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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 25, 2021

 

 

Tilray, Inc.

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Delaware   001-38594   82-4310622

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

1100 Maughan Rd.,

Nanaimo, BC, Canada

V9X 1J2
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (844) 845-7291

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading

Symbol(s)

  

Name of each exchange

on which registered

Class 2 Common Stock, $0.0001 par value per share    TLRY    The Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


Item 8.01.

Other Events.

Arrangement Agreement

As previously disclosed on December 15, 2020, Tilray, Inc., a Delaware corporation (“Tilray”), and Aphria Inc., a corporation existing under the laws of the Province of Ontario (“Aphria”), entered into an Arrangement Agreement, as amended (the “Arrangement Agreement”), pursuant to which all of the issued and outstanding common shares of Aphria (the “Aphria Shares”) will be exchanged for Class 2 common stock of Tilray, in accordance with a specified exchange ratio, pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (Ontario) (the “Arrangement”).

In connection with the proposed Arrangement, certain information about Aphria, including a description of its business is filed herewith as Exhibit 99.2 and is incorporated herein by reference.

Lock-Up Release

As previously announced, on December 12, 2019, Tilray completed its transaction with Privateer Holdings, Inc., a Delaware corporation (“Privateer”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of September 9, 2019 (the “Merger Agreement”) by and among Tilray, Privateer, Down River Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of Tilray and Michael Blue, as the Stockholder Representative. Pursuant to the terms described in the Merger Agreement, Privateer merged with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a wholly owned subsidiary of Tilray.

Pursuant to the Merger Agreement, each Privateer equity holder who received shares of Tilray common stock in the Merger is subject to a lock-up (the “Lock-Up Agreement”) allowing for the sale of such shares only under certain circumstances over a two-year period.

On February 19, 2021, the Board of Directors of Tilray unanimously approved the release of the remaining shares of Class 2 common stock from the Lock-Up Agreement, effective as of 9:00 a.m. on the second trading day following the record date for Tilray’s special meeting of the stockholders related to the Arrangement. The record date will be set by the Board of Directors of Tilray prior to filing the definitive proxy statement related to the Arrangement.

Additional Information and Where to Find It

In connection with the proposed transaction, Aphria will file a definitive management information circular, and Tilray will file a definitive proxy statement on Schedule 14A containing important information about the proposed transaction and related matters. Additionally, Aphria and Tilray will file other relevant materials in connection with the proposed transaction with the applicable securities regulatory authorities. Investors and security holders of Aphria and Tilray are urged to carefully read the entire management information circular and proxy statement (including any amendments or supplements to such documents), respectively, when such documents become available before making any voting decision with respect to the proposed transaction because they will contain important information about the proposed transaction and the parties to the transaction. The Aphria management information circular and the Tilray proxy statement will be mailed to the Aphria and Tilray shareholders, respectively, as well as be accessible on the SEDAR and EDGAR profiles of the respective companies.

Investors and security holders of Tilray will be able to obtain a free copy of the proxy statement, as well as other relevant filings containing information about Tilray and the proposed transaction, including materials that will be incorporated by reference into the proxy statement, without charge, at the SEC’s website (www.sec.gov) or from Tilray by contacting Tilray’s Investor Relations at (203) 682-8253, by email at Raphael.Gross@icrinc.com, or by going to Tilray’s Investor Relations page on its website at https://ir.tilray.com/investor-relations and clicking on the link titled “Financials.”

Participants in the Solicitation

Tilray and Aphria and certain of their respective directors, executive officers and employees may be deemed to be participants in the solicitation of Tilray proxies in respect of the proposed transaction. Information regarding the persons who may, under SEC rules, be deemed participants in the solicitation of proxies to Tilray stockholders in connection with the proposed transaction will be set forth in the Tilray proxy statement for the proposed transaction when available. Other information regarding the participants in the Tilray proxy solicitation and a description of their direct and indirect interests in the proposed transaction, by security holdings or otherwise, will be contained in such proxy statement and other relevant materials to be filed with the SEC in connection with the proposed transaction. Copies of these documents may be obtained, free of charge, from the SEC or Tilray as described in the preceding paragraph.

 

1


Notice Regarding Forward-Looking Statements

Certain information in this communication constitutes forward-looking information or forward-looking statements (together, “forward-looking statements”) under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbor created by such sections and other applicable laws. The forward-looking statements are expressly qualified by this cautionary statement. Any information or statements that are contained in this communication that are not statements of historical fact may be deemed to be forward-looking statements, including, but not limited to, statements in this communication with regards to: (i) statements relating to Aphria’s and Tilray’s strategic business combination and the expected terms, timing and closing of the Arrangement including, receipt of required regulatory approvals, shareholder approvals, court approvals and satisfaction of other closing customary conditions; (ii) estimates of pro-forma financial information of the combined company, including in respect of expected revenues and production of cannabis; (iii) estimates of future costs applicable to sales; (iv) estimates of future capital expenditures; (v) estimates of future cost reductions, synergies including pre-tax synergies, savings and efficiencies; (vi) statements that the combined company anticipates to have scalable medical and adult-use cannabis platforms expected to strengthen the leadership position in Canada, United States and internationally; (vii) statements that the combined company is expected to offer a diversified and branded product offering and distribution footprint, world-class cultivation, processing and manufacturing facilities; (viii) statements in respect of operational efficiencies expected to be generated as a result of the Arrangement in the amount of more than C$100 million of pre-tax annual cost synergies; (ix) expectations of future balance sheet strength and future equity; and (x) that the combined company is expected to unlock significant shareholder value. Aphria and Tilray use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and the negative of these terms or similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Various assumptions were used in drawing the conclusions contained in the forward-looking statements throughout this communication. Forward-looking statements reflect current beliefs of management of Aphria and Tilray with respect to future events and are based on information currently available to each respective management including based on reasonable assumptions, estimates, internal and external analysis and opinions of management of Aphria and Tilray considering their experience, perception of trends, current conditions and expected developments as well as other factors that each respective management believes to be relevant as at the date such statements are made. 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, risks assumptions and expectations described in Aphria’s and Tilray’s critical accounting policies and estimates; the adoption and impact of certain accounting pronouncements; Aphria’s and Tilray’s future financial and operating performance; the competitive and business strategies of Aphria and Tilray ; the intention to grow the business, operations and potential activities of Aphria and Tilray; the ability of Aphria and Tilray to complete the Arrangement; Aphria’s and Tilray’s ability to provide a return on investment; Aphria’s and Tilray’s ability to maintain a strong financial position and manage costs, the ability of Aphria and Tilray to maximize the utilization of their existing assets and investments and that the completion of the Arrangement is subject to the satisfaction or waiver of a number of conditions as set forth in the Arrangement Agreement. There can be no assurance as to when these conditions will be satisfied or waived, if at all, or that other events will not intervene to delay or result in the failure to complete the Arrangement. There is a risk that some or all the expected benefits of the Arrangement may fail to materialize or may not occur within the time periods anticipated by Aphria and Tilray. The challenge of coordinating previously independent businesses makes evaluating the business and future financial prospects of the combined company following the Arrangement difficult. Material risks that could cause actual results to differ from forward-looking statements also include the inherent uncertainty associated with the financial and other projections; the prompt and effective integration of the combined company; the ability to achieve the anticipated synergies and value-creation contemplated by the proposed transaction; the risk associated with Aphria’s and Tilray’s ability to obtain the approval of the proposed transaction by their shareholders required to consummate the proposed transaction and the timing of the closing of the proposed transaction, including the risk that the conditions to the transaction are not satisfied on a timely basis or at all; the risk that a consent or authorization that may be required for the proposed transaction is not obtained or is obtained subject to conditions that are not anticipated; the outcome of any legal proceedings that may be instituted against the parties and others related to the Arrangement Agreement; unanticipated difficulties or expenditures relating to the transaction, the response of business partners and retention as a result of the announcement and pendency of the transaction; risks relating to the value of Tilray’s common stock to be issued in connection with the transaction; the impact of competitive responses to the announcement of the transaction; and the diversion of management time on transaction-related issues.

For a more detailed discussion of risks and other factors, see the most recently filed annual information form of Aphria and the annual report filed on form 10-K of Tilray made with applicable securities regulatory authorities and available on SEDAR and EDGAR. The forward-looking statements included in this communication are made as of the date of this communication and neither Aphria nor Tilray undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless required by applicable securities laws.

 

Item 9.01

Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The audited consolidated financial statements of Aphria as of May 31, 2020 and May 31, 2019, and for the fiscal years ended May 31, 2020 and 2019 and the notes related thereto, as well as the unaudited interim consolidated financial statements of Aphria as of November 30, 2020 and May 31, 2020 and for the three and six months ended November 30, 2020 and 2019, and the notes related thereto, are included in Exhibit 99.2.

(b) Pro Forma Financial Information

Our unaudited pro forma condensed combined balance sheet information as at December 31, 2020, which gives effect to the Arrangement as if it had occurred on December 31, 2020, and our unaudited pro forma statement of net loss information for the year ended December 31, 2020, which gives effect to the Arrangement as if it had occurred on January 1, 2020, are filed as Exhibit 99.1. The pro forma financial statements have been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if the merger transaction had been completed on the dates or for the periods presented, nor do they purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments, various other factors will have an effect on the financial condition and results of operations after the completion of the merger transaction. The actual financial position and results of operations may differ materially from the pro forma amounts reflected herein due to a variety of factors.

 

2


(d) Exhibits.

 

Exhibit
Number

  

Description of Exhibit

23.1    Consent of Independent Registered Public Accounting Firm of Aphria
99.1    Unaudited pro forma condensed combined financial statements as of and for the year ended December 31, 2020, each giving effect to the proposed Arrangement
99.2    Disclosure regarding Aphria, including related consolidated financial statements
104    Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

3


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

Tilray, Inc.

Date: February 25, 2021     By:  

/s/ Brendan Kennedy

            Brendan Kennedy
            President and Chief Executive Officer

 

4

Exhibit 23.1

 

LOGO

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-233703) of Tilray Inc. of our report dated July 28, 2020 relating to the consolidated financial statements and effectiveness of internal control over financial reporting of Aphria Inc., which is filed as Exhibit 99.2 to this Current Report on Form 8-K of Tilray Inc. dated February 25, 2021.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

February 25, 2021

 

 

LOGO

PricewaterhouseCoopers LLP

PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2

T: +1 416 863 1133, F: +1 416 365 8215

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF TILRAY

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On December 15, 2020, Tilray, Inc. (“Tilray”) and Aphria Inc. (“Aphria”), entered into an Arrangement Agreement, under which the businesses of the two companies will be combined pursuant to a Plan of Arrangement (the “merger transaction”).

The following unaudited pro forma condensed combined financial statements (the “pro forma financial statements”) are based on the historical consolidated financial statements of Tilray and Aphria, as adjusted to give effect to the merger transaction. The unaudited pro forma condensed combined balance sheet as at December 31, 2020 (the “pro forma balance sheet”) gives effect to the merger transaction as if it had occurred on December 31, 2020. The unaudited pro forma condensed combined statement of net loss for the year ended December 31, 2020 (the “pro forma statement of net loss”) gives effect to the merger transaction as if it had occurred on January 1, 2020.

The transaction accounting adjustments consist of those necessary to account for the merger transaction as a reverse acquisition in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

The pro forma financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the merger transaction occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial condition and results of operations of the combined company may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

1


Unaudited Pro Forma Condensed Combined Balance Sheet

December 31, 2020

(in ‘000 of United States dollars)

 

     Aphria adjusted
historical
November 30, 2020
(note 6)
    Tilray
historical
December 31, 2020
    Transaction
accounting
adjustments
    Notes
(note 4)
     Pro forma
combined
December 31,
2020
 

Assets

           

Current assets

           

Cash and cash equivalents

   $ 144,713     $ 189,702     $ 37,426       H      $ 371,841  

Accounts receivable, net

     74,034       29,033       —            103,067  

Inventory

     174,817       93,645       27,355       C        295,817  

Prepayments and other current assets

     56,375       34,640       —            91,015  

Total current assets

     449,939       347,020       64,781          861,740  

Property and equipment, net

     499,164       199,559       1,490       D,E        700,213  

Operating lease, right-of-use assets

     5,393       17,985       274       E        23,652  

Intangible assets, net

     528,397       186,445       876,555       F        1,591,397  

Goodwill

     578,161       166,915       2,422,696       G        3,167,772  

Equity method investments

     —         9,300       —            9,300  

Other investments

     16,792       14,369       —            31,161  

Other assets

     2,309       4,356       —            6,665  

Total assets

   $ 2,080,155     $ 945,949     $ 3,365,796        $ 6,391,900  

Liabilities

           

Current liabilities

           

Bank indebtedness

     3,934       —         —            3,934  

Accounts payable

     62,667       17,776       —            80,443  

Accrued expenses and other

     117,501       39,946       33,841       K        198,111  

current liabilities

         6,823       L     

Income taxes payable

     12,760       —         —            12,760  

Accrued lease obligations

     1,360       2,913       —            4,273  

Warrant liability

     —         120,647       175,385       H        296,032  

Current portion of long-term debt

     11,708       —         —            11,708  

Total current liabilities

     209,930       181,282       216,049          607,261  

Accrued lease obligations

     34,560       30,623       —            65,183  

Deferred tax liability

     23,347       49,274       202,603       M        287,071  
         11,847       M     

Convertible notes, net of issuance costs

     275,581       257,789       (23,000     I        510,370  

Long-term debt

     94,321       48,470       2,028       J        144,819  

Other liabilities

     —         4,612       —            4,612  

Total liabilities

   $ 637,739     $ 572,050     $ 409,527        $ 1,619,316  

Stockholders’ equity

           

Common stock(1)

     1,601,853       16       26       B        42  
         (1,601,853     B     

Additional paid-in capital

     34,181       1,095,781       3,381,263       A, B        5,018,671  
         (1,095,781     B     
         1,390       I     
         1,601,837       B     

Warrants

     277       —         —            277  

Accumulated other comprehensive income

     (309     8,205       (8,205     B        (309

Accumulated deficit

     (243,969     (730,103     730,103       B        (296,480
         (33,841     K     
         (6,823     L     
         (11,847     M     

Total stockholders’ equity

     1,392,033       373,899       2,956,269          4,722,201  

Non-controlling interests

     50,383       —         —            50,383  

Total liabilities and stockholders’ equity

   $ 2,080,155     $ 945,949     $ 3,365,796        $ 6,391,900  

 

(1)

Consists of Aphria common shares and Tilray Class 2 common stock

 

2


Unaudited Pro Forma Condensed Combined Statement of Net Loss

For the Year Ended December 31, 2020

(in ‘000 of United States dollars, except per share and share amounts)

 

     Aphria constructed
12 month period

ending November 30,
2020 (note 6)
    Tilray 12 month
period ending
December 31, 2020
    Transaction
accounting
adjustments
    Notes
(note 4)
     Pro forma
combined
 

Revenue

   $ 471,963     $ 210,482     $ —          $ 682,445  

Cost of sales

     351,229       185,827       27,355       C        565,841  
         (56     D     
         1,486       L     

Gross profit

     120,734       24,655       (28,785        116,604  

General and administrative expenses

     112,069       85,883       33,841       K        231,117  
         6,823       L     
         (7,499     L     

Sales and marketing expenses

     45,719       54,666       (6,729     L        93,656  

Research and development expenses

     1,275       4,411       207       L        5,893  

Depreciation and amortization expenses

     15,123       13,722       (798     D        55,945  
         27,898       F     

Impairment of assets

     47,643       61,114       —            108,757  

Loss from equity method investments

     —         5,983       —            5,983  

Operating loss

     (101,095     (201,124     (82,528        (384,747

Foreign exchange loss (gain), net

     5,800       (13,169     —            (7,369

Change in fair value of warrant liability

     —         100,286       —            100,286  

Gain on debt conversion

     —         (61,118     —            (61,118

Interest expenses, net

     21,550       39,219       (5,258     I        55,185  
         (327     J     

Other expense (income), net

     83,044       10,333       —            93,377  

Loss before income taxes

     (211,489     (276,675     (76,943        (565,107

Deferred income tax recoveries

     (40,544     (5,376     (16,211     M        (58,889
         3,242       M     

Current income tax (recoveries) expenses

     18,592       (226     —            18,366  

Net loss

   $ (189,537   $ (271,073   $ (63,974      $ (524,584

Net loss per share - basic and diluted

     $ (2.05        $ (1.32

Weighted average shares used in computation of net loss per share - basic and diluted

       126,041,710       271,794,347       note 5        397,836,057  

 

3


NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

(in ‘000 of United States dollars, except for shares, warrants, per share amounts and per warrant amounts, unless otherwise noted)

 

1.

Basis of Presentation

The pro forma financial statements are based on the historical consolidated financial statements of Tilray and Aphria, adjusted to give effect to the merger transaction, and should be read in conjunction with the historical financial statements from which they are derived. Pro forma adjustments are limited to the transaction accounting adjustments that reflect the accounting for the merger transaction in accordance with US GAAP.

The pro forma financial statements were prepared using the purchase method of accounting. The merger transaction is accounted for as a reverse acquisition in which Tilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, the pro forma financial statements represent a continuation of the financial statements of Aphria; the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities of Tilray are recognized on the effective date of the merger transaction and measured at fair value.

