cash. As a result, the Company removed the following from EBITDA adjustments from the current periods but also removed from the prior periods for comparison purposes:
20
(i)
allowance for bad debts as although this is a non-cash item the Company believes it represents an estimate on future cash flows in the amount of $13 for the three months ended August 31, 2017;
(ii)
EBITDA loss from equity accounted investees in the amount of $(675) for the three months ended August 31, 2017;
(iii)
amortization of certain non-capital assets in the amount of $3 for the three months ended August 31, 2017.
The Company also added an EBITDA adjustment for foreign exchange loss of $151 for the three months ended August 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from (used in) operations for the period decreased by $10,514 from cash flow generated from operations of $(3,801) in the prior year to cash flow used in operations of $(14,315) in the current three month period. The decrease in cash flow generated from operations is primarily a result of:
·
Increase in non-cash working capital of $8,693, comprised primarily of increased HST receivable balance, and investments in inventory and biological assets offset by increased accounts payable and accrued liabilities and income taxes payable; and
·
Additional cash production costs expensed with write off of plants disposed of in the quarter.
Cash resources / working capital requirements
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at August 31, 2018, Aphria maintained $273,087 of cash and cash equivalents on hand plus $40,895 in liquid marketable securities, compared to $59,737 in cash and cash equivalents plus $45,062 marketable securities at May 31, 2018. Liquid sources of cash increased $209,183 in the quarter.
Working capital provides funds for the Company to meet its operational and capital requirements. As at August 31, 2018, the Company maintained working capital of $363,245. Management expects the Company to have adequate funds available on hand to meet the Company’s planned growth and expansion of facilities over the next 12 months.
Capital and intangible asset expenditures
For the three months ended August 31, 2018, the Company invested $28,036 in capital and intangible assets through wholly owned subsidiaries, exclusive of business acquisitions, of which $1,956 are considered maintenance CAPEX and the remaining $26,080 growth CAPEX related to Broken Coast’s Phase IV expansion and Aphria One’s Part III and Part IV expansions.
For the three months ended August 31, 2018, the Company invested $29,727 in capital and intangible assets through majority owned subsidiaries, of which $nil are considered maintenance CAPEX and the remaining $29,727 growth CAPEX, related to Aphria Diamond’s facility retrofit.
Financial covenants
The Company met its financial covenants at all times since they have come into effect. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.
Contractual obligations and off-balance sheet financing
In April 2017, the Company indemnified the landlord of the office space to be used by its then equity investee, Liberty Health Sciences Inc., with annual rent from $180 to $190 expiring June 2023.
21
The Company continues to lease office space from a related party. The lease commitment ends December 31, 2018 with the option to renew for two additional 5-year periods. As disclosed previously, the Company agreed to contribute $15,000 to Green Acre Capital Fund II. The Company has lease commitments until September 2019 and August 2020 for the use of two motor vehicles. The Company has a lease for rental office space from December 2018 until November 30, 2028.
Minimum payments payable over the next five years are as follows:
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
year
|
|
1 - 3 years
|
|
4 - 5 years
|
|
After 5 years
|
|
|
Outstanding capital related Commitments
|
|
$
|
15,737
|
|
$
|
15,737
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Investment commitment
|
|
15,000
|
|
15,000
|
|
—
|
|
—
|
|
—
|
|
|
Operating leases
|
|
1,608
|
|
295
|
|
635
|
|
678
|
|
—
|
|
|
Motor vehicle leases
|
|
47
|
|
29
|
|
18
|
|
—
|
|
—
|
|
|
Long-term debt
|
|
55,504
|
|
3,349
|
|
7,068
|
|
3,149
|
|
41,938
|
|
|
Total
|
|
$
|
87,896
|
|
$
|
34,410
|
|
$
|
7,721
|
|
$
|
3,827
|
|
$
|
41,938
|
|
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the period.
