Exhibit 99.1
Aphria Inc.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 31, 2020 AND AUGUST 31, 2019
(Unaudited, expressed in Canadian Dollars, unless otherwise noted)
Aphria Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited - in thousands of Canadian dollars)
| Note | August 31, 2020 | May 31, 2020 | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | 400,019 | $ | 497,222 | ||||||||
| Accounts receivable | 82,532 | 55,796 | ||||||||||
| Prepaids and other current assets | 4 | 51,313 | 42,983 | |||||||||
| Inventory | 5 | 321,347 | 264,321 | |||||||||
| Biological assets | 6 | 22,340 | 28,341 | |||||||||
| Current portion of convertible notes receivable | 11 | 13,975 | 14,626 | |||||||||
| 891,526 | 903,289 | |||||||||||
| Capital assets | 8 | 593,558 | 587,163 | |||||||||
| Intangible assets | 9 | 362,129 | 363,037 | |||||||||
| Promissory notes receivable | 3,000 | — | ||||||||||
| Long-term investments | 12 | 22,309 | 27,016 | |||||||||
| Goodwill | 10 | 618,052 | 617,934 | |||||||||
| $ | 2,490,574 | $ | 2,498,439 | |||||||||
| Liabilities | ||||||||||||
| Current liabilities | ||||||||||||
| Bank indebtedness | 14 | $ | 7,923 | $ | 537 | |||||||
| Accounts payable and accrued liabilities | 124,410 | 152,750 | ||||||||||
| Income taxes payable | 21,587 | 6,410 | ||||||||||
| Deferred revenue | — | 902 | ||||||||||
| Current portion of lease liabilities | 1,278 | 1,315 | ||||||||||
| Current portion of long-term debt | 15 | 10,816 | 8,467 | |||||||||
| 166,014 | 170,381 | |||||||||||
| Long-term liabilities | ||||||||||||
| Lease liabilities | 5,739 | 5,828 | ||||||||||
| Long-term debt | 15 | 128,561 | 129,637 | |||||||||
| Convertible debentures | 16 | 270,362 | 270,783 | |||||||||
| Deferred tax liability | 13 | 69,698 | 83,468 | |||||||||
| 640,374 | 660,097 | |||||||||||
| Shareholders’ equity | ||||||||||||
| Share capital | 17 | 1,860,353 | 1,846,938 | |||||||||
| Warrants | 18 | 360 | 360 | |||||||||
| Share-based payment reserve | 28,783 | 27,721 | ||||||||||
| Accumulated other comprehensive income (loss) | 1,207 | (1,269 | ) | |||||||||
| Deficit | (81,933 | ) | (61,215 | ) | ||||||||
| 1,808,770 | 1,812,535 | |||||||||||
| Non-controlling interests | 20 | 41,430 | 25,807 | |||||||||
| 1,850,200 | 1,838,342 | |||||||||||
| $ | 2,490,574 | $ | 2,498,439 | |||||||||
| Nature of operations (Note 1), | |
| Commitments and contingencies (Note 29), | |
| Approved on behalf of the Board: | |
| “Renah Persofsky” | “Irwin Simon” |
| Signed: Director | Signed: Director |
The accompanying notes are an integral part of these consolidated financial statements
| 2 |
Aphria Inc.
Condensed Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| For the three months ended August 31, | ||||||||||||
| Note | 2020 | 2019 | ||||||||||
| Cannabis revenue | $ | 82,229 | $ | 35,079 | ||||||||
| Distribution revenue | 82,198 | 95,327 | ||||||||||
| Insurance recovery | 1,000 | — | ||||||||||
| Excise taxes | (19,738 | ) | (4,294 | ) | ||||||||
| Net revenue | 145,689 | 126,112 | ||||||||||
| Production costs | 5 | 28,421 | 15,454 | |||||||||
| Cost of cannabis purchased | 3,540 | — | ||||||||||
| Cost of goods purchased | 70,396 | 83,104 | ||||||||||
| Gross profit before fair value adjustments | 43,332 | 27,554 | ||||||||||
| Fair value adjustment on sale of inventory | 5 | 27,203 | 7,286 | |||||||||
| Fair value adjustment on growth of biological assets | 6 | (59,150 | ) | (25,153 | ) | |||||||
| Gross profit | 75,279 | 45,421 | ||||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 21 | 28,353 | 22,305 | |||||||||
| Share-based compensation | 22 | 4,261 | 4,956 | |||||||||
| Amortization | 5,409 | 5,008 | ||||||||||
| Selling | 7,213 | 1,980 | ||||||||||
| Marketing and promotion | 6,107 | 5,834 | ||||||||||
| Research and development | 149 | 610 | ||||||||||
| Transaction costs | 3,048 | 735 | ||||||||||
| 54,540 | 41,428 | |||||||||||
| Operating income | 20,739 | 3,993 | ||||||||||
| Finance income (expense), net | 23 | (7,203 | ) | (5,257 | ) | |||||||
| Non-operating income (expense), net | 24 | (17,323 | ) | 20,303 | ||||||||
| Income before income taxes | (3,787 | ) | 19,039 | |||||||||
| Income taxes (recovery) | 13 | 1,308 | 2,598 | |||||||||
| Net (loss) income | (5,095 | ) | 16,441 | |||||||||
| Other comprehensive income (loss) | ||||||||||||
| Other comprehensive income (loss) | 2,476 | (1,686 | ) | |||||||||
| Comprehensive (loss) income | $ | (2,619 | ) | $ | 14,755 | |||||||
| Total comprehensive income (loss) attributable to: | ||||||||||||
| Shareholders of Aphria Inc. | (18,242 | ) | 14,926 | |||||||||
| Non-controlling interests | 20 | 15,623 | (171 | ) | ||||||||
| $ | (2,619 | ) | $ | 14,755 | ||||||||
| Weighted average number of common shares - basic | 287,504,789 | 251,163,059 | ||||||||||
| Weighted average number of common shares - diluted | 287,504,789 | 252,741,610 | ||||||||||
| (Loss) income per share - basic | 26 | $ | (0.02 | ) | $ | 0.07 | ||||||
| (Loss) income per share - diluted | 26 | $ | (0.02 | ) | $ | 0.07 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
| 3 |
Aphria Inc.
