UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
X | SEMIANNUAL REPORT PURSUANT TO REGULATION A | ||||
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| SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A | ||||
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For the fiscal semiannual period ended: | September 30, 2018 |
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True Leaf Medicine International Ltd. | |||||
(Exact name of issuer as specified in its charter) | |||||
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British Columbia |
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State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | ||||
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100 Kalamalka Lake Road, Unit 32, Vernon, British Columbia V1T 9G1 | |||||
(Full mailing address of principal executive offices) | |||||
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778-475-5323 | |||||
(Issuer’s telephone number, including area code) | |||||
1
Table of Contents
Item 1. Management Discussion and Analysis. 3
Item 3. Financial Statements. 16
2
In this Form 1-SA - Semiannual Report Pursuant To Regulation A (“Semiannual Report” or “Form 1-SA”), unless otherwise noted or the context indicates otherwise, the “we”, “us”, “our”, “True Leaf”, and “Company” refers to True Leaf Medicine International Ltd. and its subsidiaries, True Leaf Investments Corp. (“TL Investments”), True Leaf Medicine Inc. (“TL Medicine”), True Leaf Pet Inc. (“TL Pet”), True Leaf Pet Europe LLC Sàrl (“TL Europe”), and True Leaf USA Inc. (“TL USA”).
This Semiannual Report contains company names, product names, trade names, trademarks and service marks of the Company and other organizations, all of which are property of their respective owners.
The information contained herein is dated as of September 30, 2018 unless otherwise stated.
This Semiannual Report contains certain statements related to industry scope and state, production, revenue, expenses, plans, development schedules and similar items that represent forward-looking statements. Such statements are based on assumptions and estimates related to future economic and market conditions. Such statements include declarations regarding management’s intent, belief or current expectations. Certain statements contained herein may contain words such as “could”, “should”, “expect”, “believe”, “will” and similar expressions and statements relating to matters that are not historical facts but are forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results may differ materially from those indicated by such forward-looking statements. Some of the important factors, but certainly not all, that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) the possible unavailability of financing, (iii) start-up risks, (iv) general operating risks, (v) dependence on third parties, (vi) changes in government regulation, (vii) the effects of competition, (viii) dependence on senior management, (ix) impact of Canadian economic conditions, and (x) fluctuations in currency exchange rates and interest rates.
This Management’s Discussion & Analysis (this “MD&A”) has been prepared by management and should be read in conjunction with the condensed interim consolidated financial statements of the Company together with the related notes thereto for the three and six-month period ended September 30, 2018, as well as our audited consolidated financial statements and accompanying MD&A for the year ended March 31, 2018. The 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 International Financial Reporting Interpretations Committee (“IFRIC”). All amounts are stated in Canadian dollars unless otherwise indicated.
Management is responsible for the preparation and fair presentation of the condensed consolidated interim financial statements of the Company together with the related notes thereto for the three and six months ended September 30, 2018 in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
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True Leaf Medicine International Ltd. (the “Company” or “True Leaf”) was incorporated under the Business Corporations Act of the Province of British Columbia on June 9, 2014 and is the legal parent of True Leaf Investments Corp. (“TL Investments”), True Leaf Medicine Inc. (“TL Medicine”), True Leaf Pet Inc. (“TL Pet”) and True Leaf Pet Europe LLC Sàrl (”TL Pet Europe”). TL Investments, TL Medicine and TL Pet were all incorporated under the Business Corporations Act of the Province of British Columbia on March 26, 2014, July 4, 2013 and November 18, 2015 respectively and TL Pet Europe was incorporated under the Business Corporation Act in Luxembourg on July 18, 2016.
The Company’s shares trade on the Canadian Securities Exchange (the “CSE”) under the symbol “MJ”, the OTC Market Group’s OTCQB® Venture Market under the ticker symbol “TRLFF” and the Frankfurt Stock Exchange under the symbol “TLA”.
True Leaf is a plant-forward wellness brand for pets and their owners. Founded in 2013, True Leaf has two main operating divisions: True Leaf Medicine Inc. and True Leaf Pet Inc. The Company’s goal is to be a global cannabis-for-pets brand leader by embracing natural alternatives to help pets live healthier and longer lives. Management believes that both the cannabis and pet industries represent high-growth industries.
TL Medicine was launched in July 2013 to become a licensed producer of medicinal cannabis for the Canadian market under Canada’s Access to Cannabis for Medical Purposes Regulations (“ACMPR”) program administered by Health Canada. Subsequent to September 30, 2018, the ACMPR process changed as a result of new regulations that amended the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Cannabis Act”). The Cannabis Act and related regulations issued pursuant to the Cannabis Act (the “Cannabis Regulations”) were implemented on October 17, 2018. As a result, the Company's application to become a licensed producer and grower of cannabis under the ACMPR will now be migrated to the Cannabis Tracking and Licensing System (“CTLS”) under the Cannabis Act. The Company continues to work diligently to comply with all of the requirements of Health Canada in order to be successful at receiving a license to sell medicinal cannabis under the Cannabis Act.
TL Pet launched its hemp-seed based pet supplement and treat product line in the fall of 2015. The Company shares the commitment of its customers to improve the overall health of their pets with natural ingredients. The Company believes that consumers are looking for higher quality products that address nutritional needs common to their pets, without having to worry about food safety or harmful side effects. Products containing hemp, including hemp seed oil, hemp protein and hemp extracts are gaining significant acceptance as evidence of their nutritional effectiveness becomes recognized. The Company’s products are developed and marketed for the purpose of improving the health, comfort, enjoyment and safety of our customers' pets. The current hemp-seed based formula is legally compliant and meets US and Canadian guidelines allowing TL Pet to establish a distribution network that includes more than 2,800 stores globally, with retail partners like PetSmart Canada, Pets Supplies Plus, Pets Corner UK and Amazon. The Company also uses other channels to sell its products including veterinarians, food wholesalers, drug stores, club stores, mass merchandisers, discount stores and natural foods stores. The Company currently sells its hemp pet products in Canada, the United States and Europe.
TL Pet’s formulations were created with veterinarian support and include other plant-based natural ingredients. All products sold are federally legal in the US, Canada and Europe and are part of a broader strategy to position the Company as the global brand leader in the cannabis for pets space. The Company is currently working with a Vancouver branding firm to solidify this strategy and its brand message and plans to bring more pet products to the market.
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The Company’s business objectives for the next 12 months are:
The Company’s long-term business objectives are:
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The following table presents selected financial information for the most recent eight quarters:
The following table presents selected financial information for the most eight quarters from March 31, 2018:
| Three Months Ended * | |||
| March 31, 2018 | December 31, 2017 | March 31, 2018 | December 31, 2017 |
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Revenues | $ 572,071 | $ 491,334 | $ 383,844 | $ 265,555 |
Total Operating Expenditures | (1,569,262) | (1,220,258) | (2,242,640) | (649,073) |
Net loss and comprehensive loss for period | (1,330,927) | (865,059) | (1,839,673) | (541,041) |
Basic and diluted loss per share | (0.01) | (0.01) | (0.01) | (0.04) |
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| Three Months Ended * | |||
| September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 |
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Revenues | $ 458,729 | $ 289,189 | $ 99,331 | $ 143,135 |
Total Operating Expenditures | (650,722) | (1,257,104) | (390,901) | (684,868) |
Net loss and comprehensive loss for period | (416,330) | (1,170,891) | (376,349) | (623,661) |
Basic and diluted loss per share | (0.01) | (0.03) | (0.01) | (0.01) |
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* Certain comparative figures have been restated to conform to the current period’s presentation as described in Note 2(d) of the condensed consolidated interim financial statements.
All of the Company’s revenues from inception to date are from the sale of its hemp-based products for pets, mostly in North America and Europe. Revenue growth was primarily fueled by True Leaf expanding the commercial reach of its True Leaf Pet division into new geographies both in-store and online. True Hemp™ dog chews, dental sticks and supplement oils are now sold in more than 2,800 stores worldwide, including PetsSuppliesPlus (USA), PetSmart Canada, Pets Corner UK, and online on Amazon.
Revenue is recorded net of customer discounts, promotional allowances and includes freight collected in connection with online sales. Cost of sales may include different costs compared to other manufacturing and distribution companies. The Company’s cost of sales includes inventory, product-related costs and costs to ship products to customers.