Share capital
Aphria has the following securities issued and outstanding, as at October 11, 2018:
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Presently
|
|
|
|
& in-the-
|
|
Fully
|
|
|
|
|
outstanding
|
|
Exercisable
|
|
money
|
|
diluted
|
|
|
Common stock
|
|
249,762,289
|
|
—
|
|
—
|
|
249,762,289
|
|
|
Warrants
|
|
2,666,531
|
|
2,666,531
|
|
1,372,727
|
|
1,372,727
|
|
|
Stock options
|
|
8,093,159
|
|
3,519,772
|
|
3,214,611
|
|
3,214,611
|
|
|
Fully diluted
|
|
|
|
|
|
|
|
254,349,627
|
|
*
Based on closing price on October 11, 2018
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2019, ended August 31, 2018. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2018 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
22
|
|
|
Nov/17
|
|
Feb/18
|
|
May/18
|
|
Aug/18
|
|
|
Revenue
|
|
$
|
8,504
|
|
$
|
10,267
|
|
$
|
12,026
|
|
$
|
13,292
|
|
|
Net income (loss)
|
|
6,455
|
|
12,944
|
|
(4,992
|
)
|
21,176
|
|
|
Earnings (loss) per share - basic
|
|
0.05
|
|
0.08
|
|
(0.06
|
)
|
0.09
|
|
|
Earnings (loss) per share - fully diluted
|
|
0.04
|
|
0.08
|
|
(0.04
|
)
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nov/16
|
|
Feb/17
|
|
May/17
|
|
Aug/17
|
|
|
Revenue
|
|
$
|
5,227
|
|
$
|
5,119
|
|
$
|
5,718
|
|
$
|
6,120
|
|
|
Net income
|
|
945
|
|
4,950
|
|
(2,593
|
)
|
15,041
|
|
|
Earnings per share - basic
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
0.11
|
|
|
Income per share - fully diluted
|
|
0.01
|
|
0.04
|
|
(0.02
|
)
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RELATED PARTY BALANCES AND TRANSACTIONS
The Company funds a small portion of the Canadian operating costs of Liberty, for which Liberty reimburses the Company quarterly. Additionally, the Company purchased certain electrical generation equipment and pays rent to a company owned by a director. The balance owing from related parties as at August 31, 2018 was $nil (May 31, 2018 - $nil). These parties are related as they are corporations that are controlled by certain officers and directors of the Company (Mr. Cole Cacciavillani).
During the three months ended August 31, 2018, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totaling $85 (2017 - $38). Included in this amount was rent of $4 charged during the three months ended August 31, 2018 (2017 - $8).
The Company previously entered into an agreement with a director of the Company, granting it the right of first refusal to acquire an additional acre of property adjacent to its Aphria One facility. The director also maintains a put option on the same property valued at $1,000 subject to annual inflationary adjustments equal to the increases in the Consumer Price Index, which put option can only be exercised upon one of the following conditions occurring:
(i)
The director ceasing to be employed by the Company;
(ii)
The director and his affiliated group collectively ceasing to own greater than 10% of the shares of the Company; or
(iii)
A change of control in the Company.
As at August 31, 2018 the director and his affiliated group collectively own less than 10% of the shares of the Company; however, the Director has not exercised the put option.
CORPORATE POSITION ON CONDUCTING BUSINESS IN THE UNITED STATES AND OTHER INTERNATIONAL JURISDICTIONS WHERE CANNABIS IS FEDERALLY ILLEGAL
As cannabis is currently federally illegal in the U.S., The Company does not engage in any U.S. cannabis related activities as defined in Canadian Securities Administrators Staff Notice 51-352 (Revised). While the Company has historically held certain interests in U.S. cannabis related activities as at the date of this MD&A, it has divested itself of all such interests. The Company will only conduct business activities related to growing or processing cannabis, in jurisdictions where it is federally legal to do so. While the Company will not engage in marijuana-related activities in the U.S related to growing and processing cannabis so long as cannabis is federally-illegal, the Company has developed specific plans related to establishing business operations in the U.S. in the event cannabis becomes federally legal. The Company has entered into option agreements to purchase certain ownership interest in companies which operate in the U.S. cannabis industry should cannabis be rescheduled to become a legal substance in the U.S.
23
INDUSTRY TRENDS AND RISKS
The Company’s overall performance and results of operations are subject to a number of risks and uncertainties, of which the below are considered to be the Company’s principal risks. For a more detailed and complete discussion of economic, industry and risk factors of the Company, please see the “Risk Factors” section in our most recent Annual Information Form, dated July 31, 2018.
Volatile Market Price of the Common Shares
The market price of 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. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares.
Financial markets historically at times experience significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Risk Factors Related to Dilution
The Company may issue additional Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.
