tlry-8ka_20190228.htm

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K/A

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 28, 2019

 

TILRAY, INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

Delaware

001-38594

82-4310622

(State or Other Jurisdiction

of Incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

 

 

 

1100 Maughan Road

Nanaimo, BC

 

V9X IJ2

(Address of Principal Executive Offices)

 

(Zip Code)

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

Not Applicable

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

 

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

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

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

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

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

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

Emerging growth company 

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

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class 2 Common Stock, $0.0001 par value per share

 

TLRY

 

The Nasdaq Global Select Market

 

 

 


 

EXPLANATORY NOTE

 

On March 4, 2019, Tilray, Inc. (“Tilray”) filed a Current Report on Form 8-K announcing that Tilray completed the acquisition (the “Acquisition”) of FHF Holdings Ltd. (“Manitoba Harvest”) on February 28, 2019 pursuant to a plan of arrangement under Division 5 of Part 9 of the Business Corporations Act (British Columbia) (the “Manitoba Arrangement”). A description of the consideration and the terms of the Manitoba Arrangement and a copy of the Arrangement Agreement pursuant to which the Manitoba Arrangement occurred are included in the Current Report on Form 8-K filed by Tilray on February 25, 2019.

 

Tilray is filing this Amendment on Form 8-K/A solely to provide the historical financial statements of Manitoba Harvest required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K in respect of the acquisition of Manitoba Harvest.

 

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

The audited financial statements of Manitoba Harvest as of and for the years ended December 31, 2018 and 2017, as well as accompanying notes thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and incorporated herein by reference. The consent of Grant Thornton LLP, the independent auditors of Manitoba Harvest, is filed herewith as Exhibit 23.1.

(b) Pro forma financial information.

The unaudited pro forma combined financial statements of Tilray and Manitoba Harvest as of and for the year ended December 31, 2018, as well as accompanying notes thereto, each giving effect to the Acquisition, are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated herein by reference.

(d) Exhibits.

 

Exhibit

Number

 

Description

2.2*

 

Arrangement Agreement among 1197879 B.C. Ltd. and FHF Holdings Ltd. and Tilray, Inc. and the Shareholder Representative and Each Other Shareholder Bound by this Agreement dated February 19, 2019 (incorporated herein by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Tilray on February 25, 2019).

2.3*

 

Amending Agreement by and among Tilray, Inc. 1197879 B.C. Ltd., FHF Holdings Ltd. and Compass Group Diversified Holdings, LLC dated February 27, 2019 (incorporated herein by reference to Exhibit 2.3 to the Current Report on Form 8-K filed by Tilray on March 4, 2019).

23.1

 

Consent of Grant Thornton LLP, independent auditors of FHF Holdings Ltd.

99.1

 

Audited consolidated financial statements of FHF Holdings Ltd. as of and for the years ended December 31, 2018 and 2017.

99.2

 

Unaudited pro forma combined financial information of Tilray, Inc.

 

 

 

  

* Schedules have been omitted pursuant to Item 601(b)(2) of Regulations S-K. The registrant will furnish copies of any such schedules to the Securities and Exchange Commission upon request.

 

 

 

 

 

 

 

 

1


 

SIGNATURES

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

 

 

 

Tilray, Inc.

 

 

 

 

Date: May 13, 2019

 

By:

/s/ Brendan Kennedy

 

 

 

Brendan Kennedy

 

 

 

Chief Executive Officer

 

 

2

tlry-ex231_143.htm

Exhibit 23.1

 

Consent of Independent Chartered Public Accountants

 

We have issued our report dated March 6, 2019, with respect to the consolidated financial statements of FHF Holdings Ltd. for the year ended December 31, 2018 included in the Current Report on Form 8-K/A of Tilray, Inc. dated May 13, 2019. We consent to the incorporation by reference of said report in the Registration Statement of Tilray, Inc. on Form S-8 (File No. 333-226267).

 

/s/ GRANT THORNTON LLP

 

Mississauga, Canada

May 13, 2019

 

tlry-ex991_129.htm

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements and Report of Independent Chartered Professional Accountants

 

 

FHF HOLDINGS LTD. AND SUBSIDIARIES

 

December 31, 2018 and 2017

 


FHF Holdings Ltd. and Subsidiaries

 

 

 

 

Contents

 

 

Page

Report of Independent Chartered Professional Accountants

1

Consolidated Balance Sheets

2

Consolidated Statements of Comprehensive Loss

3

Consolidated Statements of Preferred Stock and Stockholders’ Equity

4

Consolidated Statements of Cash Flows

5

Notes to Consolidated Financial Statements

6

 

 


 

 

 

 

Report of Independent

Chartered Professional Accountants

Board of Directors

FHF Holdings Ltd. and Subsidiaries

 

 

 

 

 

 

 

Grant Thornton LLP

Suite 501

201 City Centre Drive Mississauga, ON L5B 2T4

 

T +1 416 366 0100

F +1 905 804 0509

 

We have audited the accompanying consolidated financial statements of FHF Holdings Ltd. and Subsidiaries (collectively, the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and December 31, 2017, and the related consolidated statements of comprehensive loss, preferred stock and stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of  material  misstatement  of  the  consolidated  financial  statements,  whether  due  to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that  are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FHF Holdings Ltd. and Subsidiaries as of December 31, 2018 and December 31, 2017, and the consolidated results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Grant Thornton LLP

 

 

 

Mississauga, Canada

Chartered Professional Accountants

March 6, 2019

Licensed Public Accountants

 

 

 

 

 

 

grantthornton.ca

 

 

 


FHF Holdings Ltd. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

As at December 31, 2018 and 2017

(in thousands, except share data)

 

TOTAL ASSETS

 

 

 

December 31,

 

 

December 31,

 

Current assets:

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,591

 

 

$

1,579

 

Accounts receivable, net of allowance for doubtful accounts of $146 (2017: $89)

 

 

9,345

 

 

 

6,684

 

Inventory, net (note 2)

 

 

15,939

 

 

 

12,353

 

Income tax receivable

 

 

216

 

 

 

330

 

Prepaid expenses

 

 

1,032

 

 

 

633

 

Other current assets

 

 

34

 

 

 

34

 

Total current assets

 

 

30,157

 

 

 

21,613

 

Property and equipment, net (note 3)

 

 

24,751

 

 

 

25,917

 

Intangible assets, net (note 4)

 

 

72,978

 

 

 

78,771

 

Goodwill (note 4)

 

 

51,499

 

 

 

51,499

 

Other long-term assets

 

-

 

 

 

36

 

Total assets

 

$

179,385

 

 

$

177,836

 

 

TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,806

 

 

$

2,805

 

Accrued expenses

 

 

7,502

 

 

 

4,648

 

Related party revolving line of credit (note 5)

 

 

12,954

 

 

 

5,936

 

Current portion of related party long-term debt (note 5)

 

 

2,375

 

 

 

2,375

 

Current portion of long-term debt (note 5)

 

 

691

 

 

 

711

 

Total current liabilities

 

 

29,328

 

 

 

16,475

 

Related party long-term debt (note 5)

 

 

49,807

 

 

 

52,104

 

Long-term debt (note 5)

 

 

2,854

 

 

 

3,526

 

Deferred tax liability (note 7)

 

 

17,506

 

 

 

19,740

 

Total liabilities

 

 

99,495

 

 

 

91,845

 

 

Commitments and contingencies (note 6)

 

Class A Preferred stock, no par value, issued and outstanding 325 (2017: 325)

 

 

 

 

 

 

 

 

(note 9)

 

 

48,301

 

 

 

43,126

 

 

 

 

 

 

 

 

 

 

Class A Common stock, no par value, issued and outstanding 865,419 (2017:

 

 

 

 

 

 

 

 

865,419)

 

 

66,127

 

 

 

65,207

 

Class B Common stock, no par value, issued and outstanding 263,748 (2017:

 

 

 

 

 

 

 

 

263,748)

 

 

18,990

 

 

 

18,990

 

Accumulated deficit

 

 

(53,038

)

 

 

(40,778

)

Accumulated other comprehensive loss

 

 

(490

)

 

 

(554

)

Total stockholders’ equity

 

 

31,589

 

 

 

42,865

 

Total liabilities, preferred stock and stockholders’ equity

 

$

179,385

 

 

$

177,836

 

 

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

 

2


FHF Holdings Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

For the years ended December 31, 2018 and 2017

(in thousands)

 

 

 

2018

 

 

2017

 

Net revenue from contracts with customers

 

$

87,415

 

 

$

72,400

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

49,997

 

 

 

39,775

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

37,418

 

 

 

32,625

 

 

 

 

 

 

 

 

 

 

Intangible asset impairment loss (note 4)

 

-

 

 

 

2,900

 

Goodwill impairment loss (note 4)

 

-

 

 

 

7,895

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

39,690

 

 

 

33,978

 

 

 

 

(2,272

)

 

 

(12,148

)

Operating loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

-

 

 

 

(1

)

Interest expense

 

 

17

 

 

 

52

 

Related party interest expense (note 5)

 

 

6,709

 

 

 

5,547

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(8,998

)

 

 

(17,746

)

 

 

 

 

 

 

 

 

 

Provision for income tax benefit (note 7)

 

 

(1,913

)

 

 

(1,884

)

 

 

 

 

 

 

 

 

 

Net loss

 

 

(7,085

)

 

 

(15,862

)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

64

 

 

 

(554

)

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(7,021

)

 

