Aphria Inc. (formerly, Black Sparrow Capital Corp.)

  • Date: 2016-01-18

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Aphria Inc. CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2015 and 2014 (Unaudited, Expressed in Canadian Dollars, unless otherwise noted)

Notice of No Auditor Review of Interim Financial Statements Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying condensed interim consolidated financial statements of the company have been prepared by and are the responsibility of the company’s management. The company’s independent auditor has not performed an audit or review of these condensed interim consolidated financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants.

Aphria Inc. Condensed Interim Consolidated Statements of Financial Position (Unaudited)

Note ASSETS Current assets Cash and cash equivalents Accounts receivable Other receivables Inventory Biological assets Prepaid assets Current portion of promissory notes receivable

4 5 6 8

Capital assets Intangible assets Promissory notes receivable

7 7 8

LIABILITIES Current liabilities Accounts payable and accrued liabilities Shareholders’ equity Share capital Warrants Share-based payment reserve Deficit

10 11 12

November 30, 2015

$ 3,285,867 1,464,624 208,549 2,021,974 304,455 219,889 549,972 8,055,330

$ 7,051,909 -759,528 1,724,247 288,858 167,270 346,255 10,338,067

6,143,252 47,599 127,823 $ 14,374,004

3,626 161 74,598 253,745 $ 14,292,571

$ 1,607,248

$ 947,223

20,316,095 556,589 1,520,920 (9,626,848) 12,766,756 $ 14,374,004

Nature of operations (Note 1) Commitments (Note 14) Subsequent events (Note 16) Approved on behalf of the Board “John Cervini” Signed: Director

“Cole Cacciavillani” Signed: Director

The accompanying notes are an integral part of these financial statements 2

May 31, 2015

20,246,095 556,589 1,261,589 (8,718,925) 13,345,348 $ 14,292,571

Aphria Inc. Condensed Interim Consolidated Statements of Loss and Comprehensive Loss (Unaudited)

Note Revenue Cost of sales: Cost of goods sold Amortization Pre-distribution growing costs Change in biological assets produced

5 7 6

Gross profit Expenses: General and administrative Share-based compensation Selling, marketing and promotion Amortization Research and development

Loss from operations

15 12 7

For the three months ended November 30, 2015 2014 $ 2,026,975 $ -1,035,599 113,565 -(431,443) 717,721

-80,559 52,899 (272,807) (139,349)

1,532,255 222,259 -(764,608) 989,906

-108,710 212,318 (272,807) 48,221

1,309,254

139,349

1,987,809

(48,221)

506,902 212,318 965,602 44,631 54,752 1,784,205

551,934 449,141 173,305 9,781 -1,184,161

930,834 259,331 1,581,250 74,656 141,251 2,987,322

(474,951)

Listing costs Finance income Gain on sale of capital assets

For the six months ended November 30, 2015 2014 $ 2,977,715 $ --

-37,402 6,451

(1,044,812) (314,037) ---

(999,513) -85,139 6,451

1,124,777 994,747 208,643 12,528 -2,340,695 (2,388,916) (570,037) ---

Net loss and comprehensive loss

$ (431,098)

$ (1,358,849)

$ (907,923)

$ (2,958,953)

Weighted average number of common shares

52,481,510

38,572,920

52,480,543

38,375,987

Loss per share – basic and diluted

$ (0.01)

$ (0.04)

$ (0.02)

The accompanying notes are an integral part of these financial statements 3

$ (0.08)

Aphria Inc. Condensed Interim Consolidated Statements of Changes in Equity (Deficiency) (Unaudited) Share capital

Balance at May 31, 2014 Shares issued, net of issuance costs Conversion of due to related parties Subscription receipts, net of issuance costs Share-based payments Net loss for the period Balance at November 30, 2014

Number of common shares 26,666,667 10,346,253 1,666,667 ---38,679,587

Share capital

Balance at May 31, 2015 Warrants exercised Share-based payments Net loss for the period Balance at November 30, 2015