Six-months ended September 30, 2018 and six-months ended September 30, 2017
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Revenue for the six-months ended September 30, 2018 was $1,063,405- the Company’s highest revenue over two quarters to date and an increase of 42% from the comparable six-month period in the prior year, which had revenue of $747,846. The Company’s European operations contributed $177,734 of the total revenue for this six-month period, an increase of 86% compared to $95,727 for the same period in the prior year.
Hiring experienced sales personnel to provide aggressive sales and marketing supported the growth in revenue for the North American and European markets. Revenues have been increasing steadily since TL Pet began operations in early 2016 with a small sales team. The Company will continue to expand the sales and marketing team to ensure continued revenue growth.
The Company incurred a net loss of $2,195,986 for the period ended September 30, 2018 (2017 - $1,587,222). Revenue from the Company’s pet business continues to grow, although not yet sufficient to fully fund the Company’s operating expenditures. Operating expenditures consist primarily of: selling and marketing, administrative and office, accounting and legal expenses and share-based compensation.
Total operating expenditures of $2,789,520 for the six-months ended September 30, 2018 were higher than the same period in the prior year, driven by higher selling & marketing, and office and administration, offset by lower share-based compensation. For the six-months ended September 30, 2018, selling and marketing expenses were $841,820 (2017 - $233,549 after capitalizing marketing costs in connection with financing obtained January 2018), administrative expenses were $1,309,954 (2017 - $551,162), and share-based compensation was $321,649 (2017 - $869,360).
Selling and marketing expenses include salaries, commissions, travel costs and promotional activities in connection with the sale of pet products and raising awareness of the True Leaf brand to consumers and investors.
The increase in selling and marketing expenses of $608,271 for the period ended September 30, 2018 compared to the same period in 2017 is consistent with the Company’s objective of growing revenue for its pet treat and supplements and increasing the brand awareness of the True Leaf name as a global leader in the cannabis for pets market. The increase in selling costs is primarily due to salaries and travel costs of a dedicated sales team working to win new customers, as well as attending trade shows in North America and Europe to build awareness for the Company’s products. The benefit of this investment is reflected in the Company’s revenue growth and increase in store count from approximately 1,800 at March 31, 2018 to approximately 2,800 at September 30, 2018.
Administrative and office expenses of $1,309,954 for the period ended September 30, 2018 increased $758,792 (2017 - $551,162), primarily due to higher insurance and travel costs due to the Regulation A+ financing completed in early 2018, and recruitment and salaries related to the hiring of additional employees and contractors in 2018, consistent with the Company’s focused effort to assemble a world-class leadership team who will deliver on the Company’s growth plans, execute on the design and build of the cultivation and production facility and lead the development of its pet and cannabis products.
Salaries, payroll expenses and consultant fees accounted for $813,150 of total administrative and office expense (2017 - $302,078). The increase is attributable to an increase in the number of employees and consultants at September 2018 compared to September 2017, as well as costs incurred to retain a top external executive search firm. In early 2018, the Company also retained Hill+Knowlton, Canada’s top-rated government relations firm, to provide insight into the cannabis regulatory environment and assist the Company with its application to Health Canada to become a licensed producer to sell medicinal cannabis. Other contributors to the increase in administrative and office expenses for the period ended September 30, 2018 are increased insurance expense and general travel, offset by a decrease in public company costs.
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Share-based compensation costs were significantly lower at $321,649 for the period ended September 30, 2018 (2017 - $869,360) because less options were granted during the current period versus the comparable period in 2017, as well as a large portion of the options granted in the comparable period in 2017 vested immediately. The Company’s revised approach to granting stock options include a longer vesting period, which better aligns those receiving options with contributing to the long-term growth and success of the Company. The Company recognizes the expense, based on the fair value of the options, using the Black-Scholes option pricing model.
Research and development expense include costs associated with the Company’s Medical Advisory Board (“MAB”) and the research of new products targeted for people. TL Medicine formed a MAB consisting of independent medical experts and Dr. Chris Spooner, a naturopath. During the period, the Company eliminated the MAB and Dr. Spooner resigned from the Board, as a result of its heavier focus on pets and pet products.
As a result, the Company entered into an agreement with veterinarian Dr. Katherine Kramer during the period, to chair the Company’s newly established Veterinary Advisory Board which will provide strategic direction to TL Pet and assist the company with the development of a ‘CBD’ product line for pets. Dr. Kramer is a vocal advocate for the research and therapeutic use of cannabis for animals, is the Medical Director at the VCA-Canada Vancouver Animal Wellness Hospital and has been practicing veterinary medicine for 16 years. She became interested in alternative treatment early in her career, blending herbs and acupuncture with Western medicine to promote optimal health.
The Company’s financial position and liquidity were strong as at September 30, 2018, with an ending cash position of $5,486,045, funds which were a result of the Company’s issuance of share capital during the year ended March 31, 2018.
As at September 30, 2018, the Company had working capital of $4,444,793 (March 31, 2018 - $10,868,317). Receivables of $435,591 (March 31, 2018 - $385,671) include trade receivables of
$191,306 (March 31, 2018 - $202,683). As at September 30, 2018, the top three customers amounted to 41% of total trade receivables (March 31, 2018 - three customers amounted to 40%) and all of the trade receivables were in good standing.
Inventory balances were as follows:
September 30, 2018 |
| March 31, 2018 | ||
Finished goods | $ | 221,156 | $ | 432,729 |
Supplies |
| 129,588 |
| 137,865 |
| $ | 350,744 | $ | 570,594 |
The growth in sales during the period reduced product inventory to $221,156 at September 30, 2018 from $432,729 at March 31, 2018. The Company’s co-packing arrangements enable it to quickly scale production to respond to increased customer demand.
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As at September 30, 2018, prepaid expenses and deposits increased from $149,199 at March 31, 2018 to $393,416 at September 30, 2018 to include a deposit of $135,803 (March 31, 2018 -$25,827) and prepaid property taxes of $18,819 for the Lumby property as well as prepaid insurance premiums of $175,000. The deposits are refundable upon completion of the construction project, subject to approval by the Village of Lumby that the Company has complied with conditions set out in its various permits.
As at September 30, 2018, the Company had an accrued liability of $369,306 as holdbacks against construction in progress. Construction is on schedule and set for completion during the fall of 2018 and payment of the holdback is expected to occur prior to March 31, 2019.
During the six-months ended September 30, 2018, the Company had capitalized construction costs of $5,322,250 (year ended March 31, 2018 - $726,955) in connection with its cannabis cultivation facility in Lumby, BC. Depreciation will commence when the facility is available for use. The total cost for the portion of phase one of the cannabis cultivation facility being completed is estimated at $7.4 million. The Company has retained Colliers Project Leaders to provide professional project management services and assist management completing the project in a timely manner.
The entire first phase of the project includes a two-story 9,000 square foot central hub for the initial grow area, laboratory services, whole-plant extraction, and the production of therapeutic cannabis products, plus a 16,000 square foot wing for cannabis cultivation. Ownership of the 40-acre site means the company is well-positioned to expand to meet future market demands.
The Company’s capital assets consist of office furniture and equipment, leasehold improvements and the corporate website and had a net book value of $94,414 (March 31, 2018 - $132,420). Capital asset additions for the six-months ended September 30, 2018 totaled $15,761 (six-months ended September 30, 2017 - $71,309) for the purchase of office furniture and other equipment to enhance communication between the Company’s geographically disbursed team. The Company’s intangible assets consist of its websites, trademarks and related costs, and intellectual property which had a net book value of $134,588 at September 30, 2018 ($142,690 at March 31, 2018).
Intangible asset additions for the period ended September 30, 2018 totaled $53,910 (September 30, 2017 - $18,789) for the protection of trademarks used in the TL Pet business and development of an e-commerce site for the European operation.
The Company’s operations during the six-months ended September 30, 2018 were funded by the revenue generating activities of True Leaf Pet and the issuance of share capital during the year ended March 31, 2018 which provided gross proceeds of $18,464,265.
The majority of capital raised in fiscal 2018 was through two public financings. The completion of a Regulation A+ crowdfunding campaign approved by the United States Securities and Exchange Commission (the “SEC”) raised $10,000,000 in gross proceeds, consisting of 14,285,715 common shares of the Company at a purchase price of $0.70 per share (the “Offering”). True Leaf was the first Canadian-listed company to conduct a successful Regulation A+ Offering. The use of Regulation A+ allowed the Company to offer and sell its common shares to public retail investors as well as traditional accredited and institutional investors. In addition, on the same terms as the Offering, the Company closed a concurrent Canadian private placement of 5,788,078 common shares raising an aggregate total of $4,051,655.
