Full Press Release Details
BUSINESS ACQUISITION REPORT
ITEM 1.IDENTITY OF COMPANY
Canopy Growth Corporation (the "Company") 1 Hershey Drive
Smiths Falls, Ontario K7A 0A8
The following executive officer of the Company is knowledgeable about the Arrangement (as defined below) and this report:
Executive Vice President & Chief Financial Officer Telephone: (613) 706-2185 ext. 150
ITEM 2.DETAILS OF ACQUISITION
All amounts in this business acquisition report are stated in Canadian dollars.
On July 10, 2018, the Company announced that it had entered into an arrangement agreement dated July 10, 2018 (the "Arrangement Agreement") with Hiku Brands Company Ltd. ("Hiku"), pursuant to which, and subject to the terms and conditions of the Arrangement Agreement, the Company acquired all of the issued and outstanding shares of Hiku (the "Hiku Shares") by way of a statutory plan of arrangement of Hiku under the Business Corporations Act (British Columbia) (the "Arrangement").
Pursuant to the terms of the Arrangement Agreement, holders of Hiku Shares (the "Hiku Shareholders") received 0.046 of a common share of the Company (each whole common share, a "Canopy Share") for each Hiku Share held.
Hiku has built a portfolio of engaging cannabis brands, immersive retail experiences and handcrafted cannabis production. Hiku's wholly-owned subsidiary, DOJA Cannabis Ltd. ("DOJA Cannabis"), owns two production facilities in the heart of British Columbia's Okanagan Valley, one of which is federally licensed by Health Canada to cultivate and distribute cannabis. Hiku is focused on building a portfolio of cannabis brands, cannabis retail stores and bringing handcrafted cannabis production to market. With a retail footprint led by TS Brandco Inc. ("Tokyo Smoke"), a wholly-owned subsidiary of Hiku, artisanal cannabis production through DOJA Cannabis' licensed production facility, Van der Pop's female-focused educational platform and Ma tri's focus on the Quebecois market,
Hiku houses a portfolio of cannabis brands in Canada. Tokyo Smoke was awarded one of four initial master retail licenses for cannabis in the Province of Manitoba and has entered into supply agreements with the British Columbia Liquor Distribution branch and the Ontario Cannabis Store. Hiku also operates a network of retail stores selling coffee, clothing and curated accessories in British Columbia, Alberta and Ontario.
Pursuant to the terms of the Arrangement Agreement, the Hiku Shareholders received 0.046 of a Canopy Share for each Hiku Share (the "Exchange Ratio"). The Exchange Ratio represents the equivalent of $3.14962 per Hiku Share, based on the closing price of the Canopy Shares on the date of closing of the Arrangement.
All of Hiku's restricted share units (the "Hiku RSUs") vested at the effective time of the Arrangement in accordance with the terms of the Arrangement Agreement and were exchanged on the basis of one Hiku Share per Hiku RSU.
All of Hiku's outstanding options (the "Hiku Options") were exchanged for an equivalent option granted pursuant to Canopy's omnibus incentive plan (each, a "Replacement Option") to purchase Canopy Shares (rounded down to the nearest whole Canopy Share) equal to: (i) the Exchange Ratio multiplied by (ii) the number of Hiku Shares subject to such Hiku Option. Each Replacement Option provides for an exercise price per Canopy Share (rounded up to the nearest whole cent) equal to:
(x) the exercise price per Hiku Share purchasable pursuant to such Hiku Option; divided by (y) the Exchange Ratio.
All of Hiku's outstanding warrants (the "Hiku Warrants") continued to be governed by and subject to the terms of the original warrant agreements but upon exercise will be exercisable for a number of Canopy Shares equal to: (i) the Exchange Ratio multiplied by (ii) the number of Hiku Shares subject to such Hiku Warrant.
All of Hiku's outstanding debentures (the "Hiku Debentures") continued to be governed by and subject to the terms of the original debenture indentures, but upon conversion will be exercisable for a number of Canopy Shares equal to: (i) the Exchange Ratio multiplied by (ii) the number of Hiku Shares subject to such Hiku Debenture.