The pro forma financial statements are presented in United States dollars (“USD”) and prepared in accordance with US GAAP. Since Aphria’s historical consolidated financial statements are presented in Canadian dollars (“CAD” or “C$”) and prepared in accordance with International Financial Reporting Standards (“IFRS”), the historical financial information of Aphria used in the pro forma financial statements has been reconciled to US GAAP and translated into USD (note 6).

The pro forma balance sheet gives effect to the merger transaction as if it had occurred on December 31, 2020. The pro forma statement of net loss gives effect to the merger transaction as if it had occurred on January 1, 2020.

The pro forma balance sheet combines the audited consolidated balance sheet of Tilray as at December 31, 2020 with the unaudited condensed consolidated statement of financial position (balance sheet) of Aphria as at November 30, 2020. As the ending date of the fiscal period for Aphria differs from that of Tilray by more than 93 days, the unaudited pro forma statement of operations (statement of net loss) for the year ended December 31, 2020 was derived by combining financial information from the audited consolidated statement of net loss and comprehensive loss of Tilray for the year ended December 31, 2020 with financial information of Aphria for the twelve months ended November 30, 2020, which was constructed by subtracting: (i) the financial information from the unaudited consolidated statement of operations for the six months ended November 30, 2019; from (ii) the financial information from the audited consolidated statement of operations for the year ended May 31, 2020; and adding (iii) the financial information from the unaudited consolidated statement of operations for the six months ended November 30, 2020 (note 6). The financial statements of Aphria used to prepare the pro forma balance sheet and the pro forma statements of operations (statement of net loss) were prepared for the purpose of such pro forma financial statements and do not conform with the financial statements for Aphria included, or incorporated by reference, elsewhere in the Circular. Tilray’s audited consolidated balance sheet as of December 31, 2020 and audited consolidated statement of net loss and comprehensive loss for the year ended December 31, 2020 are included Part II, Item 8 - Financial Statements and Supplementary Data, of Tilray’s Consolidated Financial Statements filed on Form 10-K with the SEC on February 19, 2021.

The assumptions and estimates underlying the adjustments to the pro forma financial statements are described in the accompanying notes.

The pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed. The pro forma adjustments have been made solely for the purpose of providing unaudited pro forma combined financial information and actual adjustment, when recorded, may differ materially.

The pro forma financial statements have been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if the merger transaction had been completed on the dates or for the periods presented, nor do they purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments, various other factors will have an effect on the financial condition and results of operations after the completion of the merger transaction. The actual financial position and results of operations may differ materially from the pro forma amounts reflected herein due to a variety of factors.

The unaudited pro forma financial statements do not reflect operational and administrative cost savings that may be achieved as a result of the merger transaction.

 

4


2.

Estimated Purchase Price

Tilray is the legal acquirer and, pursuant to the Plan of Arrangement, will (i) exchange each outstanding Aphria common share for 0.8381 of a Tilray Class 2 common share (the “Exchange Ratio”), and (ii) exchange outstanding equity instruments exercisable into Aphria common shares for instruments with similar terms that are exercisable into Tilray Class 2 common shares, adjusted to reflect the Exchange Ratio.

However, since the merger transaction is being accounted for as a reverse acquisition (note 1), the purchase price is calculated as the fair value of the hypothetical consideration Aphria would have to issue to acquire Tilray’s outstanding equity instruments and obtain the same percentage of ownership interest in the combined entity that will result from the merger transaction.

The estimated purchase price of $3,381,289 is based on the number of equity instruments of Tilray outstanding at December 31, 2020, adjusted for the exercise of 6,290,000 warrants (note 3, 4H), and Aphria’s closing share price of $16.60 on February 3, 2021 (the “Measurement Date”). The purchase price will change based on fluctuations in Aphria’s share price and the number of equity instruments of Tilray outstanding on the effective date of the merger transaction. A 10% increase or decrease in Aphria’s share price would increase or decrease both the purchase price and goodwill by approximately $338,924, respectively, and a 25% increase or decrease in Aphria’s share price would increase or decrease both the purchase price and goodwill by approximately $847,299, respectively.

The following table summarizes the calculation of the purchase price hypothetically paid by Aphria (in thousands, except warrants, share and per share data):

 

Tilray Class 2 common stock outstanding at December 31, 2020 adjusted for warrants exercised(1)

     164,746,087  

Aphria common stock hypothetically issued based on Exchange Ratio

     196,570,919  

Price per common stock of Aphria on Measurement Date

   $ 16.60  

Total estimated fair value of acquired Tilray Class 2 common stock

   $ 3,263,077  

Estimated fair value of Tilray stock-based compensation related to the precombination service period

   $ 118,212  

Total estimated purchase price

   $ 3,381,289  

 

(1)

Represents 158,456,087 Tilray Class 2 common stock outstanding at December 31, 2020 and 6,290,000 warrants exercised from Jan 1, 2021 to the Measurement Date (note H)

The estimated fair value of the Tilray stock-based compensation related to the precombinaion service period consisted of $91,089 related to Tilray stock options and $27,123 related to restricted share units (“RSUs”). The fair values of the RSUs included in the purchase price are estimated using the market share price of Aphria on the purchase price Measurement Date. The fair values of the options included in the purchase price are calculated using the Black Scholes model, using the following assumptions:

 

Volatility

     100%  

Dividend yield

     0%  

Risk-free interest rate

     0.03% to 0.96%  

Expected term

     0.06 to 8.13 years  

 

3.

Preliminary Purchase Price Allocation

A preliminary valuation analysis of the fair value of Tilray’s assets and liabilities has been performed at December 31, 2020, with the following exception:

 

   

The warrant liability has been valued at the Measurement Date, which reflects the exercise of 6,290,000 warrants between January 1, 2021 and the Measurement Date (note 2, 4H); and

 

   

The cash and cash equivalents balance at December 31, 2020 has been increased by $37,426 (note 4H) to reflect the cash received upon exercise of the warrants.

 

5


The purchase price has been allocated to such assets and liabilities, with the excess allocated to goodwill. The following table summarizes the preliminary purchase price allocation:

 

Cash and cash equivalents

   $ 227,128  

Accounts receivable

     29,033  

Inventory

     121,000  

Prepayments and other current assets

     34,640  

Property and equipment

     201,049  

Operating right-of-use assets

     18,259  

Intangible assets

     1,063,000  

Equity method investments

     9,300  

Other investments

     14,369  

Other assets

     4,356  

Accounts payable

     (17,776

Accrued expenses and other current liabilities

     (39,946

Accrued lease obligations

     (33,536

Warrant liability

     (296,032

Deferred tax liability

     (251,877

Convertible notes

     (236,179

Long-term debt

     (50,498

Other liabilities

     (4,612

Goodwill

     2,589,611  

The preliminary purchase price allocation has been used to prepare the pro forma adjustments (note 4). The purchase price allocation will be finalized following the effective date of the merger transaction when the valuation analysis is complete. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.

 

4.

Pro Forma Adjustments

Adjustments to the pro forma financial statements are limited to those that reflect the accounting for the merger transaction in accordance with US GAAP. The pro forma financial statements give effect to the merger transaction as if it had occurred on December 31, 2020 for purposes of the pro forma balance sheet and January 1, 2020 for purposes of the pro forma statement of net loss.

The pro forma adjustments are as follows:

A – Purchase price

Records the purchase price consideration, which is the fair value of the equity interests hypothetically issued by Aphria to acquire Tilray (note 2).

 

6


B – Equity

Eliminates Tilray’s historical equity balances and reallocates Aprhia’s equity balances so the equity structure appearing in the pro forma balance sheet reflects the legal equity structure of Tilray, including the equity interests issued by Tilray to effect the merger transaction.

The following table summarizes how the equity balances in the pro forma balance sheet were determined:

 

     Common stock     Additional
paid-in capital
    Warrants      Accumulated other
comprehensive
income
    Accumulated
deficit
    Total  

Aphria as at November 30, 2020

   $ 1,601,853     $ 34,181     $ 277      $ (309   $ (243,969   $ 1,392,033  

Total estimated purchase price (note 2, 4A)

     26       3,381,263       —          —         —         3,381,289  

Tilray as at December 31, 2020

     16       1,095,781       —          8,205       (730,103     373,899  

Eliminate Tilray as at December 31, 2020

     —         (1,095,781     —          (8,205     730,103       (373,883

Reallocate balance to reflect Tilray structure

     (1,601,853     1,601,837          —         —         (16

Equity component of Tilray convertible notes (note 4I)

     —         1,390       —          —         —         1,390  

Accumulated deficit impact of pro forma adjustments (note 4K, 4L, 4M)

     —         —         —          —         (52,511     (52,511

Pro forma - December 31, 2020

   $ 42     $ 5,018,671     $ 277      $ (309   $ (296,480   $ 4,722,201  

The $26 pro forma balance as part of the total estimated purchase price represents the $0.0001 par value of the estimated 265,504,347 of Tilray Class 2 common stock issued on the merger transaction.

C – Inventory

Increases Tilray’s inventory to a fair value of approximately $121,000, an increase of $27,355 from the carrying value. The fair value was determined based on the estimated selling price of the inventory, less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. After the merger transaction, the $27,355 step-up in inventory value will increase cost of sales over the following twelve months as the inventory is sold, which is reflected in the pro forma statement of net loss and represents a nonrecurring charge. The fair value calculation is preliminary and subject to change.

D – Property and equipment

Increases Tilray’s property and equipment to an estimated fair value of approximately $201,049, an overall increase of $1,490 from the carrying value. The overall increase represents an estimated increase of $2,110 relating to finance lease right-of-use assets (note 4E) offset by an estimated decrease of $620 to property and equipment. The estimated useful lives, excluding land, range from 4 to 27 years. The estimated fair value of property and equipment, excluding finance lease right-of-use assets is determined primarily using an income approach, which requires a forecast of expected future cash flows. After the merger transaction, the estimated impact of the combined change in the value and useful lives of property and equipment will be an estimated decrease in depreciation expense in the pro forma statement of net loss recognized through a $56 decrease in cost of sales and $798 decrease in depreciation and amortization expense. The estimated fair value and estimated useful life calculations are preliminary and subject to change.

 

7


The following table summarizes the changes in the estimated depreciation expense for property and equipment including finance lease right-of-use assets in the pro forma statement of net loss based on a straight-line method of depreciation:

 

Estimated annual depreciation expense:

  

Included in cost of sales

   $ 4,876  

Included in depreciation and amortization expenses

     1,922  

Historical depreciation expense:

  

Included in cost of sales

     4,932  

Included in depreciation and amortization expenses

     2,720  

Pro forma decrease to depreciation expense:

  

Decrease included in cost of sales

     (56

Decrease included in depreciation and amortization expenses

     (798

The preliminary estimates of fair value and estimated useful lives will likely differ from the final amounts after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying pro forma financial statements. A 10% change in the estimated fair value of property and equipment, excluding finance lease right-of-use assets, would cause a corresponding increase or decrease in the balance of goodwill. A 10% change would also cause the annual depreciation expense in the pro forma statement of net loss to increase or decrease by approximately $646, assuming a weighted average useful life of depreciable property and equipment of 18.4 years.

E – Leases

Included in Tilray’s property and equipment carrying value (note 4D) is $13,167 related to finance lease right-of-use assets. The carrying value has been adjusted to the corresponding carrying value of finance lease liabilities of $15,277, resulting in a pro forma increase of $2,110. The corresponding impact to depreciation expense is included in property and equipment (note 4D). The carrying value of Tilray’s operating lease right-of-use assets has been adjusted to the corresponding carrying value of operating lease liabilities of $18,259, resulting in a pro forma increase of $274. The finance and operating lease liabilities, and corresponding right-of-use assets may differ from the final amounts after completing the detailed incremental borrowing rate analysis.

F – Intangible assets

Increases Tilray’s intangible assets to an estimated fair value of approximately $1,063,000, an increase of $876,555 from the carrying value. As part of the preliminary valuation analysis, the identified intangible assets include distribution channels, customer relationships, know how, developed technology, licenses, brands and trademarks. The fair value of identifiable intangible assets is determined primarily using an income approach, which requires a forecast of expected future cash flows. For purposes of the preliminary fair value, the mid point of the estimated range has been used. After the merger transaction, the $876,555 increase in the value of intangible assets will increase amortization expense over the respective estimated useful lives, which is reflected in the pro forma income statement through a $27,898 increase in depreciation and amortization expenses.

The following table summarizes the estimated fair values (mid point) of Tilray’s identifiable intangible assets and, where applicable, their estimated useful lives:

 

     Estimated fair value      Estimated useful life
(years)
 

Definite-lived intangible assets

     

Distribution channels

   $ 137,000        15  

Customer relationships

     85,000        15  

Know how

     47,000        2  

Developed technology

     6,000        10  
     275,000     

Indefinite-lived intangible assets

     

Licenses

     660,000        Indefinite  

Brands

     116,000        Indefinite  

Trademarks

     12,000        Indefinite  
     788,000     
   $ 1,063,000     

 

8


The following table summarizes the changes in the estimated amortization expense recorded to depreciation and amortization expense in the pro forma statement of net loss based on a straight-line method of amortization:

 

Estimated annual amortization expense

   $ 38,900  

Historical amortization expense

     11,002  

Pro forma increase to amortization expense

   $ 27,898  

The preliminary estimates of fair value and estimated useful lives will likely differ from the final amounts after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying pro forma financial statements. A 10% change in the estimated fair value of intangible assets would cause a corresponding increase or decrease in the balance of goodwill. A 10% change would also cause the annual amortization expense in the pro forma statement of net loss to increase or decrease by approximately $3,890, assuming an overall weighted average useful life of definite-lived intangible assets of 12.7 years.

G – Goodwill

Adjusts goodwill in the pro forma balance sheet as follows:

 

Reversal of Tilray’s historical goodwill

   $ (166,915

Goodwill recognized in purchase accounting

     2,589,611  

Pro forma increase to goodwill

   $ 2,422,696  

H – Warrant liability

Increases Tilray’s warrant liability to an estimated fair value of approximately $296,032, an increase of $175,385 from the carrying value to reflect the estimated fair value at the Measurement Date. The 19,000,000 outstanding warrants at December 31, 2020 are reduced for the additional exercise of 6,290,000 warrants at a price of $5.95 from January 1, 2021 to the Measurement Date. The resulting increase in cash on exercise of $37,426 is an adjustment to the carrying value of cash in the purchase price allocation. The remaining 12,710,000 warrants outstanding on the Measurement Date have an estimated fair value of $23.29 per warrant, using Tilray’s market share price on the Measurement Date as an input.

I – Convertible notes

Adjusts the carrying value of the liability component of the convertible notes from $257,789 in Tilray’s historical balance sheet to an estimated fair value of $234,789, a decrease of $23,000. The fair value is determined using the expected cash flows, discounted by the estimated interest rate of similar nonconvertible debt based on current market rates. The combined instrument’s fair value of $236,179 is adjusted to present the equity component of $1,390 in equity (note 4B), with the remaining $234,789 recorded as a liability. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The adjusted debt discount is to be amortized as additional non-cash interest expense over the remaining term of the convertible notes using the interest method with an effective rate of 11.7 % per annum.

 

9


The following table summarizes the changes in the estimated interest expense related to convertible notes:

 

     Historical annual
interest expense
     Estimated annual
interest expense
     Pro Forma
(decrease)
increase to
interest
expense
 

Contractual coupon interest

   $ 22,929      $ 13,893      $ (9,036

Amortization of discount

     7,863        14,095        6,232  

Amortization of transaction costs

     2,454        —          (2,454

Total interest expense related to convertible notes

   $ 33,246      $ 27,988      $ (5,258

J – Long-term debt

Adjusts the carrying value of Tilray’s Senior Facility from $48,478 in Tilray’s historical balance sheet to $50,498, an increase of $2,028. The adjustment reflects removal of the unamortized transaction costs which are not recognized in a business combination.

The following table summarizes the changes in the estimated interest expense related to the Senior Facility:

 

     Historical annual
interest expense
     Estimated annual
interest expense
     Pro forma
increase
(decrease) in
interest expense
 

Contractual interest at Canadian prime plus 8.05%

   $ 4,257      $ 5,302      $ 1,045  

Amortization of transaction costs

     1,372        —          (1,372

Total interest expense related to Senior Facility

   $ 5,629      $ 5,302      $ (327

K – Transaction costs

Recognizes in both the pro forma balance sheet and pro forma statement of net loss $33,841 of nonrecurring transaction costs directly related to the merger transaction that are expected to be incurred by Aphria and Tilray subsequent to November 30, 2020 and December 31, 2020, respectively.

The following table summarizes the nonrecurring transaction costs related to the merger transaction included in general and administrative expenses in the pro forma statement of net loss:

 

     Aphria      Tilray      Total  

Expensed in historical financial statements

   $ 955      $ 2,232      $ 3,187  

Accrued in pro forma adjustment

     23,212        10,629        33,841  

Total recognized in pro forma statement of net loss

   $ 24,167      $ 12,861      $ 37,028  

L – Compensation arrangements

Recognizes in both the pro forma balance sheet and pro forma income statement $6,823 of nonrecurring compensation costs related to severance payments and retention payments. This pro forma adjustment excludes any related severance or other compensation costs which may be triggered upon an announcement of a new executive team or other headcount restructuring that may result from the merger transaction.