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The condensed consolidated interim financial statements were prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
On January 24, 2018, the Company closed two financings which raised proceeds of $14,051,655 in two offerings and put the Company in a strong cash position at September 30, 2018. The proceeds of the financing are being used to execute on the Company’s business plan, including construction of its cannabis cultivation facility. Management estimates the cost for the portion of phase one of the cannabis cultivation facility being completed to be approximately $7.4 million, of which $5,322,250 has been incurred and capitalized as at September 30, 2018. For the six- months ended September 30, 2018, the Company incurred a loss of $2,195,986 and had an accumulated deficit of $11,135,809. The Company earned revenues of $1,063,405 (2017 - $747,846) from TL Pet and TL Pet Europe; although, these two operations have not yet achieved profitability.
Management is of the opinion the continued operations of the Company are dependent on its ability to generate future cash flows from operations and obtain additional funding through external financing to deliver on its business plan. There is a risk that financing will not be available on a timely basis or on terms acceptable to the Company.
The condensed consolidated interim financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue operations. Management has assessed that it has sufficient working capital for the Company to continue operations for the next fiscal year.
The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s Directors, Chief Executive Officer and Chief Financial Officer. The total paid as salaries, management fees, accounting fees and share-based compensation for the six-months ended September 30, 2018 and September 30, 2017 was:
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| Compensation and Fees | Share-based compensation | Total | Compensation and Fees | Share-based compensation | Total |
Mike Harcourt | Board Chair | $ 1,250 | $ 25,536 | $26,786 | $ 1,250 | $ 61,002 | $62,252 |
Sylvain Toutant | Corporate Director | 4,000 | 3,666 | 7,666 | - | - | - |
Kevin Bottomley | Corporate Director and Vice President | 31,250 | 25,536 | 56,786 | 34,250 | 61,002 | 95,252 |
Chris Spooner | Corporate Director and Chief Medical Officer | 625 | - | 625 | 1,250 | 61,002 | 62,252 |
Darcy Bomford | Chief Executive Officer and Corporate Director | 72,000 | 25,536 | 97,536 | 32,500 | 61,002 | 93,502 |
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| Compensation and Fees | Share-based compensation | Total | Compensation and Fees | Share-based compensation | Total |
Kerry Biggs | Chief Financial Officer (Sept 10/18) | 8,125 | 10,095 | 18,220 | - | - | - |
Chuck Austin | Chief Financial Officer | 12,000 | - | 12,000 | 12,000 | 40,668 | 52,668 |
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| $ 129,250 | $ 90,369 | $219,619 | $ 81,250 | $ 284,676 | $365,926 |
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The Company had the following transactions with individuals who were related parties during the six-months ended September 30, 2018:
The Company’s authorized share capital consists of an unlimited number of common shares without par value and an unlimited number of preferred non-voting shares without par value. As of November 26, 2018, the total number of issued and outstanding common shares was 95,529,059 and there were no preferred shares outstanding.
The Company did not have any share capital transactions during the six-month period ended September 30, 2018. Subsequent to September 30, the Company issued common shares as follows:
On May 29, 2017 the Company granted a total of 3,900,000 stock options to directors, officers, employees and consultants that vested immediately. The stock options were valued at $793,020 ($0.203 per option) using the Black-Scholes option pricing model with the following assumptions: term of 2 years, historical volatility of 95.8%, risk-free rate of 0.71% and no expected dividends.
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On February 6, 2018 the Company granted 1,900,000 stock options at an exercise price of $0.94 per option to directors, officers, and consultants, of which 1,100,000 options vested immediately. The balance of 800,000 options vest evenly over two years, with 25% of the options vesting each six months by February 6, 2020. The stock options were valued at $1,305,554 in total ($0.687 per option), of which $128,213 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 95.80%, risk-free rate of 2.17% and expected dividends of $nil. During the six months ended September 30, 2018, a former Director forfeited 100,000 non-vested options upon his resignation.
On July 31, 2018 the Company granted 935,000 stock options at an exercise price of $0.50 per option to directors, officers, and consultants, of which 450,000 options vested immediately. The balance of 485,000 options vest evenly over three years with the final amount vesting July 31, 2021. The stock options were valued at $335,610 in total ($0.36 per option), of which $179,303 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 93.0%, risk-free rate of 2.22% and expected dividends of $nil.
On September 10, 2018 the Company granted 1,050,000 stock options at an exercise price of $0.56 per option to officers and consultants. The options vest evenly over three years, with the final amount vesting on September 10, 2021. The stock options were valued at $422,072 in total ($0.40 per option), of which $14,133 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 93.0%, risk-free rate of 2.22%.
As at November 26, 2018 the following stock options are outstanding and exercisable:
Number of Options: |
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Outstanding | Exercisable | Exercise Price ($) | Expiry Date |
857,145 | 857,145 | 0.19 | December 12, 2018 |
2,750,000 | 2,750,000 | 0.40 | May 29, 2019 |
300,000 | 300,000 | 0.45 | July 18, 2019 |
100,000 | 100,000 | 0.94 | February 6, 2020 |
1,800,000 | 1,200,000 | 0.94 | February 6, 2023 |
935,000 | 450,000 | 0.50 | July 31, 2023 |
1,050,000 | - | 0.56 | September 10, 2023 |
7,792,145 | 5,657,145 |
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As at November 26, 2018 the following warrants are outstanding and exercisable:
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Number of Warrants |
Weighted Average Exercise Price |
Balance, March 31, 2017 | 1,816,398 | $0.15 |
Warrants expired | (410,806) | 0.15 |
Warrants exercised | (3,707,000) | 0.34 |
Warrants issued | 8,598,788 | 0.51 |
Balance at September 30, 2018 | 6,297,380 | $0.53 |
Warrants exercised | (60,000) | 0.45 |
Balance at November 29, 2018 | 6,237,380 | $0.53 |
Financial instruments recorded at fair value on the consolidated statement of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The fair value hierarchy has the following levels:
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The carrying value of accounts payable, accrued liabilities and due to related parties approximates their fair value because of the short-term nature of these instruments.
The fair values of cash and cash equivalents are measured based on Level 1 inputs of the fair value hierarchy.
The Company is exposed to various risks through its financial instruments and has a risk management framework to monitor, evaluate and manage these risks. The following analysis provides information about the Company’s risk exposure and concentration as of September 30, 2018:
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Credit risk refers to the risk that another entity will default on its contractual obligations which will result in a loss for the Company. At September 30, 2018, the Company’s exposure to credit risk consists of the carrying value of cash and accounts receivable. The Company limits its credit exposure on cash by holding its deposits with established financial institutions. Accounts receivable consists of trade accounts receivable and other receivables. The Company mitigates the risk of default of accounts receivable by assessing the credit worthiness of customers prior to sale and shipment of inventory. Significant miscellaneous receivable balances are secured, to the benefit of the Company.
Liquidity risk arises from our general and capital financing needs with respect to future growth and the Company’s construction of its cannabis cultivation facility which has an estimated cost of
$7.4 million. Liquidity risk could arise if the Company encounters difficulty in meeting future obligations with financial liabilities. As at September 30, 2018, the Company had cash and cash equivalents of $5,486,045 to settle current liabilities of $2,221,003. The Company has planning, budgeting and forecasting processes to help determine its funding requirements to meet various contractual and other obligations and to manage liquidity risk. Additionally, the Company has retained Colliers Project Leaders to provide professional project management services and assist management to keep the project on time and on budget.
The operating results and financial position of the Company are reported in Canadian dollars. The Company is exposed to currency risk arising from the translation of its European subsidiary’s operations. The Company is exposed to currency transaction risk as some of the Company’s financial instruments are denominated in U.S. dollars. The results of the Company’s operations are subject to currency translation and transaction risks.
The Company’s main risk is associated with fluctuations in Canadian dollars and euros. Assets and liabilities are translated based on the Company’s foreign currency translation policy.