In connection with the closing of the Arrangement, Canopy issued an aggregate of 7,943,123 Canopy Shares to the former Hiku Shareholders (including former holders of Hiku RSUs).
The expected effect of the acquisition on the Company's financial position is outlined in the unaudited pro forma consolidated financial statements of the
Company included with this business acquisition report.
The Company does not currently have any plans or proposals for material changes in the business acquired pursuant to the Arrangement which may have a significant impact on the financial performance and financial position of the Company, including any proposal to sell, lease or exchange all or a substantial part of the business acquired pursuant to the Arrangement or to make any material changes to the Company's business.
Upon completion of the Arrangement, Hiku became a wholly-owned subsidiary of the Company. The business and operations of Hiku have been combined with those of the Company.
To the knowledge of the Company, no valuation opinion was required by securities legislation or a Canadian exchange or market within the last 12 months to support the consideration paid by the Company pursuant to the Arrangement.
The Acquisition was not with an informed person (as that term is defined in section
1.1 of National Instrument 51-102 - Continuous Disclosure Obligations), associate or affiliate of the Company.
ITEM 3.FINANCIAL STATEMENTS AND OTHER INFORMATION
The following documents of Hiku are attached as Schedule "A" to this business acquisition report:
The Company has not requested the consent of Hiku's auditors to include their auditor's report in this business acquisition report; therefore, such consent has not been provided.
The following pro-forma documents of the Company are attached as Schedule "B" to this business acquisition report:
HIKU FINANCIAL STATEMENTS
Hiku Brands Company Ltd.
(Formerly DOJA Cannabis Company Limited)
CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended December 31, 2017 and twelve months ended March 31, 2017
(In Canadian Dollars)
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of DOJA Cannabis Company Limited (the "Company") have been approved by the Board of Directors and have been prepared in accordance with International Financial Reporting Standards, which recognize the necessity of relying on some best estimates and informed judgements. The financial information contained in the management's discussion and analysis is consistent with the consolidated financial statements. The Company undertakes steps to ensure the information presented is accurate and conforms to applicable laws and standards, including:
MNP LLP Chartered Accountants, the Company's external auditors, who are appointed by the Company's shareholders, audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements. Their report is set out on the following page.
| "Signed" | "Signed" |
| Jeff Barber | Alan Gertner |
| CFO | CEO & Director |
Independent Auditors' Report
To the Shareholders of Hiku Brands Company Ltd. (formerly, DOJA Cannabis Company Ltd.):
We have audited the accompanying consolidated financial statements of Hiku Brands Company Ltd. (formerly, DOJA Cannabis Company Ltd.), which comprise the consolidated statements of financial position as at December 31, 2017 and March 31, 2017, and the consolidated statements of loss and comprehensive loss, changes in shareholders' equity and cash flows for the nine-month period ending December 31, 2017 and for the year ended March 31, 2017, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit 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 auditors' 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of 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 in our audits is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Hiku Brands Company Ltd. (formerly, DOJA Cannabis Company Ltd.) as at December 31, 2017 and March 31, 2017 and its financial performance and its cash flows for the nine-month period ended December 31, 2017 and for the year ended March 31, 2017 in accordance with International Financial Reporting Standards.
Hiku Brands Company Ltd. (Formerly DOJA Cannabis Company Limited.)