The following table summarizes the nonrecurring compensation costs related to the merger transaction included in the pro forma income statement:

 

     Aphria      Tilray      Total  

Expensed in historical financial statements

   $ —        $ —        $ —    

Accrued in pro forma adjustment

     —          6,823        6,823  

Total recognized in pro forma statement of net loss

   $ —        $ 6,823      $ 6,823  

 

10


Also recognizes in the pro forma statement of net loss is compensation costs related to the difference between Tilray’s historical share-based compensation expense and the estimated share-based compensation expense related to replacement stock options and restricted stock units hypothetically issued by Aphria as consideration. The portion of the fair value of the replacement share-based awards related to compensation costs will be recognized ratably over post-merger service periods ranging from 0 to 3 years. The following table summarizes the changes in the estimated Tilray stock-based compensation expense in the pro forma statement of net loss:

 

     Historical
stock-based
compensation
expense
     Estimated
annual stock-
based

compensation
expense
     Pro forma
increase
(decrease) in
stock-based
compensation
expense
 

Cost of sales

   $ 1,568      $ 3,054      $ 1,486  

General and administration expenses

     20,491        12,993        (7,499

Sales and marketing

     6,729        —          (6,729

Research and development expenses

     922        1,129        207  

Total stock-based compensation expense

   $ 29,710      $ 17,176      $ (12,535

The total pro forma adjustment to stock-based compensation expense excludes the impact of accelerated vesting of Aphria’s stock-based awards that is subject to the approval by the Aphria Board, which has not yet occurred.

M – Income taxes

The pro forma income tax adjustments to the pro forma balance sheet results in an overall increase in the deferred income tax liability of $214,450 relating to the following:

 

   

Increase of $202,603 related to Tilray’s increase in taxable temporary differences due primarily to fair value increases in inventory, property and equipment, and intangibles, offset by a partial reversal of the valuation allowance on net operating losses carrying forward in several legal entities and jurisdictions; and

 

   

Increase of $11,847 related to restrictions on Aphria’s losses in several legal entities and jurisdictions, and valuation allowances due to the impact of the merger transaction.

The pro forma income tax adjustments to the pro forma statement of net loss are comprised of the following amounts:

 

(a)

Tax impact of pro forma adjustments:

 

Tax impact of pro forma adjustments    Increase
(decrease)
     Deferred tax
expense
(recovery)
 

C - Inventory (cost of sales)

   $ 27,355      $ (2,227

D - Property and equipment (depreciation expense)

     (854      226  

F - Intangible assets (amortization expense)

     27,898        (7,532

I - Convertible debt (interest expense)

     (5,258      —    

J - Long-term debt (interest expense)

     (327      —    

K - Transaction costs

     33,841        —    

L - Compensation

     (5,712      —    
     76,944        (9,533

M - Income taxes—benefit of current year losses

     —          (6,678
   $ 76,944      $ (16,211

 

11


The $16,211 deferred tax recovery is comprised of the following:

 

   

$9,533 which relates to the tax-effect of pro-forma adjustments, C, D, F. The remaining pro-forma statement of loss adjustments are not tax-effected due to the amounts being non-deductible for tax purposes, or the benefit of the deductible expense cannot be recognized due to a valuation allowance in the legal entity and jurisdiction to which it relates; and

 

   

$6,678 which relates to the deferred tax asset that can be recognized for a portion of the current period loss.

 

(b)

Reversal of $3,242 of deferred tax recoveries recorded by Aphria during the twelve months ended November 30, 2020 which would either not be eligible for recovery or require a valuation allowance as a result of the merger transaction.

 

5.

Pro Forma Loss Per Share

 

Historical Tilray basic weighted average shares at December 31, 2020

     126,041,710  

Adjustment for warrants exercised at Measurement Date (note 3, note 4H)

     6,290,000  

Incremental shares issued in merger transaction (note 4B)

     265,504,347  

Pro forma combined basic and diluted weighted average shares

     397,836,057  

On a pro forma basis, the combined company incurred a net loss for the year ended December 31, 2020. As such, all potential shares are excluded from the calculation of pro forma diluted loss per share because they are anti-dilutive.

 

6.

Adjustments to the Historical Financial Information of Aphria

The historical financial information of Aphria was prepared in accordance with IFRS as issued by the IASB and presented in CAD. Aphria’s fiscal year end is May 31 and historical financial information was used to present pro forma financial statements based on the fiscal year of Tilray being December 31. Reclassification adjustments have been made to Aphria’s historical financial information to comply with Tilray’s presentation which resulted in a net impact of $nil on the net loss for the period presented and on the adjusted unaudited condensed consolidated statement of financial position of Aphria.

The historical financial information was translated from CAD to USD using the following historical exchange rates:

 

     CAD to USD  

Period end exchange rate as at November 30, 2020

     0.7698  

Average exchange rate for the year ended November 30, 2020

     0.7439  

Average exchange rate for the six months ended November 30, 2020

     0.7516  

Average exchange rate for year ended May 31, 2020

     0.7460  

Average exchange rate for the six months ended November 30, 2019

     0.7561  

 

12


The table below presents the conversion from IFRS to US GAAP adjustments as well as the presentation and reclassification adjustment which had a $nil impact on the total assets, liabilities and deficit accounts and translation of Aphria’s adjusted unaudited condensed consolidated statement of financial position as at November 30, 2020:

Adjusted Unaudited Condensed Consolidated Statement of Financial Position (Balance Sheet) of Aphria

(in ‘000)

 

     IFRS                  US GAAP  
     As at November
30, 2020

CAD
    IFRS to US
GAAP
differences
CAD
    Notes
(note 6)
     As at November 30,
2020
CAD
    Presentation
reclassification
CAD
    Adjusted
presentation
CAD
    Adjusted
presentation
USD
 

Assets

               

Current assets:

               

Cash and cash equivalents

   $ 187,997     $ —          $ 187,997     $ —       $ 187,997     $ 144,713  

Accounts receivable, net

     96,177       —            96,177       —         96,177       74,034  

Inventory

     321,484       (112,442     i        209,042       18,063       227,105       174,817  

Biological assets

     28,952       (10,889     i        18,063       (18,063     —         —    

Prepayments and other current assets

     48,162       15,704       vi        63,866       9,371       73,237       56,375  

Current portion of convertible notes receivable

     9,371       —            9,371       (9,371     —         —    

Total current assets

     692,143       (107,627        584,516       —         584,516       449,939  

Property and equipment, net

     655,114       (6,650     iii        648,464       —         648,464       499,164  

Operating lease, right-of-use assets

     —         7,006       iii        7,006       —         7,006       5,393  

Intangible assets, net

     686,440       —            686,440       —         686,440       528,397  

Goodwill

     752,289       (1,200     vii        751,089       —         751,089       578,161  

Other investments

     21,815       —            21,815       —         21,815       16,792  

Other assets

     —         —            —         3,000       3,000       2,309  

Promissory notes receivable

     3,000       —            3,000       (3,000     —         —    

Total assets

   $ 2,810,801     $ (108,471      $ 2,702,330     $ —       $ 2,702,330     $ 2,080,155  

Liabilities

               

Current liabilities

               

Bank indebtedness

     5,111       —            5,111       —         5,111       3,934  

Accounts payable

     —         —            —         81,411       81,411       62,667  

Accrued expenses and other current liabilities

     —         —            —         152,646       152,646       117,501  

Accounts payable and accrued liabilities

     254,318       (20,261     ii        234,057       (234,057     —         —    

Income taxes payable

     16,576       —            16,576       —         16,576       12,760  

Accrued lease obligations

     1,767       —            1,767       —         1,767       1,360  

Current portion of long-term debt

     15,210       —            15,210       —         15,210       11,708  

Total current liabilities

     292,982       (20,261        272,721       —         272,721       209,930  

Accrued lease obligations

     44,896       —            44,896       —         44,896       34,560  

Deferred tax liability

     45,391       (15,061     vi        30,330       —         30,330       23,347  

Long-term debt

     122,533       —            122,533       —         122,533       94,321  

Convertible notes, net of issuance costs

     358,008       —            358,008       —         358,008       275,581  

Total liabilities

   $ 863,810     $ (35,322      $ 828,488     $ —       $ 828,488     $ 637,739  

Shareholders’ equity

               

Share capital

     2,078,343       2,624       ii        2,080,967       (2,080,967     —         —    

Common stock

     —         —            —         2,080,967       2,080,967       1,601,853  

Additional paid-in capital

     —         —            —         44,404       44,404       34,181  

Warrants

     360       —            360       —         360       277  

Share-based payment reserve

     29,600       14,804       ii        44,404       (44,404     —         —    

Accumulated other comprehensive income

     —         —            —         (402     (402     (309

Accumulated other comprehensive loss

     (211     (191     v        (402     402       —         —    

Accumulated deficit

     (215,739     (92,472     i        (316,940     —         (316,940     (243,969
       2,833       ii           
       262       iii           
       (10,815     iv           
       191       v           
       (1,200     vii           

Total stockholders’ equity

   $ 1,892,353     $ (83,964      $ 1,808,389     $ —       $ 1,808,389     $ 1,392,033  

Non-controlling interests

     54,638       10,815       iv        65,453       —         65,453       50,383  
     1,946,991       (73,149        1,873,842       —         1,873,842       1,442,416  

Total liabilities and stockholders’ equity

   $ 2,810,801     $ (108,471      $ 2,702,330     $ —       $ 2,702,330     $ 2,080,155  

 

13


Adjusted Unaudited Condensed Consolidated Statement of Operations (Statement of Loss) of Aphria

(in ‘000)

 

     IFRS                  US GAAP  
     Year ended
May 31,
2020
CAD
    6 months
ended
November 30,
2019
CAD
    6 months
ended
November 30,
2020
CAD
    12 months
ended
November 30,
2020
CAD
    IFRS to
US

GAAP
differences
CAD
    Notes
(note 6)
     12 months
ended
November 30,
2020
CAD
    Presentation
reclassification
CAD
    12 months
ended
November 30,
2020
CAD
    12 months
ended
November 30,
2020
USD
 

Revenue

   $ —       $ —       $ —       $ —       $ —          $ —       $ 634,459     $ 634,459     $ 471,963  

Cannabis revenue

     204,736       —         —         204,736       —            204,736       (204,736     —         —    

Distribution revenue

     369,214       —         —         369,214       —            369,214       (369,214     —         —    

Insurance recovery

     1,000       —         —         1,000       —            1,000       (1,000     —         —    

Excise taxes

     (31,611     —         —         (31,611     —            (31,611     31,611       —         —    

Net revenue

     —         246,712       306,221       59,509       —            59,509       (59,509     —         —    

Cost of sales

     —         —         —         —         —            —         472,157       472,157       351,229  

Production costs

     64,972       —         —         64,972       500       i        65,472       (65,472     —         —    

Cost of cannabis purchased

     21,920       —         —         21,920       —            21,920       (21,920     —         —    

Cost of goods purchased

     322,688       —         —         322,688       —            322,688       (322,688     —         —    

Cost of goods sold

     —         188,670       219,136       30,466       —            30,466       (30,466     —         —    

Fair value adjustment on sale of inventory

     57,039       19,677       57,556       94,918       (94,918     i        —         —         —         —    

Fair value adjustment on growth of biological assets

     (115,255     (46,645     (85,242     (153,852     153,852       i        —         —         —         —    

Gross profit

     191,975       85,010       114,771       221,736       (59,434        162,302       —         162,302       120,734  

General and administrative expenses

     99,977       44,381       56,144       111,740       1,667       iii        113,407       37,248       150,655       112,069  

Sales and marketing expenses

     —         —         —         —         —            —         61,460       61,460       45,719  

Selling

     21,042       7,642       14,751       28,151       —            28,151       (28,151     —         —    

Marketing and promotion

     20,464       12,426       11,380       19,418       —            19,418       (19,418     —         —    

Research and development expenses

     2,568       1,282       428       1,714       —            1,714       —         1,714       1,275  

Stock-based compensation

     22,500       12,519       17,856       27,837       (6,659     ii        21,178       (21,178     —         —    

Depreciation and amortization expenses

     21,747       10,904       11,056       21,899       (1,569     iii        20,330       —         20,330       15,123  

Impairment of assets

     63,971       —         —         63,971       75       iii        64,046       —         64,046       47,643  

Acquisition-related expenses, net

     5,763       1,426       25,624       29,961       —            29,961       (29,961    

Operating loss

     (66,057     (5,570     (22,468     (82,955     (52,948        (135,903     —         (135,903     (101,095

Foreign exchange loss (gain), net

     —         —         —         —         —            —         7,797       7,797       5,800  

Interest expense, net

     26,347       10,263       13,277       29,361       (391     iii        28,970       —         28,970       21,550  

Other expense (income), net

     —         —         —         —         —            —         111,636       111,636       83,044  

Non-operating (income) expense, net

     (11,687     (24,871     107,119       120,303       (870     v        119,433       (119,433     —         —    

Loss before income taxes

     (80,717     9,038       (142,864     (232,619     (51,687        (284,306     —         (284,306     (211,489

Deferred income tax recoveries

     —         —         —         —         (15,788     vi        (15,788     (38,715     (54,503     (40,544

Current income tax expenses

     —         —         —         —         —            —         24,993       24,993       18,592  

Income taxes expense (recoveries)

     3,917       526       (17,171     (13,780     58       vi        (13,722     13,722       —         —    

Net loss

   $ (84,634   $ 8,512     $ (125,693   $ (218,839   $ (35,957      $ (254,796   $ —       $ (254,796   $ (189,537

 

14


IFRS differs in certain material respects from US GAAP. The following material adjustments have been made to reflect Aphria’s historical consolidated statement of loss on a US GAAP basis for purposes of the unaudited pro forma financial information (expressed in thousands of CAD), these adjustments are before certain reclassification adjustments:

i – Inventory and biological assets

Cannabis plants are accounted for as biological assets and agricultural products under IFRS and US GAAP, respectively. Under IFRS, biological assets are accounted for at fair value less costs to sell and are revalued at each subsequent reporting date up to the point of harvest, upon which time they are transferred into inventories. Any change in fair value is recognized in the period of change within profit or loss. Under US GAAP, agricultural products are accounted for at cost in accordance with guidance on property, plant and equipment or inventories depending on their nature.

The following table reflects the removal of the fair value adjustment that was included in the cost basis of inventories and biological assets under IFRS to reflect cannabis plants at cost in accordance with Accounting Standards Codification 330, Inventory as required under US GAAP and includes a corresponding impact to accumulated deficit:

 

     As at November 30,
2020
CAD
 

Inventory

   $ (112,442

Biological assets

     (10,889

Accumulated deficit, net of tax of $30,859

     (92,472

The following table reflects the removal of the changes in fair value recognized in the period of change within the statement of operations:

 

     Year ended
May 31, 2020
CAD
     6 months ended
November 30, 2019
CAD
     6 months ended
November 30, 2020
CAD
     12 months ended
November 30, 2020
CAD
 

Production costs

   $ 5,000      $ 4,500      $ —        $ 500  

Fair value adjustment on sale of inventory

     (57,039      (19,677      (57,556      (94,918

Fair value adjustment on growth of biological assets

     115,255        46,645        85,242        153,852  

 

15


ii – Share-based payments

Under US GAAP, Restricted Stock Units (“RSUs”) and Deferred Stock Units (“DSUs”) that can be settled in either cash or equity at the option of Aphria should be classified as equity. Currently, Aphria classifies its RSUs and DSUs as liabilities. Under US GAAP, Aphria measures and recognizes compensation expense for these awards on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards based on their grant date fair value.

The following table reflects the removal of the RSU and DSU liability in accounts payable and accrued liabilities and the reclassification of the awards to equity:

 

     As at November 30,
2020
CAD
 

Accounts payable and accrued liabilities

   $ (20,261

Share capital

     2,624  

Share-based payment reserve

     14,804  

Accumulated deficit

     2,833  

This adjustment also reflects the impact to share-based compensation of C$1,735 for the year ended May 31, 2020; C$879 for the six months ended November 30, 2019; (C$7,515) for the six months ended November 30, 2020, for a total adjustment of (C$6,659) for the twelve months ended November 30, 2020.

iii – Leases

Under US GAAP, at lease commencement, a lessee classifies a lease as a finance lease or an operating lease (unless the short-term lease recognition exemption is elected). Under IFRS, lessees do not classify leases and all leases are treated under a single model (unless the short-term leases or leases of low-value asset recognition exemptions are elected). For operating leases under US GAAP, the subsequent measurement of the lease liability is based on the present value of the remaining lease payments using the discount rate determined at lease commencement (which would result in the same amount of lease liability as in IFRS), while the right-of-use asset is remeasured at the amount of the lease liability, adjusted for the remaining balance of any lease incentives received, cumulative prepaid or accrued rents, unamortized initial direct costs and any impairment. This treatment under US GAAP generally results in straight-line expense being incurred over the lease term and recorded to general and administrative expenses. IFRS generally yields front-loaded expense recognition. Under IFRS, a constant interest rate is applied to the lease liability, interest expense decreases as cash payments are made during the lease term and the lease liability decreases. Therefore, more interest expense is incurred in the early periods and less in the later periods. This trend in the interest expense, combined with straight-line depreciation of the right-of-use asset, results in a front-loaded expense recognition pattern.