Number of common shares 52,479,587 58,333 --52,537,920

Subscription receipts

$ 2,500 5,535,748 1,000,000 ---$ 6,538,248

$ ---11,518,175 --$ 11,518,175

Subscription receipts

$ 20,246,095 70,000 --$ 20,316,095

$ ----$ --

Warrants

$ -216,261 ----$ 216,261

Warrants

$ 556,589 ---$ 556,589

Share-based payment reserve $ ----994,747 -$ 994,747

Share-based payment reserve $ 1,261,589 -259,331 -$ 1,520,920

The accompanying notes are an integral part of these financial statements 4

Deficit

$ (2,175,481) ----(2,958,953) $ (5,134,434)

Deficit

$ (8,718,925) --(907,923) $ (9,626,848)

Total

$ (2,172,981) 5,752,009 1,000,000 11,518,175 994,747 (2,958,953) $ 14,132,997

Total

$ 13,345,348 70,000 259,331 (907,923) $ 12,766,756

Aphria Inc. Condensed Interim Consolidated Statements of Cash Flows (Unaudited)

Note Cash used in operating activities: Net loss for the period Adjustments for: Amortization Gain on sale of capital assets Share-based compensation Change in fair value of biological assets Change in non-cash working capital Accounts receivable Other receivables Inventory Biological assets Prepaid assets Accounts payable and accrued liabilities

7 10 6

Cash provided by financing activities: Share capital issued, net of cash issuance costs Advances from related parties Repayment of amounts due to related parties

9 9

Cash used in investing activities: Investment in capital assets Investment in intangible assets Proceeds from disposal of capital assets Issuance of promissory notes receivable Repayment of promissory notes receivable

7 7

Six months ended November 30, 2015

Six months ended November 30, 2014

$ (907,923)

$ (2,958,953)

296,915 (6,451) 259,331 (42,790)

121,238 -994,747 (272,807)

(1,464,624) 550,979 (254,937) (15,597) (52,619) 660,025 (977,691)

-(303,835) (125,015) (157,257) (54,889) 397,986 (2,358,785)

70,000 648,725 (648,725) 70,000

5,752,009 373,560 (2,111,129) 4,014,440

(2,816,452) -35,896 (200,000) 122,205 (2,858,351)

(1,490,385) (102,470) ---(1,592,855)

Increase (decrease) in cash and cash equivalents

(3,766,042)

62,800

Cash and cash equivalents, beginning of period

7,051,909

170,455

$ 3,285,867

$ 233,255

Cash and cash equivalents, end of period

The accompanying notes are an integral part of these financial statements 5

Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited) 1.

Nature of operations Aphria Inc. (the "Company" or “Aphria”) was incorporated under the Business Corporations Act (Alberta) on June 22, 2011 as Black Sparrow Capital Corp. (“Black Sparrow”) and was continued in Ontario on December 1, 2014. Pure Natures Wellness Inc. doing business as Aphria (“PNW”), a wholly-owned subsidiary of the Company, is licensed to produce and sell medical marijuana under the provisions of the Marihuana for Medical Purposes Regulations (“MMPR”). The registered office is located at 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario. The Company’s common shares are listed under the symbol “APH” on the TSX Venture Exchange (“TSX-V”). On December 2, 2014, the Company closed its qualifying transaction with PNW. The Company was a capital pool company prior to the transaction. The transaction was accounted for as a reverse acquisition. These financial statements were approved by the Company’s board of directors on January 15, 2015.

2.

Basis of preparation (a)

Statement of compliance The Company’s condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. These financial statements do not include all notes of the type normally included within the annual financial report and should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2015, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee.

(b)

Basis of measurement These financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.

(c)

Functional currency The Company and its subsidiary’s functional currency, as determined by management is Canadian dollars. These financial statements are presented in Canadian dollars.

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, 2015. The Company has reclassified certain items on the statement of loss and comprehensive loss to improve clarity.