| Statements of Financial Position | ||
| (Expressed in Canadian Dollars) | ||
| As at December 31, 2017 | As at March 31, 2017 | |
| Assets | ||
| Current assets | ||
| Cash | $16,908,526 | $1,897,664 |
| Subscription receivable | - | 347,500 |
| Other receivables | 160,346 | 89,472 |
| Prepaids | 31,838 | - |
| Inventory (note 5) | 244,141 | - |
| Biological assets (note 5) | 118,500 | - |
| 17,463,351 | 2,334,636 | |
| Property and equipment (note 6) | 5,430,720 | 2,448,212 |
| $22,894,071 | $4,782,848 | |
| Liabilities Current liabilities | ||
| Accounts payable and accrued liabilities | $568,968 | $203,962 |
| Current portion of mortgage payable (note 7) | 13,982 | 13,387 |
| 582,950 | 217,349 | |
| Mortgage payable (note 7) | 572,024 | 582,114 |
| Convertible debentures (note 8) | 11,193,849 | - |
| Deferred tax liability (note 11) | 484,990 | - |
| 12,833,813 | 799,463 | |
| Shareholders' equity Share capital (note 9) | 11,538,504 | 4,451,420 |
| Contributed surplus (note 9) | 4,520,084 | 645,228 |
| Warrant reserve (note 9) | 1,470,269 | 115,151 |
| Deficit | (7,468,599) | (1,228,414) |
| 10,060,258 | 3,983,385 | |
| $22,894,071 | $4,782,848 |
The accompanying notes are an integral part of these consolidated financial statements.
Nature of operations (note 1)
Commitments (note 14)
On behalf of the Board
| "Signed" | "Signed" | |
| Trent Kitsch | Alan Gertner | |
| President & Director | CEO & Director |
Hiku Brands Company Ltd. (Formerly DOJA Cannabis Company Limited)
| Statements of Loss and Comprehensive Loss | ||
| (Expressed in Canadian Dollars) | ||
| Nine Months ended Dec 31, 2017 | Twelve Months ended March 31, 2017 | |
| Revenue: | ||
| Production Sales | $- | $- |
| Production cost of sales | (509,501) | - |
| Production amortization and depreciation (note 6) | (21,854) | - |
| Gross profit (loss) before fair value adjustments | (531,355) | - |
| Unrealized gain on change of fair value of biological assets (note 5) | 264,301 | - |
| Gross loss | (267,054) | - |
| Expenses: General and administrative | 887,254 | 425,902 |
| Sales and marketing | 925,059 | - |
| Professional Fees | 274,532 | 80,208 |
| Loss on change in fair value of derivative liability | - | 492 |
| Stock-based compensation (note 9) | 740,880 | 459,228 |
| Amortization and depreciation (note 6) | 66,389 | - |
| 2,894,114 | 965,830 | |
| Loss from operations before income taxes | (3,161,168) | (965,830) |
| Listing costs (note 4) | (3,925,311) | - |
| Other income | (1,477) | (1,542) |
| Loss before income taxes | (7,087,956) | (967,372) |
| Income tax recovery (note 11) | 847,771 | - |
| Net loss and comprehensive loss | $(6,240,185) | $(967,372) |
| Net loss per share Basic and diluted | $(0.11) | $(0.07) |
| Weighted average shares outstanding | 55,036,867 | 14,113,290 |
The accompanying notes are an integral part of these consolidated financial statements.
Hiku Brands Company Ltd. (Formerly DOJA Cannabis Company Limited)
| Consolidated Statements of Changes in Shareholders' Equity | |||||
| (Expressed in Canadian Dollars) (Audited) | |||||
| Share Capital | Contributed Surplus | Warrant Reserve | Deficit | Total Equity | |
| Balance, March 31, 2017 Shares issued for cash, net of issuance costs | $ 4,451,420 | $ 645,228 | $ 115,151 | $ (1,228,414) | $ 3,983,385 |
| (note 9) | 3,046,125 | - | - | - | 3,046,125 |
| Shares issued for services (note 9) | 718,679 | - | - | - | 718,679 |
| Stock based compensation (note 9) | - | 740,880 | - | - | 740,880 |
| Reverse takeover transaction (note 4) | 2,535,243 | 29,032 | 1,135,374 | - | 3,699,649 |
| Issuance of convertible debt (net of deferred tax) (note 8) | - | 3,104,944 | 498,446 | - | 3,603,390 |
| Exercise of warrants (note 9) | 787,037 | - | (278,702) | - | 508,335 |
| Net loss for the period | - | - | - | (6,240,185) | (6,240,185) |
| Balance, December 31, 2017 | $11,538,504 | $4,520,084 | $1,470,269 | $(7,468,599) | $10,060,258 |
| Balance, March 31, 2016 | $ 12 | $- | $- | $ (261,042) | $ (261,030) |
| Cancellation of shares | (12) | - | - | - | (12) |
| Subscription receivable | 3,943,623 | - | 115,151 | - | 4,058,774 |
| Shares issued for services | 347,500 | - | - | - | 347,500 |
| Conversion of promissory notes | 62,797 | - | - | - | 62,797 |
| Exercise of preferrential participation rights | 97,500 | 186,000 | - | - | 283,500 |
| Stock-based compensation | - | 459,228 | - | - | 459,228 |
| Net loss for the period | - | - | - | (967,372) | (967,372) |
| Balance, March 31, 2017 | $4,451,420 | $ 645,228 | $ 115,151 | $(1,228,414) | $3,983,385 |
The accompanying notes are an integral part of these consolidated financial statements.
