UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM 40-F

¨  Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934

or

x  Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended May 31, 2019                                                                        Commission File Number   001-38708

 

 

 

Aphria Inc.

(Exact name of Registrant as specified in its charter)

 

Canada
(Province or other jurisdiction of incorporation or organization)
2833
(Primary Standard Industrial Classification Code Number)
N/A
(I.R.S. Employer
Identification Number)


 

265 Talbot St. W.
Leamington, Ontario, Canada N8H 4H3
(844) 427-4742

(Address and telephone number of Registrant’s principal executive offices)

 

 

 

CT Corporation System
15 th Street N.W., Suite 1000, Washington, DC 20005

(202) 572-3100

(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

 

 

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Shares APHA New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: Common Shares, no par value

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

For annual reports, indicate by check mark the information filed with this Form:

 

x    Annual information form                                         x    Audited annual financial statements

 

Indicate the number of outstanding shares of each of the registrant’s classes of capital or common stock as of the close of the period covered by the annual report: 250,989,120

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). ¨ Yes ¨ No

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.

 

Emerging growth company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. ¨

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

 

 

 

EXPLANATORY NOTE

 

Aphria Inc. (the “Company”, “Aphria” or the “Registrant”) is a Canadian issuer that is permitted, under the multijurisdictional disclosure system adopted in the United States, to prepare this annual report on Form 40-F (this “Annual Report”) pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in accordance with Canadian disclosure requirements, which are different from those of the United States. The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act and Rule 405 under the Securities Act of 1933, as amended. Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3 thereunder.

 

FORWARD LOOKING STATEMENTS

 

The Exhibits incorporated by reference into this Annual Report contain “forward-looking information” and “forward-looking statements” within the meaning of United States securities laws. All information, other than statements of historical facts, included in this Annual Report that addresses activities, events or developments that the Company expects or anticipates will or may occur in the future is forward-looking information. Forward-looking information includes, among other things, information regarding:

 

· the competitive and business strategies of the Company;
· the intention to grow the business, operations and potential activities of the Company;
· the ongoing expansion of the Company’s facilities, including the Extraction Centre of Excellence (as defined on page 11 of the Company’s Annual Information Form (“AIF”) filed as Exhibit 99.1 to this Annual Report), its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity;
· the expected production capacity of the Company;
· the success of the entities the Company acquires and the Company’s collaborations;
· the market for the Company’s current and proposed market offerings, as well as the Company’s ability to capture market share;
· the benefits and applications of the Company’s product offering and expected sales mix thereof;
· the development of affiliated brands, product diversification and future corporate development;
· the competitive conditions of the industry and the Company’s market expertise;
· whether the Company will have sufficient working capital and its ability to obtain financing required in order to develop its business and continue operations;
· the applicable laws, regulations, licensing and any amendments thereof related to the cultivation, production and sale of cannabis products;
· the potential time frame for the implementation of regulations with respect to the regulatory framework for edible cannabis, cannabis extracts and cannabis topical products;
· the applicable laws and regulations, and the potential time frame for the implementation of such laws and regulations, to legalize and regulate medical or recreational cannabis (and the consumer products derived therefrom) internationally;
· the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof;
· the anticipated future gross sales and margins of the Company’s operations and the potential for significant losses;
· the performance of the Company’s business and operations; and
· the ability of the Company to continue to attract, develop, motivate and retain highly qualified and skilled employees, including a permanent Chief Executive Officer and other members of the executive team, including a Chief Commercial Officer and a Chief Medical Officer.

 

Certain forward-looking statements contain the cannabis industry and the general expectations of the Company’s business and operations are based on estimates prepared by Aphria using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which Aphria believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data are inherently imprecise. While Aphria is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

 

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Readers are cautioned that the above list of cautionary statements is not exhaustive. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. Readers should not place undue reliance on forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

 

The above statements are not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further in the exhibits attached to this Annual Report, including those described in the AIF and the MD&A and incorporated by reference herein. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements.

 

NOTE TO UNITED STATES READERS - DIFFERENCES IN UNITED STATES AND CANADIAN REPORTING PRACTICES

 

The Registrant is permitted, under a multijurisdictional disclosure system adopted by the United States Securities and Exchange Commission (the “SEC”), to prepare this Annual Report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant prepares its financial statements, which are filed with this Annual Report in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, and which are not comparable to financial statements of United States companies.

 

CURRENCY

 

Unless otherwise indicated, all dollar amounts in this Annual Report on Form 40-F are in Canadian dollars. The exchange rate of Canadian dollars into United States dollars, on May 31, 2019, based upon the daily exchange rate as quoted by the Bank of Canada was U.S.$1.00 = Cdn.$1.3527.

 

ANNUAL INFORMATION FORM

 

The AIF for the fiscal year ended May 31, 2019 is filed as Exhibit 99.1 to this Annual Report and is incorporated by reference herein.

 

AUDITED ANNUAL FINANCIAL STATEMENTS

 

The audited consolidated financial statements of the Company for the years ended May 31, 2019 and 2018, including the report of the independent registered public accounting firm thereon, are filed as Exhibit 99.2 to this Annual Report, and are incorporated by reference herein.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The Company’s MD&A for the year ended May 31, 2019 is filed as Exhibit 99.3 to this Annual Report, and is incorporated by reference herein.

 

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TAX MATTERS

 

Purchasing, holding, or disposing of the Company’s securities may have tax consequences under the laws of the United States and Canada that are not described in this Annual Report.

 

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report, the Company carried out an evaluation, under the supervision of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s CEO and CFO have concluded that, as of the end of the period covered by this Annual Report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission (the “SEC”) rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

While the Company’s principal executive officer and principal financial officer believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.

 

Attestation Report of the Registered Public Accounting Firm

 

This Annual Report does not include an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

 

Changes in Internal Control over Financial Reporting

 

During the period covered by this Annual Report, no change occurred in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

CORPORATE GOVERNANCE

 

The Company’s Board of Directors (the “Board of Directors”) is responsible for the Company’s corporate governance and has separately designated a standing Corporate Governance and Nominating Committee, established in accordance with Section 303A.04 of the New York Stock Exchange (the “NYSE”) Listed Company Manual, and a Compensation Committee, established in accordance with Section 303A.05 of the NYSE Listed Company Manual. The Board of Directors has determined that all the members of the Compensation Committee and the Corporate Governance and Nominating Committee are independent, based on the criteria for independence prescribed by Section 303A.02 of the NYSE Listed Company Manual.

 

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Compensation Committee

 

Compensation of the Company’s CEO and all other senior management is recommended to the Board of Directors for determination by the Compensation Committee. The Company’s Compensation Committee is comprised of Michael Serruya (Chair), Shlomo Bibas and Tom Looney. The Compensation Committee is responsible for: assisting the Board of Directors in discharging its responsibilities regarding executive compensation; setting objectives for the CEO and evaluating the CEO’s performance; monitoring management’s succession plan for the CEO and other senior management; and monitoring compliance with the Company’s “Minimum Share Ownership Policy.” The Compensation Committee conducts a review of all new employment, consulting, retirement and severance agreements and arrangements proposed for the Company’s senior management and makes recommendations to the board therewith. The Compensation Committee will also periodically evaluate existing agreements with the Company’s senior management for continuing appropriateness. The Compensation Committee also reviews and evaluates the performance of the CEO for the prior year.

 

The full text of the Compensation Committee Charter is posted on the Company’s website, www.aphria.com.

 

Nominating and Corporate Governance Committee

 

Nominees for the election to the Board of Directors are recommended by the Nominating and Governance Committee. The Nominating and Corporate Governance Committee is comprised of Renah Persofsky (Chair), Shawn Dym and Michael Serruya. The Nominating and Corporate Governance Committee’s responsibilities include: identifying potential nominees to the Board of Directors; assessing the effectiveness of the directors and the various committees of the Board of Directors and the composition of same; discharging responsibilities regarding the compensation of non-executive members of the Board of Directors; developing and recommending governance principles and policies related to overall corporate governance of the organization; and evaluating the Board of Directors’ independence, expertise, experience, personal qualities and ability to make the necessary time commitments in light of the opportunities and risks facing the Company.

 

The full text of the Nominating and Governance Committee Charter is posted on the Company’s website, www.aphria.com.

 

AUDIT COMMITTEE FINANCIAL EXPERT

 

The Board of Directors has determined that John M. Herhalt qualifies as a financial expert (as defined in Item 407 (d)(5)(ii) of Regulation S-K under the Exchange Act), has financial management expertise (pursuant to section 303A.07 of the NYSE Listed Company Manual) and is independent (as determined under Exchange Act Rule 10A-3).

 

AUDIT COMMITTEE

 

The Board of Directors has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act and Section 303A.06 of the NYSE Listed Company Manual.  The Company’s Audit Committee is comprised of John M. Herhalt, Tom Looney and Shlomo Bibas, all of whom, in the opinion of the Board of Directors, are independent (as determined under Rule 10A-3 of the Exchange Act and Section 303A.02 of the NYSE Listed Company Manual).  All three members of the Audit Committee are financially literate, meaning they are able to read and understand the Company’s financial statements and to understand the breadth and level of complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.  The Audit Committee meets the composition requirements set forth by Section 303A.07 of the NYSE Listed Company Manual.

 

5

 

 

The members of the Audit Committee are appointed by the Board of Directors annually.  Each member of the Audit Committee will remain on the committee until the next annual meeting of shareholders after his or her appointment, unless otherwise removed or replaced by the Board of Directors at any time.

 

The full text of the Audit Committee Mandate is available on the Company’s website at  www.aphria.com  and is attached as Schedule “A” to the Annual Information Form, which is filed as  Exhibit 99.1  to this Annual Report.

 

PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITOR

 

The Audit Committee Charter sets out responsibilities regarding the provision of non-audit services provided to the Company by the Company’s external auditors or to any subsidiary entities by the external auditors of such subsidiary entities. The Audit Committee may delegate to one or more of its members the authority to pre-approve non-audit services but preapproval by such member or members so delegated shall be presented to the full Audit Committee at its first scheduled meeting following such pre-approval.

 

Of the fees reported in this Annual Report on Form 40-F under the heading “Principal Accountant Fees and Services – Independent Auditor”, none of the fees billed PricewaterhouseCoopers LLP were approved by the Company’s audit committee pursuant to the de minimus exception provided by Section (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES – INDEPENDENT AUDITOR

 

The following table shows the aggregate fees billed to the Company by PricewaterhouseCoopers LLP and its affiliates, Chartered Professional Accountants, the Company’s independent auditor, in each of the last two years.

 

    2018     2019  
             
Audit Fees (1)   $ 285,000.00     $ 780,000.00  
Audit-Related Fees (2)     179,872.00       90,000.00  
Tax Fees (3)     Nil       Nil  
All Other Fees (4)     464,872.00       226,000.00  
Total   $ 929,744.00     $ 1,096,000.00  

 

               
(1) Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.
(2) Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.  

(3) Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.

(4) Prospectus fees.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Please see the sections entitled “Contractual obligations and off-balance sheet financing” at page 28 of the Company’s May 31, 2019 MD&A contained in Exhibit 99.3 (which sections are incorporated by reference in this annual report on Form 40-F) for a discussion of certain off-balance sheet arrangements.

 

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CODE OF ETHICS

 

The Company adopted a Code of Business Conduct and Ethics (the “Code”) on July 11, 2017, which applies to its directors, principal executive and financial officers, and accounting officers. The full text of the Code is posted on the Company’s website, www.aphria.com.

 

All amendments to the Code, and all waivers of the Code with respect to any director, principal executive or financial officers and accounting officers will be posted on the Company’s web site, and any amendment will be provided in print to any shareholder upon request.

 

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

The following table lists, as of May 31, 2019, information with respect to the Company’s known contractual obligations (in thousands):

 

Payments due by period  
Contractual Obligations   Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
Outstanding capital related commitments   $ 49,878     $ 49,878     $ --     $ --     $ --  
Operating leases     5,596       811       1,694       1,378       1,713  
Long-term debt     67,343       6,332       12,538       12,378       36,095  
Total   $ 122,817     $ 57,021     $ 14,232     $ 13,756     $ 37,808  

 

 

NOTICES PURSUANT TO REGULATION BTR

 

There were no notices required by Rule 104 of Regulation BTR that the Company sent during the year ended May 31, 2019 concerning any equity security subject to a blackout period under Rule 101 of Regulation BTR.

 

NYSE CORPORATE GOVERNANCE

 

The Company’s common shares are listed on the NYSE. Section 303A.11 of the NYSE Listed Company Manual permits foreign private issuers to follow home country practices in lieu of certain provisions of the NYSE Listed Company Manual. A foreign private issuer that follows home country practices in lieu of certain provisions of the NYSE Listed Company Manual must disclose any significant ways in which its corporate governance practices differ from those followed by domestic companies either on its website or in the annual report that it distributes to shareholders in the United States.

 

The Company has reviewed the NYSE corporate governance requirements and confirms that except as described below, the Company is in compliance with the NYSE corporate governance standards in all significant respects:

 

Shareholder Meeting Quorum Requirement

 

The NYSE is of the opinion that the quorum required for any meeting of shareholders should be sufficiently high to insure a representative vote. The Company’s quorum requirement is set forth in its bylaws. A quorum of the Company’s shareholders is present at a meeting of shareholders if the holders of not less than 10% of the shares entitled to vote at the meeting are present in person or represented by proxy, and at least two persons entitled to vote at the meeting are actually present at the meeting.

 

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Proxy Delivery Requirement

 

The NYSE requires the solicitation of proxies and delivery of proxy statements for all shareholder meetings, and requires that these proxies shall be solicited pursuant to a proxy statement that conforms to SEC proxy rules. The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act, and the equity securities of the Company are accordingly exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Exchange Act. The Company solicits proxies in accordance with applicable rules and regulations in Canada.

 

MINE SAFETY DISCLOSURE

 

Not applicable.

 

UNDERTAKING

 

The Company undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

 

CONSENT TO SERVICE OF PROCESS

 

The Company has previously filed with the SEC a written consent to service of process on Form F-X. Any change to the name or address of the Company’s agent for service shall be communicated promptly to the SEC by amendment to the Form F-X referencing the file number of the Company.

 

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  APHRIA INC.
   
   
  By:  /s/ Irwin Simon
    Name: Irwin Simon
Title:   Chief Executive Officer


Date: August 1 , 2019

 

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EXHIBIT INDEX

 

The following documents are being filed with the Commission as Exhibits to this Annual Report:

 

 

 

Exhibit Description
   
99.1 Annual Information Form dated July 31, 2019
   
99.2 Audited Annual Consolidated Financial Statements and notes thereto as at and for the years ended May 31, 2019 and May 31, 2018, together with the report thereon of the independent auditor
   
99.3 Management’s Discussion and Analysis for the years ended May 31, 2019 and May 31, 2018
   
99.4 Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act
   
99.5 Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act
   
99.6 Certificate of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
99.7 Certificate of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
99.8 Consent of PricewaterhouseCoopers LLP

 

 

XBRL  
101.INS* XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase

 

* To be filed by amendment.

 

 

 

 

 

Exhibit 99.1

  

 

ANNUAL INFORMATION FORM

 

For the financial year ended May 31, 2019

 

DATED: July 31, 2019  

 

 

 

 

TABLE OF CONTENTS

 

ANNUAL INFORMATION FORM 3
   
FORWARD-LOOKING STATEMENTS 3
   
CORPORATE STRUCTURE 5
   
GENERAL DEVELOPMENT OF THE BUSINESS 6
Licences 6
Three Year History 8
   
DESCRIPTION OF THE BUSINESS 19
Canadian Cannabis Operations 19
Products and Services 20
Distribution and Sales 21
Specialized Skill and Knowledge 22
Competitive Conditions (Canada) 22
New Products and Accessories 22
Components 23
Cycles 23
Economic Dependence 23
Employees 23
Foreign Operations 24
Social and Environmental Operations 27
Regulatory Overview 29
   
RISK FACTORS 35
   
DIVIDENDS 57
   
CAPITAL STRUCTURE 58
   
MARKET FOR SECURITIES 58
   
PRIOR SALES 59
   
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER 59
   
DIRECTORS AND OFFICERS 60
   
LEGAL PROCEEDINGS AND REGULATORY ACTIONS 66
   
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 67
   
TRANSFER AGENT AND REGISTRAR 67
   
MATERIAL CONTRACTS 68
   
AUDIT COMMITTEE INFORMATION 68
   
INTERESTS OF EXPERTS 69
   
ADDITIONAL INFORMATION 69

  

 

 

 

ANNUAL INFORMATION FORM

 

In this annual information form (this “ Annual Information Form ”), unless otherwise noted or the context indicates otherwise, the “ Company ”, “ Aphria ”, “ we ”, “ us ” and “ our ” refer to Aphria Inc. and the term “cannabis” has the meaning given to the term “marihuana” in the Cannabis Act (Canada) (the “ Cannabis Act ”) and the Cannabis Regulations (Canada) (the “ Cannabis Regulations ”). Unless otherwise stated, all financial information in this Annual Information Form is prepared in Canadian dollars and using International Financial Reporting Standards as issued by the International Accounting Standards Board. The information contained herein is dated as of May 31, 2019, unless otherwise stated.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Information Form contains certain information that may constitute “forward-looking information” and “forward-looking statements” (collectively, “ forward-looking statements ”) which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. The forward-looking statements included in this Annual Information Form are made only as of the date of this Annual Information Form. Forward-looking statements in this Annual Information Form include, but are not limited to, statements with respect to:

 

· the competitive and business strategies of the Company;

 

· the intention to grow the business, operations and potential activities of the Company;

 

· the ongoing expansion of the Company’s facilities, including the Extraction Centre of Excellence (as defined below on page 1), its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity;

 

· the expected production capacity of the Company;

 

· the success of the entities the Company acquires and the Company’s collaborations;

 

· the market for the Company’s current and proposed market offerings, as well as the Company’s ability to capture market share;

 

· the benefits and applications of the Company’s product offering and expected sales mix thereof;

 

· the development of affiliated brands, product diversification and future corporate development;

 

· the competitive conditions of the industry and the Company’s market expertise;

 

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· whether the Company will have sufficient working capital and its ability to obtain financing required in order to develop its business and continue operations;

 

· the applicable laws, regulations, licensing and any amendments thereof related to the cultivation, production and sale of cannabis products;

 

· the potential time frame for the implementation of regulations with respect to the regulatory framework for edible cannabis, cannabis extracts and cannabis topical products;

 

· the applicable laws and regulations, and the potential time frame for the implementation of such laws and regulations, to legalize and regulate medical or recreational cannabis (and the consumer products derived therefrom) internationally;

 

· the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof;

 

· the anticipated future gross sales and margins of the Company’s operations and the potential for significant losses;

 

· the performance of the Company’s business and operations; and

 

· the ability of the Company to continue to attract, develop, motivate and retain highly qualified and skilled employees.

 

Certain forward-looking statements contained herein concerning the cannabis industry and the general expectations of the Company’s business and operations are based on estimates prepared by Aphria using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which Aphria believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data are inherently imprecise. While Aphria is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties that are subject to change based on various factors.

 

Readers are cautioned that the above list of cautionary statements is not exhaustive. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. Readers should not place undue reliance on forward-looking statements contained in this Annual Information Form. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

 

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CORPORATE STRUCTURE

 

Aphria was incorporated under the Business Corporations Act (Alberta) on June 22, 2011 as Black Sparrow Capital Corp. (“ Black Sparrow ”), a capital pool company listed on the TSX Venture Exchange (the “ TSXV ”). 2427745 Ontario Inc. (“ Subco ”), a wholly-owned subsidiary of Black Sparrow, was incorporated on July 24, 2014 in order to effect a business combination with Pure Natures Wellness Inc. d/b/a Aphria (“ Pure Natures ”) whereby Black Sparrow would acquire all of the issued and outstanding shares of Pure Natures pursuant to a court-approved plan of arrangement. Pure Natures amalgamated with Subco under the Business Corporations Act (Ontario) (“ OBCA ”) to form a wholly owned subsidiary of Black Sparrow, and together with Black Sparrow, was continued in Ontario on December 1, 2014 as “Aphria Inc.” under the OBCA. On March 22, 2017, Aphria graduated from the TSXV to the Toronto Stock Exchange (“ TSX ”). On July 23, 2018, Pure Natures amalgamated with Aphria and continued as Aphria Inc. in Ontario. On November 2, 2018, Aphria listed its common shares (the “ Common Shares ”) on the New York Stock Exchange (“ NYSE ”). The Common Shares are listed under the symbol “APHA” on the TSX and NYSE.

 

Aphria’s principal cultivation facility is based in Leamington, Ontario. The Company’s head office is located at 245 Talbot Street West, Suite 103, Leamington, Ontario N8H 3C4 and its registered office is located at 1 Adelaide Street East, Suite 2310, Toronto, Ontario M5C 2V9. Aphria’s telephone number is 1-844-427-4742 and its corporate website is www.aphria.ca .

 

Inter-Corporate Relationships

 

Aphria is building its global cannabis brand. Through its subsidiaries, Aphria has operations in Canada, Germany, Italy, Lesotho, Malta, Portugal, Denmark, Colombia, Argentina, Barbados and Jamaica.

 

The Company’s material subsidiaries are as follows:

 

Subsidiaries   Jurisdiction of Incorporation   Ownership Interest (1)  
Broken Coast Cannabis Ltd.   British Columbia, Canada     100 %
LATAM Holdings Inc.   British Columbia, Canada     100 %
Marigold Acquisitions Inc.   British Columbia, Canada     100 %
MMJ International Investments Inc.   British Columbia, Canada     100 %
Nuuvera Holdings Limited   Ontario, Canada     100 %
ARA – Avanti Rx Analytics Inc.   Ontario, Canada     100 %
MMJ Colombia Partners Inc.   Ontario, Canada     100 %
FL-Group   Italy     100 %
Goodfields Supply Co. Ltd.   United Kingdom     100 %
Hampstead Holdings Ltd.   Barbados     100 %
ABP, S.A.   Argentina     100 %

 

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Nuuvera Deutschland GmbH   Germany     100 %
Aphria Deutschland GmbH   Germany     100 %
CC Pharma GmbH   Germany     100 %
CC Pharma Research and Development GmbH   Germany     100 %
Aphria Handelsgesellschaft   Germany     100 %
Marigold Projects Jamaica Limited   Jamaica     95 % (2)
Nuuvera Malta Ltd.   Malta     90 %
ASG Pharma Ltd.   Malta     90 % (3)
QSG Health Ltd.   Malta     90 % (4)
ColCanna S.A.S.   Colombia     90 %
CC Pharma Nordic ApS   Denmark     75 %
1974568 Ontario Inc.   Ontario, Canada     51 %
Aphria Terra S.R.L.   Italy     51 %
Aphria Italy S.p.A.   Italy     51 %
APL - Aphria Portugal, Lda.   Portugal     51 %
CannInvest Africa Ltd.   South Africa     50.1 %
Verve Dynamics Incorporated (Pty) Ltd.   Lesotho     30 % (5)

 

Notes :
(1) The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Ownership of some subsidiaries are held through other subsidiaries, which the Company controls.
(2) 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.
(3) The Company holds 100% of the issued and outstanding shares of ASG Pharma Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(4) The Company holds 100% of the issued and outstanding shares of QSG Health Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(5) The Company holds 60% of the issued and outstanding shares of Verve Dynamics Incorporated (Pty) Ltd., through 50% owned subsidiary CannInvest Africa Ltd.

 

GENERAL DEVELOPMENT OF THE BUSINESS

 

Licences

 

Aphria

 

Aphria is licensed to produce and sell medical and adult-use cannabis and cannabis-derived extracts in Canada under the provisions of the Cannabis Act. Aphria received its licence to produce and sell medical cannabis on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. These licences (the “ Licences ”) were extended to include the adult-use market on October 17, 2018. The Licences currently do not contain a cap on production or sales. The Licences have a current term that ends on September 25, 2019.

 

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Aphria’s head office is based in Leamington, Ontario, adjacent to the Company’s original 1,100,000 square foot Leamington greenhouse facility known as “ Aphria One ”. On March 4, 2019, Health Canada granted an amendment permitting the Company to commence production in an additional 800,000 square feet of facilities at Aphria One, as part of the Company’s Part IV and Part V Expansions (each as defined below).

 

Aphria holds third-party independent good manufacturing practice (“ GMP ”) certification of its Leamington, Ontario growing and processing facilities. The certification is for the current GMP standards of CFR 21 parts 210/211 established by the United States Food and Drug Administration for Active Pharmaceutical Ingredients and Finished Pharmaceuticals. Aphria One is in the process of obtaining EU-GMP certification (“EU-GMP”) for the supply of bulk products to the Company’s remaining EU-GMP sites for production of finished product.Broken Coast

 

In addition to the Licences, the Company equally holds a licence issued pursuant to the Cannabis Act in the name of its subsidiary, Broken Coast Cannabis Ltd. (“ Broken Coast ”). Broken Coast operates a fully licensed indoor cannabis production facility on Vancouver Island. The facility sits on a 4.5 acre parcel of owned land that has the necessary surrounding infrastructure to support further expansion. Broken Coast’s licence was renewed on April 20, 2018 and provides for total production space of 44,000 square feet.

 

Avanti

 

Through the acquisition of Nuuvera Inc., the Company acquired Brampton-based ARA - RX Analytics Inc. (“ Avanti ”), which 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 to allowing the Company to possess and handle cannabis and cannabis derivative products, these licences allow Avanti to engage in the possession, production, packaging, sale, transportation and delivery and testing of drugs and medical devices. The Company is also able to complete testing/analysis of active pharmaceutical ingredients.

 

Avanti is currently in the process of securing EU-GMP, which will then be used as the Canadian staging site for international bound GMP certified products. The Company’s EU-GMP certification will cover the extraction, post processing, testing, packaging and shipping process.

 

Aphria Germany

 

On April 5, 2019, Aphria announced that its German subsidiary, Aphria Deutschland GmbH (“ Aphria Germany ”) was selected by the German Federal Institute for Drugs and Medical Devices (“ BfArM ”) to receive a licence for the domestic cultivation of medical cannabis. Subsequently, Aphria Germany secured the licence for the domestic cultivation of medical cannabis from BfArM and, Aphria was granted a cultivation licence for five of the 13 total lots awarded by BfArM.

 

ASG

 

On June 21, 2018, the Company announced that its Malta-based subsidiary, ASG Pharma Ltd. (“ ASG ”), received the first import licence for medical cannabis issued by the Malta Medicines Authority. The licence allows ASG to import medical cannabis for analytical testing and research. Like Avanti, ASG is in the process of securing EU-GMP and will be the central importer and distributor of Canadian product in Europe.

 

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Three Year History

 

Fiscal 2017 (June 1, 2016 to May 31, 2017)

 

In March 2015, Aphria’s board of directors (the “ Board ”) approved a two-part expansion. The first part of the Company’s greenhouse expansion (the “ Part I Expansion ”) involved the retrofit of three existing greenhouses adjacent to the current facilities for an additional 20,700 square feet, for a total annual growing capacity of approximately 2,500 kilograms, and also involved Aphria building a research and development laboratory and investing in related advanced equipment at its Leamington, Ontario facility. The Part I Expansion was completed in October 2015. Subsequently, on February 7, 2016, Health Canada amended the Company’s licence to approve the use of the Part I Expansion for the purposes of growing medical cannabis.

 

The second part of the Company’s greenhouse expansion (the “ Part II Expansion ”) was approved by the Board on June 2, 2016 and the Company began construction of the $10,000,000 fully-funded capital project on July 1, 2016. On May 15, 2017, Health Canada approved the greenhouse portion of the Part II Expansion, which added an incremental 57,000 square feet of greenhouse capacity and a “level nine” vault. The Part II Expansion increased the Company’s production capacity for medical cannabis to approximately 8,000 kilograms on an annualized basis. The Part II Expansion also included 8,000 square feet of corporate office space and electrical and sewer upgrades necessary for the operation of the Company’s current and future greenhouse space.

 

On June 30, 2016, Aphria acquired the greenhouse facilities it previously leased from Cacciavillani and F.M. Farms Ltd. operating as CF Greenhouses (“ CF Greenhouses ”) and terminated the existing lease agreement for total consideration of $6,100,000. As a result of the acquisition, Aphria owned a total of 360,000 square feet of production space located on 36 acres of land (the “ Greenhouse Property ”). The $6,100,000 purchase price was satisfied by a $3,250,000 cash payment and CF Greenhouses assuming a vendor take back mortgage, in the amount of $2,850,000, bearing interest at 6.75%, with a 5-year amortization period.

 

On July 22, 2016, Aphria closed a financing comprised of three separate facilities (a mortgage, a term loan and an operating line of credit) (the “ WFCU Facilities ”) totaling $6,000,000 with Windsor Family Credit Union Limited (“ WFCU ”). The mortgage facility is for $3,750,000, bearing interest at 3.95%, with a 20-year amortization and a 5-year term. The term loan is for $1,250,000 bearing interest at 3.99%, with a 10-year amortization and a 5-year term. The operating line of credit is for $1,000,000, bearing interest at WFCU’s prime lending rate plus 75 basis points and revolves annually (the “ Line of Credit ”). Aphria used $3,250,000 of the WFCU Facilities to fund the acquisition of the Greenhouse Property and allocated the remaining $1,750,000 of the drawn portion of the WFCU Facilities towards capital projects in 2017 unrelated to the Part II Expansion, the Part III Expansion and the Part IV Expansion.

 

On August 19, 2016, Aphria entered into an agreement to purchase 11 acres of additional greenhouse property adjacent to its existing facility from DiNiro Farms Inc. for a $2,100,000 cash payment. The property consists of 345,000 square feet of existing greenhouse space which the Company demolished as part of its Part IV Expansion. Concurrently with the closing of this transaction, the abutting property was merged into Aphria’s existing municipal address, thereby avoiding the need to apply for a new Health Canada site licence.

 

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On September 16, 2016, the Board approved the commencement of a fully-funded $24,500,000 capital project (the “ Part III Expansion ”) to increase its capacity under the Cannabis Act from 100,000 square feet to 300,000 square feet and its growing capabilities from 8,000 kilograms (following completion of the Part II Expansion) to 22,000 kilograms annually. The Part III Expansion included (i) 200,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouse operations in Leamington, Ontario, (ii) 21,000 square feet of infrastructure, (iii) an additional four “Level 9” vaults, (iv) automation for both the greenhouses and processing areas, and (v) security consistent with Cannabis Act standards. On March 13, 2018, Health Canada approved the Part III Expansion and production within this area began immediately.

 

On December 14, 2016, Aphria entered into a purchase and sale agreement to acquire 200 acres of fully serviced vacant land for $6,240,000. As the land acquired is not adjacent to the Company’s existing operations, the Company requires a new site licence from Health Canada for the property. The purchase and sale closed on January 31, 2017. The land remains vacant and available for future development by the Company.

 

On January 16, 2017, the Board approved the commencement of a $137,000,000 capital project (the “ Part IV Expansion ”). The Part IV Expansion included (i) 700,000 square feet of state-of-the-art greenhouses built up to the current standards of greenhouses operations in Leamington, Ontario, for total greenhouse growing space of 1,000,000 square feet, (ii) 230,000 square feet of infrastructure, including a 15MW power co-generation facility designed to provide supplemental power to the Greenhouse Property to support existing operations and potential future operations currently contemplated on the existing Greenhouse Property, (iii) additional automation of greenhouses and warehouse facilities, and (v) security consistent with Cannabis Act standards. On March 4, 2019, Health Canada approved the Part IV and Part V Expansions, permitting the Company to commence production in an additional 800,000 square feet at its Leamington, Ontario facility.

 

Fiscal 2018 (June 1, 2017 to May 31, 2018)

 

On August 15, 2017, the Company invested $11,500,000 in HydRx Farms, Ltd. operating as Scientus Pharma (“ Scientus Pharma ”) by way of a senior, secured convertible debenture. The debenture, which has a two-year term, bears interest at the rate of 8%, paid semi-annually, is convertible into common shares of Scientus Pharma at the rate of $2.75 per common share and is secured by a first charge on all of the current and future assets of Scientus Pharma.

 

On October 17, 2017, the Company entered into an agreement with Clarus Securities Inc., on behalf of a syndicate of underwriters, for the purchase, on a “bought deal” basis, of 11,034,500 Common Shares at a price of $7.25 per Common Share for the aggregate gross proceeds to the Company of $80,000,125 wherein the Company used the net proceeds to develop infrastructure, including the purchase of capital and other equipment, the expansion of its geographic footprint in Canada, other strategic investments and for general working capital purposes. The offering closed on November 7, 2017.

 

On October 25, 2017, Renah Persofsky and Shawn Dym were elected as new directors at Aphria’s annual and special meeting.

 

On December 4, 2017, Aphria entered into an agreement to become a medical cannabis supplier to Shoppers Drug Mart. Under the terms of the agreement, the Company will supply Shoppers Drug Mart with Aphria branded medical cannabis products. Subject to Health Canada’s issuance of a sale licence under the Cannabis Act to Shoppers Drug Mart, it is expected that Aphria’s products will be sold online.

 

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On December 13, 2017, the Company entered into a subsequent agreement with Clarus Securities Inc., on behalf of a syndicate of underwriters, for the purchase, on a “bought deal” basis, of 7,272,740 Common Shares at a price of $13.75 per Common Share for aggregate gross proceeds to the Company of $100,000,175. The net proceeds of the offering were intended to finance the construction of additional cannabis production facilities globally in jurisdictions where cannabis is legally permitted. The offering of the deal closed on January 3, 2018.

 

On December 21, 2017, the Company announced a $10,000,000 equity investment in the combined entity Hiku Brand Company Ltd. (“ Hiku ”), a company formed from the combination of TS BrandCo Holdings Inc. and DOJA Cannabis Company Limited. In addition to the contemplated equity investment, the Company further entered into a supply agreement with Hiku for dried cannabis in exchange for the issuance of 800,000 units in Hiku.

 

On January 8, 2018, the Company entered into a strategic relationship to form 1974568 Ontario Ltd. (“ Aphria Diamond ”) with Double Diamond Farms (“ Double Diamond ”), a Leamington, Ontario greenhouse grower, to provide an additional 120,000 kilograms of annual cannabis production. Following the close of the transaction, Double Diamond, holding a 49% interest, supplied the land, new-state-of-the-art Dutch style greenhouses, existing infrastructure and employees to the venture. The Company, holding a controlling 51% interest, supplied its standard operating procedures and quality oversight.

 

On January 15, 2018, Aphria entered into a supply agreement with Australian based Althea Company Pty Ltd. (“ Althea ”) whereby the Company invested $2,500,000 in Althea in exchange for a 25% equity interest. As part of the supply agreement, the Company will provide Althea with packaged co-branded cannabis oil and dried flower products for the Australian medical cannabis market. On April 24, 2018, the Company completed its first shipment of medical cannabis to Althea.

 

On January 29, 2018, the Company announced its acquisition of 100% of the issued and outstanding shares (on a fully-diluted basis) of Nuuvera Inc. (“ Nuuvera ”). On March 23, 2018, the Company and Nuuvera completed the transaction pursuant to a plan of arrangement under the OBCA. Under the terms of the plan of arrangement, each Nuuvera shareholder received $0.62 in cash, plus 0.3546 of a Common Share, for each common share held in the capital of Nuuvera. Nuuvera’s common shares were subsequently delisted from the TSXV as of the close of trading on March 26, 2018.

 

Effective February 1, 2018, Aphria acquired 99.86% of the issued and outstanding Class A common shares of Broken Coast, as well as all of the issued and outstanding shares of Cannan Growers Inc. (“ Cannan ”). The total transaction value was approximately $239,000,000, paid in 14,373,675 Common Shares at a deemed price of $15.09 per Common Share. The purchase by the Company of Broken Coast: (i) increased the Company’s leading market position and geographic diversification; (ii) established brand and solidified adult-use positioning; (iii) added to the Company’s current genetic library and helped differentiate its product offering; (iv) combined production practice and proprietary technical know-how; and (v) brought on board a highly experienced management team with a west coast foothold.

 

On February 1, 2018, Aphria International, through Nuuvera Holdings Ltd. acquired all of the issued and outstanding shares of FL-Group for an aggregate purchase price of approximately €850,000, with potential contingent consideration of up to an additional €150,000, subject to adjustments in accordance with the underlying transaction agreement.

 

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On February 2, 2018, Aphria announced that it had entered into a definitive share purchase agreement with Liberty Health Sciences Inc. (“ Liberty ”) to sell its membership interests in Copperstate Farms, LLC (“ CSF ”) and Copperstate Farms Investors LLC (“ Copperstate ”) to Liberty for a total purchase price of $20,000,000 (the “ Liberty Transaction ”). The Liberty Transaction was subject to the provisions of the respective operating agreements of CSF and Copperstate, including compliance with the provisions of, or receipt of, duly executed waivers in respect of, rights of first refusal for the existing members of Copperstate, which afforded such members with the option to acquire Aphria’s membership interest in CSF and Copperstate. The rights of first refusal were subsequently exercised by the existing members with the effect that Liberty would no longer acquire Aphria’s membership interest in CSF and Copperstate. On July 5, 2018, the Company announced that it had completed the divestiture of its membership interests in CSF and Copperstate.

 

On February 5, 2018, Aphria entered into a purchase and sale agreement (the “ Liberty Agreement ”) to sell all of its freely tradeable shares in Liberty to certain buyers (the “ Liberty Buyers ”). Each of Michael Serruya, Simon Serruya and Jack Serruya, individually or through an affiliate, purchased 80% of Aphria’s freely tradeable shares in Liberty. The remaining 20% of Aphria’s freely tradeable shares in Liberty was purchased by an affiliate of Delavaco Capital owned and/or controlled by Catherine DeFrancesco. After the transaction, the Company retained an ownership position of 28.1% of the issued and outstanding shares of Liberty.

 

Pursuant to the terms of the Liberty Agreement, Liberty retained the right to the continued use of Aphria’s trademarks and preserved its interest in Aphria’s know-how system and Aphria divested 26,716,025 of its freely tradeable shares in Liberty at a price of $1.25 per share, a discount of approximately 12% to the market close on February 2, 2018, in exchange for short-term notes for $33,395,031. The short-term notes are non-interest bearing and due on February 26, 2018. The Liberty Agreement also contained a call/put option for the remainder of the shares held by Aphria in Liberty, which were subject to the Canadian Securities Exchange (“ CSE ”) mandatory escrow requirements. As each new tranche of shares became freely trading, the agreement governing the call/put option (the “ Liberty Option Agreement ”) results in the Liberty Buyers acquiring the newly freely trading shares in Liberty at an 18% discount to the market price, based on Liberty’s 10 day volume weighted trading price. The Liberty Agreement also included an opt-out for Aphria’s benefit in the event that the TSX amends its regulations such that it permits US based cannabis investments. In such instance the Liberty Option Agreement would automatically terminate (the “ Opt-Out ”). In the event the Opt-Out was exercised, Aphria agreed to pay the Liberty Buyers, on a pro-rated basis, a $2,500,000 termination fee.

 

On March 21, 2018, the Company announced that it signed an exclusive supply agreement with an Argentinian-based pharmaceutical import and distribution company, ABP S.A. (“ ABP ”), which is licensed to import, sell and distribute medical products and derivatives in Argentina. Under the terms of the agreement, Aphria will be the exclusive supplier of cannabis products to ABP for to the Argentinean market.

 

On April 11, 2018, the Company announced that it finalized a three-year supply agreement with the Société des alcools du Québec for up to 12,000 kilograms annually for sale in the Québec adult-use cannabis market. Under the terms of the agreement, the Company will supply the Société québécoise du cannabis with a variety of branded cannabis products from the Company’s adult-use cannabis brand portfolio, which will include cannabis oils and other derivative products and several strains of high-quality grown dried cannabis flower.

 

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On April 25, 2018, the Company announced the appointment of Jakob Ripshtein as the Company’s Chief Commercial Officer (effective May 1, 2018) and Dr. Christelle Gedeon as the Company’s Chief Legal Officer (effective June 1, 2018).

 

On May 16, 2018, the Company announced that it signed an exclusive supply agreement with Colcanna SAS (“ Colcanna ”), a Colombia-based pharmaceutical import and distribution company, which is licensed to import, sell and distribute medical cannabis, medical products and derivatives in Colombia. Under the terms of the agreement, the Company will be the exclusive supplier of cannabis products to Colcanna for the Colombian market and Colcanna will purchase medical cannabis products from Aphria exclusively.

 

On May 17, 2018, Aphria and Great North Distributors Inc. (“ Great North Distributors ”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits (“ Southern Glazer’s ”), announced that the parties signed an agreement for Great North Distributors to serve as the exclusive manufacturer’s representative for Aphria’s adult-use cannabis products throughout Canada, following the legalization of adult-use cannabis. Under the terms of the agreement, Great North Distributors will become Aphria’s exclusive cannabis representative in Canada, giving Aphria 100% coverage of all cannabis retailers, whether provincially or privately operated beginning on the day of legal adult-use sales and Aphria secured exclusivity from Great North Distributors for cannabis companies above the size of micro-cultivation and micro-processor.

 

On May 28, 2018, the Company entered into a new venture known as CannInvest Africa Ltd. (“ CannInvest ”) with the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years’ experience in phytoextraction of African medicinal plants. Through a combination of a share-for-share swap and cash payment of $4,050,000, the Company acquired a 50% ownership in CannInvest which in turn acquired the Verve Group of Companies’ existing 60% ownership interest in Verve Dynamics Incorporated (Pty) Ltd. (“ Verve Dynamics ”), a licensed producer of medical cannabis extracts in Lesotho.

 

Fiscal 2019 (June 1, 2018 to May 31, 2019)

 

On June 6, 2018, the Board approved a $55,000,000 capital project to build the Extraction Centre of Excellence to conduct a wide range of cannabis extractions, including CO 2 , butane, ethanol and produce cannabis concentrates, including fractionated distillates. The Extraction Centre of Excellence will house two Class 1/Division 1 extraction rooms as well as production, packaging facilities and will have the capacity to process in excess of 200,000 kilograms of cannabis annually.

 

On June 6, 2018, the Board approved the commencement of a $10,000,000 capital project (the “ Part IV and Part V Expansion ”) to increase its growing capabilities by 10,000 kilograms annually. The Part V Expansion included the build out of newly constructed state-of-the-art greenhouses dedicated to young plant cultivation. On March 4, 2019, Health Canada approved the Part IV and Part V Expansions, permitting the Company to commence production in an additional 800,000 square feet at its Leamington, Ontario facility.

 

On June 6, 2018, the Company entered into an agreement with Clarus Securities Inc., on behalf of a syndicate of underwriters, for the purchase, on a “bought deal” basis, of 18,987,400 Common Shares at a price of $11.85 per Common Share for aggregate gross proceeds to the Company of $225,000,690 (the “ June 2018 Offering ”). The net proceeds of the June 2018 Offering were intended to finance the construction of the Extraction Centre of Excellence, the Phase V Expansion and additional cannabis production facilities globally in jurisdictions where cannabis is legally permitted as well as evaluating strategic acquisitions and investments and other industry related transactions and for general corporate purposes. On June 28, 2018, the June 2018 Offering closed with a total of 21,835,510 Common Shares sold (which included the full exercise of an over-allotment option) for aggregate gross proceeds of $258,750,794.

 

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On June 29, 2018, the Company announced that it signed a supply agreement with the Manitoba Liquor and Lotteries Corporation (“ MBLL ”) to provide a portfolio of high-quality, branded cannabis and cannabis derivative products for sale in Manitoba’s adult-use market. Under the terms of the supply agreement, the Company will supply MBLL with up to 2,700,000 grams of cannabis and cannabis derivative products in the first year of the agreement.

 

On July 5, 2018, the Company announced that it signed a supply agreement with the Alberta Gaming, Liquor & Cannabis Commission (“ AGLC ”) to provide a portfolio of high-quality and cannabis derivative products for sale in Alberta’s adult-use market. Under the terms of the supply agreement, the AGLC placed an opening order of 870 kilograms to be supplied from across the full portfolio of the Company’s adult-use brands and products, including dried flower, pre-rolls and cannabis oils.

 

On July 12, 2018, the Company announced that it signed a memorandum of understanding with the British Columbia Liquor Distribution Branch (“ BDLDB ”) to provide a portfolio of high-quality and cannabis derivative products for sale in British Columbia’s adult-use market. Under the terms of the memorandum of understanding, the Company will supply the BDLDB with more than 5,000 kilograms of cannabis and cannabis derivate products in the first year of the agreement, which will be made available for sale online and at licensed retailers across the province.

 

On July 23, 2018, the Company announced that it amended the Liberty Option Agreement, effective July 26, 2018. The Company entered into a new agreement (the “ New Liberty Agreement ”) with the Liberty Buyers who previously entered into the Liberty Agreement to acquire all of the Company’s shares in Liberty (the “ Liberty Shares ”). Under the New Liberty Agreement, Aphria agreed to accept a 30-day promissory note from the Liberty Buyers to settle the next tranche of Liberty Shares owned by the Company that will be freely trading on July 26, 2018 and is scheduled to be purchased by the Liberty Buyers under the Liberty Agreement. The Company also agreed to pay the Liberty Buyers $480,000 in cash in exchange for a standstill agreement whereby the Liberty Buyers will not sell the newly acquired Liberty Shares for 18 months from the date of purchase. The Liberty Buyers further granted to the Company an option to buy back the Liberty Shares at $1.00 per Liberty Share, subject to certain downside risk protection which results in the Liberty Buyers sharing a portion of the difference between the Liberty Share price on the day the option is exercised and the exercise price, provided the Share price exceeds $1.25.

 

On July 23, 2018, the Company announced that it invested $10,000,000 in Fire & Flower Inc. (“ F&F ”). The Company acquired unsecured convertible debentures bearing interest at 8% per annum compounded, accrued and paid semi-annually in arrears (the “ F&F Debentures ”). The F&F Debentures mature on July 31, 2020, at which point, they automatically convert into common shares of F&F at the lower of $1.15 the share price on July 31, 2020. The F&F Debentures may also be converted into a loan on July 31, 2020 bearing interest at 12%, at the holder’s option.

 

On July 31, 2018, the Company announced that it secured $25,000,000 in debt financing from WFCU. The five-year term loan bears interest at 4.68% with a 15-year amortization. The term loan is secured by a first charge on the Company’s real estate holdings and a first position on a general security agreement including cash, accounts receivable and inventory.

 

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On August 8, 2018, the Company announced that it signed a manufacturer’s representative agreement with We Grow BC Ltd. (“ We Grow ”), a Vancouver-based licensed producer of premium cannabis, to become We Grow’s exclusive sales representative across Canada. The manufacturer’s representative agreement adds a second brand of premium B.C.-bud to be sold alongside Aphria’s expanding portfolio of adult-use cannabis brands through the Company’s coast-to-coast sales distribution network.

 

On August 21, 2018, the Company announced that it signed a supply agreement with the Ontario Cannabis Retail Corporation (the “ OCRC ”), doing business as the Ontario Cannabis Store (“ OCS ”), to provide high-quality branded cannabis products for sale online in the Ontario adult-use market.

 

On August 27, 2018, the Company announced that it signed a supply agreement with the Nova Scotia Liquor Corporation (“ NSLC ”) to provide a range of high-quality branded cannabis derivative products for sale in Nova Scotia’s adult-use market.

 

On September 4, 2018, the Company announced that it entered into a strategic partnership (the “ Partnership ”) with Schroll Medical (“ Schroll ”), a subsidiary of prominent European flower producer, Schroll Flowers, located in Denmark. The Partnership will pursue the cultivation and worldwide distribution of organic, EU-GMP certified medical cannabis, and will be managed by the Company’s wholly-owned subsidiary Aphria Germany. In exchange for a 15% interest in the Partnership, Aphria is providing €100,000 to the Partnership, its leadership in cannabis greenhouse cultivation and experience in processing and worldwide distribution. Aphria will also handle the worldwide distribution of cannabis produced by the Partnership, which is anticipated to be made available to markets in Germany, Luxembourg, Switzerland and other developing medical cannabis markets. As part of the deal, Aphria maintains a path to increase its ownership interest to 50% and a path to realize full liquidity, each under certain conditions.

 

On September 6, 2018, the Company announced that it had entered into a share purchase agreement with the Liberty Buyers and had completed the sale of 64,118,462 Liberty Shares, representing 100% of the Company’s outstanding investment in Liberty. As part of the transaction, Aphria retained an irrevocable option to repurchase the Liberty Shares or any replacement securities from the Liberty Buyers for a period of up to five years, subject to the satisfaction of certain conditions. As a result of the transaction, Aphria divested its remaining US cannabis assets from its balance sheet in accordance with the staff notice and requirements of the TSX.