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Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited)

New standards and interpretations issued but not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective and have not been applied in preparing these financial statements. Amendments to IAS 16 - Property Plant and Equipment and IAS 41 - Agriculture - The amendments bring bearer plants, which are used solely to grow produce, into the scope of IAS 16 so that they are accounted for in the same way as property, plant and equipment. The amendments are effective for annual periods beginning on or after January 1, 2016, with earlier application being permitted. 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 and measurement of financial instruments. IFRS 15 - Revenue from Contracts with Customers, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted, specifies how and when to recognize revenue and enhances relevant disclosures to be applied to all contracts with customers. The Company is assessing the impact of these new and revised standards. 4.

Other receivables Other receivables are comprised of:

HST receivable Accrued interest Credit card receivable Other

5.

November 30, 2015 $ 75,214 74,235 57,510 1,590 $ 208,549

May 31, 2015 $ 657,041 58,965 30,634 12,888 $ 759,528

November 30, 2015 $ 1,938,524 83,450 $ 2,021,974

May 31, 2015 $ 1,655,259 68,988 $ 1,724,247

Inventory Inventory is comprised of:

Harvested cannabis Packaging and supplies

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Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited)

6.

Biological assets Biological assets are comprised of: Amount $ 288,858 3,458,999 (3,433,353) (10,049) $ 304,455

Balance as at May 31, 2015 Increase in fair value less costs to sell due to biological transformation Transferred to inventory upon harvest Sale of biological assets Balance as at November 30, 2015

The increase in fair value less costs to sell over and above historical cost was $431,443 and $764,608 during the three and six months ended November 30, 2015 (2014 - $272,807 and $272,807) respectively. In determining the fair value of biological assets, management is required to make a number of estimates, including the expected cost required to grow the cannabis up to the point of harvest, harvesting costs, selling costs, sales price, and expected yields for the cannabis plant. These estimates are subject to volatility in market prices and a number of uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. 7.

Capital assets and intangible assets Production equipment Cost At May 31, 2014 Additions At May 31, 2015 Additions Disposals At November 30, 2015 Accumulated amortization At May 31, 2014 Amortization At May 31, 2015 Amortization Disposals At November 30, 2015 Net book value At May 31, 2014 At May 31, 2015 At November 30, 2015

Office equipment

Leasehold improvements

Construction in process

Total capital assets

Intangible assets

$ 686,549 539,818 1,226,367 230,958 (35,896) $ 1,421,429

$ 32,002 191,642 223,644 252,755 -$ 476,399

$ 862,927 1,368,685 2,231,612 57,153 -$ 2,288,765

$ -304,701 304,701 2,275,586 -$ 2,580,287

$ 1,581,478 2,404,846 3,986,324 2,816,452 (35,896) $ 6,766,880

$ -107,995 107,995 --$ 107,995

$ 8,725 139,584 148,309 99,291 (6,451) $ 241,149

$ 1,241 23,310 24,551 47,657 -$ 72,208

$ 2,716 184,587 187,303 122,968 -$ 310,271

$ -----$ --

$ 12,682 347,481 360,163 269,916 (6,451) $ 623,628

$ -33,397 33,397 26,999 -$ 60,396

$ 677,824 $ 1,078,058 $ 1,180,280

$ 30,761 $ 199,093 $ 404,191

$ 860,211 $ 2,044,309 $ 1,978,494

$ -$ 304,701 $ 2,580,287

$ 1,568,796 $ 3,626,161 $ 6,143,252

$ --$ 74,598 $ 47,599

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Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited)

8.

Promissory notes receivable May 31, 2015 $ 100,000

Additions $ --

Payments $ --

Nov. 30, 2015 $ 100,000

500,000

--

122,205

377,795

Note receivable - $100,000, noninterest bearing, one-year term, due in July 2016

--

100,000

--

100,000

Note receivable - $100,000, noninterest, one-year term, due in September 2016

--

100,000

--

100,000

$ 600,000

$ 200,000

$ 122,205

677,795

Note receivable - $100,000, noninterest bearing, one-year term, due in March 2016 Note receivable - $500,000, bearing interest at 3%, repayable in 24 equal blended monthly instalments, due in May 2017

Presented as: November 30, 2015 $ 549,972 127,823 $ 677,795

Current portion Long-term portion

9.

