Condensed interim consolidated financial statements of The ...

[Pages:28]Condensed interim consolidated financial statements of

The Hydropothecary Corporation

For the three and six months ended January 31, 2018 and 2017 (Unaudited, expressed in Canadian dollars, unless otherwise noted)

The Hydropothecary Corporation

Table of contents

Condensed interim consolidated statements of financial position ...........................................................................................1 Condensed interim consolidated statements of comprehensive loss .......................................................................................2 Condensed interim consolidated statements of changes in shareholders' equity.....................................................................3 Condensed interim consolidated statements of cash flows......................................................................................................4 Notes to the Condensed interim consolidated financial statements ................................................................................... 5-26

The Hydropothecary Corporation

Condensed interim consolidated statements of financial position as at January 31, 2018 and July 31, 2017

(Unaudited, in Canadian dollars)

Assets Current assets

Cash Short-term investments (Note 5) Accounts receivable Commodity taxes recoverable Prepaid expenses Inventory (Note 6) Biological assets (Note 7)

Property, plant and equipment (Note 8) Intangible assets and other longer term assets (Note 9)

Liabilities Current liabilities

Accounts payable and accrued liabilities Interest payable (Note 10) Warrant liability (Note 10 & 11)

Unsecured convertible debentures (Note 10)

Shareholders' equity Share capital (Note 11) Share-based payment reserve (Note 11) Contributed surplus Warrants (Note 11) Deficit

Approved by the Board /s/ Jason Ewart /s/ Michael Munzar

Director Director

January 31, 2018 $

145,993,226 118,668,048

324,299 1,689,108 1,914,963 7,580,902 1,191,406 277,361,952

19,324,446 2,903,872

299,590,270

July 31, 2017 $

38,452,823 2,871,550 351,207 495,783 200,677 3,689,239 1,504,186

47,565,465

5,849,695 2,763,764 56,178,924

6,940,128 -

4,187,416 11,127,544

11,127,544

299,270,625 3,726,020 -

16,120,859 (30,654,778) 288,462,726 299,590,270

-

1,672,406 72,511

1,355,587 3,100,504

20,638,930 23,739,434

45,159,336 1,561,587 1,774,880 3,728,255

(19,784,568) 32,439,490 56,178,924

The accompanying notes are an integral part of

these interim condensed

consolidated financial statements

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The Hydropothecary Corporation

Condensed interim consolidated statements of comprehensive loss for the three and six months ended January 31, 2018 and 2017

(Unaudited, in Canadian dollars)

For the three month period ended

January 31, 2018

January 31, 2017

Revenue

Cost of goods sold (Note 6) Gross margin before fair value adjustments

Fair value adjustment on sale of inventory (Note 6) Fair value adjustment on biological assets (Note 7) Gross margin

Operating Expenses General and administrative Marketing and promotion Stock-based compensation (Note 11) Amortization of property, plant and equipment (Note 8) Amortization of intangible assets (Note 9)

Loss from operations

Revaluation of financial instruments (Note 10) Foreign exchange loss Interest expense (Note 10) Interest income Net loss and comprehensive loss attributable to shareholders

Net loss per share, basic and diluted

1,181,622

450,551 731,071

1,031,633 (1,052,758)

752,196

1,770,086 1,357,665 1,967,754

187,904 207,349 5,490,758

(4,738,562)

(3,330,438) (108,196)

(1,094,405) 319,593

(8,952,008)

(0.10)

913,897

262,387 651,510

146,103 (433,900) 939,307

726,965 672,691 179,347

78,135 56,187 1,713,325

(774,018)

(354,494) 14,969 (1,113,543)

(0.02)

For the six month period ended

January 31, 2018 $

January 31, 2017 $

2,283,124

2,052,599

913,551 1,369,573

610,391 1,442,208

1,846,132 (3,692,015) 3,215,456

198,034 (764,509) 2,008,683

3,045,882 2,425,782 2,281,293

312,016 270,159 8,335,132

(5,119,676)

(4,612,874) (23,204)

(1,527,313) 412,857

(10,870,210)

(0.13)

1,243,805 1,450,401

281,473 109,879 116,257 3,201,815

(1,193,132)

(368,987) 18,271 (1,543,848)

(0.03)

Weighted average number of outstanding shares Basic and diluted (Note 12)

93,202,241

51,526,560

84,841,163

45,545,664

The accompanying notes are an integral part of

these interim condensed consolidated financial statements

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The Hydropothecary Corporation

Condensed interim consolidated statements of changes in shareholders' equity for the three and six month periods ended January 31, 2018 and 2017

(Unaudited, in Canadian dollars)

Balance, August 1, 2017 Issuance of 7% unsecured convertible debentures (Note 10) Issuance of Units (Note 11) Issuance costs (Note 11) Issuance of Broker/Finder warrants Conversion of 8% unsecured convertible debentures (Note 10) Conversion of 7% unsecured convertible debentures (Note 10) Exercise of stock options Exercise of warrants (Note 11) Exercise of Broker/Finder warrants (Note 11) Stock-based compensation (Note 11) Net loss Balance at January 31, 2018