 

On September 12, 2018, the Company announced that it signed a wholesale supply agreement with Emblem Cannabis Corp., a wholly-owned subsidiary of Emblem Corp. (“ Emblem ”), to supply 175,000 kilograms of high-quality cannabis over a five-year period starting May 2019 (the “ Emblem Supply Agreement ”). Under the terms of the Emblem Supply Agreement, the Company will receive a non-refundable deposit of $22,800,000, which comprised of $12,800,000 in cash and 6,952,169 common shares of Emblem. The Emblem common shares issued to the Company are subject to a contractual lock-up and standstill arrangement, with five equal releases over the terms of the Emblem Supply Agreement, subject to certain customary exceptions.

 

On September 14, 2018, the Company announced that Dennis Staudt resigned from the Board. The Company also announced that the Board approved the appointment of John Herhalt to replace Mr. Staudt as an independent director. Mr. Herhalt is a retired partner from KPMG LLP (“ KPMG ”) and has over 40 years of experience providing a wide variety of advisory and audit services to a range of clients.

 

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On September 27, 2018, the Company announced the closing of its acquisition of 100% of the issued and outstanding common shares of LATAM Holdings Inc. (“ LATAM ”), a direct, wholly-owned subsidiary of Scythian Biosciences Ltd. (“ Scythian ”), through a share purchase agreement with Scythian (the “ LATAM Share Purchase Agreement ”). As a result of the LATAM Share Purchase Agreement, the Company acquired the following entities through LATAM: (i) a 90% ownership interest in Colcanna, the first company in the Coffee Zone of Colombia with cultivation and manufacturing licences for the production of medicinal extracts of cannabis, a research licence and a licence for the production and extraction of cannabis, including cannabis oil, for domestic use and for export; (ii) 100% of ABP, an Argentinean pharmaceutical import and distribution company that holds a series of licences, including for the import of cannabidiol (“ CBD ”) oil for the purposes of research and development; (iii) 100% of Marigold Acquisitions Inc., a British Columbia incorporated entity, which owns 100% of Hampstead Holdings Ltd., a Barbados incorporated entity, which owns 49% of Marigold Projects Jamaica Limited (“ Marigold ”), which has received a licence to cultivate and conditional licences to process, sell and provide therapeutic or spa services using cannabis products; and (iv) a right of first offer and refusal (collectively, the “ Rights ”) to purchase 50.1% of a Brazilian incorporated entity, which is expected to hold a medical cannabis cultivation, processing and distribution licence in Brazil, upon receipt of a licence, for US$24,000,000, and an additional right of first refusal to acquire an additional 20-39% of the same entity at fair market value at the time.

 

Pursuant to the LATAM Share Purchase Agreement, the Company acquired all of the issued and outstanding common shares (on a fully-diluted basis) of LATAM, along with licences and other rights and assets held through LATAM’s subsidiaries in Argentina, Colombia and Jamaica, together with the Rights in Brazil, as described above, for aggregate transaction consideration of US$193,000,000, plus the Company assuming US$1,000,000 in existing debt, with the remainder of the consideration funded by the issuance of 15,678,310 Common Shares at a deemed price of $12.31 per Common Share, being the volume weighted average price of the Common Shares as traded on the facilities of the TSX for the 20 trading days immediately prior to the date of the LATAM Share Purchase Agreement.

 

On October 11, 2018, the Company announced that it entered into a charter agreement (the “ Charter Agreement ”) with Drug Free Kids Canada focused on increasing educational awareness of the potential harms of cannabis for children and underage youth and the safe and responsible use of cannabis by adults. The Charter Agreement is expected to produce new market research and cannabis health and safety campaigns, with a focus on protecting children and youth.

 

On October 15, 2018, the Company announced that it had completed its first shipment of cannabis oil to its Argentinean subsidiary, ABP, which was provided to Hospital de Pediatria Garrahan, a leading pediatric hospital located in Buenos Aires, for use in a clinical study focused on treating refractory epilepsy in children. The Company also announced that it had completed its first shipment of cannabis oil to its Malta-based subsidiary, ASG.

 

On November 2, 2018, the Common Shares commenced trading on the NYSE under the ticker symbol “APHA”, the Company’s ticker symbol on the TSX was changed from “APH” to “APHA” and the Common Shares which previously traded on the OTCQB under the ticker “APHQF” began trading on the NYSE. Upon commencement of trading on the NYSE, the Company voluntarily delisted its Common Shares from the OTCQB.

 

On November 2, 2018, three new directors were elected at the annual and special meeting of the Company’s shareholders: Michael Serruya, Shlomo Bibas, and Tom Looney.

 

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On November 5, 2018, the Company announced that it entered into an agreement (the “ RDT Agreement ”) with Rapid Dose Therapeutics Inc. (“ RDT ”) that grants the Company exclusive global preferred rights to license, manufacture, distribute and sell RDT’s QuickStrip™ innovative, proprietary delivery technology for both medical and adult-use cannabis markets worldwide. The Company intends to begin production of oral thin strips at its production facilities in Leamington, Ontario in 2019. On December 18, 2018, the Company and RDT announced an expanded scope of the RDT Agreement in order to expand the territory over which the Company has been granted exclusive preferred rights to Germany.

 

On December 6, 2018, the Company announced that in the face of a short-seller report released on December 3, 2018, the Board appointed a special committee (the “ Special Committee ”) of independent directors to undertake a comprehensive review of the Company’s previously completed acquisition of LATAM, which closed on September 27, 2018, and confirm whether the transaction conformed with all Company policies and generally accepted corporate governance practices. The Special Committee was comprised of John M. Herhalt, Shlomo Bibas and Tom Looney. Mr. Herhalt served as Chair of the Special Committee

 

On December 27, 2018, Xanthic Biopharma Inc. doing business as Green Growth Brands Ltd.’s (“ GGB ”) made an unsolicited takeover proposal to acquire all of the Common Shares in an all-stock transaction (the “ GGB Proposal ”). In response to the GGB Proposal, the Company announced that the Board had determined that the GGB Proposal significantly undervalued the Company, but that the Board had established an independent committee of directors to further consider the GGB Proposal and any formal offer received. The Company also announced the appointment of Irwin Simon as independent chair of the Board.

 

On January 8, 2019, the Company completed its first shipment of medical cannabis to Shoppers Drug Mart.

 

On January 9, 2019, the Company announced the closing of its acquisition of CC Pharma GmbH (“ CC Pharma ”), whereby the Company acquired all of the issued and outstanding securities of CC Pharma for aggregate transaction consideration of €18,920,000 in cash with an earn-out multiple on future EBITDA of up to another €23,500,000, if certain performance milestones are met.

 

On January 11, 2019, the Company announced that Vic Neufeld, Chief Executive Officer and Director of the Company, and Cole Cacciavillani, Chief Operating Officer and Director of the Company would transition out of their executive roles as of March 1, 2019 but would continue to support the Company as special advisors to both the Chair and the President, ensuring a smooth transition until a new Chief Executive Officer is appointed.

 

On January 18, 2019, the Company announced that it entered into an exclusive agreement (the “ UNOapp Agreement ”) with UNOapp Inc. (“ UNOapp ”) to collaborate on the development of technology and analytics solutions for Canada’s adult-use cannabis industry. Pursuant to the UNOapp Agreement, UNOapp has granted the Company a first option to commercialize any platform or solution developed from this collaboration in any international market outside of Canada.

 

On January 22, 2019, the Company confirmed that GGB had commenced an unsolicited takeover bid (the “ GGB Offer ”) to acquire all of the Common Shares, other than the Common Shares owned by GGB or its affiliates, in exchange for 1.5714 common shares of GGB. The Company advised shareholders to take no action on the GGB Offer until the Board made a formal recommendation to shareholders.

 

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On February 6, 2019, the Company announced that its Board rejected the GGB Offer and recommended that shareholders take no action in respect of the GGB Offer.

 

On February 15, 2019, the Company announced that its Board accepted and considered the report of the Special Committee, which reviewed the allegations made against the Company in respect of the Company’s previously completed acquisition of LATAM. The Special Committee determined that: (i) the assets acquired pursuant to the acquisition of LATAM in Argentina, Colombia and Jamaica were verified to be in and continued to develop according to the Company’s business plan; (ii) comprehensive, in-person site reviews were conducted by advisors to the Special Committee, which confirmed the existence of the LATAM assets and operations in each of Colombia and Jamaica, as well as work to confirm the contractual and permitting arrangements in Argentina; (iii) the Company retained local counsel in each jurisdiction in which LATAM operated; and (iv) the consideration for the assets purchased in acquisition of LATAM was within an acceptable range as compared to similar acquisitions by competitors, be it near the top of the range of observable valuation metrics. Further, the Special Committee determined that the acquisition of LATAM was approved by independent directors after obtaining a third-party fairness opinion, with the non-independent directors recusing themselves from the deliberations and voting. However, based on further information available to the Special Committee, the Special Committee noted that it appeared as though certain of the non-independent directors of the Company had conflicting interests in the acquisition of LATAM that were not fully disclosed to the Board. As a result, the Special Committee recommended areas of improvement to position the Company as a leader in corporate governance and management practices, which the Board unanimously agreed to adopt. On April 11, 2019, the Company subsequently adopted and approved a comprehensive Board of Directors Manual incorporating the recommendations arising from the Special Committee and placing the Company amongst the leaders in the cannabis industry for “best in class” corporate governance.

 

On February 15, 2019, the Company announced, effective March 1, 2019, that Vic Neufeld and Cole Cacciavillani will retire from the Company (including in their capacity as directors) and that Irwin Simon will step in as Interim Chief Executive Officer until the Board identifies a permanent Chief Executive Officer. The Company also announced that John Cervini will step down as a director of the Company effective as of March 1, 2019.

 

On February 19, 2019, the Company announced that the independent members of the Board unanimously approved the early termination and liquidation of a promissory note, the New Liberty Agreement and other agreements (the “ Early Termination and Liquidation ”) related to the Company’s previously announced divestment of all interests in Liberty. The independent members of the Board unanimously approved the Early Termination and Liquidation wherein the Company received cash consideration of $47,400,000 and may earn up to an additional $10,000,000 based on certain value thresholds, if the counterparties monetize the Liberty Shares underlying the terminated option within six months. The Early Termination and Liquidation represents the ultimate conclusion of Aphria’s investment in Liberty.

 

On February 26, 2019, the Company announced that it entered into a worldwide licence agreement with Manna Molecular Science, LLC (“ Manna ”), producers of state-of-the-art cannabis transdermal patches. Leveraging Manna’s established formulations, equipment and processes, Aphria will produce and sell patches containing cannabis oils for its established suite of medical and adult-use brands. Under the licence agreement, Manna agreed to grant Aphria exclusive preferred vendor status for a period of five years and an exclusive licence to produce, market, distribute, promote and sell Manna patches containing cannabis oil as an active ingredient.

 

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On April 15, 2019, the Company announced the appointment of two new independent directors: Walter Robb and David Hopkinson.

 

On April 15, 2019, the Company announced that it had entered into a series of transactions that will accelerate the expiry date for the GGB Offer to April 25, 2019 and will terminate the arrangements with GA Opportunities Corp. (“ GAOC ”) for consideration of $89,000,000. In particular, the Company announced that it has entered into a shortened deposit period agreement with GGB to facilitate the acceleration of the expiry of the GGB Offer. In that regard, Aphria agreed to reduce the initial deposit period of the bid to 92 days from January 23, 2019, the date that GGB commenced the GGB Offer. GGB subsequently mailed a notice of variation providing that the GGB Offer would expire at 5:00 p.m. on April 25, 2019. Based on the closing price of $3.86 per common share of GGB on the CSE on April 12, 2019, the implied consideration under the GGB Offer would be $6.07 per Common Share, representing a 54.7% discount to Aphria’s closing price on the TSX of $13.41 per Common Share on the same day.

 

In connection with the foregoing, GGB entered into a share purchase agreement (the “ GGB Share Purchase Agreement ”) with GAOC pursuant to which GGB has agreed to purchase (the “ Share Repurchase ”) for cancellation 27,300,000 shares of GGB held by GAOC, for an aggregate purchase price of $89,000,000 (the “ Purchase Price ”).The terms of the GGB Share Purchase Agreement include, among other things, that GGB will pay in cash $50,000,000 on of the Purchase Price to GAOC prior to or on May 15, 2019 (the “ Closing Date ”) and will issue a promissory note (the “ GGB Note ”) to GAOC for $39,000,000 due in six months from the Closing Date. The Share Repurchase was completed on May 16, 2019.

 

In addition, the Company and GAOC also entered into a debt/call option settlement agreement (the “ Settlement Agreement ”) pursuant to which the Company has agreed to settle the debt owed under a promissory note issued by GAOC to the Company in the amount of $55,000,000 and terminate its rights under a related call option in consideration for total consideration of $89,000,000 payable by GAOC upon the receipt of funds received under the GGB Share Purchase Agreement and the GGB Note. GAOC has granted a security interest to Aphria to secure its obligations under the Settlement Agreement

 

On April 23, 2019, the Company closed an offering of US$300,000,000 aggregate principal amount of 5.25% convertible senior notes due 2024 (the “ Aphria Notes ”) pursuant to an indenture (the “ Indenture ”) dated April 23, 2019, among Aphria and GLAS Trust Company LLC. The initial conversion rate for the Aphria Notes is 106.5644 Common Shares per US$1,000 principal amount of Aphria Notes, equivalent to an initial conversion price of approximately US$9.38 per Common Share. On April 26, 2019, the Company completed the sale of an additional US$50,000,000 aggregate principal amount of Aphria Notes pursuant to the exercise in full of the over-allotment option.

 

On April 25, 2019, the Company announced that the GGB Offer failed to meet the statutory minimum tender condition and has expired and terminated.

 

On May 14, 2019, the Company announced the appointment of James Meiers as the Chief Operating Officer, Aphria Leamington (effective May 14, 2019) and Tim Purdie as the Chief Information Officer & Chief Information Security Officer (effective May 14, 2019). The Company also announced that Jakob Ripshtein, the President of the Company, resigned (effective June 7, 2019).

 

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DESCRIPTION OF THE BUSINESS

 

Canadian Cannabis Operations

 

The Company’s domestic Canadian cannabis operations are comprised of (i) the original Aphria One greenhouse facility (see “ General Development of the Business - Licences ”), (ii) wholly-owned British Columbia-based subsidiary Broken Coast , (iii) 51% majority owned Leamington-based subsidiary, Aphria Diamond , (iv) the Company’s Leamington-based Extraction Centre of Excellence and (v) Avanti .

 

Broken Coast , a subsidiary of the Company acquired in February 2018, is licensed to produce and sell cannabis under the provisions of the Cannabis Act. Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with a leading premium cannabis brand. The facility sits on a 4.5 acre parcel of owned land and is licensed to cultivate in more than 50,000 square feet.

 

Aphria Diamond is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond. Aphria Diamond has applied for a cultivation licence under the provisions of the Cannabis Act. Aphria Diamond is implementing automation of its greenhouse, warehouse and processing facilities.

 

All production from Aphria Diamond will be sold to Aphria at an agreed upon transfer price, allowing Aphria to recognize 100% of the remaining profit from any further processing into a derivative product, and 100% of the wholesale margin from branding on all product from Aphria Diamond.

 

The Company is awaiting Health Canada approval at Aphria Diamond which will expand the Company’s production capacity. Once this expanded facility is licensed, operating at capacity and in full crop rotation, the Company will have more than 2.4 million square feet of space under cultivation capable of annual production of more than 255,000 kilograms of cannabis.

 

The Extraction Centre of Excellence is being constructed as an integral part of the Company’s Leamington production facilities, combining science and innovation to develop the future of the cannabis industry. The facility is located on the same property as Aphria Diamond and requires Aphria Diamond’s licence to submit a licence amendment application with Health Canada. As a result of the open licence application for Aphria Diamond, the Company has taken steps at its licensed facilities to supplement its extraction capabilities. These steps ensure that sufficient extraction capacity exists to process all of the Company’s extraction needs regardless of when the licence for the Extraction Centre of Excellence is received. Once the licence is received, the Company will have extra extraction capacity to increase the amount of biomass it processes for either internal or external needs.

 

The Company anticipates that the Extraction Centre of Excellence will provide the necessary production capacity and innovation to incorporate the Company’s currently developed extraction technologies and further expand on these technologies to create new and innovative product offerings for the adult-use market as they become legal to sell in Canada. The facility will be equipped to conduct a wide range of cannabis extractions, including CO 2 , butane, ethanol, and to produce world-class cannabis concentrates, including fractionated distillates.

 

In addition, Avanti further bolsters the Company’s processing capabilities and allows the Company to engage in the possession, production, packaging, sale, transportation and delivery and testing of drugs and medical devices in addition to cannabis and related cannabinoids through its four Canadian licences: (i) Cannabis Processing Licence; (ii) Cannabis Analytical Testing Licence; (iii) Drug Establishment Licence; and, (iv) Medical Device Establishment Licence (see “ Description of Business - Foreign Operations - Export Facility from Canada ”).

 

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In Canada, a substantial portion of the Company’s revenue is derived from the sale of cannabis for medical and adult-use markets, resulting specifically from cannabis plant material produced, cultivated and/or processed by Aphria at its greenhouse facilities in Leamington, Ontario. Aphria grows cannabis at its greenhouse for the purposes of sale and distribution of finished products in accordance with the Cannabis Act. Aphria’s current plants are at various stages of growth. The remaining portion of the Company’s revenue is comprised of the pharmaceutical distribution operations of the company’s subsidiaries, CC Pharma, ABP and FL Group. See “Description of Business - Foreign Operations ”.

 

There can be no guarantee that Health Canada will extend or renew any of the foregoing licences as necessary or, if extended or renewed, that the licences will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew any of the foregoing licences, or should it extend or renew the foregoing licences on different terms, the business, financial condition and results of the operation of Aphria could be materially adversely affected. See “Risk Factors” .

 

Products and Services

 

Aphria is focused on expanding its product development, manufacturing capacity and sales capability in the cannabis consumer market for both medical and adult-use users.

 

Brands

 

The Company’s diverse platform of brands allows it to effectively deploy brands that are targeted at specific customer demographics, use occasions and product form factors.

 

Medical Cannabis

 

Since 2014, the Aphria brand has been a leading choice for patients seeking high quality pharmaceutical-grade medical cannabis. The Company expects to continue to focus and invest in the Canadian medical market while concurrently developing cannabis-based products and brands targeting the adult-use market.

 

Adult-use Cannabis

 

The Company is investing capital and resources to establish a leading position in the adult-use market in Canada. These investments are focused on brand development, product innovation, marketing, sales, education, and research to enable the Company to capture, retain and grow a significant share of the developing Canadian market.

 

Aphria developed its initial portfolio of adult-use brands to specifically meet the evolving needs of Canada’s most profitable segments. The Company leveraged its strengths to offer products with unique attributes – from price through to potency and assortment – to best serve its consumers. The suite of brands created by the Company for Canada’s adult-use market include Solei, RIFF, Good Supply, and Broken Coast. Each brand is unique to a specific target audience with various product offerings designed to meet the needs of its targeted segments, described below:

 

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Solei Sungrown Cannabis (“Solei”) is designed for current and novice users, pairing an assortment of carefully curated strains and product formats for different experiences. Solei’s signature ‘Moments’ based approach has received very positive feedback from retailers and consumers seeking a simplified approach to cannabis.
   
RIFF is a culture and community focused brand supporting the artistic community across Canada. The brand has high potency offerings available for more experienced users.
   
Good Supply offers regular cannabis users with a no-frills, yet excellent value-for-money assortment that does not sacrifice quality.
   
Complementing Aphria’s in-house brands, the Company’s wholly-owned subsidiary Broken Coast is a multi-award-winning craft grower that delivers a premium product and provides consumers with an opportunity to access a brand synonymous with British Columbia-grown cannabis. Broken Coast’s craft cannabis is grown on the shores of the Salish Sea in small batches using single-strain growing rooms. All flower is hand-trimmed and slow-cured ensuring premium product quality and consistency.

 

Distribution and Sales

 

Medical Cannabis

 

Medical cannabis patients order from the Company, pursuant to a prescription, primarily through Aphria’s online store or through the phone. Medical cannabis is and will continue to be delivered by secured courier or other methods permitted under the Cannabis Act. Aphria’s prices vary based on growth time, strain yield and market prices.

 

The Company is also authorized for wholesale shipping of cannabis plant cuttings and dried bud to other licensed producers. Aphria has already completed several sales through its wholesale strategy and based on current costs, management expects the wholesale shipment strategy to continue. This sales channel requires minimal additional cost other than the cost to produce, transport and appropriately bulk package plant cuttings and dried bud.

 

Adult-Use Cannabis

 

The Company is a party to supply agreements with official retailers in all ten provinces and the territory of Yukon in Canada, representing access to 99.8% of Canadians, showing the Company’s commitment to becoming a leader in the adult-use market. The Company is one of a handful of licensed producers which has agreements with every province in Canada.

 

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The Company signed an exclusive distribution agreement with Great North Distributors, a wholly-owned Canadian subsidiary of Southern Glazer’s, to provide the Company with the sales force and wholesale/retail channel expertise required to efficiently distribute the Company’s product through each of the provincial/territorial cannabis control agencies. Great North Distributors has extensive expertise in managing compliance with the unique rules that govern the marketing of controlled substances in each of the jurisdictions where the Company has supply agreements. The Company has leveraged the Great Northern Distributors agreement by signing a subsequent agreement with We Grow, a Vancouver-based licensed producer of premium cannabis, to become We Grow’s exclusive sales representatives across Canada. As of May 31, 2019, We Grow has listed its products in multiple provinces providing additional revenue for the Company.

 

Specialized Skill and Knowledge

 

The Company’s management is comprised of individuals who have extensive expertise in regulated products, packaged goods and life sciences. In addition, the Board is constituted of experienced professionals from various relevant industries. See “ Directors and Officers ” for additional details.

 

Competitive Conditions (Canada)

 

The Company continues to face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and manufacturing and marketing experience than the Company. Increased competition by larger and better financed competitors could materially and adversely affect the Company’s business, financial condition and results of operations.

 

As of the date of this Annual Information Form, Health Canada has issued over 180 licences to companies on its list of licensed producers. Additional information on the current list of licensed producers can be found on Health Canada’s website. On May 8, 2019, Health Canada also introduced changes to the cannabis licensing process. Under the new cannabis licensing process, Heath Canada requires new applicants for licences to have a fully built site that meets all the requirements of the Cannabis Regulations at the time an application is submitted. The Company believes that the stringent application and compliance requirements may prove too onerous or expensive for some of those unlicensed applicants and is, in the Company’s view a significant barrier to entry into the industry.

 

The principal aspects of competition between Aphria and its competitors will be the price and quality of cannabis and client service provided to patients. While Aphria will price its cannabis according to market demands, it anticipates a lower cost of production compared to its competitors. This is expected to provide Aphria with pricing flexibility while maintaining healthy margins relative to its competitors. Additionally, Aphria will strive to have better and faster service by having more on-hand trained staff than other licensed producers. For the adult-use market, the coast to coast coverage afforded by the Company’s sales force through Great North Cannabis, is expected to result in consistent brand awareness and messaging at the retail level for the Company’s products and brands.

 

New Products and Accessories

 

The Canadian government has committed to regulating the sale of cannabis infused products in 2019. According to Headset, Inc., data which tracks US sales across the cannabis category, the vape market makes up 17% to 30% of sales (California, Nevada, Colorado, Washington) depending on the market. Aphria is investing capital and resources in product research, development, and production technologies in anticipation of the legalization of these new emerging categories. As a part of these research and development efforts, the Company is investing in the following areas to develop consistent and unique formulations to be used in its end-products:

 

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· industrial-scale extraction technologies using different methods including CO 2 , butane and ethanol;

 

· the effective isolation of terpenes, cannabinoids and other cannabis compounds; and

 

· development of nano-emulsification technology providing flavourless and colourless input material into derivative products such as edibles and beverages.

 

The Company is currently heavily engaged in research and development, intellectual property partnerships and formulation development for a broad suite of derivative products such as vapes, edibles, beverages, concentrates, topicals and other products such as oral thin strips and transdermal patches.

 

Within these categories, the Company’s primary focus in the near term is vape products as the company anticipates that said products will represent a similar percentage of the Canadian cannabis market as it does in existing US markets and is very well aligned to its superior extraction capabilities and know-how. The Company anticipates having vape products available following the statutory notice period required to sell the products under the Cannabis Regulations, sometime in December 2019. The Company believes edibles and beverages will collectively represent a much smaller proportion of the market and has a strategy established to meet this demand, which will be implemented after vapes have been introduced.

 

Components

 

While not reliant on raw materials, the Company is reliant on biological controls and sources product packaging.

 

Cycles

 

The demand for cannabis products is fairly consistent throughout the calendar year. Accordingly, the business of the Company is not seasonal or cyclical to any significant extent.

 

Economic Dependence

 

The Company’s supply contracts with the various Canadian provinces, Yukon and third-party suppliers are a critical element of the Company’s current revenues. If any of the larger suppliers change the material terms of such agreement or otherwise alter the supply arrangement with the Company, such a change may have a material adverse effect on the Company’s revenue.

 

The Company’s ability to grow, store and sell cannabis in Canada is dependent, in part, on the Licences. Aphria’s failure to comply with the requirements of Licences, or any failure to maintain the Licences in good standing, will have a material adverse impact on the business, financial condition and operating results of the Company. Should Health Canada not extend or renew the Licences, or should it renew the Licences on different terms, the business, financial condition and results of the operations of the Company could be materially adversely affected.

 

Employees

 

As of May 31, 2019, Aphria employed approximately 620 full-time employees.

 

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Foreign Operations

 

Outside of Canada, the Company is developing partnerships and making direct investments in countries where there is an existing or emerging federal or national legal cannabis market. The Company’s international strategy is currently focused on medical cannabis markets in stable economic and political jurisdictions that have developed or are developing effective regulations and enforcement mechanisms that limit licensed production and control importation and distribution.

 

Through several acquisitions, the Company secured access to key international markets, management team bench strength with a proven knowledge and executional success within the industries and jurisdictions in which they operate. The Company believes that with its significant experience in the highly regulated Canadian cannabis market, it will be able to export its industry leading knowledge and practices to its global subsidiaries as these markets mature. See “ General Development of the Business - Three Year History” .

 

As part of its international strategy, the Company is developing regional hubs. These hubs will represent key countries for investment and will aid in the flow of cannabis goods across the globe.

 

The Company has current international operations in Australia, Argentina, Colombia, Denmark, Germany, Italy, Jamaica, Lesotho, Malta, Paraguay and maintains an option for entry into Brazil. With these markets still in their infancy, and the regulatory environment around them still being formed, these countries are looking to Canada as a leader in developing the regulatory environment. The Company is among the few industry leaders capable of applying the experience from working within Canada during the development of the cannabis regulations, to these global cannabis markets.

 

Export Facility from Canada

 

Through the acquisition of Nuuvera, the Company acquired Brampton-based Avanti, which 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 to allowing the Company to possess and handle cannabis and cannabis derivative products, these licences allow Avanti to engage in the possession, production, packaging, sale, transportation and delivery and testing of drugs and medical devices in addition to cannabis and related cannabinoids. The Company is also able to complete testing/analysis of active pharmaceutical ingredients.

 

The Company is currently in the process of securing EU-GMP certification, which will then be used as the Canadian staging site for international bound GMP certified products. The Company’s EU-GMP certification will cover the extraction, post processing, testing, packaging and shipping process.

 

European Union

 

Germany

 

The German market is considered to be one of the most highly sought-after medical cannabis markets in the world. The German government recently completed a tender process to award licences for in-country cultivation. Aphria Germany was one of the three selected by BfArM to receive a licence for the cultivation of medical cannabis in Germany. Aphria Germany was granted the most available lots within the tender process, a total of five lots, and is the only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by BfArM. Each lot is expected to provide a minimum annual capacity of 200 kilograms. Germany currently allows the sale of cannabis and cannabis extracts in pharmacies. These cannabis-based products are also covered by insurance companies. This coverage provides a greater number of medical cannabis patients with access to the full use and benefits of these products.

 

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The Company’s approach in Germany is a three-pronged approach covering: demand; supply; and distribution.

 

Demand

 

Through the acquisition of a 25.1% interest in Berlin-based Schöneberg Hospital, the Company has access to doctors and patients to support the education of the benefits of medical cannabinoids. The Company also plans to build and operate pain treatment centers including the new possibilities of digital health care throughout Germany, which will further provide access to patients. The Company has partnered with a leading company in digital applications and medical software to build a modern, patient centric clinic for telemedicine. The Company launched various CBD products in the current quarter including medical and recreational products. The Company’s portfolio of CBD products ranges from medical, oil, edibles, drinkables, and skin care products that will be distributed through multiple sales channels.

 

Supply

 

The Company will, through imports and local production, supply products into the German market. The Company entered into a strategic partnership with a prominent European flower producer, to obtain access to EU-GMP certified organic medical cannabis. This agreement ensures the Company will have further access to cannabis for distribution throughout the EU. The Company is further developing the facilities, in order to deliver the first harvest by the end of 2020 to BfArM as well as a storage facility to support a GMP certified storage space.

 

Distribution

 

Through the acquisition of CC Pharma, the Company obtained a leading importer and distributor of European Union pharmaceuticals for the German market. With over 317 active German national pharmaceutical licences, 690 active European Union pharmaceutical licences, and access to approximately 13,000 active pharmacy accounts, CC Pharma operates a production, repackaging and labelling facility. Based on regulations, pharmacies can only supply the product that has been prescribed to the patient unless the product is unavailable. As such, the Company will expand CC Pharma’s operations to meet the high demand for medicinal cannabis through 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.

 

Malta

 

Through subsidiary ASG, the Company received the first import certificate for medical cannabis issued by the Government of Malta’s Ministry of Health. The Company intends on using the Malta facility to import cannabis resin and dried flower for processing, packaging and distribution of EU-GMP certified cannabis products throughout large parts of Europe. As of May 31, 2019, the analytical lab is EU-GMP certified and fully operational. The development of a new floor dedicated to the processing and packaging of bulk cannabis in accordance with EU-GMP is ongoing and is expected to be fully operational as an EU-GMP certified facility by the end of the first half of the 2020 calendar year, pending certification by the European Medicines Authority.

 

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The Malta facility will provide the Company with the ability to bring production of cannabis product from outside of Europe into an EU-GMP certified facility for further packaging, processing and distribution throughout Europe.

 

Italy

 

The Company’s wholly-owned subsidiary, FL-Group, is authorized for the distribution of pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies. The FL-Group acts as the Company’s distributor to the Italian cannabis market. The Company has also established Aphria Terra S.R.L. as a grassroots organization involved with furthering the Company’s presence in the Italian cannabis industry.

 

South America

 

LATAM Holdings Inc.

 

The acquisition of LATAM provided the Company with various production, distribution and market development opportunities in South America and the Caribbean, including Colombia, Argentina, Jamaica and potentially Brazil.

 

Colombia

 

The acquisition of LATAM provided the Company with a 90% ownership of Colcanna. This ownership provides the Company with the ability to further develop the global Aphria brand with Aphria branded products distributed to patients in Colombia. Colcanna is developing its 54 acres of land for the cultivation of cannabis, which is expected to provide 50,000 kilograms annually. Until the emerging Colombian market demand grows to match the Company’s Colombian production, the Company will be able to utilize its export licence to distribute the excess production within LATAM region including Argentina, and Paraguay. In order to seek to maximize the export activities, the Company will also apply for the EU-GMP certification of its Colombian cultivation facility, which is anticipated to allow the export from the Colombia site to be distributed throughout Latin America when permissible.

 

Argentina

 

The acquisition of LATAM provided the Company with sole ownership of ABP, granting to the Company a significant first-mover advantage, as ABP is the first company with an in-country medical cannabis research licence. The Company also continues to work with Hospital Garrahan, a leading pediatric hospital in Buenos Aires. On June 6, 2019, the Ministry of Heath approved a resolution authorizing public and private health insurance companies to import and stock medical cannabis inventory. The Company believes that with this recent resolution, the market is one step closer to an evolution of the medical cannabis regulatory framework that would allow local production and medical commercialization.

 

Jamaica

 

The acquisition of LATAM provided the Company with a 49% ownership interest in Marigold, through multiple subsidiaries and a 95% royalty on profits through an intellectual property agreement. At the time, this acquisition provided the Company with several key licences including a Tier 3 cultivation licence, a conditional Tier 2 herb house licence, as well as conditional licences for import, export and research purposes.

 

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Brazil

 

Finally, the acquisition of LATAM provided the Company with an option to purchase 50.1% of a Brazilian entity for US$24 million once it secures a medical cannabis cultivation and distribution licence from the Brazilian government and a right of first offer and refusal on another 20% to 39% of the Brazilian entity. This right of first refusal provides the Company with lower risk at a fixed price to enter the Brazilian cannabis market pending the Brazilian company obtaining a licence to cultivate and distribute cannabis lawfully within the country.

 

Africa

 

Lesotho

 

The Company entered into a venture in CannInvest, a South African corporation. Aphria’s partner in CannInvest is the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years of experience in phytoextraction of African medicinal plants. Through this transaction, the Company obtained a controlling interest in Verve. Verve holds a licence in Lesotho for prohibited drug operations, which allows Verve to cultivate, manufacture, supply, distribute, store, export and import cannabis and cannabis resin for medical purposes or scientific use.

 

The Company also entered into a supply agreement with Verve, where Verve will supply cannabis THC and CBD extract from its planned EU-GMP certified facility. This is expected to provide the Company with access to GMP certified extract for distribution into South Africa and other federally legal markets, including the European Union.

 

Construction of a new extraction and processing facility is near completion. The Company is currently working on developing sales through this facility and expects to begin processing materials and generating income before the end of calendar year 2019. Upon completion, the Company expects to process cannabis for other producers in the country for a tolling fee, while applying for EU-GMP certification which will allow all product from the Lesotho site to be distributed within the European Union.

 

During the year, Verve successfully completed the first legal purchase of medicinal cannabis in Africa for processing, allowing the Company to claim a first mover advantage in the local markets.

 

Social and Environmental Operations

 

In an emerging and constantly evolving industry, the Company’s core values unite, inform and inspire the way the Company interacts with its employees, patients, consumers and one another. The Company’s commitment to its people, the planet, product quality and innovation helps it create stronger, healthier communities everywhere it does business. The Company’s corporate social responsibility goes beyond borders. The Company is committed to exporting its industry leading knowledge and practices to its global subsidiaries. For the communities the Company touches, it is vigilant of the impact it has and strives to be a positive contributor to their well-being.

 

The Company recently launched its values, a set of guiding principles that inform how it behaves and acts, including how business decisions are made, how employees conduct themselves, and how and where the Company makes community investments. The values of the Company comprise the following pillars:

 

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We Put People First

 

The Company is committed to the needs of its patients and consumers whether they are looking for natural options for medical needs, exploring the options in wellness, or seeking alternatives to their lifestyle. The Company is driven by a desire to help others live their best life. This includes continuous product development on different methods of administrating the product through oil and soft gels, and eventually oral strip, and patches, as well as being proactive in aiding patients who have difficulties obtaining the required medical care. In the current year, the Company has taken the initiative to provide free access to treatment for a three year old epileptic patient; a treatment that has decreased daily seizures from around thirty to three or four.

 

We Lead by Example

 

The Company is passionate about pushing its industry forward. The Company’s commitment to innovation means it is always on the lookout for new opportunities, that it attracts those who share its outlook, and that it never stops focusing and imagining on what is coming next. This includes the continuous push for innovations in expansionary projects, product development and market research.

 

In the current year, the Company has expanded its reach to Latin America and Germany through its acquisitions. Furthermore, it has partnered with various organizations to further develop the product line including transdermal patches, oral thin strips, and other cannabis-infused products.

 

We Respect the Earth

 

As a conscientious company, the Company prides itself on providing a natural product for its patients and consumers. The Company is committed to ensuring that its actions and those of its employees have a positive impact on the environment around it, no matter where it operates.

 

In the current year, the Company launched its social impact platform, Plant Positivity. In 2019, Plant Positivity is partnering with national not-for-profit Evergreen to create six new garden spaces – the Plant Positivity Gardens – at Evergreen’s national headquarters, Evergreen Brick Works in Toronto. The Company’s investment will add more than 50 varieties of native plant species to the existing 8,000 square metres of gardens across the site, a global showcase for sustainability and urban innovation that opened in 2010. Plans are also underway to develop a Plant Positivity Garden in Leamington, Ontario with a local community partner.

 

The Company also employs sustainable growing practices to provide significant efficiencies, cost reduction benefits and lessen its impact on the environment. This includes:

 

Use of computerized systems to monitor and reduce water usage, and collection and cleaning of run-off water so that it can be safely reused.

 

The Company’s co-generation plant produces electricity, hot water, CO 2 and cold water which is more efficient and reduces impact on local communities. The Company practices carbon neutrality and its Leamington, Ontario facility Aphria One continually strives for a zero-carbon footprint.

 

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Capture and clean the CO 2 from the exhaust and add it into the greenhouse to promote plant growth and reduce our carbon footprint.

 

98% of the Company’s Canadian production will grow in state-of-the art greenhouses in Leamington, Ontario, using 1/12th the energy of traditional indoor growing operations.

 

We Take Responsibility to Heart

 

The Company believes it is its responsibility to protect the safety of its employees, patients, consumers, and society. The Company’s partnerships and programs reflect our ongoing commitment to the safety of its communities through education, responsible use, and meaningful corporate citizenship.

 

The Company places a great deal of energy and effort towards ensuring the safety of children and families in the communities it serves. The Company’s Charter Agreement with Drug Free Kids Canada and participation in the Global Cannabis Partnership, reflect its ongoing commitment to the safety of its communities through education, responsible use, and meaningful responsible corporate citizenship in the Company’s industry. In addition to partnerships mentioned above, the Company also has partnerships with various organizations in countries like Colombia in order to jointly develop academic curriculums on the medicinal use of cannabis.

 

In Colombia, the Company undertook a social-demographic survey to better understand the local community’s needs, wants and concerns. In doing so, the Company is able to contribute to the betterment of community members quality of life through new infrastructure and employment opportunities.

 

Regulatory Overview

 

Prior to the Cannabis Act and the Cannabis Regulations coming into force, only the sale of medical cannabis was permitted and was regulated by the ACMPR made under the Controlled Drugs and Substances Act (the “ CDSA ”); the Cannabis Act and the Cannabis Regulations replaced the CDSA and the ACMPR as the governing laws and regulations in respect of the cultivation, processing, sale and distribution of cannabis (including cannabis oil extract). On October 17, 2018, the Cannabis Act and the Cannabis Regulations came into force, legalizing the sale of cannabis for adult recreational use. Given that the Cannabis Act and the Cannabis Regulations are very new, the impact of such regulatory changes on the Company’s business is unknown. See “ Risk Factors - Risks Related to Changes in Laws, Regulations and Guidelines ”.

 

The Cannabis Act provides a licensing and permitting scheme for the production, importation, exportation, testing, packaging, labelling, sending, delivery, transportation, sale, possession and disposal of cannabis for non-medicinal (i.e., adult-use) use, implemented by regulations made under the Cannabis Act. The Cannabis Act maintains separate provisions governing cannabis for medical purposes.

 

The Cannabis Regulations, among other things, set out requirements relating to the following matters: (1) Licences; (2) Security Clearances; (3) Cannabis Products; (4) Packaging, Labelling and Promotion; (5) Health Products and Cosmetics Containing Cannabis; and (6) Cannabis for Medical Purposes.

 

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Licences

 

The Cannabis Regulations establish six classes of licences under the Cannabis Act: cultivation licences; processing licences; analytical testing licences; sales for medical purposes licences; research licences; and cannabis drug licences. The Cannabis Regulations also create subclasses for cultivation licences (standard cultivation, micro-cultivation and nursery), processing licences (standard processing and micro-processing) and sale (sale for medical purposes). Different licences and each subclass therein, carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each licence category and each subclass.

 

The Cannabis Regulations permit cultivation licence holders to conduct both outdoor and indoor cultivation of cannabis. The implications of outdoor cultivation are not yet known, but could be significant as it may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices as capital expenditure requirements related to growing outside are typically much lower than those associated with indoor growing.

 

Security Clearances

 

Certain people associated with cannabis licensees, including (i) individuals occupying a “key position” within the licensee, (ii) directors, officers and individuals who exercise, or are in a position to exercise, direct control over a corporate licensee, (iii) directors and officers of any corporation that exercises, or is in a position to exercise, direct control over a corporate licensee and (iv) certain other individuals identified by the Minister of Health (the “ Minister ”), must hold a valid security clearance issued by the Minister. Under the Cannabis Regulations, the Minister may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. This was largely the approach in place under the ACMPR, except that the security clearance requirements apply to parent companies as well as corporate licensees. Individuals who have histories of non-violent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the discretion of the Minister on a case-by-case basis.

 

Security clearances issued under the ACMPR are considered to be security clearances for the purposes of the Cannabis Act and Cannabis Regulations.

 

Cannabis Tracking System

 

Under the Cannabis Act, the Minister is authorized to establish and maintain a national cannabis tracking system. The purpose of this system is to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the legal market. The Cannabis Act provides the Minister with the authority to make a ministerial order that would require licensees to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister. The Minister has introduced the Cannabis Tracking and Licensing System, and licence holders are required to use this system to submit monthly reports to the Minister, among other things.

 

Cannabis Products

 

The Cannabis Act permits the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds. The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level, including tetrahydrocannabinol (“ THC ”) content and net quantity of cannabis products.

 

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To date, only fresh cannabis, dried cannabis and cannabis oil products are permitted for sale in Canada. Pursuant to the Cannabis Act, certain categories of cannabis products, such as edibles, extracts and topicals (together, the “ New Categories ”) are currently prohibited from sale, but new regulations under the Cannabis Act will come into force on October 17, 2019 which will permit sale of the New Categories no earlier than December 2019. While the text of the new regulations has been released, the impact of these regulatory changes on the business of the Company is unknown.

 

Packaging, Labelling and Promotion

 

The Cannabis Regulations set out requirements pertaining to the packaging and labelling of cannabis products (including the New Categories) which are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth and promoting safe consumption. These requirements include plain packaging for cannabis products, as well as packaging that is tamper-evident and child-resistant.

 

The Cannabis Regulations impose strict limits on the use of colours, graphics, and other special characteristics of packaging. Cannabis package labels must include specific information, such as: (i) product source information, including the class of cannabis and the name, phone number and email of the licensed cultivator or processor (depending on the cannabis product; (ii) a mandatory health warning, rotating between Health Canada’s list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. A cannabis product’s brand name may only be displayed once on the principal display panel or, if there are separate principal display panels for English and French, only once on each principal display panel. It can be in any font style and any size, so long as it is equal to or smaller than the health warning message. The font must not be in metallic or fluorescent colour. In addition to the brand name, only one other brand element (e.g. logo, design or slogan) can be displayed. In respect of the New Categories, the same restrictions generally apply, with limited changes.

 

Health Products and Cosmetics Containing Cannabis

 

Products that display health claims, including prescription and non-prescription drugs, natural health products, veterinary drugs and veterinary health products and medical devices must receive marketing authorization from Health Canada prior to launch. Cannabis cannot be marketed as a natural or non-prescription health product, as it is currently included on the Human and Veterinary Prescription Drug List (the “ PDL ”). While Health Canada has previously authorized prescription drug products containing cannabis, the agency maintains that there remains significant scientific uncertainty regarding the pharmacological actions, therapeutic effectiveness and safety of the majority of phytocannabinoids. The cannabis-based drug products that have been authorized by Health Canada have been studied, authorized and used in specific conditions. While these authorized products have contributed to the global body of knowledge concerning the safety and efficacy of cannabis-based therapies, Health Canada has stated that the presence of scientific uncertainty and limited market experience gives rise to the need for a precautionary approach. Listing all phytocannabinoids on the PDL addresses this uncertainty since use of prescription drugs would be under the supervision of healthcare practitioners who would monitor and manage any unanticipated effects. All phytocannabinoids will remain listed on the PDL until there is sufficient scientific evidence (e.g., as demonstrated through a submission to Health Canada) to change the prescription status of a particular phytocannabinoid when used in specific conditions.

 

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As a result of the coming into force of the Cannabis Act, cannabis, as defined in Subsection 2(1) of the Cannabis Act, has been added to Health Canada’s “Cosmetic Ingredient Hotlist”, the list of prohibited substances for use in cosmetic products.

 

Once cannabis concentrates are legalized, it is anticipated that such products will be permitted to be included in products with a cosmetic use, subject to the provisions of the Cannabis Act.

 

Advertising

 

The Cannabis Act generally restricts the promotion of cannabis. Subject to a few exceptions, all promotions of cannabis are prohibited unless authorized by the Cannabis Act.

 

Cannabis for Medical Purposes

 

With the Cannabis Act and the Cannabis Regulations coming into force on October 17, 2018, the medical cannabis regime migrated from the CDSA and the ACMPR to the Cannabis Act and the Cannabis Regulations. The medical cannabis regulatory framework under the Cannabis Act and the Cannabis Regulations remains substantively the same as under the CDSA and the ACMPR, with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system.

 

Under Part 14 of the Cannabis Regulations, patients have three options for obtaining cannabis for medical purposes: (i) they can continue to access cannabis by registering with licensees holding a licence to sell for medical purposes; (ii) they can register with Health Canada to produce a limited amount of cannabis for their own medical purposes; or (iii) they can designate someone else to produce cannabis for them. With respect to (ii) and (iii), starting materials, such as plants or seeds, must be obtained from licensees. It is possible that (ii) and (iii) could significantly reduce the addressable market for the Company’s products and could materially and adversely affect the Company’s business, financial condition and results of operations. However, management of the Company believes that many patients may be deterred from opting to proceed with options (ii) or (iii) since such steps require applying for and obtaining registration from Health Canada to grow cannabis, as well as the up-front costs of obtaining equipment and materials to produce such cannabis.

 

Provincial and Territorial Regulatory Framework

 

While the Cannabis Act provides for the regulation of the commercial production of cannabis for adult recreational purposes and related matters by the federal government, the provinces and territories of Canada have authority to regulate other aspects of adult recreational use cannabis (as is currently the case for liquor and tobacco products), such as retail sale and distribution, minimum age requirements, places where cannabis can be consumed, and a range of other matters.

 

At present, the Company has entered into supply agreements with provincial control boards and provincially licensed private retailers, as applicable, across all ten provinces.

 

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All Canadian provinces and territories have implemented regulatory regimes for the distribution and sale of cannabis for recreational purposes. There are essentially three general frameworks: (i) private cannabis retailers licensed by the province; (ii) government run retail stores; or (iii) a combination of both frameworks. Regardless of the framework, the recreational cannabis market is ultimately supplied by federally licensed cultivators and processors. In many cases, the provinces that have or propose to have privately licensed retailers will have a government run wholesaler. Such privately licensed retail stores are or will be required to obtain their cannabis products from the wholesalers, while the wholesalers, in turn, acquire the cannabis products from the federally licensed cultivators and processors. In addition, each of these Canadian jurisdictions has established a minimum age of 19 years old, except for Québec and Alberta, where the minimum age is 18. However, on December 5, 2018, Québec introduced Bill no. 2 an Act to tighten the regulation of cannabis (“ Bill 2 ”), which proposes to raise the minimum age to 21. Although not passed, Bill 2 has been adopted in principle and is currently at Committee stage.

 

Alberta: In Alberta, cannabis products are sold by private retailers that receive their products from a government-regulated distributor (the AGLC), similar to the distribution system currently in place for alcohol in the province. Only licensed retail outlets are permitted to sell cannabis with online sales run by the AGLC.

 

British Columbia: In British Columbia, recreational cannabis is to be sold through both public and privately operated stores and online through the province’s public online store, with the provincial Liquor Distribution Branch handling wholesale distribution.

 

Manitoba: In Manitoba, a “hybrid model” for cannabis distribution applies where the supply of cannabis is secured and tracked by the MBLL but licensed private retail stores are permitted to sell recreational cannabis through stores and online.

 

New Brunswick: In New Brunswick, recreational cannabis is sold, including online sales, by Cannabis NB, a subsidiary of a network of tightly-controlled, stand-alone stores through the New Brunswick Liquor Corporation (the “ ANBL ”). The ANBL also controls the distribution and wholesale of cannabis in the province.

 

Newfoundland and Labrador: In Newfoundland and Labrador, recreational cannabis must be sold through licensed private stores, with its crown-owned liquor corporation, the Newfoundland and Labrador Liquor Corp. (the “ NLC ”), overseeing the distribution to private sellers who may sell to consumers. The NLC controls the possession, sale and delivery of cannabis, and sets prices. It is also the online retailer, although licences may later be issued to private interests in the future.