Hiku Brands Company Ltd. (Formerly DOJA Cannabis Company Limited)
| Statements of Cash Flows (Expressed in Canadian Dollars) | ||
| Nine Months ended Dec 31, 2017 | Twelve Months ended March 31, 2017 | |
| Cash flow from operating activities | ||
| Net loss | $(6,240,185) | $(967,372) |
| Add (deduct) items not involving cash | ||
| Accretion and accrued interest | - | 8,987 |
| Loss of change in fair value of derivative liability | - | 492 |
| Stock-based compensation (note 9) | 740,880 | 459,228 |
| Amortization and depreciation (note 6) | 88,243 | - |
| Shares issued for services (note 9) | 718,679 | 62,797 |
| Change in fair value of biological assets (note 5) | (264,301) | - |
| Non-cash listing costs (note 4) | 3,699,648 | - |
| Deferred income tax expense (recovery) (note 11) | (847,771) | - |
| Change in non-cash working capital | ||
| Other receivables | (70,874) | (76,116) |
| Prepaid expenses | (31,838) | 1,330 |
| Inventory and biological assets (note 5) | (98,340) | - |
| Accounts payable and accrued liabilities | 365,006 | 190,330 |
| (1,940,853) | (320,324) | |
| Cash flow from financing activities | ||
| Private placement of shares, net of issuance costs (note 9) | 3,393,626 | 4,058,774 |
| Issuance of convertible debentures, net of issuance costs (note 8) | 16,130,000 | - |
| Advances/repayment to related parties | - | (16,303) |
| Proceeds from mortgages payable, net of repayments (note 7) | - | 595,501 |
| Exercise of Warrants (note 9) | 508,335 | - |
| Repayment of mortgage payable (note 8) | (30,042) | - |
| Interest paid in cash | 20,547 | - |
| 20,022,466 | 4,637,972 | |
| Cash flow from investing activities | ||
| Investment in property and equipment (note 6) | (3,070,751) | (2,448,212) |
| (3,070,751) | (2,448,212) | |
| Increase in cash | 15,010,862 | 1,869,436 |
| Cash, beginning of period | 1,897,664 | - |
| Cash, end of period | $16,908,526 | $1,869,436 |
The accompanying notes are an integral part of these consolidated financial statements.
Hiku Brands Company Ltd. (DOJA Cannabis Company Limited)
Notes to the Consolidated Financial Statements
For the Nine and Twelve months ended December 31, 2017 and March 31, 2017 respectively
Hiku Brands Company Ltd. ("Hiku" or the "Company) (formerly DOJA Cannabis Company Limited ("DOJA") and Northern Lights Marijuana Company Limited "(NLMCL")) was incorporated under the BC Business Corporations Act. The Company's principal business activity is the cultivation of medical cannabis under the license issued by Health Canada to the Company's wholly owned subsidiary DOJA Cannabis Ltd ("DOJA Cannabis"). Subsequent to December 31, 2017 The Company received an amendment to its ACMPR to permit sales of medicinal cannabis. The Company has not yet earned any revenues from sales of cannabis.