$

(16,416

)

 

 

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

 

3


 

FHF Holdings Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

For the years ended December 31, 2018 and 2017

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

Preferred Stock

(note 9)

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Total

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at January 1, 2017

 

 

325

 

 

$

38,506

 

 

 

865,419

 

 

$

63,915

 

 

 

263,748

 

 

$

18,990

 

 

$

-

 

 

$

(20,296

)

 

$

62,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,292

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,292

 

Accretion of preferred stock   liquidation amount (note 9)

 

 

-

 

 

 

4,620

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,620

)

 

 

(4,620

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,862

)

 

 

(15,862

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(554

)

 

 

-

 

 

 

(554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2017

 

 

325

 

 

$

43,126

 

 

 

865,419

 

 

$

65,207

 

 

 

263,748

 

 

$

18,990

 

 

$

(554

)

 

$

(40,778

)

 

$

42,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

920

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

920

 

Accretion of preferred stock

liquidation amount (note 9)

 

 

-

 

 

 

5,175

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,175

)

 

 

(5,175

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,085

)

 

 

(7,085

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

64

 

 

 

-

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2018

 

 

325

 

 

$

48,301

 

 

 

865,419

 

 

$

66,127

 

 

 

263,748

 

 

$

18,990

 

 

$

(490

)

 

$

(53,038

)

 

$

31,589

 

 

 

 

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

 

4


FHF Holdings Ltd. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the years ended December 31, 2018 and 2017

(in thousands)

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,085

)

 

$

(15,862

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,083

 

 

 

8,227

 

Stock-based compensation

 

 

920

 

 

 

1,292

 

Other non-cash items

 

 

96

 

 

 

(605

)

Deferred tax, net

 

 

(2,084

)

 

 

(2,036

)

Intangible asset impairment loss

 

 

-

 

 

 

2,900

 

Loss on sales of assets and other non-cash losses

 

 

20

 

 

 

-

 

Goodwill impairment loss

 

 

-

 

 

 

7,895

 

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,661

)

 

 

1,743

 

Other current assets

 

 

(399

)

 

 

107

 

Inventory, net

 

 

(3,586

)

 

 

(1,678

)

Accounts payable

 

 

3,001

 

 

 

(894

)

Accrued expenses

 

 

2,854

 

 

 

971

 

Net cash (used in) provided by operating activities

 

 

(841

)

 

 

2,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, net of dispositions

 

 

(1,055

)

 

 

(1,345

)

Investment in intellectual property

 

 

(89

)

 

 

(23

)

Net cash used in investing activities

 

 

(1,144

)

 

 

(1,368

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from related party loans and line of credit

 

 

7,000

 

 

 

4,000

 

Repayment on related party loans and line of credit

 

 

(2,375

)

 

 

(5,125

)

Payments on loans and lease obligations

 

 

(692

)

 

 

(700

)

Net cash provided by (used in) financing activities

 

 

3,933

 

 

 

(1,825

)

Translation impact

 

 

64

 

 

 

-

 

Net increase (decrease) in cash

 

 

2,012

 

 

 

(1,133

)

Cash, beginning of year

 

 

1,579

 

 

 

2,712

 

Cash, end of year

 

$

3,591

 

 

$

1,579

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash payments made for interest expense

 

$

16

 

 

$

5,454

 

Cash payments made for income taxes

 

$

141

 

 

$

881

 

 

 

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

 

5


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

 

FHF Holdings Ltd. and Subsidiaries (the “Company” or “FHF”) is a private company incorporated in 2015 under the Canada Business Corporations Act. FHF manufactures, markets and distributes food products from hemp seed. FHF offers a broad range of natural and organic food products and ingredients that are sold through more than 450 retailers and websites in Canada, the United States (“U.S.”) and internationally under the brand names of Manitoba Harvest and Just Hemp Foods and to distributors as Hemp Oil Canada Inc. (“HOCI”). FHF is headquartered in Winnipeg, Manitoba, Canada and has offices and manufacturing facilities in Winnipeg and St. Agathe, Manitoba, Canada and offices in Minneapolis, Minnesota, U.S.

 

On July 10, 2015, the Company acquired 100% of Fresh Hemp Foods Ltd. (“FHFL”), incorporated in 2015 under the Canada Business Corporations Act. Compass Group Diversified Holdings LLC (“Compass”), the majority owner of the Company, made loans to the Company of $30.4 million and purchased a controlling interest in the Company.

 

On January 1, 2017, as part of a reorganization, FHFL amalgamated with its wholly owned subsidiary, HOCI.  The transaction was between entities under common control and, accordingly, the  acquired assets  and  liabilities were  recorded at the carrying amount. The consolidated financial statements of the Company report the results of operations of HOCI for the period in which the transfer occurs and all prior periods during which the entities were under common control.

 

Principles of Consolidation

 

These consolidated financial statements represent the consolidated operations of FHF Holdings Ltd., Fresh Hemp Foods Ltd., and Manitoba Harvest USA LLC. All significant intercompany transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include sales allowances, spoil and returns reserves on inventory, allowances for product demonstrations, allowance for doubtful accounts, reserves for excess or obsolete inventory, estimated useful lives of property and equipment and intangible assets, valuation allowance for deferred tax assets and uncertain tax positions, assumptions in the valuation of  stock-based compensation, and impairment  of intangibles, goodwill and other long-term assets. Actual results could differ from those estimates.

 

 

6


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this ASU on January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as  of January 1, 2018. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements including the presentation of revenues in the consolidated statements of comprehensive loss.

 

The performance obligation on sales of products is satisfied upon receipt by the customers for branded products sold through the natural and organic distribution channel and upon shipment for ingredient products, including freight revenue, provided that persuasive evidence of an agreement exists, the price is fixed and determinable, title has transferred and collection of the resulting receivable is reasonably assured. Revenue is recorded at a point in time net of sales tax and payments are due within 30 days of invoicing date. The Company estimates its variable consideration which includes returns and sales allowances using the expected value method as a reduction of product revenue based on historical rates of returns and vendor allowances.

 

Cash

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable, net

 

Accounts receivable are unsecured customer obligations which generally require payment within various terms from the invoice date. Accounts receivable are stated at the invoice amount. Financing terms vary by customer. Payments of accounts receivable are applied to the specific invoices identified on the customer’s remittance advice or, if unspecified, to the earliest unpaid invoices.

 

The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflect management’s best estimate of amounts that may not be collected. The Company records an allowance for doubtful accounts in assessing collectability of amounts outstanding. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable, and historical experience. If there is a deterioration of a major customer’s creditworthiness, or actual defaults are higher than the historical experience, management’s estimates of the recoverability of amounts due to the Company could be adversely affected. All accounts or portions thereof deemed to be uncollectible or that may require an excessive collection cost are written off to the allowance for doubtful accounts. The Company also records accruals for chargebacks which includes an estimate of fees charged by retail customers primarily for promotions, discounts and returns. The charges for these estimated fees are based on historical experience and are reflected as a reduction to net sales and included in accrued liabilities.

 

7


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Activity in the Company’s allowance for doubtful accounts consists of the following, (in thousands):

 

 

 

2018

 

 

2017

 

Allowance, beginning of the year

 

$

89

 

 

$

257

 

Provision recorded for estimated bad debts

 

 

106

 

 

 

9

 

Recoveries of allowances previously accrued

 

 

15

 

 

 

(177

)

Write off of accounts receivable

 

 

(64

)

 

 

-

 

Allowance, end of the year

 

$

146

 

 

$

89

 

 

Inventory, net

 

Inventories are valued at the lower of weighted average cost or market. Raw materials are hempseed, packaging and other minor ingredients whose costs are determined on a weighted average first-in, first-out basis of actual costs paid. Work-in-process and finished goods inventory are composed of raw materials, labour and overhead. Inventory is reflected net of reserves for excess and obsolete inventory.

 

The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s consolidated financial position, results of operations, and cash flows.

 

Property and Equipment, net

 

Property and equipment are stated at cost and depreciated and amortized using the straight-line method over the estimated useful lives of the depreciable assets as follows:

 

Land

Indefinite

Buildings

25 years

Machinery and equipment

15 years

Leasehold improvements

10 years

Furniture and fixtures

10 years

Computer hardware and software

5 years

 

Costs incurred for property and equipment are recorded as construction in progress until placed in service. Once placed in service, depreciation expense is recorded in accordance with the Company’s policy for the class of asset as noted above. Property and equipment that have definite lives are evaluated for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable (“triggering event”). Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to its fair value. Based on this criteria, there were no impairment charges for the years ended December 31, 2018 and 2017.

 

8


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Goodwill and Intangible Assets, net

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment tests annually and more frequently in certain circumstances. In accordance with accounting guidelines, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. The Company has selected March 31 as its annual goodwill test date.

 

 

The first step of the goodwill impairment process after the qualitative assessment fails is estimating the fair value of each of its reporting units based on a discounted cash flow (“DCF”) model using revenue and profit forecast and a market approach which compares peer data and earnings multiples. The Company then compares those estimated fair values with the carrying values, which include allocated goodwill. If the estimated fair value is less than the carrying value, then a goodwill impairment is recorded.

 

The Company cannot predict the occurrence of certain future events that might adversely affect the implied value of goodwill and/or the fair value of intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on its customer base, and material adverse effects in relationships with significant customers. The impact of over-estimating or under-estimating the implied fair value of goodwill could have a material effect on the results of operations and financial position. In addition, the value of the implied goodwill is subject to the volatility of the Company’s operations which may result in significant fluctuation in the value assigned at any point in time.