 

Northwest Territories: The Northwest Territories relies on the N.W.T. Liquor Commission to control the distribution and sale of cannabis, whether through mail order service run by the Liquor Commission or online. Communities in the Northwest Territories are able to hold a plebiscite to prohibit cannabis sales in their communities, similar to options currently available to restrict alcohol in the Northwest Territories.

 

Nova Scotia: In Nova Scotia, the NSLC is responsible for the regulation of cannabis in the province, and recreational cannabis is only sold publicly through government-operated storefronts and online sales. There is no private licensing of retail. The NSLC also controls the distribution and wholesale of cannabis in the province.

 

Nunavut: The Nunavut Liquor and Cannabis Commission is responsible for distribution in the territory. The Nunavut Liquor and Cannabis Commission sells cannabis by phone and online and also licenses private retailers.

 

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Ontario: In Ontario, the distribution and online retail sale of recreational cannabis is conducted through the OCRC, a subsidiary of the Alcohol and Gaming Commission of Ontario (the “ AGCO ”). The regulatory regime in Ontario:

 

requires private retailers to obtain both a retail operator licence and a retail store authorization. Retail store authorizations are only to be issued to persons holding a retail operator licence. Separate retail store authorizations are to be required for each cannabis retail store, but a licensed retail operator may hold more than one retail store authorization and operate multiple stores. Private retailers are not permitted to sell cannabis on-line, but may only sell cannabis in person at an authorized retail store;

 

requires anyone who supervises employees of a cannabis retail store, oversees cannabis sales, manages compliance issues relating to cannabis sales or has signing authority to purchase cannabis, enters into contracts or hires employees to have a cannabis retail manager licence;

 

limits federally licensed producers (and their affiliates) to operating one retail cannabis store, which must be located at the site listed on such producer’s federal licence. The term “affiliate” is not currently defined, although it may be in future regulations. The definition of affiliate may have the effect of limiting the ability of federally licensed producers from entering into the consumer retail market in Ontario;

 

prohibits anyone, including federally licensed producers, from promoting their products by way of providing any material inducement to cannabis retailers;

 

permits municipalities and reserve band councils to opt out of the retail cannabis market by resolution. Municipalities had until January 22, 2019 to pass such by-laws. Municipalities that opted out may later lift the prohibition on retail cannabis stores by subsequent resolution. Municipalities may not pass a bylaw providing for a further system of licensing over the retail sale of cannabis; and

 

imposes further restrictions through future regulation. Cannabis retail store operators are only permitted to purchase cannabis from the OCRC, which may set a minimum price for cannabis or classes of cannabis.

 

Prince Edward Island: In Prince Edward Island, similar to Nova Scotia, the sale of cannabis is government-run through government retail sales and online, namely the PEI Cannabis Management Corporation. There is no private licensing of retail.

 

Quebec: In Quebec, the Société québécoise du cannabis (“ SQDC ”), a subsidiary of the Société des alcools du Québéc, is responsible for the sale of cannabis in Quebec. Adult-use cannabis is only sold publicly through SQDC-operated storefronts and SQDC online sales. There is currently no private licensing of retail in Quebec. Quebec is currently the only province that has introduced draft regulations that will place restrictions on edibles, extracts and topicals.

 

Saskatchewan: In Saskatchewan, recreational cannabis is sold by private retailers. The Saskatchewan Liquor and Gaming Authority (the “ SLGA ”) has issued 30 retail permits to private stores located in roughly 40 municipalities and First Nation communities across the province, with municipalities having the option of opting out of having a cannabis store if they choose. Saskatchewan is the only jurisdiction to allow for private distribution and wholesale (but regulated by the SLGA).

 

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Yukon: Yukon limits the initial distribution and sale of recreational cannabis to government outlets and government-run online stores, and allows for the later licensing of private retailers. The Yukon Liquor Corporation is responsible for the distribution and wholesale of cannabis in the territory while the Cannabis Licensing Board is the regulatory body in Yukon.

 

The Regulatory Status of Cannabis in the United States of America

 

Aphria does not maintain any direct or indirect investments in the United States, where despite being legal in individual states, cannabis remains federally illegal. The Company is focused on participating in federally permissible activities in the United States, and is therefore currently reviewing the landscape and looking to prepare for legalization of cannabis through the purchase of profit generating companies in other industries and converting their existing operations to include cannabis when it is federally legal to do so. The Company is looking to develop cannabis operations based on the best locations to service demand in the United States as opposed to operating individual locations in less desired locations as a result of the current legalization structure.Furthermore, the Company is evaluating potential strategic partnerships to accelerate and escalate the Company’s brand capabilities and strategies. The Company intends to be well poised to capitalize on the US market should it become federally legal to do so through this strategy. The Company believes investing in more established industries will generate faster returns through positive EBITDA, while putting the Company in the best possible position to generate significant long-term returns if and when the US legalizes cannabis federally and removes the current barriers in the industry.

 

RISK FACTORS

 

There are a number of risk factors that could cause future results to differ materially from those described herein. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of the following risks actually occur, the Company’s business may be harmed and its financial condition and results of operations may suffer significantly.

 

Risks Related to the Company’s Business and the Cannabis Industry

 

Reliance on Licences

 

The Company’s ability to cultivate, store and sell cannabis and cannabis oil in Canada is dependent on maintaining the Licences with Health Canada and licences through its various subsidiaries. Failure to comply with the requirements of the Licences or any subsidiary licence or any failure to maintain the Licences or any subsidiary licence may have a material adverse impact on the Company’s business, financial condition and results of operations. There can be no guarantees that Health Canada will extend or renew the Licences as necessary or, if it extended or renewed, that the Licences will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the Licences or should it renew the Licences on different terms, the Company’s business, financial condition and results of operations may be materially adversely affected.

 

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Expansion Strategy

 

There is no guarantee that the Company’s expansion strategy (including receiving the expected Health Canada approvals in a timely fashion, if at all) will be completed in the currently proposed form, if at all, nor is there any guarantee that the Company will be able to expand into additional jurisdictions. There is also no guarantee that the Company’s intentions to acquire and/or construct additional cannabis production and manufacturing facilities in Canada and in other jurisdictions with federally legal cannabis markets, and to expand the Company’s marketing and sales initiatives will be successful. Any such activities will require, among other things, various regulatory approvals, licences and permits (such as additional licences from Health Canada under the Cannabis Act, as applicable) and there is no guarantee that all required approvals, licences and permits will be obtained in a timely fashion or at all. There is also no guarantee that the Company will be able to complete any of the foregoing activities as anticipated or at all.

 

The Company’s failure to successfully execute its international expansion strategy (including receiving required regulatory approvals, licences and permits) could adversely affect the Company’s business, financial condition and results of operations and may result in the Company failing to meet anticipated or future demand for its cannabis products, when and if it arises.

 

The Company’s expansion into jurisdictions outside of Canada is subject to additional business risks, including new or unexpected risks or could significantly increase the Company’s exposure to one or more existing risk factors, including economic instability, changes in laws and regulations and the effects of competition. In addition, international expansion could subject the Company’s business to certain risks relating to fluctuating exchange rates or require a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. These factors may limit the Company’s ability to successfully expand its operations into such jurisdictions and may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Highly Regulated Industry

 

The laws, regulations and guidelines generally applicable to the cannabis industry domestically and internationally may change in ways currently unforeseen. The Company’s operations are subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage, sale, health and safety and disposal of cannabis, including the Cannabis Act, any regulations thereunder and applicable stock exchange rules and regulations. Any amendment to or replacement of existing laws may cause adverse effects to the Company’s operations. The risks to the Company’s business represented by subsequent regulatory changes could reduce the addressable market for the Company’s products and could materially and adversely affect the Company’s business, financial condition, results of operations and prospects. To the knowledge of management, other than make routine corrections that may be required by Health Canada from time to time, the Company is currently in compliance with all such laws. Achievement of the Company’s business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and, where necessary, obtaining regulatory approvals. The impact of Health Canada’s compliance regime, any delays in obtaining, or failure to obtain regulatory approvals required may significantly delay or impact the development of the Company’s business and operations, and could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects. Any potential non-compliance could cause the Company’s business, financial condition, results of operations and prospects to be adversely affected. Further, any amendment to or replacement of the Cannabis Act and other applicable rules and regulations governing the Company’s business activities may cause adverse effects on the Company’s business, financial conditions and results of operations. The risks to the Company’s business associated with the decision to amend or replace the Cannabis Act, and subsequent regulatory changes, could reduce the addressable market for the Company’s products and could materially and adversely affect the Company’s business, financial condition, results of operations and prospects.

 

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The Company will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with applicable laws and regulations could subject the Company to regulatory or agency proceedings or investigations and may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include damage awards, fines, penalties or corrective measures requiring capital expenditures or remedial actions. Parties may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation and no assurance can be given that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources. Amendments to current laws, regulations and permitting requirements, or more stringent application of existing laws or regulations, may have a material adverse impact on the Company’s business, resulting in increased capital expenditures or production costs, reduced levels of cannabis production or abandonment or delays in the development of facilities.

 

Health Canada inspectors routinely assess the Company’s facilities against the Cannabis Act and its regulations and provide the Company with follow up reports noting observed deficiencies. The Company is continuously reviewing and enhancing its operational procedures and facilities both proactively and in response to routine inspections. The Company follows all regulatory corrections in response to inspections in a timely manner. If the Company fails to comply with applicable laws, regulations and guidelines, the Company may incur additional costs or penalties, or the Company’s operations may be restricted or shut down.

 

In addition, the introduction of new tax laws, regulations or rules, or changes to, or differing interpretation of, or application of, existing tax laws, regulations or rules in Canada or any of the jurisdictions in which the Company operates could result in an increase in taxes, or other governmental charges, duties or impositions. No assurance can be given that new tax laws, regulations or rules will not be enacted or that existing tax laws, regulations or rules will not be changed, interpreted or applied in a manner which could result in the Company’s profits being subject to additional taxation or which could otherwise have a material adverse effect. Due to the complexity and nature of the Company’s operations, various legal and tax matters may be outstanding from time to time. If the Company is unable to resolve any of these matters favorably, it may have a material adverse effect on the Company.

 

Licence Application in Respect of Aphria Diamond May Not be Successful

 

There is no guarantee that Health Canada will approve the Aphria Diamond license application in a timely fashion, if at all. The Company’s failure to successfully execute the licence application (including receiving the Health Canada approvals in a timely fashion, if at all) could adversely affect the Company’s business, financial condition and results of operations, and may result in the Company not meeting anticipated or future demand when it arises.

 

Laws and Regulations Governing Cannabis in Foreign Jurisdictions

 

The Company’s ability to achieve its business objectives in foreign jurisdictions is contingent, in part, upon its compliance with regulatory requirements enacted by governmental authorities and the Company obtaining all regulatory approvals, where necessary, for the sale of its products. The Company cannot predict the impact of the compliance regime countries such as Germany, Italy, Lesotho, Malta, Colombia, Argentina or Jamaica are implementing and the method in which their governmental authorities will implement the adult-use or medical cannabis industry. Similarly, the Company cannot predict how long it will take to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. The impact of the various compliance regimes, any delays in obtaining, or failure to obtain regulatory approvals may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

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The Company currently incurs and will continue to incur ongoing costs and obligations related to regulatory compliance. A failure on the Company’s part to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions on its operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

Foreign Investment in Cannabis Companies

 

Certain jurisdictions may prohibit or restrict its citizens or residents from investing in or transacting with companies involved in the cannabis industry, even if such companies only conduct business in jurisdictions where cannabis is legal. For example, if an investor in the United Kingdom profits from an investment in a cannabis producer or supplier, such investment may technically violate the United Kingdom Proceeds of Crime Act 2002 . Similar prohibitions or restrictions may apply in other jurisdictions where cannabis has not been legalized. In the United States, there have been certain instances of US Customs and Border Protection preventing citizens of foreign countries from entering the United States for reasons related to the cannabis industry.

 

Operations in Foreign Jurisdictions

 

The Company has operations in various emerging markets and may have operations in additional emerging markets in the future. Such operations expose the Company to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates, military repression; war or civil war; social and labor unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licences, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, banking and currency controls and governmental regulations that favor or require us to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction.

 

Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in cannabis industry or investment policies or shifts in political attitude in the countries in which the Company operates may adversely affect its operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of concessions, licences, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licences, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.

 

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The Company continues to monitor developments and policies in the emerging markets in which its operates and assess the impact thereof to our operations; however, such developments cannot be accurately predicted and could have an adverse effect on the Company’s business, financial condition and results of operations.

 

Corruption and Fraud in Emerging Markets

 

There are uncertainties, corruption and fraud relating to title ownership of real property in certain emerging markets in which the Company operates or may operate. Property disputes over title ownership are frequent in emerging markets, and, as a result, there is a risk that errors, fraud or challenges could adversely affect the Company’s ability to operate in such jurisdictions. Any of the foregoing risks and uncertainties could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

Inflation in Emerging Markets

 

In the past, high levels of inflation have adversely affected emerging economies and financial markets, and the ability of government to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. The emerging markets in which the Company operates or may operate may experience high levels of inflation in the future. Inflationary pressures may weaken investor confidence in such countries and lead to further government intervention in the economy. If countries in which the Company operates experience high levels of inflation in the future and/or price controls are imposed, the Company may not be able to adjust the rates the Company charges its customers to fully offset the impact of inflation on the Company’s cost structures, which could adversely affect the Company’s business, financial condition and results of operations.

 

Acquisition or Use of Properties in Foreign Jurisdictions

 

Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which the Company operates in certain countries. Accordingly, the Company’s current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and the Company’s ownership or access rights in respect of any property it owns or leases in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

 

International Expansion

 

In addition to the jurisdictions described elsewhere in this Annual Information Form, the Company may in the future expand into other geographic areas, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. the Company may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with the Company’s existing operations.

 

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Reliance on International Advisors and Consultants

 

The legal and regulatory requirements in the foreign countries in which the Company operates or will operate with respect to the cultivation and sale of cannabis, banking systems and controls, as well as local business culture and practices are different from those in Canada. The Company must rely, to a great extent, on local legal counsel, consultants and advisors retained by it in order to keep apprised of legal, regulatory and governmental developments as they pertain to and affect the Company’s business, and to assist the Company with its governmental relations. The Company must rely, to some extent, on those members of management and the Board who have previous experience working and conducting business in these countries, if any, in order to enhance its understanding of and appreciation for the local business culture and practices. The Company also relies on the advice of local experts and professionals in connection with current and new regulations that develop in respect of the cultivation and sale of cannabis as well as in respect of banking, financing, labour, litigation and tax matters in these jurisdictions. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices are beyond the Company’s control. The impact of any such changes may adversely affect the Company’s business, financial condition and results of operations.

 

Anti-Money Laundering Laws and Regulation Risks

 

The Company is subject to a variety of domestic and international laws and regulations pertaining to money laundering, financial recordkeeping and proceeds of crime, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities internationally.

 

In the event that any of the Company’s operations or investments, any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations or investments were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the Company’s ability to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends in the foreseeable future, in the event that a determination was made that proceeds obtained by the Company could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Corruption and Anti-Bribery Law Violations

 

The Company’s business is subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, the Company is subject to the anti-bribery laws of any other countries in which it conducts business now or in the future. the Company’s employees or other agents may, without its knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and anti-bribery laws for which the Company may be held responsible. the Company’s policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that the Company’s internal control policies and procedures will always protect it from recklessness, fraudulent behaviour, dishonesty or other inappropriate acts committed by its affiliates, employees, contractors or agents. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

 

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Legislative or Regulatory Reform and Compliance

 

The commercial cannabis industry is a new industry, and we anticipate that such regulations will be subject to change as the Canadian federal government monitors licensees in action. The Company’s operations are subject to a variety of laws, regulations, guidelines and policies, whether in Canada or elsewhere, relating to the cultivation, manufacture, import, export, management, packaging/labelling, advertising and promotion, sale, transportation, storage and disposal of cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management, the Company is currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the Company’s control may cause adverse effects to the Company’s operations.

 

Environmental Regulations and Risks

 

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Government approvals and permits are currently, and may in the future be required in connection with The Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of adult-use or medical cannabis or from proceeding with the development of its operations as currently proposed.

 

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

Amendments to current laws, regulations and permits governing the production of medical cannabis, or more stringent implementation thereof, could have a material adverse impact on the company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

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Risks Inherent in an Agricultural Business

 

The Company’s business involves the growing of adult-use or medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the Company expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.

 

Reliance on a Single Cultivation Facility

 

To date, other than Broken Coast, the Company’s principal activities and resources have been primarily focused on the premises in Leamington, Ontario. The Company expects to continue to focus its operation in this facility for the foreseeable future. Adverse changes or developments affecting the existing facility and location could have a material and adverse effect on the Company’s ability to continue producing cannabis, its business, financial condition and prospects.

 

Third Party Transportation

 

In order for customers of the Company to receive their product, the Company must rely on third party transportation services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by the Company. Any delay by third party transportation services may adversely affect the Company’s financial performance.

 

Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on the Company’s business, financials and prospects. Any such breach, including any failure to comply with recommendations or requirements of Health Canada for the transportation of cannabis, could impact the Company’s ability to continue operating under its Licences or the prospect of renewing its Licences.

 

Reliance on Third Party Suppliers, Manufacturers and Contractors

 

The Company intends to maintain a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the novel regulatory landscape for regulating cannabis in Canada and the variability surrounding the regulation of cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors, including for non-cannabis based products coming from the United States, may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

In addition, any significant interruption, negative change in the availability or economics of the supply chain or increase in the prices for the products or services provided by any such third party suppliers, manufacturers and contractors could materially impact the Company’s business, financial condition, results of operations and prospects. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the Company’s business, financial condition, results of operations and prospects.

 

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Reliance on Key Personnel

 

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its executive management. The Company’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of member of the Company’s executive management, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Currently, the Company’s executive management team is in transition and is led by an interim Chief Executive Officer. The retention of a permanent Chief Executive Officer and other members of the executive team, including a President and a Chief Operating Officer, Chief Commercial Officer, a Chief Medical Officer and Chief Compliance Officer, would distribute the Company’s reliance on executive management among a larger group of qualified individuals. Further, as licensees under the Cannabis Act, the Company’s officers and directors and each member of executive management are subject to a security clearance by Health Canada. There is no assurance that any of the Company’s existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who require a security clearance will be able to obtain one. A failure by a member of the Company’s executive management to maintain or renew his or her security clearance, would result in a material adverse effect on the Company’s business, financial condition and results of operations. In addition, if a member of the Company’s executive management leaves the Company, and the Company is unable to find a suitable replacement that has a security clearance required by the Cannabis Act in a timely manner, or at all, there could occur a material adverse effect on the Company’s business, financial condition and results of operations. While employment agreements are customarily used as a primary method of retaining the services of a member of the Company’s executive management, these agreements cannot assure the continued services of such employees.

 

Limited Operating History

 

The Company, while incorporated in 1994, began carrying on business in 2012 and did not generate revenue from the sale of products until late 2014. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.

 

Product Liability

 

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of the Company’s products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that the Company’s products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

 

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A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company. There can be no assurances that the Company will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products.

 

Product Recalls

 

Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. If any of the Company’s products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. the Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s significant brands were subject to recall, the image of that brand and the Company could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

Wholesale Price Volatility

 

The cannabis industry is a margin-based business in which gross profits depend on the excess of sales prices over costs. Consequently, profitability is sensitive to fluctuations in wholesale and retail prices caused by changes in supply (which itself depends on other factors such as weather, fuel, equipment and labour costs, shipping costs, economic situation and demand), taxes, government programs and policies for the cannabis industry (including price controls and wholesale price restrictions that may be imposed by government agencies responsible for the sale of cannabis), and other market conditions, all of which are factors beyond the control of the Company. The Company’s operating income may be significantly and adversely affected by a decline in the price of cannabis and will be sensitive to changes in the price of cannabis and the overall condition of the cannabis industry, as the Company’s profitability is directly related to the price of cannabis. There is currently not an established market price for cannabis and the price of cannabis is affected by numerous factors beyond the Company’s control. Any price decline may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Results of Future Clinical Research

 

To date, there is limited standardization in the research of the effects of cannabis, and future clinical research studies may lead to conclusions that dispute or conflict with the Company’s understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis. Research in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids (such as CBD and THC) remains in relatively early stages.

 

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Future research and clinical trials may draw opposing conclusions to statements in this Annual Information Form or could reach different or negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to cannabis, which could adversely affect social acceptance of cannabis and the demand for the Company’s products.

 

Insurance Coverage

 

The Company has insurance to protect its assets, operations, directors and employees in Canada. While the Company believes its insurance coverage addresses all material risks to which it is exposed and is adequate and customary in its current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed. In addition, no assurance can be given that such insurance will be adequate to cover the Company’s liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If the Company were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if the Company were to incur such liability at a time when it is not able to obtain liability insurance, there could be a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company is also currently pursuing additional insurance coverage over its crop, product liability claims and for business interruption. While the Company believes the insurance coverage addresses all material risks to which it is exposed and is adequate and customary in the current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed.

 

Unfavorable Publicity or Consumer Perception

 

The Company believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of cannabis and related products distributed to such consumers. Consumer perception of the Company’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Company’s products and the business, results of operations, financial condition and cash flows of the Company. The Company’s dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for the Company’s products, and the business, results of operations, financial condition and cash flows of the Company.

 

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Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis and related products in general, or the Company’s products specifically, or associating the consumption of cannabis or related products with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regard to the Company and its activities, whether true or not. Although the Company believes that it operates in a manner that is respectful to all stakeholders and that it takes care in protecting its image and reputation, it does not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to the Company’s overall ability to advance its projects, thereby having a material adverse impact on its financial performance, financial condition, cash flows and growth prospects.

 

Reputational Risk to Third Parties

 

The parties outside of the cannabis industry with which the Company does business may perceive that they are exposed to reputational risk as a result of the Company’s cannabis business activities. Failure to establish or maintain business relationships could have a material adverse effect on the Company.

 

Growth Targets

 

The Company’s ability to continue the cultivation of cannabis products at the same pace as it is currently producing or at all, and the Company’s ability to continue to increase both the Company’s cultivation capacity and the Company’s production, may be affected by a number of factors, including plant design errors, non-performance by third party contractors, increases in materials or labor costs, construction performance falling below expected levels of output or efficiency, environmental pollution, contractor or operator errors, breakdowns, aging or failure of equipment or processes, labor disputes, as well as factors specifically related to indoor agricultural and processing practices, such as reliance on provision of energy and utilities to the facility, and potential impacts of major incidents or catastrophic events on the facility, such as fires, explosions, earthquakes or storms.

 

Additional Financing

 

There is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company ceasing to carry on business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. In addition, from time to time, the Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may increase the Company’s debt levels above industry standards. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. Debt financings may also contain provisions which, if breached, may entitle lenders or their agents to accelerate repayment of loans and/or realize upon security over the assets of the Company, and there is no assurance that the Company would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to such debt financing.

 

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Future Acquisitions or Dispositions

 

Although there is no present intention to undertake any of the following transactions, material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations; and (vi) loss or reduction of control over certain of the Company’s assets.

 

The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the results of operations, business prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.

 

Conflicts of Interest

 

The Company may be subject to various potential conflicts of interest because of the fact that some of its officers and directors may be engaged in a range of business activities. The Company’s executive officers and directors may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to Aphria. In some cases, the Company’s executive officers, directors and consultants may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the Company’s operations.

 

In addition, the Company may also become involved in other transactions which conflict with the interests of its directors and officers who may from time to time deal with persons, firms, institutions or corporations with which the Company may be dealing, or which may be seeking investments similar to those the Company desires. The interests of these persons could conflict with the Company’s interests. In addition, from time to time, these person may be competing with the Company for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the Board, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the Company’s directors are required to act honestly, in good faith and in the Company’s best interests.

 

Litigation

 

From time to time, the Company may become involved in legal proceedings or be subject to claims, some of which arise in the ordinary course of the Company’s business. Litigation is inherently uncertain, and any adverse outcomes could negatively affect the Company’s business, results of operations, financial condition, brand and/or the trading price of its securities. In addition, litigation can involve significant management time and attention and be expensive, regardless of outcome. During the course of litigation, there may be announcements of the results of hearings and motions and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the trading price of the Company’s securities may decline. In addition, the Company evaluates these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, the Company may establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from the Company’s current assessments and estimates.

 

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The Company was served statements of claims in class action lawsuits against it and certain of its current and former officers. These claims relate to alleged misconduct in connection with the Company’s acquisitions of LATAM and Nuuvera, and the Company’s June 2018 Offering. At the present time, the Company is aware of five such claims, two of which were commenced in the United States and three of which were commenced in Canada. The US claims include alleged violations of Section 10(b) of the United States Securities Exchange Act of 1934 , as amended (the “ Exchange Act ”), Rule 10b-5 under the Exchange Act and Section 20(a) of the Exchange Act. The Canadian claims include alleged statutory and common law misrepresentation and oppression. The Company intends to vigorously defend ourselves in each of these actions. With respect to the cases commenced in the United States, the Company is self-insured for the costs associated with any award or damages arising from such actions and have entered into indemnity agreements with each of the Company’s directors and officers and, subject to certain exemptions, will cover any costs incurred by them in connection with any of the class action claims. With respect to the cases commenced in Canada, the Company’s insurance policies may not be sufficient to cover any judgments against it.

 

Intellectual Property

 

The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as the Company may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the Company’s business, financial condition and results of operations.

 

In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licences from third parties who allege that the Company has infringed on their lawful rights. However, such licences may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licences or other rights with respect to intellectual property that it does not own.

 

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Customer Acquisitions

 

The Company’s success depends on its ability to attract and retain customers. There are many factors which could impact the Company’s ability to attract and retain customers, including but not limited to the Company’s brand awareness, its ability to continually produce desirable and effective cannabis products and the successful implementation of customer-acquisition plans. The failure to acquire and retain customers could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Contracts with Provincial and Territorial Governments

 

The Company expects to derive a significant portion of its future revenues from its supply contracts with the various Canadian provinces and territories. There are many factors which could impact the Company’s contractual agreements with the provinces and territories, including but not limited to availability of supply, product selection and the popularity of the Company’s products with retail customers. If the Company’s supply agreements with certain Canadian provinces and territories are amended, terminated or otherwise altered, the Company’s sales and results of operations could be adversely affected, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

In addition, not all of the Company’s supply contracts with the various Canadian provinces and territories contain purchase commitments or otherwise obligate the provincial or territorial wholesaler to buy a minimum or fixed volume of cannabis products from the Company. The amount of cannabis that the provincial or territorial wholesalers may purchase under the supply contracts may therefore vary from what the Company expects or has planned for. As a result, the Company's revenues could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the provincial or territorial wholesalers. If any of the provincial or territorial wholesalers decide to purchase lower volumes of products from the Company than the Company expects, alters its purchasing patterns at any time with limited notice or decides not to continue to purchase the Company's cannabis products at all, the Company's revenues could be materially adversely affected, which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects.

 

Constraints on Marketing Products

 

In view of the restrictions on marketing, advertising and promotional activities set forth in the Cannabis Act and related regulations, the Company’s business, financial condition and results of operations may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations could be adversely affected.

 

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Fraudulent or Illegal Activity

 

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Information Technology Systems and Cyber-Attacks

 

The Company has entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with its operations. The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.

 

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

Security Risks

 

Given the nature of the Company’s product and its lack of legal availability outside of channels approved by the Government of Canada, as well as the concentration of inventory in its facilities, despite meeting or exceeding Health Canada’s security requirements, there remains a risk of shrinkage as well as theft. A security breach at one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.

 

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In addition, the Company collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

In addition, there are a number of federal and provincial laws protecting the privacy of personal information, including records of a patient’s personal health information. Generally, these laws require the prior consent of an individual to collect, use and disclose that individual’s personal information. They also require that personal information be protected by appropriate safeguards, and that the Company restrict the handling of personal information to the minimum amount of personal information necessary to carry out permitted purposes. If the Company is found to be in violation of these privacy laws, or other laws governing patient health information, the Company could be subject to sanctions and civil or criminal penalties, which could increase the Company’s liabilities, harm the Company’s reputation and have a material adverse effect on the Company’s business, results of operations and financial condition.

 

Challenging Global Financial Conditions

 

In recent years, global credit and financial markets have experienced extreme disruptions, including with respect to, at times, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that significant deterioration in credit and financial markets and confidence in economic conditions will not occur in the future. Any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Further, global credit and financial markets have displayed arguably increased volatility in response to global events. Future crises may be precipitated by any number of causes, including natural disasters, geopolitical instability, changes to energy prices or sovereign defaults. These factors may impact the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favorable to the Company. Increased levels of volatility and market turmoil can adversely impact the Company’s operations and the value and the price of the Common Shares could be adversely affected.

 

In addition, there is a risk that one or more of the Company’s current service providers may themselves be adversely impacted by difficult economic circumstances, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

History of Losses

 

The Company incurred losses in prior periods. The Company may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, the Company expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If the Company’s revenues do not increase to offset these expected increases in costs and operating expenses, the Company will not be profitable.

 

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Competition

 

The Company expects significant competition from other companies in light of the recent coming into force of the Cannabis Act. A large number of companies appear to be applying for cultivation, processing and sale licences, some of which may have significantly greater financial, technical, marketing and other resources than the Company, may be able to devote greater resources to the development, promotion, sale and support of their products and services, and may have more extensive customer bases and broader customer relationships. The Company’s future success depends upon its ability to achieve competitive per unit costs through increased production and on its ability to recognize higher margins through the sale of higher margin products. To the extent that the Company is not able to produce its products at competitive prices or consumers prioritize established low margin products over innovative, higher margin products, the Company’s business, financial condition and results of operations could be materially and adversely affected.

 

Should the size of the cannabis market increase as projected the overall demand for products and number of competitors will increase as well, and in order for the Company to be competitive it will need to invest significantly in research and development, market development, marketing, production expansion, new client identification, distribution channels and client support. If the Company is not successful in obtaining sufficient resources to invest in these areas, the Company’s ability to compete in the market may be adversely affected, which could materially and adversely affect the Company’s business, financial condition and results of operations.

 

Difficulty to Forecast

 

The Company must rely largely on its own market research to forecast sales as detailed forecasts are, with certain exceptions, not generally available from other sources at this early stage of the cannabis industry. A failure in the demand for the Company’s products to materialize as a result of competition, technological change, change in the regulatory or legal landscape or other factors could have a material adverse effect the Company’s business, financial condition and results of operations.

 

Unsolicited Takeover Proposals

 

The review and consideration of any takeover proposal may be a significant distraction for the Company’s management and employees and could require the expenditure of significant time and resources by the Company.

 

Moreover, any unsolicited takeover proposal may create uncertainty for the Company’s employees and this uncertainty may adversely affect the Company’s ability to retain key employees and to hire new talent. Any such takeover proposal may also create uncertainty for the Company’s customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with the Company. The uncertainty arising from unsolicited takeover proposals and any related costly litigation may disrupt the Company’s business, which could result in an adverse effect on its business, financial condition and results of operations. Management and employee distraction related to any such takeover proposal also may adversely impact the Company’s ability to optimally conduct its business and pursue its strategic objectives.

 

Reliance on the Veterans Affairs Canada (“ VAC ”) Medical Cannabis Reimbursement Policies

 

VAC reimburses certain medical cannabis purchases for eligible Canadian Armed Forces veterans. The current reimbursement policy includes a three gram per day limit, subject to certain exceptions, and an $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although veteran sales have decreased in recent years. As the Company grows larger and, more particularly, since the legalization of adult-use cannabis, veteran patients have become less and less material to the Company’s overall sales as a relative percentage. However, should VAC further amend its reimbursement policies this may further exacerbate demand for medical cannabis and the Company may be materially adversely affected.

 

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Risks Related to the Company’s Common Shares

 

Volatile Market Price of the Common Shares

 

The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. The market price for the Common Shares on the TSX has varied between a high of $22.00 on September 12, 2018 and a low of $4.76 on December 5, 2018 in the twelve month period ending on May 31, 2019. Since the Common Shares became listed for trading on the NYSE on November 2, 2018, the trading price of the Common Shares on the NYSE has ranged from a high of US$13.45 on November 7, 2018 and a low of US$3.75 on December 6, 2018. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price.

 

Market price fluctuations in the Common Shares may be due to the Company’s results of operations failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s results of operations, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.

 

Risks Related to Dilution

 

The Company may issue Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The Board has discretion to determine the price and the terms of issue of further issuances. Issuances of the Company’s securities may involve the issuance of a significant number of Common Shares at prices less than the current market price for the Common Shares. Issuances of substantial numbers of Common Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices of the Common Shares. Any transaction involving the issuance of previously authorized but unissued Common Shares, or securities convertible into Common Shares, would result in dilution, possibly substantial, to security holders. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.

 

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The Company may sell equity securities in offerings (including through the sale of securities convertible into equity securities). The Company cannot predict the size of such issuances of equity securities or the size and terms of future issuances of debt instruments or other securities convertible into equity securities or the effect, if any, that future issuances and sales of the Company’s securities will have on the market price of the Common Shares.

 

Sales of substantial amounts of the Company’s securities by the Company or its existing shareholders, or the availability of such securities for sale, could adversely affect the prevailing market prices for the Company’s securities and dilute investors’ earnings per Common Share. Exercises of presently outstanding share options or warrants may also result in dilution to security holders. A decline in the market prices of the Company’s securities could impair the Company’s ability to raise additional capital through the sale of securities should the Company desire to do so.

 

Dividends

 

The Company has not paid any dividends on the outstanding Common Shares, and the Company has no current intention to declare dividends on the Common Shares in the foreseeable future. Any decision to pay dividends on the Common Shares in the future will be at the discretion of the Board and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board may deem relevant. Additionally, the Company’s ability to pay dividends is currently restricted by the terms of its credit facilities with WFCU, which requires that dividends may only be paid after satisfaction of all terms, conditions and covenants contained therein. As a result, investors may not receive any return on an investment in the Common Shares unless they are able to sell their Common Shares for a price greater than that which such investors paid for them.

 

Regulated Nature of the Company’s Business May Impede or Discourage a Takeover

 

The Company requires and holds various licences to operate its business, which would not necessarily continue to apply to an acquiror of the Company’s business following a change of control. These licensing requirements could impede a merger, amalgamation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer for Common Shares, which, under certain circumstances, could reduce the market price of the Common Shares.

 

Listing Standards of the TSX and NYSE

 

The Company must meet continuing listing standards to maintain the listing of the Common Shares on the TSX and NYSE. If the Company fails to comply with listing standards and the TSX or NYSE delists the Common Shares, the Company and its shareholders could face significant material adverse consequences, including: (i) a limited availability of market quotations for the Common Shares; (ii) reduced liquidity for the Common Shares; (iii) a determination that the Common Shares are “penny stock,” which would require brokers trading in the Common Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the Common Shares; (iv) a limited amount of news about us and analyst coverage of the Company; and (v) a decreased ability for the Company to issue additional equity securities or obtain additional equity or debt financing in the future.

 

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TSX Restrictions

 

On October 16, 2017, the TSX provided clarity regarding the application of Sections 306 (Minimum Listing Requirements) and 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities) of the TSX Company Manual (collectively, the “ Requirements ”) to TSX listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017 0009, the TSX notes that issuers with ongoing business activities that violate US federal law regarding cannabis are not in compliance with the Requirements. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. Failure to comply with the Requirements could have an adverse effect on the Company.

 

Liquid Trading Market

 

The Company’s shareholders may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the TSX or the NYSE or achieve listing on any other public listing exchange.

 

Emerging Growth Company

 

The Company is an “emerging growth company,” as defined in the US Jumpstart Our Business Start-ups Act , and it uses the exemption provided to emerging growth companies from the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act of 2002 (“ SOX ”). Therefore, the Company’s internal controls over financial reporting (“ ICOFR ”) will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are not using an exemption.

 

The Company may fail to maintain the adequacy of the Company’s ICOFR as such standards are modified, supplemented or amended from time to time, and may not be able to ensure that the Company can conclude, on an ongoing basis, that the Company has effective ICOFR in accordance with Section 404 of SOX or equivalent Canadian legislation. Failure to satisfy the requirements of Section 404 of SOX and equivalent Canadian legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could harm the Company’s business and negatively impact the trading price of the Common Shares or the market value of the Company’s other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s results of operations or cause it to fail to meet reporting obligations. Future acquisitions of companies, if any, may provide the Company with challenges in implementing the required processes, procedures and controls in the Company’s acquired operations. No evaluation can provide complete assurance that the Company’s ICOFR will detect or uncover all failures of persons to disclose material information otherwise required to be reported. The effectiveness of the Company’s processes, procedures and controls could also be limited by simple errors or faulty judgments. In addition, as the Company expands, the challenges involved in implementing appropriate ICOFR will increase and will require that the Company continues to improve its ICOFR.

 

In addition, the Company cannot predict if investors will find the Common Shares less attractive because it relies on the aforementioned exemption. If some investors find the Common Shares less attractive as a result, there may be a less active trading market for the Common Shares and trading price for the Common Shares may be negatively affected.

 

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Foreign Private Issuer Status

 

In order to maintain the Company’s status as a foreign private issuer, a majority of the Common Shares must be either directly or indirectly owned by non-residents of the United States if the Company has one or more other connections to the United States prescribed by the foreign private issuer test. The Company may in the future lose its foreign private issuer status if a majority of the Common Shares are held in the United States and if the Company fails to meet the additional requirements necessary to avoid loss of its foreign private issuer status. The regulatory and compliance costs under US federal securities laws as a US domestic issuer may be significantly more than the costs incurred as a Canadian foreign private issuer eligible to use the multijurisdictional disclosure system (“ MJDS ”). If the Company is not a foreign private issuer, the Company would not be eligible to use the MJDS or other foreign issuer forms and would be required to file periodic and current reports and registration statements on US domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. In addition, the Company would lose the ability to rely upon exemptions from NYSE corporate governance requirements that are available to foreign private issuers.

 

Passive Foreign Investment Company

 

The Company may be characterized as a passive foreign investment company (“ PFIC ”). Under the PFIC rules, for any taxable year that the Company’s passive income or the Company’s assets that produce passive income exceed specified levels, the Company will be characterized as a PFIC for US federal income tax purposes. This characterization could result in adverse US tax consequences for the Company’s US holders, which may include having certain distributions on the Common Shares and gains realized on the sale of Common Shares treated as ordinary income, rather than as capital gains income, and having potentially punitive interest charges apply to the proceeds of sales of Common Shares and certain distributions. Based on current business plans and financial expectations, although there can be no assurance, the Company expects that it will not be a PFIC for the Company’s current taxable year and expect that it will not be a PFIC for the foreseeable future.

 

Certain elections may be made to reduce or eliminate the adverse impact of the PFIC rules for holders of the Common Shares, but these elections may be detrimental and/or unavailable to the shareholders under certain circumstances. The PFIC rules are extremely complex and US investors are urged to consult independent tax advisers regarding the potential consequences to them of the Company’s classification as a PFIC.

 

Risks Related to Changes in Laws, Regulations and Guidelines

 

The Company’s operations are subject to various laws, regulations and guidelines relating to the manufacture, management, packaging/labelling, advertising, sale, transportation, storage and disposal of adult-use or medical cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may cause adverse effects business, financial condition and results of operations of the Company. The Company endeavours to comply with all relevant laws, regulations and guidelines. To the best of the Company’s knowledge, the Company is in compliance or in the process of being assessed for compliance with all such laws, regulations and guidelines.

 

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The Cannabis Act and Cannabis Regulations came into force on October 17, 2018. The Cannabis Act and Cannabis Regulations prohibit testimonials, lifestyle branding and packaging that is appealing to youth. The restrictions on advertising, marketing and the use of logos and brand names could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, the Cannabis Act allows for licences to be granted for outdoor cultivation, which may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices, as capital expenditure requirements related to outdoor growing are typically much lower than those associated with indoor growing. Such results may also have a material adverse impact on the Company’s business, financial condition and results of operations.

 

The legislative framework pertaining to the Canadian adult-use cannabis market is uncertain. In addition, the governments of every Canadian province and territory have, to varying degrees, announced regulatory regimes for the distribution and sale of cannabis for adult-use purposes within those jurisdictions. There is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult-use purposes will be enacted according to all the terms announced by such provinces and territories, or at all, or that any such legislation, if enacted, will create the growth opportunities that the Company currently anticipates. While the impact of any new legislative framework for the regulation of the Canadian adult-use cannabis market is uncertain, any of the foregoing could result in a material adverse effect of the Company’s business, financial condition and results of operations.

 

To date, only fresh cannabis, dried cannabis and cannabis oil products are permitted for sale in Canada. Pursuant to the Cannabis Act, certain classes of cannabis products, such as edibles, concentrates and other edibles are currently prohibited from sale, but new regulations under the Cannabis Act will come into force on October 17, 2019 to permit edibles, concentrates and other edibles to be available for sale no earlier than December 2019. While regulations have been released, the impact of these regulatory changes on the business of the Company is unknown, and the proposed regulations may not be implemented at all or, if they are, may change significantly.

 

Further, Health Canada may change their administration, interpretation or application of the applicable regulations or their compliance or enforcement procedures at any time. Any such changes could require the Company to revise its ongoing compliance procedures, requiring the Company to incur increased compliance costs and expend additional resources. There is no assurance that the Company will be able to comply or continue to comply with applicable regulations.

 

DIVIDENDS

 

The Company has not paid dividends in the past on any class of its securities.

 

As of the date of this Annual Information Form, the Company has no current intention to declare dividends on its Common Shares in the foreseeable future. Any decision to pay dividends on its Common Shares in the future will be at the discretion of the Company’s board of directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board of Directors may deem relevant.

 

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CAPITAL STRUCTURE

 

The Company is authorized to issue an unlimited number of Common Shares. As of May 31, 2019, there were 250,989,120 Common Shares issued and outstanding The holders of the Common Shares are entitled to one vote per Common Share at all meetings of the shareholders of the Company. The holders of Common Shares are also entitled to dividends, if and when declared by the Board of Directors and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company.

 

The Company adopted an omnibus long-term incentive plan (the “ Omnibus Incentive Plan ”) under which it is authorized to grant a variety of equity-based awards that provide different types of incentives to its directors, officers, employees and/or its affiliates. The Omnibus Incentive Plan facilitates granting of common share purchase options (“ Options ”), restricted share units (“ RSUs ”) and deferred share units (“ DSUs ” and collectively with the Options and RSUs, the “ Awards ”), representing the right to receive one Common Share in accordance with the terms of the Omnibus Incentive Plan.

 

Under the Omnibus Incentive Plan, the maximum number of shares issuable from treasury pursuant to Awards shall not exceed 10% of the total outstanding Common Shares from time to time less the number of Common Shares issuable pursuant to all other security-based compensation arrangements of the Company, consisting of (i) the former Amended and Restated Stock Option Plan (the “ Former Option Plan ”) and the former Amended and Restated DSU Plan, each approved at the Company’s annual and special meeting in 2017; and (ii) legacy options issuable in connection with Company’s acquisition of Nuuvera in March 2018.

 

The number of Common Shares issuable to insiders, at any time, under all security-based compensation arrangements of the Company, may not exceed 10% of the Company’s issued and outstanding Common Shares; and the number of Common Shares issued to insiders within any one-year period, under all security-based compensation arrangements of the Company, may not exceed 10% of the Company’s issued and outstanding Common Shares.

 

In addition, the Company has warrants outstanding to purchase up to an aggregate of 2,292,800 Common Shares.

 

MARKET FOR SECURITIES

 

Common Shares

 

The Common Shares are listed and traded on the TSX and the NYSE under the trading symbol “APHA”. The Common Shares began trading on the NYSE on November 2, 2018. The following tables set forth trading information for the Common Shares on the TSX and NYSE for the months indicated:

 

TSX   High
Trading
Price
    Low
Trading
Price
    Volume  
May 2019   $ 10.48     $ 8.60       60,918,474  
April 2019   $ 13.57     $ 9.86       67,570,056  
March 2019   $ 14.21     $ 11.73       75,948,940  
February 2019   $ 14.37     $ 10.70       154,263,470  
January 2019   $ 11.74     $ 7.44       166,612,114  
December 2018   $ 9.12     $ 4.76       322,181,042  
November 2018   $ 17.60     $ 10.15       126,085,249  
October 2018   $ 20.96     $ 12.37       281,295,869  
September 2018   $ 22.00     $ 15.76       251,553,958  
August 2018   $ 16.98     $ 8.62       182,202,170  
July 2018   $ 12.22     $ 10.11       58,388,603  
June 2018   $ 13.45     $ 11.31       112,871,497  

 

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NYSE   High
Trading
Price (US$)
    Low
Trading
Price
(US$)
    Volume  
May 2019   $ 7.68     $ 6.38       93,794,289  
April 2019   $ 10.17     $ 7.33       108,444,901  
March 2019   $ 10.68     $ 8.74       94,131,512  
February 2019   $ 10.95     $ 8.08       206,362,798  
January 2019   $ 8.93     $ 5.45       134,356,114  
December 2018   $ 6.91     $ 3.75       259,556,641  
November 2 - 30, 2018   $ 13.45     $ 7.63       51,801,517  

 

PRIOR SALES

 

The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued by Aphria during the twelve month period between June 1, 2018 and May 31, 2019:

 

Date   Type of Security Issued   Issuance/Exercise
Price per Security
    Number of
Securities
Issued
 
May 31, 2019   Deferred share units     N/A       29,392  
April 29, 2019   Restricted share units     N/A       31,600  
April 26, 2019   Aphria Notes     US$ 9.38       5,330,490 (1)
April 23, 2019   Aphria Notes     US$ 9.38       31,982,942 (1)
April 17, 2019   Options     $11.45       80,000  
March 1, 2019   Restricted share units     N/A       70,000  
February 28, 2019   Deferred share units     N/A       3,516  
February 24, 2019   Options     $13.31       1,000,000  
February 24, 2019   Restricted share units     N/A       85,000  
February 19, 2019   Restricted share units     N/A       11,000  
February 19, 2019   Options     $12.77       425,000  
November 30, 2018   Deferred share units     N/A       3,041  
October 11, 2018   Options     $19.70       80,000  
September 19, 2018   Options     $19.38       250,000  
August 31, 2018   Deferred share units     N/A       1,884  
July 31, 2018   Options     $11.51       100,000  
July 31, 2018   Deferred share units     N/A       14,000  
July 23, 2018   Deferred share units     N/A       45,000  
July 9, 2018   Options     $11.85       720,000  
June 1, 2018   Options     $11.78       250,000  

 

 

Notes:

(1) Securities issued pursuant to the Indenture pursuant to which Aphria offered the Aphria Notes.

 

ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER

 

The following table summarizes details of the Company’s securities of each class held, to the Company’s knowledge, in escrow or that are subject to a contractual restriction on transfer as of the date of this Annual Information Form:

 

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Designation of Class   Number of securities held in
escrow or that are subject to a
contractual restriction on
transfer escrow
    Percentage of class  
Common Shares     600,000       0.002 % (1)

 

Note:

(1) Based on 250,989,120 Common Shares outstanding as of May 31, 2019.

 

DIRECTORS AND OFFICERS

 

Name, Occupation and Security Holding

 

The following table sets out, for each of the directors and executive officers of the Company, the person’s name, province or state and country of residence, position, principal occupation and, if a director, the date on which the person became a director. The term of each director of Aphria will expire on the date of the next annual meeting of shareholders of Aphria:

 

Name and Province
or State and Country
of Residence
  Position with
Aphria
  Director of
Aphria Since
  Principal Occupation(s) for
last Five Years
Irwin Simon
New York, New York, USA
  Interim Chief Executive Officer and Chair of the Board   December 27, 2018   Founder, President, Chief Executive Officer and Chairman of The Hain Celestial Group, Inc.
             
Carl Merton
Belle River, Ontario, Canada
  Chief Financial Officer   N/A   Chief Financial Officer of Reko International Group
             
Christelle Gedeon
Toronto, Ontario, Canada
  Chief Legal Officer   N/A  

Partner, Fasken Martineau DuMoulin LLP

Associate, Fasken Martineau DuMoulin, LLP

             
James Meiers
Naples, Florida, USA
  Chief Operating Officer, Aphria Leamington   N/A   Senior Executive of The Hain Celestial Group, Inc.
             
Tim Purdie
LaSalle, Ontario, Canada
  Chief Information Officer & Chief Information Security Officer   N/A   Chief Operating Officer, Xede Consulting Group
             
Shlomo Bibas (1)(2)
Toronto, Ontario, Canada
  Director   November 2, 2018   Senior Vice President and Global Chief Information Officer, Celestica Inc.