The following table reflects the adjustments to the right-of-use asset for operating leases under US GAAP, the corresponding impact to accumulated deficit and reclassifies the right-of-use asset from property and equipment, net to operating lease, right-of-use assets:

 

     As at November 30,
2020
CAD
 

Operating lease, right-of-use assets

   $ 7,006  

Property and equipment, net

     (6,650

Accumulated deficit, net of tax of $94

     262  

For the operating leases under US GAAP, the following table reflects the removal of amortization and interest expense recognized under IFRS and instead includes the straight-line operating lease expense as calculated under US GAAP in general and administrative expenses. Furthermore, additional impairment was recognized for the year ended May 31, 2020 under US GAAP for leases that were fully impaired under IFRS as a result of the adjustments to the associated right-of-use assets:

 

     Year ended
May 31, 2020
CAD
     6 months ended
November 30, 2019
CAD
     6 months ended
November 30, 2020
CAD
     12 months ended
November 30, 2020
CAD
 

General and administrative expenses

   $ 1,512      $ 630      $ 785      $ 1,667  

Depreciation and amortization expenses

     (1,455      (606      (720      (1,569

Impairment of assets

     75                      75  

Interest expense, net

     (380      (161      (172      (391

 

16


iv – Non-controlling interest on acquisition

Under US GAAP, non-controlling interest is measured at fair value on acquisition date. Under IFRS, Aphria measures non-controlling interest at the proportionate share of the fair value of the acquiree’s net identifiable assets and goodwill recorded on consolidation by Aphria would only reflect the acquirer’s share. This approach does not exist under US GAAP and the adjustment reflects the increase in non-controlling interests and accumulated deficit of C$10,815 as of November 30, 2020.

v – Investments in debt securities

US GAAP requires the use of three categories for the classification and measurement of debt securities based on the entity’s investment intent: held-to-maturity (“HTM”) - measured at amortized cost, trading - measured at fair value through profit or loss (“FVTPL”), available-for-sale (“AFS”) - measured at fair value through other comprehensive income (“FVOCI”). Under US GAAP, Aphria will classify its investments in debt securities as available-for-sale, measured at FVOCI. Since amounts were previously recognized at FVTPL under IFRS, this will result in a presentation reclassification difference.

This adjustment reflects the reversal of gains and losses recorded by Aphria for its investments in debt securities from non-operating income (expense), net into other comprehensive income of (C$7,341) for the year ended May 31, 2020; (C$6,939) for the six months ended November 30, 2019; (C$468) for the six months ended November 30, 2020, for a total adjustment of (C$870) for the twelve months ended November 30, 2020. This also results in a reclassification of amounts recognized in accumulated deficit to accumulated other comprehensive loss of C$191 as of November 30, 2020.

vi – Income taxes

For the purposes of the IFRS to US GAAP adjustments Aphria’s effective income tax rate was 26.5% for the year ended May 31, 2020, for the six months ended November 30, 2020 and for the six months ended November 30, 2019. The effective income tax rate was used in determining adjustments to:

 

   

Deferred tax liability of (C$15,061) as of November 30, 2020 as a result of the removal of the fair value adjustment of (C$30,859) from biological assets and inventory offset by an increase to the right-of-use asset under US GAAP C$94 and a reclassification of income taxes on intercompany transfers of inventory of C$15,704 that remain within the consolidated group from Deferred tax liability to Prepayments and other current assets. Under US GAAP, income tax expense paid by the transferor on intercompany profits from the transfer or sale of inventory within a consolidated group are deferred on consolidation, resulting in the recognition of a prepaid asset for the taxes paid rather than deferred taxes as required under IFRS.

 

   

Deferred income tax recoveries of C$15,179 for the year ended May 31, 2020; C$7,070 for the six months ended November 30, 2019; C$7,679 for the six months ended November 30, 2020, for a total adjustment of C$15,788 for the twelve months ended November 30, 2020 as a result of the removal of the fair value adjustments from biological assets and inventory under US GAAP.

 

   

Income taxes of C$66 for the year ended May 31, 2020; C$36 for the six months ended November 30, 2019; C$28 for the six months ended November 30, 2020, for a total adjustment of C$58 for the twelve months ended November 30, 2020 as a result of decreases to operating lease expense under US GAAP.

vii – Cannway Pharmaceuticals Inc.

In the fiscal year ending May 31, 2016, Aphria acquired 100% of the issued and outstanding shares of Cannway Pharmaceuticals Inc. Under IFRS, Aphria treated this transaction as a business combination and accordingly recorded goodwill of C$1,200. Under US GAAP, the transaction did not meet the definition of a business and is considered an asset acquisition. This adjustment reflects the removal of goodwill and includes a corresponding impact to accumulated deficit as the asset is fully amortized as of November 30, 2020.

 

17

Exhibit 99.2

Company Overview

 

 

We are a leading global cannabis-lifestyle consumer packaged goods company, with operations in Canada, the United States, Europe and Latin America, that is changing people’s lives for the better – one person at a time – by inspiring and empowering the worldwide community to live their very best life by providing them with products that meet the needs of their mind, body and soul and invoke a sense of wellbeing. Our mission is to be the trusted partner for our patients and consumers by providing them with a cultivated experience and health and wellbeing through high-quality, differentiated brands and innovative products. Headquartered in Leamington, Ontario, we cultivate, process, market and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products in Canada under the provisions of the Cannabis Act and globally pursuant to applicable international regulations. We also manufacture, market and sell alcoholic beverages in the United States.

Aphria Inc. exists under the laws of the Business Corporations Act (Ontario) and our common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“TSX”) in Canada and the Nasdaq Global Select Market (“Nasdaq”) in the U.S.

Core Mission and Values

We are committed to changing people’s lives for the better by investing in our products, our people and our planet. In an emerging and constantly evolving industry, our values unite us, informing and inspiring the way we work with our employees, patients, consumers and one another. The following core values serve as our compass in our strategic direction and decisions:

We put people first

We are committed to significantly improving the lives of as many people as possible – whether it is meeting the needs of our patients and consumers, building a best-in-class, diverse workforce that’s more representative of all people or giving back and supporting our neighbours in the communities where we make our home – we continuously seek to help others live their very best life.

We lead by example

We are passionate about pushing our industry forward in a responsible manner. We believe that we should use our influence in helping to establish industry standards that continue to support the health and wellbeing of our employees, our patients and consumers and the communities in which we call home. As a purpose-driven organization, we continuously explore ways to deliver on our values and commitments to serve all our key stakeholders including our shareholders.

We respect the earth

As a conscientious company, we are committed to ensuring that our actions and those of our employees have a positive impact on the environment around us. We are proud to employ – and continuously improve – sustainable growing and business practices to provide efficiencies, cost reduction benefits and lessen our impact on the environment.

We take responsibility to heart

We believe it is our responsibility to ensure the safety of our employees, patients, consumers and the worldwide community. Our partnerships and programs reflect our ongoing commitment to the safety of our worldwide communities through education, responsible use and meaningful corporate citizenship. We are also committed to ensuring ample access to legal, safe, high-quality cannabis products to help eliminate the illicit market and keep cannabis out of the hands of youth.

 

   

LOGO

  


Strategy and Outlook

Our overall strategy is to leverage our scale, expertise and capabilities to drive market share in Canada and internationally, achieve industry-leading, profitable growth and build sustainable, long-term shareholder value. We are focused on maximizing growth in net revenue and profitability in our identified core markets in Canada, the United States, Germany and Latin America. In order to ensure the long-term sustainable growth of our Company, we continue to focus on developing strong capabilities in consumer insights, drive category management leadership and assess growth opportunities with the introduction of innovative new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial position.

Within Canada, we are focused on gaining market share in the Canadian cannabis industry by executing on our strategic priorities through entering new product categories that possess the most consumer demand, while leveraging our expertise to develop brands that are truly differentiated from our competitors, investing in brand building and innovation activities and optimizing our production to continue to be the high-quality, low-cost producer we are today.

Internationally, we are focused on business activities that provide a return on investment in the near term without being capital intensive. We intend to continue to maximize the utilization of our existing assets and investments in connection with the development and execution of our growth plans, while leveraging our cannabis expertise and well-established Aphria medical brand. By building on this foundation, we strive to take a leadership position in the international cannabis industry.

Within the U.S., we are focused on leading the craft beer segment in the U.S., including growing our SweetWater brand through expanding distribution within the U.S., focusing on new product development and innovation and building brand awareness of, and equity in, our existing adult-use cannabis brands in the U.S. ahead of federal legalization of cannabis by leveraging the SweetWater manufacturing and distribution infrastructure.

Canadian Cannabis Business2

Medical

In 2014, we were among the first companies to be permitted to cultivate and sell legal medical cannabis. Since then, we grew to be one of the top Canadian providers of medical cannabis with operations in multiple international markets.

We are committed to meeting the needs of our patients whether they are looking for more natural options for their medical needs, exploring their options in wellness, or seeking alternatives in their lifestyle. We are driven by a desire to help others live their very best life. This includes continuous product development on different methods of administering cannabis products through oil, softgels, vapes and eventually edibles and other derivatives, as well as being proactive in aiding patients with difficulties obtaining the required medical care by partnering with them on their healthcare journey.

Accessibility is a top priority for Aphria. We are committed to ensuring patients have access to the medication they depend on through a strong supply chain and dedicated support through our dedicated patient care team. We also understand some patients may have barriers that can impact their financial wellbeing. To help, we offer various financial support programs including a Compassionate Pricing Program for those in financial need, a Senior Pricing Program for patients 65 years of age and older and a Front-line Workers Program for those who are currently risking their lives to protect their fellow Canadians during the unprecedented COVID-19 pandemic. We also maintain a robust Veterans Program to help support veterans across Canada. In addition, the Company continues to provide access to treatment, on a compassionate basis, for a four-year-old girl in the United Kingdom; a treatment that has decreased her seizures from around thirty per day to just three or four.

We currently produce, market and distribute our medical cannabis products under the Aphria (Canada and international) and Broken Coast (Canada only) brands.

 

2

References to Canadian cannabis business include the results of Aphria One, Aphria Diamond and Broken Coast.

 

   

LOGO

  


      

 

LOGO

 

Since 2014, the Aphria brand has been a leading, trusted choice for patients seeking high-quality pharmaceutical-grade medical cannabis. Today, the Aphria brand continues to be a leading brand in Canada and, we continue to leverage its market leadership as we grow our medical cannabis markets internationally under the Aphria brand.

 

LOGO

 

Medical cannabis products under the Broken Coast brand are grown in small batches in single-strain rooms, with a commitment to product quality in order to exceed patient expectations.

We continue to invest in the medical cannabis space within Canada and in international markets through the development of innovative product offerings, state-of-the-art facilities and the expansion of our global supply chain to address the unmet needs of patients around the world.

In May, the Canadian Medical Association reported that patient volumes in family practices have dropped by about 30-50%. A survey of over 1,700 Canadians conducted by the Angus Reid Institute found that 23%3 were unable to see their doctor due to the pandemic. This decrease in access to health care led Health Canada to issue a temporary amendment that allowed patients already registered with a licensed producer whose medical document expires between March 13, 2020 and September 20, 2020 to extend their medical document for 6 months without the authorization of a Health Care Practitioner. While this amendment helped patients that are currently registered patients, it did not help address the access issue for patients that were seeking access to medical cannabis for the first time during the COVID-19 pandemic.

Canadian Adult-Use Market Brands

We believe that our differentiated portfolio of brands, which is designed to resonate with consumers in all categories, sets us apart from our competitors and is providing us with the ability to establish a leading position in the adult-use market in Canada. Therefore, we are investing in brand building with our consumers, new product innovation, distribution, trade marketing and cannabis education to drive market share in the Canadian adult-use cannabis industry.

As the industry continues to evolve, we continue to evaluate the market and our adult-use brand portfolio in order to ensure that it continues to meet the different consumer segments that continue to emerge. In addition, we seek to leverage our vast selection of strains to offer each consumer segment a different experience through product and terpene profiles, while also focusing on the value proposition for each of these segments as it relates to price, potency and product assortment. We are also focused on gaining market share by entering new product categories that possess the most consumer demand. Today, our brands consist of B!NGO, P’tite Pof, Good Supply, Solei, RIFF and Broken Coast. Each brand is unique to a specific consumer segment and is designed to meet the needs of these targeted segments, as described below:

 

3 http://angusreid.org/covid19-medical-access/

 

   

LOGO

  


    ECONOMY BRANDS

      

       LOGO  

Everyday enjoyment

 

 

B!NGO is like a nice cold beer on a summer’s day. Our products hit the spot and gives consumers that little something that lets them enjoy the moment.

 

 

We are the everyday companion that keeps it light and simple.

    VALUE BRANDS
 

LOGO

 

Unmistakably Québécois

 

 

P’tite Pof is inspired by Québécois culture, casse-croûte signage and your local dépanneur.

 

 

 

Straightforward, functional, bold, charming and iconic. Our traditional blue and red with a modern twist.

    CORE BRANDS
   

Quality Bud. No B.S.

 

  LOGO  

Embrace the goodness of classic cannabis culture.

 

 

Good Supply is an insider brand that speaks your language and reminds you of when you first fell in love with cannabis.

 

  LOGO  

Find Your Moment

 

 

Solei Sungrown Cannabis (“Solei”) is a brand designed to embrace the bright Moments in your day.

 

 

Solei’s Moments-based products help to make cannabis simple, approachable and welcoming.

 

    PREMIUM BRANDS
  LOGO  

Elevate. Collaborate. Create.

 

 

RIFF is not your conventional cannabis brand. We are a brand by creatives for creatives.

 

 

An unconventional brand, fueled by creativity and collaboration.

 

   

LOGO

  


 

 

        

 

 

 

LOGO

 

Cultivated with Character

 

LOGO

PREMIUM+ BRANDS

 

   

West Coast, Naturally – The best bud in the world

 

  LOGO  

Authentic and effortless build on small batch growing techniques / craft approach.

 

 

Broken Coast’s reputation for its high-quality flower; aroma, bud composition, and heavy trichome appearance delivers an incredible experience.

Operations

Our Canadian cannabis business is comprised of our Aphria One and Aphria Diamond greenhouse facilities and our Broken Coast indoor cultivation facility.

 

FACILITY

   LOCATION    TYPE    PROPERTY
OWNED/LEASED
   LICENCE
EXPIRATION
   OWNERSHIP  

APHRIA ONE 5

   Leamington,
Ontario
   Cultivation, Processing,
Distribution, R&D
   Owned    March 20, 2023      100

APHRIA DIAMOND

   Leamington,
Ontario
   Cultivation    Owned    October 29, 2023      51

BROKEN COAST

   Vancouver Island,
B.C.
   Cultivation, Processing,
Distribution, R&D
   Owned    March 13, 2023      100

Cannabis Distribution

Medical Cannabis

In Canada, we distribute medical cannabis to our patients following a direct to patient model which allows us to provide patients with medical cannabis directly through our medical portal. We recently upgraded our medical portal to a state-of-the-art platform in order to provide our patients with an optimal experience and service.

 

4 

No peeking (unless you already peeked). Coming soon.

5 

Aphria One maintains a European Union Good Manufacturing Practices (“EU-GMP”) certification as an active substance manufacturer (Part II - Medical Products) issued by the Malta Medicines Authority for the supply of bulk cannabis product for medicinal use to worldwide EU-GMP-certified facilities, where permissible.

 

   

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Wholesale and Other Sales Channels

Recent changes in the Canadian market have resulted in more of our competitors moving towards an asset light model through the rationalization of their cultivation facilities. As this transition occurs, we anticipate the demand for bulk, saleable flower to increase, thereby providing new opportunities for revenue growth in the wholesale channel. Our early focus and investment in developing the capabilities for high-quality, low-cost cannabis cultivation and processing at scale provides us with the unique positioning to drive wholesale channel opportunities for revenue growth. We already completed several sales through our wholesale strategy and expect to continue to do so by building partnerships in the industry.

Canadian Adult-Use Market

We maintain supply agreements for the sale and distribution of adult-use cannabis products with all the provinces and the Yukon Territory in Canada, representing access to 99.8% of the Canadian population.

We opted to out-source the majority of our sales function by entering into an agreement with Great North Distributors Inc. (“Great North Distributors”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits, which provides us with the sales force and wholesale/retail channel expertise required to effectively and efficiently promote our cannabis products through each of the provincial/territorial cannabis control agencies.

New Cannabis Products and Accessories

At the launch of cannabis infused products (“Cannabis 2.0 ”), the Company’s primary focus was within the vape category as the Company anticipated, similar to the U.S. market, that these products would grow to represent a significant percentage of the Canadian cannabis market demand for derivatives. The current Canadian vape pen market represents approximately 15%6 of the total Canadian retail cannabis market, and the Company believes it has the potential to reach at least 20%. Additionally, vape products are aligned with the Company’s extraction capabilities and know-how. Once legislatively allowed, the Company successfully launched over 30 new vape SKUs into the Canadian market with positive reviews from control boards and consumers alike. The Company benefited from being first in the Canadian cannabis vape market, winning market share with consumers with its 510 and “all in one” branded vape products. The Company also supplies vape pods under the PAX platform for consumers who already purchased this proprietary vape componentry system.