 

As a result of operating results that were above forecasted amounts, the Company determined that there is no indicator of impairment during the year 2018. Therefore, the Company did not perform impairment testing of the goodwill and indefinite lived tradename as at December 31, 2018 (note 4).

 

9


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Goodwill and Intangible Assets, net – Continued

 

Intangible Assets, net

 

Intangible assets with definite useful lives include customer relationships, manufacturing technology, the Hemp Oil trade name, trademarks and are subject to amortization over their respective useful lives. These intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. If facts and circumstances indicate that the carrying value might not be recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.

 

The Manitoba Harvest trade name is considered to have an indefinite life and is not amortized. The Manitoba Harvest trade name is subject to testing for impairment at least annually.

 

Definite life intangible assets are stated at cost and amortized using the  straight-line  method over the estimated useful lives  as follows:

 

Customer relationships

15 years

Technology

10 years

Trade name – Hemp Oil Canada

10 years

Other assets Trademark

8 years

 

Capitalized Software Development Costs

 

The Company capitalizes the costs of computer software developed or obtained for internal use in accordance with FASB Statement ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”). Capitalized computer software costs consist of purchased software licenses, implementation costs, consulting costs and payroll-related costs for certain projects that qualify for capitalization. The Company amortizes the capitalized computer software costs on a straight-line basis over the estimated useful life of the software upon being placed in service, which management has estimated to be three years. The Company expenses costs related to preliminary project assessment, training and application maintenance as incurred.

 

Loan Fees, net

 

Debt issuance costs, principally loan origination and related fees, are deferred and amortized to related party interest expense using the straight-line method, which approximates the effective interest method, and reflected as a reduction to debt.

 

10


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Income Taxes

 

The Company accounts for income taxes under the asset and liability method under which it recognizes deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and its tax bases and net operating loss and tax credit carryforwards.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company applies a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit or obligation as the largest amount that is more than 50%  likely  of  being  realized  upon  ultimate  settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments.

 

Interest  and  penalties  related  to  unrecognized  tax  benefits  will  be  recognized  in  income  tax  expense.  As   at December 31, 2018 and 2017, no interest or penalties were included in income tax expense.

 

The Company is subject to Canadian federal, provincial and U.S. federal, state, and local tax regulations, and in the normal course of business, its income tax returns are subject to examination by the relevant taxing authorities with varying statutes of limitations. As at December 31, 2018 tax years after 2012 remain subject to examination in the U.S. federal tax jurisdiction and certain states, and tax years after 2011 remain subject to examination in Canada, Canadian provinces and certain U.S. states. The Company continued to have no material unrecognized tax benefit and does not expect its unrecognized tax benefits to change significantly over the next 12 months. As a result, the Company did not record a liability for unrecognized tax benefits.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact, positively or negatively, the Company for taxable years ended December 31, 2017 and thereafter. The impact of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal Revenue Service. Management has concluded there is no impact of the Tax Act on the Company.

 

Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for 100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through entities was added; U.S. federal income taxes on foreign earnings was eliminated (subject to several important exceptions), and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were added.

 

11


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Income Taxes - Continued

 

In the United States, for taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest income and deductions are ignored. It is not expected that the provision will limit the deduction of interest by the Company for 2019.

 

Accounting for Stock-Based Compensation

 

Stock-based compensation cost is calculated on the date of grant using the estimated fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized ratably over the vesting period of the individual option grants. The Black-Scholes valuation calculation requires the Company to estimate key assumptions including the value of common stock, expected term, volatility and interest rates to determine the fair value of the stock options. The estimate of these key assumptions is based on an analysis of comparable companies, the Company’s leverage and judgment regarding market factors and trends.  The Company has estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Fair Value Measurements

 

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under U.S. GAAP must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between different levels will be rare.

 

12


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Fair Value Measurements - Continued

 

The carrying value of the Company’s cash, accounts receivable, accounts payable and accrued expenses, approximate their fair value due to the short period of time to maturity. Debt with a carrying value of $68.6 million at December 31, 2018 (2017:

$64.4 million) approximates fair value, net of loan fees. The fair value is based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.

 

Advertising

 

Advertising costs are expensed as incurred and recorded in selling, general and administrative expenses. Costs incurred for advertising totaled $2 million for the year ended December 31, 2018 (2017: $0.8 million).

 

Shipping and Handling

 

Shipping and handling costs are expensed as incurred and recorded in selling, general and administrative expenses. Costs incurred for shipping and handling totaled $3.7 million for the year ended December 31, 2018 (2017: $3.6 million).

 

Comprehensive Income

 

Accounting Standards Codification (“ASC”) 220, Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. The Company’s other comprehensive loss consists of foreign currency translation adjustments of the Company’s U.S. operations. Other comprehensive loss is presented net of tax in the consolidated statements of comprehensive loss.

 

Concentration of Credit Risk

 

The Company maintains cash balances at various banks where balances are insured by the Canadian Deposit Insurance Corporation up to $100,000 for Canadian based accounts and by the U.S. Federal Deposit Insurance Corporation up to $341,000. From time to time, the Company maintains cash balances in excess of the insured limits. The Company performs periodic credit evaluations of its customers. The Company maintains allowances for potential credit losses and such losses have historically been within management’s expectation.

 

In 2018, the Company’s top ten customers accounted for 72.7% of gross sales (2017: 73.0%). One customer accounted for 38.8% of the Company’s net sales for the year ended December 31, 2018 (2017: 32.7%); the top two combined  accounted  for 50.3% of the Company’s net sales for the year ended December 31, 2018 (2017: 46.3%). Three customers accounted for approximately 44.9% of accounts receivable, net as at December 31, 2018 (2017: 36.5%).

 

13


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Concentration of Vendors

 

The Company sources 100% of its raw seed material in Canada with a minimal amount of packaging from the U.S. and miscellaneous ingredients from Malaysia.

 

Foreign Currency

 

Unless otherwise stated, these financial statements and footnotes are in Canadian dollars.

 

Foreign Currency Transactions

 

Amounts held and transactions denominated in foreign currencies other than the Company’s functional currency give rise to foreign exchange gains and losses which are included in selling, general and administrative expenses, in the accompanying consolidated statements of comprehensive loss. For the year ended December 31, 2018 the transaction gains and losses aggregated to a gain of $73,000 (2017: gain of $70,000).

 

Foreign Currency Translation

 

The functional currency of the Company’s U.S. operations is the U.S dollar. The Company’s U.S. operations’ assets and liabilities are translated into Canadian dollars at exchange rates in effect at the year-end reporting date, and net sales and costs are translated using average exchange rates for the year. Foreign currency translation adjustments are reported in other comprehensive income/loss, in the accompanying consolidated statements of comprehensive income/loss.

 

14


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Reclassification

 

Certain 2017 amounts have been reclassified to conform to 2018 presentation. Such reclassification did not affect the previously reported 2018 net loss and comprehensive loss.

 

Future Accounting Pronouncements

 

In February 2016, the FASB issued an accounting standard update related to the accounting for leases (Leases "Topic 842") which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. In July 2018, the FASB issued two updates to Topic 842 to clarify how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. The Company will adopt the new standard using the optional transition method effective January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company expects to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally expect to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component and the practical expedient pertaining to land easements. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset.

The Company has performed an assessment of the impact of the adoption of Topic 842 on the Company's consolidated financial position and results of operations for the Company's leases, which consist of manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicle leases. Based on our assessment to date, we expect that the adoption of Topic 842 will not have a material effect on our results of operations but will result in an increase in lease-related assets and liabilities recognized in our Consolidated Balance Sheets. We are unable to quantify the amount of that increase at this time.\

NOTE 2 – INVENTORY, net

Inventory, net consisted of the following at December 31, (in thousands):

 

 

 

2018

 

 

2017

 

Raw materials

 

$

5,308

 

 

$

2,593

 

Work in progress

 

 

5,913

 

 

 

6,829

 

Finished goods

 

 

5,973

 

 

 

3,649

 

Reserves for excess and obsolete inventory

 

 

(1,255

)

 

 

(718

)

Inventory, net

 

$

12,353

 

 

$

12,353

 

 

 

 

15


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 3 - PROPERTY AND EQUIPMENT, net

Property and equipment, net consisted of the following at December 31, (in thousands):

 

 

 

2018

 

 

2017

 

Land

 

$

392

 

 

$

392

 

Land improvement

 

 

47

 

 

 

-

 

Buildings

 

 

10,199

 

 

 

10,198

 

Machinery and equipment

 

 

14,944

 

 

 

14,520

 

Leasehold improvements

 

 

1,786

 

 

 

1,716

 

Computers

 

 

1,773

 

 

 

1,743

 

Furniture and fixtures

 

 

543

 

 

 

534

 

Construction in progress

 

 

2,080

 

 

 

1,663

 

 

 

 

31,764

 

 

 

30,766

 

Accumulated depreciation

 

 

(7,013

)

 

 

(4,849

)

Property and equipment, net

 

$

24,751

 

 

$

25,917

 

 

 

Depreciation expense was approximately $2,200,000 for the year ended December 31, 2018 (2017: $2,205,000) and is recorded in cost of sales and selling, general and administrative expenses. Additions during the year amounted to $1,062,000 (2017: $1,362,000) and disposals amounted to $65,000 (2017: $14,000) for the year ended December 31, 2018.