 

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Shawn Dym (3)
Toronto, Ontario, Canada
  Director   October 25, 2017   Managing Director, York Plains Investment Corp.
             
John M. Herhalt (1)
Vaughan, Ontario, Canada
  Director   September 14, 2018   Consultant, self-employed
             
David Hopkinson
Madrid, Spain
  Director   April 15, 2019   Global Head of Partnerships, Real Madrid Club de Futbol’s
             
Tom Looney (1)(2)
Ridgefield, Connecticut, USA
  Director   November 2, 2018   President, Diageo US Spirits & Canada
             
Renah Persofsky (3)
Toronto, Ontario, Canada
  Director   October 25, 2017   Executive Consultant in the Innovation Group at CIBC
             
Walter Robb
California and Texas, USA
  Director   April 15, 2019  

Chairman, Whole Kids Foundation and Whole Cities Foundation

Co-Chief Executive Officer of Whole Foods Market

             
Michael Serruya (2)(3)
Toronto, Ontario, Canada
  Director   November 2, 2018   Managing Director, Serruya Private Equity Inc.

 

Notes :
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Governance Committee.

 

As of the date of this Annual Information Form, the Company’s directors and executive officers, as a group, beneficially owned, directly or indirectly, or exercised control over 127,942 Common Shares, representing approximately 0.005% of the issued and outstanding Common Shares. The statement as to the number of Common Shares beneficially owned directly or indirectly, or over which control or direction is exercised by the director and executive officers of the Company as a group is based upon information furnished by the directors and executive officers.

 

The following is a summary biography of each of the directors and executive officers of Aphria:

 

Irwin Simon
Interim Chief Executive Officer and Chairman

 

Irwin Simon is a business executive who founded The Hain Celestial Group, Inc. (the “ Hain Celestial Group ”) (NASDAQ: HAIN) a leading organic and natural products company in 1993. As Founder, President, Chief Executive Officer and Chairman, Mr. Simon led the Hain Celestial Group for more than 25 years and grew the business to $3 billion in net sales with operations in North America, Europe, Asia and the Middle East providing consumers with A Healthier Way of Life™. Mr. Simon has more than 30 years of business experience spanning many domestic and international leadership and operating roles. Prior to the Hain Celestial Group, Mr. Simon was employed in various marketing and sales positions at Slim-Fast Foods Company, a dietary supplement foods company, and The Häagen-Dazs Company, a frozen dessert company, then a division of Grand Metropolitan, a multi-national luxury brands company.

 

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Carl Merton
Chief Financial Officer

 

Carl Merton has over 25 years of financial and business experience, having spent almost 12 years combined with Ernst & Young LLP and KPMG LLP prior to serving as Vice-President, Special Projects at Atlas Tube Canada ULC, Chief Financial Officer of Reko International Group Inc. (TSXV:REK) and Chief Financial Officer of Aphria. Mr. Merton is a Chartered Professional Accountant, Chartered Accountant and is a Fellow of the Canadian Institute of Chartered Business Valuators (the “ CICBV ”). As the Chief Financial Officer of Aphria, Mr. Merton is responsible for leading strategic discussions, acquisitions and divestitures, budgeting, financing, financial reporting and internal controls. Mr. Merton holds an Honours Bachelor of Commerce in Sports Administration from Laurentian University. In addition Mr. Merton, is a former board member of Motor City Community Credit Union and the former Chair of their Audit Committee and has served as a past Chair of both the CICBV and the International Association of Professional Business Valuators.

 

Christelle Gedeon
Chief Legal Officer

 

Prior to joining Aphria, Christelle Gedeon was a Partner at Fasken Martineau DuMoulin LLP, a prominent Bay Street law firm where her practice focused on the life sciences industry, advising on intellectual property matters, regulated products under the Food and Drugs Act and general corporate commercial matters. She received her LL.B./B.C.L. from McGill University and holds a Ph.D. in clinical pharmacology and toxicology from the University of Toronto. She is called in the province of Quebec and Ontario and is currently the Chair of the Canadian Association of Professionals in Regulatory Affairs.

 

James Meiers
Chief Operating Officer, Aphria Leamington

 

James Meiers joined the Company from the Hain Celestial Group, where he was a senior executive. Over his 14-year tenure at the Hain Celestial Group, he held various executive roles including President Celestial Seasonings, Hain Celestial Personal Care, Chief Executive Officer Hain Pure Protein and Chief Supply Chain Officer of Hain Grocery & Snacks. Mr. Meiers has over 30 years of supply chain experience and general management for consumer-packaged goods companies, including H.J. Heinz and Kraft Food.

 

Tim Purdie
Chief Information Officer & Chief Information Security Officer

 

With over 30 years of experience prior to joining Aphria, Tim Purdie held successive executive leadership positions as Chief Operating Officer, Vice President & Chief Information Officer, Director, as well as other senior management positions in well-known international companies such as Xede Consulting Group, Sandvine, Research In Motion (Blackberry) and OpenText. In addition, Mr. Purdie holds designations as Certified Information Security Manager, Certified Supply Chain Professional, Lean Six Sigma Black Belt, Master Project Manager, Certified Scrum Master and Certified Rummler-Brache Process Improvement consultant.

 

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Shlomo Bibas
Director

 

On September 2018, Shlomo Bibas joined Celestica Inc.’s (“ Celestica ”) executive team, as Senior Vice President and Global Chief Information Officer. Prior to joining Celestica, Mr. Bibas served as Senior Vice President of Global Operations and Chief Information Officer for the Apotex Group of Companies since 2012. In this capacity, Mr. Bibas had global accountability for all IT operations, risk management, customer care, innovation, business enablement, legal services, business services, and indirect procurement functions. As Corporate Officer and member of Apotex’ Executive Committee, Mr. Bibas was part of the senior leadership team responsible for strategy development, governance, and global execution of the company. Prior to joining Apotex, Mr. Bibas was a Partner at Accenture, where he spent 18 years of his career providing IT and management consulting services to Fortune 500 companies. During his tenure at Accenture, Mr. Bibas took several international assignments. He developed strong business skills and gained deep cross-industry experience, serving as part of the Global Business Solutions Leadership Team; and later leading the High-Tech practice in Canada.

 

Mr. Bibas has extensive experience in the Pharmaceutical industry; and a proven track record identifying, qualifying, defining, planning, and successfully delivering transformation programs that drive business growth, expansion, cost management, and regulatory compliance. Mr. Bibas has also participated in several business start-ups, where he created an immediate impact through innovation, intellect, and multi-disciplinary collaboration. Mr. Bibas is a Mechanical Engineering alumnus from the University of Toronto; and a graduate from the joint Rotman School of Management and Institute of Corporate Directors’ Education Program, where he obtained his ICD.D designation.

 

Shawn Dym
Director

 

Shawn Dym is a managing director at York Plains Investment Corp. a private investment vehicle focused on maximizing absolute returns by investing in a wide array of asset classes, including successful cannabis related investments. He currently serves on the board of advisors for Green Acre Capital, Canada’s first private independent investment fund focused on the cannabis industry. He has extensive experience managing companies with high growth both at York Plains and as an entrepreneur. Since 2014 he has been President of Eddy Smart Home Solutions Inc. a leading smart home water monitoring venture based out of Toronto. Mr. Dym has more than a decade of experience in the energy industry, most recently co-founding National Home Services and serving as its chief operating officer from 2008 to 2011. He currently serves on the board of directors at Wellpoint Health and Totally Green. He graduated from York University and holds an MBA from Harvard Business School.

 

John M. Herhalt
Director and Chair of the Audit Committee

 

John M. Herhalt is a FCPA (FCA) and a retired partner from KPMG and has over 40 years of experience providing a wide variety of advisory and audit services to a range of clients. He has worked across several industry sectors including automotive manufacturing, consumer products, infrastructure, power and utilities and the public sector. During his time with KPMG, Mr. Herhalt served as Canada’s national advisory leader, national public sector leader, and KPMG International’s global head of infrastructure, government and health care sectors providing subject matter advice and support to various KPMG member firms and their clients on a variety of projects in the Americas, Europe, Middle East and Asia. After retiring from KPMG, Mr. Herhalt has continued to provide management consulting services on a part-time basis and serves as a director on several boards.

 

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David Hopkinson
Director

 

David Hopkinson serves as Real Madrid Club de Futbol’s (“ Real Madrid ”) Global Head of Partnerships. Mr. Hopkinson joined Real Madrid in August 2018 and brings his 25 years of professional sports sales, marketing and leadership experience to Aphria. Mr. Hopkinson began his career in professional sports in Toronto, Ontario, Canada where he ascended from an entry-level day one employee with the National Basketball Association’s Toronto Raptors (the “ Raptors ”) to Chief Commercial Officer of Maple Leaf Sports and Entertainment, who are owners of the Raptors as well as the National Hockey League’s Toronto Maple Leafs, Major League Soccer’s Toronto FC, the Canadian Football League’s Toronto Argonauts and the NBA 2K League’s Raptors Uprising e-sports team. He also serves on the Chancellor’s Advisory Committee for McGill University in Montreal, Quebec, Canada. In 2012, David was awarded the Queen Elizabeth II Diamond Jubilee Medal in recognition of his contributions to Canada.

 

Tom Looney
Director

 

Tom Looney is the former President of Diageo US Spirits & Canada (“ Diageo ”). In this position Mr. Looney had full responsibility for the growth and development of the company’s spirits business in the United States & Canada including brands such as Smirnoff, Crown Royal, Baileys, Johnnie Walker, Captain Morgan and Ketel One. Mr. Looney was also a member of Diageo’s North American Executive Team. Mr. Looney’s career spans 30 plus years in the beverage alcohol industry. Previously, Mr. Looney held the position of President, Diageo Beer Company overseeing US sales, finance, marketing and innovation teams. Prior to that, Mr. Looney was Chief Commercial Officer where he oversaw the pricing strategy, business analytics and commercial marketing functions across spirits, beer and wine for North America. Mr. Looney has also held a variety of roles in finance, customer marketing and strategy roles, including SVP of global business support. He also had responsibility for new business development in North America where his responsibilities included M&A work and route to consumer strategy development.

 

During his time with Diageo, Mr. Looney delivered sustainable growth; through delivery of innovation brands; resourced top talent; built organizational capability; led several reorganizations to successful integration; developed and enhanced long-standing relationships with distributor and retail customers and helped to build Diageo’s brands with consumers. Mr. Looney graduated from University of Florida Warrington School of Business and subsequently attended executive training courses at Wharton School of Business for Finance and Marketing.

 

Renah Persofsky
Director

 

Renah Persofsky is an executive consultant in the Innovation Group at CIBC. She is a widely respected entrepreneur and strategist with a successful track record of creating 27 start-up companies and a rich history of investing in early stage companies. Ms. Persofsky serves as Board Chair for mobile on demand senior care and child care start-up BookJane, advises award winning payment card and platform technology firm Dynamics Inc. and is a board member for retail/QSR automation software specialty firm MeazureUp Inc.

 

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Walter Robb
Director

 

Walter Robb is an investor, mentor and advisor to next generation companies and as former Co-Chief Executive Officer of Whole Foods Market, he brings to Aphria a long and varied entrepreneurial history ranging from natural food retailer to farmer to consultant. Mr. Robb joined Whole Foods Market in 1991 and in 2010 was named co-Chief Executive Officer, at which time he joined the Whole Foods Market board of directors. In 2017, he transitioned his leadership focus to his role as a passionate advocate for greater food access in underserved communities, serving as Chairman of the Board for Whole Kids Foundation and Whole Cities Foundation. Mr. Robb also serves on the board of directors for Union Square Hospitality Group, The Container Store, FoodMaven, HeatGenie and Apeel Sciences.

 

Mr. Robb is an ardent organic advocate; he works his own organic garden and has served on the Board of Directors of the Organic Trade Association and the Organic Center for Education and Promotion. In 2013 he received the Culinary Institute of America “Augie” Award for Sustainability and Food Ethics, and in 2018, he was inducted into the Expo West Natural Products Expo Hall of Legends.

 

Michael Serruya
Director

 

Michael Serruya serves as Managing Director of Serruya Private Equity Inc. Mr. Serruya began his career at age twenty, as one of the co-founders of Yogen Früz®. Mr. Serruya co-founded CoolBrands International Inc., where he served as Chairman and CEO. CoolBrands was a leading consumer packaged goods company, which included brands such as Weight Watchers, Eskimo Pie, Tropicana and Godiva Ice Cream. More recently, Mr. Serruya was Chairman and CEO of Kahala Brands, a multinational Franchisor to global QSR brands including Cold Stone Creamery, Taco Time and Blimpie Subs. Mr. Serruya has also participated on the Boards of Directors of a number of both publicly and privately traded companies including Jamba Juice Inc., The Second Cup LTD., and The ONE Group Hospitality Inc. Over the years, Mr. Serruya has been recognized for his entrepreneurial vision, by receiving the Ernst and Young ® “Entrepreneur of the Year” award in Canada as well as, Canada’s “Top 40 under 40” award. Mr. Serruya previously received “Operators of the Year”, presented by FoodService and Hospitality Magazine in Canada.

 

Cease Trade Orders or Bankruptcies

 

To the knowledge of Aphria, no director or executive officer of Aphria, or shareholder holding a sufficient number of securities of Aphria to affect materially the control of the Company:

 

(a) is, as at the date hereof, or has been, within the ten years before the date hereof, a director, a chief executive officer or chief financial officer of any company that was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days, that was issued:

 

(i) while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or

 

(ii) after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer;

 

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(b) is, as at the date hereof, or has been, within the ten years before the date hereof, a director or executive officer of any company that, while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

 

(c) has, within the ten years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.

 

Penalties or Sanctions

 

To the knowledge of Aphria, no director or executive officer of Aphria, or a shareholder holding sufficient number of securities of Aphria to affect materially the control of Aphria, has been subject to:

 

(a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or

 

(b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

Conflicts of Interest

 

We may from time to time become involved in transactions which conflict with the interests of our directors and the officers. The interests of these persons could conflict with those of the Company. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of our directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

Other than as disclosed below, the Company is not aware of (a) any legal proceedings to which the Company is or was a party, or to which any of the Company’s property is subject, during the financial year ended May 31, 2019, which would be material to the Company or of any such proceedings being contemplated, (b) any penalties or sanctions imposed by a court or securities regulatory authority relating to securities legislation during the financial year ended May 31, 2019, or other penalties or sanctions imposed by a court or securities regulatory authority against the Company that would likely be considered important to a reasonable investor making an investment decision, or (c) any settlement agreements that the Company has entered into before a court relating to securities legislation or with a securities regulatory authority during the financial year ended May 31, 2019.

 

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On February 7, 2019, a proposed class action was commenced by Vecchio Longo Consulting Services Inc. (“ Vecchio ”) in the Ontario Superior Court of Justice against the Company and certain of its current or former officers, alleges statutory and common law misrepresentation and oppression relating to the LATAM and Nuuvera acquisitions (including the June 2018 Prospectus Offering). It seeks $1,675,000,000 in damages from the Company and certain current and former officers and/or directors, plus legal fees, disbursements and interest. The certification motion and leave to proceed motion for the secondary market claim under the Securities Act (Ontario) have not yet been scheduled . The Company intends to vigorously defend itself in this action.

 

There were three other proposed class actions that were commenced against the Company and certain of its current or former officers in December 2018 raising similar allegations relating to the LATAM acquisition. Two of the actions were stayed on June 19, 2019 in favour of the Vecchio claim and plaintiffs’ counsel in the third action has filed a motion seeking court approval to discontinue the third proposed class action.

 

On December 21, 2018, a proposed class action was commenced by Ranger et. al. in the Québec Superior Court against the Company and certain current and former officers and/or directors. The proposed class action claims damages for a breach of Article 1457 of the Québec Civil Code , secondary market misrepresentations, and conspiracy in relation to the LATAM and Nuuvera acquisitions. The plaintiffs are seeking unspecified monetary damages plus interest, additional indemnity, and full costs and expenses. The certification motion and the leave to proceed motion for the secondary market claim under the Securities Act (Québec) have not yet been scheduled. The Company intends to vigorously defend itself in this action.

 

On December 5, 6, and 7, 2018, four class action lawsuits were filed against the Company and certain of its current and former officers in the United States District Court for the Southern District of New York by Edvin Jakobsen, John Curkan, Anthony Gloschat, and James Florence as plaintiffs. These claims relate to alleged violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act and Section 20(a) of the Exchange Act. On March 27, 2019, the Court consolidated the four cases, appointed a lead plaintiff, Shawn Cunix, and appointed lead counsel for plaintiffs. On May 28, 2019, the lead plaintiff filed a consolidated amended complaint that added claims against additional officers and directors. The plaintiffs are seeking damages in connection with their respective purchases of Aphria securities during the class period. The Company’s response to the consolidated amended complaint is due on September 13, 2019. The Company intends to vigorously defend itself in each of these actions.

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Other than as disclosed elsewhere in this Annual Information Form, to the best of the Company’s knowledge, none of the directors or executive officers of the Company, or any shareholders who beneficially own, control or direct, directly or indirectly, more than 10% of the Company’s outstanding Common Shares, or any known associates or affiliates of such persons, had any material interests, direct or indirect, in any transaction within the three most recently completed financial years or during the current financial year that has materially affected or is reasonably expected to materially affect the Company.

 

TRANSFER AGENT AND REGISTRAR

 

The transfer agent and registrar of Aphria is Computershare Trust Company of Canada at its offices in Toronto, Ontario.

 

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MATERIAL CONTRACTS

 

Except for contracts entered into in the ordinary course of business, the only contracts entered into by the Company during the twelve month period ending May 31, 2019 which are material or entered into before the twelve month period ending May 31, 2019 but are still in effect are:

 

(i) the Licences; and

 

(ii) the Indenture.

 

AUDIT COMMITTEE INFORMATION

 

As of May 31, 2019, the Audit Committee consists of John M. Herhalt, Tom Looney and Shlomo Bibas, all of whom are “independent” and “financially literate” within the meaning of National Instrument 52-110 - Audit Committees . Each of the Audit Committee members has an understanding of the accounting principles used to prepare Aphria’s financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting

 

The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of Aphria’s financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring Aphria’s compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of Aphria’s internal auditors. The Audit Committee has specific responsibilities relating to Aphria’s financial reports; the external auditor; the internal audit function; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on Aphria; and Aphria’s whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in “ Directors and Officers ” above. The full text of the Audit Committee’s charter is disclosed in Schedule A.

 

Pre-Approval Policies and Procedures

 

The Committee will pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but preapproval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.

 

External Auditor Service Fees

 

The following table sets forth, by category, the fees for all services rendered by the Company’s external auditors, PricewaterhouseCoopers LLP for the financial years ended May 31, 2018, and May 31, 2019:

 

Financial year end date   May 31, 2018     May 31, 2019  
Audit Fees (1)   $ 285,000     $ 780,000  
Audit Related Fees (2)   $ 179,872     $ 90,000  
Tax Fees (3)     -       -  
All Other Fees (4)   $ 464,872     $ 226,000  

 

Notes :

(1) Includes fees necessary to perform the annual audit and quarterly reviews of the Company’s financial statements. Audit Fees include fees for review of tax provisions and for accounting consultations on matters reflected in the financial statements. Audit Fees also include audit or other attest services required by legislation or regulation, such as comfort letters, consents, reviews of securities filings and statutory audits.

 

(2) Includes services that are traditionally performed by the auditor. These audit-related services include employee benefit audits, due diligence assistance, accounting consultations on proposed transactions, internal control reviews and audit or attest services not required by legislation or regulation.

 

(3) Includes fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax planning and tax advice. Tax planning and tax advice includes assistance with tax audits and appeals, tax advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.

 

(4) Prospectus fees.

 

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INTERESTS OF EXPERTS

 

PricewaterhouseCoopers LLP was appointed as the auditor of the Company on October 27, 2016. PricewaterhouseCoopers LLP is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.

 

ADDITIONAL INFORMATION

 

Additional information relating to the Company may be found on SEDAR at www.sedar.com .

 

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Schedule A – Audit Committee Charter

 

 

 

This charter (the “ Charter ”) sets forth the purpose, composition, responsibilities and authority of the Audit Committee (the “ Committee ”) of the Board of Directors (the “ Board ”) of Aphria Inc. (“ Aphria ”).

 

Purpose

 

The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities relating to Aphria’s financial statements and accounting practices.

 

In particular, the purpose of the Committee is to serve as an independent and objective body to:

 

· oversee the quality and integrity of the financial statements and other financial information Aphria provides to any governmental body or the public;

 

· ensure that an effective risk management and financial control framework has been implemented and tested by management of Aphria;

 

· oversee Aphria’s compliance with legal and regulatory requirements;

 

· oversee the qualifications, performance and independence of the independent external auditors;

 

· oversee the performance of Aphria’s internal audit function;

 

· oversee Aphria’s systems of internal control regarding finance, accounting and legal compliance established by Aphria’s management and the Board;

 

· facilitate open communication among the external auditors, management, the internal auditing department, and the Board, with the external auditors being accountable to the Committee; and

 

· perform such other duties as are directed by the Board.

 

Composition and Membership

 

(a) The Board will appoint the members (“ Members ”) of the Committee. The Members will be appointed to hold office until the next annual meeting of shareholders of Aphria or until their successors are appointed. The Board may remove a Member at any time with or without cause and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will automatically cease to be a Member upon ceasing to be a director.

 

(b) The Committee will consist of at least three “independent” members of the Board, as such term is defined from time to time by the New York Stock Exchange (the “NYSE”), by Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended, and by the rules and regulations of the U.S. Securities and Exchange Commission as applicable to Aphria. In addition, all Members shall meet the criteria for independence established by applicable Canadian laws and the rules of the Toronto Stock Exchange (the “TSX”). In addition, each director will be free of any relationship which could, in the view of the Board, reasonably interfere with the exercise of a Member’s independent judgment.

 

  A - 1  

 

 

(c) Each Member will meet the criteria for financial literacy established by applicable laws and the rules of the TSX and the NYSE, including National Instrument 52-110 — Audit Committees. At least one Member of the Committee must be an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K under the Securities Act of 1933, as amended. A person who satisfies this definition of audit committee financial expert will also be presumed to have accounting or related financial management expertise.

 

(d) The Board will, in consultation with the Committee, appoint one of the Members to act as the chair of the Committee (the “ Chair ”). The Executive Administrator of Aphria (the “ Secretary ”) will be the secretary of all meetings and will maintain minutes of all meetings and deliberations of the Committee. If the Secretary is not in attendance at any meeting, the Committee will appoint another person who may, but need not, be a Member to act as the secretary of that meeting.

 

Meetings

 

(a) Meetings of the Committee will be held at such times and places as the Chair may determine, but in any event not less than four (4) times per year before Aphria release its earnings reports. Twenty-four (24) hours advance notice of each meeting will be given to each Member orally, by telephone, by facsimile or email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by telephone.

 

(b) At the request of the external auditors of Aphria, the Chief Executive Officer or the Chief Financial Officer of Aphria or any Member, the Chair will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.

 

(c) The Chair, if present, will act as the chairman of meetings of the Committee. If the Chair is not present at a meeting of the Committee the Members in attendance may select one of the Members to act as chairman of the meeting.

 

(d) A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority. The Chair will not have a deciding or casting vote in the case of an equality of votes. Powers of the Committee may also be exercised by written resolutions signed by all Members.

 

(e) The Committee may invite from time to time such persons as it sees fit to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee. The Committee may meet in camera without members of management in attendance for a portion of each meeting of the Committee, as the Committee deems appropriate.

 

(f) In advance of every regular meeting of the Committee, the Chair, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chair, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Aphria to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.

 

  A - 2  

 

 

Duties and Responsibilities

 

The duties and responsibilities of the Committee as they relate to the following matters, are as follows:

 

Financial Reporting and Disclosure

 

(a) review and recommend to the Board for approval, the audited annual financial statements, including the auditors’ report thereon, the quarterly financial statements, management discussion and analysis, financial reports, and any guidance with respect to earnings per share to be given, prior to the public disclosure of such information, with such documents to indicate whether such information has been reviewed by the Board or the Committee;

 

(b) review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual report to shareholders, management proxy circular, material change disclosures of a financial nature and similar disclosure documents prior to the public disclosure of such information;

 

(c) review with management of Aphria, and with external auditors, significant accounting principles, disclosure issues and judgments made in connection with the preparation of Aphria’s financial statements, including alternative treatments under International Financial Reporting Standards (“ IFRS ”), with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Aphria’s financial position and the results of its operations in accordance with IFRS, as applicable;

 

(d) seek to ensure that adequate procedures are in place for the review of Aphria’s public disclosure of financial information extracted or derived from Aphria’s financial statements, periodically assess the adequacy of those procedures and recommend any proposed changes to the Board for consideration; 

 

(e) review the minutes from each meeting of the Responsible Parties, established pursuant to Aphria’s corporate disclosure policy, since the last meeting of the Committee;

 

Internal Controls and Audit

 

(a) review the adequacy and effectiveness of Aphria’s system of internal control and management information systems through discussions with management and the external auditor to ensure that Aphria maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Aphria’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statement and for detecting control weaknesses or fraud. From time to time the Committee shall assess whether it is necessary or desirable to establish a formal internal audit department having regard to the size and stage of development of Aphria at any particular time;

 

  A - 3  

 

 

(b) satisfy itself that management has established adequate procedures for the review of Aphria’s disclosure of financial information extracted or derived directly from Aphria’s financial statements;

 

(c) satisfy itself, through discussions with management, that the adequacy of internal controls, systems and procedures has been periodically assessed in order to ensure compliance with regulatory requirements and recommendations;

 

(d) review and discuss Aphria’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities;

 

(e) review, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Aphria’s risk management policies and procedures with regard to identification of Aphria’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Aphria;

 

(f) recommend the appointment, or if necessary, the dismissal of the head of Aphria’s internal audit process;

 

External Audit

 

(a) recommend to the Board a firm of external auditors to be nominated for appointment as the external auditor of Aphria;

 

(b) ensure the external auditors report directly to the Committee on a regular basis;

 

(c) review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;

 

(d) review and recommend to the Board the fee, scope and timing of the audit and other related services rendered by the external auditors;

 

(e) review the audit plan of the external auditors prior to the commencement of the audit;

 

(f) establish and maintain a direct line of communication with Aphria’s external and internal auditors;

 

(g) meet in camera with only the auditors, with only management, and with only the Members at every Committee meeting where, and to the extent that, such parties are present and the Committee deems appropriate;

 

(h) oversee the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors’ team;

 

  A - 4  

 

 

(i) oversee the work of the external auditors appointed by the shareholders of Aphria with respect to preparing and issuing an audit report or performing other audit, review or attest services for Aphria, including the resolution of issues between management of Aphria and the external auditors regarding financial disclosure;

 

(j) review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used, any alternative treatments of financial information that have been discussed with management of Aphria, the ramifications of their use as well as any other material changes. Review a report describing all material written communication between management and the auditors such as management letters and schedule of unadjusted differences;

 

(k) discuss with the external auditors their perception of Aphria’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;

 

(l) discuss with the external auditors their perception of Aphria’s identification and management of risks, including the adequacy or effectiveness of policies and procedures implemented to mitigate such risks;

 

(m) review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board;

 

(n) review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues;

 

Associated Responsibilities

 

(a) review and approve Aphria’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of Aphria;

 

(b) establish and oversee procedures for the receipt, retention and treatment of complaints received by Aphria regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by Aphria employees of concerns regarding questionable accounting or auditing matters; 1 and

 

 

1 Refer to the Company’s Whistleblower Policy.

 

  A - 5  

 

 

Non-Audit Services

 

(a) pre-approve all non-audit services to be provided to Aphria or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its Members the authority to pre-approve non-audit services but pre-approval by such Member or Members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.

 

Oversight Function

 

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that Aphria’s financial statements are complete and accurate or comply with IFRS and other applicable requirements. These are the responsibilities of Management and the external auditors. The Committee, the Chair and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Aphria, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Aphria’s financial information or public disclosure.

 

Reporting

 

The Chair will report to the Board at each Board meeting on the Committee’s activities since the last Board meeting. The Committee will annually review and approve the Committee’s report for inclusion in the Annual Information Form. The minutes of each meeting of the Committee will be available to the members of the Board, at their request.

 

Performance Evaluation

 

The Committee shall conduct an annual evaluation of the performance of its duties under this Charter and shall present the results of the evaluation to the Board. The Committee shall conduct this evaluation in such manner as it deems appropriate.

 

Access to Information and Authority

 

The Committee will be granted unrestricted access to all information regarding Aphria that is necessary or desirable to fulfill its duties and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Aphria’s expense, independent legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities, including sole authority to retain and to approve any such firm’s fees and other retention terms without prior approval of the Board. The Committee also has the authority to communicate directly with internal and external auditors.

 

Review of Charter

 

The Committee will annually review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.

 

  A - 6  

 

Exhibit 99.2

 

 

 

 

Aphria Inc.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MAY 31, 2019 AND MAY 31, 2018

 

(Expressed in Canadian Dollars, unless otherwise noted)

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Aphria Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of Aphria Inc. and its subsidiaries (together, the Company) as of May 31, 2019 and 2018, and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2019 and 2018, and their financial performance and their cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements 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 of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits 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. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

 

Chartered Professional Accountants, Licensed Public Accountants

 

Toronto, Canada

July 31, 2019

 

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

 

 

 

 

 
 

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.

  

     

 

 

Aphria Inc.

Consolidated Statements of Financial Position

(In thousands of Canadian dollars)

 

    Note   May 31,
2019
    May 31,
2018
 
Assets                    
Current assets                    
Cash and cash equivalents       $ 550,797     $ 59,737  
Marketable securities   4     20,199       45,062  
Accounts receivable         25,488       3,386  
Prepaids and other current assets   5     23,391       14,384  
Inventory   6     91,529       22,150  
Biological assets   7     18,725       7,331  
Assets held for sale        

      40,620  
Promissory notes receivable   15     39,200        
Current portion of convertible notes receivable   12     11,500       1,942  
          780,829       194,612  
Capital assets   9     503,898       303,151  
Intangible assets   10     392,056       226,444  
Convertible notes receivable   12     20,730       16,129  
Interest in equity investees   13     9,311       4,966  
Long-term investments   14     64,922       46,028  
Goodwill   11     669,846       522,762  
        $ 2,441,592     $ 1,314,092  
Liabilities                    
Current liabilities                    
Accounts payable and accrued liabilities       $ 105,813     $ 31,517  
Income taxes payable         2,722       3,584  
Deferred revenue         23,678       2,607  
Current portion of promissory note payable   18           610  
Current portion of long-term debt   19     6,332       2,140  
Current portion of derivative liability               3,396  
          138,545       43,854  
Long-term liabilities                    
Long-term debt   19     60,895       28,337  
Convertible debentures   20     421,366        
Derivative liability               9,055  
Deferred tax liability   16     87,633       59,253  
          708,439       140,499  
Shareholders’ equity                    
Share capital   21     1,655,273       1,113,981  
Warrants   22     1,336       1,375  
Share-based payment reserve         36,151       22,006  
Accumulated other comprehensive loss         (119 )     (801 )
Non-controlling interest   24     28,409       9,580  
Retained earnings         12,103       27,452  
          1,733,153       1,173,593  
          2,441,592     $ 1,314,092  

 

Nature of operations (Note 1), Commitments and contingencies (Note 32), Subsequent events (Note 34)

 

Approved on behalf of the Board:

 

“John Herhalt”   “Irwin Simon”
Signed:  Director   Signed:  Director

 

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

 

  2  

 

 

Aphria Inc.

Consolidated Statements of Income and Comprehensive Income

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

 

        For the year ended
May 31,
 
    Note   2019     2018  
Revenue from cannabis produced       $ 86,348     $ 36,917  
Distribution revenue         157,931        
Other revenue         3,035        
Excise taxes         (10,204 )      
                     
Net revenue         237,110       36,917  
                     
Production costs   6     35,548       8,692  
Cost of goods purchased         138,126        
Other costs of sales         898       313  
                     
Gross profit before fair value adjustments         62,538       27,912  
                     
Fair value adjustment on sale of inventory   6     27,724       10,327  
Fair value adjustment on growth of biological assets   7     (40,607 )     (23,302 )
                     
Gross profit         75,421       40,887  
Operating expenses:                    
General and administrative   25     69,752       13,901  
Share-based compensation   26     26,080       17,874  
Selling, marketing and promotion         27,971       11,873  
Amortization         14,084       3,985  
Research and development         1,391       490  
Impairment   11     58,039        
Transaction costs         23,259       5,192  
          220,576       53,315  
                     
Operating loss         (145,155 )     (12,428 )
                     
Non-operating income   27     129,510       48,284  
                     
Income (loss) before income taxes         (15,645 )     35,856  
                     
Income taxes   16     854       6,408  
Net income (loss)         (16,499 )     29,448  
                     
Other comprehensive loss                    
Other comprehensive loss         (119 )     (801 )
Net comprehensive income (loss)       $ (16,618 )   $ 28,647  
                     
Total comprehensive income (loss) is attributable to:                    
Shareholders of Aphria Inc.         (14,667 )     28,867  
Non-controlling interest   24     (1,951 )     (220 )
        $ (16,618 )   $ 28,647  
                     
Weighted average number of common shares - basic         242,763,558       161,026,463  
Weighted average number of common shares - diluted         242,763,558       165,914,000  
                     
Earnings (loss) per share - basic   29   $ (0.07 )   $ 0.18  
Earnings (loss) per share - diluted   29   $ (0.07 )   $ 0.18  

 

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 21)
    Warrants
(Note 22)
    Share-based
payment
reserve
    Accumulated
other
comprehensive
loss
    Non-
controlling
interest
(Note 24)
    Retained
earnings
    Total  
Balance at May 31, 2017     138,628,704     $ 274,317     $ 445     $ 3,230     $     $     $ (4,123 )   $ 273,869  
Share issuance - November 2017 bought deal     12,689,675       86,661                                     86,661  
Share issuance - Broken Coast acquisition     8,363,651       109,000                                     109,000  
Share issuance - January 2018 bought deal     14,373,675       214,168                                     214,168  
Share issuance - Nuuvera acquisition     31,226,910       411,258       1,015       12,133                         424,406  
Share issuance - warrants exercised     2,388,636       3,767       (85 )                             3,682  
Share issuance - options exercised     2,493,623       11,559             (7,230 )                       4,329  
Share issuance - deferred share units     5,050       62                                     62  
Share-based payments                       15,780                         15,780  
Income tax recovery on share issuance costs           3,002                                     3,002  
Shares held in escrow for services not yet earned           187                                     187  
Share-based payments rescinded                       (1,907 )                 1,907        
Non-controlling interest                                   9,800             9,800  
Total comprehensive income for the year                             (801 )     (220 )     29,668       28,647  
Balance at May 31, 2018     210,169,924     $ 1,113,981     $ 1,375     $ 22,006     $ (801 )   $ 9,580     $ 27,452     $ 1,173,593  

 

    Number of
common shares
    Share capital
(Note 21)
    Warrants
(Note 22)
    Share-based
payment
reserve
    Accumulated
other
comprehensive
loss
    Non-
controlling
interest
(Note 24)
    Retained
earnings
    Total  
Balance at May 31, 2018     210,169,924     $ 1,113,981     $ 1,375     $ 22,006     $ (801 )   $ 9,580     $ 27,452     $ 1,173,593  
Share issuance - June 2018 bought deal     21,835,510       245,925                                     245,925  
Additional share issuance - Broken Coast acquisition     19,963       297                                     297  
Share issuance - 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 interest                                   9,439             9,439  
Total comprehensive loss for the year                             (119 )     (1,951 )     (14,548 )     (16,618 )
Balance at May 31, 2019     250,989,120     $ 1,655,273     $ 1,336     $ 36,151     $ (119 )   $ 28,409     $ 12,103     $ 1,733,153  

 

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   2019     2018  
Cash generated used in operating activities:                    
Net income (loss) for the year       $ (16,499 )   $ 29,448  
Adjustments for:                    
Future income taxes   16     (4,090 )     3,658  
Fair value adjustment on sale of inventory   6     27,724       10,327  
Fair value adjustment on growth of biological assets   7     (40,607 )     (23,302 )
Loss on marketable securities   4     178       2,155  
Unrealized foreign exchange gain         (256 )     (94 )
Amortization   9,10     22,940       6,678  
(Gain) loss on sale of capital assets         (55 )     191  
Impairment   11     58,039        
Unrealized loss (gain) on convertible notes receivable   12     3,399       (5,943 )
Gain on equity investees         (58,438 )     (24,587 )
Deferred gain recognized         (618 )     (1,304 )
Consulting revenue               (1,244 )
Other non-cash items         (566 )     (63 )
Share-based compensation   26     26,080       17,874  
Gain on long-term investments   28     (19,651 )     (26,675 )
Unrealized gain on convertible debentures         (48,439 )      
Unrealized loss on financial liabilities         1,326       12,451  
Transaction costs         15,419       5,192  
Change in non-cash working capital   30     (21,491 )     (10,411 )
          (55,605 )     (5,649 )
Cash provided by financing activities:                    
Share capital issued, net of cash issuance costs         245,925       195,661  
Share capital issued on warrants, options and DSUs exercised         7,772       8,011  
Proceeds from convertible debentures         454,386        
Proceeds from non-controlling interest               9,800  
Advances from related parties   8           11,386  
Repayment of amounts due to related parties   8           (10,890 )
Proceeds from long-term debt         27,841        
Repayment of long-term debt         (11,374 )     (7,622 )
          724,550       206,346  
Cash used in investing activities:                    
Investment in marketable securities   4           (7,365 )
Proceeds from disposal of marketable securities   4     24,685       47,495  
Investment in capital and intangible assets, net of shares issued         (205,965 )     (216,699 )
Proceeds from disposal of capital assets         55       431  
Convertible notes advances   12     (19,500 )     (14,001 )
Repayment of convertible and promissory notes receivable         8,551       640  
Investment in long-term investments and equity investees         (72,367 )     (51,692 )
Proceeds from disposal of long-term investments and equity investees         110,213       43,077  
Net cash paid on business acquisitions         (23,557 )     (22,756 )
          (177,885 )     (220,870 )
Net increase (decrease) in cash and cash equivalents         491,060       (20,173 )
Cash and cash equivalents, beginning of year         59,737       79,910  
Cash and cash equivalents, end of year       $ 550,797     $ 59,737  
Cash is comprised of:                    
Cash in bank       $ 129,998     $ 15,073  
Short-term deposits         420,799       44,664  
Cash and cash equivalents       $ 550,797     $ 59,737  

 

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, 2019 and May 31, 2018

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

 

1. Nature of operations

 

Aphria Inc. (the "Company" or “Aphria”) existing under the laws of Business Corporations Act (Ontario) and is licensed to produce and sell cannabis under The Cannabis Act. In February 2018, the Company acquired Broken Coast Cannabis Ltd. (“Broken Coast”) (Note 11). Broken Coast is licensed to produce and sell cannabis under The Cannabis Act . In March 2018, the Company acquired Nuuvera Inc. (“Nuuvera”) (Note 11). Nuuvera is an international organization with a focus on building a global cannabis brand, with operations in Germany, Italy, Malta, and Lesotho. In September 2018, the Company acquired LATAM Holdings Inc. (“LATAM”) (Note 11). This purchase provides Aphria an early foothold into the Latin American cannabis market whereby LATAM holds licenses and license applications presently in-process for production, import, export and sale of cannabis and cannabis derivatives in Colombia, Argentina and Jamaica. In January 2019, Aphria through wholly-owned subsidiary Nuuvera Deutschland GmbH acquired CC Pharma GmbH (“CC Pharma”) (Note 11). CC Pharma is a distributor of pharmaceutical products to pharmacies in Germany.

 

In July 2018, Aphria Inc. and its wholly-owned subsidiary, Pure Natures Wellness Inc. (o/a Aphria) amalgamated.

 

1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority owned subsidiary of the Company, incorporated in November 2017. Aphria Diamond has applied for 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 New York Stock Exchange (“NYSE”) in the United States.

 

These consolidated financial statements were approved by the Company’s Board of Directors on July 31, 2019.

 

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, including marketable securities, long-term investments and promissory notes payable, 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, 2019 and May 31, 2018

(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.

 

Subsidiaries   Jurisdiction of incorporation   Ownership interest (1)  
Nuuvera Holdings Limited   Ontario, Canada     100 %
ARA – Avanti Rx Analytics Inc.   Ontario, Canada     100 %
Nuuvera Israel Ltd. (2)   Israel     100 %
Nuuvera Deutschland GmbH   Germany     100 %
Aphria Deutschland GmbH   Germany     100 %
FL-Group   Italy     100 %
Broken Coast Cannabis Ltd.   British Columbia, Canada     100 %
Goodfields Supply Co. Ltd.   United Kingdom     100 %
LATAM Holdings Inc.   British Columbia, Canada     100 %
MMJ Colombia Partners Inc.   Ontario, Canada     100 %
Marigold Acquisitions Inc.   British Columbia, Canada     100 %
Hampstead Holdings Ltd.   Bermuda     100 %
MMJ International Investments Inc.   British Columbia, Canada     100 %
ABP, S.A.   Argentina     100 %
CC Pharma GmbH   Germany     100 %
CC Pharma Research and Development GmbH   Germany     100 %
Aphria Handelsgesellschaft   Germany     100 %
Marigold Projects Jamaica Limited   Jamaica     95 % (3)
Nuuvera Malta Ltd.   Malta     90 %
ASG Pharma Ltd.   Malta     90 % (4)
QSG Health Ltd.   Malta     90 % (5)
ColCanna S.A.S.   Colombia     90 %
CC Pharma Nordic ApS   Denmark     75 %
1974568 Ontario Ltd.   Ontario, Canada     51 %
Aphria Terra S.R.L.   Italy     51 %
Aphria Italy S.p.A. (2)   Italy     51 %
APL – Aphria Portugal, Lda.   Portugal     51 %
CannInvest Africa Ltd.   South Africa     50 %
Verve Dynamics Incorporated (Pty) Ltd.   Lesotho     30 % (6)

 

 

(1) The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Legal ownership of some subsidiaries differ from ownership interest shown above.
(2) Represents inactive subsidiaries, which have no operations and do not own any assets, save and except for related party balances owing to the Company and is in the process of being dissolved.
(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.
(4) The Company holds 100% of the issued and outstanding shares of ASG Pharma Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(5) The Company holds 100% of the issued and outstanding shares of QSG Health Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(6) The Company holds 60% of the issued and outstanding shares of Verve Dynamics Incorporated (Pty) Ltd., through 50% owned subsidiary CannInvest Africa Ltd.

 

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.

 

  7  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.

 

(e) Amalgamations and dissolutions

 

Effective June 1, 2017, CannWay Pharmaceuticals Ltd. (“CannWay”), a wholly-owned subsidiary of the Company, was amalgamated with Pure Natures Wellness Inc. (o/a Aphria). The Company has historically presented all balances and activities of CannWay as a fully consolidated entity for financial statement presentation purposes. As of the date of amalgamation, CannWay did not have any assets or outstanding liabilities. There were no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.

 

Effective July 23, 2018, Pure Natures Wellness Inc. (o/a Aphria). (“PNW”), a wholly-owned subsidiary of the Company, was amalgamated with Aphria Inc. The Company had historically presented all balances and activities of PNW as a fully consolidated entity for financial statement presentation purposes. There were no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation.

 

Effective February 1, 2019, 2589671 Ontario Inc. and 2589674 Ontario Inc., each a wholly-owned subsidiary of the Company, were amalgamated with Avalon Pharmaceuticals Inc. The Company has historically presented all balances and activities of 2589671 Ontario Inc., 2589674 Ontario Inc. and Avalon Pharmaceuticals Inc. as a fully consolidated entity for financial statement presentation purposes. Effective April 15, the Company wound-up wholly owned subsidiary Avalon Pharmaceuticals into wholly owned subsidiary Nuuvera holdings limited. There were no material changes to be considered prospectively or to the comparative consolidated statements as a result of the amalgamation and wind-up.

 

Effective April 15, 2019, Nuuvera Inc. and Cannan Growers Inc., each a wholly-owned subsidiary of the Company, were wound up into Aphria Inc. The Company had historically presented all balances and activities of Nuuvera Inc. and Cannan Growers Inc. as a fully consolidated entity for financial statement presentation purposes. There were no material changes to be considered prospectively or to the comparative consolidated statements as a result of the wind-up.

 

Effective April 25, 2019, Aphria (Arizona) Inc., a wholly-owned subsidiary of the Company, was dissolved. The Company had historically presented all balances and activities of Aphria (Arizona) Inc. as a fully consolidated entity for financial statement presentation purposes. There were no material changes to be considered prospectively or to the comparative consolidated statements as a result of the dissolution.

 

(f) Interest in equity investees

 

The Company’s interest in equity investees is comprised of its interest in Althea Company Pty Ltd. (“Althea”).

 

In accordance with IFRS 10, associates are those in which the Company has significant influence, but not control or joint control over the financial and accounting policies.

 

Interests in associates are accounted for using the equity method in accordance with IAS 28. They are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income (“OCI”) of equity investees until the date on which significant influence ceases.

 

If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.

 

Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

  8  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

The carrying amount of equity investments is tested for impairment in accordance with the policy described in Note 3(k).

 

3. Significant accounting policies

 

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

 

a. Revenue

 

Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for transferring promised goods. Revenue from the sale of goods is recognized when control of the goods has transferred, 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 upon passing of control to the customer.

 

Amounts disclosed as net revenue are net of sales tax, duty tax, allowances, discounts and rebates.

 

c. 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.

 

d. 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”).

 

e. Inventory

 

Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. The capitalized cost of 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 income and comprehensive income 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 income and comprehensive income.

 

f. 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 income and comprehensive income and subsequently transferred to inventory at the point of harvest.

 

  9  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

g. Assets held for sale

 

Assets and liabilities held for disposal are no longer amortized and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.

 

h. 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

 

An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated statements of income and comprehensive income in the year the asset is derecognized.

 

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

 

i. 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.

 

j. 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.

 

  10  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

k. 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.

 

l. Income taxes

 

Income tax expense consisting of current and deferred tax expense is recognized in the consolidated statements of income and comprehensive income. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.

 

Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.

 

A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

 

m. 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.

 

n. 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 income and comprehensive income such that the cumulative expense reflects the revised estimate.

 

o. Research and development

 

Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures that do not meet the above criteria are recognized in the consolidated statements of income and comprehensive income as incurred.

 

  11  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

p. 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
Other receivables   amortized cost
Convertible notes receivable   FVTPL
Long-term investments   FVTPL
Promissory notes receivable   amortized cost
Accounts payable and accrued liabilities   other financial liabilities
Income taxes payable   other financial liabilities
Promissory note payable   other financial liabilities
Convertible debentures   FVTPL
Long-term debt   other financial liabilities
Derivative liability   FVTPL

 

(i) FVTPL financial assets

 

Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of income and comprehensive income. Transaction costs are expensed as incurred.

 

(ii) 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 income and comprehensive income. 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 income and comprehensive income.

 

  12  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

(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 income and comprehensive income. Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.

 

(v) Embedded derivatives

 

Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in profit or loss.

 

(vi) 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.

 

q. 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.

 

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;

 

  13  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

· 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.

 

Share-based compensation

 

The fair value of share-based compensation expenses are estimated using the Black-Scholes option pricing model and rely on a number of estimates, such as the expected life of the option, the volatility of the underlying share price, the risk free rate of return, and the estimated rate of forfeiture of options granted.

 

Business combinations

 

Judgement is used in determining whether an acquisition is a business combination or an asset acquisition. In determining the allocation of the purchase price in a business combination, including any acquisition-related contingent consideration, estimates including market based and appraisal values are used. The contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37, as appropriate, with the corresponding gain or loss being recognized in profit or loss.

 

The Company measures all assets acquired and liabilities assumed at their acquisition-date fair values. Non-controlling interests in the acquiree are measured on the basis of the non-controlling interests’ proportionate share of this equity in the acquiree’s identifiable net assets. Acquisition-related costs are recognized as expenses in the periods in which the costs are incurred and the services are received (except for the costs to issue debt or equity securities which are recognized according to specific requirements). The excess of the aggregate of (a) the consideration transferred to obtain control, the amount of any non-controlling interest in the acquire over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, is recognized as goodwill as of the acquisition date.

 

  14  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

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.

 

r. New standards and interpretations applicable effective June 1, 2018

 

IFRS 9 - Financial Instruments; Classification and Measurement, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets.

 

Under IFRS 9, financial instruments are initially measured at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. Subsequently, all assets within scope of IFRS 9 are measured at:

(i) Amortized cost;
(ii) Fair value through other comprehensive income (“FVOCI”); or
(iii) Fair value through profit or loss (“FVTPL”).