The Company has determined that, with other variables unchanged, the effect of a 10% increase in the Canadian dollar as at September 30, 2018:
would result in an increase of approximately $238,000 to the net loss and comprehensive loss for the six-months ended September 30, 2018. The inverse effect would result if the Canadian dollar weakened by 10% against the Euro and U.S. dollar.
At September 30, 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. Certain operational costs are denominated in U.S. dollars and funded directly from the Company’s U.S. funds. The Company’s European operation provides further natural hedging as U.S. dollars are used to periodically fund operations. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time. Management monitors fluctuations in foreign currency rates to maximize conversion of U.S. dollars to Canadian dollars.
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Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. As at September 30, 2018, the Company did not have any liabilities that bear interest at rates fluctuating with the prime rate.
(a) Adoption of New IFRS Pronouncements
The Company adopted the new IFRS pronouncements listed below as of April 1, 2018, in accordance with the transitional provisions outlined in the respective standards described below.
IFRS 9- Financial Instruments
In November 2009, as part of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement, the IASB issued the first phase of IFRS 9 Financial Instruments, that introduces new requirements for the classification and measurement of financial assets. The standard was revised in October 2010 to include requirements regarding classification and measurement of financial liabilities. In November 2013, new general hedging requirements were added to the standard. In July 2014, the final version of IFRS 9 was issued, which adds a new expected loss impairment model and amends the classification and measurement model for financial assets by adding a new fair value through other comprehensive income category for certain debt instruments and additional guidance on how to apply the business model and contractual cash flow characteristics. The Company has assessed the classification and measurement of its financial instruments and deemed the expected credit loss of its financial assets to be insignificant. As such, the implementation of IFRS 9 did not have a material impact on the condensed interim financial statements.
IFRS 15- Revenue
In May 2014 the IASB approved IFRS 15, Revenue from Contracts with Customers, which specifies how and when entities recognize revenue, as well as requires entities to provide users of financial statements with more informative, relevant disclosures. IFRS 15 supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue related interpretations. IFRS 15 provides a single, principles based five-step model to be applied to all contracts with customers, with certain exceptions, for determining the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.
Application of IFRS 15 is mandatory for annual periods beginning on or after January 1, 2018. The Company has reviewed the implications of the adoption of IFRS 15 against its customer contracts and concluded the timing and amount of revenue recognized by the Company did not change from the adoption of IFRS 15.
(b) New standards not yet adopted
The following new standards and amendments to existing standards will be effective in future periods and may impact the reporting and disclosures of the Company:
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The Company does not have any off-balance sheet arrangements.
The Company does not have any proposed transactions.
Subsequent to the six-month period ended September 30, 2018:
None.
16
True Leaf Medicine International Ltd.
Condensed Consolidated Interim Financial Statements
For the Six Months ended September 30, 2018 and September 30, 2017
(Unaudited)
(Expressed in Canadian dollars)
17
TRUE LEAF MEDICINE INTERNATIONAL LTD.
Condensed Consolidated Interim Statements of Financial Position
(Unaudited)
(Expressed in Canadian dollars)
| September 30, 2018 | March 31, 2018 |
Assets |
|
|
Current assets |
|
|
Cash and cash equivalents | $ 5,486,045 | $ 10,812,815 |
Receivables (Notes 4,11) | 435,591 | 385,671 |
Inventories (Note 5) | 350,744 | 570,594 |
Prepaid expenses and deposits (Notes 6,7) | 393,416 | 149,199 |
6,665,796 | 11,918,279 | |
Non-current assets Land (Note 7) |
3,380,387 |
3,380,387 |
Construction in progress (Note 7) | 5,322,250 | 726,955 |
Capital assets (Note 8) | 94,414 | 132,420 |
Intangible assets (Note 9) | 134,588 | 142,690 |
Total assets | $ 15,597,435 | $ 16,300,731 |
Liabilities and shareholders' equity |
|
|
Current liabilities |
|
|
Accounts payable and accrued liabilities | $ 1,743,737 | $ 927,987 |
Construction holdback payable (Note 7) | 369,306 | 98,661 |
Short term financing (Note 10) | 98,760 | - |
Due to related parties (Note 11) | 9,200 | 23,314 |
Total current liabilities | 2,221,003 | 1,049,962 |
|
|
|
Total liabilities | 2,221,003 | 1,049,962 |
Shareholders’ equity Share capital (Note 12) |
21,693,918 |
21,693,918 |
Reserves | 2,818,323 | 2,518,723 |
Deficit | (11,135,809) | (8,961,872) |
Total shareholders’ equity | 13,376,432 | 15,250,769 |
Total liabilities and shareholders’ equity | $ 15,597,435 | $ 16,300,731 |
Nature of Operations and Going Concern (Note 1) |
|
|
Commitments (Note 15) Events after the reporting period (Note 18) |
|
|
Approved on behalf of the Board of Directors on November 26, 2018
“Darcy Bomford” Director “Michael Harcourt” Director
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
18
TRUE LEAF MEDICINE INTERNATIONAL LTD.
Condensed Consolidated Interim Statements of Loss and Comprehensive Loss
(Unaudited)
(Expressed in Canadian dollars)
| For the Three Months Ended September 30, | For the Six Months Ended September 30, | |||
| 2018 | 2017 | 2018 | 2017 |
|
| (Note 2(d)) |
| (Note 2(d)) |
Sales |
$ 572,071 |
$ 458,729 |
$ 1,063,405 |
$ 747,846 |
Cost of sales | (325,956) | (237,395) | (576,236) | (414,503) |
Gross profit | 246,115 | 221,334 | $ 487,169 | $ 333,343 |
Operating Expenditures |
|
|
|
|
Accounting and legal | 60,953 | 134,326 | 153,628 | 223,630 |
Accretion | - | 2,940 | - | 5,879 |
Administrative and office (Note 13) | 657,474 | 320,783 | 1,309,954 | 551,162 |
Amortization and depreciation (Notes 8,9) | 58,079 | 6,771 | 115,779 | 13,543 |
Directors’ fees (Note 11) | 5,250 | 1,875 | 7,125 | 3,750 |
Research and development | 18,073 | 26,711 | 39,565 | 29,122 |
Selling and marketing | 498,325 | 80,976 | 841,820 | 233,549 |
Share-based compensation (Note 10) | 271,108 | 76,340 | 321,649 | 869,360 |
Total operating expenditures | (1,569,262) | (650,722) | (2,789,520) | (1,929,995) |
Rental income | 2,072 | - | 26,231 | - |
Foreign exchange (loss) gain | (9,852) | 13,058 | 80,134 | 9,430 |
Loss and comprehensive loss for the period |
$ (1,330,927) |
$ (416,330) |
$ (2,195,986) |
$ (1,587,222) |
Loss per common share- basic and diluted |
$ (0.01) |
$ (0.01) |
$ (0.02) |
$ (0.02) |
Weighted average number of common shares outstanding- basic and diluted |
95,369,059 |
69,874,408 |
95,369,059 |
66,501,985 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
19
TRUE LEAF MEDICINE INTERNATIONAL LTD.
Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity
(Unaudited)
(Expressed in Canadian dollars)
| Number of Shares |
Share Capital |
Reserves |
Deficit | Total Shareholders’ Equity |
|
|
|
|
|
|
Balance, March 31, 2017 | 60,427,383 | $ 5,088,454 | $ 339,802 | $ (5,001,453) | $ 426,803 |
Private placements, net of share issue costs | 7,741,645 | 2,289,574 | - | - | 2,289,574 |
Shares issued on exercise of stock options | 1,488,759 | 409,709 | (139,130) | - | 270,579 |
Shares issued on exercise of warrants | 375,000 | 56,250 | - | - | 56,250 |
Share-based compensation | - | - | 869,360 | - | 869,360 |
Loss for the period | - | - | - | (1,587,222) | (1,587,222) |
Balance, Sept 30, 2017 | 70,032,787 | $ 7,843,987 | $ 1,070,032 | $ (6,588,675) | $ 1,898,541 |
|
|
|
|
|
|
Balance, March 31, 2018 | 95,369,059 | $ 21,693,918 | $ 2,518,723 | $ (8,961,872) | $ 15,250,769 |
Share-based compensation | - | - | 321,649 | - | 321,649 |
Fair value adjustment on forfeiture of stock options | - | - | (22,049) | 22,049 | - |
Loss for the period | - | - | - | (2,195,986) | (2,195,986) |
Balance, September 30, 2018 | 95,369,059 | $ 21,693,918 | $ 2,818,323 | $ (11,135,809) | $ 13,376,432 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
20
TRUE LEAF MEDICINE INTERNATIONAL LTD.
