UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, AND (Expressed in Canadian Dollars) NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS The management of Delivra Corp. is responsible for the preparation of the accompanying unaudited condensed interim consolidated financial statements. The unaudited condensed interim consolidated financial statements have been prepared using accounting policies in compliance with International Financial Reporting Standards for the preparation of condensed interim consolidated financial statements and are in accordance with IAS 34 - Interim Financial Reporting. The Company s auditor has not performed a review of these condensed interim consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor.
UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, AND (Expressed in Canadian Dollars) INDEX Unaudited Condensed Interim Consolidated Statements of Financial Position 1 Unaudited Condensed Interim Consolidated Statements of Loss and Comprehensive Loss 2 Unaudited Condensed Interim Consolidated Statements of Changes in Equity 3 Unaudited Condensed Interim Consolidated Statements of Cash Flows 4 5-20
Unaudited Condensed Interim Consolidated Statements of Financial Position (Expressed in Canadian Dollars) December 31, $ $ Assets Current assets Cash and cash equivalents 652,604 637,438 Trade and other receivables (Note 4) 1,048,039 576,997 Inventories (Note 5) 1,211,314 870,847 Prepaid expenses 61,718 263,971 2,973,675 2,349,253 Non-current assets Intangible assets (Note 6) 444,081 383,105 Equipment (Note 7) 541,837 604,866 Total assets 3,959,593 3,337,224 Liabilities Current liabilities Accounts payable and accrued liabilities (Note 8) 1,326,293 848,589 Current portion of loans payable (Note 9) 170,980 193,764 1,497,273 1,042,353 Non-current liabilities Other liabilities (Note 10) 182,576 162,059 Loans payable (Note 9) 1,583,357 1,545,443 Total liabilities 3,263,206 2,749,855 Equity Share capital (Note 12) 16,118,773 14,757,476 Equity reserves (Note 13) 4,505,441 4,066,363 Deficit (19,927,827) (18,236,470) Total equity 696,387 587,369 Total liabilities and equity 3,959,593 3,337,224 Going concern (Note 2(b)) Commitments and contingencies (Notes 9 and 16) Subsequent events (Note 21) Approved by the Board of Directors on November 16, Signed Dr. Joseph Gabriele, Director Signed Paul G. Smith, Director See accompanying notes to the unaudited condensed interim consolidated financial statements. 1
Unaudited Condensed Interim Consolidated Statements of Loss and Comprehensive Loss For the three and nine months and (Expressed in Canadian Dollars) $ $ $ $ Operations Sales 1,670,077 923,850 3,976,861 3,297,836 Cost of goods sold (431,672) (266,189) (1,093,446) (961,756) Gross profit 1,238,405 657,661 2,883,415 2,336,080 Operating expenses General and administrative expenses (Note 17) 202,084 125,126 709,948 775,460 Research and development expenses (Note 19) 161,340 248,617 456,516 392,852 Selling, marketing and promotional expenses 1,151,414 538,425 2,807,229 2,148,549 Share-based compensation (Note 13) 143,567 88,808 409,115 261,002 1,658,405 1,000,976 4,382,808 3,577,863 Loss from operations (420,000) (343,315) (1,499,393) (1,241,783) Other expenses Interest and accretion on loans payable (Note 9) 63,906 75,878 191,964 222,325 Accretion on convertible debentures (Note 11) - - - 130,680 Fair value change in derivatives (Note 11) - - - (220,462) Net loss and comprehensive loss (483,906) (419,193) (1,691,357) (1,374,326) Loss per share Basic and diluted (0.01) (0.01) (0.04) (0.03) Weighted average number of shares outstanding Basic and diluted 47,459,450 42,962,592 46,127,178 42,397,460 See accompanying notes to the unaudited condensed interim consolidated financial statements. 2
Unaudited Condensed Interim Consolidated Statements of Changes in Equity For the three and nine months and (Expressed in Canadian Dollars) Number of Shares Share Capital Equity Reserves Deficit Total Equity # $ $ $ $ (Note 12) (Note 12) (Note 13) Balance, December 31, 2016 38,523,669 11,979,286 3,552,292 (16,752,348) (1,220,770) Conversion of debentures 3,674,358 2,271,829 447,200-2,719,029 Share issue costs - (2,954) - - (2,954) Exercise of stock options 775,000 478,465 (258,465) - 220,000 Share-based compensation - - 261,002-261,002 Net loss and comprehensive loss - - - (1,374,326) (1,374,326) Balance, 42,973,027 14,726,626 4,002,029 (18,126,674) 601,981 Balance, December 31, 43,023,027 14,757,476 4,066,363 (18,236,470) 587,369 Share issuance 3,561,423 910,798 335,700-1,246,498 Share issue costs - (84,401) (9,587) - (93,988) Exercise of warrants 475,000 286,900 (168,150) - 118,750 Exercise of stock options 400,000 248,000 (128,000) - 120,000 Share-based compensation - - 409,115-409,115 Net loss and comprehensive loss - - - (1,691,357) (1,691,357) Balance, 47,459,450 16,118,773 4,505,441 (19,927,827) 696,387 See accompanying notes to the unaudited condensed interim consolidated financial statements. 3