Number common

shares #

76,192,990 -

37,375,000 -

15,853,887 31,384,081

285,829 13,103,115

3,123,074 -

177,317,976

Share capital

$

45,159,336 -

139,029,262 (5,725,953) (1,485,797) 23,462,232 61,555,345 335,047 30,154,364 6,786,789 -

299,270,625

Share-based payment reserve $

1,561,587

(116,860) 2,281,293 3,726,020

Warrants $

3,728,255 3,529,770 10,470,738

(768,186) 2,351,615

(1,995,962) (1,195,371) 16,120,859

Contributed surplus $

1,774,880 7,283,084

(505,767)

(1,742,779) (6,809,418)

-

Deficit $

(19,784,568) -

(10,870,210) (30,654,778)

Shareholders' equity $

32,439,490 10,812,854 149,500,000 (6,999,906)

865,818 21,719,453 54,745,927

218,187 28,158,402

5,591,418 2,281,293 (10,870,210) 288,462,726

Balance, August 1, 2016 Issuance of Units (Note 11) Private placement (Note 11) Concurrent financing (Note 11) Issuance costs (Note 11) Broker/Finder warrants (Note 11) Exercise of stock options Exercise of warrants Stock-based compensation (Note 11) Net Loss Balance at January 31, 2017

39,305,832 338,274

4,285,716 17,517,042

150,000 53,286 61,650,150

12,756,262 192,253

2,500,001 13,137,782 (1,645,171)

66,000 48,250

27,055,377

937,065 -

(41,000) -

281,473 -

1,177,538

1,370,579 61,453 -

521,018 -

(12,726) -

1,940,324

89,601 -

89,601

(7,366,998) -

(1,543,847) (8,910,845)

Outstanding number of shares has been retrospectively adjusted to reflect a share exchange in connection with the Qualifying Transaction (Note 1) 6 common shares of the Company for every 1 share of The Hydropothecary Corporation, which was effected in March 2017.

7,786,509 253,706

2,500,001 13,137,782 (1,645,171)

521,018 25,000 35,524

281,473 (1,543,847) 21,351,995

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

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The Hydropothecary Corporation

Condensed interim consolidated statements of cash flows for the six-month period ended January 31, 2018 and 2017

(Unaudited, in Canadian dollars)

January 31, 2018 $

Operating activities Net loss and comprehensive loss Items not affecting cash Amortization of property, plant and equipment (Note 8) Amortization of intangible assets (Note 9) Unrealized revaluation gain on biological assets (Note 7) Foreign exchange Realized fair value adjustment on inventory sold Stock-based compensation (Note 11) Non-cash interest expense Accretion of convertible debt (Note 10) Accrued interest Revaluation of financial instruments Changes in non-cash operating working capital items Accounts receivable Commodity taxes recoverable Prepaid expenses Investment tax credit receivable Inventory Accounts payable and accrued liabilities Interest payable (Note 10)

Cash used in operating activities

(10,870,210)

312,016 270,159 (3,692,015)

1,846,132 2,281,293

312,043 1,437,758

(69,744) 4,612,875

26,908 (1,193,325) (1,714,286)

(1,733,000) 1,435,981

(72,511) (6,809,926)

Financing activities Issuance of units (Note 11) Issuance of common shares - Private Placement (Note 11) Issuance of common shares - Concurrent Financing (Note 11) Issuance of secured convertible debentures (Note 10)

Financing fees (Note 11) Exercise of stock options Exercise of warrants Share issuance costs (Note 11) Cash provided by financing activites

149,500,000 -

69,000,000 (3,925,826)

218,187 31,968,776 (6,086,536) 240,674,601

Investing activities Acquisition of short-term investment (Note 5) Acquisition of property, plant and equipment (Note 8) Purchase of intangible assets (Note 9)

Cash used in investing activities

(115,796,498) (10,117,507) (410,267)

(126,324,272)

Decrease in cash Cash, beginning of period Cash, end of period

107,540,403 38,452,823

145,993,226

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

January 31, 2017 $

(1,543,848)

109,879 116,257 (1,002,534) (145,551)

281,473 (2,079)

173,969

-

232,346 (331,255)

(15,735) -

186,317 (614,866)

(2,555,627)

503,717 2,500,001 13,137,782 4,403,881 (437,836)

25,000 35,524 (1,124,153) 19,043,916

(1,220,715)

(74,056) (1,294,771)

15,193,518 1,931,454

17,124,972

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The Hydropothecary Corporation

Notes to the condensed interim consolidated financial statements For the three and six months ended January 31, 2018 and 2017

(Unaudited, in Canadian dollars)

1. Description of business

The Hydropothecary Corporation, formerly BFK Capital Corp. (the "Company"), has one wholly-owned subsidiary, 10074241 Canada Inc. ("1007"). 1007 has three wholly-owned subsidiaries: 167151 Canada Inc., Banta Health Group and Coral Health Group (together "THC"). THC is a producer of medical marijuana and its site is licensed by Health Canada for production and sale. Its head office is located at 120 Chemin de la Rive, Gatineau, Quebec, Canada. The Company is a publicly traded corporation, incorporated in Ontario. The Company's common shares are listed on the TSX Venture Exchange ("TSXV"), under the trading symbol "THCX".