Condensed Consolidated Interim Statements of Cash Flows
(Unaudited)
(Expressed in Canadian dollars)
| Six months ended | Six months ended |
Operating activities
Loss for the period |
$ (2,195,986) |
$ (1,587,222) |
Items not affecting cash: |
|
|
Depreciation and amortization | 115,779 | 13,543 |
Accretion | - | 5,879 |
Share-based compensation | 321,649 | 869,360 |
Inventory write-down | 9,789 | - |
Changes in non-cash working capital items: |
|
|
Prepaid expenses and deposits | (145,457) | (41,020) |
Accounts payable and accrued liabilities | (102,634) | 37,119 |
Due to related parties | (6,783) | (9,500) |
Inventories | 154,176 | (420,656) |
Receivables | (49,920) | (141,325) |
Net cash used in operating activities | $ (1,899,387) | $ (1,273,822) |
Investing activities
Purchase of capital assets |
(16,750) |
(71,309) |
Intangible asset costs | (52,775) | (30,108) |
Expenditures on construction in progress | (3,357,858) | (21,750) |
Deposit to purchase land | - | (100,000) |
Net cash used in investing activities | $ (3,427,383) | $ (223,167) |
Financing activities
Proceeds from issuance of share capital |
- |
2,322,495 |
Proceeds from exercise of stock options | - | 270,579 |
Proceeds from exercise of warrants | - | 56,250 |
Repayment of promissory note | - | (23,213) |
Share issue costs | - | (469,604) |
Net cash provided by financing activities | $ - | $ 2,156,507 |
Change in cash and cash equivalents for the period | (5,326,770) | 659,518 |
Cash and cash equivalents, beginning of the period | 10,812,815 | 159,575 |
Cash and cash equivalents, end of the period | $ 5,486,045 | $ 819,093 |
Supplemental disclosure with respect to cash flows (Note 16)
The accompanying notes are an integral part of these condensed consolidated financial statements.
21
True Leaf Medicine International Ltd. (the “Company”) was incorporated under the Business Corporations Act of the Province of British Columbia on June 9, 2014 and is the legal parent of True Leaf Investments Corp. (“TL Investments”), True Leaf Medicine Inc. (“TL Medicine”), True Leaf Pet Inc. (“TL Pet”) and True Leaf Pet Europe LLC Sàrl (”TL Pet Europe”). TL Investments, TL Medicine and TL Pet were all incorporated under the Business Corporations Act of the Province of British Columbia on March 26, 2014, July 4, 2013 and November 18, 2015 respectively, and TL Pet Europe was incorporated under the Business Corporation Act in Luxembourg on July 18, 2016. The Company’s head office and registered office is located at 200, 1238 Homer Street, Vancouver, BC, V6B 2Y5. On February 9, 2015, the Company began trading on the Canadian Securities Exchange (the “CSE”) under the symbol “MJ” and on July 20, 2017 the Company began trading on the OTC under the ticker symbol “TRLFF”.
The Company’s manufactures and distributes hemp-based nutrition for pets. TL Pet and TL Pet Europe have entered the Canadian, US and European natural pet product market with a product line consisting of hemp functional chews and supplemental products for pets.
The Company, through TL Medicine, is also seeking to become a licensed producer of medicinal cannabis for the Canadian market under Canada’s Access to Cannabis for Medical Purposes Regulations (“ACMPR”) program administered by Health Canada. As at September 30, 2018, the Company does not have a license with the ACMPR and no products are in commercial production or use. Subsequent to September 30, 2018, the ACMPR process changed as a result of new regulations that amended the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Cannabis Act”). The Cannabis Act and related regulations issued pursuant to the Cannabis Act (the “Cannabis Regulations”) were implemented on October 17, 2018. As a result, the Company's application to become a licensed producer or grower of cannabis under the ACMPR will now be migrated to the Cannabis Tracking and Licensing System (“CTLS”) under the Cannabis Act. The process is similar under the new Cannabis Regulations and the Company will still be required to satisfy additional obligations in order to qualify, including the completion of a compliant facility on a parcel of land owned by the Company in Lumby, British Columbia (Note 7). There is some risk that the Company will not receive a license, thus rendering the Company unable to proceed with its cannabis business model. The Company continues to work diligently to comply with the requirements of Health Canada.
Going Concern
These condensed consolidated interim financial statements (the “financial statements”) have been prepared on the going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
On January 24, 2018, the Company closed a financing which raised an aggregate total of $14,051,655 in two offerings, the proceeds of which are being used to execute on the Company’s business plan, including construction of its cannabis cultivation facility (Note 7). For the six-month period ended September 30, 2018, the Company incurred a loss of $2,195,986 and had an accumulated deficit of $11,135,809. The Company earned revenues of $1,063,405 (2017 - $747,846) from TL Pet and TL Pet Europe; although, these two operations have not yet achieved profitability.
Management is of the opinion the continued operations of the Company are dependent on its ability to generate future cash flows from operations and obtain additional funding through external financing to deliver on its business plan. There is a risk that financing will not be available on a timely basis or on terms acceptable to the Company.
22
These financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue operations. Management has assessed that it has sufficient working capital for the Company to continue operations for the next fiscal year.
(a) Statement of compliance
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, using the same accounting policies and methods of application as the audited annual consolidated financial statements of the Company for the year ended March 31, 2018, which were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), except as described in Note 3 below. Accordingly, certain information and footnote disclosure normally included in annual financial statements have been omitted or condensed.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended March 31, 2018.
These condensed interim financial statements were approved by the Company’s Board of Directors on November 26, 2018.
(b) Principles of consolidation
These financial statements incorporate the financial statements of the Company and its controlled subsidiaries. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. These financial statements include the accounts of the Company and its wholly-owned subsidiaries: TL Investments, TL Medicine, TL Pet and TL Pet Europe. All significant intercompany transactions and balances have been eliminated on consolidation.
(c) Basis of measurement and use of estimates
These financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value (Note 14). All amounts in the financial statements are presented in Canadian dollars which is the functional currency of the Company and its subsidiaries.
The preparation of these financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the period. These estimates are, by their nature, uncertain. The impacts of such estimates are pervasive throughout the financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There have been no significant changes to the estimates and judgements since the year ended March 31, 2018.
23
(d) Comparative figures
Certain comparative figures have been restated to reflect the quarterly impact of adjustments made in the fourth quarter of the year ended March 31, 2018 and to conform to the current period’s presentation, as described below:
Three months ended September 30, 2017 | ||||
| Previously reported | Change |
| Restated |
Sales | $ 468,056 | $ (9,327) | (i) | $ 458,729 |
Cost of sales | 268,087 | (9,327) | (i) | 237,395 |
|
| (21,365) | (ii) |
|
Gross margin | $ 199,969 | $21,365 |
| $ 221,334 |
Accounting and legal | 145,598 | (11,272) | (iii) | 134,326 |
Administrative and office | 328,283 | (7,500) | (iv) | 320,783 |
Selling and marketing | 155,428 | 21,365 | (ii) | 80,976 |
|
| (95,817) | (iii) |
|
Other operating expenditures | 114,637 | - |
| 114,637 |
Total operating expenditures | 743,946 | (93,224) |
| 650,722 |
Other income | 13,058 | - |
| 13,058 |
Loss for the period | $ (530,919) | $ (114,589) |
| $ (416,330) |
Six months ended September 30, 2017 | ||||
| Previously reported | Change |
| Restated |
Sales | $ 762,228 | $ (14,382) | (i) | $ 747,846 |
Cost of sales | 465,373 | (14,382) | (i) | 414,503 |
|
| (36,488) | (ii) |
|
Gross margin | $ 296,855 | $ 36,488 |
| $ 333,343 |
Accounting and legal | 239,516 | (15,886) | (iii) | 223,630 |
Administrative and office | 592,634 | (21,750) | (iv) | 551,162 |
|
| (19,722) | (v) |
|
Selling and marketing | 617,858 | 36,488 | (ii) | 233,549 |
|
| (420,797) | (iii) |
|
Other operating expenditures | 921,654 | - |
| 921,654 |
Total operating expenditures | 2,371,662 | (441,667) |
| 1,929,995 |
Other income | 9,430 | - |
| 9,430 |
Loss for the period | $ (2,065,377) | $ 478,155 |
| $ (1,587,222) |
(i) Customer discounts reclassified from cost of sales to sales.