Unaudited Condensed Interim Consolidated Statements of Cash Flows For the three and nine months and (Expressed in Canadian Dollars) $ $ $ $ Cash flows from (used in) operating activities Net loss for the period (483,906) (419,193) (1,691,357) (1,374,326) Adjustments for: Amortization (Notes 6 and 7) 26,099 13,978 78,033 63,667 Share-based compensation (Note 13) 143,567 88,808 409,115 261,002 Accretion on loans payable (Note 9) 62,349 73,164 186,409 213,413 Other liabilities (Note 10) 7,113 (108,805) 20,517 (88,595) Accretion on convertible debentures (Note 11) - - - 130,680 Fair value change in derivatives (Note 11) - - - (220,462) Discount on loans included in loss (Note 9) - (33,728) (133,602) (428,335) (244,778) (385,776) (1,130,885) (1,442,956) Changes in non-cash working capital: Trade and other receivables (271,648) 89,859 (471,042) 242,596 Inventories (226,748) 93,562 (340,467) (14,374) Prepaid expenses 102,792 18,228 202,253 51,233 Accounts payable and accrued liabilities 355,627 (22,648) 486,593 (369,168) Net cash flows (used in) operating activities (284,755) (206,775) (1,253,548) (1,532,669) Cash flows from (used in) investing activities Purchase of intangible assets (9,687) (53,320) (73,748) (163,686) Purchase of equipment - - - (20,373) Net cash flows (used in) investing activities (9,687) (53,320) (73,748) (184,059) Cash flows from (used in) financing activities Proceeds of loans payable - 54,561 154,837 717,820 Repayments of loans payable (73,754) (64,388) (203,635) (192,577) Proceeds from exercise of warrants - - 118,750 - Proceeds from exercise of stock options - 40,000 120,000 220,000 Share issuance - - 1,246,498 - Share issue costs - - (93,988) (2,954) Net cash flows from financing activities (73,754) 30,173 1,342,462 742,289 (Decrease) increase in cash and cash equivalents (368,196) (229,922) 15,166 (974,439) Cash and cash equivalents, beginning of the year 1,020,800 1,028,762 637,438 1,773,279 Cash and cash equivalents, end of the period 652,604 798,840 652,604 798,840 Cash and cash equivalents consist of: Cash 602,604 298,840 602,604 298,840 Cash equivalents 50,000 500,000 50,000 500,000 See Note 14 for supplementary cash flow information. 652,604 798,840 652,604 798,840 See accompanying notes to the unaudited condensed interim consolidated financial statements. 4
and 1. Nature of operations Delivra Corp. ( Delivra or the Company ) is a specialty biotechnology company having a proprietary transdermal delivery system platform that can shuttle pharmaceutical and natural molecules, through the skin, in a targeted manner. Delivra manufactures and sells a growing line of natural topical creams with the proprietary transdermal delivery system platform under the LivRelief TM brand, for conditions such as joint and muscle pain, nerve pain, varicose veins, wound healing and sports performance. LivRelief TM products are available in over 6,000 retail locations, including pharmacies, grocery chains, and independent health food stores across Canada, including, but not limited to, Shoppers Drug Mart, Walmart, Loblaw, Rexall, Pharmasave, London Drugs, and on-line at www.livrelief.com. In parallel with its consumer products business, Delivra also has a mandate to license its patent-pending, proprietary transdermal delivery technology platform to pharmaceutical companies globally, for the repurposing of pharmaceutical molecules transdermally to treat a broad range of conditions, along with licensing its over-the-counter products globally. Delivra was incorporated on October 21, 2013. The Company s head office is located at 347 Grays Road, Hamilton, Ontario, L8E 2Z1. The Company s shares are listed on the TSX Venture Exchange ( TSX-V ), under the trading symbol DVA. 2. Basis of preparation These unaudited condensed interim consolidated financial statements incorporate the accounts of Delivra Corp. and its whollyowned, Canadian subsidiaries: - Delivra Inc. - Delivra Pharmaceuticals Inc. - LivCorp Inc. - LivCorp International Inc. - LivVet Inc. - PortaPack Ltd. (a) Statement of compliance These unaudited condensed interim consolidated financial statements are prepared in accordance with International Accounting Standards 34, Interim Financial Reporting ( IAS34 ), as issued by the International Accounting Standards Board ( IASB ) and apply the same accounting policies and application as disclosed in the annual consolidated financial statements for the year December 31,. They do not include all of the information and disclosures required by IFRS for annual statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included in these unaudited condensed interim consolidated financial statements. Operating results for the period are not necessarily indicative of the results that may be expected for the full year December 31,. For further information, see the Company s audited consolidated financial statements including the notes thereto for the year December 31,. These unaudited condensed interim consolidated financial statements were reviewed, approved and authorized for issue by the Company s Board of Directors on November 16,. (b) Basis of presentation and going concern These unaudited condensed interim consolidated financial statements have been prepared in accordance with IFRS accounting principles applicable to a going concern, using the historical cost basis. The application of the going concern basis is dependent upon the Company achieving profitable operations to generate sufficient cash flows to fund continuing operations, or, in the absence of adequate cash flows from operations, obtaining additional financing to support operations for the foreseeable future. It is not possible to predict whether financing efforts will be successful or if the Company will attain profitable levels of operations. These unaudited condensed interim consolidated financial statements do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying condensed interim consolidated financial statements. Such adjustments could be material. In addition, these unaudited condensed interim consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information. 5