Reliance on Veterans Affairs Canada (‘‘VAC’’) medical cannabis reimbursement policies
As the Company has previously disclosed, VAC reimburses certain medical cannabis purchases for eligible retired Canadian Armed Forces veterans. The current reimbursement policy includes a three gram per day limit, subject to certain exceptions, and an $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although as discussed in the Company’s previous continuous disclosure, veteran sales have decreased over the prior quarter. As the Company grows larger and, more particularly, when adult-use of cannabis is implemented by the Canadian Federal Government, the Company anticipates that veteran patients will become less and less material to its overall sales as a relative percentage. However, should VAC further amend its reimbursement policies prior to the introduction of adult-use of cannabis, the Company may be materially adversely affected.
Reliance on Key Personnel
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management (collectively, “
Key Personnel
”). The Company’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of a Key Person, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to
24
execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Further, as a Licensed Producer, each Key Person is subject to 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 Person 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 Person 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. While employment agreements are customarily used as a primary method of retaining the services of Key Personnel, these agreements cannot assure the continued services of such employees.
Environmental Regulations and Risks
The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations. Government approvals and permits are currently, and may in the future be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical marijuana or from proceeding with the development of its operations as currently proposed. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Reliance on a Single Facility
To date, the Company’s activities and resources have been primarily focused on the premises in Leamington, Ontario. Aphria expects to continue the focus on this facility for the foreseeable future. Adverse changes or developments affecting the existing facility could have a material and adverse effect on the Company’s ability to continue producing medical marijuana, its business, financial condition and prospects.
Regulatory Compliance
The commercial medical cannabis industry is a new industry in Canada and the Company anticipates that once in force, the Cannabis Act and its regulations will subject the Company to a new regulatory regime governed by new regulations, guidelines and policies relating to the manufacture, processing, import, export, management, packaging/labelling, advertising, sale, transportation, storage and disposal of cannabis but also laws and regulations relating to drugs containing cannabis, amended security measures and outdoor cultivation. While, to the knowledge of management, the Company is currently in compliance with the current regulatory regime and is on track to transition its licences under the Cannabis Act, any changes to such laws, regulations, guidelines and policies may have a material adverse effect on its business, financial condition and results of operations.
25
Changes in Laws, Regulations and Guidelines
On December 20, 2017, the Prime Minister communicated that the Canadian Federal Government intends to legalize cannabis in the summer of 2018, despite previous reports of a July 1, 2018 deadline. On June 7, 2018, Bill C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act. On June 20, 2018, Prime Minister Trudeau announced that marijuana would be legal by October 17, 2018. On June 21, 2018, the Government of Canada announced that Bill C-45 received Royal Assent. The Bill-C-45 will come into force on October 17, 2018. On July 11, 2018, the regulations made pursuant to the Cannabis Act were published. The regulations under the Cannabis Act contemplate the various licences including cultivation, processing, analytical testing, sale (including medical sales), analytical testing and scientific research. The regulations introduced the nursery and made outdoor cultivation permissible. Finally, the requirements for packaging and labelling of products for both medical and non-medical consumption were explicitly set forth. The impact of changes in the regulatory enforcement by Health Canada under the Cannabis Act and its regulations, particularly in respect of product packaging, labelling, marketing, advertising and promotions and product approvals and its impact on the Company’s business are unknown at this time.
In addition, with respect to the retail cannabis framework in each province, there is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult use purposes will remain unchanged following the coming into force of the Cannabis Act. It is possible for significant legislative amendments to arise in each province to address any regulatory issues or perceived shortcomings in the distribution of cannabis at the retail level.
Reliance on Third Party Suppliers, Manufacturers and Contractors
The Company intends to maintain a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the novel regulatory landscape for regulating cannabis in Canada and the variability surrounding the regulation of cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors may have a material adverse effect on the Company’s business and operational results.
Risks Inherent in an Agricultural Business
Aphria’s business involves the growing of medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although Aphria expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.
Third Party Transportation
In order for customers of Aphria to receive their product, Aphria must rely on third party mail and courier services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by Aphria. Any delay by third party transportation and/or rising costs associated with these services may adversely affect Aphria’s financial performance. Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on Aphria’s business, financials and prospects. Any such breach could impact Aphria’s ability to continue operating under its licenses or the prospect of renewing its licenses.