(ii) Sales commissions reclassified from cost of sales to selling and marketing.
(iii) Share issuance costs reclassified to equity in the year ended March 31, 2018.
(iv) Costs previously expensed capitalized to construction in progress in the year ended March 31, 2018.
(v) Costs incurred in the three-month period ended June 30, 2017; reallocated to correct period.
24
(a) Adoption of New IFRS Pronouncements
The Company adopted the new IFRS pronouncements listed below as at April 1, 2018, in accordance with the transitional provisions outlined in the respective standards described below.
IFRS 9- Financial Instruments
In November 2009, as part of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement, the IASB issued the first phase of IFRS 9 Financial Instruments, that introduces new requirements for the classification and measurement of financial assets. The standard was revised in October 2010 to include requirements regarding classification and measurement of financial liabilities. In November 2013, new general hedging requirements were added to the standard. In July 2014, the final version of IFRS 9 was issued, which adds a new expected loss impairment model and amends the classification and measurement model for financial assets by adding a new fair value through other comprehensive income category for certain debt instruments and additional guidance on how to apply the business model and contractual cash flow characteristics. The Company has assessed the classification and measurement of its financial instruments and deemed the expected credit loss of its financial assets to be insignificant. As such, the implementation of IFRS 9 did not have a material impact on the financial statements.
IFRS 15- Revenue
In May 2014 the IASB approved IFRS 15, Revenue from Contracts with Customers, which specifies how and when entities recognize revenue, as well as requires entities to provide users of financial statements with more informative, relevant disclosures. IFRS 15 supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue related interpretations. IFRS 15 provides a single, principles based five-step model to be applied to all contracts with customers, with certain exceptions, for determining the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.
Application of IFRS 15 is mandatory for annual periods beginning on or after January 1, 2018. The Company has reviewed the implications of the adoption of IFRS 15 against its customer contracts and concluded the timing and amount of revenue recognized by the Company did not change from the adoption of IFRS 15.
(b) New standards not yet adopted
The following new standards and amendments to existing standards will be effective in future periods. The following may impact the reporting and disclosures of the Company:
25
| September 30, 2018 | March 31, 2018 | |||
Trade receivables (a) | $ | 191,306 | $ | 202,683 |
Miscellaneous receivables (b) |
| 124,970 |
| 119,770 |
Goods and services tax receivable |
| 119,315 |
| 63,218 |
| $ | 435,591 | $ | 385,671 |
(a) Trade receivables
Trade receivables are non-interest bearing and are due within 30 days. As at September 30, 2018, the Company did not have any trade receivables that were past due.
During the six-month period ended September 30, 2018, revenues from three customers amounted to 41% of total sales (September 30, 2017- two customers amounted to 36% of total sales). As at September 30, 2018, the top three customers amounted to 44% of total trade receivables (March 31, 2018 - three customers amounted to 40%).
(b) Miscellaneous receivables
At September 30, 2018 a past director and key consultant was indebted to the Company for an amount of $119,770. The Company has remitted withholding tax on behalf of the past director in connection with his exercise of stock options in January 2018. The balance is non-interest bearing and payable in full by March 15, 2019. A share purchase agreement has been put in place as security against the amount due.
At September 30, 2018, miscellaneous receivables include an amount of $5,200 in connection with rent payable by a third party for space at the Company’s Lumby property.
September 30, 2018 | March 31, 2018 | |||
Finished goods | $ | 221,156 | $ | 432,729 |
Supplies |
| 129,588 |
| 137,865 |
| $ | 350,744 | $ | 570,594 |
September 30, 2018 | March 31, 2018 | |||
Insurance premiums | $ | 175,000 | $ | 80,791 |
Property taxes |
| 18,819 |
| - |
Annual filing fees |
| 25,608 |
| - |
Marketing fees |
| 15,802 |
| 33,505 |
Prepaid expenses | $ | 235,229 | $ | 114,296 |
Construction deposits (Note 7) |
| 135,803 |
| 25,827 |
Security deposits |
| 22,384 |
| 9,076 |
|
| 158,187 |
| 34,903 |
| $ | 393,416 | $ | 149,199 |
26
During the year ended March 31, 2018, the Company acquired a property of 40 acres located in Lumby B.C. for total consideration of $3,380,387 to build its cannabis cultivation facility. As at September 30, 2018, construction costs incurred of $5,322,250 (March 31, 2018 - $726,955) are capitalized and depreciation will commence when the facility is available for use.
As at September 30, 2018, prepaid expenses and deposits include a deposit of $135,803 (March 31, 2018 -$25,827), refundable upon completion of the construction project, subject to approval by the Village of Lumby that the Company has complied with conditions set out in its various permits. As at September 30, 2018, the Company has accrued a liability of $369,306 (March 31, 2018 - $98,661) as holdbacks against construction in progress.
Cost: |
| Office furniture |
| Office equipment | Leasehold improvements |
|
Total | |
Balance, March 31, 2017 | $ | - | $ | 7,642 | $ | 3,694 | $ | 11,336 |
Additions |
| 20,165 |
| 42,074 |
| 76,235 |
| 138,474 |
Balance, March 31, 2018 |
| 20,165 |
| 49,716 |
| 79,929 |
| 149,810 |
Additions |
| - |
| 15,761 |
| - |
| 15,761 |
Balance, September 30, 2018 | $ | 20,165 | $ | 65,477 | $ | 79,929 | $ | 165,571 |
Accumulated depreciation: |
|
|
|
|
|
|
|
|
Balance, March 31, 2017 | $ | - | $ | 1,786 | $ | 739 | $ | 2,525 |
Depreciation for the year |
| 2,150 |
| 4,353 |
| 8,362 |
| 14,865 |
Balance, March 31, 2018 |
| 2,150 |
| 6,139 |
| 9,101 |
| 17,390 |
Depreciation for the period |
| 8,066 |
| 13,729 |
| 31,972 |
| 53,767 |
Balance, September 30, 2018 | $ | 10,216 | $ | 19,868 | $ | 41,073 | $ | 71,157 |
Carrying value: |
|
|
|
|
|
|
|
|
As at March 31,2018 | $ | 18,015 | $ | 43,577 | $ | 70,828 | $ | 132,420 |
As at September 30, 2018 | $ | 9,949 | $ | 45,609 | $ | 38,856 | $ | 94,414 |
27
Cost: |
|
Website | Trademarks and related costs |
| Intellectual property |
|
Total | |
Balance, March 31, 2017 | $ | 10,801 | $ | 80,276 | $ | 55,500 | $ | 146,577 |
Additions |
| - |
| 37,124 |
| - |
| 37,124 |
Balance, March 31, 2018 |
| 10,801 |
| 117,400 |
| 55,500 |
| 183,701 |
Additions |
| - |
| 53,910 |
| - |
| 53,910 |
Balance, September 30, 2018 | $ | 10,801 | $ | 171,310 | $ | 55,500 | $ | 237,611 |
Accumulated amortization: |
|
|
|
|
|
|
|
|
Balance, March 31, 2017 | $ | 7,256 | $ | 5,591 | $ | 5,550 | $ | 18,397 |
Amortization for the year |
| 2,700 |
| 11,589 |
| 8,325 |
| 22,614 |
Balance, March 31, 2018 |
| 9,956 |
| 17,180 |
| 13,875 |
| 41,011 |
Amortization for the period |
| 845 |
| 38,967 |
| 22,200 |
| 62,012 |
Balance, September 30, 2018 | $ | 10,801 | $ | 56,147 | $ | 36,075 | $ | 103,023 |
Carrying value: |
|
|
|
|
|
|
|
|
As at March 31, 2018 | $ | 845 | $ | 100,220 | $ | 41,625 | $ | 142,690 |
As at September 30, 2018 | $ | - | $ | 115,163 | $ | 19,425 | $ | 134,588 |
Pursuant to a commercial insurance premium finance and security agreement dated September 13, 2018, BankDirect Capital Finance, a division of Texas Capital Bank, provided the Company financing of US$75,000 at a rate of 6.49% per annum. The financing is repayable at a rate of US$9,621 per month, ending May 13, 2019.