Condensed Interim Consolidated Statements of Changes in Equity
(Unaudited - in thousands of Canadian dollars, except share amounts)
| Number of common shares | Share capital (Note 17) | Warrants (Note 18) | Share-based payment reserve | Accumulated other comprehensive loss | Retained earnings | Non-controlling interests (Note 20) | Total | |||||||||||||||||||||||||
| Balance at May 31, 2019 | 250,989,120 | $ | 1,655,273 | $ | 1,336 | $ | 36,151 | $ | (119 | ) | $ | 12,103 | $ | 28,409 | $ | 1,733,153 | ||||||||||||||||
| Share issuance - options exercised | 974,487 | 5,912 | — | (1,967 | ) | — | — | — | 3,945 | |||||||||||||||||||||||
| Share issuance - RSUs exercised | 50,000 | 456 | — | — | — | — | — | 456 | ||||||||||||||||||||||||
| Share-based payments | — | — | — | 3,013 | — | — | — | 3,013 | ||||||||||||||||||||||||
| Comprehensive income (loss) for the period | — | — | — | — | (1,686 | ) | 16,612 | (171 | ) | 14,755 | ||||||||||||||||||||||
| Balance at August 31, 2019 | 252,013,607 | $ | 1,661,641 | $ | 1,336 | $ | 37,197 | $ | (1,805 | ) | $ | 28,715 | $ | 28,238 | $ | 1,755,322 | ||||||||||||||||
| Number of common shares | Share capital (Note 17) | Warrants (Note 18) | Share-based payment reserve | Accumulated other comprehensive income (loss) | Retained earnings (deficit) | Non-controlling
interests (Note 20) | Total | |||||||||||||||||||||||||
| Balance at May 31, 2020 | 286,520,265 | $ | 1,846,938 | $ | 360 | $ | 27,721 | $ | (1,269) | $ | (61,215) | $ | 25,807 | $ | 1,838,342 | |||||||||||||||||
| Share issuance - legal settlement | 1,658,375 | 9,676 | — | — | — | — | — | 9,676 | ||||||||||||||||||||||||
| Share issuance - options exercised | 48,998 | 643 | — | (638 | ) | — | — | — | 5 | |||||||||||||||||||||||
| Share issuance - RSUs exercised | 512,206 | 3,096 | — | — | — | — | — | 3,096 | ||||||||||||||||||||||||
| Share-based payments | — | — | — | 1,700 | — | — | — | 1,700 | ||||||||||||||||||||||||
| Comprehensive income (loss) for the period | — | — | — | — | 2,476 | (20,718 | ) | 15,623 | (2,619 | ) | ||||||||||||||||||||||
| Balance at August 31, 2020 | 288,739,844 | $ | 1,860,353 | $ | 360 | $ | 28,783 | $ | 1,207 | $ | (88,623 | ) | $ | 48,120 | $ | 1,850,200 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| 4 |
Aphria Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited - in thousands of Canadian dollars)
| For the three months ended August 31, | ||||||||||||
| Note | 2020 | 2019 | ||||||||||
| Cash used in operating activities: | ||||||||||||
| Net (loss) income for the period | $ | (5,095 | ) | $ | 16,441 | |||||||
| Adjustments for: | ||||||||||||
| Future income taxes | 13 | (13,770 | ) | 1,351 | ||||||||
| Fair value adjustment on sale of inventory | 5 | 27,203 | 7,286 | |||||||||
| Fair value adjustment on growth of biological assets | 6 | (59,150 | ) | (25,153 | ) | |||||||
| Loss on marketable securities | — | 85 | ||||||||||
| Unrealized foreign exchange loss (gain) | 19,340 | 6,674 | ||||||||||
| Amortization | 8,9 | 13,905 | 9,218 | |||||||||
| Unrealized loss (gain) on convertible notes receivable | 11,24 | 758 | (1,155 | ) | ||||||||
| Other non-cash items | (83 | ) | 9 | |||||||||
| Share-based compensation | 22 | 4,261 | 4,956 | |||||||||
| Loss (gain) on long-term investments | 25 | 1,389 | (13,708 | ) | ||||||||
| Gain on convertible debentures | (421 | ) | (14,207 | ) | ||||||||
| Change in non-cash working capital | 27 | (57,674 | ) | (15,893 | ) | |||||||
| (69,337 | ) | (24,096 | ) | |||||||||
| Cash provided by (used in) financing activities: | ||||||||||||
| Share capital issued, net of cash issuance costs | (324 | ) | — | |||||||||
| Proceeds from warrants and options exercised | 5 | 4,401 | ||||||||||
| Proceeds from long-term debt | 2,340 | — | ||||||||||
| Repayment of long-term debt | (1,091 | ) | (6,752 | ) | ||||||||
| Repayment of lease liabilities | (191 | ) | (255 | ) | ||||||||
| Increase in bank indebtedness | 7,386 | — | ||||||||||
| 8,125 | (2,606 | ) | ||||||||||
| Cash used in investing activities: | ||||||||||||
| Proceeds from disposal of marketable securities | — | 5,000 | ||||||||||
| Investment in capital and intangible assets | (17,304 | ) | (39,348 | ) | ||||||||
| Proceeds from disposal of capital assets | — | 409 | ||||||||||
| Promissory notes advances | (3,000 | ) | — | |||||||||
| Proceeds from disposal of long-term investments and equity investees | 25 | 3,318 | 528 | |||||||||
| Net cash paid on business acquisitions | — | (34,722 | ) | |||||||||
| (16,986 | ) | (68,133 | ) | |||||||||
| Effect of foreign exchange on cash and cash equivalents | (19,005 | ) | (6,757 | ) | ||||||||
| Net decrease in cash and cash equivalents | (97,203 | ) | (101,592 | ) | ||||||||
| Cash and cash equivalents, beginning of year | 497,222 | 550,797 | ||||||||||
| Cash and cash equivalents, end of year | $ | 400,019 | $ | 449,205 | ||||||||
| Cash and cash equivalents are comprised of: | ||||||||||||
| Cash in bank | $ | 38,718 | $ | 426,725 | ||||||||
| Short-term deposits | 361,301 | 22,480 | ||||||||||
| Cash and cash equivalents | $ | 400,019 | $ | 449,205 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
| 5 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 1. | Nature of operations |
Aphria Inc. (the "Company" or “Aphria”) is an international organization with a focus on building a global cannabis brand, with operations in Canada, Germany, Italy, Malta, Colombia, and Argentina. The Company exists under the laws of the Business Corporations Act (Ontario), is licensed to produce and sell medical and adult-use cannabis, cannabis-derived extracts, and derivative cannabis products in Canada under the provisions of The Cannabis Act.
Broken Coast Cannabis Ltd. (“Broken Coast”) is a wholly-owned subsidiary of the Company licensed to produce and sell cannabis under The Cannabis Act.
1974568 Ontario Ltd. (“Aphria Diamond”) is a 51% majority-owned subsidiary of the Company. In November 2019, Aphria Diamond received its cultivation licence under the provisions of The Cannabis Act.
The registered office of the Company is located at 1 Adelaide Street East, Suite 2310, Toronto, Ontario.
The Company’s common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“TSX”) in Canada and the National Association of Securities Dealers Automated Quotations Exchange (“NASDAQ”) in the United States.
These condensed interim consolidated financial statements were approved by the Company’s Board of Directors on October 14, 2020.
| 2. | Basis of preparation |
| (a) | Statement of compliance |
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These condensed interim consolidated financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2020, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.
| (b) | Basis of measurement |
These condensed interim consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.
| (c) | Functional currency |
All figures presented in the consolidated financial statements are reflected in Canadian dollars; however, the functional currency of the Company includes the Canadian dollar and the Euro.
Foreign currency transactions are translated to the respective functional currencies of the Company’s entities at the exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the foreign exchange rate applicable at the statement of financial position date. Non-monetary items carried at historical cost denominated in foreign currencies are translated to the functional currency at the date of the transactions. Non-monetary items carried at fair value denominated in foreign currencies are translated to the functional currency at the date when the fair value was determined. Realized and unrealized exchange gains and losses are recognized through profit and loss.
On consolidation, the assets and liabilities of foreign operations reported in their functional currencies are translated into Canadian dollars, the Group’s presentation currency, at period-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity. The Company and all of its subsidiaries’ functional currency is Canadian dollars, with the exception of CC Pharma GmbH whose functional currency is the Euro.
| 6 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| (d) | Basis of consolidation |
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The following is a list of the Company’s operating subsidiaries:
| Subsidiaries | Jurisdiction of incorporation | Ownership interest |
| Broken Coast Cannabis Ltd. | British Columbia, Canada | 100% |
| ARA – Avanti Rx Analytics Inc. | Ontario, Canada | 100% |
| FL Group S.r.l. | Italy | 100% |
| ABP, S.A. | Argentina | 100% |
| Aphria Germany GmbH | Germany | 100% |
| Aphria RX GmbH | Germany | 100% |
| CC Pharma GmbH | Germany | 100% |
| CC Pharma Research and Development GmbH | Germany | 100% |
| Aphria Wellbeing GmbH | Germany | 100% |
| Marigold Projects Jamaica Limited | Jamaica | 95%1 |
| ASG Pharma Ltd. | Malta | 100% |
| ColCanna S.A.S. | Colombia | 90% |
| CC Pharma Nordic ApS | Denmark | 75% |
| 1974568 Ontario Ltd. | Ontario, Canada | 51% |
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity.