 

The classification is based on whether the contractual cash flows give rise to payments on specified dates that are solely payments of principal and interest (the “SPPI test”), and the objective of the Company’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (the “Business Model test”). Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date.

 

The impairment requirements under IFRS 9 are based on an expected credit loss (“ECL”) model, replacing the IAS 39 incurred loss model. The expected credit loss model applies to debt instruments recorded at amortized cost or at FVOCI, such as loans, debt, securities and trade receivables, lease receivables and most loan commitments and financial guarantee contracts.

 

The following table summarizes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets and financial liabilities:

 

Financial assets/liabilities   IAS 39 Classification   IFRS 9 Classification
Cash and cash equivalents   FVTPL   FVTPL
Marketable securities   FVTPL   FVTPL
Accounts receivable   loans and receivables   amortized cost
Other receivables   loans and receivables   amortized cost
Convertible notes receivable   AFS   FVTPL
Long-term investments   FVTPL   FVTPL
Accounts payable and accrued liabilities   other financial liabilities   other financial liabilities
Income taxes payable   other financial liabilities   other financial liabilities
Promissory note payable   other financial liabilities   other financial liabilities
Long-term debt   other financial liabilities   other financial liabilities
Derivative liability   derivative financial instruments   FVTPL

 

There were no other changes on adoption aside from the above classification changes.

 

IFRS 15 - Revenue from Contracts with Customers; effective for annual periods beginning on or after January 1, 2018, specifies how and when to recognize revenue, based on five-step model, and enhances relevant disclosures to be applied to all contracts with customers.

 

The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is as follows:

 

To recognize revenue under IFRS 15, the Company applies the following five steps:

 

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when or as the Company satisfies a performance obligation

 

Revenue from the direct sale of goods to customers for a fixed price is recognized when the company transfers control of the good to the customer.

 

s. New standards and interpretations issued but not yet adopted

 

IFRS 16 – Leases; in January 2016, the IASB issued IFRS 16, which specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. Based on its current assets, relationship with other entities interests and investments, no significant impact is anticipated from the new standard.

 

  15  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

There are no other standards that are not yet effective and that would be expected to have a material impact on the Company in the current or future reporting periods and on foreseeable future transactions.

 

The Company has reclassified certain immaterial items on the comparative consolidated statements of financial position, consolidated statements of income and comprehensive income, and consolidated statements of cash flows to improve clarity.

 

4. Marketable securities

 

Marketable securities are classified as fair value through profit or loss, and are comprised of:

 

    S&P rating at
purchase
  Interest
rate
    Maturity
date
  May 31,
2019
    May 31,
2018
 
Fixed Income:                                
Ford Motor Credit Co. LLC    BBB     3.700 %   8/2/2018   $     $ 1,015  
Sobeys Inc.    BB+     3.520 %   8/8/2018           3,040  
Canadian Western Bank    A-     3.077 %   1/14/2019           1,528  
Sun Life Financial Inc.    A     2.770 %   5/13/2019           3,018  
Ford Motor Credit Co. LLC    BBB     3.140 %   6/14/2019     5,074       5,101  
Canadian Western Bank    A-     3.463 %   12/17/2019     1,019       1,025  
Laurentian Bank of Canada    BBB     2.500 %   1/23/2020           3,003  
Enercare Solutions Inc.    BBB     4.600 %   2/3/2020     3,907       3,974  
Enbridge Inc.    BBB+     4.530 %   3/9/2020     5,137       5,203  
Choice Properties REIT    BBB     3.600 %   4/20/2020     5,062       5,091  
Westcoast Energy Inc.    BBB+     4.570 %   7/2/2020           5,293  
Citigroup Inc. (USD)    BBB+     2.050 %   12/17/2018           3,914  
Royal Bank of Canada (USD)    AA-     1.625 %   4/15/2019           3,857  
                    $ 20,199     $ 45,062  

 

The cost of marketable securities as at May 31, 2019 was $20,907 (May 31, 2018 – $45,863). During the year ended May 31, 2019, the company divested of certain marketable securities for proceeds of $24,685 (2018 - $47,495), resulting in a gain (loss) on disposal of $18 (2018 - $(608)), and re-invested $nil (2018 - $7,365). During the year ended May 31, 2019, the Company recognized a (loss) of $(178) (2018 - $(2,155)) on its marketable securities portfolio, of which $(196) (2018 - $(1,547)) represented unrealized fair value adjustments.

 

5. Prepaids and other current assets

 

Prepaids and other current assets are comprised of:

 

    May 31,
2019
    May 31,
2018
 
Sales tax receivable   $ 7,583     $ 10,840  
Accrued interest     2,779       831  
Prepaid assets     10,696       1,720  
Other     2,333       993  
    $ 23,391     $ 14,384  

 

  16  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

6. Inventory

 

Inventory is comprised of:

 

    Capitalized
cost
    Fair value
adjustment
    May 31,
2019
    May 31,
2018
 
Harvested cannabis   $ 10,039     $ 13,214     $ 23,253     $ 12,331  
Harvested cannabis trim     2,830       2,959       5,789       2,277  
Cannabis oil     11,300       8,301       19,601       6,578  
Softgel capsules     422       342       764        
Distribution inventory     32,944             32,944        
Other inventory items     9,178             9,178       964  
    $ 66,713     $ 24,816     $ 91,529     $ 22,150  

 

During the year ended May 31, 2019, the Company recorded $35,548 (2018 - $8,692) of production costs. Included in production costs for the year ended May 31, 2019 is $1,682 of cannabis oil conversion costs (2018 - $241), $142 related to the cost of accessories (2018 - $236), and amortization of $4,133 (2018 - $1,715). The Company also included $4,723 of amortization which remains in inventory for the year ended May 31, 2019 (2018 - $978) related to capital assets utilized in production. During the year ended May 31, 2019, the Company expensed $27,724 (2018 –$10,327) of fair value adjustments on the growth its biological assets included in inventory sold.

 

The Company holds 6,309.9 kilograms of harvested cannabis (May 31, 2018 – 3,221.3 kgs), 1,908.0 kilograms of harvested cannabis trim (May 31, 2018 – 702.0 kgs) and 28,458.1 litres of cannabis oils or 4,949.2 kilograms equivalent in various stages of production (May 31, 2018 – 7,724.7 litres or 1,716.6 kilograms equivalent), 982.0 litres of cannabis oils used in softgel capsules or 218.2 kilograms equivalent at May 31, 2019 (May 31, 2018 – nil).

 

7. Biological assets

 

Biological assets are comprised of:

 

    Amount  
Balance at May 31, 2017   $ 1,408  
Changes in fair value less costs to sell due to biological transformation     23,302  
Purchased as part of business acquisition     826  
Production costs capitalized     12,143  
Transferred to inventory upon harvest     (30,348 )
Balance at May 31, 2018   $ 7,331  
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  

 

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 $3.50 and $2.75 per gram respectively, upon harvest for greenhouse produced cannabis (May 31, 2018 – $3.75 and $3.00 per gram) and $4.00 and $3.25 per gram respectively (May 31, 2018 - $4.25 and $3.50 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 $40,607 during the year ended May 31, 2019 (2018 – $23,302).

 

  17  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

The fair value of biological assets is determined using a valuation model to estimate expected harvest yield per plant applied to the estimated price per gram less processing and selling costs. Only when there is a material change from the expected fair value used for cannabis does the Company make any adjustments to the fair value used. During the year, there was no material change to these inputs and therefore there has been no change in the determined fair value per plant.

 

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

· The harvest yield is between 40 grams and 80 grams per plant;
· The selling price is between $3.00 and $7.00 per gram;
· Processing costs include drying and curing, testing, post-harvest overhead allocation, packaging and labelling costs between $0.30 and $0.80 per gram;
· Selling costs include shipping, order fulfilment, patient acquisition and patient maintenance costs between $0.00 and $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 $516 (2018 - $267) and inventory decreasing by $2,470 (2018 - $1,040)
· Harvest yield per plant – a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $266 (2018 - $179)

 

These inputs are level 3 on the fair value hierarchy and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

 

8. Related party transactions

 

During the prior quarter, the Company disposed of its remaining shares in Liberty Health Sciences Inc. (“Liberty”) (Note 13).

 

The Company previously funded a portion of the Canadian operating costs of Liberty, for which Liberty reimbursed the Company quarterly. Liberty was considered a related party because certain officers and directors of Aphria were directors of Liberty. In January 2019, those directors resigned from Liberty’s and the Company’s board and the Company ceased its relationship with Liberty.

 

The Company purchased certain electrical generation equipment from and pays rent to a company owned by a former director. In March 2019, the director resigned his officer and director position with the Company and was no longer considered a related party.

 

Key management personnel compensation for the year ended May 31, 2019 and 2018 was comprised of:

 

    For the year ended
May 31,
 
    2019     2018  
Salaries     $ 5,024     $ 1,699  
Short-term employment benefits (included in office and general)     116       70  
Share-based compensation       11,854       3,235  
    $ 16,994     $ 5,004  

 

Directors and officers of the Company control 0.1% or 135,942 of the voting shares of the company.

 

  18  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

During the year ended May 31, 2019, the Company appointed Mr. Irwin Simon as Interim CEO and Chair of the Board. Mr. Simon’s compensation for the combined role is $1,100 annually, paid on a consultancy basis. On February 24, 2019, the Board of Aphria declared, in accordance with the Omnibus Incentive Plan, 1,000,000 stock options and 25,000 restricted share units to Mr. Simon, which vested immediately.

 

During the year ended May 31, 2019 certain officers and non-independent directors retired from the Company. No amounts were paid to the retired officers and directors as part of their retirement. In addition, compensation for the Board of Directors were amended to a flat-fee $300 annually, with $150 paid in cash and $150 in Deferred Share Units under the Company’s Omnibus Plan each, plus a one-time award of 7,500 Restricted Share Units each.

 

9. Capital assets

 

    Land     Production Facility     Equipment     Leasehold
improvements
    Construction in
process
    Total capital
assets
 
Cost                                                
At May 31, 2017   $ 10,829     $ 16,170     $ 5,340     $ 262     $ 42,159     $ 74,760  
Business acquisitions     854       6,992       2,860       1,388       5,947       18,041  
Additions     12,716       47,149       4,759       15       151,899       216,538  
Transfers     105       29,338       2,990             (32,433 )      
Disposals           (207 )                 (415 )     (622 )
At May 31, 2018     24,504       99,442       15,949       1,665       167,157       308,717  
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  
                                                 
Accumulated depreciation                                                
At May 31, 2017   $     $ 983     $ 1,260     $ 62     $     $ 2,305  
Amortization           1,517       1,697       47             3,261  
At May 31, 2018           2,500       2,957       109             5,566  
Amortization           5,160       5,962       80             11,202  
At May 31, 2019   $     $ 7,660     $ 8,919     $ 189     $     $ 16,768  
                                                 
Net book value                                                
At May 31, 2017   $ 10,829     $ 15,187     $ 4,080     $ 200     $ 42,159     $ 72,455  
At May 31, 2018   $ 24,504     $ 96,942     $ 12,992     $ 1,556     $ 167,157     $ 303,151  
At May 31, 2019   $ 33,153     $ 224,808     $ 70,708     $ 1,047     $ 174,182     $ 503,898  

 

  19  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

10. Intangible assets

 

    Customer
relationships
    Corporate
website
    Licences, permits
& applications
    Non-compete
agreements
    Intellectual
property,
trademarks &
brands
    Total
intangible
assets
 
Cost                                                
At May 31, 2017   $     $ 218     $ 1,250     $     $ 4,887     $ 6,355  
Business acquisitions     11,730       39       137,920       1,930       76,190       227,809  
Additions           152             -       9       161  
At May 31, 2018     11,730       409       139,170       1,930       81,086       234,325  
Business acquisitions     21,300             123,956       1,400       16,200       162,856  
Additions           496       12,754             1,244       14,494  
At May 31, 2019   $ 33,030     $ 905     $ 275,880     $ 3,330     $ 98,530     $ 411,675  
                                                 
Accumulated depreciation                                                
At May 31, 2017   $     $ 156     $ 153     $     $ 4,155     $ 4,464  
Amortization     1,274       100       124       314       1,605       3,417  
At May 31, 2018     1,274       256       277       314       5,760       7,881  
Amortization     4,729       161       582       1,176       5,090       11,738  
At May 31, 2019   $ 6,003     $ 417     $ 859     $ 1,490     $ 10,850     $ 19,619  
                                                 
Net book value                                                
At May 31, 2017   $     $ 62     $ 1,097     $     $ 732     $ 1,891  
At May 31, 2018   $ 10,456     $ 153     $ 138,893     $ 1,616     $ 75,326     $ 226,444  
At May 31, 2019   $ 27,027     $ 488     $ 275,021     $ 1,840     $ 87,680     $ 392,056  

 

Included in Licences, permits & applications is $273,579 of indefinite lived intangible assets.

 

11. Business Acquisitions

 

Acquisition of Broken Coast Cannabis Ltd.

 

On February 13, 2018, the Company entered into a share purchase agreement to purchase all of the shares of Cannan Growers Inc. (“Cannan”), a holding company owning shares of Broken Coast Cannabis Ltd. (“Broken Coast”), and to acquire the remaining shares for a combined total of 99.86% of the issued and outstanding shares of Broken Coast. The combined purchase price was $214,168 satisfied through the issuance of an aggregate 14,373,675 common shares. The share purchase agreement entitled the Company to control over Broken Coast on February 1, 2018, which became the effective acquisition date. In August 2018, the Company came to terms with the holder of the remaining 0.14% of the issued and outstanding shares of Broken Coast. In exchange for purchasing the remaining shares, the Company issued 19,963 shares to the holder.

 

  20  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the acquisition date:

 

    Note   Number of shares     Share price     Amount  
Consideration paid                            
Shares issued   (i)     14,393,638     $ 14.90     $ 214,465  
Total consideration paid                       $ 214,465  
                             
Net assets acquired                            
Current assets                            
Cash and cash equivalents                         2,007  
Accounts receivable                         299  
Prepaids and other current assets                         43  
Inventory                         2,572  
Biological assets                         826  
Long-term assets                            
Capital assets                         13,298  
Customer relationships                         11,730  
Corporate website                         39  
Licences, permits & applications                         6,320  
Non-competition agreements                         1,930  
Intellectual property, trademarks & brands                         72,490  
Goodwill                         146,091  
Total assets                         257,645  
Current liabilities                            
Accounts payable and accrued liabilities                         10,455  
Income taxes payable                         922  
Long-term liabilities                            
Deferred tax liability                         25,889  
Long-term debt                         5,914  
Total liabilities                         43,180  
                             
Total net assets acquired                       $ 214,465  

 

(i) Share price based on the price of the shares on February 1, 2018.

 

Net income and comprehensive net income within the prior year for the Company would have been higher by approximately $2,268 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $1,643.

 

Acquisition of Nuuvera Corp.

 

On March 23, 2018, the Company completed a definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which the Company acquired Nuuvera, by way of a court-approved plan of arrangement, under the Business Corporations Act (Ontario). The Company acquired 100% of the issued and outstanding common shares (on a fully diluted basis) of Nuuvera for a total consideration of $0.62 in cash plus 0.3546 of an Aphria share for each Nuuvera share held. All of Nuuvera’s outstanding options were exchanged for an equivalent option granted pursuant to Aphria’s stock option plan (each, a “Replacement Option”) to purchase from Aphria the number of common shares (rounded to the nearest whole share) equal to: (i) the exchange ratio multiplied by (ii) the number of Nuuvera shares subject to such Nuuvera Option. Each such Replacement Option shall provide for an exercise price per common share (rounded to the nearest whole cent) equal to: (i) the exercise price per Nuuvera share purchasable pursuant to such Nuuvera Option; divided by (ii) the exchange ratio.

 

  21  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

The table below summarizes the fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

 

    Note   Number of shares     Share price     Amount  
Consideration paid                            
Cash                       $ 54,604  
Shares issued   (i)     31,226,910     $ 13.17       411,258  
Warrants outstanding   (ii)     1,345,866               1,015  
Replacement options issued   (ii)     1,280,330               12,133  
                          479,010  
                             
Fair value of previously held investment                            
Shares held by Aphria   (i)     1,878,738     $ 14.92       28,028  
Warrants held by Aphria   (ii)     322,365               243  
                          28,271  
                             
Total fair value of consideration                       $ 507,281  
                             
Net assets acquired                            
Current assets                            
Cash and cash equivalents                         35,033  
Accounts receivable                         464  
Prepaids and other current assets                         1,142  
Inventory                         401  
Long-term assets                            
Capital assets                         4,743  
Intellectual property, trademarks & brands                         3,700  
Licences, permits & applications                         131,600  
Goodwill                         377,221  
Total assets                         554,304  
Current liabilities                            
Accounts payable and accrued liabilities                         11,000  
Long-term liabilities                            
Deferred tax liability                         36,023  
Total liabilities                         47,023  
                             
Total net assets acquired                       $ 507,281  

 

(i) Share price based on the price of the shares on March 23, 2018; shares held by Aphria include the cash consideration paid.

 

(ii) Options and warrants are valued using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 2.19%; expected life of 1- 10 years; volatility of 30% based on volatility used for similar instruments on the open market; forfeiture rate of nil; dividend yield of nil; and the exercise price of $2.52 - $20.30.

 

Net income and comprehensive net income within the prior year for the Company would have been lower by approximately $19,611 if the acquisition had taken place on June 1, 2017. In connection with this transaction, the Company expensed transaction costs of $3,439.

 

Acquisition of LATAM Holdings Inc.

 

On July 17, 2018, the Company signed a share purchase agreement with Scythian Biosciences Corp. (“Scythian”) to purchase 100% of the issued and outstanding shares of LATAM Holdings Inc. (“LATAM Holdings”); a direct wholly-owned subsidiary of Scythian. As outlined in the share purchase agreement, the negotiated purchase price was to be settled with the issuance of 15,678,310 shares of the Company valued on July 17, 2018 at $193,000 and the assumption of $1,000 USD ($1,310 CAD) short-term liabilities. The acquisition of LATAM Holdings closed on September 27, 2018. Therefore, in accordance with IFRS 3 - Business Combinations, the equity consideration transferred was measured at fair value at the acquisition date, which is the date control was obtained, which in this case was determined to be September 27, 2018. The fair value of the consideration shares on September 27, 2018 was $273,900.

 

  22  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

LATAM Holdings, through other subsidiaries, provides the Company with access to the emerging cannabis markets in Latin America and the Caribbean. Through this acquisition, the Company secured key licenses in Colombia, Argentina and Jamaica which is anticipated to provide first mover advantage in these countries. In addition, the Company acquired an option and rights of first refusal to purchase a Brazilian incorporated entity, with the option and right of first refusal vesting only upon the entity obtaining a licence to cultivate and distribute cannabis lawfully in Brazil.

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

 

    Note     Number of shares     Share price     Amount  
Consideration paid                                
Shares issued     (i)       15,678,310     $ 17.47     $ 273,900  
Total consideration paid                           $ 273,900  
Net assets acquired                                
Current assets                                
Cash and cash equivalents                             2,704  
Accounts receivable                             571  
Prepaids and other current assets                             106  
Inventory                             65  
Long-term assets                                
Capital assets                             494  
Licences, permits & applications                             123,956  
Goodwill                             189,188  
Total assets                             317,084  
Current liabilities                                
Accounts payable and accrued liabilities                             1,986  
Income taxes payable                             20  
Long-term liabilities                                
Deferred tax liability                             29,837  
Total liabilities                             31,843  
Non-controlling interest                             11,341  
                                 
Total net assets acquired                           $ 273,900  

 

(i) Share price based on the price of the shares on September 27 th , 2018.

 

Net income and comprehensive net income for the Company would have been lower by approximately $4,556 for the year ended May 31, 2019, if the acquisition had taken place on June 1, 2018. In connection with this transaction, the Company expensed transaction costs of $1,133.

 

Acquisition of CC Pharma GmbH

 

On November 7 ,2018, the Company signed a share purchase agreement to acquire 100% of the issued and outstanding shares of CC Pharma. The purchase price was cash consideration of €18,920 ($28,775 CAD) and additional cash consideration of up to €23,500 ($35,741 CAD) contingent on CC Pharma obtaining a specified EBITDA target. The acquisition of CC Pharma closed on January 9, 2019.

 

CC Pharma is a leading distributor of pharmaceutical products to pharmacies in Germany as well as throughout Europe. The acquisition of CC Pharma provides the Company access to the cannabis markets in Germany and ultimately pan-European platforms.

 

The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date:

 

  23  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

    Amount  
Consideration        
Cash   $ 28,775  
Contingent consideration     35,741  
Total consideration   $ 64,516  
         
Net assets acquired        
Current assets        
Cash and cash equivalents     7,237  
Accounts receivable     33,989  
Prepaids and other current assets     14,616  
Inventory     28,352  
Long-term assets        
Capital assets     6,373  
Customer relationships     21,300  
Non-compete agreements     1,400  
Intellectual property, trademarks & brands     16,200  
Goodwill     6,146  
Total assets     135,613  
Current liabilities        
Bank loans and overdrafts     20,255  
Accounts payable and accrued liabilities     44,111  
Income taxes payable     672  
Long-term liabilities        
Deferred tax liability     6,059  
Total liabilities     71,097  
         
Total net assets acquired   $ 64,516  

 

Revenue and net income and comprehensive net income for the Company would have been higher by approximately $367,200 and $9,955 respectively, for the year ended May 31, 2019, if the acquisition had taken place on June 1, 2018. In connection with this transaction, the Company expensed transaction costs of $595.

 

Goodwill is comprised of:

 

    May 31,
2019
    May 31,
2018
 
CannWay goodwill   $ 1,200     $ 1,200  
Broken Coast goodwill     146,091       145,794  
Nuuvera goodwill     377,221       375,768  
LATAM goodwill     139,188        
CC Pharma goodwill     6,146        
    $ 669,846     $ 522,762  

 

During the year ended May 31, 2019, an independent third party completed their review of the LATAM acquisition, which provided the Company with new information. In accordance with IAS 36, the Company completed an impairment analysis and determined the fair value of the assets based on a discounted cash flow approach for the three operating entities acquired in the transaction; Colcanna S.A.S (“Colcanna”), ABP, S.A. (“ABP”) and Marigold Projects Jamaica Limited (“Marigold”).

 

As a result of new information obtained from the independent third party’s review, the Company determined some changes in the projected cashflows were appropriate and adjusted the discount rates used in the discounted cash flow approach from 31.0%, 21.3%, and 36.5% to 33.0%, 23.3%, and 38.5% for Colcanna, ABP and Marigold respectively. Based on the determined fair value, the Company recognized $50,000 in impairment of goodwill. Also included in impairment is £4,600 GBP ($8,039 CAD) related to uncollectible promissory notes receivable (Note 15) for a total impairment of $58,039.

 

  24  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

12. Convertible notes receivable

 

    May 31,
2019
    May 31,
2018
 
Copperstate Farms Investors, LLC   $     $ 1,942  
HydRx Farms Ltd. (d/b/a Scientus Pharma)     11,500       16,129  
Fire & Flower Inc.     11,166        
10330698 Canada Ltd. (d/b/a Starbuds)     5,204        
High Tide Inc.     4,360        
      32,230       18,071  
Deduct - current portion     (11,500 )     (1,942 )
    $ 20,730     $ 16,129  

 

Copperstate Farms Investors, LLC

 

On May 15, 2018, the Company entered into an amendment agreement with CSF which extended the maturity date and automatic conversion date to June 30, 2018, which was subsequently extended into July. As at May 31, 2019, this note was paid in full.

 

HydRx Farms Ltd. (d/b/a Scientus Pharma)

 

On August 14, 2017, Aphria purchased $11,500 in secured convertible debentures of Scientus Pharma (“SP”). The convertible debenture bears interest at 8%, paid semi-annually, matures in two years and includes the right to convert the debenture into common shares of SP at $2.75 per common share at any time before maturity. SP maintains the option of forced conversion of the convertible debenture if the common shares of SP trade on a stock exchange at a value of $3.02 or more for 30 consecutive days. The Company maintains a first charge on all assets of SP. In October 2018, the Company agreed to share its first charge on all assets of SP with a third party on a pari passu basis. The Company understands that the third party has not completed a transaction with SP. As at May 31, 2019, the third party has not completed its investment.

 

As at May 31, 2019, the fair value of the Company’s secured convertible debenture was $11,500, which resulted in a fair value loss for the year ended May 31, 2019 of $4,629.

 

Fire & Flower Inc.

 

On July 26, 2018, Aphria purchased $10,000 in unsecured convertible debentures of Fire & Flower Inc. (“F&F”). The convertible debentures bear interest at 8% per annum compounded, accrued and paid semi-annually in arrears. The debentures mature on July 31, 2020, at which point, they automatically convert into common shares of F&F at the lower of $1.15 and the share price on July 31, 2020. The debentures may also be converted into a loan on July 31, 2020 bearing interest at 12%, at the holder’s option.

 

As at May 31, 2019, the fair value of the unsecured convertible debenture was $11,166, which resulted in a fair value loss for the year ended May 31, 2019 of $1,166.

 

10330698 Canada Ltd. (d/b/a Starbuds)

 

On December 28, 2018, Aphria purchased $5,000 in secured convertible debentures of Starbuds. The convertible debentures bear interest at 8.5% per annum accruing daily due on the December 28, 2020. The debentures are secured against the assets of Starbuds. The debentures and any accrued and unpaid interest are convertible into common shares for $0.50 per common share and mature on December 28, 2020.

 

As at May 31, 2019, the fair value of the Company’s secured convertible debenture was $5,204, which resulted in a fair value loss for the year ended May 31, 2019 of $204.

 

High Tide Inc.

 

On April 10, 2019, Aphria purchased $4,500 in unsecured convertible debentures of High Tide Inc. (“High Tide”). The convertible debentures bear interest at 10% per annum, payable annually up front in common shares of High Tide based on the 10-day volume weighted average price (the “Debentures”). The debentures mature on April 10, 2021, they are convertible into common shares of High Tide at a price of $0.75 at the option of the holder. In addition to the debentures the Company received 6,000,000 warrants in High Tide as part of the purchase of the unsecured convertible debentures (Note 15).

 

  25  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

As at May 31, 2019, the fair value of the unsecured convertible debenture was $4,360, which resulted in a fair value loss for the year ended May 31, 2019 of $140.

 

Convertible notes receivable

 

During the year ended May 31, 2019, the Company purchased a total of $19,500 (2018 - $14,001) in convertible notes. The unrealized (loss) gain on convertible notes receivable recognized in the results of operations amounts to $(3,399) for the year ended May 31, 2019 (2018 - $5,943).

 

The fair value was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 0.85- 1.51%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.

 

13. Interest in equity investees

 

    May 31,
2019
    May 31,
2018
 
Associated company                  
Althea Company Pty Ltd.       $ 9,311     $ 4,966  
    $ 9,311     $ 4,966  

 

Althea Company Pty Ltd. (“Althea”)

 

As at May 31, 2019 the Company held 50,750,000 common shares of Althea (May 31, 2018 - 4,500) representing an ownership interest of 25% (May 31, 2018 - 37.5%).

 

The following table summarizes the financial of the Company’s associate and reflects the amounts presented in the financial statements of Althea, amended to reflect adjustments made by the Company when using the equity method, including fair value adjustments and modifications for differences in accounting policy.

  

    March 31,
2019
    March 31,
2018
 
Current assets     $ 18,210     $ 3,857  
Non-current assets       1,125       3  
Current liabilities       (655 )     (14 )
Non-current liabilities              
Net assets     $ 18,680     $ 3,846  

 

For the period from April 1, 2018 to March 31, 2019 the investee, Althea, reported a net loss of $4,368 AUD on its financial statements. In accordance with the equity method, the Company recorded a loss of $1,123, for the year ended May 31, 2019, from its investee relative to its ownership of the outstanding common shares at the time.

 

During the year, Althea completed a share split of 7,500 shares for each existing share. Althea also issued 101,310,000 common shares for total proceeds of $19,650 AUD. The Company participated in the financing of Althea contributing $3,400 AUD ($3,258 CAD) of the total $19,650 AUD raised. This additional raise reduced the Company’s ownership interest in Althea from 37.5% to 25% and accordingly, the Company recognized a gain on dilution of $2,210. The fair value of the shares as at May 31, 2019 is $36,032 AUD ($33,776 CAD) based on the closing share price of Althea.

 

  26  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

    May 31,
2019
    May 31,
2018
 
Reconciliation to carrying amount:                
Opening balance     $ 4,966     $  
Transfer from long-term investments           2,483  
Cash contributions, net of share issuance costs     3,258       2,497  
Gain on account of dilution of ownership     2,210        
Share of reported net loss     (1,123 )     (14 )
Closing balance   $ 9,311     $ 4,966  

 

Liberty Health Sciences Inc.

 

In February 2018, the Company entered into a call/put obligation (“Obligation Agreement”) for the remaining shares held in Liberty, which were subject to CSE mandatory escrow requirements. As each new tranche of shares became freely trading, the Obligation Agreement resulted in the buyers acquiring the newly freely trading shares at an 18% discount to the market price of Liberty, based on Liberty’s 10-day volume weighted trading price.

 

The Obligation Agreement included an opt-out for Aphria’s benefit, in the event that the Toronto Stock Exchange amended their regulations such that it permitted investments by Canadian companies in U.S. based cannabis businesses, and in such instance, the Obligation Agreement would be automatically terminated. In exchange for the opt-out, the Company agreed to pay the buyers a $2,500 termination fee.

 

Based on the terms of the Obligation Agreement, the Company determined that the remaining shares held in Liberty met the requirements under IFRS 5 and were reclassified from interest in equity investees to assets held for sale. The Company ceased accounting for the investment as an equity investment as of November 30, 2017 and transferred the carrying value to assets held for sale.

 

In July 2018, 16,029,615 shares were released from escrow and sold as part of the Obligation Agreement. The Company received gross proceeds of $11,514 and recognized a gain on sale of equity investee of $9,880. As part of the transaction, the Company paid $480 in exchange for an option to buy back the shares at $1.00 a share, subject to certain downside risk protection which results in the purchaser sharing a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25. The option to repurchase the shares was subject to the following conditions (collectively, the enumerated conditions (1) through (5), the “ Conditions ”):

 

(1) Cannabis becoming legalized federally in the United States; and

One or more of the following conditions have been satisfied:

(2) The TSX has provided its approval for the purchase of the U.S. cannabis assets;
(3) The TSX revises its rules such that it no longer has a prohibition against its listed companies having an interest in US assets which are involved in the cannabis business;
(4) The common shares of the Company are voluntarily or involuntarily delisted from the TSX; and/or
(5) The Company is acquired by another entity, provided that the common shares of the Company will be delisted from the TSX upon the change of control.

 

This option was initially included in long-term investments (Note 14).

 

During the prior quarter, the Company and the third party agreed to terminate the Obligation Agreement, in exchange for a $1,000 termination fee. The Company then entered into a share purchase agreement to divest of the remaining 64,118,462 Liberty shares in exchange for consideration in the form of a promissory note in the amount of $59,098, bearing interest at a rate of 12% due in 5 years (Note 15). As a security for the promissory note, the Liberty shares were placed in trust with an escrow agent. The purchaser was able to remove the Liberty shares from the escrow at any time by paying off the promissory note. In the event that the Company enforces the security, the escrow agent was to return the shares to the Company, provided that the Conditions were met. In the event they were not met, the escrow agent was to transfer the securities to a third-party investment bank for liquidation, with the proceeds of liquidation delivered to the Company. Simultaneously with this sale, the Company entered into an option agreement to repurchase the Liberty shares for the amount of the promissory note (Note 14). The Company agreed to pay an annual fee equal to 12.975% of the face value of the promissory note to maintain this option (Note 20). The option to repurchase the shares was subject to the Conditions described above. During the year ended May 31, 2019, the Company reported a gain on sale of equity investee of $57,351.

 

On February 19, 2019, the Company and the third party agreed to liquidate the promissory note, security agreement and the option in exchange for a cash payment of $47,448 and a contingent payment up to $10,000, in the event the third party monetizes the assets held under the option within six (6) months of the transaction date. As the satisfaction of these conditions require actions outside of the Company’s control, the Company has not allocated any value to the contingent consideration.

 

For the year ended May 31, 2018, the Company reported a total gain on dilution of ownership in equity investee of $7,535. Prior to the Company no longer recording Liberty as an equity investee, Liberty reported a net loss of $24,671 and a net comprehensive loss of $26,798. In accordance with the equity method, the Company recorded a loss of $9,281 and other comprehensive loss of $801.

 

  27  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

14. Long-term investments

 

    Cost
May 31,
2018
    Fair value
May 31,
2018
    Investment     Divesture/
Transfer
    Subtotal
May 31,
2019
    Change in
fair value
    Fair value
May 31,
2019
 
Level 1 on fair value hierarchy                                                        
CannaRoyalty Corp.   $ 1,500     $ 3,765     $     $ (3,765 )   $     $     $  
MassRoots, Inc.     304       164             (164 )                  
Tetra Bio-Pharma Inc.     2,300       6,800       16,757             23,557       (6,341 )     17,216  
Hiku Brands Company Ltd.     9,775       13,558             (13,558 )                  
Scythian Biosciences Corp.     9,349       8,603       298       (8,901 )                  
National Access Cannabis Corp.     1,093       710       10,481             11,191       (4,044 )     7,147  
Aleafia Health Inc.                 10,000             10,000       (1,555 )     8,445  
Rapid Dose Therapeutics Inc.                 5,400             5,400       432       5,832  
Fire & Flower Inc.                 3,416             3,416       (593 )     2,823  
High Tide Inc.                 450             450       (110 )     340  
      24,321       33,600       46,802       (26,388 )     54,014       (12,211 )     41,803  
Level 2 on fair value hierarchy                                                        
Hiku Brands Company Ltd.     2,336       1,906       16,787       (18,693 )                  
Scythian Biosciences Corp.     3,153       661             (661 )                  
      5,489       2,567       16,787       (19,354 )                  
Level 3 on fair value hierarchy                                                        
Copperstate Farms, LLC     1,755       5,300             (5,300 )                  
Copperstate Farms Investors, LLC     9,407       14,700             (14,700 )                  
Resolve Digital Health Inc.     718       3,300                   3,300       (2,200 )     1,100  
Resolve Digital Health Inc.     282       1,916                   1,916       (1,634 )     282  
Green Acre Capital Fund I     1,600       2,042       400             2,442       1,848       4,290  
Green Acre Capital Fund II                 3,000       (3,000 )                  
Green Tank Holdings Corp.     650       647       1,240             1,887       3,447       5,334  
IBBZ Krankenhaus GmbH     1,956       1,956                   1,956       9       1,965  
Greenwell Brands GmbH                 152             152       1       153  
HighArchy Ventures Ltd.                 9,995             9,995             9,995  
US legalization options                 54,762       (54,762 )                  
      16,368       29,861       69,549       (77,762 )     21,648       1,471       23,119  
Deduct - assets held for sale     (11,162 )     (20,000 )           20,000                    
    $ 35,016     $ 46,028     $ 133,138     $ (103,504 )   $ 75,662     $ (10,740 )   $ 64,922  

 

The fair value attached to warrants in both Level 2 and Level 3 were determined using the Black-Scholes option pricing model using the following assumptions: risk-free rate of 0.75-1.70% on the date of grant; expected life of 1 and 2 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective warrant.

 

  28  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

CannaRoyalty Corp. (“CR”)

During the year ended May 31, 2019, the Company sold its remaining 750,000 shares of CR for proceeds of $4,111, resulting in an accounting gain of $346 (Note 28).

 

MassRoots, Inc.

During the year ended May 31, 2019, the Company sold its remaining 500,000 common shares in MassRoots, Inc. for proceeds of $1, resulting in a loss of $163 (Note 28).

 

Tetra Bio-Pharma Inc.

During the year ended May 31, 2019, the Company purchased an additional 6,900,000 units of Tetra Bio-Pharma Inc. at a total cost of $7,107. Each unit is comprised of one Class A common share and one common share purchase warrant with an exercise price of $1.29 expiring November 2021.

 

During the year, the Company purchased 10,000,000 common shares of Tetra Bio-Pharma Inc. at a total cost of $9,650.

 

The Company owns 26,900,000 common shares and 6,900,000 warrants at a cost of $19,057, with a fair value of $17,216 as at May 31, 2019.

 

Hiku Brands Company Ltd (formerly TS BrandCo Holdings Inc.)

During the year ended May 31, 2019, the Company exercised its 7,993,605 warrants at $2.10 per warrant. Subsequent to exercising its warrants the Company sold all of its shares of Hiku in exchange for $48,153, resulting in a gain on disposal of $15,902 (Note 28).

 

As part of the purchase of Hiku by a third party, the third party terminated the Hiku supply agreement with the Company. The third party purported to terminate the Tokyo Smoke supply agreement with the Company at approximately the same time.

 

Scythian Biosciences Inc.

During the year ended May 31, 2019, the Company purchased 123,800 common shares of Scythian at a total cost of $298. During the year, the Company sold its 2,812,300 common shares and 672,125 common share purchase warrants in Scythian in exchange for $6,609, resulting in a loss on disposal of $2,953 (Note 28).

 

National Access Cannabis

During the year ended May 31, 2019, the Company purchased 10,344,505 common shares of National Access Cannabis Corp. at a total cost of $10,481. The Company owns 11,344,505 common shares in NAC at a cost of $11,574, with a fair value of $7,941 as at May 31, 2019.

 

Aleafia Health Inc. (formerly Emblem Corp.) (“Aleafia”)

During the year end May 31, 2019, the Company entered into a 5-year supply agreement with Emblem Corp. As part of the supply agreement the Company received 6,952,169 common shares to satisfy a deposit valued at $10,000. During the year, Emblem Corp. was purchased by a third party, Aleafia Health Inc. (“Aleafia”). The Company’s shares in Emblem Corp. translated into 5,823,831 shares of Aleafia. The Company owns 5,823,831 common shares in Aleafia at a cost of $10,000, with a fair value of $8,445 as at May 31, 2019. The shares are subject to various hold restrictions tied to terms within the supply agreement.

 

Rapid Dose Therapeutics Inc. (“RDT”)

In August 2018, the Company entered into a subscription agreement with RDT for the purchase of 7,200,000 common shares, for a total cost of $5,400, with a fair value of $5,832 as at May 31, 2019. During the year, RDT’s common shares began trading on the Canadian Stock Exchange. The Company reclassified this investment from level 3 on fair value hierarchy to level 1 during the year.

 

Fire & Flower Inc.

In October 2018, the Company entered into a subscription agreement with Fire & Flower Inc. for the purchase of 2,277,000 common shares, for a total cost of $3,416 with a fair value of $2,823 as at May 31, 2019. During the year, Fire & Flower Inc.’s common shares began trading on the Toronto Stock Exchange Venture.

 

  29  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

High Tide Inc.

During the year ended May 31, 2019, the Company received 6,000,000 warrants in High Tide as part of the purchase of convertible debentures (Note 12), and 943,396 common shares of High Tide Inc. as a payment for interest on the convertible notes receivable (Note 12). The Company owns 943,396 common shares and 6,000,000 warrants in High Tide Inc. at a cost of $450, with a fair value of $340 as at May 31, 2019. Each warrant is exercisable at $0.85 per warrant expiring April 18, 2021.

 

US legalization options

During the year ended May 31, 2019, the Company purchased an option to acquire 16,029,615 Liberty shares at $1.00 a share, expiring January 23, 2020. This option includes specific downside risk protection in which the purchaser will share a portion of the difference between the share price on the day the option is exercised and the exercise price, provided the share price exceeds $1.25. The cost of the option was $480. The option to repurchase the shares was subject to the Conditions described in note 13.

 

During the year, the Company entered into an option agreement to repurchase 64,118,462 Liberty shares in exchange for settlement of a promissory note receivable, expiring September 6, 2023 (Note 13). The cost of this option was a gross annual fee of $7,668, however the Company also received $7,092 of interest income associated with the promissory note receivable, resulting in a net annual cost to the Company of $576. The option to repurchase the shares was subject to the Conditions described in note 13.

 

During the year, the Company liquidated the option and promissory note for cash proceeds of $47,448, with a contingent fee owing of up to $10,000 upon satisfaction of certain conditions. As the satisfaction of these conditions require actions outside of the Company’s control, the Company has not allocated any value to the contingent consideration.

 

During the year, the Company contributed assets with a fair value of $55,000 to GA Opportunities Corp. Simultaneously, the Company entered into an option agreement to purchase all of the assets owned by GA Opportunities Corp. at a cost of $55,000, expiring September 24, 2023. The cost of this option is a gross fee of $6,765, however the Company also receives $6,600 of interest income associated with the promissory note receivable, resulting in a net annual cost to the Company of $165. In the event the securities in the fund represent direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of cannabis in the United States, the option to purchase the securities was subject to the Conditions described in note 13.

 

During the year, the Company liquidated the option and promissory note for cash proceeds of $89,000, with $39,000 of the proceeds due within six months (Note 28 and Note 15).

 

Copperstate Farms, LLC (“Copperstate”) and Copperstate Farms Investors, LLC (“CSF”)

During the year, the Company received $20,000 from the sale of the shares of Copperstate and CSF, which were previously held as available for sale.

 

Resolve Digital Health Inc. (“Resolve”)

The Company owns 2,200,026 common shares and 2,200,026 warrants in Resolve at a total cost of $1,000, with a fair value of $1,382 as at May 31, 2019. The Company determined the fair value of its investment based on its net realizable value. Each warrant is exercisable at $0.65 per warrant expiring December 1, 2021.

 

Green Acre Capital Fund I

The Company committed and invested $2,000 to Green Acre Capital Fund I. The Company determined the fair value of its investment, based on its proportionate share of net assets, to be $4,290 as at May 31, 2019. During the year, the Company received a return of capital of $700 from this investment.

 

Green Acre Capital Fund II

During the year, the Company committed to a $15,000 investment in Green Acre Capital Fund II, and as of the balance sheet date, has funded $3,000. During the current quarter, the Company and Green Acre Capital Fund II agreed to end the Company’s involvement with the fund. The Company and Green Acre Capital Fund II agreed that the Company would no longer be committed to fund the remaining amount of its investment and in exchange, the Company agreed to sell its interest in the fund to the limited partners for $500, resulting in a loss of 2,500 (Note 28).

 

  30  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

Green Tank Holdings Corp. (“Green Tank”)

During the year Green Tank completed a 12:1 share split, which resulted in the Company obtaining an additional 1,082,675 shares at no additional cost. The Company purchased an additional 359,208 shares of Green Tank for a cost of $920 USD ($1,240 CAD). The Company owns 1,540,308 preferred shares in Green Tank for a total cost of $1,420 USD ($1,890 CAD), with a fair value of $3,943 USD ($5,334 CAD). The Company determined the fair value of its investment, based on Green Tank’s most recent financing.

 

IBBZ Krankenhaus GmbH Klinik Hygiea (“Krankenhaus”)

The Company owns 25.1% of Krankenhaus, which is the owner and operator of Berlin-based Schöneberg Hospital, for €1,294 ($1,956 CAD). Through this investment, the Company is entitled to 5% of the net income (loss) for the years 2018 to 2021, and 10% of the net income (loss) for the period thereafter. The Company determined that the fair value of its investment, based on Krankenhaus’ most recent financing at the same price, is equal to its carrying value. The Company recognized a loss from the change in fair value of $(5) due to changes in the foreign exchange rate.

 

Greenwell Brands GmbH (“Greenwell”)

In September 2018, the Company entered into an investment and shareholder agreement with Greenwell for the purchase of 1,250 common shares, for a total cost of €100 ($152 CAD). The Company determined that the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value.

 

HighArchy Ventures Ltd.

In October 2018, the Company entered into a subscription agreement with HighArchy Ventures Ltd. for the purchase of 1,999 Class A shares and 1,999 Class B shares, for a total cost of $9,995. During the year HighArchy Ventures Ltd. completed a share split of 10,000 to 1. The Company determined that the fair value of its investment, based on the most recent financing at the same price, is equal to its carrying value.

 

15. Promissory notes receivable

 

      May 31,
2018
    Additions     Disposal/
Impairment
    May 31,
2019
 
September 6, 2018 - $59,098 - 12%, due September 6, 2023     $     $ 59,098     $ (59,098 )   $  
September 24, 2018 - $55,000 - 12%, due September 24, 2023             55,000       (55,000 )      
May 15, 2019 - $39,000 - 3%, due October 15, 2019             39,000             39,000  
October 11, 2018 - GBP £4,600 - 3.25%, due October 11, 2021             7,952       (7,952 )      
October 31, 2018 - $6,609 - 12%, due October 31, 2023             6,609       (6,609 )      
November 1, 2018 - $200 - interest free, due May 1, 2020             200             200  
      $     $ 167,859     $ (128,659 )   $ 39,200  

 

During the year, the Company impaired the promissory note receivable of £4,600 GBP to $nil (Note 11).

 

  31  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

16. Income taxes and deferred income taxes

 

A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:

 

    For the year ended
May 31,
 
    2019     2018  
Income (loss) before income taxes (recovery)       $ (15,645 )   $ 35,856  
Statutory rate         26.5 %     26.5 %
                 
Expected income tax expense (recovery) at combined basic federal and provincial tax rate     (4,146 )     9,502  
                 
Effect on income taxes of:                    
Foreign tax differential         (539 )      
Permanent differences         1,137       65  
Non-deductible share-based compensation and other expenses     20,161       4,737  
Non-taxable portion of losses (gains)         (15,504 )     (7,162 )
Other         (648 )     (768 )
Tax assets not recognized         393       34  
    $ 854     $ 6,408  
                 
Income tax expense (recovery) is comprised of:                    
Current       $ 4,944     $ 2,750  
Future         (4,090 )     3,658  
    $ 854     $ 6,408  

 

The following table summarizes the components of deferred tax:

 

    May 31,
2019
    May 31,
2018
 
Deferred tax assets                
Non-capital loss carry forward   $ 20,133     $ 4,567  
Capital loss carry forward           405  
Share issuance and financing fees     9,689       5,443  
Unrealized loss           916  
Other     1,102       27  
Deferred tax liabilities                
Net book value in excess of undepreciated capital cost     (2,751 )     (1,017 )
Intangible assets in excess of tax costs     (101,271 )     (64,120 )
Unrealized gain     (6,534 )     (1,097 )
Biological assets and inventory in excess of tax costs     (8,001 )     (4,377 )
Net deferred tax assets (liabilities)   $ (87,633 )   $ (59,253 )

 

17. Bank indebtedness

 

The Company secured an operating line of credit in the amount of $1,000 which bears interest at the lender’s prime rate plus 75 basis points. As of the May 31, 2019, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St. West, Leamington, Ontario and a first ranking position on a general security agreement.

 

  32  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

18. Promissory note payable

 

During the prior year, the Company entered into a promissory note with Althea for $700 AUD ($686), as part of the purchase of Althea common shares (Note 14), the note is due and payable on December 31, 2020. The Company reached an agreement with Althea where the promissory note amount will be used by Althea to purchase products from the Company in connection with a supply agreement entered into in September 2017.

 

    May 31,
2019
    May 31,
2018
 
Note payable to Althea Company Pty Ltd - $700 AUD ($686), opening balance,
non-interest bearing, due and payable on December 31, 2020
  $ 610     $ 686  
Reduction of Promissory note payable balance with respect to products provided     (581 )     (63 )
Foreign exchange (gain) loss       (29 )     (13 )
Balance remaining             610  
Deduct - principal portion included in current liabilities           (610 )
    $     $  

 

19. Long-term debt

 

    May 31,
2019
    May 31,
2018
 
Term loan - $25,000 - Canadian Five Year Bond interest rate plus 2.73% with a minimum 4.50%, 5 year term, with a 15-year amortization, repayable in blended monthly payments, due in July 2023   $ 24,022     $  
Term loan - $25,000 - 3.95%, compounded monthly, 5 year term with a 15-year amortization, repayable in equal monthly instalments of $188 including interest, due in April 2022     23,352       24,107  
Term loan - $1,250 - 3.99%, 5-year term, with a 10-year amortization, repayable in equal monthly instalments of $13 including interest, due in July 2021     946       1,057  
Mortgage payable - $3,750 - 3.95%, 5-year term, with a 20-year amortization, repayable in equal monthly instalments of $23 including interest, due in July 2021     3,380       3,515  
Vendor take-back mortgage owed to related party - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021     1,305       1,869  
Term loan - €5,000 - Euro Interbank Offered Rate + 1.79%, 5-year term, repayable in quarterly instalments of €250 plus interest, due in December 2023     7,169        
Term loan - €5,000 - Euro Interbank Offered Rate + 2.68%, 5-year term, repayable in quarterly instalments of €250 plus interest, due in December 2023     7,169        
      67,343       30,548  
Deduct   - unamortized financing fees     (116 )     (71 )
- principal portion included in current liabilities     (6,332 )     (2,140 )
    $ 60,895     $ 28,337  

 

Total long-term debt repayments are as follows:

 

Next 12 months     $ 6,332  
2 years       6,499  
3 years       6,039  
4 years       6,119  
5 years       6,259  
Thereafter       36,095  
Balance of obligation     $ 67,343  

 

  33  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

The term loan of $24,022 was entered into on July 27, 2018 and is secured by a first charge on the property at 223, 231, 239, 265, 269, 271 and 275 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in August 2018. The effective interest rate during the year was 4.68%.