May 31, 2015 $ 346,255 253,745 $ 600,000

Related party transactions Prior to going public, the Company funded operations through the support of related parties. Since going public, the Company has continued to leverage the purchasing power of these related parties for certain of its growing related expenditures. The balance owing to related parties as at November 30, 2015 was $nil (May 31, 2015 - $nil). These parties are related as they are corporations that are controlled by certain officers and directors of the Company. Amount $ -648,725 (648,725) $ --

Balance as at May 31, 2015 Related party charges in period Payments to related parties in period Balance as at November 30, 2015

9

Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited) During the six months ended November 30, 2015, related party corporations charged or incurred expenditures on behalf of the Company (including rent) totalling $648,725 (2014 - $373,560). Included in this amount was rent of $77,173 charged during the six months ended November 30, 2015 (2014 - $84,000). Key management personnel compensation was comprised of: November 30, 2015 $ 254,495 156,532 $ 411,027

Salaries Share-based compensation

May 31, 2015 $ 418,077 864,270 $ 1,282,347

Directors of the Company control 41.3% of the voting shares of the Company. 10.

Share capital The Company is authorized to issue an unlimited number of common shares. As at November 30, 2015, the Company has issued 52,537,920 shares.

11.

Warrants The warrant details of the Company are as follows:

12.

Type of warrant

Expiry date

Number of warrants

Warrant Compensation warrant / option Compensation warrant / option Warrant Balance at November 30, 2015

June 3, 2016 December 2, 2016 June 3, 2019 December 2, 2019

5,114,794 802,268 618,333 11,500,000 18,035,395

Weighted average price $ 1.20 $ 1.10 $ 0.60 $ 1.50 $ 1.37

Amount

$ -340,328 216,261 -$ 556,589

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

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Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited)

The option details of the Company are as follows: Expiry date

Exercise price

November 2017 December 2017 March 2018 April 2018 August 2018 October 2018 November 2018 June 2019 August 2019 September 2020 October 2020 Balance at November 30, 2015

$ $ $ $ $ $ $ $ $ $ $ $

1.10 1.10 0.90 1.18 0.93 1.17 1.49 0.60 1.10 0.85 1.19 0.82

Number of options 480,000 1,020,000 205,000 165,000 30,000 20,000 20,000 2,600,000 50,000 200,000 50,000 4,840,000

Vested and exercisable 170,000 170,960 25,000 5,000 10,000 6,667 20,000 2,600,000 50,000 200,000 50,000 3,307,627

The Company recognized a share-based compensation expense of $259,331 during the six months ended November 30, 2015 (2014 - $994,747). The total fair value of options granted during the period was $149,500 (2014 - $1,186,375).

Outstanding, beginning of the period Expired during the period Issued during the period Cancelled during the period Outstanding, end of period Exercisable, end of period

November 30, 2015 Weighted Average Number of Exercise Options Price 4,520,000 $ 0.81 --320,000 0.97 --4,840,000 $ 0.82 3,307,627 $ 0.69

November 30, 2014 Weighted Average Number of Exercise Options Price ----3,130,000 $ 0.68 --3,130,000 $ 0.68 -$ --

In September 2015, the Company issued 200,000 stock options at an exercise price of $0.85 per share, exercisable for 5 years. The options vested fully in December, 2015. In October 2015, the Company issued 20,000 stock options at an exercise price of $1.17 per share, exercisable for 3 years. The options vest 1/3 upon grant, 1/3 on first anniversary date of grant, 1/3 on 2nd anniversary date of grant. In November 2015, the Company issued 70,000 stock options, 50,000 at an exercise price of $1.19, exercisable for 5 years, and 20,000 at an exercise price of $1.49, exercisable for 3 years. The options vested immediately upon grant. The Company used the Black Scholes option pricing model to determine the fair value of options granted using the following assumptions: risk-free rate of 0.44% on the date of grant; expected life of 3 & 5 years; 11

Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited) volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, exercise price of the respective options. 13.