The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to the owners of the Company.
| 3. | Significant accounting policies |
These condensed interim consolidated financial statements have been prepared following the same accounting policies used in the preparation of the audited financial statements of the Company for the year ended May 31, 2020. For comparative purposes, the Company has reclassified certain immaterial items on the condensed interim consolidated statements of financial position and the condensed interim consolidated statements of income (loss) and comprehensive income (loss) to conform with the current period’s presentation.
| 4. | Prepaids and other current assets |
Prepaids and other current assets are comprised of:
| August 31, 2020 | May 31, 2020 | |||||||
| Sales tax receivable | $ | 18,020 | $ | 11,670 | ||||
| Prepaid assets | 24,652 | 23,365 | ||||||
| Other | 8,641 | 7,948 | ||||||
| $ | 51,313 | $ | 42,983 | |||||
1 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.
| 7 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 5. | Inventory |
Inventory is comprised of:
| Capitalized cost | Fair value adjustment | August 31, 2020 | May 31, 2020 | |||||||||||||
| Cannabis | $ | 98,623 | $ | 112,653 | $ | 211,276 | $ | 151,715 | ||||||||
| Cannabis trim | 6,330 | — | 6,330 | 4,023 | ||||||||||||
| Cannabis oil | 32,543 | 1,023 | 33,566 | 42,502 | ||||||||||||
| Softgel capsules | 112 | 44 | 156 | 580 | ||||||||||||
| Cannabis vapes | 6,530 | 1,254 | 7,784 | 7,551 | ||||||||||||
| Distribution inventory | 40,918 | — | 40,918 | 35,341 | ||||||||||||
| Packaging and other inventory items | 21,317 | — | 21,317 | 22,609 | ||||||||||||
| $ | 206,373 | $ | 114,974 | $ | 321,347 | $ | 264,321 | |||||||||
During the three months ended August 31, 2020, the Company recorded $28,421 (2019 - $15,454) of production costs. Included in production costs for the three months ended August 31, 2020 is $796 of internal cannabis oil conversion costs (2019 - $426), and amortization of $5,559 (2019 - $1,895). The Company also included $2,937 of amortization which remains in inventory for the period ended August 31, 2020 (2019 - $2,315) related to capital assets utilized in production. During the three months ended August 31, 2020, the Company expensed $27,203 (2019 - $7,286) of fair value adjustments on the growth of biological assets included in inventory sold.
The Company holds 74,996.7 kgs of cannabis (May 31, 2020 – 50,205.9 kgs), 32,487.1 kgs of cannabis trim (May 31, 2020 – 16,092.3 kgs), 120,420.1 litres of cannabis oils or 20,942.6 kgs equivalent in various stages of production (May 31, 2020 – 124,963.0 litres or 21,732.7 kgs equivalent), 600.1 litres of cannabis oils used in softgel capsules or 104.4 kgs equivalent (May 31, 2020 – 1,669.2 litres or 290.3 kgs equivalent) and 29,835.9 litres of cannabis oils used in cannabis vape oils or 5,188.9 kgs equivalent at August 31, 2020 (May 31, 2020 – 21,707.5 litres or 3,775.2 kgs equivalent).
| 6. | Biological assets |
Biological assets are comprised of:
| Amount | ||||
| Balance at May 31, 2019 | $ | 18,725 | ||
| Changes in fair value less costs to sell due to biological transformation | 115,255 | |||
| Production costs capitalized | 131,561 | |||
| Transferred to inventory upon harvest | (237,200 | ) | ||
| Balance at May 31, 2020 | $ | 28,341 | ||
| Changes in fair value less costs to sell due to biological transformation | 59,150 | |||
| Production costs capitalized | 36,963 | |||
| Transferred to inventory upon harvest | (102,114 | ) | ||
| Balance at August 31, 2020 | $ | 22,340 | ||
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 cannabis to be between $2.50 and $3.00 per gram, upon harvest for greenhouse produced cannabis (May 31, 2020 – $3.00 per gram) and between $3.50 and $4.00 per gram (May 31, 2020 - $4.00 per gram), upon harvest for indoor produced cannabis. The Company has determined the fair value increment on cannabis trim to be $nil per gram (May 31, 2020 - $0.01 per gram).
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 $59,150 during the three months ended August 31, 2020 (2019 - $25,153).
| 8 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - 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 period, the Company amended the fair value based on an expected lower average selling price with the release of the Company’s economy brands, which the Company is using to create demand for lower potency harvested cannabis.
In determining the fair value of biological assets, management has made the following estimates in this valuation model:
· The harvest yield is between 20 grams and 60 grams per plant;
· The selling price is between $1.50 and $6.50 per gram of cannabis;
· 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 $490 (May 31, 2020 - $682) and inventory decreasing by $12,639 (May 31, 2020 - $9,895)
· Harvest yield per plant – a decrease in the harvest yield per plant of 5% would result in the biological asset value decreasing by $306 (May 31, 2020 - $439)
These inputs are level 3 on the fair value hierarchy and are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
| 7. | Related party transactions |
Key management personnel compensation for the three months ended August 31, 2020 and 2019 was comprised of:
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Salaries | $ | 3,618 | $ | 1,311 | ||||
| Share-based compensation | 3,766 | 579 | ||||||
| $ | 7,384 | $ | 1,890 | |||||
Directors and officers of the Company control 0.12% or 332,377 of the voting shares of the Company.
As at August 31, 2020, a balance paid to an officer and director of the Company of $412 is included within prepaid and other current assets.
During the period, the Company issued 150,000 deferred share units to directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan.
During the period, the Company issued 866,190 restricted share units to officers and directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan, all of which vest over two years.
| 9 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
During the period, the Company issued 50,000 stock options to officers of the Company, under the terms of the Company’s Omnibus Long-Term Incentive Plan.
| 8. | Capital assets |
| Land | Production facility | Equipment | Leasehold improvements | Construction in process | Right-of-use assets | Total capital assets | ||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||
| At May 31, 2019 | $ | 33,153 | $ | 232,468 | $ | 79,627 | $ | 1,236 | $ | 174,182 | $ | — | $ | 520,666 | ||||||||||||||
| IFRS 16 Adjustment | — | — | — | — | — | 8,606 | 8,606 | |||||||||||||||||||||
| Additions | — | 4,480 | 21,034 | 1,240 | 101,284 | 677 | 128,715 | |||||||||||||||||||||
| Transfers | 72 | 37,491 | 108,730 | 16,081 | (162,414 | ) | 40 | — | ||||||||||||||||||||
| Disposals | — | — | (7,157 | ) | — | (5,559 | ) | — | (12,716 | ) | ||||||||||||||||||
| Impairment | (15 | ) | (3,433 | ) | (46 | ) | (119 | ) | (2,147 | ) | (840 | ) | (6,600 | ) | ||||||||||||||
| Effect of foreign exchange | — | 14 | 22 | — | 114 | 107 | 257 | |||||||||||||||||||||
| At May 31, 2020 | 33,210 | 271,020 | 202,210 | 18,438 | 105,460 | 8,590 | 638,928 | |||||||||||||||||||||
| Additions | 99 | 1,744 | 2,870 | 149 | 11,685 | 65 | 16,612 | |||||||||||||||||||||
| Transfers | — | 47,517 | — | — | (47,517 | ) | — | — | ||||||||||||||||||||
| Effect of foreign exchange | 5 | 73 | 40 | — | 83 | 43 | 244 | |||||||||||||||||||||
| At August 31, 2020 | $ | 33,314 | $ | 320,354 | $ | 205,120 | $ | 18,587 | $ | 69,711 | $ | 8,698 | $ | 655,784 | ||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||||||
| At May 31, 2019 | $ | — | $ | 7,660 | $ | 8,919 | $ | 189 | $ | — | $ | — | $ | 16,768 | ||||||||||||||
| Amortization | — | 13,584 | 19,508 | 450 | — | 1,455 | 34,997 | |||||||||||||||||||||