 

 

16


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS, net - Continued

Goodwill

 

Goodwill is comprised of the following, (in thousands):

 

 

 

Goodwill

 

Balance as at January 1, 2017

 

 

59,394

 

Impairment loss

 

 

(7,895

)

Balance as at December 31, 2017

 

 

51,499

 

Impairment loss

 

 

-

 

Balance as at December 31, 2018

 

 

51,499

 

 

During the year ended December 31, 2017, Manitoba Harvest missed budget expectations, driven by a significant drop in ingredient sales in the Asian market and declining protein powder sales. As a result, the Company evaluated the fair value of the single reporting unit to the carrying value and as a result, recorded a goodwill impairment loss: $7,894,800 in 2017. There was no impairment in 2018. Fair value was determined using a discounted cash flow methodology and includes management’s assumptions on revenue growth rates, operating margins, appropriate discount rates and expected capital expenditures. The weighted average cost of capital used in the income approach was 11.7%.

 

Intangible Assets, net

 

Intangible assets, net are comprised of the following as at December 31, 2018 (in thousands):

 

Amortizable Intangible Assets (Not Goodwill)

 

Gross

Intangible

Asset

 

 

Accumulated

Amortization

 

 

Impairment

Loss

 

 

Net

Intangible

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

 

$

61,500

 

 

$

(13,959

)

 

$

-

 

 

$

47,541

 

Technology

 

 

16,400

 

 

 

(5,514

)

 

 

-

 

 

 

10,886

 

Trade Name – Hemp Oil Canada

 

 

1,100

 

 

 

(335

)

 

 

-

 

 

 

765

 

Other Assets – Trademark

 

 

272

 

 

 

(86

)

 

 

-

 

 

 

186

 

 

 

 

79,272

 

 

 

(19,894

)

 

 

-

 

 

 

59,378

 

Trade Name not subject to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Manitoba Harvest)

 

 

13,600

 

 

 

-

 

 

 

-

 

 

 

13,600

 

 

 

$

92,872

 

 

$

(19,894

)

 

$

-

 

 

$

72,978

 

 

 

17


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS, net - Continued

 

Intangible assets, net are comprised of the following as at December 31, 2017, (in thousands):

 

Amortizable Intangible Assets (Not Goodwill)

 

Gross

Intangible

Asset

 

 

Accumulated

Amortization

 

 

Impairment

Loss

 

 

Net

Intangible

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

 

$

61,500

 

 

$

(9,858

)

 

$

-

 

 

$

51,642

 

Technology

 

 

16,400

 

 

 

(3,874

)

 

 

-

 

 

 

12,526

 

Trade Name – Hemp Oil Canada

 

 

1,100

 

 

 

(224

)

 

 

-

 

 

 

876

 

Other Assets – Trademark

 

 

182

 

 

 

(55

)

 

 

-

 

 

 

127

 

 

 

 

79,182

 

 

 

(14,011

)

 

 

-

 

 

 

65,171

 

Trade Name not subject to Amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Manitoba Harvest)

 

 

16,500

 

 

 

-

 

 

 

(2,900

)

 

 

13,600

 

 

 

$

95,682

 

 

$

(14,011

)

 

$

(2,900

)

 

$

78,771

 

 

Amortization expense of intangibles was $5.9 million for the year ended December 31, 2018 (2017: $5.9 million) and is recorded in selling, general and administrative expenses. Estimated charges to amortization expense of intangible assets over the next five years and thereafter are as follows, (in thousands):

 

Year ending December 31,

 

 

 

 

2019

 

$

5,884

 

2020

 

 

5,884

 

2021

 

 

5,884

 

2022

 

 

5,884

 

2023

 

 

5,884

 

Thereafter

 

 

29,958

 

 

 

$

59,378

 

 

During 2017 the Company missed budget expectations as a result of significant drop in ingredient sales in the Asian market and declining protein powder sales. The Company evaluated the fair value of the trade name not subject to amortization (Manitoba Harvest) to the carrying value. As a result, the Company recorded an intangible impairment loss of $2.9 million in 2017. There was no impairment in 2018. Fair value was determined based on the expected discounted future cash flows attributable to the trade name not subject to amortization (Manitoba Harvest). The weighted average cost of capital used  in the income approach was 11.7%.

 

 

18


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 5 – DEBT - Continued

 

Related Party Debt

 

In connection with the FHF acquisition, on July 10, 2015, the Company obtained a $10.0 million revolving line of credit (“Line of Credit”) from Compass, the majority shareholder, maturing on July 10, 2022. The Company also obtained a $21.0 million loan (“Term Loan A”) and an $8.0 million loan (“Term Loan B”) from Compass, maturing either on July 10, 2021 and July 10, 2022, respectively, or such earlier date pursuant to an event of default as defined. In connection with the HOCI acquisition, the 1st Amendment to the Credit Agreement, dated as at December 15, 2015 was executed and the Company obtained additional Term Loan A and Term Loan B from Compass of $26.5 million and $5.0 million, respectively. A 5th amendment to the Credit Agreement, dated May 16, 2018 was executed to increase Line of Credit to $13.0 million until March 31, 2019 and then to decrease it back to $10.0 million from April 1, 2019. As at December 31, 2018, the revolving line of credit, Term Loans A and B totaled $65.1 million (2017: $60.4 million) (collectively, the “Compass Debt”). The terms of the loan agreement for the Term Loan A and Term Loan B require quarterly payments of $0.6 million and nil, respectively, until maturity at which time the remaining balance is due.

 

The Line of Credit and Term Loan A allow for loans at either the base rate or London InterBank Offered Rate (“LIBOR”), as defined. Base rate loans bear interest at a fluctuating rate per annum equal to the greater of (i) the prime rate of interest published by the Wall Street Journal or (ii) the sum of the Federal Funds Rate plus 0.5% for the relevant period, plus the Applicable Margin below. LIBOR loans bear interest at a fluctuating rate per annum equal to the LIBOR for the relevant period, plus the Applicable Margin below:

 

 

 

Line of Credit and

Term Loan A Applicable

Margin %

 

 

 

Base Loan

 

 

LIBOR

 

Total debt to EBITDA ratio:

 

 

 

 

 

 

 

 

Less than 2.0:1.0

 

 

3.50

 

 

 

4.50

 

Greater than 2.0:1.0 but less than 3.0:1.0

 

 

3.75

 

 

 

4.75

 

Greater than 3.0:1.0 but less than 4.0:1.0

 

 

4.00

 

 

 

5.00

 

Greater than 4.0:1.0 but less than 5.0:1.0

 

 

4.25

 

 

 

5.25

 

Greater than 5.0:1.0

 

 

4.50

 

 

 

5.50

 

Greater than 5.0:1.0 (Effective July 1, 2016 to June 30, 2017)

 

 

6.50

 

 

 

7.50

 

 

The Line of Credit and Term Loan A also have an unused fee of 0.50% at each level above.

 

The interest rate on the Line of Credit and Term Loan A as at December 31, 2018 ranged from 6.87% to 10.11% (2017: 6.87% to 6.99%). The interest rate on the Term Loan B as at December 31, 2018 is 13% (2017: 11%).

 

19


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 5 – DEBT - Continued

 

Non-Related Party Debt

 

In connection with the HOCI acquisition in December 2015, the Company assumed repayable contribution agreements of $4.3 million and $147,000 also from the Canadian Federal Government under the auspices of the Agriinnovation Program (“AIP Loan”) and API Loan maturing June 2024 and March 2019, respectively. Pursuant to the terms of these agreements the loans were obtained as interest-free loans to facilitate the expansion of FHF and HOCI and agricultural development and related businesses in the Province of Manitoba, Canada. As at December 31, 2018, the AIP and API Loans, collectively, totaled $3.4 million (2017: $4.0 million). The terms of the repayable contribution agreement for the AIP and API advances require monthly payments of $50,000 until maturity.

 

The Compass Debt is subject to certain financial covenants. These covenants include a fixed charge ratio, senior debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio, total debt to EBITDA ratio and a limit    on capital expenditures, among other requirements, including restrictions on dividend payments. On May 16, 2018, the Company executed the 5th Amendment to the Credit Agreement, which modified certain definitions and covenant ratios. The Company was not in compliance with all financial covenants as at December 31, 2018, which resulted in a premium interest rate applied to the borrowings. Subsequent to December 31, 2018, the Company executed the 6th Amendment to the Credit Agreement, which increased the Term B loan by $5.0 million along with modification to certain definitions and covenant ratios. The 6th Amendment was signed on January 9, 2019 and moves the covenant assessment to 2019. The covenant assessment in 2019 will be calculated as of the last day of the Fiscal Quarter immediately preceding the Fiscal Quarter in which such additional amount is to be advanced. The Company has continued to classify the Term Loans A and B as long-term liabilities.

 

In February 2018, the Company executed the 4th Amendment to the Credit Agreement, which modified certain definitions, covenant ratios and its permitted capital expenditure covenant. Term Loans A and B and the Line of Credit are collateralized by the Company’s right, title and interest in the Company’s assets except for certain excluded intangible assets as defined in the collateral agreement with Compass. Pursuant to the Line of Credit agreement, unused amounts are subject to a fee of 0.5% per month.