 

The term loan of $23,352 was entered into on May 9, 2017 and is secured by a first charge on the property at 265 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. Principal payments started on the term loan in March 2018.

 

The term loan of $946 and mortgage payable of $3,380 were entered into on July 22, 2016 and are secured by a first charge on the property at 265 Talbot Street West, Leamington, Ontario and a first position on a general security agreement.

 

The vendor take-back mortgage payable of $1,305, owed to a former director of the Company, was entered into on June 30, 2016 in conjunction with the acquisition of the property at 265 Talbot Street West. The mortgage is secured by a second charge on the property at 265 Talbot Street West, Leamington, Ontario.

 

The Company acquired term loans of $3,000 and $1,201, and a mortgage payable of $1,713 as part of the acquisition of Broken Coast (Note 11). These loans and mortgages were paid in full during the prior year.

 

The Company acquired term loans initially up to €17,000 ($25,460 CAD) as part of the acquisition of CC Pharma (Note 11). As at May 31, 2019, the Company had amounts outstanding of €9,500 ($14,338 CAD). These term loans are secured against the distribution inventory held by CC Pharma.

 

20. Convertible debentures

 

    May 31,
2019
    May 31,
2018
 
Opening balance   $     $  
Principal amount issued     469,805       -  
Fair value adjustment     (48,439 )      
Closing balance   $ 421,366     $  

 

The convertible debentures were entered into in April 2019, the unsecured convertible debentures in the principal amount of $350,000 USD are due in five years from issuance (the “Notes”). The Notes bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Notes are an unsecured obligation and ranked senior in right of payment to all indebtedness that is expressly subordinated in right of payment to the Notes. The Notes will rank equal in right of payment with all liabilities that are not subordinated. The Notes are effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness.

 

Holders of the Notes may convert all or any portion of their Notes, in multiples of $1 principal amount, at their option at any time between December 1, 2023 to the maturity date. The initial conversion rate for the Notes will be 106.5644 common shares of Aphria per $1 USD principal amount of Notes, which will be settled in cash, common shares of Aphria or a combination thereof, at Aphria’s election. This is equivalent to an initial conversion price of approximately $9.38 per common share, subject to adjustments in certain events. In addition, holders of the Notes may convert all or any portion of their Notes, in multiples of $1 principal amount, at their option at any time preceding December 1, 2023, if:

(a) the last reported sales price of the common shares for at least 20 trading days during a period of 30 consecutive trading days immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(b) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1 principal amount of the Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common shares and the conversion rate on each such trading day;

(c) the Company call any or all of the Notes for redemption or;

(d) upon occurrence of specified corporate event.

 

  34  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

The Company may not redeem the Notes prior to June 6, 2022, except upon the occurrence of certain changes in tax laws. On or after June 6, 2022, the Company may redeem for cash all or part of the Notes, at its option, if the last reported sale price of the Company’s common shares has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including trading day immediately preceding the date won which the Company provide notice of redemption. The redemption of Notes will be equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date.

 

21. Share capital

 

The Company is authorized to issue an unlimited number of common shares. As at May 31, 2019, the Company has issued 250,989,120 shares, of which 600,000 shares were held and subject to various escrow agreements.

 

Common Shares   Number of
shares
    Amount  
Balance at May 31, 2018     210,169,924     $ 1,113,981  
June 2018 bought deal, net of cash issuance costs     21,835,510       245,925  
Broken Coast acquisition     19,963       297  
LATAM acquisition     15,678,310       273,900  
Warrants exercised     550,335       1,762  
Options exercised     2,632,078       15,029  
DSUs exercised     103,000       953  
Income tax recovery on share issuance costs           3,426  
      250,989,120     $ 1,655,273  

 

a) Throughout the year, 550,335 warrants with exercise prices ranging from $1.50 to $20.30 were exercised for a value of $1,762 including any cash consideration.

 

b) Throughout the year, 2,632,078 shares were issued from the exercise of stock options with exercise prices ranging from $0.60 to $20.19 for a value of $15,029, including any cash consideration.

 

c) Throughout the year, 103,000 shares were issued in accordance with the deferred share unit plan to former directors of the Company.

 

d) In June 2018, the Company closed a bought deal financing in which it issued 21,835,510 common shares at a purchase price of $11.85 per share for $245,925 net of cash issuance costs.

 

e) During the year, the Company agreed to terms to acquire the remaining 0.14% of Broken Coast (Note 11) and accordingly, the Company agreed to issue 19,963 shares.

 

f) In September 2018, the Company completed the acquisition of LATAM (Note 11) in which it issued 15,678,310 common shares at a purchase price of $17.47 per share for $273,900.

 

g) During the year, the Company recognized a $3,426 income tax recovery on share issuance costs.

 

22. Warrants

 

The warrant details of the Company are as follows:

 

Type of warrant   Expiry date   Number of
warrants
    Weighted
average price
    Amount  
Warrant   December 2, 2019     798,997       1.50        
Warrant   September 26, 2021     200,000       3.14       360  
Nuuvera warrant   February 14, 2020     1,293,803       20.30       976  
          2,292,800     $ 12.25     $ 1,336  

 

  35  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

    May 31, 2019     May 31, 2018  
    Number of
warrants
    Weighted
average price
    Number of
warrants
    Weighted
average price
 
Outstanding, beginning of the year     2,843,138     $ 10.52       3,885,908     $ 1.61  
Issued during the year                 1,345,866       20.30  
Exercised during the year     (550,335 )     3.29       (2,388,636 )     1.54  
Cancelled during the year     (3 )     1.75              
Outstanding, end of the year       2,292,800     $ 12.25       2,843,138     $ 10.52  

 

In March 2018, the Company completed the acquisition of Nuuvera (Note 11) in which it reserved 1,345,866 common shares for issuance to the holders of certain common share purchase warrants of Nuuvera (“Nuuvera Warrants”). There are 3,795,450 Nuuvera Warrants, exercisable for Nuuvera shares at an exercise price of $7.20 per share, the Nuuvera shares would convert to 0.3546 Aphria shares and $0.62 cash.

 

23. Stock options

 

The Company adopted a stock option plan under which it is authorized to grant options to officers, directors, employees and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of stock options that can be granted under the plan is 10% of the issued and outstanding common shares of the Company. The options granted can be exercised for up to a maximum of 10 years and vest as determined by the Board of Directors. The exercise price of each option can not be less than the market price of the common shares on the date of grant.

 

The Company recognized a share-based compensation expense of $24,078 during the year ended May 31, 2019 (2018 - $15,780). The total fair value of options granted during the year was $21,952 (2018 - $28,912).

 

    May 31, 2019     May 31, 2018  
    Number of
options
    Weighted
average price
    Number of
options
    Weighted
average price
 
Outstanding, beginning of the year     8,956,195     $ 7.60       5,926,001     $ 1.99  
Exercised during the year     (3,164,174 )     4.05       (2,637,363 )     2.30  
Issued during the year     3,005,000       13.05       6,703,330       11.12  
Cancelled during the year     (982,025 )     8.27       (1,035,773 )     11.77  
Outstanding, end of the year     7,814,996     $ 11.05       8,956,195     $ 7.60  
Exercisable, end of the year     4,474,966     $ 9.54       4,507,696     $ 4.04  

 

In June 2018, the Company issued 250,000 stock options at an exercise price of $11.78 per share, exercisable for 3 years to officers of the Company. 83,331 vested immediately and the remainder vest over 2 years. As at May 31, 2019 133,335 of these options have been cancelled.

 

In July 2018, the Company issued 820,000 stock options at an exercise price between $11.51 and $11.85 per share, exercisable for 5 years to employees of the Company. 50,000 vested immediately and the remainder vest over 3 years. As at May 31, 2019 50,000 of these options have been cancelled.

 

In September 2018, the Company issued 250,000 stock options at an exercise price of $19.38, exercisable for 5 years to employees of the Company. Nil vested immediately and the remainder vest over 3 years. As at May 31, 2019 33,334 of these options have been cancelled.

 

In October 2018, the Company issued 80,000 stock options at an exercise price of $19.70, exercisable for 5 years to employees of the Company. Nil vested immediately and the remainder vest over 3 years.

 

In February 2019, the Company issued 1,525,000 stock options at an exercise price between $9.92 and $13.31, exercisable for 3 to 5 years to officers and employees of the Company. 1,100,000 vested immediately and the remainder vest over 3 years. As at May 31, 2019 30,000 of these options have been cancelled.

 

  36  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

In April 2019, the Company issued 80,000 stock options at an exercise price of $11.45, exercisable for 5 years to employees of the Company. Nil vested immediately and the remainder vest over 3 years.

 

The outstanding option details of the Company are as follows:

 

Expiry date   Weighted
average exercise
price
    Number of
options
    Vested and
exercisable
 
September 2019   $ 3.00       42,365       42,365  
November 2019   $ 3.90       591,318       591,318  
December 2019   $ 5.25       400,000       33,333  
January 2020   $ 5.72       1,834       1,834  
April 2020   $ 7.92       38,334       38,334  
June 2020   $ 5.44       133,334       116,667  
July 2020   $ 5.24       538,660       434,983  
September 2020   $ 0.85       185,000       185,000  
October 2020   $ 6.90       156,667       26,666  
November 2020   $ 9.05       136,667       43,333  
November 2020   $ 9.28       50,000       33,333  
December 2020   $ 14.06       100,000       66,666  
January 2021   $ 21.70       10,000       6,666  
January 2021   $ 22.89       143,333       86,665  
January 2021   $ 22.08       50,000       33,333  
March 2021   $ 14.39       20,000       13,333  
March 2021   $ 9.98       200,000       133,333  
March 2021   $ 12.39       50,000       33,333  
April 2021   $ 11.40       380,000       266,666  
April 2021   $ 9.92       400,000       300,000  
April 2021   $ 11.45       66,667       33,333  
May 2021   $ 20.19       908,500       241,832  
June 2021   $ 1.40       168,335       168,335  
June 2021   $ 11.78       116,665       83,331  
July 2021   $ 11.85       150,000       50,000  
August 2021   $ 1.64       65,000       44,991  
September 2021   $ 19.38       66,666       33,332  
October 2022   $ 6.90       74,000       74,000  
July 2023   $ 11.51       80,000        
July 2023   $ 11.85       528,000        
September 2023   $ 19.38       150,000        
October 2023   $ 19.70       80,000        
February 2024   $ 12.77       395,000        
February 2024   $ 13.31       1,000,000       1,000,000  
April 2024   $ 11.45       80,000        
July 2027   $ 2.52       59,689       59,689  
November 2027   $ 6.29       39,792       39,792  
March 2028   $ 12.29       119,378       119,378  
March 2028   $ 14.38       39,792       39,792  
Outstanding, end of the year   $ 11.05       7,814,996       4,474,966  

 

The Company used the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 2.00-2.08% on the date of grant; expected life of 3 – 5 years; volatility of 70% based on comparable companies; forfeiture rate of 0%; dividend yield of nil; and, the exercise price of the respective option.

 

  37  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

24. Non-controlling interest

 

The following tables summarise the information relating to the Company’s subsidiaries, 1974568 Ontario Ltd. (“Aphria Diamond”), CannInvest Africa Ltd., Verve Dynamics Incorporated (Pty) Ltd. (“Verve Dynamics”), Nuuvera Malta Ltd., Marigold, and ColCanna S.A.S. before intercompany eliminations.

 

    Aphria
Diamond
    CannInvest
Africa Ltd.
    Verve
Dynamics
    Nuuvera
Malta Ltd.
    Marigold     ColCanna
S.A.S.
    May 31,
2019
 
Current assets   $ 2,598     $ 2     $ 185     $ 1,813     $ 441     $ 5,078     $ 10,117  
Non-current assets     171,314           $ 14,635     $ 741     $ 7,872       112,953       307,515  
Current liabilities     (5,743 )     (3 )   $ (2,155 )     (178 )   $ (16 )     (78 )     (8,173 )
Non-current liabilities     (150,892 )     (9 )   $       (3,196 )   $ (1,654 )     (9,638 )     (165,389 )
Net assets     17,277       (10 )     12,665       (820 )     6,643       108,315       144,070  
                                                         
Non-controlling interest %     49 %     50 %     70 %     10 %     5 %     10 %        
Non-controlling interest   $ 8,466     $ (5 )   $ 8,866     $ (82 )   $ 332     $ 10,832     $ 28,409  

 

    Aphria
Diamond
    CannInvest
Africa Ltd.
    Verve
Dynamics
    Nuuvera
Malta Ltd.
    Marigold     ColCanna
S.A.S.
    May 31,
2019
 
Revenue   $     $     $     $ 230     $     $     $ 230  
Total expenses     2,274     $ 10     $ 839     $ 1,046     $ 757       1,246       6,172  
Net loss and comprehensive loss     (2,274 )     (10 )     (839 )     (816 )     (757 )     (1,246 )     (5,942 )
                                                         
Non-controlling interest %     49 %     50 %     70 %     10 %     5 %     10 %        
    $ (1,114 )   $ (5 )   $ (587 )   $ (82 )   $ (38 )   $ (125 )   $ (1,951 )

 

    Aphria
Diamond
    CannInvest
Africa Ltd.
    Verve
Dynamics
    Nuuvera
Malta Ltd.
    Marigold     ColCanna
S.A.S.
    May 31,
2018
 
Current assets   $ 7,313     $     $     $     $     $     $ 7,313  
Non-current assets     83,207                                     83,207  
Current liabilities     (10,085 )                                   (10,085 )
Non-current liabilities     (60,884 )                                   (60,884 )
Net assets     19,551                                     19,551  
                                                         
Non-controlling interest %     49 %     0 %     0 %     0 %     0 %     0 %        
Non-controlling interest   $ 9,580     $     $     $     $     $     $ 9,580  

 

25. General and administrative expenses

 

    For the year ended
May 31,
 
    2019     2018  
Executive compensation   $ 5,821     $ 1,794  
Consulting fees     6,517       1,154  
Office and general     16,511       3,166  
Professional fees     11,790       2,951  
Salaries and wages     19,627       3,295  
Insurance     5,356       396  
Travel and accommodation     3,116       889  
Rent     1,014       256  
    $ 69,752     $ 13,901  

 

  38  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

26. Share-based compensation

 

Share-based compensation is comprised of:

 

    For the year ended
May 31,
 
    2019     2018  
Amounts charged to share-based payment reserve in respect of
share-based compensation
  $ 24,078     $ 15,780  
Share-based compensation accrued     187       (44 )
Share-based compensation issued on behalf of a related party           (32 )
Shares for services compensation           187  
Deferred share units expensed in the period     588       1,983  
Restricted share units expensed in the period     1,227        
    $ 26,080     $ 17,874  

 

During the year, the Company issued 96,833 deferred share units to certain directors of the Company, under the terms of the Company’s Omnibus Long-Term Incentive Plan. In May 2018, directors and officers of the Company forfeited 312,000 deferred share units which were granted during the prior year.

 

During the year, the Company issued 197,600 restricted share units to employees, officers and directors.

 

As at May 31, 2019, the Company had 136,958 deferred share units and 197,600 restricted share units outstanding. As at May 31, 2019 114,550 restricted share units were vested.

 

27. Non-operating income (loss)

 

Non-operating income (loss) is comprised of:

 

    For the year ended
May 31,
 
    2019     2018  
Non-operating income:                
Consulting revenue   $     $ 1,244  
Foreign exchange gain     915       124  
Loss on marketable securities     (178 )     (2,155 )
Gain (loss) on sale of capital assets     55       (191 )
Gain on dilution of ownership in equity investee     2,210       7,535  
Loss from equity investees     (1,123 )     (9,295 )
Gain on sale of equity investee     57,351       26,347  
Deferred gain on sale of intellectual property     340       1,304  
Interest income     14,350       6,362  
Interest expense     (7,775 )     (1,350 )
Unrealized (loss) gain on convertible notes     (3,399 )     4,135  
Gain on long-term investments     19,651       26,675  
Unrealized gain on convertible debentures     48,439        
Unrealized loss on financial liabilities     (1,326 )     (12,451 )
    $ 129,510     $ 48,284  

 

  39  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

28. Gain on long-term investments

 

Gain on long-term investments for the year ended May 31, 2019 is comprised of:

 

Investment   Proceeds     Opening fair
value / cost
    Gain (loss) on
disposal
    Change in fair
value
    Total  
Level 1 on fair value hierarchy                                        
CannaRoyalty Corp. - shares   $ 4,111     $ 3,765     $ 346     $     $ 346  
MassRoots, Inc. - shares     1       164       (163 )           (163 )
North Bud Farms Inc. - shares     373       253       120             120  
Hiku Brands Company Ltd. - shares     30,542       13,558       16,984             16,984  
Scythian Biosciences Corp. - shares     6,609       8,901       (2,292 )           (2,292 )
Level 2 on fair value hierarchy                                        
Hiku Brands Company Ltd. - warrants     17,611       18,693       (1,082 )           (1,082 )
Scythian Biosciences Corp. - warrants           661       (661 )           (661 )
Level 3 on fair value hierarchy                                        
Copperstate Farms, LLC - shares     5,300       5,300                    
Copperstate Farms Investors, LLC - shares     14,700       14,700                    
US legalization options     136,448       116,809       19,639             19,639  
Green Acre Capital Fund II     500       3,000       (2,500 )           (2,500 )
Long-term investments (Note 14)                       (10,740 )     (10,740 )
Year ended May 31, 2019   $ 216,195     $ 185,804     $ 30,391     $ (10,740 )   $ 19,651  

 

29. Earnings (loss) per share

 

The calculation of earnings (loss) per share for the year ended May 31, 2019 was based on the net income (loss) attributable to common shareholders of $(16,499) (2018 – $29,448) and a weighted average number of common shares outstanding of 242,763,558 (2018 – 161,026,463) calculated as follows:

 

    2019     2018  
Basic earnings (loss) per share:                
Net income (loss) for the year   $ (16,499 )   $ 29,448  
Average number of common shares outstanding during the year     242,763,558       161,026,463  
Earnings (loss) per share - basic   $ (0.07 )   $ 0.18  

 

    2019     2018  
Diluted earnings per share:                
Net income (loss) for the year   $ (16,499 )   $ 29,448  
                 
Average number of common shares outstanding during the year     242,763,558       161,026,463  
"In the money" warrants outstanding during the year           1,293,890  
"In the money" options outstanding during the year           3,593,647  
      242,763,558       165,914,000  
Earnings (loss) per share - diluted   $ (0.07 )   $ 0.18  

 

  40  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

30. Change in non-cash working capital

 

Change in non-cash working capital is comprised of:

 

    For the year ended
May 31,
 
    2019     2018  
Decrease (increase) in accounts receivable   $ 12,458     $ (1,797 )
Decrease (increase) in other current assets     5,715       (7,628 )
Decrease (increase) in inventory, net of fair value adjustment     (22,151 )     (7,045 )
Decrease (increase) in biological assets, net of fair value adjustment     (17,322 )     (367 )
Increase (decrease) in accounts payable and accrued liabilities     (10,998 )     3,764  
Increase (decrease) in income taxes payable     (882 )     2,662  
Increase (decrease) in deferred revenue     11,689        
    $ (21,491 )   $ (10,411 )

 

31. Financial risk management and financial instruments

 

Financial instruments

 

The Company has classified its cash and cash equivalents, marketable securities, long-term investments, and convertible notes receivable as FVTPL, accounts receivable, prepaids and other current assets and promissory notes receivable as loans and receivables, and accounts payable and accrued liabilities, promissory notes payable, long-term debt and convertible debentures as FVTPL or amortized cost.

 

The carrying values of accounts receivable, prepaids and other current assets, accounts payable and accrued liabilities, and promissory notes payable approximate their fair values due to their short periods to maturity.

 

The Company’s long-term debt of $28,982 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at May 31, 2019 was $28,377.

 

Fair value hierarchy

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:

 

Level 1 quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2 inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
Level 3 inputs for assets and liabilities not based upon observable market data

 

    Level 1     Level 2     Level 3     May 31,
2019
 
Financial assets at FVTPL                                
Cash and cash equivalents   $ 550,797     $     $     $ 550,797  
Marketable securities     20,199                   20,199  
Convertible notes receivable                 32,230       32,230  
Long-term investments     41,803             23,119       64,922  
Outstanding, end of the year   $ 612,799     $     $ 55,349     $ 668,148  

 

  41  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

    Level 1     Level 2     Level 3     May 31,
2018
 
Financial assets at FVTPL                                
Cash and cash equivalents   $ 59,737     $     $     $ 59,737  
Marketable securities     45,062                   45,062  
Convertible notes receivable                 18,071       18,071  
Long-term investments     33,600       2,567       29,861       66,028  
Outstanding, end of the year   $ 138,399     $ 2,567     $ 47,932     $ 188,898  

 

The following table presents the changes in level 3 items for the years ended May 31, 2019 and May 31, 2018:

 

    Unlisted
equity
securities
    Trading
derivatives
    Total  
Closing balance May 31, 2018   $ 29,861     $ 18,071     $ 47,932  
Acquisitions     69,549       19,500       89,049  
Disposals     (77,762 )     (1,942 )     (79,704 )
Unrealized gain on fair value     1,471       (3,399 )     (1,928 )
Closing balance May 31, 2019   $ 23,119     $ 32,230     $ 55,349  

 

Financial risk management

 

The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.

 

(a) Credit risk

 

The maximum credit exposure at May 31, 2019 is the carrying amount of cash and cash equivalents, marketable securities, accounts receivable, prepaids and other current assets and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major financial institutions. Marketable securities are placed with major investment banks and are represented by investment grade corporate bonds.

 

The Company mitigates its credit risk and volatility on its marketable securities through its investment policy, which permits investments in Federal or Provincial government securities, Provincial utilities or bank institutions and Investment grade corporate bonds.

 

    Total     0-30 days     31-60 days     61-90 days     90+ days  
Trade receivables   $ 25,488     $ 20,777     $ 3,333     $ 237     $ 1,141  
              82 %     13 %     1 %     4 %

 

(b) Liquidity risk

 

As at May 31, 2019, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which has contractual maturity dates within one year, promissory note payable, which has a contractual maturity within 15 months and long-term debt, and convertible debentures which has contractual maturities over the next five years. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at May 31, 2019, management regards liquidity risk to be low.

 

(c) Currency rate risk

 

As at May 31, 2019, a portion of the Company’s financial assets and liabilities held in United States Dollars (“USD”) and Euros consist of cash and cash equivalents, marketable securities, convertible notes receivable, long-term investments and a promissory note payable. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.

 

  42  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at May 31, 2019, the majority of the Company’s cash and cash equivalents was in United States dollars. A 1% change in the foreign exchange rate would result in an unrealized gain or loss of approximately $4,000.

 

(d) Interest rate price risk

 

The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.

 

(e) Capital management

 

The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.

 

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.

 

32. Commitments and contingencies

 

The Company has a lease for rental office space from December 2018 to November 30, 2028. The Company has committed purchase orders outstanding at May 31, 2019 related to capital asset expansion of $49,364, all of which are expected to be paid within the next year. Minimum payments payable over the next five years are as follows:

 

      Years ending May 31,  
2020     $ 50,689  
2021       942  
2022       752  
2023       711  
2024       656  
Thereafter       1,724  
      $ 55,474  

 

From time to time, the Company and/or its subsidiaries may become defendants in legal actions arising out of the ordinary course and conduct of its business.

 

As of May 31, 2019, the Company was served statements of claims in class action lawsuits against the Company and certain of its officers and former officers. These claims relate to alleged misconduct in connection with the Company’s acquisitions of LATAM Holdings Inc. (“LATAM”) and Nuuvera Inc., and the Company’s June 2018 securities offering. At the present time, the representative claimants have been identified and selected in both the U.S. and Canada. The U.S. claims include alleged violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act and Section 20(a) of the Exchange Act. The Canadian claims include alleged statutory and common law misrepresentation and oppression. The Company intends to vigorously defend itself in each of these actions. With respect to the cases commenced in the United States, the Company is self-insured for the costs associated with any award or damages arising from such actions and has entered into indemnity agreements with each of the directors and officers and, subject to certain exemptions, will cover any costs incurred by them in connection with any of the class action claims. With respect to the cases commenced in Canada, the Company’s insurance policies may not be sufficient to cover any judgments against the Company. As at May 31, 2019, the Company has not recorded any uninsured amount related to this contingency.

 

  43  

 

 

Aphria Inc.

Notes to the Consolidated Financial Statements

For the years ended May 31, 2019 and May 31, 2018

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

 

 

33. Segment reporting

 

Information reported to the Chief Operating Decision Maker (“CODM”) for the purpose of resource allocation and assessment of segment performance focuses on the nature of the operations. The Company operates in three segments. 1) cannabis operations, which encompasses the production, distribution and sale of both medical and adult-use cannabis, 2) distribution operations, which encompasses the purchase and resale of products to customers. The distribution operations are carried out through the Company’s wholly owned subsidiaries ABP, FL Group and CC Pharma, and 3) businesses under development which encompasses operations in which the Company has not received final licensing or has not commenced commercial sales from operations. Factors considered in determining the operating segments include the Company’s business activities, the management structure directly accountable to the CODM, availability of discrete financial information and strategic priorities within the organizational structure.

 

Segment information for the year ended May 31, 2019:

 

    Cannabis
operations
    Distribution
operations
    Businesses
under
development
    Total  
Revenue       $ 78,853     $ 157,931     $ 326     $ 237,110  
Income (loss) before income taxes         726       2,914       (19,285 )     (15,645 )

 

Included in the net loss from cannabis operations is the $58,039 of impairment (Note 11).

 

Segment information for the year ended May 31, 2018:

 

    Cannabis
operations
    Distribution
operations
    Businesses
under
development
    Total  
Revenue   $ 36,917     $     $     $ 36,917  
Income (loss) before income taxes     39,128       (119 )     (3,153 )     35,856  

 

Geographic information for the year ended May 31, 2019:

 

    North America     Europe     Latin America     Africa     Total  
Revenue     $ 78,853     $ 154,163     $ 4,094     $     $ 237,110  
Capital assets       471,391       25,817       3,758       2,932       503,898  

 

Geographic information for the year ended May 31, 2018:

 

    North America     Europe     Latin America     Africa     Total  
Revenue     $ 36,618     $ 299     $     $     $ 36,917  
Capital assets       296,438       6,713                   303,151  

 

Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues and greater than 10% of accounts receivable. For the year ended May 31, 2019, the Company had no one customer that accounted for greater than 10% of the Company’s revenue (2018 – nil). For the year ended May 31, 2019, the Company had no one customer that accounted for greater than 10% of the Company’s accounts receivable (2018 – nil).

 

34. Subsequent events

 

Subsequent to year-end the Company’s subsidiary Marigold Projects Jamaica Limited received a retail Herb House licence from Jamaica’s Cannabis Licensing Authority to open its first store at the Peter Tosh Square, Unit 51, Pulse Center, 38a Trafalgar Road, overlooking the Peter Tosh Museum in New Kingston, Jamaica.

 

  44  

 

Exhibit 99.3

 

APHRIA INC.

Management’s Discussion & Analysis

 

APHRIA INC.

 

Management’s Discussion & Analysis

 

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc., (the “Company” or “Aphria”), is for the year ended May 31, 2019. It is supplemental to, and should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes for the year ended May 31, 2019. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).

 

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding Aphria Inc. is available on our website at www.aphriainc.com or through the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com.

 

In this MD&A, reference is made to gram equivalents, “all-in” cost of sales of dried cannabis per gram, cash costs to produce dried cannabis per gram, cannabis gross profit, cannabis gross margin, distribution gross profit, distribution gross margin, adjusted EBITDA, adjusted EBITDA from cannabis operations, adjusted EBITDA from distribution operations, adjusted EBITDA from businesses under development, strategic investments, capital and intangible asset expenditures – wholly owned subsidiaries, and capital and intangible asset expenditures – majority owned subsidiaries which are not measures of financial performance under IFRS. The Company calculates each as follows:

 

· “Gram equivalents” include both grams of dried cannabis as well as grams of cannabis oil as derived using an ‘equivalency factor’ of 1 gram per 5.75 mL of cannabis oil, prior year 1 gram per 4.5 mL of cannabis oil. Management believes this measure provides useful information as a benchmark of the Company against its competitors.
· “All-in” cost of sales of dried cannabis per gram is equal to production costs less the costs of accessories less cannabis oil conversion costs (“cost of sales of dried cannabis”) plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. This measure provides the cost per gram of dry cannabis and gram equivalent of oil sold before the post harvesting processing costs to create oil or other ancillary products.
· Cash costs to produce dried cannabis per gram is equal to cost of sales of dried cannabis less amortization, packaging costs and distribution costs plus (minus) increase (decrease) in plant inventory divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash amortization and packaging costs and provides a benchmark of the Company against its competitors.
· Cannabis gross profit is equal to gross profit less distribution revenue, other revenue, cost of goods purchased, other costs of sales, the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes non-similar revenue, costs and fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
· Cannabis gross margin is cannabis gross profit divided by net revenue from cannabis produced. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.
· Distribution gross profit is equal to gross profit less revenue from cannabis produced, other revenue, excise taxes, production costs, other costs of sales, the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes non-similar revenue and costs.
· Distribution gross margin is distribution gross profit divided by distribution revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s costs to purchase inventory for resale.
· Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery) 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.
· Adjusted EBITDA from cannabis operations is calculated based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements: Aphria Inc. and Broken Coast Cannabis Ltd. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s operations in the cannabis regulated industry.
· Adjusted EBITDA from distribution operations is calculated based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements; CC Pharma GmbH, ABP, S.A. and FL-Group. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s distribution operations.
· Adjusted EBITDA from businesses under development is adjusted EBITDA minus adjusted EBITDA from cannabis operations and adjusted EBITDA from distribution operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by the Company’s businesses under development.
· Strategic investments are the total cash out flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.
· Capital and intangible asset expenditures - wholly owned subsidiaries are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for wholly owned subsidiaries. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.

 

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APHRIA INC.

Management’s Discussion & Analysis  

 

· Capital and intangible asset expenditures - majority owned subsidiaries are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for majority owned subsidiaries. Management believes this measure provides useful information as it helps provide an indication of the use of capital raised by the Company outside of its operating activities.

  

These measures are not necessarily comparable to similarly titled measures used by other companies.

 

All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.

 

This MD&A is prepared as of July 31, 2019.

 

Company Overview

 

Aphria Inc. (“ Aphria ”), a company amalgamated under the laws of the province of Ontario, is licensed to produce and sell medical and adult-use cannabis and cannabis-derived extracts in Canada under the provisions of the Cannabis Act . Aphria received its licence to produce and sell medical cannabis on November 26, 2014, followed by its licence to sell cannabis extracts on August 18, 2016. These licences were extended to include the adult-use market on October 17, 2018. Aphria’s head office is based in Leamington, Ontario, adjacent to Aphria One , the Company’s original 1,100,000 square foot Leamington greenhouse facility. Throughout this MD&A, Aphria will refer to its original Leamington campus as “Aphria One”.

 

The Company’s common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“ TSX ”) and on the New York Stock Exchange (“ NYSE ”).

 

Canadian Cannabis Operations

 

The Company’s domestic Canadian cannabis operations are comprised of the original Aphria One greenhouse facility (described above), its Leamington-based Extraction Centre of Excellence , wholly-owned British Columbia-based subsidiary Broken Coast , and 51% majority owned Leamington-based subsidiary , 1974568 Ontario Ltd. (“ Aphria Diamond ”).

 

The Extraction Centre of Excellence is being constructed as an integral part of the Company’s Leamington production facilities, combining science and innovation to develop the future of the cannabis industry.

 

Broken Coast Cannabis Ltd. (“ Broken Coast ”), a subsidiary of the Company acquired in February 2018, is licensed to produce and sell cannabis under the provisions of the Cannabis Act . Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with ‘B.C. Bud’ and is a leading premium cannabis brand.

 

Aphria Diamond is a 51% majority owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms (“ Double Diamond ”). Aphria Diamond has applied for a second site cultivation licence under the provisions of the Cannabis Act .

 

The Company is awaiting Health Canada approval at Aphria Diamond which will expand the Company’s production capacity. Once this expanded facility is licensed, operating at capacity and in full crop rotation, the Company will have more than 2.4 million square feet of space under cultivation capable of annual production of more than 255,000 kgs of cannabis.

 

International Operations

 

Aphria EMEA is a group of subsidiaries of the Company operating throughout the emerging Cannabis market in Europe, the Middle East, and Africa with a focus on building a global cannabis company. The Company’s operations are split between distribution and production.

 

The Company has a distribution operations presence throughout the EMEA region. Currently, the majority of distribution activities within the EMEA region relate to distribution of medical products with plans to continue developing and incorporating cannabis products into the product assortment.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The Company has production operations presence in Germany and Lesotho. The production presence in Germany has expanded in the current year with the Company obtaining 5 cultivation lots from the German government. In addition to obtaining the maximum number of lots within the tender process, the Company stands as the only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by the BfArM. Further, the Company launched CBD offerings for medical and cosmetic products within Germany. The Company has a production presence in Lesotho, with an under construction large-scale extraction operation to support the forecasted demand of cannabis products within the EMEA corridor.

 

LATAM Holdings Inc. (“ LATAM ”) is a subsidiary of the Company acquired in September 2018. LATAM holds key licences in Colombia, Argentina and Jamaica through its subsidiaries MMJ Colombia Partners Inc., Marigold Acquisitions Inc., Hampstead Holdings Ltd., MMJ International Investments Inc., ABP, S.A., Marigold Projects Jamaica Limited, and ColCanna S.A.S. Through the LATAM acquisition, the Company obtained the rights to purchase a majority interest in a Brazilian incorporated entity, upon that Brazilian entity obtaining a medical cannabis cultivation, processing and distribution licence in Brazil.

 

The Company’s majority and wholly-owned subsidiaries are as follows:

 

Subsidiaries   Jurisdiction of incorporation   Ownership interest (1)  
Broken Coast Cannabis Ltd.   British Columbia, Canada     100 %
LATAM Holdings Inc.   British Columbia, Canada     100 %
Marigold Acquisitions Inc.   British Columbia, Canada     100 %
MMJ International Investments Inc.   British Columbia, Canada     100 %
Nuuvera Holdings Limited   Ontario, Canada     100 %
ARA – Avanti Rx Analytics Inc.   Ontario, Canada     100 %
MMJ Colombia Partners Inc.   Ontario, Canada     100 %
Nuuvera Israel Ltd. (2)   Israel     100 %
FL-Group   Italy     100 %
Goodfields Supply Co. Ltd.   United Kingdom     100 %
Hampstead Holdings Ltd.   Bermuda     100 %
ABP, S.A.   Argentina     100 %
Nuuvera Deutschland GmbH   Germany     100 %
Aphria Deutschland GmbH   Germany     100 %
CC Pharma GmbH   Germany     100 %
CC Pharma Research and Development GmbH   Germany     100 %
Aphria Handelsgesellschaft   Germany     100 %
Marigold Projects Jamaica Limited   Jamaica        95 % (3)
Nuuvera Malta Ltd.   Malta     90 %
ASG Pharma Ltd.   Malta        90 % (4)
QSG Health Ltd.   Malta        90 % (5)
ColCanna S.A.S.   Colombia     90 %
CC Pharma Nordic ApS   Denmark     75 %
1974568 Ontario Ltd.   Ontario, Canada     51 %
Aphria Terra S.R.L.   Italy     51 %
Aphria Italy S.p.A.   Italy     51 %
APL – Aphria Portugal, Lda.   Portugal     51 %
CannInvest Africa Ltd.   South Africa     50 %
Verve Dynamics Incorporated (Pty) Ltd.   South Africa     30 % (6)

 

 

(1) The Company defines ownership interest as the interest in which the Company is entitled a proportionate share of net income. Legal ownership of some subsidiaries differs from ownership interest shown above.
(2) Represents inactive subsidiaries, which have no operations and do not own any assets, save and except for a related party balance owing to the Company, and is in the process of being dissolved.

(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.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

(4) The Company holds 100% of the issued and outstanding shares of ASG Pharma Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(5) The Company holds 100% of the issued and outstanding shares of QSG Health Ltd., through 90% owned subsidiary Nuuvera Malta Ltd.
(6) The Company holds 60% of the issued and outstanding shares of Verve Dynamics Incorporated (Pty) Ltd., through 50% owned subsidiary CannInvest Africa Ltd.

 

STRATEGY AND OUTLOOK

 

Aphria, a leading global cannabis consumer packaged goods company and is setting the standard for brand development, product innovation, and industrial scale cultivation automation for the production of high-quality cannabis grown in the most natural conditions possible. The Company was one of the first licensed producers in Canada and the first Canadian licensed producer to fully exploit greenhouse cultivation and industrial-scale production to deliver sustainable operating profit margins in the emerging cannabis industry. Through its international operations, the Company also seeks opportunities to create long-term shareholder value by identifying partnership and investment opportunities where the Company can apply experience and knowledge gained in the Canadian cannabis industry. Applying this experience to other jurisdictions where a national cannabis legalization framework is developing and local market characteristics are expected to support the Company’s competitive strengths.

 

Canadian Cannabis Operations

 

Canadian Cannabis Operations include the results of: (i) the parent Aphria; (ii) Canadian subsidiaries which hold investments and have no other operations; (iii) companies which are applicants and are expected to become licensed cannabis producers in Canada (Aphria Diamond); and, (iv) companies which also actively produce and sell cannabis under the Cannabis Act (Aphria Inc. and Broken Coast).

 

 

Licences  

The Company received approval from Health Canada for its 800,000 sq, ft. Part IV and Part V expansion at Aphria One. It placed the first plants in the approved greenhouse area during the first week of March 2019. As of the date of this MD&A, the greenhouses have been fully planted and the Company has completed first sale of cannabis grown and harvested from Part IV and Part V expansion.

 

As of the date of this MD&A, the Aphria Diamond facility is complete, the licence application was originally submitted in March 2018 and we continue to engage in discussions with Health Canada on the application. The ultimate date of approval by Health Canada is unknown. Once approved by Health Canada, the facility will go through a short ramp period, similar to Aphria One. Once fully planted the Company’s expected production capacity (1) will be 255,000 kgs a year.

 

(1) These figures are considered forward-looking information and are based on the Company’s experience in growing cannabis, and data available concerning the wide variety of strains under the growing conditions maintained at its facilities. Material assumptions to derive capacity at full completion include, but are not limited to: the number of plants expected to occupy each facility, the number of harvest cycles and average yield per harvest cycle per year for the strains expected to be grown at each facility.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Canadian medical market brands

Since 2014, the Aphria brand has been a leading choice for patients seeking high quality pharmaceutical-grade medical cannabis. As the Canadian adult-use market continues to develop, the Company expects to continue to focus and invest in the Canadian medical market while concurrently developing cannabis-based products and brands targeting the adult-use market.

 

Canadian adult-use market brands

The Company is investing capital and resources to establish a leading position in the adult-use market in Canada. These investments are focused on brand development, product innovation, marketing, sales, education, and research to enable the Company to capture, retain and grow a significant share of the Canadian market as it continues to develop.

 

Aphria developed its initial portfolio of adult-use brands to specifically meet the evolving needs of Canada’s most profitable segments. The Company leveraged its strengths to offer products with unique attributes – from price through to potency and assortment – to best serve its consumers. The suite of brands created by the Company for Canada’s adult-use market include Solei, RIFF, Good Supply, and Broken Coast. Each brand is unique to a specific target audience with various product offerings designed to meet the needs of its targeted segments, described below:

 

   

 

Solei Sungrown Cannabis (“Solei”) is designed for current and novice users, pairing an assortment of carefully curated strains and product formats for different experiences. Solei’s signature ‘Moments’ based approach has received very positive feedback from retailers and consumers seeking a simplified approach to cannabis.

 

 

   

RIFF is a culture and community focused brand supporting the artistic community across Canada. The brand has high potency offerings available for more experienced users.

 

 

Good Supply offers regular cannabis users with a no-frills, yet excellent value-for-money assortment that does not sacrifice quality. 

 

 

 

 

Complementing Aphria’s in-house brands, the Company’s wholly-owned subsidiary Broken Coast is a multi-award-winning craft grower that delivers a premium product and provides consumers with an opportunity to access a brand synonymous with British Columbia-grown cannabis. Broken Coast’s craft cannabis is grown on the shores of the Salish Sea in small batches using single-strain growing rooms. All flower is hand-trimmed and slow-cured ensuring premium product quality and consistency.

 

Product development

The Canadian government has committed to regulating the sale of cannabis infused products in 2019. According to Headset, Inc., data which tracks US sales across the cannabis category, the vape market makes up 17% to 30% of sales (California, Nevada, Colorado, Washington) depending on the market. Aphria is investing capital and resources in product research, development, and production technologies in anticipation of the legalization of these new emerging categories. As a part of these R&D efforts, the Company is investing in the following areas to develop consistent and unique formulations to be used in its end-products:

 

· Industrial-scale extraction technologies using different methods including CO 2 , butane and ethanol;
     
· The effective isolation of terpenes, cannabinoids and other cannabis compounds; and,

 

· Development of nano-emulsification technology providing flavourless and colourless input material into derivative products such as edibles and beverages.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The Company is currently highly engaged in R&D, IP partnerships and formulation development for a broad suite of high margin derivative products such as vapes, edibles, beverages, concentrates, topicals and other products such as oral thin strips and transdermal patches. 

 

Within these categories, the Company’s primary focus in the near term is vape products as the company anticipates that said products will represent a similar percentage of the Canadian cannabis market as it does in existing US markets and is very well aligned to its superior extraction capabilities and know-how. The Company anticipates having vape products available following the statutory notice period required to sell the products under the Cannabis Regulations, sometime in December. The Company believes edibles and beverages will collectively represent a much smaller proportion of the market and has a strategy established to meet this demand, which will be implemented after vapes have been introduced.

 

Distribution

The Company signed supply agreements with all the provinces and the Yukon Territory in Canada, representing access to 99.8% of Canadians, showing the Company’s commitment to becoming a leader in the adult-use market. The Company is one of a handful of licensed producers which has agreements with every province in Canada.

 

The Company signed an exclusive distribution agreement with Great North Distributors Inc. (“ Great North Distributors ”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits (“ Southern Glazer’s ”), to provide the Company with the sales force and wholesale/retail channel expertise required to efficiently distribute the Company’s product through each of the provincial/territorial cannabis control agencies. As one of the leading distributors of alcoholic beverages in Canada, Great North Distributors has extensive expertise in managing compliance with the unique rules that govern the marketing of controlled substances in each of the jurisdictions where the Company has supply agreements. The Company has leveraged the Great Northern Distributors agreement by signing a subsequent agreement with We Grow BC Ltd. (“ We Grow ”), a Vancouver-based licensed producer of premium cannabis, to become We Grow’s exclusive sales representatives across Canada. As of May 31, 2019, We Grow has listed its products in multiple provinces providing additional revenue for the Company.

 

In addition to the above distribution agreements for the adult-use market, the Company sees an expanded distribution path in the medical cannabis market with its five-year supply agreement with Shoppers Drug Mart.

 

Production

The Company’s Aphria One facility is fully licensed and as of the date of this MD&A is fully planted. The Company currently has an open second site licence application for its Aphria Diamond site. The site is complete, the licence application was originally submitted in March 2018 and we continue to engage in discussions with Health Canada on the application. The ultimate date of approval by Health Canada is unknown. Once approved by Health Canada, the facility will go through a short ramp period, similar to Aphria One. Once fully planted the Company’s expected production capacity (1) will be 255,000 kgs a year.

 

(1) These figures are considered forward-looking information and are based on the Company’s experience in growing cannabis, and data available concerning the wide variety of strains under the growing conditions maintained at its facilities. Material assumptions to derive capacity at full completion include, but are not limited to: the number of plants expected to occupy each facility, the number of harvest cycles and average yield per harvest cycle per year for the strains expected to be grown at each facility.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Aphria One

The Company’s original flagship greenhouse facility, Aphria One, accounts for more than 90% of the Company’s current production.

 

The Company obtained Health Canada approval on the additional 800,000 square feet at Aphria One in March 2019. Prior to obtaining this approval, the Company effectively lowered Aphria One’s functional capacity by allocating a portion of the facility to the growth and maintenance of mother plants, to ensure Part IV could commence growing operations without delay upon approval from Health Canada. With the Part IV and Part V greenhouse expansions completed and approved, the Company has over 1,100,000 sq. ft. of state-of-the-art operational greenhouse facilities.

 

As of May 31, 2019, the Company has spent approximately $159,000 for the Part IV and Part V expansion, an increase of approximately $11,000 (7%) from the original combined budget. The increase is mainly due to project add-ons and change orders relating to upgrades in order to maintain the industry leading state-of-the-art infrastructures.

 

The Company is positioned to be the first licensed producer to bring industrial horticulture production technology into the cultivation of cannabis within a greenhouse environment. This cutting-edge technology will automate the following functions of the plant growing cycle:

 

· Transplanting cuttings through various stages into the final pots for flowering;
· Aiding in evaluation of the health and quality of plants to ensure plants meet the Company’s stringent quality standards throughout the many stages of the growing cycle;
· Monitoring and providing the necessary water and vital nutrients to the plants during the growing cycle; and
· Transporting plants through different areas in the greenhouse including to the processing room once harvested.

 

With this innovative technology implemented, the only human interaction throughout the plants’ growth cycle for plants grown in these areas are at the initial phase of taking the cuttings and in the final phase to trim and prune the plants.

 

Additional state-of-the-art automation employed throughout the rest of the facilities include processes that involve:

 

· Cutting the plants, and transferring them to be processed;
· Automating the de-budding and trimming process;
· Disposing of waste produced in the cutting, de-budding and trimming phase of production; and
· Distributing the buds into trays in a drying rack to evenly dry and cure the harvested product.

 

Automating labour-intensive parts of the production process enables the Company to achieve optimal product consistency and quality control while significantly reducing operating costs. In addition to the reduction of labour costs, the Company has also introduced measures that significantly reduce energy costs and consumption.

 

The Company installed a co-generation power plant that utilizes natural gas to generate its own electricity and as a by-product of this process, hot & cold water and CO 2 . This combined-cycle process not only generates electricity for use in the greenhouse to operate the lights and air conditioners, but also hot & cold water that is used to control the temperature and humidity in the greenhouse. The residual gas emissions created by this process are directed through a catalytic converter to create CO 2 which is used during the growing cycle. This co-generation power plant also incorporates state-of-the-art power switching capability that automatically selects between the public electrical grid and the Company’s private power co-generation equipment to ensure it is constantly using the most cost-effective energy available.

  

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APHRIA INC.

Management’s Discussion & Analysis

 

In addition to these energy saving initiatives, the Company has installed systems that recycle the water used in the irrigation process. The ‘used’ water is sterilized through a pasteurization process which then allows it to be reused to irrigate additional plants thereby reducing the total amount and cost of water used on a per gram basis.

 

Aphria Diamond

Through this 51% owned subsidiary, the Company has partnered with Double Diamond, a company with multi-generational expertise in the commercial greenhouse industry. This partnership provides Aphria with access to an industry leading team of growers and operators with expertise in large-scale greenhouse operations as well as contracted exclusive access to all of the production from the Aphria Diamond joint venture.

 

The Company anticipates that the infrastructure will be complete in time for the first harvest from the Aphria Diamond greenhouse.

 

The Company provided $10,200 of initial capital to the venture with Double Diamond contributing $9,800. Aphria Diamond acquired 100 acres of land, including almost 32 acres of greenhouses for $42,389, and spent an additional approximately $77,000 as at May 31, 2019 made up both the greenhouse retrofit and capital expenditures relating to operational equipment. The Company expects the project to cost an additional $4,400 to complete due to additional high-voltage lighting and electrical service upgrades as well as project add-ons. All funds above the initial seed capital are currently being funded by the Company and will be repaid in full by Aphria Diamond.

 

Aphria Diamond is implementing similar levels of automation, as described above in Aphria One.

 

All production from Aphria Diamond will be sold to Aphria at an agreed upon transfer price, allowing Aphria to recognize 100% of the remaining profit from any further processing into a derivative product, and 100% of the wholesale margin from branding on all product from Aphria Diamond.