| At May 31, 2020 | — | 21,244 | 28,427 | 639 | — | 1,455 | 51,765 | |||||||||||||||||||||
| Amortization | — | 4,106 | 5,960 | 104 | — | 291 | 10,461 | |||||||||||||||||||||
| At August 31, 2020 | $ | — | $ | 25,350 | $ | 34,387 | $ | 743 | $ | — | $ | 1,746 | $ | 62,226 | ||||||||||||||
| Net book value | ||||||||||||||||||||||||||||
| At May 31, 2019 | $ | 33,153 | $ | 224,808 | $ | 70,708 | $ | 1,047 | $ | 174,182 | $ | — | $ | 503,898 | ||||||||||||||
| At May 31, 2020 | $ | 33,210 | $ | 249,776 | $ | 173,783 | $ | 17,799 | $ | 105,460 | $ | 7,135 | $ | 587,163 | ||||||||||||||
| At August 31, 2020 | $ | 33,314 | $ | 295,004 | $ | 170,733 | $ | 17,844 | $ | 69,711 | $ | 6,952 | $ | 593,558 | ||||||||||||||
| 10 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 9. | Intangible assets |
| Customer relationships | Corporate website | Licences, permits & applications | Non-compete agreements | Intellectual property, trademarks & brands | Total intangible assets | |||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| At May 31, 2019 | $ | 33,030 | $ | 905 | $ | 275,880 | $ | 3,330 | $ | 98,530 | $ | 411,675 | ||||||||||||
| Additions | 112 | 557 | 2,893 | 2 | 1,944 | 5,508 | ||||||||||||||||||
| Impairment | — | — | (19,363 | ) | — | — | (19,363 | ) | ||||||||||||||||
| Effect of foreign exchange | (540 | ) | (5 | ) | 68 | (55 | ) | (358 | ) | (890 | ) | |||||||||||||
| At May 31, 2020 | 32,602 | 1,457 | 259,478 | 3,277 | 100,116 | 396,930 | ||||||||||||||||||
| Additions | — | 34 | 405 | — | 318 | 757 | ||||||||||||||||||
| Effect of foreign exchange | 877 | 5 | 153 | 60 | 684 | 1,779 | ||||||||||||||||||
| At August 31, 2020 | $ | 33,479 | $ | 1,496 | $ | 260,036 | $ | 3,337 | $ | 101,118 | $ | 399,466 | ||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||
| At May 31, 2019 | $ | 6,003 | $ | 417 | $ | 859 | $ | 1,490 | $ | 10,850 | $ | 19,619 | ||||||||||||
| Amortization | 6,040 | 437 | 176 | 1,348 | 6,273 | 14,274 | ||||||||||||||||||
| At May 31, 2020 | 12,043 | 854 | 1,035 | 2,838 | 17,123 | 33,893 | ||||||||||||||||||
| Amortization | 1,497 | 74 | 102 | 175 | 1,596 | 3,444 | ||||||||||||||||||
| At August 31, 2020 | $ | 13,540 | $ | 928 | $ | 1,137 | $ | 3,013 | $ | 18,719 | $ | 37,337 | ||||||||||||
| Net book value | ||||||||||||||||||||||||
| At May 31, 2019 | $ | 27,027 | $ | 488 | $ | 275,021 | $ | 1,840 | $ | 87,680 | $ | 392,056 | ||||||||||||
| At May 31, 2020 | $ | 20,559 | $ | 603 | $ | 258,443 | $ | 439 | $ | 82,993 | $ | 363,037 | ||||||||||||
| At August 31, 2020 | $ | 19,939 | $ | 568 | $ | 258,899 | $ | 324 | $ | 82,399 | $ | 362,129 | ||||||||||||
Included in Licences, permits & applications is $254,216 of indefinite lived intangible assets.
| 10. | Goodwill |
| Goodwill is comprised of: | ||||||||
| August 31, 2020 | May 31, 2020 | |||||||
| CannWay Pharmaceuticals Inc. acquisition | $ | 1,200 | $ | 1,200 | ||||
| Broken Coast Cannabis Ltd. acquisition | 146,091 | 146,091 | ||||||
| Nuuvera Corp. acquisition | 377,221 | 377,221 | ||||||
| LATAM Holdings Inc. acquisition | 87,188 | 87,188 | ||||||
| CC Pharma GmbH acquisition | 6,146 | 6,146 | ||||||
| Effect of foreign exchange | 206 | 88 | ||||||
| $ | 618,052 | $ | 617,934 | |||||
During the period ended August 31, 2020, the Company completed its quarterly assessment of indicators of impairment of the Company’s cash-generating units (“CGUs”). The Company determined there were no indicators of impairment and did not estimate the recoverable amount of the CGUs.
| 11 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 11. | Convertible notes receivable |
| August 31, 2020 | May 31, 2020 | |||||||
| HydRx Farms Ltd. (d/b/a Scientus Pharma) | $ | 5,000 | $ | 6,000 | ||||
| 10330698 Canada Ltd. (d/b/a Starbuds) | 5,018 | 4,728 | ||||||
| High Tide Inc. | 3,957 | 3,898 | ||||||
| 13,975 | 14,626 | |||||||
| Deduct - current portion | (13,975 | ) | (14,626 | ) | ||||
| $ | — | $ | — | |||||
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
debentures bore interest at 8%, paid semi-annually, matured in two years and included the right to convert the debentures into
common shares of SP at $2.75 per common share at any time before maturity. The Company agreed with SP to extend the due date to
January 16, 2020. The Company maintains a first security position on all of SP’s assets. As at August 31, 2020, the convertible
debentures remain unpaid as the Company is in the process of enforcing its security against the assets of SP.
As at August 31, 2020, the fair value of the Company’s secured convertible debentures was $5,000 (May 31, 2020 - $6,000), which resulted in a fair value loss for the three months ended August 31, 2020 of $(1,000) (2019 - $nil). Subsequent to quarter-end, the Company settled the note receivable for $5,000.
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 until maturity on 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 August 31, 2020, the fair value of the Company’s secured convertible debentures was $5,018 (May 31, 2020 - $4,728), which includes $323 (May 31, 2020 - $216) of accrued interest. The remaining change resulted in a fair value gain (loss) for the three months ended August 31, 2020 of $183 (2019 - $388).
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 and 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 12).
As at August 31, 2020, the fair value of the unsecured convertible debentures was $3,957 (May 31, 2020 - $3,898), which resulted in a fair value gain (loss) for the three months ended August 31, 2020 of $59 (2019 - $78).
Convertible notes receivable
The unrealized gain (loss) on convertible notes receivable recognized in the results of operations amounts to $(758) for the three months ended August 31, 2020 (2019 - $1,155).
The fair value was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 1.25%; expected life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the respective conversion feature.
| 12 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 12. | Long-term investments |
| Cost May 31, 2020 |
Fair value May 31, 2020 | Investment | Divesture/ Transfer | Subtotal August 31, 2020 |
Change in fair value | Fair value August 31, 2020 | |
| Level 1 on fair value hierarchy | |||||||
| Tetra Bio-Pharma Inc. | 19,057 | 5,784 | - | - | 5,784 | (942) | 4,842 |
| Aleafia Health Inc. | 10,000 | 3,320 | - | (3,320) | - | - | - |
| Rapid Dose Therapeutics Inc. | 5,189 | 1,730 | - | - | 1,730 | (346) | 1,384 |
| Fire & Flower Inc. | 389 | 237 | - | (237) | - | - | - |
| High Tide Inc. | 450 | 165 | - | - | 165 | (5) | 160 |
| Althea Group Holdings Ltd. | 2,206 | 4,266 | - | - | 4,266 | 154 | 4,420 |
| 37,291 | 15,502 | - | (3,557) | 11,945 | (1,139) | 10,806 | |
| Level 3 on fair value hierarchy | |||||||
| Resolve Digital Health Inc. | 718 | - | - | - | - | - | - |
| Resolve Digital Health Inc. | 282 | - | - | - | - | - | - |
| Green Acre Capital Fund I | 2,000 | 2,373 | - | - | 2,373 | 4 | 2,377 |
| Weekend Holdings Corp. | 1,890 | 1,379 | - | - | 1,379 | (69) | 1,310 |
| IBBZ Krankenhaus GmbH | 1,956 | 1,993 | - | - | 1,993 | 39 | 2,032 |
| Greenwell Brands GmbH | 152 | 155 | - | - | 155 | 3 | 158 |
| HighArchy Ventures Ltd. | 9,995 | 4,997 | - | - | 4,997 | - | 4,997 |
| Schroll Medical ApS | 605 | 617 | - | - | 617 | 12 | 629 |
| 17,598 | 11,514 | - | - | 11,514 | (11) | 11,503 | |
| 54,889 | 27,016 | - | (3,557) | 23,459 | (1,150) | 22,309 |
Tetra Bio-Pharma Inc.
The Company owns 26,900,000 common shares and 6,900,000 warrants at a cost of $19,057, with a fair value of $4,842 as at August 31, 2020. Each warrant is exercisable at $1.29 per warrant expiring November 1, 2021.
Aleafia Health Inc. (formerly Emblem Corp.) (“Aleafia”)
During the period, the Company sold 5,823,831 common shares in Aleafia, for proceeds of $3,066 resulting in a loss of $254 (Note 25).