 

Long-term debt and the related current portion as at December 31, consist of the following, (in thousands):

 

 

 

2018

 

 

2017

 

Line of Credit

 

$

12,954

 

 

$

5,936

 

Term Loan A

 

 

39,316

 

 

 

41,651

 

Term Loan B

 

 

12,866

 

 

 

12,828

 

AIP Loan

 

 

3,280

 

 

 

3,791

 

API Loan

 

 

87

 

 

 

175

 

Long-term Capital Lease

 

 

178

 

 

 

271

 

 

 

 

68,681

 

 

 

64,652

 

Less current portion

 

 

(16,020

)

 

 

(9,022

)

Total long-term debt, net of loan origination fees

 

$

52,661

 

 

$

55,630

 

 

The Term Loan B balance of $12.9 million (2017: $12.8 million) matures and is due on July 10, 2022.

 

20


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 5 – DEBT - Continued

 

Total interest expense on the Compass Debt for the year ended December 31, 2018 was $6.6 million (2017: $5.4 million).  As at December 31, 2018, loan fees associated with the Compass Debt of $0.4 million (2017:  $0.5  million)  reflected  in  the accompanying consolidated balance sheets were net of accumulated amortization of $0.5 million, as at December 31, 2018 (2017: $0.4 million). Loan fee amortization included in related party interest expense in the accompanying consolidated statements of comprehensive loss were $147,000 for the year ended December 31, 2018 (2017: $146,000).

 

Capital Leases

 

The Company leases certain equipment under a capital lease that expires in December 2020. This equipment totaled $626,000 (2017: $626,000) and is recorded in property and equipment net of $198,000 (2017: $157,000) accumulated depreciation as at December 31, 2018.

 

Future minimum payments on this capital lease are $184,000 (2017: $286,000) less the interest portion of $7,000 (2017:

$15,000). As at December 31, 2018, future annual minimum lease payments under capital leases are as follows, (in thousands):

 

Year ending December 31,

 

 

 

 

2019

 

 

92

 

2020

 

 

92

 

 

 

$

184

 

 

As at December 31, 2018, future annual minimum lease payments under all non-cancelable operating leases are as follows, (in thousands):

 

Year ending December 31,

 

 

 

 

2019

 

449

 

2020

 

450

 

2021

 

453

 

2022

 

385

 

2023

 

101

 

 

 

$

1,838

 

 

 

 

21


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Lease Commitments - Operating Leases

 

The Company has triple-net building leases for its facilities in Winnipeg, Manitoba, Canada under non-cancelable operating lease agreements which expire May 2023. The fixed monthly rental payment of $20,000, includes a proportional share of the buildings’ operating expenses.

 

The Company also entered into a new lease agreement effective June 1, 2017 for its office located in Minneapolis, Minnesota,

U.S. under a non-cancelable operating lease agreement which expires August 2022. The monthly rental payments escalate over time with the monthly payments ranging from $15,000 to $16,000. The monthly payments include a proportional share of the building’s operating expenses and common area costs.

 

Payments made under these leases were $435,000 for the year ended December 31, 2018 (2017: $289,000). For the year ended December 31, 2018, the Company incurred $374,000 (2017: $329,000) in total rent expenses.

 

Purchase Commitments

 

As at December 31, 2018, the Company had $3.0 million (2017: $4.0 million) and $23.9 million (2017: $31.9 million) in open purchase commitments for inventory due and payable within the next 12 months and following 36 months, respectively.

 

Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company believes that it currently is not a  party to any legal proceedings, which, individually or  in the aggregate, would have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 

 

22


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 7 – INCOME TAXES

The provision for income taxes at December 31, is as follows, (in thousands):

 

 

 

2018

 

 

2017

 

Current income tax expense (benefit):

 

 

 

 

 

 

 

 

Federal – Canada

 

$

-

 

 

$

(15

)

Federal – U.S.

 

 

373

 

 

 

(13

)

State/Provincial

 

 

-

 

 

 

19

 

Total current income tax expense (benefit)

 

 

373

 

 

$

(9

)

 

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit):

 

 

 

 

 

 

 

 

Federal – Canada

 

 

(2,166

)

 

 

(1,766

)

Federal – U.S.

 

 

(103

)

 

 

(92

)

State/Provincial

 

 

(17

)

 

 

(17

)

Total deferred income tax expense (benefit)

 

 

(2,286

)

 

 

(1,875

)

Total current income tax expense (benefit)

 

$

(1,913

)

 

$

(1,884

)

 

 

 

23


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 7 – INCOME TAXES - Continued

The income tax expense of the Company differed from the amounts computed by applying the combined Canadian federal and provincial income tax rate of 27% as applicable to income before income tax benefit due to state income taxes, income subject to a higher rate in the U.S. and permanently non-deductible expenses for tax purposes. The U.S. tax reform passed in December 2017, reducing the federal tax rate from 34% to 21% effective for tax years beginning January 1, 2018. As the rate is considered to be enacted in 2017, it was necessary for the Company to restate its deferred tax asset or liability on its temporary differences from a previously computed 39% combined effective U.S. federal and state rate to a recomputed 26% combined effective U.S. federal and state rate.

 

The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax liabilities as at December 31, is as follows, (in thousands):

 

 

 

2018

 

 

2017

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

3,154

 

 

$

2,797

 

Accrued expenses

 

 

665

 

 

 

100

 

State income taxes

 

 

38

 

 

 

3

 

Amortization

 

 

-

 

 

 

-

 

Other

 

 

154

 

 

 

184

 

Deferred tax assets

 

$

4,011

 

 

$

3,084

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangible assets

 

$

(17,895

)

 

$

(19,436

)

Property and equipment

 

 

(3,253

)

 

 

(3,466

)

Other

 

 

(369

)

 

 

78

 

Deferred tax liabilities

 

$

(21,517

)

 

$

(22,824

)

Total net deferred tax liabilities

 

$

(17,506

)

 

$

(19,740

)

 

As at December 31, 2018, the Company had Canadian net operating loss carryforwards of approximately $11.7 million (2017: $10.4 million). Canadian net operating losses expire beginning 2035.

 

Net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than  not that some or all of the deferred tax assets will not be realized.  Management monitors positive  and negative factors that may arise in the future as it assesses the need for a valuation allowance against its deferred tax assets. As at December 31, 2018, the Company did not have a valuation allowance against any of its Canadian and U.S. deferred tax assets.

 

 

24


 

FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 8 - STOCK-BASED COMPENSATION

The Company adopted the 2015 Stock Option Plan, (the “SO Plan”), as amended, which provides for the issuance of options to purchase shares of the Company’s common stock to employees and directors of the Company. The options  that may be issued under the plan vest over time (“Time-Vesting”) or vest pursuant to pre-established earnings performance levels (“Performance-Vesting”). The SO Plan is administered by the  Board  of  Directors (the “Board”)  of the Company or, if established by the Board, the Compensation Committee of the Board, which has the authority to determine the type of incentive award, as well as the terms and conditions of the awards, under  the SO Plan. Options under the SO Plan are available for grant from authorized, but unissued, or reacquired shares of the Company. Any  granted options that are forfeited for any reason become available to be reissued under the SO Plan.

 

Under the SO plan, 220,000 options were available for grant as either Time-Vesting or Performance-Vesting. As at December 31, 2018, there were 78,990 (2017: 57,813) remaining options available for grant under the SO  plan  and 141,010 (2017: 162,187) options outstanding, comprised of 121,010 (2017: 142,187) Time-Vesting options and 20,000 (2017: 20,000) Performance-Vesting options. Time-Vesting options typically vest over 5 years for employees or over 1    year for directors at 20% per year or 100% in year 1 for employees and directors, respectively. Options issued  to  employees are, therefore, fully vested at the end of the fifth year. Options continue in force, and are exercisable through  the tenth anniversary of the grant date, unless terminated sooner.

 

On October 24, 2018, the Company granted 300 share options to an officer of the Company. The share options granted  are exercisable at $72.00 per common share, vest at 100% per year over ten years commencing October 24, 2018  and expire on October 24, 2028.

 

As at December 31, 2018, there was approximately $2.1 million (2017: $3.1 million) of total unrecognized stock-based compensation expense under the SO Plan that will be recognized over the vesting period of the underlying option. The Company recorded pre-tax compensation expense of $0.9 million (2017: $1.3 million) for the year ended December 31, 2018. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

 

The following is a summary of each type of option issued and outstanding under the SO Plan.

 

Time -Vesting Options

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of the  options granted.  The  expected life represents the period the Company’s equity based awards are expected  to be outstanding. The Company  uses the simplified method for estimating expected life. The simplified method does not require the use of historical or post-vesting exercise data. Estimated volatilities are based on an analysis of comparable companies and the Company’s leverage. The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury strips maturing at the expected option term. The Company has never paid dividends and does not anticipate doing so over the expected life of the options and, therefore, used 0% for dividend yield.