The Company believes edibles, concentrates and beverage products will collectively represent a growing proportion of the Cannabis 2.0 market and developed a strategy to meet this demand.

United States Operations

 

 

Beverage Alcohol Business

The Company recently acquired U.S.-based independent craft brewer, SweetWater Brewing Company, LLC. SweetWater is one of the largest independent craft brewers in the U.S. based on volume. Beginning with the flagship 420 beverage offerings, SweetWater has created an award-winning lineup of year-round, seasonal and specialty beers, a portfolio of brands closely aligned with a cannabis lifestyle. We will seek to expand SweetWater’s presence in the U.S. and internationally and grow its product offerings within the beverage alcohol industry. In addition, we seek to build brand awareness of, and equity in, our existing adult-use cannabis brands in the U.S. ahead of federal legalization by leveraging SweetWater’s manufacturing and distribution infrastructure.

 

6 Per Headset reporting data – October 2020

 

   

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SweetWater Brand

We believe that the SweetWater product offerings, including the 420 Strain series of products, resonate as a cannabis lifestyle brand. In addition to branding, SweetWater’s various 420 strains of craft brews use plant-based terpenes and natural hemp flavours that, when combined with select hops, emulate the flavours and aromas of popular cannabis strains, to appeal to a loyal consumer base that made the 420 Strain G13 IPA SweetWater’s #2 best-selling beer and #1 best-selling new craft beer in the U.S.

 

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Operations

Our U.S. craft beer operations are concentrated today in Atlanta, Georgia, in a 158,000 square foot brewhouse and taproom, that is leased through 2040. The real estate lease includes an option to purchase for the first three years and thereafter a right of first refusal on sale of the real estate.

The brewhouse is capable of brewing approximately 400,000 barrels of craft beer a year, and SweetWater sold approximately 230,000 barrels in the twelve month period ended November 30, 2020.

Distribution

In the U.S., our craft beer is distributed under a three-tier model utilized for beverage alcohol. Distribution points include approximately 29,000 off-premises retail locations ranging from independent bottle shops to national chains. SweetWater’s significant on-premises business allows consumers to enjoy its varietals in more than 10,000 restaurants and bars. Further, in addition to its traditional distribution footprint, SweetWater 420 Extra Pale Ale and IPA are served on all Delta flights nationwide plus internationally totaling more than 50 countries across six continents which have served to extend SweetWater’s brand reach on both a national and international level. The Company supplements this distribution with Delta with a kiosk in Atlanta’s Hartsfield-Jackson Airport. SweetWater is also available in Canada through limited distribution within Ontario and Quebec.

International Operations

 

 

Internationally, we are seeking to drive market share growth in key core markets by leveraging our expertise and capabilities in order to achieve profitable growth and build sustainable, long-term shareholder value. We intend to continue to maximize the utilization of our existing assets and investments in connection with the development and execution of our strategic plan, while leveraging our cannabis expertise and well-established Aphria medical brand. We are focused on maximizing growth in net sales, profitability and managing cash flow in our identified core markets by focusing on business activities that provide a return on investment in the near term that are not capital intensive.

We currently maintain key international operations in the United States, Germany, Italy, Malta, Colombia and Argentina as well as strategic relationships in Israel with Canndoc, Denmark and Poland. In establishing our international footprint, we sought to create operational hubs in those continents where we identified the biggest opportunities for growth and designed our operations to ensure consistent, high-quality supply of cannabis products as well as a distribution network.

 

   

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Export Facility from Canada

Leveraging our industrial scale cultivation and automation for the production of cannabis grown in environmentally responsible conditions in Canada and our ability to cultivate high-quality, low cost cannabis on a consistent basis, we expect to supply much of our international demand with cannabis and cannabis derivative products from Canada. The Company ships EU-GMP certified dried cannabis from our Aphria One facility and EU-GMP certified cannabis oil from our wholly-owned subsidiary ARA – Avanti Rx Analytics Inc. (“Avanti”) to our wholly-owned subsidiary CC Pharma in Germany in order to leverage CC Pharma’s extensive distribution network. For Argentina, we supplied medical cannabis oil from Canada to Argentina under the Argentinian “Compassionate Use” national law as well as for the medical cannabis product being supplied to the Hospital de Pediatria Garrahan for a pediatric refractory epilepsy clinical study.

Avanti currently holds four Canadian licences: (i) Cannabis Processing Licence; (ii) Cannabis Analytical Testing Licence; (iii) Drug Establishment Licence; and (iv) Medical Device Establishment Licence. In addition, Avanti received its EU-GMP certification in respect of medicinal products for human use and medicinal and research purposes for human use (Part 1 – Medical Products) in January 2020. Avanti provides laboratory testing services to our Canadian cannabis businesses and, its Part II EU-GMP certification allows Avanti to process, package, label and test cannabis oil as well as package, label and test dried cannabis for medicinal use in permitted jurisdictions throughout the European Union and in any jurisdiction, worldwide, that recognizes the EU-GMP standards. In addition, Aphria One’s EU-GMP certification allows the Company to be a supplier of bulk dried flower for medicinal use worldwide to other Part I EU-GMP-certified facilities licensed to further process or package bulk dried flower into finished cannabis product for sale in permitted jurisdictions.

European Union

Germany

The German market is considered to be one of the most highly sought-after developed medical cannabis markets in the world and, therefore, we focused our efforts and resources on developing this important market.

Our strategy in Germany consists of a three-pronged approach covering demand, supply and distribution:

Demand

During the COVID-19 pandemic, we refocused our efforts to develop virtual educational programs and other means of outreach to healthcare professionals to deliver education on the uses of medical cannabis. In order to improve access to medical cannabis, we also partnered with a leading company in digital applications and medical software to establish a modern and patient-centric telemedicine clinic to improve patient access to healthcare professionals capable of prescribing medical cannabis. Our plan is to establish strategic partnerships, which will further facilitate access for patients to medical cannabis. It is also our intention to establish collaborations with academic institutions in Germany to improve scientific evidence for Aphria medical cannabis products.

Supply

The Company intends to supply cannabis products to meet the demand in Germany through imports from Canada and our German cultivation and processing facility, which was completed as of the date of this MD&A. We also entered into a supply agreement with a prominent European flower producer in Denmark for EU-GMP-certified dried bud for both the German market as well as throughout Europe.

In Germany, we participated in the tender process for in-country cultivation licences and are one of three companies selected by the German Federal Institute for Drugs and Medical Devices (“BfArM”) to receive a licence for the cultivation of medical cannabis. We were granted a total of five lots, which was the most available lots within the tender process and we are the only winner of the German tender with the permission to grow all three strains of medical cannabis approved by the BfArM. Each lot is currently expected to provide a minimum annual capacity of 200 kgs for a total of 1,000 kgs. Pursuant to the licence granted by BfArM, the Company is expecting the first harvest in the beginning of calendar year 2021. In addition, we completed the construction of a storage facility located at CC Pharma. All cultivation and storage facilities are being constructed in line with EU-GMP requirements, subject to certification.

 

   

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Distribution

Germany currently allows for the sale of medical cannabis and cannabis extracts to pharmacies. These cannabis products are also covered by insurance companies. This coverage provides the opportunity for a greater number of medical cannabis patients with access to the full use and benefits of these products. Through CC Pharma, we have a leading importer and distributor of EU-pharmaceuticals for the German market and Europe. CC Pharma operates a production, repackaging and labelling facility. Based on regulations, pharmacies can only supply the branded product that has been named in a prescription to the patient by a physician. Substitution of the product is only possible if the particular brand of product is unavailable. As such, the Company intends to expand CC Pharma’s operations to meet the high demand for medicinal cannabis by distributing cannabis throughout the German pharmacies, leveraging its existing business and know-how to ensure that the Company’s products are sufficiently stocked in the pharmacies in Germany. Currently, the majority of distribution activities for CC Pharma within Europe relate to the distribution of non-cannabis medical products. However, the Company exports EU-GMP certified cannabis from our Canadian facilities and from our partner in Denmark to CC Pharma and purchases third party EU-GMP certified cannabis grown in Europe in order to leverage CC Pharma’s extensive distribution network.

Malta

Through our subsidiary, ASG Pharma Ltd. (“ASG”), we received the first import permit for medical cannabis issued by the Government of Malta’s Ministry of Health. ASG also received its Part II EU-GMP certification in respect of production of cannabis for medicinal and research purposes, allowing it to ship finished dried flower and finished oil for medicinal and research use in permitted jurisdictions throughout the European Union. The Company intends to use ASG to import cannabis oil in bulk and dried flower for packaging and distribution of EU-GMP compliant cannabis products. In October 2020, ASG received its first shipment of EU-GMP certified bulk cannabis oil from our Avanti facility, which it packaged into finished product for Germany.

Italy

Our wholly-owned subsidiary, FL Group, is authorized to import cannabis products into Italy and to distribute pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies.

Poland

We entered into a supply agreement with ODI Pharma AB (“ODI”). Under the terms of the supply agreement, ODI has the exclusive right to sell a defined set of co-branded products in Poland over a five-year period. During each five-year term, we will provide ODI with an annual minimum of 1,200 kgs. of medical cannabis product, which will be processed into finished product, co-branded under the Aphria and ODI brand names, and sold exclusively within the Polish market.

South America

Colombia

We maintain a 90% ownership interest in ColCanna S.A.S. (“ColCanna”). This ownership provides the Company with the ability to further develop the global Aphria brand through the distribution of Aphria branded products to patients across South America. Furthermore, the Company signed an exclusive three-year agreement with the Colombian Medical Federation (“FMC”), a national guild that oversees the ethical exercise of the medical profession in Colombia. Under this agreement, Aphria and the FMC jointly developed an academic curriculum and cohosted several conferences and events on the appropriate medicinal use of cannabis. The FMC is affiliated with nearly 2,000 doctors and maintains a database of more than 70,000 medical professionals that rely on the organization for research and educational resources, including through a virtual platform that offers certified courses on a range of subjects.

Argentina

In Argentina, ABP, the Company’s wholly-owned subsidiary, is a distributor of traditional pharmaceutical medicines and medical cannabis products for the Argentinian market. On June 6, 2019, the Ministry of Health in Argentina approved a resolution authorizing public and private health insurance companies to import and stock medical cannabis inventory for sale to patients suffering from refractory epilepsy. This represents a significant improvement for these patients since before the resolution products could only be imported on a named patient basis. The legislative change reduces the delay experienced by patients when ordering and receiving their prescribed medical cannabis since it is now readily available and can be dispensed on demand. The Company believes that this recent resolution represents an evolution of the medical cannabis regulatory framework in Argentina towards sustainable commercialization.

 

   

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ABP distributes and delivers medical cannabis into Argentina under the “Compassionate Use” national law for patients with refractory epilepsy, holding a medical prescription from a neurologist. In compliance with the national drug law, patients are required to pick up controlled substances products at an authorized pharmacy. ABP is fully authorized and licensed by the national regulatory agency (“ANMAT”) to distribute and deliver controlled substances via authorized pharmaceutical channels.

The Company maintains its relationship with Hospital de Pediatria Garrahan, a leading pediatric hospital in Buenos Aires, which recently published favourable preliminary results in refractory epileptic patients following treatment with Aphria products.

Pan-Asia

Australia

Aphria maintains relationships in Australia with two companies conducting medical cannabis clinical trials.

Medlab Pty Ltd. is currently in a clinical trial related to oncology pain using Aphria blended cannabis strains for oil, subsequently converted in Australia into a nanocell mucosol spray. Aphria and Medlab Pty Ltd. share the rights in the intellectual property associated with the active pharmaceutical ingredient in this trial.

CannPal Pty Ltd. is currently in a clinical trial related to animal pain in cats and dogs, wherein the test product is fabricated using Aphria strains.

Israel

Aphria entered into a Strategic Supply Agreement (the “Canndoc Agreement”) with Canndoc Ltd. (“Canndoc”), a subsidiary of InterCure Ltd. (TASE: INCR/INCR.TA), one of Israel’s largest and most established medical cannabis producers. Under the terms of the Canndoc Agreement, Aphria will exclusively supply Canndoc with dried bulk flower in Israel over a two-year period, with the option to extend for two additional terms of two years each, and an option for an additional year if the parties agree to terms. During each two-year term, Aphria will provide Canndoc with up to 3,000 kgs. of bulk dried flower, which will be processed into finished product, co-branded under the Aphria and Canndoc brand names, and sold exclusively within the Israeli market.

 

   

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Recent Events

 

 

Business Combination with Tilray

On December 16, 2020, the Company and Tilray, Inc. (“Tilray”) announced that we entered into a definitive agreement (the “Agreement”) to combine their businesses and create the world’s largest global cannabis company (the “Combined Company”) based on pro forma revenue. The transaction will be completed by way of a plan of arrangement (the “Arrangement”) under the Business Corporations Act (Ontario), and the implied pro forma equity value of the Combined Company is approximately $5.0 billion ($3.9 billion USD), based on the share price of Aphria and Tilray at the close of market on December 15, 2020. Following the completion of the Arrangement, the Combined Company will have principal offices in the United States (New York and Seattle), Canada (Toronto, Leamington and Vancouver Island), Portugal and Germany, and it will operate under the Tilray corporate name with shares trading on Nasdaq under ticker symbol “TLRY”. In addition, the Combined Company is pursuing a listing of its shares on the TSX.

Under the terms of the Arrangement, the shareholders of Aphria (the “Aphria Shareholders”) will receive 0.8381 shares (the “Exchange Ratio”) of Tilray common stock (each, a “Tilray Share”) for each Aphria common share (each, an “Aphria Share”). Upon the completion of the Arrangement, Aphria Shareholders will own approximately 62 percent of the outstanding Tilray Shares on a fully diluted basis, resulting in a reverse acquisition of Tilray. On a pro forma basis for the last twelve months reported by each company, the Combined Company would have had revenue of $874,000 ($685,000 USD). As part of the Arrangement, we identified over $100,000 of annual pre-tax cost synergies that can be achieved within the first 24 months of the Combined Company.

The Combined Company will be the largest global cannabis company based on pro forma revenue for the last twelve months reported by each company with scale and breadths across major geographies and a complete portfolio of market leading brands in the major Cannabis 2.0 product categories. Subject to receiving the requisite approvals, we believe the business combination pursuant to the Arrangement will provide the following financial and strategic benefits, among others:

Financial Strength and Flexibility

The Combined Company will enjoy an attractive financial pro forma revenue of approximately $874,000 for the last twelve months reported by each company, the highest in the global cannabis industry. In Canada, the combination of Aphria and Tilray will create the leading adult-use cannabis company with gross revenue of approximately $296,000 in the adult-use market for the last twelve months reported by each company. We have generated positive adjusted EBITDA* over the last seven quarters, which we believe, in combination with the synergies to be realized, will provide a robust platform for future profitability and cash flow generation for the Combined Company. This, collectively with the strength of the Combined Company’s balance sheet and access to capital, is expected to help accelerate global growth and value for the Combined Company’s shareholders.

Creates the Leading Canadian Adult-Use Cannabis Licensed Producer

Together, we will be the leading adult-use cannabis Canadian licensed producer based on revenue for the last twelve months by combining respective brands, distribution networks and world-class facilities. In Canada’s $3.1 billion adult-use, retail market8, we believe the Combined Company will have one of the lowest cost production operations with its state-of-the-art facilities. In addition, the Combined Company will have a portfolio of carefully curated brands across all consumer segments that are sold through its distribution partners. On a pro forma basis, for the period August to October 2020, the Combined Company would have held a 17.3%, retail market share9, the largest share held by any single licensed producer in Canada and 700 basis points higher than the next closest competitor.

Increases Product Breadth and Commitment to Innovation

Leveraging both companies’ commitment and culture of innovation and brand building, the Combined Company will serve clients with a complete portfolio of Cannabis 2.0 products and sales and service infrastructure supported by leading distribution partners. Our complementary brands will be available across economy, value, core, premium and premium plus product offerings. In addition, the Combined Company will have a complete breadth of products in every major cannabis category, including flower, pre-roll, oils, capsules, vapes, edibles and beverages.

 

8 Annualized September 2020 retail sales of $256 million based on Statistics Canada November 2020 release

9 Based on Stifel analyst report by Andrew Carter, dated December 6, 2020, “December 2020 Headset Canada Review”

* Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery), plus (minus) finance (income) expense, net, plus (minus) non-operating (income) loss, 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, plus transaction costs, 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.

 

   

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Establishes an Unrivaled European Platform

The Combined Company will be well-positioned to pursue growth opportunities with its end-to-end EU-GMP supply chain and distribution, which includes our German medical cannabis distribution footprint and Tilray’s 2.7 million square foot European EU-GMP low-cost cannabis cultivation and production facility in Portugal. In Germany, our wholly-owned subsidiary, CC Pharma, will provide the Combined Company with distribution capabilities for our medical cannabis brands to more than 13,000 pharmacies. In Portugal, Tilray’s EU-GMP cultivation and production facility will provide the Combined Company with the capacity to cultivate and produce medical cannabis products in order to meet international demand and has export capabilities, which provides tariff-free access to the EU.