Rapid Dose Therapeutics Inc. (“RDT”)
The Company owns 6,918,500 common shares, for a total cost of $5,189, with a fair value of $1,384 as at August 31, 2020.
Fire & Flower Inc.
During the period, the Company sold 334,525 common shares, for proceeds of $252 resulting in a gain of $15 (Note 25).
High Tide Inc.
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 $160 as at August 31, 2020. Each warrant is exercisable at $0.85 per warrant expiring April 18, 2021.
Althea Group Holdings Ltd. (“Althea”)
The Company owns 12,250,000 common shares of Althea at a cost of $2,348 AUD ($2,206 CAD) with a fair value of $4,594 AUD ($4,420 CAD) as at August 31, 2020.
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 $nil as at August 31, 2020. 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.
| 13 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Green Acre Capital Fund I
The Company 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 $2,377 as at August 31, 2020. The Company has received $1,400 return of capital since its initial contribution.
Weekend Holdings Corp. (formerly Green Tank Holdings Corp.)
The Company owns 2,040,218 shares in Weekend Holdings Corp. for a total cost of $1,420 USD ($1,890 CAD), with a fair value of $1,000 USD ($1,310 CAD) as at August 31, 2020. The Company determined the fair value of its investment based on its net realizable value. The Company recognized a loss from the change in fair value of $69 due to changes in the foreign exchange rate.
IBBZ Krankenhaus GmbH Klinik Hygiea (“Krankenhaus”)
The Company owns 25.1% of Krankenhaus, which is the owner and operator of Berlin-based Schöneberg Hospital, for €1,294 ($1,956 CAD). Through this investment, the Company is entitled to 5% of the net income (loss) for the years 2018 to 2021, and 10% of the net income (loss) for the period thereafter. The Company determined that the fair value of its investment, based on Krankenhaus’ most recent financing at the same price, is equal to its carrying value. The Company recognized a gain from the change in fair value of $39 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. The Company recognized a gain from the change in fair value of $3 due to changes in the foreign exchange rate.
HighArchy Ventures Ltd. (“HighArchy”)
The Company owns 9,453,168 shares, and has an option to re-acquire control of 10,536,832 shares in HighArchy for a total cost of $9,995, with a fair value of $4,997 as at August 31, 2020. The Company determined the fair value of its investment based on its net realizable value.
Schroll Medical ApS
The Company has contributed capital of €403 ($605 CAD) and owns 3,000 shares in Schroll Medical ApS. 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. The Company recognized a gain from the change in fair value of $12 due to changes in the foreign exchange rate.
| 14 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 13. | Income taxes and deferred income taxes |
| A reconciliation of income taxes at the statutory rate with the reported taxes is as follows: | ||||||||
For the three months ended | ||||||||
| 2020 | 2019 | |||||||
| Net (loss) income before income taxes (recovery) | $ | (3,787 | ) | $ | 19,039 | |||
| Statutory rate | 26.5 | % | 26.5 | % | ||||
| Expected income tax (recovery) at combined basic federal and provincial tax rate | (1,004 | ) | 5,045 | |||||
| Effect on income taxes of: | ||||||||
| Foreign tax differential | (552 | ) | 78 | |||||
| Permanent differences | 37 | 18 | ||||||
| Non-deductible share-based compensation and other expenses | 1,129 | 1,313 | ||||||
| Non-taxable portion of loss (gains) | 1,336 | (3,576 | ) | |||||
| Other | (311 | ) | (626 | ) | ||||
| Tax assets not recognized | 673 | 346 | ||||||
| $ | 1,308 | $ | 2,598 | |||||
| Income tax expense (recovery) is comprised of: | ||||||||
| Current | $ | 14,992 | $ | 1,247 | ||||
| Future | (13,684 | ) | 1,351 | |||||
| $ | 1,308 | $ | 2,598 | |||||
| The following table summarized the movement in deferred tax: | ||||||||
| Amount | ||||||||
| Balance at May 31, 2019 | $ | 87,633 | ||||||
| Future income tax recovery | (3,682 | ) | ||||||
| Income tax recovery on share issuance costs | (483 | ) | ||||||
| Balance at May 31, 2020 | $ | 83,468 | ||||||
| Future income tax recovery | (13,684 | ) | ||||||
| Income tax recovery on share issuance costs | (86 | ) | ||||||
| Balance at August 31, 2020 | $ | 69,698 | ||||||
| The following table summarizes the components of deferred tax: | ||||||||
| August 31, 2020 | May 31, 2020 | |||||||
| Deferred tax assets | ||||||||
| Non-capital loss carry forward | $ | 65,334 | $ | 40,792 | ||||
| Capital loss carry forward | 3,489 | 2,556 | ||||||
| Share issuance and financing fees | 6,247 | 6,924 | ||||||
| Other | 2,069 | 2,483 | ||||||
| Deferred tax liabilities | ||||||||
| Net book value in excess of undepreciated capital cost | (13,705 | ) | (11,523 | ) | ||||
| Intangible assets in excess of tax costs | (95,108 | ) | (95,928 | ) | ||||
| Unrealized gain | (6,297 | ) | (5,592 | ) | ||||
| Biological assets and inventory in excess of tax costs | (31,727 | ) | (23,180 | ) | ||||
| Net deferred tax liabilities | $ | (69,698 | ) | $ | (83,468 | ) | ||
| 15 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 14. | 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 at August 31, 2020, 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 Street West, Leamington, Ontario and a first ranking position on a general security agreement.
The Company’s subsidiary, CC Pharma, has two operating lines of credit for €3,500 each, which bear interest at Euro Over Night Index Average plus 1.79% and Euro Interbank Offered Rate plus 3.682%. As at August 31, 2020, a total of €5,080 ($7,923 CAD) was drawn down from the available credit of €7,000. The operating lines of credit are secured by a first charge on the inventory held by CC Pharma.
| 15. | Long-term debt |
| August 31, 2020 |
May 31, 2020 | |||||
| Credit facility - $80,000 - Canadian prime interest rate plus an applicable margin, 3-year term, with a 10-year amortization, repayable in blended monthly payments, due in November 2022 | $ | 80,000 | $ | 80,000 | ||
| 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 | 18,073 | 18,241 | ||||
| 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 | 21,740 | 21,975 | ||||
| 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 | 800 | 830 | ||||
| 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 | 3,203 | 3,239 | ||||
| Vendor take-back mortgage - $2,850 - 6.75%, 5-year term, repayable in equal monthly instalments of $56 including interest, due in June 2021 | 597 | 701 | ||||
| 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 | 5,459 | 5,740 | ||||
| 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 | 5,459 | 5,740 | ||||
| Term loan - €1,500 - Euro Interbank Offered Rate + 2.00%, 5-year term, repayable in quarterly instalments of €98 including interest, due in April 2025 | 2,340 | 2,296 | ||||
| Term loan - €1,500 - Euro Interbank Offered Rate + 2.00%, 5-year term, repayable in quarterly instalments of €98 including interest, due in June 2025 | 2,340 | — | ||||
| 140,011 | 138,762 | |||||
| Deduct - unamortized financing fees | (634 | ) | (658 | ) | ||
| - principal portion included in current liabilities | (10,816 | ) | (8,467 | ) | ||
| $ | 128,561 | $ | 129,637 | |||
| Total long-term debt repayments are as follows: | ||||||
| Next 12 months | $ | 10,816 | ||||
| 2 years | 14,963 | |||||
| 3 years | 75,086 | |||||
| 4 years | 5,651 | |||||
| 5 years | 3,905 | |||||
| Thereafter | 29,590 | |||||
| Balance of obligation | $ | 140,011 | ||||
| 16 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The credit facility of $80,000 was entered into on November 29, 2019 by 51% owned subsidiary Aphria Diamond and is secured by a first charge on the property at 620 County Road 14, Leamington, Ontario, owned by Aphria Diamond, and a guarantee from Aphria Inc. Principal payments start on the credit facility in March 2021.
The term loan of $18,073 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 $21,740 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 $800 and mortgage payable of $3,203 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 $597 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.