 

 

25


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 8 – STOCK-BASED COMPENSATION - Continued

 

The estimated values of stock option grants, as well as the weighted-average assumptions used in calculating these values for the year ended December 31, 2018 were based on estimates at the date of grant and are as follows:

 

Expected term in years

 

5.5 – 7.5

 

Expected volatility

 

50%

 

Risk free interest rate

 

3.02% - 3.10%

 

Dividend yield

 

0%

 

 

A summary of the Company’s Time-Vested stock option activity and related information for the SO Plan are as follows:

 

 

 

Number of Stock Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Life

Outstanding as at January 1, 2017

 

 

109,542

 

 

$

72.00

 

 

8.6 years

Granted

 

 

64,345

 

 

 

74.28

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

Forfeited

 

 

(31,700

)

 

 

72.00

 

 

 

Outstanding as at December 31, 2017

 

 

142,187

 

 

$

73.03

 

 

8.6 years

Granted

 

 

3,123

 

 

$

72.00

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

Forfeited

 

 

(24,300

)

 

 

72.00

 

 

 

Outstanding at December 31, 2018

 

 

121,010

 

 

 

73.21

 

 

7.9 years

 

 

Non-vested and vested option activity under the SO Plan for time-vesting options are as follows:

 

 

 

Number of

Non-Vested

 

 

Weighted

Average Grant

Date Fair Value

 

 

Number of

Vested

 

 

Weighted

Average Grant

Date Fair Value

 

Balance at January 1, 2017

 

 

92,742

 

 

$

38.13

 

 

 

16,800

 

 

$

39.30

 

Granted

 

 

64,345

 

 

 

39.85

 

 

 

-

 

 

 

-

 

Vested

 

 

(24,702

)

 

 

33.44

 

 

 

24,702

 

 

$

33.44

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(31,700

)

 

 

39.31

 

 

 

-

 

 

 

-

 

Balance at December 31, 2017

 

 

100,685

 

 

$

38.72

 

 

 

41,502

 

 

$

35.81

 

Granted

 

 

3,123

 

 

 

3.84

 

 

-

 

 

-

 

Vested

 

 

(30,203

)

 

 

37.92

 

 

 

30,203

 

 

$

37.92

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(24,300

)

 

 

39.32

 

 

 

-

 

 

 

-

 

Balance at December 31, 2018

 

 

49,305

 

 

$

36.70

 

 

 

71,705

 

 

$

36.70

 

 

 

 

 

26


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 8 – STOCK-BASED COMPENSATION - Continued

 

Performance-Vesting Options

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted, as adjusted  for various probability factors underlying the achievement of earnings targets in the performance options.  The performance options vest based on the achievement of specific earnings targets as of December 31, 2020. The option holder has 120 days after December 31, 2020 to exercise any of the options that vested before the option expires. Each performance option was issued with an exercise price of $72.00.  The Company granted 100,000 performance options  upon adoption of the SO Plan in 2015.

 

A summary of the Company’s Performance-Vested stock option activity and related information for the SO Plan are as follows:

 

 

 

Number of Stock Options

 

Weighted Average

Grant Date Fair Value

 

Balance at January 1, 2017

 

80,000

 

$

25.97

 

Granted

 

-

 

 

-

 

Vested

 

-

 

 

-

 

Exercised

 

-

 

 

-

 

Forfeited

 

(60,000)

 

 

25.97

 

Balance at December 31, 2017

 

20,000

 

$

25.97

 

Granted

 

-

 

 

-

 

Vested

 

-

 

 

-

 

Exercised

 

-

 

 

-

 

Forfeited

 

-

 

 

-

 

Balance at December 31, 2018

 

20,000

 

$

25.97

 

 

 

 

27


FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 9 – PREFERRED STOCK

 

The Company has authorized and issued 325 no par value Class A Preferred shares, callable at the holder’s option, at an issue price of $100,000. The shares have a liquidation preference and the liquidation amount is increased annually by 12% of the liquidation amount as of the end of the previous fiscal period.

 

NOTE 10 - EMPLOYEE BENEFIT PLAN

 

The Company maintains a qualified profit sharing plan and deferred salary plan for Canadian employees (the “RRSP”) that was adopted by Fresh Hemp Foods, Ltd. in July 2015. The RRSP plan covers all employees that meet the length of service requirement of one year and are over the age of 21. The Company’s contributions to the matching and profit sharing programs are based on length of service and position. The cash contributions for the year ended December 31, 2018 were $218,000 (2017: $268,000) and is recorded to cost of sales and selling, general and administrative expenses.  The RRSP for Canadian employees is a defined contribution plan.

 

The Company also maintains a qualified profit sharing plan and deferred salary 401(k) plan that was adopted by Fresh Hemp Foods, Ltd.’s wholly owned U.S. based subsidiary, Manitoba Harvest USA LLC, in May, 2015. The 401(k) plan covers all employees that meet the length of service requirement of one year and are over the age of 21. The Company’s contributions to the matching and profit sharing programs are 100% of employee contribution not to exceed 3% of the employee’s salary. The cash contributions for the year ended December 31, 2018 were $90,000 (2017: $34,000) and is recorded to selling, general and administrative expenses. The 401(k) plan is a defined contribution plan.

 

NOTE 11 - RELATED PARTY TRANSACTIONS

 

In addition to the Compass Debt (note 5), the Company paid management fees, integration fees and other professional services to Compass for services to the Company’s benefit totaling $0.5 million during the year ended December 31, 2018 (2017: $0.5 million) to Compass, included in selling, general and administrative expenses. Included in accrued expenses is $1,146,700 of interest payable due to Compass at December 31, 2018 (2017: $712,500).

 

During the year ended December 31, 2018, the Company also paid storage fees for a building owned by current and former employees in the amount of $18,900 (2017: $19,000). In addition, the Company paid management fees of $64,855, included in selling, general and administrative expenses, to a company where certain executives are shareholders and/or directors of the Company (2017: $69,000). $16,694 of management fees payable are included in accrued expenses at December 31, 2018 (2017: $16,100).

 

These transactions were measured at the amounts agreed to between each party.

 

 

28


 

FHF Holdings Ltd. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the years ended December 31, 2018 and 2017

NOTE 12 - SUBSEQUENT EVENTS

On February 19, 2019, the company entered into a definitive agreement (the "Agreement") with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, Inc., through Tilray Subco, all of the issued and outstanding securities of Manitoba Harvest for total consideration of up to C$419 million. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including  the  Company,  may receive the following from Tilray as consideration for their shares of  Manitoba  Harvest:  (a) C$150  million in cash to  the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), (b) C$50 million in cash and C$42.5 million in Common Stock to the Common Holders on the date that is six months after the closing date of the Arrangement (the “Deferred Consideration”) and (c) C$49 million  in Common  Stock  to the  Common Holders,  which amount may be reduced, potentially to zero, if Manitoba Harvest fails to attain certain levels of U.S. branded gross sales of edible or topical  products containing  broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The cash portion of the Closing Date Consideration will be reduced by the amount of the net indebtedness of Manitoba Harvest   on the closing date and transaction expenses expected to be approximately $5 million. The Common Stock consideration is expected to be issued in reliance on the exemption from the registration requirements of the U.S. Securities Act and pursuant to exemptions from applicable securities laws of any state of the United States, such that     any shares of Common Stock received by the Common Holders will be freely tradeable. The sale of Manitoba Harvest    will occur pursuant to a plan of arrangement under the Business Operations Act (British Columbia). The completion of the plan of arrangement is subject to approval by the British Columbia Supreme Court.

 

29

tlry-ex992_6.htm

EXHIBIT 99.2

TILRAY, INC.

Unaudited Pro Forma Combined Financial Information

 

The following unaudited pro forma combined financial information was prepared in connection with the acquisition of FHF Holdings Ltd. (“Manitoba Harvest”) by Tilray, Inc. (“Tilray”) on February 28, 2019 (the “Acquisition”) for an aggregate maximum purchase price of $310 million ($419 million CAD), as previously reported in the Current Report on Form 8-K filed by Tilray with the Securities and Exchange Commission (the “SEC”) on March 4, 2019. On closing, Tilray issued 1,209,946 shares of Class 2 common stock and paid $115 million in cash ($127 million CAD) to the shareholders of Manitoba Harvest. Six months after closing, Tilray shall pay $37 million ($50 million CAD) in cash and issue $32 million ($42 million CAD) in Class 2 common stock to the shareholders of Manitoba Harvest. In addition, Tilray shall issue a maximum of $37 million ($49 million CAD) in Class 2 common stock to the shareholders of Manitoba Harvest, pending the achievement of certain milestones for branded cannabidiol product sales in the United States for the period from January 1, 2019 to December 31, 2019. A detailed description of the terms of the Acquisition and a copy of the agreement governing the Acquisition are included in the Current Report on Form 8-K filed by Tilray on February 25, 2019.

 

The following unaudited pro forma combined financial information is based on the audited historical financial information of Tilray and Manitoba Harvest as adjusted to give effect to the Acquisition as if it occurred on: (i) December 31, 2018 for the unaudited pro forma combined balance sheet, and (ii) January 1, 2018 for the unaudited pro forma combined statement of net loss and comprehensive loss.

 

The unaudited pro forma combined financial statements should be read in conjunction with the following:

 

the historical audited consolidated financial statements of Tilray for the fiscal year ended December 31, 2018 included in Tilray’s Annual Report on Form 10-K filed with the SEC on March 25, 2019; and

 

the historical audited consolidated financial statements of Manitoba Harvest as of and for the years ended December 31, 2018 and 2017 included as Exhibit 99.1 to this Form 8-K/A.

 

 

 

 

 

1

 


TILRAY, INC.

Unaudited Pro Forma Combined Balance Sheet

(in thousands of U.S. dollars)

 

As of December 31, 2018

Tilray, Inc.

 

 

FHF Holdings Ltd.