Enhances Consumer Packaged Goods Presence and Infrastructure in the U.S.

In the U.S., the Combined Company will have a strong consumer packaged goods presence and infrastructure with two strategic pillars, including SweetWater, a cannabis lifestyle branded craft brewer, and Manitoba Harvest, a pioneer in branded hemp, CBD and wellness products with access to 17,000 stores in North America. The Combined Company is expected to leverage SweetWater’s craft beer manufacturing and distribution network to build brand awareness for the Combined Company’s leading brands via craft beers, hard seltzers, and other beverages as it seeks to take advantage of opportunities for both the adult-use and health and wellbeing beverage trends. We also expect to pursue the opportunity to expand with new or existing CBD or other cannabinoid brands leveraging Manitoba Harvest’s strong hemp and wellness product platform. If and when U.S. regulations allow, we expect to be well-positioned to compete in the U.S. cannabis market given Aphria and Tilray’s existing strong brands and distribution systems in addition to their track record of growth in consumer-packaged goods and cannabis.

Positions Combined Company to Continue to Grow in the Beverage Segment

We believe the Combined Company will be well-positioned to pursue an accelerated rate of growth in the Canadian and U.S. beverage industries by leveraging SweetWater’s innovation, knowledge and expertise to introduce adult-use cannabis brands via craft beers and other beverages. This includes leveraging Aphria and Tilray’s proven distribution networks in Canada to sell SweetWater’s 420 cannabis lifestyle brand in Canada.

Substantial Synergies

The combination is expected to deliver approximately $100,000 of annual pre-tax cost synergies within 24 months of the completion of the transaction. The Combined Company is expected to achieve cost synergies in the key areas of cultivation and production, cannabis and product purchasing, sales and marketing and corporate expenses. This is expected to include the opportunity for our Leamington, Ontario operations to provide additional volume for Tilray’s brands and to replace the need for Tilray to use wholesale cannabis purchases from other licensed producers. Tilray’s London, Ontario facility will also provide us with excess capacity to increase production of additional form factors including their branded edibles and beverages. The Combined Company is considering utilizing Tilray’s existing Nanaimo, British Colombia facility for Aphria’s premium Broken Coast brand to increasingly meet consumer demand for its products. The Combined Company is expected to capitalize on opportunities for growth through a broadened product offering and additional form factors, with the aim of increasing adult-use cannabis brand availability across certain Canadian provinces to an expanded customer base with the Combined Company’s scalable infrastructure. Internationally, the Combined Company will have the opportunity to reach additional pharmacies and patients via distribution relationships. We expect the combination to unlock significant shareholder value.

The Arrangement will require the approval of at least two-thirds of the votes cast by the Aphria Shareholders at a special meeting of Aphria Shareholders. Approval of a majority of the votes cast by Tilray stockholders at a meeting of Tilray stockholders will be required to, among other things contemplated by the Agreement, authorize the issuance of Tilray Shares to Aphria Shareholders pursuant to the Arrangement. Following completion of the Arrangement, Aphria will become a wholly-owned subsidiary of Tilray, with Aphria Shareholders owning approximately 62 percent of the Combined Company.

 

   

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Completion of the Arrangement is subject to regulatory and court approvals and other customary closing conditions, including competition authorities.

Acquisition of SweetWater Brewing Company

During the quarter, the Company completed the acquisition of SweetWater, one of the largest independent craft brewers in the United States based on volume. SweetWater manufactures and distributes bottled, canned and draft premium craft beers under the SweetWater brand. With a state-of-the-art brewery and integrated restaurant and live music venue, SweetWater maintains its principal offices in Atlanta, Georgia. SweetWater created an award-winning lineup of year-round, seasonal and specialty beers and a portfolio of brands closely aligned with a cannabis lifestyle, including its 420 beverage offerings.

In addition to acquiring a strong brand and accretive business, this strategic acquisition positions Aphria with a platform and infrastructure within the U.S. to enable it to access the U.S. market more quickly in the event of U.S. federal legalization of cannabis. The acquisition creates a larger and more diversified leading global company. Aphria believes the acquisition will provide several financial and strategic benefits including the following:

Creates a Combined Branded Cannabis Lifestyle Products Company with Diversified Financial Position

The SweetWater acquisition further diversifies our current net revenue mix, with the combined cannabis and distribution business representing approximately 85 percent of net revenue and the craft brewing and beverage business representing approximately 15 percent of net revenue, based on the pro forma net revenue. In addition, the acquisition is margin accretive with SweetWater generating adjusted EBITDA margins well in excess of 30 percent of net revenue.

Generates Significant Cross-Selling Opportunities while Expanding Aphria’s Addressable Market in both the U.S. and Canada

The combination of our existing cannabis business with SweetWater’s craft brewing business expands the Company’s addressable market. According to Brewers Association, 2019 retail dollar sales of craft beer in the U.S. was USD $29.3 billion. SweetWater provides a profitable platform for future growth and development in the U.S. market. We believe the acquisition positions us to introduce and build brand awareness of, and equity in, our existing adult-use cannabis brands in the U.S. by leveraging SweetWater’s manufacturing and distribution infrastructure. The significant growth of SweetWater’s Strain series, launched in 2018, showcases its cultivated reputation for innovation, staying at the forefront of the industry and current with craft and consumer trends. Leveraging SweetWater’s innovation, knowledge and expertise, we plan to introduce our brands via craft beers and other beverages as well as other non-alcoholic products as we seek to take advantage of opportunities for both the adult-use and health and wellbeing beverage trends. In addition, SweetWater’s innovation pipeline includes entry into the rapidly growing hard seltzer category, which is being fueled by millennials, an important demographic.

Opportunity for Accelerated Entry into the U.S. Cannabis Market, Subject to U.S. Federal Legalization

We believe the acquisition of SweetWater is the cornerstone of our longer-term U.S. strategy. SweetWater’s existing infrastructure can be leveraged to accelerate our entry into the U.S. ahead of U.S. federal legalization of cannabis. The acquisition provides key partnerships with leading U.S. distributors, retailers and on-premises customers strengthening our ability to develop new distribution in the U.S. for our products.

Addition of an Experienced Executive Team

The acquisition expands our leadership team through the addition of SweetWater’s talented group of executives with substantial operational experience in the craft brewing and beverage industry and a proven track record of developing, building and growing strong consumer brands. SweetWater’s management team will remain in place along with approximately 125 employees. Freddy Bensch will continue as Chief Executive Officer of the SweetWater, reporting directly to Irwin D. Simon, reflecting the commitment and belief of both companies in the future success of the combined company. Freddy Bensch entered into a consulting agreement that will continue until the end of calendar 2023, subject to renewals.

 

   

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Coronavirus (“COVID-19”) Pandemic, Its Impact

Aphria continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the well-being of our employees remains one of our top priorities. The Company also remains committed to providing best in class care and service to our valued patients and consumers – facilities continue to remain open and operational with heightened measures in place to protect the health and safety of employees, vendors, partners and their families. The Company is committed to enhancing these measures and implementing other necessary practices as the situation warrants.

Leamington, Ontario and Brampton, Ontario

Our Leamington facilities, Aphria One and Aphria Diamond, and Brampton facility, Avanti, remain open as they are currently considered essential businesses by the Ontario government.

Duncan, British Columbia

Our Duncan facility in British Columbia (“BC”), Broken Coast, remains open and is currently considered an essential business by the BC government.

Supply chain in Canada

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption. As of the date of this MD&A, there do not appear to be any indications of challenges or material delays in our supply chain; however, the Company has undertaken pre-emptive measures to ensure alternate supply sources in different continents.

Densborn, Germany

Our Densborn facility, CC Pharma, remains open and is considered an essential service by the German government.

Supply chain in Germany

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption associated with COVID-19. As of the date of this MD&A, a number of suppliers in foreign countries are impacted by COVID-19. Further, at this time, recent Brexit initiatives, while not COVID-19 related, will impact CC Pharma’s supply chain in the future. CC Pharma is working closely with alternative suppliers to minimize any Brexit impacts and has purchased additional inventory, after quarter-end, from the United Kingdom in advance of Brexit.

Atlanta, Georgia

Our Atlanta facility, SweetWater, remains open during the COVID-19 pandemic.

Supply chain in United States

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption. As of the date of the MD&A, supply chain challenges related to the supply of aluminum cans is the only noticeable impact on SweetWater’s supply chain. SweetWater is managing the supply of aluminum cans by increasing the production of bottled craft beer.

 

   

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COVID-19 impact on our SweetWater business

Various federal, state and local government imposed restrictions as a result of the COVID-19 pandemic, which include, among others, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), ordering businesses, particularly bars and restaurants, to close or limit operations or people to stay at home, which have impacted the SweetWater business primarily driven by reductions in sales and profit margin. The reduced profit margins are driven by a reduction in keg demand from the on-premises channel, which have higher profit margins than products intended for off-premises consumption. We believe this change in SweetWater’s sales mix and demand may continue as long as the COVID-19 pandemic and related restrictions continue.

COVID-19 impact on our medical and distribution businesses

As a result of individual country restrictions, a general decrease in elective medical procedures and surgeries, in-person medical visits and social distancing requirements, the Company experienced and may continue to experience decreases in revenue in its Canadian medical cannabis business and global distribution businesses. Declining new patient registrations in Canada driven by the decrease in medical visits continue to impact our medical cannabis business. Limitations on elective medical procedures and lower frequency patient visits to physicians and pharmacies continue to impact our global distribution businesses as doctors have less opportunity to write new prescriptions.

Increasing COVID-19 case counts in Canada, Germany and the United States

During the COVID-19 global pandemic, we continued to monitor infection rates and the measures taken by various governments to contain the infection. As of the date of this MD&A, we noted an increase in infection rates with increasingly stronger measures being adopted in those countries in which the Company operates predominately – Canada, Germany and the United States. In Canada, individual provinces are taking increasingly stronger measures to slow infection rates, including the temporary closure of retail outlets, including cannabis stores. Most provinces, however, allow curbside pick-up or delivery replacing in-person visits to cannabis stores. In Germany, the duration of lockdown measures that were put in place continue to be extended and have become more restrictive and, as a result, the Germany population is becoming less mobile with patients not visiting their physicians or engaging in elective surgeries. In the United States, while lockdown measures have not been as stringent as in Canada and in Germany, certain state and local governments significantly curtailed entertainment activities, including the consumption of alcohol at on-premises locations. The reduction of on-premises consumption has not fully been offset by an increase in off-premises consumption. Depending on the length and severity of these measures to help curtail COVID-19, our revenues may be negatively impacted in the short-term.

Liquidity

At the present time, Aphria believes it has sufficient levels of cash to respond to the current pandemic through its anticipated duration. As of November 30, 2020, Aphria has working capital of $399,161 including cash balances of over $187,997 and access to line of credit facilities in the United States, Germany and to a very minor extent Canada. Further, on a proforma basis, proforma cash is approximately $320,000.

Throughout the pandemic, the Company has applied for and received Canadian government funding under the Canada Emergency Wage Subsidy program, where and when available. The funds received are not repayable and are included in other non-operating items, net.

To this point in the pandemic, the Company has neither experienced a decline in its adult-use cannabis revenue nor observed signs suggesting that adult-use cannabis demand is expected to decrease.

While there are certain principal payments due in the next 12 months, our earliest debt maturity with a material repayment due is in April 2022.

 

   

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Protection of our employees

We took and continue to take, important steps to protect our employees during this period, including:

 

   

Mandatory mask policy in all common and production areas;

 

   

Staggered work schedules, banning all non-essential contractors and closing our facility to guests, all to reduce flow of traffic into and out of our facilities;

 

   

Staggered employee breaks, redesigned work stations and processes to minimize employee interaction and ensure appropriate social distancing;

 

   

Installed thermal scanners at all facility employee entrances to monitor employee temperatures;

 

   

Enhanced sanitation of work areas, both in terms of breadth and depth of cleanings; and

 

   

Implemented mandatory 14-day quarantines for all workers returning from out of country visits.

Giving back to our communities

We are providing multiple programs to seniors and front-line healthcare workers in the local Leamington community to support them during this period, including having:

 

   

Made various donations to Erie Shores Community Hospital;

 

   

Made a donation of excess personal protective equipment to Erie Shores Community Hospital;

 

   

Piloted ‘The Wellness Lounge’, a virtual mental health forum to promote mental health awareness, community and connections among Veterans and First Responders in conjunction with Wounded Warriors Canada;

 

   

Continued the Aphria Supports program, where employee volunteers operate a dedicated local phone number for seniors and front-line healthcare workers to purchase and deliver groceries and other necessities during this difficult time; and,

 

   

Continued a 10% discount on medical products to compensate for the current economic climate.

Brand and Product portfolio

The Company’s brand and product portfolio continue to grow in stature and size. The Company’s early efforts in consumer segmentation laid the cornerstone for its brand strategy and has continued to grow as a result of the Company’s focus on product and its competitive pricing strategy. The end result continues to resonate with new and repeat purchasers.

Canadian market overview

During the quarter, the Canadian cannabis retail market grew from an annualized value of $2.9 billion at the start of the quarter, to $3.2 billion in October10. The four largest markets remain Ontario, Quebec, Alberta and British Columbia, which represent over 80% of the Canadian market10.

During the period, the top provincial markets grew as follows:

 

   

Ontario grew the most from $0.8 billion to $1.0 billion, or 25%10;

 

   

Quebec grew from $0.5 billion to $0.6 billion, or 8%10;

 

   

Alberta grew from $0.6 billion to $0.7 billion or 7%10; and,

 

   

British Colombia grew from $0.4 billion to $0.5 billion, or 4%10.

During this period, the Company maintained its #1 position, as the top licensed producer in terms of sales to provincial boards across all brands, in both Ontario11 and Alberta11. In Ontario, the Company maintained a 16.9 share11, and in Alberta, it maintained a 12.2 share11, both as measured in the same manner as above. For the same period, the Company maintained a #3 position in British Columbia11, the #3 position in Saskatchewan11 and based on its own internal estimates, the Company believes that it maintained the #4 position in Quebec

Disclosure Controls and Procedures and Management’s Annual Report on Internal Control 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, 2020, 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. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. 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 and Rule 13a-15(e) and 15d-15(e) under the Exchange Act within the U.S.) 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 control over financial reporting (as defined in the SEC’s rules and the rules of the Canadian Securities Administrators) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS. Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting includes those policies and procedures that:

 

   

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management team, under the supervision of the CEO and the CFO, has evaluated the effectiveness of internal control over financial reporting using COSO to design the Company’s internal control over financial reporting. Based on the evaluation performed, management has concluded that internal control over financial reporting was effective as of May 31, 2020.

The effectiveness of the Company’s internal control over financial reporting as of May 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which accompanies the consolidated financial statements.

It is important to understand that there are inherent limitations on effectiveness 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. These inherent limitations include the following:

 

   

Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes;

 

   

Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override;

 

   

The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; and

 

   

Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies 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.

In accordance with the provisions of National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, the Company has limited the design of its disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of SweetWater. Aphria Inc. acquired the SweetWater on November 25, 2020, and the brand portfolio and other assets acquired are currently operated by Aphria Inc’s wholly-owned subsidiary, Four Twenty Corporation

Further details related to the acquisition of SweetWater are included in Note 10 in the Notes to the Company’s interim condensed consolidated financial statements for the three- and six-month periods ended November 30, 2020.

Since the completion of the acquisition of SweetWater on November 25, 2020, the acquired brands and assets have contributed $881 to revenues and $299 in net earnings. The purchase price has been preliminarily allocated as described in Note 10 to the interim condensed consolidated financial statements for the three and six months ended November 30, 2020.

The scope limitation discussed under this section is primarily based on the time required to assess SweetWater Brewing Company’s disclosure controls and procedures and internal control over financial reporting in a manner that is consistent with the Company’s other operations.

Except for the preceding changes, there have been no changes in the Company’s internal control over financial reporting during the three months ended November 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

10 Per Stats Canada report – October 2020

11 Per Headset reporting data – November 2020

 

   

LOGO

  


LOGO

Aphria Inc.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MAY 31, 2020 AND MAY 31, 2019

(Expressed in Canadian Dollars, unless otherwise noted)


LOGO

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Aphria Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Aphria Inc. and its subsidiaries (together, the Company) as of May 31, 2020 and 2019, and the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of May 31, 2020, based on criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included under the heading ‘Disclosure Controls and Procedures and Management’s Annual Report on Internal Controls Over Financial Reporting’ appearing in Management’s Discussion and Analysis dated July 28, 2020 for the year ended May 31, 2020. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

 

PricewaterhouseCoopers LLP

PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2

T: +1 416 863 1133, F: +1 416 365 8215, www.pwc.com/ca

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.