 

Broken Coast

Broken Coast is the Company’s premium brand of indoor-grown cannabis. Broken Coast provides the Company access to the quality associated with British Columbia-grown cannabis as well as an award-winning genetic bank of cannabis strains which in turn can be produced at scale through the Company’s Aphria One and Aphria Diamond facilities. Broken Coast will continue the development of new premium strains and continue to represent what is the highest level of premium cannabis grown through their custom-built indoor facilities.

 

Extraction Centre of Excellence

The Company’s state-of-the-art Extraction Centre of Excellence will be physically located on the same property as Aphria Diamond and requires Aphria Diamond’s licence to submit a licence amendment application with Health Canada. As a result of the open licence application, the Company has taken steps at its licensed facilities to supplement its extraction capabilities. These steps ensure that sufficient extraction capacity exists to process all of the Company’s extraction needs regardless of when the licence for the Extraction Centre of Excellence is received. Once the licence is received, the Company will have extra extraction capacity to increase the amount of biomass it processes for either internal or external needs.

 

This facility will provide the necessary production capacity and innovation to incorporate the Company’s currently developed extraction technologies and further expand on these technologies to create new and innovative product offerings for the adult-use market as they become legal to sell in Canada. The facility will be equipped to conduct a wide range of cannabis extractions, including CO 2 , butane, ethanol, and to produce world-class cannabis concentrates, including fractionated distillates.

 

The Canadian cannabis market is in the early stages of its evolution with a limited focus on the sale of cannabis as a product, in the form of dried flower or bud, shake or trim, as well as cannabis oil in its many forms, including tinctures, softgel capsules, and oral sprays. The Company believes that as the global cannabis industry evolves, this focus on cannabis as a product will evolve into cannabis as an ingredient. The Extraction Centre of Excellence was created to facilitate Aphria’s leadership in the evolution of cannabis as an ingredient as the Company intends to create its own branded products with these cannabis ingredients.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

As at May 31, 2019, the Company incurred expenditures approximately $41,700 of its expected cost of $62,300 budgeted, for the completion of the Extraction Centre of Excellence, an increase of $7,300 from the original budget. The increase is mainly due to the additional costs expected in order to ensure that the new facility has all the safety upgrades installed as well as the most modern state-of-the-art equipment and extraction methods available.

 

Licences

The Company holds two licences under the Cannabis Act for cultivation processing and sale: Aphria One and Broken Coast.

 

The Company obtained approval from Health Canada in March 2019 expanding the licensed growing area at Aphria One from 300,000 sq. ft. to over 1,100,000 sq. ft. The Company also has submitted an application for a second site licence for Aphria Diamond, once approved will provide an additional 1,300,000 sq. ft. of licensed greenhouse growing area.

 

The Company is in progress of obtaining EU-GMP certification by the European Medicines Authority within its Aphria One and Avanti locations.

 

The licences and certification provide the Company with the ability to cultivate, process and sell cannabis within Canada and to export its products into other countries where the sale of cannabis is legal.

 

U.S. Expansion Strategy

 

The Company believes that the existing U.S. cannabis market is hindered by the federal prohibition on cannabis resulting in poor capital allocation by active players as they jockey for first mover advantage. Currently, operators are forced to create cultivation and distribution centers in each state they wish to participate in, forcing them to operate multiple facilities in order to become a multi-state operator (“ MSO ”). The current MSO model results in poor capital allocation as money is invested within multiple individual states where investments would not be made but for current interstate trade barriers. The Company is focused on participating in U.S. federally permissible activities, and is therefore currently reviewing the landscape and looking to prepare for legalization of cannabis through the purchase of profit generating companies in other industries and converting their existing operations to include cannabis when it is federally legal to do so. The Company is looking to develop cannabis operations based on the best locations to service the United States as opposed to operating individual locations in less desired locations as a result of the current legalization structure, when federally legal to do so. Furthermore, the Company is evaluating potential strategic partnerships in order to accelerate and escalate the Company’s brand capabilities and strategies.

 

The Company intends to be well poised to capitalize on the U.S. market once it becomes federally legal to do so through this unique strategy. The Company believes investing in more established industries will generate faster returns through positive EBITDA, while putting the Company in the best possible position to generate significant long-term returns when the U.S. legalizes cannabis federally and removes the current barriers in the industry.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

International Operations

 

Outside of Canada, the Company is developing partnerships and making direct investments in countries where there is an existing or emerging federal legal cannabis market. The Company’s international strategy is currently focused on medical cannabis markets in stable economic and political jurisdictions that have developed or are developing effective regulations and enforcement mechanisms that limit licensed production and control importation and distribution.

 

Through several acquisitions, the Company secured access to key international markets, management team bench strength with a proven knowledge and executional success within the industries and jurisdictions in which they operate. The Company believes that with its significant experience in the highly regulated Canadian cannabis market, it will be able to export its industry leading knowledge and practices to its global subsidiaries as these markets mature.

 

As part of its international strategy, the Company is developing regional hubs. These hubs will represent key countries for investment and will aid in the flow of cannabis goods across the globe.

 

 

The Company has international operations in Australia, Argentina, Colombia, Denmark, Germany, Italy, Jamaica, Lesotho, Malta, Paraguay and maintains an option for entry into Brazil. With these markets still in their infancy, and the regulatory environment around them still being formed, these countries are looking to Canada as a leader in developing the regulatory environment. The Company provides a unique opportunity to bring the experience from working within Canada during the development of the cannabis regulations, to provide this expertise and knowledge to develop these global cannabis markets.

 

Export facility from Canada

Through the acquisition of Nuuvera Inc., the Company acquired Brampton-based ARA - RX Analytics Inc. (“ Avanti ”), which currently holds three Canadian licences: (i) Cannabis Processing Licence; (ii) Cannabis Analytical Testing Licence; (iii) Drug Establishment Licence; and, (iv) Medical Device Establishment Licence.

 

In addition to allowing the Company to possess and handle cannabis and cannabis derivative products, these licences allow Avanti to engage in the possession, production, packaging, sale, transportation and delivery and testing of drugs and medical devices in addition to cannabis and related cannabinoids. The Company is also able to complete testing/analysis of active pharmaceutical ingredients.

 

The Company is currently in the process of securing EU-GMP certification, which will then be used as the Canadian staging site for international bound GMP certified products. The Company’s EU-GMP certification will cover the extraction, post processing, testing, packaging and shipping process.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Pan-Asia

 

Australia

Aphria Inc. 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 (“API”) on this trial. CannPal Pty Ltd., is currently in a clinical trial related to animal pain in cats and dogs, using Aphria strains.

 

European Union

 

Germany

The German market is considered to be one of the most highly sought-after medical cannabis markets in the world. German law currently permits import of cannabis only. The German government recently completed a tender process to award licences for in-country cultivation. Aphria EMEA, through its German wholly-owned subsidiary Aphria Deutschland GmbH (“ Deutschland ”), was one of the three selected by the German Federal Institute for Drugs and Medical Devices (“BfArM”) to receive a licence for the cultivation of medical cannabis in Germany. The Company was granted the most available lots within the tender process, a total of 5 lots, and is the only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by the BfArM. Each lot is expected to provide a minimum annual capacity of 200 kgs. Germany currently allows the sale of cannabis and cannabis extracts in pharmacies. These cannabis-based products are also covered by insurance companies. This coverage provides a greater number of medical cannabis patients with access to the full use and benefits of these products.

 

The Company’s approach in Germany is a three-pronged approach covering: demand; supply; and, distribution.

 

Demand

Through the acquisition of a 25.1% interest in Berlin-based Schöneberg Hospital, the Company has access to doctors and patients to support the education of the benefits of medical cannabinoids. The Company also plans to build and operate pain treatment centers including the new possibilities of digital health care throughout Germany, which will further provide access to patients. The Company has partnered with a leading company in digital apps and medical software to build a modern, patient centric clinic for telemedicine. The Company launched various CBD products in the current quarter including medical and recreational products. The Company’s portfolio of CBD products ranges from medical, oil, edibles, drinkables, and skin care products that will be distributed through multiple sales channels.

 

Supply

The Company will, through imports and local production, supply products into the German market. The Company entered into a strategic partnership with a prominent European flower producer, to obtain access to EU GMP-certified organic medical cannabis. This agreement ensures the Company will have further access to cannabis for distribution throughout the EU. The Company is further developing the facilities, in order to deliver the first harvest by the end of 2020 to BfArM as well as a storage facility to support a GMP certified storage space.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Distribution

Through the acquisition of CC Pharma GmbH (“ CC Pharma ”), the Company obtained a leading importer and distributor of EU-pharmaceuticals for the German market. With over 317 active German national pharmaceutical licences, 690 active EU pharmaceutical licences, and access to approximately 13,000 active pharmacy accounts, CC Pharma operates a production, repackaging and labelling facility. Based on regulations, pharmacies can only supply the product that has been prescribed to the patient unless the product is unavailable. As such, the Company will expand CC Pharma’s operations to meet the high demand for medicinal cannabis through 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.

 

Malta

Through subsidiary ASG Pharma Ltd. (“ ASG ”), the Company received the first import certificate for medical cannabis issued by the Government of Malta’s Ministry of Health. The Company intends on using the Malta facility to import cannabis resin and dried flower for processing, packaging and distribution of EU-GMP certified cannabis products throughout large parts of Europe. As of May 31, 2019, the analytical Lab is EU GMP certified and fully operational. The development of a new floor dedicated to the processing and packaging of bulk cannabis in accordance with EU-GMP is ongoing and will be ready and expected to be fully operational as an EU GMP certified facility by the end of Q2 of fiscal year 2020, pending certification by the European Medicines Authority.

 

This Malta facility will provide the Company with the ability to bring production of cannabis product from outside of Europe into an EU-GMP certified facility for further packaging, processing and distribution throughout Europe.

 

Through subsidiary QSG Health Ltd. (“ QSG ”), the Company will pursue the health and wellness market with CBD based products. These products will not have the THC component found in cannabis and will focus on diversifying the Company’s product offerings throughout Europe.

 

Italy

The Company’s wholly owned subsidiary, FL-Group, is authorized for the distribution of pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies. The FL-Group acts as the Company’s distributor to the Italian cannabis market. The company has established Aphria Terra as a grassroots organization involved with furthering the Company’s presence in the Italian cannabis industry.

 

United Kingdom

Medicinal cannabis was legalized in the UK effective November 1, 2018. The Company entered into a supply agreement for bulk product for sale in the UK medicinal cannabis market. In addition, the Company recently exported, on a compassionate basis, to the UK “Jorja’s Hope”, a 200:1 product to assist a three year-old control her epileptic seizures.

 

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Africa

 

Lesotho

The Company entered into a venture in CannInvest Africa Ltd. (“ CannInvest ”), a South African corporation. Aphria’s partner in CannInvest is the Verve Group of Companies, founded by Richard Davies, a South African with more than 20 years experience in phytoextraction of African medicinal plants. Through this transaction, the Company obtained a controlling interest in Verve Dynamics Incorporated (Pty) Ltd. (“ Verve ”). Verve holds a licence in Lesotho for prohibited drug operations, which allows Verve to cultivate, manufacture, supply, distribute, store, export and import cannabis and cannabis resin for medical purposes or scientific use.

 

The Company also entered into a supply agreement with Verve, where Verve will supply cannabis THC and CBD extract from its planned EU-GMP certified facility. This is expected to provide the Company with access to GMP certified extract for distribution into South Africa and other federally legal markets, including the European Union.

 

Construction of a new extraction and processing facility is near completion. The Company is currently working on developing sales through this facility and expects to begin processing materials and generating income before the end of calendar year 2019. Upon completion, the Company expects to process cannabis for other producers in the country for a tolling fee, while applying for EU-GMP certification which will allow all product from the Lesotho site to be distributed within the EU.

 

During the year, Verve successfully completed the first legal purchase of medicinal cannabis in Africa for processing, allowing the Company to claim a first mover advantage in the local markets.

  

South America

 

LATAM Holdings Inc.  

The acquisition of LATAM provided the Company with various production, distribution and market development opportunities in South America and the Caribbean, including Colombia, Argentina, Jamaica and potentially Brazil.

 

Colombia

The acquisition of LATAM provided the Company with a 90% ownership of Colcanna S.A.S. (“ Colcanna ”). This ownership provides the Company with the ability to further develop the global Aphria brand with Aphria branded products distributed to patients in Colombia. Colcanna is developing its 54 acres of land for the cultivation of cannabis, which is expected to provide 50,000 kgs. annually,. Until the emerging Colombian market demand grows to match the Company’s Colombian production, the Company will be able to utilize its export licence to distribute the excess production within LATAM region including Argentina, and Paraguay. In order to seek to maximize the export activities, the Company will apply for the EU-GMP certification, which is expected to allow all products from the Colombia site to be distributed globally.

 

Argentina

The acquisition of LATAM provided the Company with sole ownership of ABP, S.A. (“ APB ”), granting to the Company a significant first-mover advantage, as APB is the first company with an in-country medical cannabis research licence. The Company also continues to work with Hospital Garrahan, a leading pediatric hospital in Buenos Aires. On June 6, 2019, the Ministry of Heath approved a resolution authorizing public and private health insurance companies to import and stock medical cannabis inventory. The Company believes that with this recent resolution, the market is one step closer to an evolution of the medical cannabis regulatory framework that would allow local production and medical commercialization.

 

Jamaica

The acquisition of LATAM provided the Company with a 49% ownership interest in Marigold Projects Jamaica Limited (“ Marigold ”), through multiple subsidiaries and a 95% royalty on profits through an Intellectual Property agreement. This acquisition provides the Company with several key licences including a Tier 3 cultivation licence, a Tier 2 herb house licence, as well as conditional licences for import, export and research purposes.

 

    Page | 13

 

APHRIA INC.

Management’s Discussion & Analysis

 

Brazil

Finally, the acquisition of LATAM provided the Company with an option to purchase 50.1% of a Brazilian entity for $24,000 USD once it secures a medical cannabis cultivation and distribution licence from the Brazilian government and a right of first offer and refusal on another 20% to 39% of the Brazilian entity. This right of first refusal provides the Company with lower risk at a fixed price to enter into the Brazilian cannabis market pending the Brazilian company obtaining a licence to cultivate and distribute cannabis lawfully within the country.

 

Equity Financing Activities

During the year, the Company closed a bought deal equity financing for net proceeds of over $245,000 and a convertible debentures offering for net proceeds of approximately $335,000 USD ($455,000 CAD).

 

The Company has sufficient funds and capital to complete all current plans announced or otherwise, including the existing expansion of the Canadian cannabis operations including capital investments for the build out of the Company’s Aphria One, Aphria Diamond and Broken Coast facilities. Depending on the depth and speed of its US expansion strategy, the Company may require additional funds.

 

Aphria’s Purpose

 

Mission

To be the premier global cannabis company through an unrelenting commitment to our people, the planet, product quality and innovation.

 

Vision

To be the best performing cannabis company globally, providing investors with access to the most accretive cannabis opportunities around the world.

 

Our Values

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. Our commitment to our people, the planet, product quality and innovation helps us create stronger, healthier communities everywhere we do business. Our Corporate Social Responsibly goes beyond our borders. We are committed to exporting our industry leading knowledge and practices to our global subsidiaries. For the communities we touch, we are vigilant of the impact we have and strive to be a positive contributor to their well-being.

 

We put people first

We're committed to the needs of our patients and consumers whether they are looking for natural options for medical needs, exploring the options in wellness, or seeking alternatives to their lifestyle. We're driven by a desire to help others live their best life.

 

This includes continuous product development on different methods of administering the product through oil and softgels, and eventually oral strip, and patches, as well as being proactive in aiding patients who have difficulties obtaining the required medical care. In the current year, the Company has taken the initiative to provide access to treatment on a compassionate basis for a three-year-old epileptic girl; a treatment that has decreased daily seizures from around thirty to just three or four.

 

We lead by example

We're passionate about pushing our industry forward. Our commitment to innovation means we're always on the lookout for new opportunities, that we attract those who share our outlook, and that we never stop focusing and imagining on what's coming next.

 

This includes the continuous push for innovations in expansionary projects, product development and market research. In the current year, the Company has expanded its reach to Latin America and Germany through its acquisitions. Furthermore, it has partnered with various organizations to further develop the product line including transdermal patches, oral thin strips, and other cannabis-infused products.

 

We respect the earth

As a conscientious company, we pride ourselves on providing a natural product for our patients and consumers. We're committed to ensuring that our actions and those of our employees have a positive impact on the environment around us, no matter where we operate.

 

The Company employs sustainable growing practices to provide significant efficiencies, cost reduction benefits and lessen our impact on the environment. This includes:

 

· Use of computerized systems to monitor and reduce water usage, and collection and cleaning of run-off water so that it can be safely reused.
     
· Aphria’s co-generation plant produces electricity, hot water, CO 2 and cold water which is more efficient and reduces impact on local communities. The Company is an industry leader on carbon neutrality - Aphria One is a zero-carbon footprint facility.
     
· Capture and clean the CO 2 from the exhaust and add it into the greenhouse to promote plant growth and reduce our carbon footprint.
     
· 98% of our Canadian production will grow in state-of-the art greenhouses in Leamington, Ontario, using 1/12th the energy of traditional indoor growing operations.

 

    Page | 14

 

APHRIA INC.

Management’s Discussion & Analysis

 

We take responsibility to heart

We believe it is our responsibility to protect the safety of our employees, patients, consumers, and society. Our partnerships and programs reflect our ongoing commitment to the safety of our communities through education, responsible use, and meaningful corporate citizenship.

 

The Company places a great deal of energy and effort towards ensuring the safety of children and families in communities we serve. Our Charter Agreement with Drug Free Kids Canada and participation in the Global Cannabis Partnership, reflect our ongoing commitment to the safety of our communities through education, responsible use, and meaningful responsible corporate citizenship in our industry. In addition to partnerships mentioned above, the Company has also partnerships with various organizations in countries like Colombia in order to jointly develop academic curriculums on the medicinal use of cannabis.

 

These core values serve as a compass impacting the Company’s strategic decisions and the outlooks. The activities and outlooks covered within each of the operations below as well as the activities within the Investor Highlights are aligned to these core values.

 

INVESTOR HIGHLIGHTS

 

    YE - 2019     Q4 - 2019     Q3 - 2019  
Distribution revenue   $ 157,931     $ 99,186     $ 57,599  
Net cannabis revenue   $ 76,144     $ 28,608     $ 15,438  
Kilograms equivalents sold     13,397.9       5,574.3       2,636.5  
Production costs   $ 35,548     $ 13,333     $ 7,803  
Cost of goods purchased   $ 138,126     $ 87,270     $ 49,745  
Cash cost to produce dried cannabis / gram 1   $ 1.37     $ 1.35     $ 1.48  
"All-in" cost of sales of dried cannabis / gram 1   $ 2.44     $ 2.35     $ 2.86  
Gross profit before fair value adjustments 1   $ 62,538     $ 28,185     $ 15,738  
Adjusted distribution margin 1     12.5 %     12.4 %     13.6 %
Adjusted cannabis margin 1     53.3 %     53.0 %     49.5 %
Adjusted EBITDA from cannabis operations 1   $ (17,516 )   $ 1,851     $ (12,694 )
Adjusted EBITDA from businesses under development 1   $ (16,240 )   $ (5,514 )   $ (3,990 )
Adjusted EBITDA from distribution operations 1   $ 6,036     $ 3,872     $ 2,249  
Cash and cash equivalents & marketable securities   $ 570,996     $ 570,996     $ 134,736  
Working capital   $ 642,284     $ 642,284     $ 131,278  
Capital and intangible asset expenditures - wholly owned subsidiaries 1   $ 132,941     $ 26,828     $ 29,016  
Capital and intangible asset expenditures - majority owned subsidiaries 1   $ 73,024     $ 16,943     $ 19,779  
Strategic investments 1   $ 115,424     $ 6,862     $ 36,128  

 

1 – Non-GAAP measure

 

Fourth quarter three-month period

· Aphria One facility now fully licensed and fully planted
· Mid-term potential capacity of 255,000 kgs. (annualized), pending Health Canada approval
· Aphria introduced CannRelief, a CBD-Based nutraceutical product line for the German market
· Granted 5 lots, maximum awarded, in German tender, only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by the BfArM
· Closed 5.25% convertible senior notes offering for net proceeds of approximately $335,000 USD ($455,000 CAD)
· Enhanced the executive team with appointment of several key positions
· Highest-ever quarter sales with a three-month period net revenue of $128.6 million
· P ositive adjusted EBITDA of $209 and adjusted EBITDA from cannabis operations of $1,851 for the quarter
· Settlement of Green Growth Brands takeover bid resulting in $50 million cash received and an additional $39 million to be received in November 2019

  

2019 fiscal period

· Successfully completed acquisitions of LATAM and CC Pharma expanding the Company’s global presence
· Irwin D. Simon appointed as independent chair of Aphria’s Board of Directors in December 2018 and Interim CEO in March 2019
· Signed agreements to supply every Canadian province and the Yukon Territory, securing access to 99.8% of Canadians

  

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APHRIA INC.

Management’s Discussion & Analysis

 

· Successfully divested of all US cannabis assets 1 , and listed on the NYSE
· Completed first shipments in the Canadian adult-use market
· Bought deal equity financing closed during the year for net proceeds of over $245,000

1 In accordance with requirement to list on the NYSE.

 

FAIR VALUE MEASUREMENTS

 

Impact of fair value metrics on biological assets and inventory

 

In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the twelfth week of growth for Aphria One and ninth week of growth for Broken Coast. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation of the fair value of the plant. At the time of harvest, the Company increases the carrying value of the harvested produce to its full fair value less costs to sell.

 

As at May 31, 2019, the Company’s harvested cannabis and cannabis oil, as detailed in Note 6, and biological assets, as detailed in Note 7 of its financial statements, are as follows:

 

    May 31,
2019
    February 28,
2019
 
Harvested cannabis - at cost   $ 10,039     $ 8,977  
Harvested cannabis - fair value increment     13,214       10,278  
Harvested cannabis trim - at cost     2,830       1,838  
Harvested cannabis trim - fair value increment     2,959       2,112  
Cannabis oil - at cost     11,300       11,168  
Cannabis oil - fair value increment     8,301       7,304  
Softgel capsules - at cost     422       378  
Softgel capsules - fair value increment     342       273  
Biological assets - at cost     13,430       4,939  
Biological assets - fair value increment     5,295       2,322  
Cannabis products - at fair value   $ 68,132     $ 49,589  

 

In an effort to increase transparency, Aphria One’s biological assets are carried at cost plus fair value increments of $0.44, $0.88, $1.32 and $1.76 per gram for weeks 13, 14, 15 and 16, respectively. Broken Coast’s biological assets are carried at cost plus fair value increments of $0.73, $1.46, $2.19 and $2.92 per gram for weeks 10, 11, 12 and 13 respectively. Harvested cannabis and harvested cannabis trim are carried at fair values of $3.50 per gram and $2.75 per gram, respectively (February 28, 2019 - $3.50 and $2.75) for greenhouse produced cannabis. Harvested cannabis and harvested cannabis trim are carried at fair values of $4.00 per gram, $3.25 per gram, respectively (February 28, 2019 - $4.00 and $3.25) for indoor produced cannabis. Cannabis oil and softgel capsules include the relative fair value based on the amount of harvested cannabis or harvested cannabis trim used in the production of each product.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The individual components of fair values are as follows:

 

    May 31,
2019
    February 28,
2019
 
Harvested cannabis - at cost - per gram   $ 1.59     $ 1.72  
Harvested cannabis - fair value increment - per gram   $ 1.97     $ 1.97  
Harvested cannabis trim - at cost - per gram   $ 1.48     $ 1.42  
Harvested cannabis trim - fair value increment - per gram   $ 1.55     $ 1.63  
Cannabis oil - at cost - per mL   $ 0.40     $ 0.48  
Cannabis oil - fair value increment - per mL   $ 0.29     $ 0.31  
Softgel capsules - at cost - per mL   $ 0.43     $ 0.45  
Softgel capsules - fair value increment - per mL   $ 0.35     $ 0.33  

 

COST PER GRAM

 

Calculation of “all-in” costs of sales of dried cannabis per gram

 

The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:

 

    Year ended     Three months ended  
"All-in" cost of sales of dried cannabis per gram   May 31,
2019
    May 31,
2019
    February 28,
2019
 
                   
Production costs   $ 35,548     $ 13,333     $ 7,803  
Less:                        
Cost of accessories   $ (142 )   $ (7 )   $ (22 )
Cannabis oil conversion costs   $ (1,682 )   $ (250 )   $ (238 )
Disposal of plants   $ (979 )   $     $  
Adjusted "All-in" cost of sales of dried cannabis   $ 32,745     $ 13,076     $ 7,543  
Gram equivalents sold during the quarter     13,397,958       5,574,298       2,636,519  
"All-in" cost of sales of dried cannabis per gram   $ 2.44     $ 2.35     $ 2.86  

 

During the quarter, the Company identified selling costs previously reported as distribution costs and included as part of the “all-in” cost of sales of dried cannabis per gram. The Company has reclassified these costs in the current quarter to selling marketing and promotion, and adjusted the prior quarter to remove the $2,372 previously included in distribution costs. This reduced the “all-in” cost of sale of dried cannabis per gram from $3.76 to $2.86.

 

The Company recognized a temporary increase in the “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram as a result of the allocation of production space in the Part III expansion to mother and vegetative plants for the Part IV and Part V and the Aphria Diamond expansions. This increased the “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram by an estimated $0.20. The Company received Health Canada approval for the Part IV and Part V expansions in March 2019. The Company expects a temporary increase in the “all-in” cost of sale of dried cannabis per gram and cash costs to produce dried cannabis per gram until the Aphria Diamond expansion is fully planted.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Calculation of cash costs to produce dried cannabis per gram

 

The Company calculates cash costs to produce dried cannabis per gram as follows:

 

    Year ended     Three months ended  
Cash costs to produce dried cannabis per gram   May 31,
2019
    May 31,
2019
    February 28,
2019
 
                   
Adjusted "All-in" cost of sales of dried cannabis   $ 32,745     $ 13,076     $ 7,543  
Less:                        
Amortization   $ (4,133 )   $ (1,812 )   $ (788 )
Packaging costs   $ (6,446 )   $ (2,813 )   $ (1,354 )
Distribution costs   $ (3,836 )   $ (912 )   $ (1,486 )
Cash costs to produce dried cannabis   $ 18,330     $ 7,539     $ 3,915  
Gram equivalents sold during the quarter     13,397,958       5,574,298       2,636,519  
Cash costs to produce per gram   $ 1.37     $ 1.35     $ 1.48  

 

Results of Operations

 

Net revenue

 

During the three months ended May 31, 2019 the Company recognized $128,568 versus $12,026 in the same period of the prior year and $73,582 in the third quarter of fiscal 2019, representing an increase of 969.08% from the prior year and a 74.73% increase from the prior quarter. Included in net revenue for the three months ended May 31, 2019 is $33,532 of revenue from cannabis produced, $(4,924) of excise taxes, $99,186 of distribution revenue and $774 of other revenue.

 

Net Revenue for the year ended May 31, 2019 was $237,110 versus $36,917 in the same period of the prior year, representing a 542.28% increase. Included in net revenue for the year ended May 31, 2019 is $86,348 of revenue from cannabis produced, $(10,204) of excise taxes, $157,931 of distribution revenue and $3,035 of other revenue.

 

Distribution revenue

 

Included in distribution revenue is $96,904 and $152,949 of revenue from CC Pharma, and $2,119 and $4,819 of revenue from other distribution companies for the three months and year ended May 31, 2019 respectively. These companies were acquired during the year, therefore did not produce revenue for the company in the prior year.

 

Also included in distribution revenue is $163 of CBD based products sold through the German market for the three months ended May 31, 2019 and year ended May 31, 2019.

 

Revenue from cannabis produced

 

    Year ended     Three months ended  
Revenue from cannabis produced   May 31,
2019
    May 31,
2019
    February 28,
2019
 
                   
Revenue from medical cannabis produced   $ 43,662     $ 10,855     $ 10,649  
Revenue from adult-use cannabis produced   $ 36,948     $ 18,506     $ 7,185  
Wholesale cannabis revenue   $ 5,738     $ 4,171     $ 28  
Revenue from cannabis produced   $ 86,348     $ 33,532     $ 17,862  

 

Gross revenue from medical cannabis produced

 

Revenue from medical cannabis produced for the three months ended May 31, 2019 was $10,855 versus $11,770 in the same period of the prior year and $10,649 in the third quarter of fiscal 2019, representing a decrease of 7.77% from the prior year and an 1.93% increase from the prior quarter.

 

Revenue from medical cannabis produced for the year ended May 31, 2019 was $43,662 versus $31,713 in the same period of the prior year, representing a 37.68% increase.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The increase in revenue from medical cannabis produced during the quarter from the prior quarter was related to:

 

· Increase in the medical cannabis sales by 143,124 gram equivalents to 1,417,292 gram equivalents sold in the current quarter, compared to 1,274,168 gram equivalents sold in the prior quarter;

 

These factors were partially offset by:

 

· Decrease in the average retail selling price (excluding wholesale) before excise taxes to medical patients during the quarter from $8.03 to $7.66. Decrease in selling price is a result of a higher percentage of total medical sales coming from Aphria.

 

Gross revenue from adult-use cannabis produced

 

Revenue from adult-use cannabis produced for the three months ended May 31, 2019 was $18,506 versus $nil in the same period of the prior year and $7,185 in the third quarter of fiscal 2019, representing an increase of 157.56% from the prior quarter.

 

Revenue from adult-use cannabis produced for the year ended May 31, 2019 was $36,948 versus $nil in the prior year.

 

The increase in revenue from adult-use cannabis produced during the quarter from the prior quarter was related to:

 

· Increase in the adult-use cannabis sales by 1,899,220 gram equivalents to 3,228,597 gram equivalents sold in the current quarter, compared to 1,329,377 gram equivalents sold in the prior quarter; and
· Increase in the average selling price before excise taxes to the adult-use market from $5.14 to $5.73.

 

Wholesale cannabis revenue

 

Revenue from wholesale cannabis produced for the three months ended May 31, 2019 was $4,171 versus $256 in the same period of the prior year and $28 in the third quarter of fiscal 2019. During the quarter, the Company took advantage of large inventory quantities of cannabis resin and wholesaled them to other licensed producers. In addition, the Company began shipments to Alefia Health Inc. under its wholesale supply agreement.

 

Revenue from wholesale cannabis produced for the year ended May 31, 2019 was $5,738 versus $5,204 in the prior year.

 

Gross profit and gross margin

 

The gross profit for the three months ended May 31, 2019 was $36,007, compared to $18,212 in the same quarter in the prior year and $19,667 in the previous quarter. The increase in gross profit from the prior year and prior quarter is a result of the inclusion of the distribution revenue from the acquisition of CC Pharma and ABP, the increase in revenue from cannabis produced and the increase in the net fair value adjustment for biological assets.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

    Year ended     Three months ended  
    May 31,
2019
    May 31,
2019
    February 28,
2019
 
                   
Revenue from cannabis produced   $ 86,348     $ 33,532     $ 17,862  
Distribution revenue     157,931       99,186       57,599  
Other revenue     3,035       774       545  
Excise taxes     (10,204 )     (4,924 )     (2,424 )
                         
Net revenue     237,110       128,568       73,582  
                         
Production costs     35,548       13,443       7,803  
Cost of goods purchased     138,126       86,912       49,745  
Other costs of sales     898       28       296  
                         
Gross profit before fair value adjustments     62,538       28,185       15,738  
                         
Fair value adjustment on sale of inventory     27,724       9,649       5,542  
Fair value adjustment on growth of biological assets     (40,607 )     (17,471 )     (9,471 )
      (12,883 )     (7,822 )     (3,929 )
                         
Gross profit   $ 75,421     $ 36,007     $ 19,667  
Gross margin     31.8 %     28.0 %     26.7 %

 

Cost of sales currently consist of four main categories: (i) production costs and, (ii) cost of goods purchased, (iii) fair value adjustment on sale of inventory and (iv) fair value adjustment on growth of biological assets:

 

(i) Production costs include all direct and indirect costs of production, related to cannabis sold. This includes costs relating to growing, cultivation and harvesting, stringent quality assurance and quality control, cannabis oil processing, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of cannabis. All cannabis shipped and sold by Aphria has been grown and produced by the Company.


(ii) Cost of goods purchased consist of items purchased for resale through the Company’s distribution businesses which are run through its subsidiaries ABP and CC Pharma.

 

(iii) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of inventory sold in the period.

 

(iv) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of biological assets (cannabis) produced in the period. In an effort to increase transparency, inventory of harvested cannabis (Note 6 – Consolidated financial statements for the year ended May 31, 2019) consists of harvested cannabis and harvested cannabis trim to be $3.50 and $2.75 per gram respectively, for greenhouse produced cannabis and $4.00 and $3.25 per gram respectively, for indoor produced cannabis.

 

Management believes that the different components of net revenue and cost of sale included in the gross profit and gross margin can be confusing. Accordingly, management believes the use of cannabis gross profit, cannabis gross margin, distribution gross profit and distribution gross margin provides a better representation of performance of the Company’s different types of operations because it excludes non-cash fair value adjustments required by IFRS.

 

    Page | 20

 

APHRIA INC.

Management’s Discussion & Analysis

 

Cannabis gross profit, cannabis gross margin, distribution gross profit and distribution gross margin are non-GAAP financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.

 

The following is the Company’s cannabis gross profit and cannabis gross margin as compared to IFRS for the three months ended May 31, 2019:

 

    Three months ended
May 31, 2019
(IFRS)
    Adjustments     Three months ended
May 31, 2019
(Adjusted)
 
                   
Revenue from cannabis produced   $ 33,532     $     $ 33,532  
Distribution revenue     99,186       (99,186 )      
Other revenue     774       (774 )      
Excise taxes     (4,924 )           (4,924 )
                         
Net revenue     128,568       (99,960 )     28,608  
                         
Production costs     13,443             13,443  
Cost of goods purchased     86,912       (86,912 )      
Other costs of sales     28       (28 )      
Fair value adjustment on sale of inventory     9,649       (9,649 )      
Fair value adjustment on biological assets     (17,471 )     17,471        
      92,561       (79,118 )     13,443  
                         
Cannabis gross profit   $ 36,007     $ (20,842 )   $ 15,165  
Cannabis gross margin     28.0 %             53.0 %

 

The following is the Company’s distribution gross profit and distribution gross margin as compared to IFRS for the three months ended May 31, 2019:

 

    Three months ended
May 31, 2019
(IFRS)
    Adjustments     Three months ended
May 31, 2019
(Adjusted)
 
                   
Revenue from cannabis produced   $ 33,532     $ (33,532 )   $  
Distribution revenue     99,186             99,186  
Other revenue     774       (774 )      
Excise taxes     (4,924 )     4,924        
                         
Net revenue     128,568       (29,382 )     99,186  
                         
Production costs     11,071       (11,071 )      
Cost of goods purchased     86,912             86,912  
Other costs of sales     28       (28 )      
Fair value adjustment on sale of inventory     9,649       (9,649 )      
Fair value adjustment on biological assets     (17,471 )     17,471        
      90,189       (3,277 )     86,912  
                         
Distribution gross profit   $ 38,379     $ (26,105 )   $ 12,274  
Distribution gross margin     29.9 %             12.4 %

 

The gross profit for the year ended May 31, 2019 was $75,421, compared to $40,887 in the same period of the prior year. The increase in gross profit for the year ended May 31, 2019 are consistent with the reasons for the increase in gross profit for the three months ended May 31, 2019.

 

    Page | 21

 

APHRIA INC.

Management’s Discussion & Analysis

 

The following is the Company’s cannabis gross profit and cannabis gross margin as compared to IFRS for the year ended May 31, 2019:

 

    Year ended
May 31, 2019
(IFRS)
    Adjustments     Year ended May 31,
2019 (Adjusted)
 
                   
Revenue from cannabis produced   $ 86,348     $     $ 86,348  
Distribution revenue     157,931       (157,931 )      
Other revenue     3,035       (3,035 )      
Excise taxes     (10,204 )           (10,204 )
                         
Net revenue     237,110       (160,966 )     76,144  
                         
Production costs     35,548             35,548  
Cost of goods purchased     138,126       (138,126 )      
Other costs of sales     898       (898 )      
Fair value adjustment on sale of inventory     27,724       (27,724 )      
Fair value adjustment on biological assets     (40,607 )     40,607        
      161,689       (126,141 )     35,548  

                       
Cannabis gross profit   $ 75,421     $ (34,825 )   $ 40,596  
Cannabis gross margin     31.8 %             53.3 %

 

The following is the Company’s distribution gross profit and distribution gross margin as compared to IFRS for the year ended May 31, 2019:

 

    Year ended
May 31, 2019
(IFRS)
    Adjustments     Year ended May 31,
2019 (Adjusted)
 
                   
Revenue from cannabis produced   $ 86,348     $ (86,348 )   $  
Distribution revenue     157,931             157,931  
Other revenue     3,035       (3,035 )      
Excise taxes     (10,204 )     10,204        
                         
Net revenue     237,110       (79,179 )     157,931  
                         
Production costs     35,548       (35,548 )      
Cost of goods purchased     138,126             138,126  
Other costs of sales     898       (898 )      
Fair value adjustment on sale of inventory     27,724       (27,724 )      
Fair value adjustment on biological assets     (40,607 )     40,607        
      161,689       (23,563 )     138,126  

 

                       
Distribution gross profit   $ 75,421     $ (55,616 )   $ 19,805  
Distribution gross margin     31.8 %             12.5 %

  

    Page | 22

 

APHRIA INC.

Management’s Discussion & Analysis

 

Selling, general and administrative costs

 

    Three months ended     For the year ended  
    May 31,     May 31,  
    2019     2018     2019     2018  
General and administrative   $ 26,191     $ 7,399     $ 69,752     $ 13,901  
Share-based compensation     3,084       7,206       26,080       17,874  
Selling, marketing and promotion     7,946       4,115       27,971       11,873  
Amortization     4,528       2,715       14,084       3,985  
Research and development     294       210       1,391       490  
Impairment                 58,039        
Transaction costs     20,329       939       23,259       5,192  
    $ 62,372     $ 22,584     $ 220,576     $ 53,315  

 

Selling, general and administrative expenses are comprised of general and administrative, share-based compensation, selling, marketing and promotion, amortization, research and development, impairment, and transaction costs. These costs increased by $39,788 to $62,372 from $22,584 in the same quarter in the prior year.

 

General and administrative costs

 

    Three months ended     For the year ended  
    May 31,     May 31,  
    2019     2018     2019     2018  
Executive compensation   $ 2,156     $ 567     $ 5,821     $ 1,794  
Consulting fees     2,700       944       6,517       1,154  
Office and general     5,026       1,622       16,511       3,166  
Professional fees     6,086       1,589       11,790       2,951  
Salaries and wages     6,375       1,919       19,627       3,295  
Insurance     2,136       185       5,356       396  
Travel and accomondation     1,358       372       3,116       889  
Rent     354       201       1,014       256  
    $ 26,191     $ 7,399     $ 69,752     $ 13,901  

 

The increase in general and administrative costs during the quarter was largely related to an increase in:

 

· Executive compensation as a result of the increase in director and executive headcount including a new chief information officer, chairman of the board and two additional independent board members for the entire quarter;
· Consulting fees as a result of increased work on corporate development and international initiatives;
· Office and general as a result of increased operations, head count for directors and officers, as well as the inclusion and growth of the Company’s international presence, including $2,082 from CC Pharma;
· Professional fees as a result of increased work on corporate development and international initiatives, increased costs resulting from the increase in size of the Company, as well as expenses related to the special committee review of $800; and
· Salaries and wages, insurance, and travel and accommodation as a result of the introduction of Aphria EMEA, LATAM and CC Pharma activities, increased headcount and other activity within the business over the same period in the prior year.

 

Share-based compensation

 

The Company recognized share-based compensation expense of $3,084 for the three months ended May 31, 2019 compared to $7,206 for the prior year. Share-based compensation was valued using the Black-Scholes valuation model and represents a non-cash expense. The decrease in share-based compensation is a result of a decrease in the deferred share units (“ DSUs ”) and stock options issued in the current period. The Company issued 29,392 DSUs, 197,600 RSUs and 80,000 stock options in the current quarter compared, to 32,000 DSUs, nil RSUs and 1,470,000 stock options in the same period of the prior year. Of the stock options granted in the quarter, nil vested in the quarter. The Company also accrued $187 worth of share based-compensation to be issued in the quarter.

 

    Page | 23

 

APHRIA INC.

Management’s Discussion & Analysis

 

For the year ended May 31, 2019, the Company incurred share-based compensation of $26,080 as opposed to $17,874 for the prior year. The increase in share-based compensation is a result of an increase in stock options vesting. The Company issued 96,833 DSUs, 197,600 RSUs and 3,005,000 stock options in the current year compared to 263,000 DSUs, nil RSUs and 5,123,000 stock options in prior year. Of the stock options granted in the period, 1,266,663 vested in the year.

 

Selling, marketing and promotion costs

 

For the three months ended May 31, 2019, the Company incurred selling, marketing and promotion costs of $7,946, versus $6,948 in the last quarter. The current period costs comprise of $7,706 of cannabis related selling, marketing and promotion or 22.98% of revenue from cannabis produced and $240 of distribution selling marketing and promotion or 0.24% of distribution revenue. These costs relate to general marketing, research and education expenses, patient acquisition and maintenance, call center operations, and shipping costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to perform medical studies as well as support to assist with operating costs incurred by clinics resulting from the education of patients using the Company’s products.

 

For the year ended May 31, 2019, the Company incurred selling, marketing and promotion costs of $27,971, as opposed to $11,873 in the prior year. The current year costs comprise of $26,192 of cannabis related selling, marketing and promotion or 30.33% of revenue from cannabis produced and $1,779 of distribution selling marketing and promotion or 1.13% of distribution revenue. The increase in costs in the year is consistent with the increase in the three-month period as well as additional costs related to developing, advertising and marketing the adult-use brands, prior to the Cannabis Act coming into effect.

 

Amortization

 

The Company incurred non-production related amortization charges of $4,528 for the three months ended May 31, 2019 compared to $2,715 for the same period in the prior year. The increase in amortization charges are a result of the finite-life intangibles acquired as part of the Company’s acquisitions, as well as the assets that have been transferred into use from the capital expenditures incurred in the current and prior fiscal year.

 

The Company incurred amortization charges of $14,084 for the year ended May 31, 2019 compared to $3,985 for the prior year. The increase for the year is consistent with the increase for the three-month period.

 

Research and development

 

Research and development costs of $294, or 0.88% of revenue from cannabis produced were expensed during the three months ended May 31, 2019 compared to $210 in same period last year. These relate to costs associated with the development of new cannabis products. Although the Company spends a significant amount on research and development, the majority of these costs remain in production costs, as the Company does not reclassify research and development costs on products which can still be sold.

 

For the year ended May 31, 2019, the Company incurred research and development costs of $1,391 as opposed to $490 in the prior year.

 

    Page | 24

 

APHRIA INC.

Management’s Discussion & Analysis

 

Impairment

 

During the year ended May 31, 2019, the Company completed its required annual impairment tests. In the prior quarter, the Company recognized impairment charges of $58,039. The Company did not record any impairment changes in the current quarter.

 

Transaction costs

 

Transaction costs of $20,329 were expensed during the three months ended May 31, 2019 compared to $939 in same period last year. These relate to costs associated with the completed convertible debenture financing, fees associated with the review of the hostile bid and various other potential acquisitions the Company has considered and abandoned, or is still considering.

 

For the year ended May 31, 2019, the Company incurred transaction costs of $23,529 as opposed to $5,192 in the prior year.

 

Non-operating income (loss)

 

    Three months ended     For the year ended  
    May 31,     May 31,  
    2019     2018     2019     2018  
Consulting revenue   $     $ 555     $     $ 1,244  
Foreign exchange gain     1,063       55       915       124  
Loss on marketable securities     (27 )     38       (178 )     (2,155 )
Gain (loss) on sale of capital assets     55             55       (191 )
Gain on dilution of ownership in equity investee                 2,210       7,535  
Loss from equity investees     (293 )     (14 )     (1,123 )     (9,295 )
Gain on sale of equity investee                 57,351       26,347  
Deferred gain on sale of intellectual property           604       340       1,304  
Interest income     2,822       1,813       14,350       6,362  
Interest expense     (5,740 )     (334 )     (7,775 )     (1,350 )
Unrealized (loss) gain on convertible notes     (2,312 )     3,559       (3,399 )     4,135  
(Loss) gain on long-term investments     (3,584 )     (13,026 )     19,651       26,675  
Unrealized gain on convertible debentures     48,439             48,439        
Unrealized loss on financial liabilities     (217 )     4,399       (1,326 )     (12,451 )
    $ 40,206     $ (2,351 )   $ 129,510     $ 48,284  

 

For the three months ended May 31, 2019, the Company recognized an unrealized gain on convertible debentures of $48,439, resulting from the change in fair value of the outstanding convertible debentures. The Company also realized a gain of $4,390 on the sale of the investment in GA Opportunities Corp. in the quarter offset by unrealized losses from the changes in fair value of the long-term investments and convertible notes.

 

For the year ended May 31, 2019, the Company recognized a gain on long-term investment of $19,651 and a gain on sale of equity investee of 57,351, and an unrealized gain on convertible debentures of $48,439.

 

Net income (loss)

 

The Company recorded net income for the three months ended May 31, 2019 of $15,760 or $0.05 per share as opposed to net loss of $(4,992) or $(0.04) per share in the prior year.

 

    Page | 25

 

APHRIA INC.

Management’s Discussion & Analysis

 

The Company recorded net loss for the year ended May 31, 2019 of $(16,499) of $(0.07) per share as opposed to net income of $29,449 or $0.18 per share in the prior year.

  

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net income (loss), plus (minus) income taxes (recovery), 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, and certain one-time non-operating expenses, as determined by management, all as follows:

 

    Three months ended     For the year ended  
    May 31,     May 31,  
    2019     2018     2019     2018  
Net income (loss)   $ 15,760     $ (4,992 )   $ (16,499 )   $ 29,448  
Income taxes (recovery)     453       (1,731 )     854       6,408  
Non-operating (income) loss     (40,206 )     2,351       (129,510 )     (48,284 )
Amortization     8,611       3,809       22,940       6,678  
Share-based compensation     3,084       7,206       26,080       17,874  
Fair value adjustment on sale of inventory     9,649       3,077       27,724       10,327  
Fair value adjustment on growth of biological assets     (17,471 )     (11,821 )     (40,607 )     (23,302 )
Impairment                 58,039        
Transaction costs     20,329       939       23,259       5,192  
Adjusted EBITDA from businesses under development     5,514       2,834       16,240       2,834  
Adjusted EBITDA from distribution operations     (3,872 )           (6,036 )      
Adjusted EBITDA from cannabis operations   $ 1,851     $ 1,672     $ (17,516 )   $ 7,175  

 

    Three months ended     For the year ended  
    May 31,     May 31,  
    2019     2018     2019     2018  
Adjusted EBITDA from cannabis operations   $ 1,851     $ 1,672     $ (17,516 )   $ 7,175  
Adjusted EBITDA from businesses under development     (5,514 )     (2,834 )     (16,240 )     (2,834 )
Adjusted EBITDA from distribution operations     3,872             6,036        
Adjusted EBITDA   $ 209     $ (1,162 )   $ (27,720 )   $ 4,341  

 

Last year, the Company reported adjusted EBITDA of $2,227 and $8,419 for the three months and year ended May 31, 2018. In a prior quarter, the Company re-assessed the definition of adjusted EBITDA, particularly as it related to presenting a repeatable proxy for cash. As a result, the Company removed the following from EBITDA adjustments from the current periods but also removed from the prior periods for comparison purposes:

 

(i) Consulting revenue in the amount of $555 and $1,244 for the three months and year ended May 31, 2018.

 

    Page | 26

 

APHRIA INC.

Management’s Discussion & Analysis

 

LIQUIDITY and capital resources

 

Cash flow used in operations for the year totaled $55,605, this is an $49,956 increase from $5,649 used in the prior year. The increase in cash flow used in operations is primarily a result of:

 

· Increase in operating cash outflow from developing international operations; and
· Additional cash production costs expensed due to temporary higher packaging and distribution costs.

 

Cash resources / working capital requirements

 

The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at May 31, 2019, Aphria maintained $550,797 of cash and cash equivalents on hand plus $20,199 in liquid marketable securities, compared to $59,737 in cash and cash equivalents plus $45,062 marketable securities at May 31, 2018. Liquid sources of cash increased $466,197 in the quarter.