Financial risk management and financial instruments Financial instruments The Company has classified its cash and cash equivalents as fair value through profit or loss, accounts receivable and other receivables and promissory notes receivable as loans and receivables, and accounts payable and accrued liabilities and amounts due to related parties as other financial liabilities. The carrying values of other receivables, promissory notes receivable, accounts payable and accrued liabilities, and due to related parties approximate their fair values due to their short periods to maturity. 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 Level 2 Level 3

quoted prices (unadjusted) in active markets for identical assets and liabilities inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data inputs for assets and liabilities not based upon observable market data

Financial risk management The Company has exposure to the following risks from its use of financial instruments: credit risk; and, liquidity risk. (a)

Credit risk The maximum credit exposure at November 30, 2015 is the carrying amount of cash and cash equivalents, accounts receivable and other receivables and promissory notes receivable. The Company does not have significant credit risk with respect to customers. All cash and cash equivalents are placed with major Canadian financial institutions.

(b)

Liquidity risk As at November 30, 2015, the Company’s financial liabilities consist of accounts payable and accrued liabilities, which have contractual maturity dates within one year. The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at November 30, 2015, management regards liquidity risk to be low.

(c)

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 12

Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited) manages the capital structure and makes adjustments to 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. As at November 30, 2015, the Company has not entered into any debt financing. The Company is not subject to externally imposed capital requirements. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the period. The Company considers its cash and cash equivalents as capital. 14.

Commitments The Company has a lease commitment until December 31, 2018 for the rental of greenhouse and office space from a related party. The Company has an option to extend this lease for two additional 5 year periods. Minimum payments payable over the next five years are as follows: Fiscal year ending May 31, $ 116,337 232,673 232,673 135,726 $ 717,409

2016 2017 2018 2019

15.

General and administrative expenses

Executive compensation Consulting fees Office and general Professional fees Salaries and wages Travel and accommodation Rent

16.

For the three months ended November 30, 2015 2014 $ 131,541 $ 111,577 17,387 201,820 103,546 45,838 99,755 110,726 85,379 42,332 56,551 25,141 12,743 14,500 $ 506,902 $ 551,934

For the six months ended November 30, 2015 2014 $ 254,495 $ 418,077 27,287 340,020 224,057 74,150 135,581 163,960 151,469 42,332 115,362 29,738 22,583 56,500 $ 930,834 $ 1,124,777

Subsequent events On December 11, 2015, the Company granted 195,000 stock options at an exercise price of $1.26 per share, expiring 3 years from the date of grant. The options vest immediately upon grant. On December 11, 2015 the Company closed a bought deal financing in which it issued 8,846,370 units at $1.30 per unit for total financing raise of $11,500,281. Each unit contained one common share and a half warrant at an exercise price of $1.75. The Company incurred cash costs of $1,015,017 and issued 530,782 broker warrants at $1.30 with an expiry date of December 11, 2017. In addition, the Company issued

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Aphria Inc. Notes to the Condensed Interim Consolidated Financial Statements For the six months ended November 30, 2015 and 2014 (Unaudited) 265,391 broker compensation warrants at $1.75 with an expiry date of December 11, 2018. The Company plans to use the proceeds primarily to fund future expansion. On January 13, 2015 the Company issued 3,600,000 common shares to owners of CannWay Pharmaceuticals Ltd. (“CannWay”) in exchange for 100% ownership of CannWay. The Company previously had a branding agreement with CannWay which allowed it to use the CannWay brand in exchange for a royalty on all sales of CannWay branded products, this contract is now terminated and Aphria owns full rights to the brand.

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