LOGO

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Goodwill for the LATAM, Nuuvera and Broken Coast Cash Generating Units and Indefinite lived Intangible Assets

As described in Notes 3, 9 and 10 to the consolidated financial statements, the Company’s consolidated goodwill and indefinite lived intangible assets balances were $617.9 and $254.2 million respectively at May 31, 2020. The goodwill associated with the LATAM, Nuuvera and Broken Coast cash generating units was $87.2 million, $377.2 million and $146.1 million respectively. For the year ended May 31, 2020, management recorded an impairment of $71.4 million on their LATAM cash generating unit consisting of $52.0 million goodwill and $19.4 million indefinite lived intangible assets. Management conducts an impairment assessment annually, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill or indefinite lived intangibles may be impaired. Potential impairment is identified by comparing the recoverable amount of a cash generating unit to its carrying value. The recoverable amount is the higher of the asset’s fair value less costs to sell and the value in use. Recoverable amounts are estimated by management using a discounted cash flow model. Management’s cash flow models included significant judgements and assumptions relating to future cash flows, growth rates and discount rates.

 

Page 2 of 4


LOGO

 

The principal considerations for our determination that performing procedures relating to valuation of goodwill for the LATAM, Nuuvera and Broken Coast cash generating units and indefinite lived intangible assets is a critical audit matter are there was significant judgement by management when developing their estimate of the recoverable amount of the cash generating units. This in turn led to a high degree of auditor judgement, subjectivity and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including future cash flows, growth rates and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite lived intangible assets impairment assessment, including controls over the valuation of the Company’s cash generating units. These procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the future cash flows, growth rates and discount rates. Evaluating management’s assumptions related to future cash flows and growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the cash generating unit, (ii) the consistency with external market and industry data, (iii) sensitivities over significant inputs and assumptions and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and certain significant assumptions, including the discount rate.

Fair value less costs to sell inventory and biological assets

As described in Notes 3, 5 and 6 to the consolidated financial statements, the Company’s consolidated inventory and biological assets related to cannabis inventory is $264.3 and $28.3 million, respectively at May 31, 2020. Inventory is carried at the lower of cost and net realizable value, with cost also including a fair value adjustment which represents the fair value of the biological asset at the time of harvest. Biological assets are carried at fair value less costs to sell prior to harvest. Fair value less costs to sell require management to make significant judgements and assumptions relating to the stage of growth of the cannabis, harvesting costs, sales price and expected yields.

The principal considerations for our determination that performing procedures relating to fair value less costs to sell inventory and biological assets is a critical audit matter are there was significant judgement by management when developing the fair value less costs to sell estimates of the biological assets and inventory. This led to a high degree of auditor judgement, subjectivity and effort in performing procedures to evaluate management’s estimate of fair value less costs to sell and the significant assumptions, including the stage of growth, harvest costs, sales price and expected yields.

 

Page 3 of 4


LOGO

 

Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the fair value less costs to sell for inventory and biological assets. These procedures also included, among others, testing management’s process for developing the fair value estimate; testing the model used to calculate the fair value less costs to sell; testing the completeness, accuracy and relevance of the underlying data used in the calculation; and evaluating the significant assumptions used by management including the stage of growth, harvest costs, sales price and expected yields. Evaluating management’s assumptions related to the stage of growth of cannabis involved performing physical observation of the growing cannabis and assessing quantities and growth stage as compared to the plant’s birth date. Evaluating management’s assumptions related to harvest costs, sales price and expected yields involved evaluating whether the assumptions used by management were reasonable considering (i) historical actual information, (ii) independent calculations of these inputs, (iii) sensitivities over significant inputs and assumptions, (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit, and (v) consideration of future sales price and distribution.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

July 28, 2020

We have served as the Company’s auditor since 2017.

 

 

Page 4 of 4


Aphria Inc.

Consolidated Statements of Financial Position

(In thousands of Canadian dollars)

 

 

     Note      May 31,
2020
    May 31,
2019
 

Assets

       

Current assets

       

Cash and cash equivalents

      $ 497,222     $ 550,797  

Marketable securities

        —         20,199  

Accounts receivable

        55,796       25,488  

Prepaids and other current assets

     4        42,983       23,391  

Inventory

     5        264,321       91,529  

Biological assets

     6        28,341       18,725  

Promissory notes receivable

     14        —         39,200  

Current portion of convertible notes receivable

     11        14,626       11,500  
     

 

 

   

 

 

 
        903,289       780,829  
     

 

 

   

 

 

 

Capital assets

     8        587,163       503,898  

Intangible assets

     9        363,037       392,056  

Convertible notes receivable

     11        —         20,730  

Interest in equity investees

     12        —         9,311  

Long-term investments

     13        27,016       64,922  

Goodwill

     10        617,934       669,846  
     

 

 

   

 

 

 
      $ 2,498,439     $ 2,441,592  
     

 

 

   

 

 

 
       

Liabilities

       

Current liabilities

       

Bank indebtedness

     16      $ 537     $ —    

Accounts payable and accrued liabilities

        152,750       105,813  

Income taxes payable

        6,410       2,722  

Deferred revenue

        902       23,678  

Current portion of lease liabilities

        1,315       —    

Current portion of long-term debt

     17        8,467       6,332  
     

 

 

   

 

 

 
        170,381       138,545  
     

 

 

   

 

 

 

Long-term liabilities

       

Lease liabilities

        5,828       —    

Long-term debt

     17        129,637       60,895  

Convertible debentures

     18        270,783       421,366  

Deferred tax liability

     15        83,468       87,633  
     

 

 

   

 

 

 
        660,097       708,439  
     

 

 

   

 

 

 

Shareholders’ equity

       

Share capital

     19        1,846,938       1,655,273  

Warrants

     20        360       1,336  

Share-based payment reserve

        27,721       36,151  

Accumulated other comprehensive loss

        (1,269     (119

Retained earnings (deficit)

        (61,215     12,103  
     

 

 

   

 

 

 
        1,812,535       1,704,744  

Non-controlling interests

     22        25,807       28,409  
     

 

 

   

 

 

 
        1,838,342       1,733,153  
     

 

 

   

 

 

 
      $ 2,498,439     $ 2,441,592  
     

 

 

   

 

 

 
       

Nature of operations (Note 1),

Commitments and contingencies (Note 31),

Approved on behalf of the Board:

 

“Renah Persofsky”

  

“Irwin Simon”

Signed: Director

  

Signed: Director

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

 

2


Aphria Inc.

Consolidated Statements of Loss and Comprehensive Loss

(In thousands of Canadian dollars, except share and per share amounts)

 

 

            For the year ended May 31,  
     Note      2020     2019  

Cannabis revenue

      $ 204,736     $ 89,383  

Distribution revenue

        369,214       157,931  

Insurance recovery

        1,000       —    

Excise taxes

        (31,611     (10,204
     

 

 

   

 

 

 

Net revenue

        543,339       237,110  

Production costs

     5        64,972       36,446  

Cost of cannabis purchased

        21,920       —    

Cost of goods purchased

        322,688       138,126  
     

 

 

   

 

 

 

Gross profit before fair value adjustments

        133,759       62,538  

Fair value adjustment on sale of inventory

     5        57,039       27,724  

Fair value adjustment on growth of biological assets

     6        (115,255     (40,607
     

 

 

   

 

 

 

Gross profit

        191,975       75,421  

Operating expenses:

       

General and administrative

     23        99,977       69,752  

Share-based compensation

     24        22,500       26,080  

Amortization

        21,747       14,084  

Selling

        21,042       4,961  

Marketing and promotion

        20,464       23,010  

Research and development

        2,568       1,391  

Impairment

     10        63,971       58,039  

Transaction costs

        5,763       23,259  
     

 

 

   

 

 

 
        258,032       220,576  
     

 

 

   

 

 

 

Operating loss

        (66,057     (145,155

Finance income (expense), net

     25        (26,347     6,575  

Non-operating income, net

     26        11,687       122,935  
     

 

 

   

 

 

 

Loss before income taxes

        (80,717     (15,645
     

 

 

   

 

 

 

Income taxes (recovery)

     15        3,917       854  
     

 

 

   

 

 

 

Net loss

        (84,634     (16,499
     

 

 

   

 

 

 

Other comprehensive loss

       

Other comprehensive loss

        (1,150     (119
     

 

 

   

 

 

 

Comprehensive loss

      $ (85,784   $ (16,618
     

 

 

   

 

 

 

Total comprehensive income (loss) attributable to:

       

Shareholders of Aphria Inc.

        (91,961     (14,667

Non-controlling interests

     22        6,177       (1,951
     

 

 

   

 

 

 
      $ (85,784   $ (16,618
     

 

 

   

 

 

 

Weighted average number of common shares—basic

        257,914,589       242,763,558  

Weighted average number of common shares—diluted

        257,914,589       242,763,558  
     

 

 

   

 

 

 

Loss per share—basic

     28      $ (0.33   $ (0.07

Loss per share—diluted

     28      $ (0.33   $ (0.07
     

 

 

   

 

 

 

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
    Retained
earnings
    Non-
controlling
interests
(Note 22)
    Total  

Balance at May 31, 2018

     210,169,924      $ 1,113,981      $ 1,375     $ 22,006     $ (801   $ 27,452     $ 9,580     $ 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—LATAM acquisition

     15,678,310        273,900        —         —         —         —         11,341       285,241  

Share issuance—warrants exercised

     550,335        1,762        (39     —         —         —         —         1,723  

Share issuance—options exercised

     2,632,078        15,029        —         (9,933     —         —         —         5,096  

Share issuance—DSUs exercised

     103,000        953        —         —         —         —         —         953  

Income tax recovery on share issuance costs

     —          3,426        —         —         —         —         —         3,426  

Share-based payments

     —          —          —         24,078       —         —         —         24,078  

Elimination of CTA on disposal of equity investee

     —          —          —         —         801       (801     —         —    

Non-controlling interests

     —          —          —         —         —         —         9,439       9,439  

Comprehensive loss for the year

     —          —          —         —         (119     (14,548     (1,951     (16,618
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 31, 2019

     250,989,120      $ 1,655,273      $ 1,336     $ 36,151     $ (119   $ 12,103     $ 28,409     $ 1,733,153  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Number of
common
shares
    Share
capital
(Note 19)
    Warrants
(Note 20)
    Share-
based
payment

reserve
    Accumulated
other
comprehensive
loss
    Retained
earnings
(deficit)
    Non-
controlling
interests
(Note 22)
    Total  

Balance at May 31, 2019

     250,989,120     $ 1,655,273     $ 1,336     $ 36,151     $ (119   $ 12,103     $ 28,409     $ 1,733,153  

Share issuance—January 2020 bought deal

     14,044,944       99,727       —         —         —         —         —         99,727  

Share issuance—debt settlement

     18,860,505       78,063       —         —         —         —         —         78,063  

Share issuance—options exercised

     1,293,745       6,950       —         (2,848     —         —         —         4,102  

Share issuance—RSUs exercised

     667,529       4,428       —         —         —         —         —         4,428  

Share issuance—DSUs exercised

     398,050       1,962       —         —         —         —         —         1,962  

Share issuance—warrants exercised

     766,372       1,150       —         —         —         —         —         1,150  

Cancelled shares

     (500,000     (615     —         —         —         615       —         —    

Expired options

     —         —         —         (15,984     —         15,984       —         —    

Expired warrants

     —         —         (976     —         —         976       —         —    

Share-based payments

     —         —         —         10,402       —         —         —         10,402  

Nuuvera Malta acquisition

     —         —         —         —         —         (82     82       —    

Non-controlling interests

     —         —         —         —         —         —         (8,861     (8,861

Comprehensive income (loss) for the year

     —         —         —         —         (1,150     (90,811     6,177       (85,784
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 31, 2020

     286,520,265     $ 1,846,938     $ 360     $ 27,721     $ (1,269   $ (61,215   $ 25,807     $ 1,838,342  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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      2020     2019  

Cash used in operating activities:

       

Net loss for the year

      $ (84,634   $ (16,499

Adjustments for:

       

Future income taxes

     15        (2,722     (4,090

Fair value adjustment on sale of inventory

     5        57,039       27,724  

Fair value adjustment on growth of biological assets

     6        (115,255     (40,607

Loss on marketable securities

        338       178  

Unrealized foreign exchange gain

        (605     (256

Amortization

     8,9        49,271       22,940  

Loss (gain) on sale of capital assets

        10,824       (55

Impairment

     10        63,971       58,039  

Unrealized loss on convertible notes receivable

     11,26        7,341       3,399  

Gain on equity investee

        —         (58,438

Loss on promissory notes receivable

        13,000       —    

Deferred gain recognized

        —         (618

Other non-cash items

        (458     (566

Share-based compensation

     24        22,500       26,080  

Loss (gain) on long-term investments

     27        32,568       (19,651

Gain on convertible debentures

        (71,866     (48,439

Unrealized loss on financial liabilities

        —         1,326  

Transaction costs

        —         15,419  

Change in non-cash working capital

     29        (115,068     (21,491
     

 

 

   

 

 

 
        (133,756     (55,605
     

 

 

   

 

 

 

Cash provided by (used in) financing activities:

       

Share capital issued, net of cash issuance costs

        99,727       245,925  

Proceeds from warrants and options exercised

        5,252       7,772  

Proceeds from convertible debentures

        —         454,386  

Repayment of convertible debentures

        (1,089     —    

Proceeds from long-term debt

        81,696       27,841  

Repayment of long-term debt

        (10,877     (11,374

Repayment of lease liabilities

        (1,301     —    

Increase in bank indebtedness

        537       —    
     

 

 

   

 

 

 
        173,945       724,550  
     

 

 

   

 

 

 

Cash used in investing activities:

       

Proceeds from disposal of marketable securities

        19,861       24,685  

Investment in capital and intangible assets

        (132,423     (205,965

Proceeds from disposal of capital assets

        1,892       55  

Convertible notes advances

        —         (19,500

Repayment of convertible and promissory notes receivable

        26,000       8,551  

Investment in long-term investments and equity investees

        (605     (72,367

Proceeds from disposal of long-term investments and equity investees

     27        26,233       110,213  

Net cash paid on business acquisitions

     10        (34,722     (23,557
     

 

 

   

 

 

 
        (93,764     (177,885
     

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

        (53,575     491,060  

Cash and cash equivalents, beginning of year

        550,797       59,737  
     

 

 

   

 

 

 

Cash and cash equivalents, end of year

      $ 497,222     $ 550,797  
     

 

 

   

 

 

 

Cash is comprised of:

       

Cash in bank

      $ 86,151     $ 129,998  

Short-term deposits

        411,071       420,799  
     

 

 

   

 

 

 

Cash and cash equivalents

      $ 497,222     $ 550,797  
     

 

 

   

 

 

 

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, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

1. Nature of operations

Aphria Inc. (the “Company” or “Aphria”) is an international organization with a focus on building a global cannabis brand, with operations in Canada, Germany, Italy, Malta, Colombia, and Argentina. The Company exists under the laws of the Business Corporations Act (Ontario), is licensed to produce and sell medical and adult-use cannabis, cannabis-derived extracts, and derivative cannabis products in Canada under the provisions of The Cannabis Act.

Broken Coast Cannabis Ltd. (“Broken Coast”) is a wholly owned subsidiary of the Company licensed to produce and sell cannabis under The Cannabis Act.

1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company. In November 2019, Aphria Diamond received its cultivation licence under the provisions of The Cannabis Act.

The registered office of the Company is located at 1 Adelaide Street East, Suite 2310, Toronto, Ontario.

The Company’s common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“TSX”) in Canada and the National Association of Securities Dealers Automated Quotations Exchange (“NASDAQ”) in the United States.

These consolidated financial statements were approved by the Company’s Board of Directors on July 28, 2020.

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

All figures presented in the consolidated financial statements are reflected in Canadian dollars; however, the functional currency of the Company includes the Canadian dollar and the Euro.

Foreign currency transactions are translated to the respective functional currencies of the Company’s entities at the exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the foreign exchange rate applicable at the statement of financial position date. Non-monetary items carried at historical cost denominated in foreign currencies are translated to the functional currency at the date of the transactions. Non-monetary items carried at fair value denominated in foreign currencies are translated to the functional currency at the date when the fair value was determined. Realized and unrealized exchange gains and losses are recognized through profit and loss.

On consolidation, the assets and liabilities of foreign operations reported in their functional currencies are translated into Canadian dollars, the Group’s presentation currency, at period-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. The Company and all of its subsidiaries’ functional currency is Canadian dollars, with the exception of CC Pharma GmbH whose functional currency is the Euro.

 

6


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

  (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. The following is a list of the Company’s operating subsidiaries:

 

Subsidiaries

   Jurisdiction of incorporation    Ownership
interest1
 

Broken Coast Cannabis Ltd.

   British Columbia, Canada      100

ARA – Avanti Rx Analytics Inc.

   Ontario, Canada      100

FL Group S.r.l.

   Italy      100

ABP, S.A.

   Argentina      100

Nuuvera Deutschland GmbH2

   Germany      100

Aphria RX GmbH

   Germany      100

CC Pharma GmbH

   Germany      100

CC Pharma Research and Development GmbH

   Germany      100

Aphria Wellbeing GmbH

   Germany      100

Marigold Projects Jamaica Limited

   Jamaica      95 %3 

ASG Pharma Ltd.

   Malta      100

ColCanna S.A.S.

   Colombia      90

CC Pharma Nordic ApS

   Denmark      75

1974568 Ontario Ltd.

   Ontario, Canada      51

 

 

1 

The Company defines ownership interest as the interest in which the Company is entitled to a proportionate share of net income. Legal ownership of some subsidiaries differ from ownership interest shown above.