 

 

Pro forma adjustments

 

 

Notes

 

Pro forma combined

 

 

 

 

 

 

Note 2

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

487,255

 

 

$

2,632

 

 

$

(111,689

)

 

3,4(a)

 

$

378,198

 

Short-term investments

 

30,335

 

 

 

 

 

 

 

 

 

 

 

30,335

 

Accounts receivable, net of allowance for doubtful

  accounts

 

16,525

 

 

 

6,849

 

 

 

(642

)

 

3

 

 

22,732

 

Other receivables

 

969

 

 

 

158

 

 

 

(158

)

 

3

 

 

969

 

Inventory

 

16,211

 

 

 

11,682

 

 

 

3,629

 

 

3

 

 

31,522

 

Prepaid expenses and other current assets

 

3,007

 

 

 

781

 

 

 

249

 

 

3

 

 

4,037

 

Total current assets

 

554,302

 

 

 

22,103

 

 

 

(108,612

)

 

 

 

 

467,793

 

Property and equipment, net

 

80,214

 

 

 

18,141

 

 

 

5,393

 

 

3

 

 

103,748

 

Intangible assets, net

 

4,486

 

 

 

53,487

 

 

 

141,947

 

 

3

 

 

199,920

 

Investments

 

16,911

 

 

 

 

 

 

 

 

 

 

 

16,911

 

Deposits and other assets

 

754

 

 

 

 

 

 

 

 

 

 

 

754

 

Goodwill

 

 

 

 

37,745

 

 

 

90,248

 

 

3

 

 

127,993

 

Total assets

$

656,667

 

 

$

131,475

 

 

$

128,977

 

 

 

 

$

917,119

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

10,649

 

 

$

4,255

 

 

$

397

 

 

3

 

$

15,301

 

Accrued expenses and other current liabilities

 

14,818

 

 

 

5,498

 

 

 

98,123

 

 

3,4(b)

 

 

118,439

 

Accrued obligations under capital lease

 

470

 

 

 

 

 

 

 

 

 

 

 

470

 

Current portion of long-term debt

 

 

 

 

506

 

 

 

(506

)

 

4(c)

 

 

 

Related party current debt

 

 

 

 

11,235

 

 

 

(11,235

)

 

4(c)

 

 

 

Total current liabilities

$

25,937

 

 

$

21,495

 

 

$

86,778

 

 

 

 

$

134,210

 

Accrued obligations under capital lease

 

8,286

 

 

 

 

 

 

321

 

 

3

 

 

8,607

 

Related party long-term debt

 

 

 

 

36,505

 

 

 

(36,505

)

 

4(c)

 

 

 

Long-term debt

 

 

 

 

2,092

 

 

 

(2,092

)

 

4(c)

 

 

 

Deferred tax liability

 

4,424

 

 

 

12,831

 

 

 

42,183

 

 

3

 

 

59,438

 

Convertible senior notes due 2023, net of issuance cost

 

420,367

 

 

 

 

 

 

 

 

 

 

 

420,367

 

Total liabilities

$

459,014

 

 

$

72,922

 

 

$

90,686

 

 

 

 

$

622,622

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class 1 common stock

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

Class 2 common stock

 

8

 

 

 

 

 

 

 

 

 

 

 

8

 

Class A preferred stock

 

 

 

 

35,401

 

 

 

(35,401

)

 

4(c)

 

 

 

Class A common stock

 

 

 

 

48,466

 

 

 

(48,466

)

 

4(c)

 

 

 

Class B common stock

 

 

 

 

13,918

 

 

 

(13,918

)

 

4(c)

 

 

 

Additional paid-in capital

 

302,057

 

 

 

 

 

 

96,844

 

 

4(d)

 

 

398,901

 

Accumulated other comprehensive income

 

3,763

 

 

 

(359

)

 

 

359

 

 

4(c)

 

 

3,763

 

Accumulated deficit

 

(108,177

)

 

 

(38,873

)

 

 

38,873

 

 

4(c)

 

 

(108,177

)

Total stockholders' equity

 

197,653

 

 

 

58,553

 

 

 

38,291

 

 

 

 

 

294,497

 

Total liabilities and stockholders' equity

$

656,667

 

 

$

131,475

 

 

$

128,977

 

 

 

 

$

917,119

 

 

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

2

 


TILRAY, INC.

Unaudited Pro Forma Combined Statement of Net Loss

(in thousands of U.S. dollars, except for share and per share data)

 

For the year ended December 31, 2018

Tilray, Inc.

 

 

FHF Holdings Ltd.

 

 

Pro forma adjustments

 

 

Note

 

Pro forma combined

 

 

 

 

 

 

Note 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

43,130

 

 

$

67,467

 

 

$

 

 

 

 

$

110,597

 

Cost of sales

 

28,855

 

 

 

38,588

 

 

 

2,369

 

 

4(e)

 

 

69,812

 

Gross margin

 

14,275

 

 

 

28,879

 

 

 

(2,369

)

 

 

 

 

40,785

 

Research and development expenses

 

4,264

 

 

 

 

 

 

 

 

 

 

 

4,264

 

Sales and marketing expenses

 

15,366

 

 

 

 

 

 

 

 

 

 

 

15,366

 

General and administrative expenses

 

31,307

 

 

 

30,633

 

 

 

9,124

 

 

4(f)

 

 

71,064

 

Stock-based compensation expense

 

20,988

 

 

 

 

 

 

 

 

 

 

 

20,988

 

Operating loss

 

(57,650

)

 

 

(1,754

)

 

 

(11,493

)

 

 

 

 

(70,897

)

Foreign exchange loss, net

 

7,234

 

 

 

 

 

 

 

 

 

 

 

7,234

 

Interest expense, net

 

9,110

 

 

 

13

 

 

 

 

 

 

 

 

9,123

 

Related party interest expense

 

 

 

 

5,178

 

 

 

(5,178

)

 

4(c)

 

 

 

Other income, net

 

(1,820

)

 

 

 

 

 

 

 

 

 

 

(1,820

)

Loss before income taxes

 

(72,174

)

 

 

(6,945

)

 

 

(6,315

)

 

 

 

 

(85,434

)

Deferred income tax recovery

 

(4,485

)

 

 

(1,476

)

 

 

(2,461

)

 

4(g)

 

 

(8,422

)

Current income tax expense

 

34

 

 

 

 

 

 

 

 

 

 

 

34

 

Net loss

$

(67,723

)

 

$

(5,469

)

 

$

(3,854

)

 

 

 

$

(77,046

)

Net loss per share - basic and diluted

 

(0.82

)

 

 

 

 

 

 

 

 

 

 

 

 

(0.70

)

Weighted average shares used in computation of net

  loss per share - basic and diluted

 

83,009,656

 

 

 

 

 

 

 

27,352,442

 

 

4(h)

 

 

110,362,098

 

Net loss

$

(67,723

)

 

$

(5,469

)

 

$

(3,854

)

 

 

 

$

(77,046

)

 

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

 

 

 

3

 


TILRAY, INC.

Notes to Unaudited Pro Forma Combined Financial Information

 

1. Basis of Presentation

 

The unaudited pro forma combined financial information was prepared using the audited historical financial information of Tilray and Manitoba Harvest and presents the pro forma effects of the Acquisition described herein, in accordance with Article 11 of Regulation S-X. The historical financial information of both Tilray and Manitoba Harvest were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The historical financial information of Tilray and the information presented herein are in U.S. dollars unless otherwise stated. The historical financial information of Manitoba Harvest was translated from Canadian dollars (“CAD”) into U.S. dollars for purposes of presenting pro forma financial information. Revenue and expenses were translated using an average exchange rate for the year, and the assets and liabilities were translated using the exchange rate as of the balance sheet date.

 

The unaudited pro forma combined balance sheet reflects the Acquisition, which was completed on February 28, 2019, as if it had been consummated on December 31, 2018. The unaudited pro forma combined statement of net loss and comprehensive loss for the year ended December 31, 2018 reflects the Acquisition as if it had been consummated on January 1, 2018.

 

The unaudited pro forma combined financial information was prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations, with Tilray considered the acquirer of Manitoba Harvest for accounting purposes.

 

The historical combined financial information was adjusted to give effect to pro forma events that are: (i) directly attributable to the Acquisition, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results. The pro forma combined financial information is provided for illustrative purposes only and is not intended to represent, and is not necessarily indicative of, what the combined company’s consolidated financial position or results of operations actually would have been, had the Acquisition been completed as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company.

 

The pro forma financial information does not reflect the impacts of any cost savings, operating synergies or revenue enhancements that may be achieved, integration costs, or costs necessary to achieve the cost savings, operating synergies or revenue enhancements. Differences between estimates used in the preliminary purchase price allocation included herein and the final purchase price allocation amounts will occur and these differences could have a material impact on the accompanying unaudited pro forma combined financial information.

 

4

 


2. Adjustments to Manitoba Harvest Historical Financial Statements

 

The historical financial information of Manitoba Harvest were translated into U.S. dollars using: (i) the exchange rate of 0.7329 as of December 31, 2018 for assets and liabilities, and (ii) an average exchange rate of 0.7718 for the year ended December 31, 2018 for revenue and expenses. In addition, certain reclassifications were recorded to conform the financial statement presentation of Manitoba Harvest with that of Tilray as follows:

 

(in thousands)

FHF Holdings Ltd.

 

 

Presentation adjustments

 

 

Total FHF Holdings Ltd.

 

 

Total FHF Holdings Ltd.