28
a) Goods and services
The Company had the following transactions with related parties during the six months ended September 30, 2018:
b) Compensation of key management personnel
The Company considers its key management personnel to be its Directors, Chief Executive Officer and its Chief Financial Officer.
| Six months ended September 30, | ||
| 2018 | 2017 |
Director compensation (salaries, consulting fees) | $ 37,125 | $ 36,750 |
Share-based compensation | 54,738 | 183,006 |
| $ 91,953 | $ 219,756 |
Management compensation (salaries, management fees, consulting fees) | $ 92,125 | $ 44,500 |
Share-based compensation | 35,631 | 101,670 |
| $ 127,756 | $ 146,170 |
| $ 219,619 | $ 356,926 |
c) Amount due from a former director of $119,770 included in receivables at September 30, 2018 (March 31, 2018 - $119,770) (Note 4).
d) Amounts payable to related parties as at September 30, 2018 of $9,200 (March 31, 2018 - $23,314) are unsecured, non-interest bearing with no scheduled terms of repayment.
29
a) Authorized
Unlimited Common voting shares with no par value
Unlimited Preferred non-voting shares with no par value
b) Issued
The Company had the following share capital transactions during the six-month period ended September 30, 2017:
The Company did not have any share capital transactions during the six-month period ended September 30, 2018.
c) Share purchase warrants
Share purchase warrant transactions are summarized as follows:
| Number of Warrants | Weighted Average Exercise Price |
Balance, March 31, 2017 | 1,816,398 | $0.15 |
Warrants expired | (410,806) | 0.15 |
Warrants exercised | (3,707,000) | 0.34 |
Warrants issued | 8,598,788 | 0.51 |
Balance, March 31, 2018 and September 30, 2018 | 6,297,380 | $0.53 |
30
As at September 30, 2018, the following share purchase warrants are outstanding:
Number |
Exercise |
|
of Warrants | Price ( $ ) | Expiry Date |
2,097,954 | 0.45 | May 29, 2019 |
3,342,283 | 0.45 | June 12, 2019 |
857,143 | 1.05 | November 21, 2020 |
6,297,380 |
d) Stock options
The Company has a Stock Option Plan (the “Plan”) in place under which it is authorized to grant options to directors, executive officers, employees and consultants enabling them to acquire up to 10% of the issued and outstanding common shares of the Company in any twelve-month period. Under the Plan, the exercise price of each stock option is subject to a minimum of $0.10 and may not be less than the closing market price of Company’s common shares on the trading day immediately preceding the date of grant of the options. The options can be granted for a maximum term of five years and vest at the discretion of the Board of Directors.
Stock option transactions are summarized as follows:
|
Number of Options | Weighted Average Exercise Price |
Balance, March 31, 2017 | 3,149,995 | $0.18 |
Stock options exercised | (3,342,580) | 0.25 |
Stock options expired | (100,270) | 0.12 |
Stock options granted | 6,200,000 | 0.57 |
Balance, March 31, 2018 | 5,907,145 | $0.55 |
Stock options granted |
1,985,000 |
0.53 |
Stock options forfeited | (100,000) | 0.94 |
Balance, September 30, 2018 | 7,792,145 | $0.54 |
31
As at September 30, 2018, the following stock options are outstanding and exercisable:
Number of Options |
|
| ||
Outstanding | Exercisable |
| Exercise Price ( $ ) | Expiry Date |
857,145 | 857,145 |
| 0.19 | December 12, 2018 |
2,750,000 | 2,750,000 |
| 0.40 | May 29, 2019 |
300,000 | 300,000 |
| 0.45 | July 18, 2019 |
100,000 | 100,000 |
| 0.94 | February 6, 2020 |
1,800,000 | 1,200,000 |
| 0.94 | February 6, 2023 |
935,000 | 450,000 |
| 0.50 | July 31, 2023 |
1,050,000 | - |
| 0.56 | September 10, 2023 |
7,792,145 | 5,657,145 |
|
|
|
On May 29, 2017, the Company granted a total of 3,900,000 stock options to directors, officers, employees and consultants that vested immediately. The stock options were valued at $793,020 ($0.203 per option) using the Black-Scholes option pricing model with the following assumptions: term of 2 years, historical volatility of 95.8%, risk-free rate of 0.71% and expected dividends of $nil.
On February 6, 2018, the Company granted 1,900,000 stock options at an exercise price of $0.94 per option to directors, officers, and consultants, of which 1,100,000 options vested immediately. The balance of 800,000 options vest evenly over two years, with 25% of the options vesting each six months by February 6, 2020. The stock options were valued at $1,305,554 in total ($0.687 per option), of which $128,213 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 95.80%, risk-free rate of 2.17% and expected dividends of $nil. During the six months ended September 30, 2018, a former Director forfeited 100,000 non-vested options upon his resignation.
On July 31, 2018, the Company granted 935,000 stock options at an exercise price of $0.50 per option to directors, officers, and consultants, of which 450,000 options vested immediately. The balance of 485,000 options vest evenly over three years with the final amount vesting July 31, 2021. The stock options were valued at $335,610 in total ($0.36 per option), of which $179,303 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 93.0%, risk-free rate of 2.22% and expected dividends of $nil.
On September 10, 2018, the Company granted 1,050,000 stock options at an exercise price of $0.56 per option to officers and consultants. The options vest evenly over three years, with the final amount vesting on September 10, 2021. The stock options were valued at $422,072 in total ($0.40 per option), of which $14,133 is included in operating expenditures for the six-months ended September 30, 2018. The options were valued using the Black-Scholes option pricing model with the following assumptions: term of 5 years, historical volatility of 93.0%, risk-free rate of 2.22% and expected dividends of $nil.
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Three months ended | Six months ended | |||
| 2018 | 2017 | 2018 | 2017 |
Application cost | $ 15,900 | $ - | $ 31,800 | $ - |
Filing fees | 22,460 | 21,732 | 22,700 | 62,897 |
Insurance | 45,103 | 8,823 | 88,405 | 13,529 |
Office supplies | 44,249 | 35,439 | 127,699 | 59,841 |
Property tax expense | 14,548 | - | 52,206 | - |
Rent | 14,200 | 15,900 | 27,100 | 34,454 |
Transfer agent | 17,240 | 3,248 | 29,368 | 9,288 |
Travel and meals | 72,241 | 45,298 | 106,705 | 67,649 |
Utilities | 5,524 | 955 | 10,822 | 1,426 |
Wages and salaries | 406,009 | 189,388 | 813,149 | 302,078 |
| $ 657,474 | $ 320,783 | $1,309,954 | $ 551,162 |
Fair Value
Financial instruments recorded at fair value on the consolidated statement of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
a) Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
b) Level 2 - Inputs other than quoted prices that are observable for assets or liabilities, either directly or indirectly; and
c) Level 3 - Inputs for assets and liabilities that are not based on observable market
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The carrying value of receivables, accounts payable and accrued liabilities, short term financing and due to related parties approximates their fair value because of the short-term nature of these instruments.
The fair values of cash and cash equivalents are measured based on level 1 inputs of the fair value hierarchy.
Risk
The Company is exposed to various risks through its financial instruments and has a risk management framework to monitor, evaluate and manage these risks. The following analysis provides information about the Company’s risk exposure and concentration as of September 30, 2018:
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Credit risk
Credit risk refers to the risk that another entity will default on its contractual obligations which will result in a loss for the Company. At September 30, 2018, the Company’s exposure to credit risk consists of the carrying value of cash and cash equivalents, and receivables. The Company limits its credit exposure on cash by holding its deposits with established financial institutions. Accounts receivable consists of trade accounts receivable and miscellaneous receivables. The Company mitigates the risk of default of accounts receivable by assessing the credit worthiness of customers prior to sale and shipment of inventory. Significant miscellaneous receivable balances are secured, to the benefit of True Leaf.
Liquidity risk
Liquidity risk arises from our general and capital financing needs with respect to future growth and the Company’s construction of its cannabis cultivation facility (Note 7). Liquidity risk could arise if the Company encounters difficulty in meeting future obligations with financial liabilities. As at September 30, 2018, the Company has cash and cash equivalents of $5,486,045 (March 31, 2018 - $10,812,815) to settle current liabilities of $2,221,003 (March 31, 2018 - $1,049,962). The Company has planning, budgeting and forecasting processes to help determine its funding requirements to meet various contractual and other obligations and to manage liquidity risk.