2 

Entity name was changed to Aphria Germany GmbH subsequent to year-end.

3 

The Company holds 49% of the issued and outstanding shares of Marigold Projects Jamaica Limited, through wholly owned subsidiary Marigold Acquisitions Inc. The Company holds rights through a licensing agreement to 95% of the results of operations of Marigold Projects Jamaica Limited.

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)

Corporate reorganization

During the year, the Company completed the name changes for the following entities: Aphria RX GmbH (formerly Aphria Deutschland GmbH) and Aphria Wellbeing GmbH (formerly Aphria Handelsgesellschaft). The Company also dissolved Aphria Italy S.p.A. and sold its interest in APL – Aphria Portugal, Lda.

 

  (f)

Interest in equity investees

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.

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.

 

7


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

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.

3. Significant accounting policies

The significant accounting policies used by the Company are as follows:

a. Revenue

Revenue is recognized when performance obligation under the terms of a contract with a customer are satisfied, which is upon the transfer of control of the contracted goods. Except for goods sold under bill-and-hold arrangements, control is transferred when title and physical possession of the product has transferred to the customer, which is determined by respective shipping terms and certain additional considerations. Invoices are generally issued at the time of delivery (which is when the Company has satisfied its performance obligation under the arrangement). The Company does not have performance obligations subsequent to delivery on the sale of goods to customers and revenues from sale of goods are recognized at a “point in time”, which is upon passing of control to the customer.

Under bill-and-hold arrangements – whereby the Company bills a customer for product to be delivered at a later date – control typically transfers when the product is still in our physical possession, and title and risk of loss has passed to the customer. Revenue is recognized when all specific requirements for transfer of control under a bill-and-hold arrangement have been met.

Amounts disclosed as net revenue are net of sales tax, duty tax, 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. Purchased inventory is carried at cost and is determined using the weighted average method. The capitalized cost for produced inventory includes the direct and indirect costs initially capitalized to biological assets before the transfer to inventory. The capitalized cost also includes subsequent costs such as materials, labour and amortization expense on equipment involved in packaging, labelling and inspection. The total cost of inventory also includes a fair value adjustment which represents the fair value of the biological asset at the time of harvest. All direct and indirect costs related to inventory are capitalized as they are incurred, and they are subsequently recorded within ‘production costs’ on the statements of loss and comprehensive loss at the time cannabis is sold, the realized fair value amounts included in inventory sold are recorded as a separate line on the statements of loss and comprehensive loss.

 

8


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

e. Biological assets

The Company’s biological assets consist of 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 costs of growing materials as well as other indirect costs of production such as utilities and supplies used in the growing process. Indirect labour for individuals involved in the growing and quality control process is also included, as well as amortization on production equipment and overhead costs to the extent it is associated with the growing space. All direct and indirect costs of biological assets are capitalized as they are incurred, and subsequently transferred to inventory at the point of harvest. Unrealized fair value gains on growth of biological assets are recorded in a separate line on the face of the statements of loss and comprehensive loss and subsequently transferred to inventory at the point of harvest.

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:

 

Asset type

  

Amortization method

   Amortization term  
Land    Not amortized      No term  
Production facility    Straight-line      15 – 20 years  
Equipment    Straight-line      3 – 10 years  
Leasehold improvements    Straight-line      Over lease term  
Construction in progress    Not amortized      No term  
Right-of-use assets    Straight-line      Over lease 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 loss and comprehensive loss in the year the asset is derecognized.

The assets’ residual values and useful lives are reviewed at each financial year end and adjusted prospectively if appropriate.

g. 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 – 10 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  
Intellectual property, trademarks & brands    Straight-line      15 months – 20 years  

The estimated success of applications and useful life are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Following initial recognition, intangible assets with indefinite useful lives are carried at cost less any accumulated impairment losses.

 

9


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

h. Goodwill

Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net tangible and intangible assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

i. Impairment of non-financial assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

For the purpose of testing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit, or “CGU”). An impairment loss is recognized for the amount, if any, by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and the value in use (being the present value of expected future cash flows of the asset or CGU). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized, with the exception of goodwill and indefinite lived intangible assets.

j. Income taxes

Income tax expense consisting of current and deferred tax expense is recognized in the consolidated statements of loss and comprehensive loss. 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, convertible debentures 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, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

l. Share-based compensation

The Company has an omnibus long-term incentive plan which includes issuances of stock options, restricted share units and deferred share units 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 loss and comprehensive loss 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 loss and comprehensive loss as incurred.

n. Leases

The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Company recognizes the leases as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are assumed.

Lease liability

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The incremental borrowing rate is defined as the rate of interest that the Company would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Lease payments included in the measurement of the lease liability comprise:

 

   

fixed lease payments (including in-substance fixed payments), less any lease incentives;

 

   

variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

 

   

the amount expected to be payable by the lessee under residual value guarantees;

 

   

the exercise of purchase options, if the lessee is reasonably certain to exercise the options; and

 

   

payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

 

   

the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

 

   

the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

 

   

a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

 

 

11


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

Right-of-use assets

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Whenever the Company incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognized and measured under IAS 37. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The Company applies IAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired.

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line administrative expenses in the consolidated statements of operations and comprehensive income.

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Company has elected to use this practical expedient.

o. Financial instruments

Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provision of the respective instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities, other than financial assets and financial liabilities at FVTPL , are included in the initial carrying value of the related instrument and are amortized using the effective interest method. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss.

Fair value estimates are made at the consolidated statement of financial position date based on relevant market information and information about the financial instrument. The Company has made the following classifications:

 

Financial assets/liabilities

  

IFRS 9 Classification

Cash and cash equivalents

  

FVTPL

Marketable securities

  

FVTPL

Accounts receivable

  

amortized cost

Promissory notes receivable

  

amortized cost

Convertible notes receivable

  

FVTPL

Long-term investments

  

FVTPL

Bank indebtedness

  

amortized cost

Accounts payable and accrued liabilities

  

other financial liabilities

Income taxes payable

  

other financial liabilities

Lease liabilities

  

other financial liabilities

Long-term debt

  

other financial liabilities

Convertible debentures

  

FVTPL

 

12


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

  (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 loss and comprehensive loss. Transaction costs are expensed as incurred.

 

  (ii)

Amortized cost financial assets

Financial assets at amortized cost are non-derivative financial assets which are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset is initially measured at fair value, including transaction costs and subsequently at amortized cost.

 

  (iii)

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

The carrying amount of all financial assets, excluding trade receivables, is directly reduced by the impairment loss. The carrying amount of trade receivables is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in the consolidated statements of loss and comprehensive loss. With the exception of FVOCI 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 loss and comprehensive loss.

 

  (iv)

Financial liabilities and other financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or at amortized cost. Financial liabilities at FVTPL are stated at fair value, with changes being recognized through the consolidated statements of loss and comprehensive loss. 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.

 

  (v)

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 within the critical accounting estimates and judgements.

 

  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.

Long-term investments and convertible notes receivable

The determination of fair value of the Company’s long-term investments and convertible notes receivable at other than initial cost is 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.

 

13


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

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 or convertible notes receivable 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 and convertible notes receivable.

The fair value of long-term investments and convertible notes receivable 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 and convertible notes receivable 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. The uncertainties of coronavirus’ (“COVID-19”) impact on the future cash flow estimates are further described in Note 10.

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.

 

14


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

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.

Convertible debentures

The fair value of the convertible debentures is determined using the quoted price in the over-the-counter broker market. As the convertible debentures are classified as FVTPL, the subsequent interest as well as change in the fair value will flow through the consolidated statements of comprehensive income. There is judgement in assessing what portion of the gain/loss, if any, relates to the change in the Company’s own risk.

q. New standards and interpretations applicable effective June 1, 2019

Adoption of IFRS 16 – Leases

IFRS 16 introduced a single, on-balance sheet accounting model for leases. The Company, as a lessee, has recognized right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments.

The Company has applied IFRS 16 using the modified retrospective method and has elected to set the right-of-use asset equal to the lease liability. As such the cumulative effect of initial application recognized in retained earnings at June 1, 2019 is nil. Accordingly, the comparative information presented for the prior period has not been restated and is presented as previously reported under IAS 17 and related interpretations.

Previously, the Company determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement Contains a Lease. The Company now determines whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is Initially measured at cost, and subsequently at cost less any accumulated depreciation or impairment losses and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The Company primarily uses its incremental borrowing rate as the discount rate. The weighted average discount rate used was 5.0% . The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions represent leases. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into, or changed, on or after June 1, 2019.

 

15


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

The Company used the following additional practical expedients:

 

   

Applied a single discount rate to a portfolio of leases with similar characteristics;

 

   

Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

 

   

Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application;

 

   

Account for any lease and associated non-lease components as a single arrangement and

 

   

Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

The Company has furthermore applied judgment to determine the applicable discount rate. The discount rate is based on the Company’s incremental borrowing rate and reflects the current market assessments of the time value of money and the associated risks for which the estimates of future cash flows have not been adjusted for.

With the election of the practical expedient methods on transition to IFRS 16, the Company recognized right-of-use assets and corresponding lease liabilities of $8,606 on June 1, 2019 for a combination of vehicle and office lease agreements. The Company has recognized amortization expense of $1,455 and finance costs of $380 in the consolidated statements of loss and comprehensive loss for the year ended May 31, 2020.

Lease liabilities recognized in the consolidated statement of financial position on the date of transition:

 

Reconciliation of IFRS 16 transitional impact

   June 1,
2019
 

Discounted using the incremental borrowing rate at the date of initial application

     7,722  

Adjustments for renewal options reasonably certain to be exercised

     884  
  

 

 

 

Lease liabilities recognized

   $ 8,606  
  

 

 

 

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 loss and comprehensive loss, and consolidated statements of cash flows to improve clarity.

 

4.

Prepaids and other current assets

 

Prepaids and other current assets are comprised of:

 

     May 31,
2020
     May 31,
2019
 

Sales tax receivable

   $ 11,670      $ 7,583  

Accrued interest

     125        2,779  

Prepaid assets

     23,365        10,696  

Other

     7,823        2,333  
  

 

 

    

 

 

 
   $ 42,983      $ 23,391  
  

 

 

    

 

 

 

 

16


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

5.

Inventory

 

Inventory is comprised of:

 

     Capitalized
cost
     Fair value
adjustment
     May 31,
2020
     May 31,
2019
 

Harvested cannabis

   $ 72,641      $ 70,310      $ 142,951      $ 23,253  

Purchased cannabis

     8,764        —          8,764        —    

Harvested cannabis trim

     3,855        168        4,023        5,789  

Cannabis oil

     30,946        6,053        36,999        19,601  

Purchased CBD distillate

     5,503        —          5,503        —    

Softgel capsules

     430        150        580        764  

Cannabis vapes

     5,686        1,865        7,551        —    

Distribution inventory

     35,341        —          35,341        32,944  

Packaging and other inventory items

     22,609        —          22,609        9,178  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 185,775      $ 78,546      $ 264,321      $ 91,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended May 31, 2020, the Company recorded $64,972 (2019 - $36,446) of production costs. Included in production costs for the year ended May 31, 2020 is $1,860 of internal cannabis oil conversion costs (2019 - $1,682), $nil of external cannabis oil conversion costs (2019 - $892), and amortization of $9,544 (2019 - $4,133). The Company also included $17,980 of amortization which remains in inventory for the year ended May 31, 2020 (2019 - $4,723) related to capital assets utilized in production. During the year ended May 31, 2020, the Company expensed $57,039 (2019 - $27,724) of fair value adjustments on the growth of biological assets included in inventory sold.

During the year, the Company purchased a total of $30,684 (9,253.6 kgs) of dried flower cannabis on the wholesale market. At May 31, 2020, the Company maintained $8,764 (2,887.5 kgs) of purchased cannabis in inventory. During the year ended May 31, 2020, the Company recorded $21,920 of purchased cannabis in the statements of loss and comprehensive loss.

The Company holds 47,318.4 kgs of harvested cannabis (May 31, 2019 – 6,309.9 kgs), 16,092.3 kgs of harvested cannabis trim (May 31, 2019 – 1,908.0 kgs), 106,371.0 litres of cannabis oils or 18,499.3 kgs equivalent in various stages of production (May 31, 2019 – 28,458.1 litres or 4,949.2 kgs equivalent), 1,669.2 litres of cannabis oils used in softgel capsules or 290.3 kgs equivalent (May 31, 2019 – 982.0 litres or 218.2 kgs equivalent) and 21,707.5 litres of cannabis oils used in cannabis vape oils or 3,775.2 kgs equivalent at May 31, 2020 (May 31, 2019 – nil litres or nil kgs equivalent).

 

6.

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

     40,607  

Production costs capitalized

     47,747  

Transferred to inventory upon harvest

     (76,960
  

 

 

 

Balance at May 31, 2019

   $ 18,725  

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

     115,255  

Production costs capitalized

     131,561  

Transferred to inventory upon harvest

     (237,200
  

 

 

 

Balance at May 31, 2020

   $ 28,341  
  

 

 

 

 

17


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

The Company values 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 $3.00 and $0.25 per gram respectively, upon harvest for greenhouse produced cannabis (May 31, 2019 – $3.50 and $2.75 per gram) and $4.00 and $0.25 per gram respectively (May 31, 2019 – $4.00 and $3.25 per gram), 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 $115,255 during the year ended May 31, 2020 (2019 – $40,607).

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, the Company lowered the expected selling price of cannabis and cannabis trim from between $3.00 and $7.00 to $2.50 and $6.50 for harvested cannabis and $0.50 and $2.00 for harvested cannabis trim. These changes resulted in a decrease in the fair value of biological assets of approximately $5,000 for the year ended May 31, 2020. The lower fair value of biological assets will continue to result in lower carrying value of harvested cannabis inventory for all harvested inventory upon the change in assumptions.

In determining the fair value of biological assets, management has made the following estimates in this valuation model:

 

   

The harvest yield is between 20 grams and 60 grams per plant;

 

   

The selling price is between $2.50 and $6.50 per gram of harvested cannabis;

 

   

The selling price is between $0.50 and $2.00 per gram of harvested cannabis trim;

 

   

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 $1.50 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 $682 (May 31, 2019 – $516) and inventory decreasing by $9,895 (May 31, 2019 – $2,470)

 

   

Harvest yield per plant – a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $439 (May 31, 2019 – $266)

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.

 

7.

Related party transactions

 

Key management personnel compensation for the year ended May 31, 2020 and 2019 was comprised of:

 

     For the year ended
May 31,
 
     2020      2019  

Salaries

   $ 6,863      $ 5,140  

Share-based compensation

     5,037        11,854  
  

 

 

    

 

 

 
   $ 11,900      $ 16,994  
  

 

 

    

 

 

 

 

18


Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2020 and May 31, 2019

(In thousands of Canadian dollars, except share and per share amounts)

 

 

Directors and officers of the Company control 0.12% or 353,442 of the voting shares of the Company.

As at May 31, 2020, a balance paid to an officer and director of the Company of $801 is included within prepaid and other current assets.

During the year, the Company issued 165,100 deferred share units to directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan.

During the year, the Company issued 1,575,848 restricted share units to officers and directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan. 1,127,698 restricted share units issued to an officer and director of the Company vest upon the achievement of specified performance measures. 50,000 vested immediately, 86,746 vest June 1, 2020 and the remaining vest over two years.

During the year, the Company issued 1,200,962 stock options to officers of the Company, under the terms of the Company’s Omnibus Long-Term Incentive Plan.

 

8.

Capital assets

 

 

     Land     Production
facility
    Equipment     Leasehold
improvements
    Construction
in process
    Right-
of-use

assets
    Total
capital
assets
 

Cost

              

At May 31, 2018

   $ 24,504     $ 99,442     $ 15,949     $ 1,665     $ 167,157     $ —       $ 308,717  

Business acquisitions

     345       4,524       1,662       182       154       —         6,867  

Additions

     8,109       3,829       28,305       778       163,953       —         204,974  

Transfers

     192       124,603       33,687       (1,389     (157,093     —         —    

Effect of foreign exchange

     3       70       24       —         11       —         108  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At May 31, 2019

     33,153       232,468       79,627       1,236       174,182       —         520,666  

IFRS 16 Adjustment

     —         —         —         —         —         8,606       8,606  

Additions

     —         4,480       21,034       1,240       101,284       677       128,715  

Transfers

     72       37,491       108,730       16,081       (162,414     40       —    

Disposals

     —         —         (7,157     —         (5,559     —         (12,716

Impairment

     (15     (3,433     (46     (119     (2,147     (840     (6,600

Effect of foreign exchange

     —         14       22       —         114       107       257  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At May 31, 2020

   $ 33,210     $ 271,020     $ 202,210     $ 18,438     $ 105,460     $ 8,590     $ 638,928  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation

              

At May 31, 2018

   $ —       $ 2,500     $ 2,957     $ 109     $ —       $ —       $ 5,566  

Amortization

     —         5,160       5,962       80       —         —         11,202  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At May 31, 2019

     —         7,660       8,919       189       —         —         16,768  

Amortization