 

 

CAD

 

 

CAD

 

 

CAD

 

 

USD

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3,591

 

 

$

 

 

$

3,591

 

 

$

2,632

 

Accounts receivable, net of allowance for doubtful

  accounts

 

9,345

 

 

 

 

 

 

9,345

 

 

 

6,849

 

Inventory, net

 

15,939

 

 

 

 

 

 

15,939

 

 

 

11,682

 

Income tax receivable

 

216

 

 

 

(216

)

 

 

 

 

 

 

Other receivables

 

 

 

 

216

 

 

 

216

 

 

 

158

 

Prepaid expenses

 

1,032

 

 

 

 

 

 

1,032

 

 

 

756

 

Other current assets

 

34

 

 

 

 

 

 

34

 

 

 

25

 

Total current assets

 

30,157

 

 

 

 

 

 

30,157

 

 

 

22,103

 

Property and equipment, net

 

24,751

 

 

 

 

 

 

24,751

 

 

 

18,141

 

Intangible assets, net

 

72,978

 

 

 

 

 

 

72,978

 

 

 

53,487

 

Goodwill

 

51,499

 

 

 

 

 

 

51,499

 

 

 

37,745

 

Total assets

$

179,385

 

 

$

 

 

$

179,385

 

 

$

131,475

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

5,806

 

 

$

 

 

$

5,806

 

 

$

4,255

 

Accrued expenses

 

7,502

 

 

 

 

 

 

7,502

 

 

 

5,498

 

Related party revolving line of credit

 

12,954

 

 

 

(12,954

)

 

 

 

 

 

 

Current portion of related party long-term debt

 

2,375

 

 

 

(2,375

)

 

 

 

 

 

 

Related party current debt

 

 

 

 

15,329

 

 

 

15,329

 

 

 

11,235

 

Current portion of long-term debt

 

691

 

 

 

 

 

 

691

 

 

 

506

 

Total current liabilities

 

29,328

 

 

 

 

 

 

29,328

 

 

 

21,495

 

Related party long-term debt

 

49,807

 

 

 

 

 

 

49,807

 

 

 

36,505

 

Long-term debt

 

2,854

 

 

 

 

 

 

2,854

 

 

 

2,092

 

Deferred tax liability

 

17,506

 

 

 

 

 

 

17,506

 

 

 

12,831

 

Total liabilities

$

99,495

 

 

$

 

 

$

99,495

 

 

$

72,922

 

Class A preferred stock

 

48,301

 

 

 

 

 

 

48,301

 

 

 

35,401

 

Class A common stock

 

66,127

 

 

 

 

 

 

66,127

 

 

 

48,466

 

Class B common stock

 

18,990

 

 

 

 

 

 

18,990

 

 

 

13,918

 

Accumulated deficit

 

(53,038

)

 

 

 

 

 

(53,038

)

 

 

(38,873

)

Accumulated other comprehensive loss

 

(490

)

 

 

 

 

 

(490

)

 

 

(359

)

Total stockholders’ equity

 

79,890

 

 

 

 

 

 

79,890

 

 

 

58,553

 

Total liabilities, preferred stock and

  stockholders’ equity

$

179,385

 

 

$

 

 

$

179,385

 

 

$

131,475

 

 

5

 


(in thousands)

FHF Holdings Ltd.

 

 

Presentation adjustments

 

 

Total FHF Holdings Ltd.

 

 

Total FHF Holdings Ltd.

 

 

CAD

 

 

CAD

 

 

CAD

 

 

USD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue from contracts with customers

$

87,415

 

 

$

 

 

$

87,415

 

 

$

67,467

 

Cost of sales

 

49,997

 

 

 

 

 

 

49,997

 

 

 

38,588

 

Gross profit

 

37,418

 

 

 

 

 

 

37,418

 

 

 

28,879

 

Selling, general and administrative expenses

 

39,690

 

 

 

 

 

 

39,690

 

 

 

30,633

 

Operating loss

 

(2,272

)

 

 

 

 

 

(2,272

)

 

 

(1,754

)

Interest expense

 

17

 

 

 

 

 

 

17

 

 

 

13

 

Related party interest expense

 

6,709

 

 

 

 

 

 

6,709

 

 

 

5,178

 

Loss before provision for income taxes

 

(8,998

)

 

 

 

 

 

(8,998

)

 

 

(6,945

)

Provision for income tax benefit

 

(1,913

)

 

 

1,913

 

 

 

 

 

 

 

Deferred income tax recovery

 

 

 

 

(1,913

)

 

 

(1,913

)

 

 

(1,476

)

Net loss

$

(7,085

)

 

$

 

 

$

(7,085

)

 

$

(5,469

)

Foreign currency translation adjustments

 

64

 

 

 

 

 

 

64

 

 

 

49

 

Comprehensive loss

$

(7,021

)

 

$

 

 

$

(7,021

)

 

$

(5,420

)

 

3. Purchase Consideration and Preliminary Purchase Price Allocation

 

An estimate of the preliminary purchase consideration for the Acquisition is presented below:

 

(in thousands of U.S. dollars)

 

 

 

 

Cash paid on closing

 

$

114,591

 

Cash payable six months after closing

 

 

37,490

 

Class 2 common stock issued on closing (1)

 

 

96,844

 

Class 2 common stock issuable six months after closing (1)

 

 

31,866

 

Contingent consideration

 

 

29,207

 

Total fair value of consideration transferred

 

$

309,998

 

(1)

1,209,946 shares of Class 2 common stock were issued on closing. The amount of Class 2 common stock issuable six months after closing will be the determined in accordance with the Manitoba Harvest acquisition agreement based on the trading price of the shares.

 

As part of the acquisition of Manitoba Harvest, Tilray entered into a contingent consideration arrangement whereby Tilray may pay a maximum of $37,129 ($49,000 CAD) in Class 2 common stock. The payment amount is based on gross branded cannabidiol product sales in the United States for the period from January 1, 2019 to December 31, 2019. The estimated fair value of the contingent consideration is $29,207 and is recorded within accrued expenses and other current liabilities. The contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the estimated cost of debt for the Company. The contingent consideration will be reassessed and adjusted to fair value each quarter though other income, net.

 

The fair value of the purchase consideration for the Acquisition was allocated to the preliminary fair values of the assets acquired and liabilities assumed. The excess of the aggregate fair value of the assets acquired and liabilities assumed is considered goodwill in accordance with ASC 805.

 

6

 


(in thousands of U.S. dollars)

 

 

 

 

Assets

 

 

 

 

Cash and cash equivalents

 

$

5,534

 

Accounts receivable

 

 

6,207

 

Inventory

 

 

15,311

 

Prepaid expenses and other current assets

 

 

1,030

 

Property and equipment

 

 

23,534

 

Intangible assets:                                                        Estimated useful life

 

 

 

 

Trademarks                                                                    Indefinite

 

 

54,688

 

Developed technology                                                 10 years

 

 

6,912

 

Customer relationships                                               14-16 years

 

 

133,834

 

Goodwill

 

 

127,993

 

Total assets

 

$

375,043

 

Liabilities

 

 

 

 

Accounts payable

 

$

4,652

 

Accrued expenses and other current liabilities

 

 

5,058

 

Accrued obligations under capital lease

 

 

321

 

Deferred tax liability

 

 

55,014

 

Total liabilities

 

 

65,045

 

Net assets acquired

 

$

309,998

 

 

The final calculation and allocation of the purchase consideration are dependent on the finalization of fair value estimates and assumptions at the acquisition date that are still in progress. As a result, the preliminary purchase price allocation is subject to change and will be finalized no later than one year from the acquisition date.

 

4. Pro Forma Adjustments

 

The following pro forma adjustments are reflected in the unaudited pro forma combined financial statements. These adjustments were based on Tilray’s preliminary estimates and assumptions that are subject to change:

 

 

(a)

Cash and cash equivalents: Decrease of $114,591 thousand for cash paid to the shareholders of Manitoba Harvest on close of the Acquisition.

 

(b)

Accrued expenses and other current liabilities: Increase of $98,563 thousand to reflect the $37,490 thousand cash payable six months after closing and $31,866 of Class 2 common stock issuable six months after closing, as well as the $29,207 thousand contingent consideration with respect to the purchase consideration for the Acquisition.

 

(c)

Long-term debt, related party debt and related party interest expense: For the purposes of the pro forma combined balance sheet, it was assumed that the long-term debt and related party debt paid off on acquisition close occurred on December 31, 2018 and Manitoba Harvest stockholders’ equity was eliminated. For the purposes of the pro forma combined statement of net loss and comprehensive loss, it was assumed that no related party debt was outstanding at January 1, 2018 and thus no related party interest expense is applicable.

 

(d)

Additional paid-in capital: Increase of $96,844 thousand for the issuance of 1,209,946 Class 2 common stock at a deemed issuance price of $80.04 per share on close of the Acquisition.

 

(e)

Cost of sales: Increase of $2,041 thousand for amortization of the fair value adjustment to inventory and increase of $328 thousand for amortization of property and equipment directly related to manufacturing and distribution of products.

 

(f)

General and administrative expenses: Increase of $9,116 thousand for the amortization of intangibles and increase of $8 thousand for amortization of property and equipment not directly related to manufacturing and distribution of products.

 

(g)

Deferred income tax recovery: $2,461 thousand for the income tax effect of the pro forma adjustment for the amortization of intangibles, calculated using an estimated effective tax rate of 27%.

 

(h)

For the purposes of the pro forma combined statement of net loss and comprehensive loss, it was assumed the issuance of 1,209,946 Class 2 common shares occurred on January 1, 2018 as share consideration on close of the Acquisition, and the issuance of 404,185 Class 2 common shares at deemed price of $80.04 per share occurred on July 1, 2018 as share consideration six months after close of the Acquisition.

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