 

Working capital provides funds for the Company to meet its operational and capital requirements. As at May 31, 2019, the Company maintained working capital of $642,284. Management expects that the Company’s existing cash and cash equivalents balance and cash flow from operations will be adequate to meet the Company’s announced expansion of facilities and operational activities in the next year.

 

Capital and intangible asset expenditures

 

For the year ended May 31, 2019, the Company invested $132,941 in capital and intangible assets through wholly owned subsidiaries, exclusive of business acquisitions, of which $12,015 are considered maintenance CAPEX and the remaining $120,926 growth CAPEX related to Extraction Centre of Excellence, Aphria One’s Part IV and Part V expansions.

 

For the year ended May 31, 2019, the Company invested $73,024 in capital and intangible assets through majority owned subsidiaries, of which $17 are considered maintenance CAPEX and the remaining $73,007 growth CAPEX.

 

Financial covenants

 

The Company was in breach of its debt service ratio loan covenant for the year, however obtained a waiver from calling the loan from this breach prior to year-end, and expects to meet the covenant in the next year. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants during this period.

 

Contractual obligations and off-balance sheet financing

 

The Company has a lease for rental office space from December 2018 until November 30, 2028.

 

Minimum payments payable over the next five years are as follows:

 

  Payments due by period
    Total     Less than 1
year
    1 - 3 years     4 - 5 years     After 5 years  
Outstanding capital related commitments   $ 49,878     $ 49,878     $     $     $  
Operating leases     5,596       811       1,694       1,378       1,713  
Long-term debt     67,343       6,332       12,538       12,378       36,095  
Total   $ 122,817     $ 57,021     $ 14,232     $ 13,756     $ 37,808  

 

Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the year-to-date period.

 

    Page | 27

 

APHRIA INC.

Management’s Discussion & Analysis

 

Contingencies

 

From time to time, the Company and/or its subsidiaries may become defendants in legal actions arising out of the ordinary course and conduct of its business.

 

As of May 31, 2019, the Company was served statements of claims in class action lawsuits against the Company and certain of its officers and former officers. These claims relate to alleged misconduct in connection with the Company’s acquisitions of LATAM Holdings Inc. (“LATAM”) and Nuuvera Inc., and the Company’s June 2018 securities offering. At the present time, the representative claimants have been identified and selected in both the U.S. and Canada. The U.S. claims include alleged violations of Section 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act and Section 20(a) of the Exchange Act. The Canadian claims include alleged statutory and common law misrepresentation and oppression. The Company intends to vigorously defend itself in each of these actions. With respect to the cases commenced in the United States, the Company is self-insured for the costs associated with any award or damages arising from such actions and has entered into indemnity agreements with each of the directors and officers and, subject to certain exemptions, will cover any costs incurred by them in connection with any of the class action claims. With respect to the cases commenced in Canada, the Company’s insurance policies may not be sufficient to cover any judgments against the Company. As at May 31, 2019, the Company has not recorded any uninsured amount related to this contingency.

 

Share capital

 

Aphria has the following securities issued and outstanding, as at July 31, 2019:

 

   

Presently

outstanding

    Exercisable    

Exercisable

& in-the-
money

    Fully
diluted
 
Common stock     251,039,120                   251,039,120  
Warrants     2,292,800       2,292,800       998,997       998,997  
Stock options     7,981,664       4,841,633       1,835,640       1,835,640  
Restricted share units     195,100       117,500       117,500       117,500  
Deferred share units     91,958                    
Convertible debentures     37,297,540       37,297,540              
Fully diluted                             253,873,757  

 

* Based on closing price on July 31, 2019

 

Quarterly results

 

The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the fourth quarter of fiscal 2019, ended May 31, 2019. The information has been derived from the Company’s unaudited consolidated financial statements, which in management’s opinion, have been prepared on a basis consistent with the audited consolidated financial statements filed in the Company’s 2019 Annual Report and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.

 

    Aug/18     Nov/18     Feb/19     May/19  
Net revenue   $ 13,292     $ 21,668     $ 73,582     $ 128,568  
Net income (loss)     21,176       54,774       (108,209 )     15,760  
Earnings (loss) per share - basic     0.09       0.22       (0.43 )     0.05  
Earnings (loss) per share - fully diluted     0.09       0.22       (0.43 )     0.05  

 

    Aug/17     Nov/17     Feb/18     May/18  
Net revenue   $ 6,120     $ 8,504     $ 10,267     $ 12,026  
Net income (loss)     15,041       6,455       12,944       (4,992 )
Earnings (loss) per share - basic     0.11       0.05       0.08       (0.06 )
Income (loss) per share - fully diluted     0.10       0.04       0.08       (0.04 )

 

    Page | 28

 

APHRIA INC.

Management’s Discussion & Analysis

 

related party balances and transactions

 

During the prior quarter, the Company disposed of its remaining shares in Liberty Health Sciences Inc. (“Liberty”).

 

The Company previously funded a portion of the Canadian operating costs of Liberty, for which Liberty reimbursed the Company quarterly. Liberty was considered a related party because certain officers and directors of Aphria were directors of Liberty. During the quarter, those directors resigned from Liberty’s board and the Company ceased its relationship with Liberty.

 

The Company purchased certain electrical generation equipment from and pays rent to a company owned by a former director. During the year ended May 31, 2019, the director resigned his officer and director position with the Company.

 

During the year ended May 31, 2019, the Company appointed Mr. Irwin Simon as Interim CEO and Chair of the Board. Mr. Simon’s compensation for the combined role is $1,100 annually, paid on a full-time consultancy basis. On February 24, 2019, the Board of Aphria declared, in accordance with the Omnibus Incentive Plan, 1,000,000 stock options and 25,000 restricted share units to Mr. Simon, which vested immediately.

 

During the year ended May 31, 2019 certain officers and non-independent directors retired from the Company. No amounts were paid to the retired officers and directors as part of their retirement. In addition, compensation for the Board of Directors were amended to a flat-fee $300 annually, with $150 paid in cash and $150 in Deferred Share Units under the Company’s Omnibus Plan each, plus a one-time award of 7,500 Restricted Share Units each.

 

CORPORATE POSITION ON CONDUCTING BUSINESS IN THE UNITED STATES AND OTHER INTERNATIONAL JURISDICTIONS WHERE CANNABIS IS FEDERALLY ILLEGAL

 

 

As cannabis is currently federally illegal in the U.S., The Company does not engage in any U.S. cannabis related activities as defined in Canadian Securities Administrators Staff Notice 51-352 (Revised). While the Company has historically held certain interests in U.S. cannabis related activities as at the date of this MD&A, it has divested 1 itself of all such interests. The Company will only conduct business activities related to growing or processing cannabis, in jurisdictions where it is federally legal to do so.

 

1 In accordance with existing TSX precedent.

 

    Page | 29

 

APHRIA INC.

Management’s Discussion & Analysis  

 

INDUSTRY TRENDS AND RISKS

 

There are a number of risk factors that could cause future results to differ materially from those described herein. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of the following risks actually occur, the Company’s business may be harmed and its financial condition and results of operations may suffer significantly.

 

Risks Related to the Company’s Business and the Cannabis Industry

 

Reliance on Licence

 

The Company’s ability to cultivate, store and sell cannabis and cannabis oil in Canada is dependent on maintaining its licence with Health Canada and licences through its various subsidiaries. Failure to comply with the requirements of the licence or any subsidiary licence or any failure to maintain its licence or any subsidiary licence may have a material adverse impact on the business, financial condition and operations. There can be no guarantees that Health Canada will extend or renew the licence as necessary or, if it extended or renewed, that the licence will be extended or renewed on the same or similar terms. Should Health Canada not extend or renew the licence or should it renew the licence on different terms, the business, financial condition and results of the operation of the Company may be materially adversely affected.

  

Expansion Strategy

 

There is no guarantee that the Company’s expansion strategy (including receiving the expected Health Canada approvals in a timely fashion, if at all) will be completed in the currently proposed form, if at all, nor is there any guarantee that the Company will be able to expand into additional jurisdictions. There is also no guarantee that the Company’s intentions to acquire and/or construct additional cannabis production and manufacturing facilities in Canada and in other jurisdictions with federally legal cannabis markets, and to expand the Company’s marketing and sales initiatives will be successful. Any such activities will require, among other things, various regulatory approvals, licences and permits (such as additional licences from Health Canada under the Cannabis Act, as applicable) and there is no guarantee that all required approvals, licences and permits will be obtained in a timely fashion or at all. There is also no guarantee that the Company will be able to complete any of the foregoing activities as anticipated or at all.

 

The Company’s failure to successfully execute its international expansion strategy (including receiving required regulatory approvals, licences and permits) could adversely affect the Company’s business, financial condition and results of operations and may result in the Company failing to meet anticipated or future demand for its cannabis products, when and if it arises.

 

The Company’s expansion into jurisdictions outside of Canada is subject to additional business risks, including new or unexpected risks or could significantly increase the Company’s exposure to one or more existing risk factors, including economic instability, changes in laws and regulations and the effects of competition. In addition, international expansion could subject the Company’s business to certain risks relating to fluctuating exchange rates or require a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. These factors may limit the Company’s ability to successfully expand its operations into such jurisdictions and may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Highly Regulated Industry

 

The laws, regulations and guidelines generally applicable to the cannabis industry domestically and internationally may change in ways currently unforeseen. The Company’s operations are subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage, sale, health and safety and disposal of cannabis, including the Cannabis Act, any regulations thereunder and applicable stock exchange rules and regulations. Any amendment to or replacement of existing laws may cause adverse effects to the Company’s operations. The risks to the Company’s business represented by subsequent regulatory changes could reduce the addressable market for the Company’s products and could materially and adversely affect the Company’s business, financial condition, results of operations and prospects. To the knowledge of management, other than make routine corrections that may be required by Health Canada from time to time, the Company is currently in compliance with all such laws. Achievement of the Company’s business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and, where necessary, obtaining regulatory approvals. The impact of Health Canada’s compliance regime, any delays in obtaining, or failure to obtain regulatory approvals required may significantly delay or impact the development of the Company’s business and operations, and could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects. Any potential non-compliance could cause the Company’s business, financial condition, results of operations and prospects to be adversely affected. Further, any amendment to or replacement of the Cannabis Act and other applicable rules and regulations governing the Company’s business activities may cause adverse effects on the Company’s business, financial conditions and results of operations. The risks to the Company’s business associated with the decision to amend or replace the Cannabis Act, and subsequent regulatory changes, could reduce the addressable market for the Company’s products and could materially and adversely affect the Company’s business, financial condition, results of operations and prospects.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The Company will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with applicable laws and regulations could subject the Company to regulatory or agency proceedings or investigations and may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include damage awards, fines, penalties or corrective measures requiring capital expenditures or remedial actions. Parties may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation and no assurance can be given that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources. Amendments to current laws, regulations and permitting requirements, or more stringent application of existing laws or regulations, may have a material adverse impact on the Company’s business, resulting in increased capital expenditures or production costs, reduced levels of cannabis production or abandonment or delays in the development of facilities.

 

Health Canada inspectors routinely assess the Company’s facilities against the Cannabis Act and its regulations and provide the Company with follow up reports noting observed deficiencies. The Company is continuously reviewing and enhancing its operational procedures and facilities both proactively and in response to routine inspections. The Company follows all regulatory corrections in response to inspections in a timely manner. If the Company fails to comply with applicable laws, regulations and guidelines, the Company may incur additional costs or penalties, or the Company’s operations may be restricted or shut down.

 

In addition, the introduction of new tax laws, regulations or rules, or changes to, or differing interpretation of, or application of, existing tax laws, regulations or rules in Canada or any of the jurisdictions in which the Company operates could result in an increase in taxes, or other governmental charges, duties or impositions. No assurance can be given that new tax laws, regulations or rules will not be enacted or that existing tax laws, regulations or rules will not be changed, interpreted or applied in a manner which could result in the Company’s profits being subject to additional taxation or which could otherwise have a material adverse effect. Due to the complexity and nature of the Company’s operations, various legal and tax matters may be outstanding from time to time. If the Company is unable to resolve any of these matters favorably, it may have a material adverse effect on the Company.

 

Licence Application in Respect of Aphria Diamond May Not be Successful

 

There is no guarantee that Health Canada will approve the Aphria Diamond licence application in a timely fashion, if at all. The Company’s failure to successfully execute the licence application (including receiving the Health Canada approvals in a timely fashion, if at all) could adversely affect the Company’s business, financial condition and results of operations, and may result in the Company not meeting anticipated or future demand when it arises.

 

Laws and Regulations Governing Cannabis in Foreign Jurisdictions

 

The Company’s ability to achieve its business objectives in foreign jurisdictions is contingent, in part, upon its compliance with regulatory requirements enacted by governmental authorities and the Company obtaining all regulatory approvals, where necessary, for the sale of its products. The Company cannot predict the impact of the compliance regime countries such as Germany, Italy, Lesotho, Malta, Colombia, Argentina or Jamaica are implementing and the method in which their governmental authorities will implement the adult-use or medical cannabis industry. Similarly, the Company cannot predict how long it will take to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. The impact of the various compliance regimes, any delays in obtaining, or failure to obtain regulatory approvals may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

The Company currently incurs and will continue to incur ongoing costs and obligations related to regulatory compliance. A failure on the Company’s part to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions on its operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

Foreign Investment in Cannabis Companies

 

Certain jurisdictions may prohibit or restrict its citizens or residents from investing in or transacting with companies involved in the cannabis industry, even if such companies only conduct business in jurisdictions where cannabis is legal. For example, if an investor in the United Kingdom profits from an investment in a cannabis producer or supplier, such investment may technically violate the United Kingdom Proceeds of Crime Act 2002. Similar prohibitions or restrictions may apply in other jurisdictions where cannabis has not been legalized. In the United States, there have been certain instances of U.S. Customs and Border Protection preventing citizens of foreign countries from entering the United States for reasons related to the cannabis industry.

 

Operations in Foreign Jurisdictions

 

The Company has operations in various emerging markets and may have operations in additional emerging markets in the future. Such operations expose the Company to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates, military repression; war or civil war; social and labor unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licences, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, banking and currency controls and governmental regulations that favor or require us to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction.

 

Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in cannabis industry or investment policies or shifts in political attitude in the countries in which the Company operates may adversely affect its operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of concessions, licences, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licences, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.

 

The Company continues to monitor developments and policies in the emerging markets in which it operates and assess the impact thereof to our operations; however, such developments cannot be accurately predicted and could have an adverse effect on the Company’s business, financial condition and results of operations.

 

Corruption and Fraud in Emerging Markets

 

There are uncertainties, corruption and fraud relating to title ownership of real property in certain emerging markets in which the Company operates or may operate. Property disputes over title ownership are frequent in emerging markets, and, as a result, there is a risk that errors, fraud or challenges could adversely affect the Company’s ability to operate in such jurisdictions. Any of the foregoing risks and uncertainties could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Inflation in Emerging Markets

 

In the past, high levels of inflation have adversely affected emerging economies and financial markets, and the ability of government to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. The emerging markets in which the Company operates or may operate may experience high levels of inflation in the future. Inflationary pressures may weaken investor confidence in such countries and lead to further government intervention in the economy. If countries in which the Company operates experience high levels of inflation in the future and/or price controls are imposed, the Company may not be able to adjust the rates the Company charges its customers to fully offset the impact of inflation on the Company’s cost structures, which could adversely affect the Company’s business, financial condition and results of operations.

 

Acquisition or Use of Properties in Foreign Jurisdictions

 

Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which the Company operates in certain countries. Accordingly, the Company’s current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and the Company’s ownership or access rights in respect of any property it owns or leases in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

 

International Expansion

 

In addition to the jurisdictions described elsewhere in this Annual Information Form, the Company may in the future expand into other geographic areas, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. the Company may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with the Company’s existing operations.

 

Reliance on International Advisors and Consultants

 

The legal and regulatory requirements in the foreign countries in which the Company operates or will operate with respect to the cultivation and sale of cannabis, banking systems and controls, as well as local business culture and practices are different from those in Canada. The Company must rely, to a great extent, on local legal counsel, consultants and advisors retained by it in order to keep apprised of legal, regulatory and governmental developments as they pertain to and affect the Company’s business, and to assist the Company with its governmental relations. The Company must rely, to some extent, on those members of management and the Board who have previous experience working and conducting business in these countries, if any, in order to enhance its understanding of and appreciation for the local business culture and practices. The Company also relies on the advice of local experts and professionals in connection with current and new regulations that develop in respect of the cultivation and sale of cannabis as well as in respect of banking, financing, labour, litigation and tax matters in these jurisdictions. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices are beyond the Company’s control. The impact of any such changes may adversely affect the Company’s business, financial condition and results of operations.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Anti-Money Laundering Laws and Regulation Risks

 

The Company is subject to a variety of domestic and international laws and regulations pertaining to money laundering, financial recordkeeping and proceeds of crime, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities internationally.

 

In the event that any of the Company’s operations or investments, any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations or investments were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the Company’s ability to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends in the foreseeable future, in the event that a determination was made that proceeds obtained by the Company could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

 

Corruption and Anti-Bribery Law Violations

 

The Company’s business is subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, the Company is subject to the anti-bribery laws of any other countries in which it conducts business now or in the future. the Company’s employees or other agents may, without its knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and anti-bribery laws for which the Company may be held responsible. the Company’s policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that the Company’s internal control policies and procedures will always protect it from recklessness, fraudulent behaviour, dishonesty or other inappropriate acts committed by its affiliates, employees, contractors or agents. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

 

Legislative or Regulatory Reform and Compliance

 

The commercial cannabis industry is a new industry, and we anticipate that such regulations will be subject to change as the Canadian federal government monitors licencees in action. The Company’s operations are subject to a variety of laws, regulations, guidelines and policies, whether in Canada or elsewhere, relating to the cultivation, manufacture, import, export, management, packaging/labelling, advertising and promotion, sale, transportation, storage and disposal of cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management, the Company is currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the Company’s control may cause adverse effects to the Company’s operations.

 

Environmental Regulations and Risks

 

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

    Page | 34

 

APHRIA INC.

Management’s Discussion & Analysis

 

Government approvals and permits are currently, and may in the future be required in connection with The Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of medical cannabis or from proceeding with the development of its operations as currently proposed.

 

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

Amendments to current laws, regulations and permits governing the production of medical cannabis, or more stringent implementation thereof, could have a material adverse impact on the company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

Risks Inherent in an Agricultural Business

 

The Company’s business involves the growing of medical cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the Company expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.

 

Reliance on a Single Cultivation Facility

 

To date, other than Broken Coast, the Company’s principal activities and resources have been primarily focused on the premises in Leamington, Ontario. The Company expects to continue to focus its operation in this facility for the foreseeable future. Adverse changes or developments affecting the existing facility and location could have a material and adverse effect on the Company’s ability to continue producing cannabis, its business, financial condition and prospects.

 

Third Party Transportation

 

In order for customers of the Company to receive their product, the Company must rely on third party transportation services. This can cause logistical problems with and delays in patients obtaining their orders and cannot be directly controlled by the Company. Any delay by third party transportation services may adversely affect the Company’s financial performance.

 

Moreover, security of the product during transportation to and from the Company’s facilities is critical due to the nature of the product. A breach of security during transport could have material adverse effects on the Company’s business, financials and prospects. Any such breach, including any failure to comply with recommendations or requirements of Health Canada for the transportation of cannabis, could impact the Company’s ability to continue operating under its licences or the prospect of renewing its licences.

 

Reliance on Third Party Suppliers, Manufacturers and Contractors

 

The Company intends to maintain a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the novel regulatory landscape for regulating cannabis in Canada and the variability surrounding the regulation of cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors, including for non-cannabis based products coming from the United States, may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

In addition, any significant interruption, negative change in the availability or economics of the supply chain or increase in the prices for the products or services provided by any such third party suppliers, manufacturers and contractors could materially impact the Company’s business, financial condition, results of operations and prospects. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the Company’s business, financial condition, results of operations and prospects.

 

Reliance on Key Personnel

 

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its executive management. The Company’s future success depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. The loss of the services of member of the Company’s executive management, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all. Currently, the Company’s executive management team is in transition and is led by an interim Chief Executive Officer. The retention of a permanent Chief Executive Officer and other members of the executive team, including a President and a Chief Operating Officer, Chief Commercial Officer, a Chief Medical Officer and Chief Compliance Officer, would distribute the Company’s reliance on executive management among a larger group of qualified individuals. Further, as licencees under the Cannabis Act, the Company’s officers and directors and each member of executive management are subject to a security clearance by Health Canada. There is no assurance that any of the Company’s existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who require a security clearance will be able to obtain one. A failure by a member of the Company’s executive management to maintain or renew his or her security clearance, would result in a material adverse effect on the Company’s business, financial condition and results of operations. In addition, if a member of the Company’s executive management leaves the Company, and the Company is unable to find a suitable replacement that has a security clearance required by the Cannabis Act in a timely manner, or at all, there could occur a material adverse effect on the Company’s business, financial condition and results of operations. While employment agreements are customarily used as a primary method of retaining the services of a member of the Company’s executive management, these agreements cannot assure the continued services of such employees.

 

Limited Operating History

 

The Company, while incorporated in 1994, began carrying on business in 2012 and did not generate revenue from the sale of products until late 2014. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.

 

Product Liability

 

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of the Company’s products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that the Company’s products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company. There can be no assurances that the Company will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products.

 

Product Recalls

 

Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. If any of the Company’s products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. the Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s significant brands were subject to recall, the image of that brand and the Company could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

Wholesale Price Volatility

 

The cannabis industry is a margin-based business in which gross profits depend on the excess of sales prices over costs. Consequently, profitability is sensitive to fluctuations in wholesale and retail prices caused by changes in supply (which itself depends on other factors such as weather, fuel, equipment and labour costs, shipping costs, economic situation and demand), taxes, government programs and policies for the cannabis industry (including price controls and wholesale price restrictions that may be imposed by government agencies responsible for the sale of cannabis), and other market conditions, all of which are factors beyond the control of the Company. The Company’s operating income may be significantly and adversely affected by a decline in the price of cannabis and will be sensitive to changes in the price of cannabis and the overall condition of the cannabis industry, as the Company’s profitability is directly related to the price of cannabis. There is currently not an established market price for cannabis and the price of cannabis is affected by numerous factors beyond the Company’s control. Any price decline may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Results of Future Clinical Research

 

To date, there is limited standardization in the research of the effects of cannabis, and future clinical research studies may lead to conclusions that dispute or conflict with the Company’s understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis. Research in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids (such as CBD and THC) remains in relatively early stages.

 

Future research and clinical trials may draw opposing conclusions to statements in this prospectus or could reach different or negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to cannabis, which could adversely affect social acceptance of cannabis and the demand for the Company’s products.

 

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APHRIA INC.

Management’s Discussion & Analysis

 

Insurance Coverage

 

The Company has insurance to protect its assets, operations, directors and employees in Canada. While the Company believes its insurance coverage addresses all material risks to which it is exposed and is adequate and customary in its current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed. In addition, no assurance can be given that such insurance will be adequate to cover the Company’s liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If the Company were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if the Company were to incur such liability at a time when it is not able to obtain liability insurance, there could be a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company is also currently pursuing additional insurance coverage over its crop, product liability claims and for business interruption. While the Company believes the insurance coverage addresses all material risks to which it is exposed and is adequate and customary in the current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed.

 

Unfavorable Publicity or Consumer Perception

 

The Company believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of cannabis and related products distributed to such consumers. Consumer perception of the Company’s products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Company’s products and the business, results of operations, financial condition and cash flows of the Company. The Company’s dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for the Company’s products, and the business, results of operations, financial condition and cash flows of the Company.

 

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis and related products in general, or the Company’s products specifically, or associating the consumption of cannabis or related products with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regard to the Company and its activities, whether true or not. Although the Company believes that it operates in a manner that is respectful to all stakeholders and that it takes care in protecting its image and reputation, it does not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to the Company’s overall ability to advance its projects, thereby having a material adverse impact on its financial performance, financial condition, cash flows and growth prospects.

 

Reputational Risk to Third Parties

 

The parties outside of the cannabis industry with which the Company does business may perceive that they are exposed to reputational risk as a result of the Company’s cannabis business activities. Failure to establish or maintain business relationships could have a material adverse effect on the Company.

 

    Page | 38

 

APHRIA INC.

Management’s Discussion & Analysis

 

Growth Targets

 

The Company’s ability to continue the cultivation of cannabis products at the same pace as it is currently producing or at all, and the Company’s ability to continue to increase both the Company’s cultivation capacity and the Company’s production, may be affected by a number of factors, including plant design errors, non-performance by third party contractors, increases in materials or labor costs, construction performance falling below expected levels of output or efficiency, environmental pollution, contractor or operator errors, breakdowns, aging or failure of equipment or processes, labor disputes, as well as factors specifically related to indoor agricultural and processing practices, such as reliance on provision of energy and utilities to the facility, and potential impacts of major incidents or catastrophic events on the facility, such as fires, explosions, earthquakes or storms.

 

Additional Financing

 

There is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company ceasing to carry on business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company. In addition, from time to time, the Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may increase the Company’s debt levels above industry standards. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. Debt financings may also contain provisions which, if breached, may entitle lenders or their agents to accelerate repayment of loans and/or realize upon security over the assets of the Company, and there is no assurance that the Company would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to such debt financing.

 

Future Acquisitions or Dispositions

 

Although there is no present intention to undertake any of the following transactions, material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increasing the scope and complexity of the Company’s operations; and (vi) loss or reduction of control over certain of the Company’s assets.

 

The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the results of operations, business prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.

 

Conflicts of Interest

 

The Company may be subject to various potential conflicts of interest because of the fact that some of its officers and directors may be engaged in a range of business activities. The Company’s executive officers and directors may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to Aphria. In some cases, the Company’s executive officers, directors and consultants may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the Company’s operations.

 

    Page | 39

 

APHRIA INC.

Management’s Discussion & Analysis

 

In addition, the Company may also become involved in other transactions which conflict with the interests of its directors and officers who may from time to time deal with persons, firms, institutions or corporations with which the Company may be dealing, or which may be seeking investments similar to those the Company desires. The interests of these persons could conflict with the Company’s interests. In addition, from time to time, these person may be competing with the Company for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the Board, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the Company’s directors are required to act honestly, in good faith and in the Company’s best interests.

 

Litigation

 

From time to time, the Company may become involved in legal proceedings or be subject to claims, some of which arise in the ordinary course of the Company’s business. Litigation is inherently uncertain, and any adverse outcomes could negatively affect the Company’s business, results of operations, financial condition, brand and/or the trading price of its securities. In addition, litigation can involve significant management time and attention and be expensive, regardless of outcome. During the course of litigation, there may be announcements of the results of hearings and motions and other interim developments related to the litigation. If securities analysts or investors regard these announcements as negative, the trading price of the Company’s securities may decline. In addition, the Company evaluates these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, the Company may establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from the Company’s current assessments and estimates.

 

The Company was served statements of claims in class action lawsuits against it and certain of its current and former officers. These claims relate to alleged misconduct in connection with the Company’s acquisitions of LATAM and Nuuvera, and the Company’s June 2018 Offering. At the present time, the Company is aware of five such claims, two of which were commenced in the United States and three of which were commenced in Canada. The U.S. claims include alleged violations of Section 10(b) of the United States Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), Rule 10b 5 under the Exchange Act and Section 20(a) of the Exchange Act. The Canadian claims include alleged statutory and common law misrepresentation and oppression. The Company intends to vigorously defend ourselves in each of these actions. With respect to the cases commenced in the United States, the Company is self-insured for the costs associated with any award or damages arising from such actions and have entered into indemnity agreements with each of the Company’s directors and officers and, subject to certain exemptions, will cover any costs incurred by them in connection with any of the class action claims. With respect to the cases commenced in Canada, the Company’s insurance policies may not be sufficient to cover any judgments against it.

 

Intellectual Property

 

The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as the Company may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the Company’s business, financial condition and results of operations.

 

    Page | 40

 

APHRIA INC.

Management’s Discussion & Analysis

 

In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licences from third parties who allege that the Company has infringed on their lawful rights. However, such licences may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licences or other rights with respect to intellectual property that it does not own.

 

Customer Acquisitions

 

The Company’s success depends on its ability to attract and retain customers. There are many factors which could impact the Company’s ability to attract and retain customers, including but not limited to the Company’s brand awareness, its ability to continually produce desirable and effective cannabis products and the successful implementation of customer-acquisition plans. The failure to acquire and retain customers could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Contracts with Provincial and Territorial Governments

 

The Company expects to derive a significant portion of its future revenues from its supply contracts with the various Canadian provinces and territories. There are many factors which could impact the Company’s contractual agreements with the provinces and territories, including but not limited to availability of supply, product selection and the popularity of the Company’s products with retail customers. If the Company’s supply agreements with certain Canadian provinces and territories are amended, terminated or otherwise altered, the Company’s sales and results of operations could be adversely affected, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

In addition, not all of the Company’s supply contracts with the various Canadian provinces and territories contain purchase commitments or otherwise obligate the provincial or territorial wholesaler to buy a minimum or fixed volume of cannabis products from the Company. The amount of cannabis that the provincial or territorial wholesalers may purchase under the supply contracts may therefore vary from what the Company expects or has planned for. As a result, the Company's revenues could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the provincial or territorial wholesalers. If any of the provincial or territorial wholesalers decide to purchase lower volumes of products from the Company than the Company expects, alters its purchasing patterns at any time with limited notice or decides not to continue to purchase the Company's cannabis products at all, the Company's revenues could be materially adversely affected, which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects.

 

Constraints on Marketing Products

 

In view of the restrictions on marketing, advertising and promotional activities set forth in the Cannabis Act and related regulations, the Company’s business, financial condition and results of operations may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations could be adversely affected.

 

Fraudulent or Illegal Activity

 

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

    Page | 41

 

APHRIA INC.

Management’s Discussion & Analysis

 

Information Technology Systems and Cyber-Attacks

 

The Company has entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with its operations. The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.

 

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

Security Risks

 

Given the nature of the Company’s product and its lack of legal availability outside of channels approved by the Government of Canada, as well as the concentration of inventory in its facilities, despite meeting or exceeding Health Canada’s security requirements, there remains a risk of shrinkage as well as theft. A security breach at one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.

 

In addition, the Company collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition and results of operations.

 

In addition, there are a number of federal and provincial laws protecting the privacy of personal information, including records of a patient’s personal health information. Generally, these laws require the prior consent of an individual to collect, use and disclose that individual’s personal information. They also require that personal information be protected by appropriate safeguards, and that the Company restrict the handling of personal information to the minimum amount of personal information necessary to carry out permitted purposes. If the Company is found to be in violation of these privacy laws, or other laws governing patient health information, the Company could be subject to sanctions and civil or criminal penalties, which could increase the Company’s liabilities, harm the Company’s reputation and have a material adverse effect on the Company’s business, results of operations and financial condition.

 

    Page | 42

 

APHRIA INC.

Management’s Discussion & Analysis

 

Challenging Global Financial Conditions

 

In recent years, global credit and financial markets have experienced extreme disruptions, including with respect to, at times, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that significant deterioration in credit and financial markets and confidence in economic conditions will not occur in the future. Any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Further, global credit and financial markets have displayed arguably increased volatility in response to global events. Future crises may be precipitated by any number of causes, including natural disasters, geopolitical instability, changes to energy prices or sovereign defaults. These factors may impact the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favorable to the Company. Increased levels of volatility and market turmoil can adversely impact the Company’s operations and the value and the price of the Common Shares could be adversely affected.

 

In addition, there is a risk that one or more of the Company’s current service providers may themselves be adversely impacted by difficult economic circumstances, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

History of Losses

 

The Company incurred losses in prior periods. The Company may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, the Company expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If the Company’s revenues do not increase to offset these expected increases in costs and operating expenses, the Company will not be profitable.

 

Competition

 

The Company expects significant competition from other companies in light of the recent coming into force of the Cannabis Act. A large number of companies appear to be applying for cultivation, processing and sale licences, some of which may have significantly greater financial, technical, marketing and other resources than the Company, may be able to devote greater resources to the development, promotion, sale and support of their products and services, and may have more extensive customer bases and broader customer relationships. The Company’s future success depends upon its ability to achieve competitive per unit costs through increased production and on its ability to recognize higher margins through the sale of higher margin products. To the extent that the Company is not able to produce its products at competitive prices or consumers prioritize established low margin products over innovative, higher margin products, the Company’s business, financial condition and results of operations could be materially and adversely affected.

 

Should the size of the cannabis market increase as projected the overall demand for products and number of competitors will increase as well, and in order for the Company to be competitive it will need to invest significantly in research and development, market development, marketing, production expansion, new client identification, distribution channels and client support. If the Company is not successful in obtaining sufficient resources to invest in these areas, the Company’s ability to compete in the market may be adversely affected, which could materially and adversely affect the Company’s business, financial condition and results of operations.

 

    Page | 43

 

APHRIA INC.

Management’s Discussion & Analysis

 

Difficulty to Forecast

 

The Company must rely largely on its own market research to forecast sales as detailed forecasts are, with certain exceptions, not generally available from other sources at this early stage of the cannabis industry. A failure in the demand for the Company’s products to materialize as a result of competition, technological change, change in the regulatory or legal landscape or other factors could have a material adverse effect the Company’s business, financial condition and results of operations.

 

Unsolicited Takeover Proposals

 

The review and consideration of any takeover proposal may be a significant distraction for the Company’s management and employees and could require the expenditure of significant time and resources by the Company.

 

Moreover, any unsolicited takeover proposal may create uncertainty for the Company’s employees and this uncertainty may adversely affect the Company’s ability to retain key employees and to hire new talent. Any such takeover proposal may also create uncertainty for the Company’s customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with the Company. The uncertainty arising from unsolicited takeover proposals and any related costly litigation may disrupt the Company’s business, which could result in an adverse effect on its business, financial condition and results of operations. Management and employee distraction related to any such takeover proposal also may adversely impact the Company’s ability to optimally conduct its business and pursue its strategic objectives.

 

Reliance on the Veterans Affairs Canada (“ VAC ”) Medical Cannabis Reimbursement Policies

 

VAC reimburses certain medical cannabis purchases for eligible Canadian Armed Forces veterans. The current reimbursement policy includes a three gram per day limit, subject to certain exceptions, and an $8.50 per gram price cap. The Company maintains a number of veterans as part of its overall medical patient list, although veteran sales have decreased in recent years. As the Company grows larger and, more particularly, since the legalization of adult-use cannabis, veteran patients have become less and less material to the Company’s overall sales as a relative percentage. However, should VAC further amend its reimbursement policies this may further exacerbate demand for medical cannabis and the Company may be materially adversely affected.

 

Risks Related to the Company’s Common Shares

 

Volatile Market Price of the Common Shares

 

The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. The market price for the Common Shares on the TSX has varied between a high of $22.00 on September 12, 2018 and a low of $4.76 on December 5, 2018 in the twelve month period ending on May 31, 2019. Since the Common Shares became listed for trading on the NYSE on November 2, 2018, the trading price of the Common Shares on the NYSE has ranged from a high of US$13.45 on November 7, 2018 and a low of US$3.75 on December 6, 2018. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price.

 

Market price fluctuations in the Common Shares may be due to the Company’s results of operations failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s results of operations, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.

 

    Page | 44

 

APHRIA INC.

Management’s Discussion & Analysis

 

Risks Related to Dilution

 

The Company may issue Common Shares in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The Board has discretion to determine the price and the terms of issue of further issuances. Issuances of the Company’s securities may involve the issuance of a significant number of Common Shares at prices less than the current market price for the Common Shares. Issuances of substantial numbers of Common Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices of the Common Shares. Any transaction involving the issuance of previously authorized but unissued Common Shares, or securities convertible into Common Shares, would result in dilution, possibly substantial, to security holders. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s stock option plan and upon the exercise of outstanding warrants.

 

The Company may sell equity securities in offerings (including through the sale of securities convertible into equity securities). The Company cannot predict the size of such issuances of equity securities or the size and terms of future issuances of debt instruments or other securities convertible into equity securities or the effect, if any, that future issuances and sales of the Company’s securities will have on the market price of the Common Shares.

 

Sales of substantial amounts of the Company’s securities by the Company or its existing shareholders, or the availability of such securities for sale, could adversely affect the prevailing market prices for the Company’s securities and dilute investors’ earnings per Common Share. Exercises of presently outstanding share options or warrants may also result in dilution to security holders. A decline in the market prices of the Company’s securities could impair the Company’s ability to raise additional capital through the sale of securities should the Company desire to do so.

 

Dividends

 

The Company has not paid any dividends on the outstanding Common Shares, and the Company has no current intention to declare dividends on the Common Shares in the foreseeable future. Any decision to pay dividends on the Common Shares in the future will be at the discretion of the Board and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board may deem relevant. Additionally, the Company’s ability to pay dividends is currently restricted by the terms of its credit facilities with WFCU, which requires that dividends may only be paid after satisfaction of all terms, conditions and covenants contained therein. As a result, investors may not receive any return on an investment in the Common Shares unless they are able to sell their Common Shares for a price greater than that which such investors paid for them.

 

Regulated Nature of the Company’s Business May Impede or Discourage a Takeover

 

The Company requires and holds various licences to operate its business, which would not necessarily continue to apply to an acquiror of the Company’s business following a change of control. These licensing requirements could impede a merger, amalgamation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer for Common Shares, which, under certain circumstances, could reduce the market price of the Common Shares.

 

    Page | 45

 

APHRIA INC.

Management’s Discussion & Analysis

 

Listing Standards of the TSX and NYSE

 

The Company must meet continuing listing standards to maintain the listing of the Common Shares on the TSX and NYSE. If the Company fails to comply with listing standards and the TSX or NYSE delists the Common Shares, the Company and its shareholders could face significant material adverse consequences, including: (i) a limited availability of market quotations for the Common Shares; (ii) reduced liquidity for the Common Shares; (iii) a determination that the Common Shares are “penny stock,” which would require brokers trading in the Common Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the Common Shares; (iv) a limited amount of news about us and analyst coverage of the Company; and (v) a decreased ability for the Company to issue additional equity securities or obtain additional equity or debt financing in the future.

 

TSX Restrictions

 

On October 16, 2017, the TSX provided clarity regarding the application of Sections 306 (Minimum Listing Requirements) and 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities) of the TSX Company Manual (collectively, the “ Requirements ”) to TSX listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017 0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with the Requirements. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements, the TSX has the discretion to initiate a delisting review. Failure to comply with the Requirements could have an adverse effect on the Company.

 

Liquid Trading Market

 

The Company’s shareholders may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the TSX or the NYSE or achieve listing on any other public listing exchange.

 

Emerging Growth Company

 

The Company is an “emerging growth company,” as defined in the U.S. Jumpstart Our Business Start-ups Act, and it uses the exemption provided to emerging growth companies from the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act of 2002 (“ SOX ”). Therefore, the Company’s internal controls over financial reporting (“ ICOFR ”) will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are not using an exemption.

 

The Company may fail to maintain the adequacy of the Company’s ICOFR as such standards are modified, supplemented or amended from time to time, and may not be able to ensure that the Company can conclude, on an ongoing basis, that the Company has effective ICOFR in accordance with Section 404 of SOX or equivalent Canadian legislation. Failure to satisfy the requirements of Section 404 of SOX and equivalent Canadian legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could harm the Company’s business and negatively impact the trading price of the Common Shares or the market value of the Company’s other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s results of operations or cause it to fail to meet reporting obligations. Future acquisitions of companies, if any, may provide the Company with challenges in implementing the required processes, procedures and controls in the Company’s acquired operations. No evaluation can provide complete assurance that the Company’s ICOFR will detect or uncover all failures of persons to disclose material information otherwise required to be reported. The effectiveness of the Company’s processes, procedures and controls could also be limited by simple errors or faulty judgments. In addition, as the Company expands, the challenges involved in implementing appropriate ICOFR will increase and will require that the Company continues to improve its ICOFR.

 

    Page | 46

 

APHRIA INC.

Management’s Discussion & Analysis

 

In addition, the Company cannot predict if investors will find the Common Shares less attractive because it relies on the aforementioned exemption. If some investors find the Common Shares less attractive as a result, there may be a less active trading market for the Common Shares and trading price for the Common Shares may be negatively affected.

 

Foreign Private Issuer Status

 

In order to maintain the Company’s status as a foreign private issuer, a majority of the Common Shares must be either directly or indirectly owned by non-residents of the United States if the Company has one or more other connections to the United States prescribed by the foreign private issuer test. The Company may in the future lose its foreign private issuer status if a majority of the Common Shares are held in the United States and if the Company fails to meet the additional requirements necessary to avoid loss of its foreign private issuer status. The regulatory and compliance costs under U.S. federal securities laws as a U.S. domestic issuer may be significantly more than the costs incurred as a Canadian foreign private issuer eligible to use the multijurisdictional disclosure system (“ MJDS ”). If the Company is not a foreign private issuer, the Company would not be eligible to use the MJDS or other foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. In addition, the Company would lose the ability to rely upon exemptions from NYSE corporate governance requirements that are available to foreign private issuers.

 

Passive Foreign Investment Company

 

The Company may be characterized as a passive foreign investment company (“ PFIC ”). Under the PFIC rules, for any taxable year that the Company’s passive income or the Company’s assets that produce passive income exceed specified levels, the Company will be characterized as a PFIC for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences for the Company’s U.S. holders, which may include having certain distributions on the Common Shares and gains realized on the sale of Common Shares treated as ordinary income, rather than as capital gains income, and having potentially punitive interest charges apply to the proceeds of sales of Common Shares and certain distributions. Based on current business plans and financial expectations, although there can be no assurance, the Company expects that it will not be a PFIC for the Company’s current taxable year and expect that it will not be a PFIC for the foreseeable future.

 

Certain elections may be made to reduce or eliminate the adverse impact of the PFIC rules for holders of the Common Shares, but these elections may be detrimental and/or unavailable to the shareholders under certain circumstances. The PFIC rules are extremely complex and U.S. investors are urged to consult independent tax advisers regarding the potential consequences to them of the Company’s classification as a PFIC.

 

Risks Related to Changes in Laws, Regulations and Guidelines

 

The Company’s operations are subject to various laws, regulations and guidelines relating to the manufacture, management, packaging/labelling, advertising, sale, transportation, storage and disposal of medical cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may cause adverse effects business, financial condition and results of operations of the Company. The Company endeavours to comply with all relevant laws, regulations and guidelines. To the best of the Company’s knowledge, the Company is in compliance or in the process of being assessed for compliance with all such laws, regulations and guidelines.

 

The Cannabis Act and Cannabis Regulations came into force on October 17, 2018. The Cannabis Act and Cannabis Regulations prohibit testimonials, lifestyle branding and packaging that is appealing to youth. The restrictions on advertising, marketing and the use of logos and brand names could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, the Cannabis Act allows for licences to be granted for outdoor cultivation, which may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices, as capital expenditure requirements related to outdoor growing are typically much lower than those associated with indoor growing. Such results may also have a material adverse impact on the Company’s business, financial condition and results of operations.

 

    Page | 47

 

APHRIA INC.

Management’s Discussion & Analysis

 

The legislative framework pertaining to the Canadian adult-use cannabis market is uncertain. In addition, the governments of every Canadian province and territory have, to varying degrees, announced regulatory regimes for the distribution and sale of cannabis for adult-use purposes within those jurisdictions. There is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult-use purposes will be enacted according to all the terms announced by such provinces and territories, or at all, or that any such legislation, if enacted, will create the growth opportunities that the Company currently anticipates. While the impact of any new legislative framework for the regulation of the Canadian adult-use cannabis market is uncertain, any of the foregoing could result in a material adverse effect of the Company’s business, financial condition and results of operations.

 

To date, only fresh cannabis, dried cannabis and cannabis oil products are permitted for sale in Canada. Pursuant to the Cannabis Act, certain classes of cannabis products, such as edibles, concentrates and other ingestibles are currently prohibited from sale, but new regulations under the Cannabis Act will come into force on October 17, 2019 to permit edibles, concentrates and other ingestibles to be available for sale no earlier than mid-December 2019. While regulations have been released, the impact of these regulatory changes on the business of the Company is unknown, and the proposed regulations may not be implemented at all or, if they are, may change significantly.

 

Further, Health Canada may change their administration, interpretation or application of the applicable regulations or their compliance or enforcement procedures at any time. Any such changes could require the Company to revise its ongoing compliance procedures, requiring the Company to incur increased compliance costs and expend additional resources. There is no assurance that the Company will be able to comply or continue to comply with applicable regulations.

 

INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“ CEO ”) and the Chief Financial Officer (“ CFO ”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted as of May 31, 2019, based on the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“ COSO ”) by and under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.

  

Under the supervision of the CEO and CFO, the Company designed internal controls over financial reporting (as defined in National Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s internal controls over financial reporting.

 

It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls, no matter how well designed and operated, can only provide reasonable assurance to management and the Board of Directors regarding achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an organization's disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable assurance of achieving their control objectives.

 

There have been no changes in the Company’s internal controls over financial reporting during the year ended May 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

    Page | 48

 

APHRIA INC.

Management’s Discussion & Analysis

 

Subsequent events

 

Subsequent to year-end the Company’s subsidiary Marigold Projects Jamaica Limited received a retail Herb House licence from Jamaica’s Cannabis Licensing Authority to open its first store at the Peter Tosh Square, Unit 51, Pulse Center, 38a Trafalgar Road, overlooking the Peter Tosh Museum in New Kingston, Jamaica.

  

This MD&A contains forward-looking statements within the meaning of applicable securities legislation with regards to expected financial performance, strategy and business conditions. We use words such as “forecast”, “future”, “should”, “could”, “enable”, “potential”, “contemplate”, “believe”, “anticipate”, “estimate”, “plan”, “expect”, “intend”, “may”, “project”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks and uncertainties. Many factors could cause actual results, performance or achievement to be materially different from any future forward-looking statements. Factors that may cause such differences include, but are not limited to, general economic and market conditions, investment performance, financial markets, legislative and regulatory changes, technological developments, catastrophic events and other business risks. These forward-looking statements are as of the date of this MD&A and the Company and management assume no obligation to update or revise them to reflect new events or circumstances except as required by securities laws. The Company and management caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.

 

Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:

· the intended expansion of the Company’s facilities and receipt of approval from Health Canada to complete such expansion;
· the expected cost to produce a gram of dried cannabis;
· the expected cost to process cannabis oil;
· expectation with respect to product development and the market share thereof;
· expectations with respect to crop rotation and harvest;
· the anticipated future gross margins of the Company’s operations; and,
· The Company’s investments in the United States, the characterization and consequences of those investments under Federal Law, and the framework for the enforcement of cannabis and cannabis-related offenses in the United States.

 

    Page | 49

 

Exhibit 99.4

 

CERTIFICATION

 

I, Irwin Simon, certify that:

 

1. I have reviewed this annual report on Form 40-F of Aphria Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

 

4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

 

Date: August 1 , 2019 By: /s/ Irwin Simon
  Irwin Simon
  Chief Executive Officer
    (Principal Executive Officer)

 

 

 

Exhibit 99.5

 

CERTIFICATION

 

I, Carl Merton, certify that:

 

1. I have reviewed this annual report on Form 40-F of Aphria Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

 

4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5 The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

 

Date: August 1 , 2019 By: /s/ Carl Merton
  Carl Merton
  Chief Financial Officer
    (Principal Financial and Accounting Officer)

  

 

  

Exhibit 99.6

 

 

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report of Aphria Inc. (the “Company”) on Form 40-F for the period ended May 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Irwin Simon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)       The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)       The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: August 1 , 2019 By: /s/ Irwin Simon
  Irwin Simon
  Chief Executive Officer
    (Principal Executive Officer)

 

A signed original of this written statement required by Section 906 has been provided to Aphria Inc. and will be retained by Aphria Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

Exhibit 99.7

 

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report of Aphria Inc. (the “Company”) on Form 40-F for the period ended May 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carl Merton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)       The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)       The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 1 , 2019 By: /s/ Carl Merton
  Carl Merton
  Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

A signed original of this written statement required by Section 906 has been provided to Aphria Inc. and will be retained by Aphria Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

 

Exhibit 99.8

 

 

 



 

Consent of Independent Registered Public Accounting Firm

  

 

We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended May 31, 2019 of Aphria Inc. of our report dated July 31, 2019, relating to the consolidated financial statements, which appears in the Exhibit 99.2 to this Annual Report on Form 40-F.

 

 

/s/ PricewaterhouseCoopers LLP

 

Chartered Professional Accountants, Licensed Public Accountants

 

Toronto, Canada

 

July 31, 2019

 

 

 

 
 

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.