On August 3, 2017 SG Spirit Gold Inc. completed a reverse takeover transaction, pursuant to which, DOJA Cannabis amalgamated with a wholly owned subsidiary of the company (note 4). As DOJA has been identified as the accounting acquirer, these financial statements are considered a continuation of DOJA and any comparative information provided prior to the reverse takeover are those of DOJA. The company's common shares resumed trading on the Canadian Securities Exchange (the "CSE") under the symbol "DOJA" on August 4, 2017
On January 30, 2018 subsequent to the acquisition of TS Brandco Holdings Inc (note 15), the Company renamed Hiku Brands Company Ltd and resumed trading on the CSE as "HIKU".
All prior year number of shares, options and warrants are posted consolidated and adjusted by 1.8 times for the reverse takeover transaction in Note 4.
The Company's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and Interpretations of the IFRS Interpretations Committee ("IFRIC").
These audited consolidated financial statements were authorized for issue by the Company's Board of Directors (the "Board") on April 30, 2018.
These financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair value and biological assets measured at fair value less cost to sell, as detailed in the Company's accounting policies. These consolidated financial statements have been prepared using the accrual basis of accounting.
These consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries, DOJA Cannabis Ltd. And DOJA Caf Ltd. All significant intercompany transactions were eliminated on consolidation.
The Company and its subsidiaries' functional currency, as determined by management, is the Canadian dollar. These financial statements are presented in Canadian dollars.
Pursuant to the amalgamation (note 4) the Company was deemed to have changed its year end from Dec 31 to March 31, being the fiscal year end of the wholly owned subsidiary DOJA Cannabis. The directors of the Company
Hiku Brands Company Ltd. (DOJA Cannabis Company Limited)
Notes to the Consolidated Financial Statements
For the Nine and Twelve months ended December 31, 2017 and March 31, 2017 respectively
have determined that it is in the best interests of the Company to revert to a December 31st year end. The Company's transition year will consist of a 9-month period ended December 31, 2017.
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.
Inventories of harvested finished goods and packing materials are valued at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the initial deemed cost. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Cost is determined using the average cost basis. Products for resale and supplies and consumables are valued at the lower of cost and net realizable value.
The Company measures biological assets consisting of medical cannabis plants at fair value less cost to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. Unrealized gains or losses arising from changes in fair value less cost to sell during the year are included in the results of operations of the related year.
Plant, property and equipment is measured at cost less accumulated amortization and impairment losses. Amortization is provided using the following terms and method:
| Buildings & Improvements | Straight Line over 15 - 30 years |
| Production Equipment | Straight Line over 3 - 30 years |
| Furniture & Fixtures | Straight Line over 1 - 5 years |
| Land | Not Amortized |
| Assets Under Development | Not Amortized |
An asset's residual value, useful life and amortization method are reviewed at each financial year end and adjusted if appropriate. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of equipment.
Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount of the equipment and are recognized in profit or loss.
Asset under development is transferred to the related category when the area is Licensed by Health Canada for cultivation and therefore available for use.
Long-lived assets, including property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount.
Hiku Brands Company Ltd. (DOJA Cannabis Company Limited)
Notes to the Consolidated Financial Statements
For the Nine and Twelve months ended December 31, 2017 and March 31, 2017 respectively
The Company classifies its financial assets and liabilities depending on the purpose for which the financial instruments were acquired, their characteristics, and management intent.
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to financial assets or liabilities at fair value through profit or loss are recognized immediately in profit or loss.
The Company initially recognizes financial assets at fair value on the date that they are acquired, adjusted for transaction costs, if applicable. All financial assets (including assets designated at fair value through profit or loss) are recognized initially on the date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
The Company classifies its financial assets as financial assets at fair value through profit and loss, held to maturity, available for sale or loans and receivables. A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company's risk management or investment strategy. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at adjusted fair value, adjusted for applicable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments through the expected life of the financial instrument, or, where appropriate, a shorter period.