Product Liability
As a distributor of products designed to be ingested by humans, Aphria 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 sale of Aphria’s products involves 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 Aphria’s products alone or in combination with other medications or substances could occur. Aphria may be subject to various product liability claims, including, among others, that Aphria’s products caused injury or illness, include inadequate instructions for use or include
26
inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against Aphria could result in increased costs, could adversely affect Aphria’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of Aphria. There can be no assurances that Aphria will be able to obtain or 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 Aphria’s potential 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 labelling disclosure. If any of Aphria’s products are recalled due to an alleged product defect or for any other reason, Aphria could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. Aphria 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 management attention. Although Aphria 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 Aphria’s significant brands were subject to recall, the image of that brand and Aphria could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for Aphria’s products and could have a material adverse effect on the results of operations and financial condition of Aphria and the Resulting Issuer. Additionally, product recalls may lead to increased scrutiny of Aphria’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Regulatory or Agency proceedings, Investigations and Audits
The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. Aphria may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require Aphria to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.
Information technology systems and cyber-attacks
Aphria 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 it 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, intentional damage and destruction, 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.
Aphria 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. 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
27
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.
Insurance coverage
The Company has insurance to protect its assets, operations, directors and employees. The Company is currently pursuing additional insurance coverage over its crop, product liability claims and for business interruption. While the Company believes the insurance coverage addresses all material risks to which it is exposed and is adequate and customary in the 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 to. In addition, no assurance can be given that such insurance will be adequate to cover our 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, the business, results of operations and financial condition could be materially adversely affected.
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 Company’s ability to continue operating and the value of the Common Shares and could use significant resources. Even if Aphria is involved in litigation and wins, litigation can redirect significant Company resources, including the time and attention of management and available working capital. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as Aphria may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the business, financial condition and results of operations of the Company.
In addition, other parties may claim that the Company’s products infringe on their proprietary rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, Aphria may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.
Negative Consumer Perception
The Company believes the cannabis industry is highly dependent upon consumer perception regarding the medical benefits, safety, efficacy and quality of the cannabis distributed for medical purposes to such consumers. Consumer perception of
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Aphria’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, political statements both in Canada and in other countries, media attention and other publicity (whether or not accurate or with merit) regarding the consumption of cannabis products for medical or recreational purposes, including unexpected safety or efficacy concerns arising with respect to the products of the Company or its competitors. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable 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 favorable 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 and financial condition 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 an adverse effect on any demand for Aphria’s products which could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis for medical purposes in general, or the Company’s products specifically, or associating the consumption of 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 such products resulted from consumers’ failure to consume such products legally, appropriately or as directed.
Risk Factors Related to International Activities
Expansion into Foreign Jurisdictions
The Company’s expansion into jurisdictions outside of Canada is subject to risks. In addition, in jurisdictions outside of Canada, there can be no assurance that any market for the Company’s products will develop. 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 ability to successfully expand its operations into such jurisdictions and may have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s Operations in Emerging Markets are Subject to Political and Other Risks Associated with Operating in a Foreign Jurisdiction
The Company has operations in various emerging markets and may have operations in additional emerging markets in the future. Such operations expose the Company to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates, military repression; war or civil war; social and labour unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licenses, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, banking and currency controls and governmental regulations that favour or require the Company to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction.
Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in marijuana industry or investment policies or shifts in political attitude in the countries in which the Company operates may adversely affect the Company’s operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of concessions, licenses, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licenses, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.
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The Company continues to monitor developments and policies in the emerging markets in which it operates and assess the impact thereof to its operations; however such developments cannot be accurately predicted and could have an adverse effect on the Company’s operations or profitability.
Corruption and Fraud in Certain Emerging Markets Relating to Ownership of Real Property May Adversely Affect the Company’s Business
There are uncertainties, corruption and fraud relating to title ownership of real property in certain emerging markets in which the Company operates or may operate. Property disputes over title ownership are frequent in emerging markets, and, as a result, there is a risk that errors, fraud or challenges could adversely affect the Company’s ability to operate in such jurisdictions.