During the period, the Company entered into a term loan for €1,500 ($2,340 CAD) through wholly-owned subsidiary CC Pharma. The term loans for €10,000 ($15,598 CAD) are held through wholly-owned subsidiary CC Pharma. These term loans are secured against the distribution inventory held by CC Pharma.
| 16. | Convertible debentures |
| August 31, 2020 | May 31, 2020 | |||||||
| Opening balance | $ | 270,783 | $ | 421,366 | ||||
| Debt settlement | — | (91,169 | ) | |||||
| Fair value adjustment | (421 | ) | (59,414 | ) | ||||
| Closing balance | $ | 270,362 | $ | 270,783 | ||||
The unsecured convertible debentures were entered into in April 2019, 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 USD 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 USD 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 USD 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 calls any or all of the Notes for redemption or;
(d) upon occurrence of specified corporate event.
| 17 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - 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 on which the Company provides 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.
As at August 31, 2020 there was $259,200 USD principal outstanding (May 31, 2020 - $259,200 USD).
| 17. | Share capital |
The Company is authorized to issue an unlimited number of common shares. As at August 31, 2020, the Company has issued 288,739,844 shares.
| Common Shares | Number of shares | Amount | ||||||
| Balance at May 31, 2020 | 286,520,265 | $ | 1,846,938 | |||||
| Legal settlement | 1,658,375 | 9,676 | ||||||
| Options exercised | 48,998 | 643 | ||||||
| RSUs exercised | 512,206 | 3,096 | ||||||
| 288,739,844 | $ | 1,860,353 | ||||||
| a) | In June 2020, the Company issued 1,658,375 shares as part of a legal settlement; |
| b) | Throughout the period, 48,998 shares were issued from the exercise of stock options with exercise prices ranging from $5.24 to $5.44 for a value of $643, including any cash consideration; and, |
| c) | Throughout the period, 512,206 shares were issued in accordance with the restricted share unit plan to employees. |
| 18. | Warrants |
The warrant details of the Company are as follows:
| Type of warrant | Expiry date | Number of warrants | Weighted average price | Amount | ||||||||||||
| Warrant | September 26, 2021 | 200,000 | $ | 3.14 | $ | 360 | ||||||||||
| Warrant | January 30, 2022 | 7,022,472 | 9.26 | — | ||||||||||||
| 7,222,472 | $ | 9.09 | $ | 360 | ||||||||||||
| August 31, 2020 | May 31, 2020 | |||||||||||||||
| Number of warrants | Weighted average price | Number of warrants | Weighted average price | |||||||||||||
| Outstanding, beginning of the period | 7,222,472 | $ | 9.09 | 2,292,800 | $ | 12.25 | ||||||||||
| Exercised during the period | — | — | (766,372 | ) | 1.50 | |||||||||||
| Issued during the period | — | — | 7,022,472 | 9.26 | ||||||||||||
| Expired during the period | — | — | (1,326,428 | ) | 19.84 | |||||||||||
| Outstanding, end of the period | 7,222,472 | $ | 9.09 | 7,222,472 | $ | 9.09 | ||||||||||
| 18 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 19. | 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 $1,700 during the three months ended August 31, 2020 (2019 - $3,013), related to stock options (Note 22). The total fair value of options granted during the period was $111 (2019 - $4,614).
| August 31, 2020 | May 31, 2020 | |||||||||||||||
| Number of options | Weighted average price | Number of options | Weighted average price | |||||||||||||
| Outstanding, beginning of the period | 5,882,471 | $ | 11.95 | 7,814,996 | $ | 11.05 | ||||||||||
| Exercised during the period | (261,027 | ) | 5.28 | (1,566,331 | ) | 3.86 | ||||||||||
| Issued during the period | 50,000 | 6.00 | 1,894,128 | 7.98 | ||||||||||||
| Forfeited during the period | (8,925 | ) | 8.26 | (2,260,322 | ) | 11.10 | ||||||||||
| Outstanding, end of the period | 5,662,519 | $ | 12.21 | 5,882,471 | $ | 11.95 | ||||||||||
| Exercisable, end of the period | 4,390,084 | $ | 12.87 | 3,873,497 | $ | 12.26 | ||||||||||
In June 2020, the Company issued 50,000 stock options at an exercise price of $6.00 per share, exercisable for 5 years to officers of the Company. Nil options vested immediately and the remainder vest over 3 years.
| 19 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
The outstanding option details of the Company are as follows:
| Expiry date | Weighted average exercise price | Number of options | Vested and exercisable | |||||||||
| October 2020 | $ | 6.90 | 20,000 | 20,000 | ||||||||
| November 2020 | $ | 9.05 | 20,000 | 20,000 | ||||||||
| December 2020 | $ | 5.25 | 300,000 | 125,000 | ||||||||
| December 2020 | $ | 14.06 | 100,000 | 100,000 | ||||||||
| January 2021 | $ | 21.70 | 10,000 | 10,000 | ||||||||
| January 2021 | $ | 22.89 | 110,000 | 80,000 | ||||||||
| March 2021 | $ | 14.39 | 20,000 | 20,000 | ||||||||
| March 2021 | $ | 9.98 | 200,000 | 200,000 | ||||||||
| March 2021 | $ | 12.39 | 50,000 | 50,000 | ||||||||
| April 2021 | $ | 11.40 | 333,334 | 283,334 | ||||||||
| May 2021 | $ | 20.19 | 858,500 | 858,500 | ||||||||
| June 2021 | $ | 1.40 | 1,668 | 1,668 | ||||||||
| June 2021 | $ | 11.78 | 50,000 | 50,000 | ||||||||
| August 2021 | $ | 1.64 | 65,000 | 65,000 | ||||||||
| September 2021 | $ | 19.38 | 50,000 | 33,333 | ||||||||
| October 2022 | $ | 6.90 | 37,000 | 37,000 | ||||||||
| July 2023 | $ | 11.51 | 60,000 | 40,000 | ||||||||
| July 2023 | $ | 11.85 | 328,000 | 214,666 | ||||||||
| September 2023 | $ | 19.38 | 113,334 | 59,998 | ||||||||
| October 2023 | $ | 19.70 | 40,000 | 13,332 | ||||||||
| February 2024 | $ | 12.77 | 125,000 | 74,996 | ||||||||
| February 2024 | $ | 13.31 | 1,000,000 | 1,000,000 | ||||||||
| April 2024 | $ | 11.45 | 60,000 | 19,998 | ||||||||
| June 2024 | $ | 9.15 | 300,000 | 100,000 | ||||||||
| June 2024 | $ | 9.70 | 50,000 | 16,666 | ||||||||
| August 2024 | $ | 9.13 | 460,717 | 154,609 | ||||||||
| October 2024 | $ | 6.63 | 300,000 | 300,000 | ||||||||
| November 2024 | $ | 6.26 | 291,315 | 183,333 | ||||||||
| June 2025 | $ | 6.00 | 50,000 | — | ||||||||
| 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 period | $ | 12.21 | 5,662,519 | 4,390,084 | ||||||||
The Company used the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.39% on the date of grant; expected life of 5 years; volatility of 70% based on comparable companies; forfeiture rate of 35%; dividend yield of nil; and, the exercise price of the respective option.