Currency risk
The operating results and financial position of the Company are reported in Canadian dollars. The Company is exposed to currency risk arising from the translation of its European subsidiary’s operations and to currency transaction risk as some of the Company’s financial instruments are denominated in U.S. dollars. The results of the Company’s operations are subject to currency translation and transaction risks.
The Company’s main risk is associated with fluctuations in Canadian and U.S. dollars and Euros. Assets and liabilities are translated based on the Company’s foreign currency translation policy.
The Company has determined that, with other variables unchanged, the effect of a 10% increase in the Canadian dollar as at September 30, 2018:
would result in an increase of approximately $238,000 to the net loss and comprehensive loss for the six- months ended September 30, 2018 (2017- decrease of approximately $8,700). The inverse effect would result if the Canadian dollar weakened by 10% against the Euro and U.S. dollar.
At September 30, 2018, the Company had no hedging agreements in place with respect to foreign exchange rates as the Company’s operations provide a natural hedge. Certain operational costs are denominated in U.S. dollars and funded directly from the Company’s U.S. funds. The Company’s European operation provides further natural hedging as U.S. dollars are used to periodically fund operations. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time. Management monitors fluctuations in foreign currency rates to maximize conversion of U.S. dollars to Canadian dollars.
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Interest rate risk
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates. In seeking to minimize the risk from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities. As at September 30, 2018, the Company did not have any liabilities that bear interest at rates fluctuating with the prime rate.
Capital Management
The Company’s capital includes share capital and the accumulated deficit. The Company’s objectives when managing capital are to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. The Company manages the capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company may issue new shares in order to meet its financial obligations. The Company has not changed its approach to capital management during the six-months ended September 30, 2018.
The Company had the following commitments as of September 30, 2018:
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Cash equivalents consists of a $46,000 guaranteed investment certificate held at a chartered financial institution.
The significant non-cash investing and financing activities during the six-month periods ended September 30, 2018 and 2017 consisted of the following:
| 2018 | 2017 |
Inventory costs included in accounts payable and accrued liabilities | $ 65,085 | $ 64,600 |
Intangible asset costs included in accounts payable and accrued liabilities. | 2,392 | - |
Capital assets included in accounts payable and accrued liabilities | - | 3,287 |
Construction costs included in accounts payable and accrued liabilities | 1,139,492 | - |
Construction costs included in construction holdback payable | 270,645 | - |
Fair value relating to stock options forfeited was recorded as a reduction to reserves and the deficit. | 22,049 | - |
Fair value relating to 1,488,759 stock options exercised was recorded as an increase to share capital and a reduction from reserves. | - | 139,130 |
Operating segmented information
As at September 30, 2018, the Company had three reportable segments, being the sale of hemp-based nutrition for pets (Pet), the planned sale of medical marijuana under Canada’s ACMPR program (Medicine) and Corporate. The Corporate segment is responsible for treasury management, regulatory reporting, financial and legal administration and general corporate activities conducted in Canada, Europe and U.S. The Company has identified these reporting segments based on the internal reports reviewed and used by the Chief Executive Officer, its chief decision maker, in allocating resources and assessing performance. Operations whose revenue, earnings, losses or assets exceed 10% of the total consolidated revenue, earnings, losses or assets are reportable segments.
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Operating segmented information is presented as follows:
As at September 30, 2018 | Pet | Medicine | Corporate | Total |
Current assets | $854,819 | $297,403 | $ 5,513,574 | $6,665,796 |
Non-current assets | 159,702 | 8,771,937 | - | 8,931,639 |
Total assets | 1,014,521 | 9,069,340 | 5,513,574 | 15,597,435 |
Liabilities | (202,695) | (1,564,622) | (453,686) | (2,221,003) |
Net assets | $811,826 | $7,504,718 | $5,059,888 | $13,376,432 |
|
|
|
|
|
Six-months ended September 30, 2018 | ||||
| Pet | Medicine | Corporate | Total |
Revenues | $1,063,405 | $ - | $ - | $1,063,405 |
Gross profit | 487,169 | - | - | 487,169 |
Operating expenses | 1,058,266 | 300,637 | 1,451,617 | 2,810,520 |
Loss and comprehensive loss | $(439,325) | $(253,428) | $(1,503,233) | $(2,195,986) |
|
|
|
|
|
Three-months ended September 30, 2018 | ||||
| Pet | Medicine | Corporate | Total |
Revenues | $572,071 | $ - | $ - | $572,071 |
Gross profit | 246,115 | - | - | 246,115 |
Operating expenses | 561,422 | 133,897 | 873,942 | 1,569,262 |
Loss and comprehensive loss | $(332,245) | $(131,319) | $(867,363) | $(1,330,927) |
As at March 31, 2018 | Pet | Medicine | Corporate | Total |
Current assets | $1,054,069 | $ 211,549 | $10,652,661 | $11,918,279 |
Non-current assets | 229,085 | 4,153,367 | - | 4,382,452 |
Total assets | 1,283,154 | 4,364,916 | 10,652,661 | 16,300,731 |
Liabilities | (227,118) | (488,808) | (334,036) | (1,049,962) |
Net assets | $1,056,036 | $3,876,108 | $10,318,625 | $15,250,769 |
As at and for the three and six-months ended September 30, 2017, the Company had one operating segment, being the sale of hemp-based nutrition for pets in North America and Europe, which accounted for all of the Company’s revenues from inception to date. Therefore, comparative information as at and for the three and six-months ended September 30, 2017 is not presented.
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Geographic segmented information
The Company operates in two main geographic locations, North America and Europe, selling hemp-based nutrition for pets in North America and Europe, which has accounted for all of the Company’s revenues since its inception.
As at September 30, 2018 | North America | Europe | Total |
Current assets | $6,540,737 | $125,059 | $6,665,796 |
Non-current assets | 8,892,364 | 39,275 | 8,931,639 |
Liabilities | (2,182,875) | (38,128) | (2,221,003) |
Total net assets | $13,250,226 | $126,206 | $13,376,432 |
Revenues: |
|
|
|
Six-months ended September 30, 2018 | $885,671 | $177,734 | $1,063,405 |
Three-months ended September 30, 2018 | $542,616 | $29,455 | $572,071 |
As at March 31, 2018 | North America | Europe | Total |
Current assets | $11,753,046 | $165,233 | $11,918,279 |
Non-current assets | 4,374,765 | 7,687 | 4,382,452 |
Liabilities | (987,060) | (62,902) | (1,049,962) |
Total net assets | $15,140,751 | $110,018 | $15,250,769 |
Subsequent to September 30, 2018:
a) The Company issued 100,000 common shares pursuant to an employment The shares issued are to be held on a restricted basis for one year from the issue date, October 17, 2019.
b) The Company issued 60,000 common shares pursuant to the exercise of share purchase warrants for gross proceeds of $27,000.
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Description of Item | |
2.1 | Certificate of Incorporation (1) |
2.2 | |
2.3 | Articles (1) |
3.1 | |
3.2 | |
3.3 | |
6.1 | |
6.2 | |
6.3 | |
6.3 | |
6.4 | |
6.5 | |
6.6 | |
6.7 | Property Option Agreement with Gudeit Bros. Contracting Ltd. (5) |
8 | Payment Processing and AML/KYC Services Agreement with Issuer Direct Corp. (4) |
14 | |
15 |
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Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
True Leaf Medicine International Ltd. | ||
By: | /s/ Darcy Bomford | |
Darcy Bomford | ||
Chief Executive Officer | ||
Date: January 3, 2019
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
/s/ Darcy Bomford | ||
By: | ||
Darcy Bomford | ||
Chief Executive Officer and Director | ||
Date: | January 3, 2019
| |
/s/ Kerry Biggs | ||
By: | ||
Kerry Biggs | ||
Chief Financial Officer, Principal Accounting Officer | ||
Date: | January 3, 2019 | |
|
|
|
/s/ Kevin Bottomley | ||
By: | ||
Kevin Bottomley | ||
Director | ||
Date: | January 3, 2019 | |
|
|
|
/s/ Sylvain Toutant | ||
By: | ||
Sylvain Toutant | ||
Director | ||
Date: | January 3, 2019
| |
/s/ Michael Harcourt | ||
By: | ||
Michael Harcourt | ||
Director | ||
Date: | January 3, 2019 |
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