Inflation in Emerging Markets, Along with Governmental Measures to Combat Inflation, may have a Significant Negative Effect on Local Economies and also on the Company’s Financial Condition and Results of Operations
In the past, high levels of inflation have adversely affected emerging economies and financial markets, and the ability of government to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. The emerging markets in which the Company operates or may operate may experience high levels of inflation in the future. Inflationary pressures may weaken investor confidence in such countries and lead to further government intervention in the economy. If countries in which the Company operates experience high levels of inflation in the future and/or price controls are imposed, the Company may not be able to adjust the rates the Company charges the Company’s customers to fully offset the impact of inflation on the Company’s cost structures, which could adversely affect the Company’s results of operations or financial condition.
The Company’s Operations may be Impaired as a Result of Restrictions on the Acquisition or Use of Properties by Foreign Investors or Local Companies under Foreign Control
Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which the Company operates in certain countries. Accordingly, the Company’s current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and the Company’s ownership or access rights in respect of any property it owns or leases in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
The Company May Expand into Other Geographic Areas, which could Increase the Company’s Operational, Regulatory and Other Risks
In addition to the jurisdictions described elsewhere in this MD&A, the Company may in the future expand into other geographic areas, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. The Company may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with the Company’s existing operations.
The Company may be Responsible for Corruption and Anti-bribery Law Violations
The Company’s business is subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, the Company is subject to the anti-bribery laws of any other countries in which it conducts business now or in the future. The
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Company’s employees or other agents may, without its knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and anti-bribery laws for which the Company may be held responsible. The Company’s policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that the Company’s internal control policies and procedures will always protect it from recklessness, fraudulent behaviour, dishonesty or other inappropriate acts committed by its affiliates, employees, contractors or agents. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“
CEO
”) and the Chief Financial Officer (“
CFO
”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2018, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“
COSO
”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.
There have been no changes in the Company’s internal controls over financial reporting during the three months ended August 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
SUBSEQUENT EVENTS
Subsequent to quarter-end, the Company entered into a strategic partnership with Schroll Medical, a subsidiary of prominent European flower producer, Schroll Flowers. The Company paid €100 and will provide cannabis genetics, strains and proprietary growing IP for a 15% interest in Schroll Medical.
Subsequent to quarter-end, the Company secured an exemption from the CSE allowing it to have the remaining Liberty shares released from the CSE mandated escrow. Subsequent to the release from escrow, the Company entered into a share purchase agreement to divest of the remaining 64,118,462 Liberty shares in exchange for a promissory note in the amount of $59,098, bearing interest at a rate of 12% due in 5 years. As a security for the promissory note, the Liberty shares have been placed in trust with an escrow agent. The purchaser is able to remove the Liberty shares from the escrow
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at any time by paying off the promissory note. In the event that the Company enforces the security, the escrow agent will return the shares to the Company, provided that the Conditions are met. In the event they are not met, the escrow agent will transfer the securities to a third-party investment for liquidation, with the proceeds of liquidation delivered to the Company. Simultaneously with this sale, the Company entered into an option agreement to repurchase the Liberty shares for the value of the promissory note. The Company will pay an annual fee equal to 12.975% of the face value of the promissory note to maintain this option. The option to repurchase the shares is subject to the Conditions described above. In exchange for the early termination of the Obligation Agreement, the Company paid a $1,000 termination fee.
Subsequent to quarter-end, the Company signed a supply agreement to supply Emblem Corp. with 175,000 kg of cannabis over a five-year period starting May 2019.
Subsequent to quarter-end, the Company closed the acquisition of assets in Latin America and the Caribbean from Scythian. The Company issued 15,678,310 shares and assumed $1,000 USD of existing debt as part of the acquisition.
Subsequent to quarter-end, the Company transferred assets with a fair value of $30,542 to GA Opportunities Corp. in exchange for a promissory note, bearing interest at 12% per annum due in 5 years. Simultaneously with this transfer, the Company entered into an option agreement to repurchase the assets acquired by GA Opportunities Corp. for the value of the promissory note. The Company will pay an annual fee equal to 12.3% of the face value of the promissory note to maintain this option. In the event that the assets acquired by GA Opportunities Corp. qualify as US cannabis assets, the option to repurchase the shares is subject to the same Conditions described above.
This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:
·
the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
·
the expected cost to produce a gram of dried cannabis;
·
the expected cost to process cannabis oil;
·
the anticipated future gross margins of the Company’s operations; and,
·
The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of medical cannabis and cannabis-related offenses in the United States.
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