The Company was incorporated under the name BFK Capital Corp. by articles of incorporation pursuant to the provisions of the Business Corporations Act (Ontario) on October 29, 2013, and after completing its initial public offering of shares on the TSX-V on November 17, 2014, it was classified as a Capital Pool Corporation as defined in policy 2.4 of the TSX-V. The principal business of the Company at that time was to identify and evaluate businesses or assets with a view to completing a qualifying transaction (a "Qualifying Transaction") under relevant policies of the TSX-V. The Company had one wholly-owned subsidiary, 10100170 Canada Inc., which was incorporated with the sole purpose of facilitating a future Qualifying Transaction.

On March 15, 2017, the Company completed its Qualifying Transaction which was effective pursuant to an agreement between the Company and the legacy entity, The Hydropothecary Corporation ("Hydropothecary"). As part of the Qualifying Transaction, the Company changed its name to The Hydropothecary Corporation and consolidated its 2,756,655 shares on a 1.5 to 1 basis to 1,837,770. Following this change, Hydropothecary amalgamated with 10100170 Canada Inc., which resulted in the creation of a new entity, 10074241 Canada Inc. (THC). In connection with that amalgamation, THC acquired all of the issued and outstanding shares of the Company and the former shareholders of Hydropothecary received a total of 68,428,824 post-consolidation common shares. Immediately following closing, the Company had a total 70,266,594 common shares outstanding.

Upon closing of the transaction, the shareholders of Hydropothecary owned 97.4% of the common shares of the Company and as a result, the transaction is considered a reverse acquisition of the Company by Hydropothecary. For accounting purposes Hydropothecary is considered the acquirer and the Company is considered the acquiree. Accordingly, the condensed interim consolidated financial statements are in the name of The Hydropothecary Corporation (formerly BFK Capital Corp.); however, they are a continuation of the financial statements of Hydropothecary. Additional information on the transaction is disclosed in Note 4.

2. Basis of presentation

Statement of compliance

These condensed interim consolidated financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Reporting ("IAS 34"). These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the fiscal year ended July 31, 2017, which have been prepared in accordance with International Financial Reporting Standards ("IFRS").

These condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors on March 27, 2018.

Basis of measurement and consolidation

The condensed interim consolidated financial statements have been prepared on an historical cost basis except for short term investments, biological assets, the warrant liability, conversion liability, which are measured at fair value on a recurring basis and include the accounts of the Company and entities controlled by the Company and its subsidiaries. They include its wholly-owned subsidiary, 10074241 Canada Inc. They also include 167151 Canada Inc., Banta Health Group and Coral Health Group, three wholly-owned subsidiaries of 10074241 Canada Inc. They also include the accounts of 8980268 Canada

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The Hydropothecary Corporation

Notes to the condensed interim consolidated financial statements For the three and six months ended January 31, 2018 and 2017

(Unaudited, in Canadian dollars)

Inc., a company for which THC holds a right to acquire the outstanding shares at any time for a nominal amount. All subsidiaries are located in Canada.

Historical cost is the fair value of the consideration given in exchange for goods and services based upon the fair value at the time of the transaction of the consideration provided.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these condensed interim consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, Share-based payment and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2, Inventories.

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

Level 2 - inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

Level 3 - inputs are unobservable inputs for the asset or liability.

The preparation of these condensed interim consolidated financial statements requires the use of certain critical accounting estimates, which requires management to exercise judgement in applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these condensed interim consolidated financial statements have been set out in Note 3 of the audited consolidated financial statements for the year ended July 31, 2017.

Functional and presentation currency

These condensed interim consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its subsidiaries.

3. Changes to Accounting Standard and Interpretations

IFRS 9, Financial Instruments

IFRS 9 was issued by the International Accounting Standards Board ("IASB") in November 2009 and October 2010 and will replace IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Two measurement categories continue to exist to account for financial liabilities in IFRS 9, fair value through profit or loss ("FVTPL") and amortized cost. Financial liabilities held-for-trading are measured at FVTPL, and all other financial liabilities are measured at amortized cost unless the fair value option is applied. The treatment of embedded derivatives under the new standard is consistent with IAS 39 and is applied to financial liabilities and non-derivative hosts not within the scope of the standard. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

Equity investments that are less than significant investments are currently recorded at cost as these are private companies and organizations that do not have a quoted price in an active market and whose fair value cannot be readily measured. Upon implementation of IFRS 9, these investments will need to be recorded at fair value and the Company is currently assessing available information and practicable methods to determine their fair value.

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