| 20 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 20. | Non-controlling interests |
| The following tables summarise the information relating to the Company’s subsidiaries, Aphria Diamond, Marigold Projects Jamaica Limited (“Marigold”), and ColCanna S.A.S. before intercompany eliminations. | ||||||||||||||||||||||||||||
| Non-controlling interests as at August 31, 2020: | ||||||||||||||||||||||||||||
| Aphria Diamond | Marigold | ColCanna S.A.S. | August 31, 2020 | |||||||||||||||||||||||||
| Current assets | $ | 40,121 | $ | — | $ | 487 | $ | 40,608 | ||||||||||||||||||||
| Non-current assets | 191,258 | — | 115,708 | 306,966 | ||||||||||||||||||||||||
| Current liabilities | (14,968 | ) | — | (387 | ) | (15,355 | ) | |||||||||||||||||||||
| Non-current liabilities | (149,250 | ) | — | (30,601 | ) | (179,851 | ) | |||||||||||||||||||||
| Net assets | 67,161 | — | 85,207 | 152,638 | ||||||||||||||||||||||||
| Non-controlling interests % | 49 | % | 5 | % | 10 | % | ||||||||||||||||||||||
| Non-controlling interests | $ | 32,909 | $ | — | $ | 8,521 | $ | 41,430 | ||||||||||||||||||||
| Non-controlling interests as at May 31, 2020: | ||||||||||||||||||||||||||||
| Aphria Diamond | Marigold | ColCanna S.A.S. | May 31, 2020 | |||||||||||||||||||||||||
| Current assets | $ | 51,521 | $ | — | $ | 754 | $ | 52,275 | ||||||||||||||||||||
| Non-current assets | 176,507 | — | 115,614 | 292,121 | ||||||||||||||||||||||||
| Current liabilities | (15,630 | ) | — | (378 | ) | (16,008 | ) | |||||||||||||||||||||
| Non-current liabilities | (176,516 | ) | — | (33,738 | ) | (210,254 | ) | |||||||||||||||||||||
| Net assets | 35,882 | — | 82,252 | 118,134 | ||||||||||||||||||||||||
| Non-controlling interests % | 49 | % | 5 | % | 10 | % | ||||||||||||||||||||||
| Non-controlling interests | $ | 17,582 | $ | — | $ | 8,225 | $ | 25,807 | ||||||||||||||||||||
| Non-controlling interests for the three months ended August 31, 2020: | ||||||||||||||||||||||||||||
| Aphria Diamond | Marigold | ColCanna S.A.S. | August 31, 2020 | |||||||||||||||||||||||||
| Revenue | $ | 76,007 | $ | — | $ | — | $ | 76,007 | ||||||||||||||||||||
| Total expenses (recovery) | 44,728 | — | (2,960 | ) | 41,768 | |||||||||||||||||||||||
| Net comprehensive income | 31,279 | — | 2,960 | 34,239 | ||||||||||||||||||||||||
| Non-controlling interests % | 49 | % | 5 | % | 10 | % | ||||||||||||||||||||||
| $ | 15,327 | $ | — | $ | 296 | $ | 15,623 | |||||||||||||||||||||
| Non-controlling interests for the three months ended August 31, 2019: | ||||||||||||||||||||||||||||
| Aphria Diamond | CannInvest Africa Ltd. | Verve Dynamics | Nuuvera Malta Ltd. | Marigold | ColCanna S.A.S. | August 31, 2019 | ||||||||||||||||||||||
| Revenue | $ | — | $ | 13 | $ | — | $ | 39 | $ | 6 | $ | — | $ | 58 | ||||||||||||||
| Total expenses (recovery) | 72 | $ | 1 | $ | 337 | 408 | 92 | (1,350 | ) | (440 | ) | |||||||||||||||||
| Net comprehensive loss | (72 | ) | 12 | (337 | ) | (369 | ) | (86 | ) | 1,350 | 498 | |||||||||||||||||
| Non-controlling interests % | 49 | % | 50 | % | 70 | % | 10 | % | 5 | % | 10 | % | ||||||||||||||||
| $ | (35 | ) | $ | 6 | $ | (236 | ) | $ | (37 | ) | $ | (4 | ) | $ | 135 | $ | (171 | ) | ||||||||||
| 21 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 21. | General and administrative expenses |
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Executive compensation | 2,790 | $ | 1,837 | |||||
| Consulting fees | 2,401 | 3,765 | ||||||
| Office and general | 5,163 | 4,207 | ||||||
| Professional fees | 1,239 | 2,512 | ||||||
| Salaries and wages | 11,585 | 6,282 | ||||||
| Insurance | 3,976 | 2,495 | ||||||
| Travel and accommodation | 901 | 1,041 | ||||||
| Rent | 298 | 166 | ||||||
| $ | 28,353 | $ | 22,305 | |||||
| 22. | Share-based compensation |
Share-based compensation is comprised of:
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Amounts charged to share-based payment reserve in respect of share-based compensation | $ | 1,700 | $ | 3,013 | ||||
| Deferred share units vested in the year | 872 | 300 | ||||||
| Deferred share units revalued in the year | 114 | 1 | ||||||
| Restricted share units vested in the year | 1,440 | 865 | ||||||
| Restricted share units revalued in the year | 135 | 777 | ||||||
| $ | 4,261 | $ | 4,956 | |||||
During the period, the Company issued 150,000 deferred share units to directors of the Company under the terms of the Company’s Omnibus Long-Term Incentive Plan.
During the period, the Company issued 2,574,986 restricted share units to employees, consultants and officers under the terms of the Company’s Omnibus Long-Term Incentive Plan. Nil vested immediately and the remaining vest over two years.
During the period, the Company issued 50,000 stock options to officers of the Company, under the terms of the Company’s Omnibus Long-Term Incentive Plan.
As at August 31, 2020, the Company had 346,716 deferred share units and 3,793,594 restricted share units outstanding, of which 30,000 deferred share units and 309,255 restricted share units were vested.
| 22 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 23. | Finance Income (expense), net |
| Finance income (expense), net is comprised of: | ||||||||
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Interest income | $ | 426 | $ | 3,896 | ||||
| Interest expense | (7,629 | ) | (9,153 | ) | ||||
| $ | (7,203 | ) | $ | (5,257 | ) | |||
| 24. | Non-operating income |
| Non-operating income is comprised of: | ||||||||
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Non-operating income (loss): | ||||||||
| Foreign exchange loss | $ | (20,250 | ) | $ | (8,682 | ) | ||
| (Loss) gain on long-term investments | (1,389 | ) | 13,708 | |||||
| Unrealized gain on convertible debentures | 421 | 14,207 | ||||||
| Other non-operating items, net | 3,895 | 1,070 | ||||||
| $ | (17,323 | ) | $ | 20,303 | ||||
| 25. | Gain (loss) on long-term investments |
| Gain (loss) on long-term investments for the three months ended August 31, 2020 is comprised of: | ||||||||||||||||||||
| Investment | Proceeds | Opening fair value / cost | Gain (loss) on disposal | Change in fair value | Total | |||||||||||||||
| Level 1 on fair value hierarchy | ||||||||||||||||||||
| Aleafia Health Inc. | $ | 3,066 | $ | 3,320 | $ | (254 | ) | $ | — | $ | (254 | ) | ||||||||
| Fire & Flower Inc. | 252 | 237 | 15 | — | 15 | |||||||||||||||
| Long-term investments (Note 12) | — | — | — | (1,150 | ) | (1,150 | ) | |||||||||||||
| For the period ended August 31, 2020 | 3,318 | 3,557 | (239 | ) | (1,150 | ) | (1,389 | ) | ||||||||||||
| 23 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 26. | Earnings per share |
| The calculation of earnings per share for the three months ended August 31, 2020 was based on the net (loss) income of $(5,095) (2019 – $16,441) and a weighted average number of common shares outstanding of 287,504,789 (2019 – 251,163,059) calculated as follows: | ||||||||
| 2020 | 2019 | |||||||
| Basic (loss) earnings per share: | ||||||||
| Net (loss) income for the period | $ | (5,095 | ) | $ | 16,441 | |||
| Average number of common shares outstanding during the period | 287,504,789 | 251,163,059 | ||||||
| (Loss) earnings per share - basic | $ | (0.02 | ) | $ | 0.07 | |||
| 2020 | 2019 | |||||||
| Diluted (loss) income per share: | ||||||||
| Net (loss) income for the period | $ | (5,095 | ) | $ | 16,441 | |||
| Average number of common shares outstanding during the period | 287,504,789 | 251,163,059 | ||||||
| "In the money" warrants outstanding during the period | — | 875,610 | ||||||
| "In the money" options outstanding during the period | — | 702,941 | ||||||
| 287,504,789 | 252,741,610 | |||||||
| (Loss) income per share - diluted | $ | (0.02 | ) | $ | 0.07 | |||
| 27. | Change in non-cash working capital |
| Change in non-cash working capital is comprised of: | ||||||||
| For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Decrease (increase) in: | ||||||||
| Accounts receivable | $ | (26,736 | ) | $ | (1,905 | ) | ||
| Other current assets | (8,330 | ) | 4,836 | |||||
| Inventory, net of fair value adjustment | (20,598 | ) | (8,595 | ) | ||||
| Biological assets, net of fair value adjustment | 1,520 | (6,532 | ) | |||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued liabilities | (17,805 | ) | (2,132 | ) | ||||
| Income taxes payable | 15,177 | (574 | ) | |||||
| Deferred revenue | (902 | ) | (991 | ) | ||||
| $ | (57,674 | ) | $ | (15,893 | ) | |||
| 28. | Financial risk management and financial instruments |
Financial instruments
The Company has classified its financial instruments as described in Note 3 of the Company’s audited financial statements for the year ended May 31, 2020.
The carrying values of accounts receivable, prepaids and other current assets, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity.
The Company’s long-term debt of $26,340 is subject to fixed interest rates. The Company’s long-term debt is valued based on discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada security is based on the then current market value to derive the discount rate. The fair value of the Company’s long-term debt in repayment as at August 31, 2020 was $26,112.
| 24 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
| Level 1 | quoted prices (unadjusted) in active markets for identical assets and liabilities |
| Level 2 | inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data |
| Level 3 | inputs for assets and liabilities not based upon observable market data |
| Level 1 | Level 2 | Level 3 | August 31, 2020 | |||||||||||||
| Financial assets at FVTPL | ||||||||||||||||
| Cash and cash equivalents | $ | 400,019 | $ | — | $ | — | $ | 400,019 | ||||||||
| Convertible notes receivable | — | — | 13,975 | 13,975 | ||||||||||||
| Long-term investments | 10,806 | — | 11,503 | 22,309 | ||||||||||||
| Financial liabilities at FVTPL | ||||||||||||||||
| Convertible debentures | — | — | (270,362 | ) | (270,362 | ) | ||||||||||
| Outstanding, end of the period | $ | 410,825 | $ | — | $ | (244,884 | ) | $ | 165,941 | |||||||
| Level 1 | Level 2 | Level 3 | May 31, 2020 | |||||||||||||
| Financial assets at FVTPL | ||||||||||||||||
| Cash and cash equivalents | $ | 497,222 | $ | — | $ | — | $ | 497,222 | ||||||||
| Convertible notes receivable | — | — | 14,626 | 14,626 | ||||||||||||
| Long-term investments | 15,502 | — | 11,514 | 27,016 | ||||||||||||
| Financial liabilities at FVTPL | ||||||||||||||||
| Convertible debentures | — | — | (270,783 | ) | (270,783 | ) | ||||||||||
| Outstanding, end of the period | $ | 512,724 | $ | — | $ | (244,643 | ) | $ | 268,081 | |||||||
| The following table presents the changes in level 3 items for the three months ended August 31, 2020: | ||||||||||||||||
| Unlisted equity securities | Convertible notes receivable | Convertible debentures | Total | |||||||||||||
| Closing balance May 31, 2019 | $ | 11,514 | $ | 14,626 | $ | (270,783 | ) | $ | (244,643 | ) | ||||||
| Additions | — | 107 | — | 107 | ||||||||||||
| Unrealized gain (loss) on fair value | (11 | ) | (758 | ) | 421 | (348 | ) | |||||||||
| Closing balance August 31, 2020 | $ | 11,503 | $ | 13,975 | $ | (270,362 | ) | $ | (244,884 | ) | ||||||
| 25 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
| (a) | Credit risk |
The maximum credit exposure at August 31, 2020 is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other current assets, promissory notes receivable and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions.
| Total | 0-30 days | 31-60 days | 61-90 days | 90+ days | |
| Trade receivables | 82,532 | 70,456 | 9,195 | 77 | 2,804 |
| 86% | 11% | 0% | 3% |
| (b) | Liquidity risk |
As at August 31, 2020, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have contractual maturity dates within one-year, long-term debt, and convertible debentures which have contractual maturities over the next five years.
Aphria maintains a debt service charge covenant on certain loans secured by its Aphria One facilities that is measured at year-end only. 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.
The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at August 31, 2020, management regards liquidity risk to be low.
| (c) | Currency rate risk |
As at August 31, 2020, a portion of the Company’s financial assets and liabilities held in United States Dollars (“USD”) and Euros consist of cash and cash equivalents, convertible notes receivable, and long-term investments. 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.
The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at August 31, 2020, approximately $275,000 USD ($360,000 CAD) 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 $3,500.
| (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.
| 26 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.
| 29. | Commitments and contingencies |
The Company has committed purchase orders outstanding at August 31, 2020 related to capital asset expansion of $14,058, all of which are expected to be paid within the next year.
The following table presents the future undiscounted payment associated with capital asset expansion and lease liabilities as of August 31, 2020:
| Years ending August 31, | ||||||
| 2021 | $ | 15,651 | ||||
| 2022 | 1,289 | |||||
| 2023 | 1,231 | |||||
| 2024 | 1,105 | |||||
| 2025 | 919 | |||||
| Thereafter | 1,989 | |||||
| $ | 22,184 | |||||
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 August 31, 2020, 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 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 itself in each of these actions. With respect to the cases commenced in the U.S., the Company pursued a motion to dismiss the U.S. claim. The Company’s motion was denied and the claim was maintained against the Company and certain of its former and current senior officers. In the U.S. action, 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. Canadian insurance coverage may not be sufficient to fully cover any judgments against the Company. As at August 31, 2020, the Company has not recorded any uninsured amount related to this contingency.
As of July 20, 2020, a proposed class action has been commenced against a number of Canadian licensed producers including the Company and its subsidiary, Broken Coast (collectively, the “Defendants”) by Lisa Marie Langevin (the “Plaintiff”) on behalf of all persons in Canada who purchased cannabis products that were manufactured, sold, promoted, or distributed by the Defendants and consumed prior to the labelled expiry date of such products on or after June 16, 2010, if such products were used for medicinal purposes and on or after October 17, 2018, if such products were used for recreational purposes (the “Proposed Class”). The Plaintiff specifically alleges that (i) the Defendants marketed medicinal and recreational cannabis products with an advertised content of TCH and CBD that was “drastically different” (higher and lower percentages) from the actual amount in the cannabis products and (ii) The Plaintiff suggests that the plastic bottles or caps used to store the cannabis products may have absorbed or degraded the THC or CBD content. The Plaintiff seeks recovery of the money the Proposed Class spent on the Defendants’ products that did not contain what they were advertised to contain and compensatory damages for those who suffered physical or mental injuries as a result of the Defendants’ mislabelling of the products. The Company intends to vigorously defend itself in each of these actions. Canadian insurance coverage may not be sufficient to fully cover any judgments against the Company. As at August 31, 2020, the Company has not recorded any uninsured amount related to this contingency.
| 27 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
| 30. | 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 encompass 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 net revenue: | ||||||||
For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Cannabis business | $ | 63,491 | $ | 30,785 | ||||
| Distribution business | 81,667 | 95,327 | ||||||
| Business under development | 531 | — | ||||||
| Total | $ | 145,689 | $ | 126,112 | ||||
| Segment net income (loss): | ||||||||
For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| Cannabis business | $ | 7,773 | $ | 19,887 | ||||
| Distribution business | (1,455 | ) | 1,861 | |||||
| Business under development | (11,413 | ) | (5,307 | ) | ||||
| Total | $ | (5,095 | ) | $ | 16,441 | |||
| Geographic net revenue: | ||||||||
For the three months ended August 31, | ||||||||
| 2020 | 2019 | |||||||
| North America | $ | 63,479 | $ | 30,785 | ||||
| Europe | 80,696 | 93,705 | ||||||
| Latin America | 1,514 | 1,622 | ||||||
| Africa | — | — | ||||||
| Total | $ | 145,689 | $ | 126,112 | ||||
| Geographic capital assets: | ||||||||
| August 31, 2020 | May 31, 2020 | |||||||
| North America | $ | 513,820 | $ | 519,768 | ||||
| Europe | 73,425 | 61,143 | ||||||
| Latin America | 6,313 | 6,252 | ||||||
| Africa | — | — | ||||||
| Total | $ | 593,558 | $ | 587,163 | ||||
| 28 |
Aphria Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended August 31, 2020 and August 31, 2019
(Unaudited - in thousands of Canadian dollars, except share and per share amounts)
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 three months ended August 31, 2020, the Company did not have a customer that accounted for greater than 10% of the Company’s revenue (2019 – nil).