and 2. Basis of preparation (continued) (c) Functional and presentation currency These unaudited condensed interim consolidated financial statements are presented in Canadian dollars ( $ ), which is also the functional currency of the Company and its subsidiaries. (d) Significant accounting estimates and judgments The preparation of these unaudited condensed interim consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities at the date of the unaudited condensed interim consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Actual outcomes could differ from these estimates. The unaudited condensed interim consolidated financial statements include estimates, which, by their nature, are uncertain. The impact of such estimates are pervasive throughout the unaudited condensed interim consolidated financial statements, and may require accounting adjustments based on future occurrences. The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The areas involving a higher degree of judgment or complexity, or areas where the assumptions and estimates are significant to the financial statements were the same as those applied to the Company s audited consolidated financial statements for the year December 31,. 3. Changes in accounting policies and recent accounting pronouncements Changes in accounting policies The Company has adopted the following new standards, along with any consequential amendments, effective January 1,. These changes were made in accordance with the applicable transitional provisions. There was no impact to the financial statements upon adoption. IFRS 9 Financial Instruments ( IFRS 9 ) IFRS 9 was issued by the IASB in November 2009 with additions in October 2010 and May 2013 and will replace IAS 39 Financial Instruments: Recognition and Measurement ( 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. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9, except that an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity s own credit risk in other comprehensive income, rather than within profit or loss. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 15 - Revenue from Contracts with Customers ( IFRS 15 ) IFRS 15 replaces IAS 18 - Revenue, IAS 11 - Construction contracts, and some revenue-related interpretations. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. IFRIC 22 Foreign Currency Transactions and Advance Consideration ( IFRIC 22 ) IFRIC 22 was issued on December 8, 2016. The Interpretation clarifies which date should be used for translation when a foreign currency transaction involves an advance payment or receipt. Recent accounting pronouncements Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRIC that are mandatory for accounting periods beginning on or after January 1, 2019 or later. Updates that are not applicable or are not consequential to the Company have been excluded. The following are being evaluated to determine their impact on the Company. 6
and 3. Changes in accounting policies and recent accounting pronouncements (continued) Recent accounting pronouncements (continued) IFRS 16 Leases ( IFRS 16 ) IFRS 16 was issued in January 2016 and replaces IAS 17 Leases as well as some lease related interpretations. With certain exceptions for leases under twelve months in length or for assets of low value, IFRS 16 states that upon lease commencement a lessee recognises a right-of-use asset and a lease liability. The right-of-use asset is initially measured at the amount of the liability plus any initial direct costs. After lease commencement, the lessee shall measure the right-of-use asset at cost less accumulated depreciation and accumulated impairment. A lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. IFRS 16 requires that lessors classify each lease as an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise it is an operating lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Earlier adoption is permitted if IFRS 15 has also been applied. IFRIC 23 Uncertainty Over Income Tax Treatments ( IFRIC 23 ) IFRIC 23 was issued in June and clarifies the accounting for uncertainties in income taxes. The interpretation committee concluded that an entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment. If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, then the entity shall determine taxable profit (tax loss), tax bases, unused tax losses and credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings. If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses and credits or tax rates. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. 4. Trade and other receivables December 31, $ $ Trade receivables 997,440 545,967 Sales tax recoverable 50,599 31,030 1,048,039 576,997 Aging analysis of trade receivables: December 31, $ $ 1-30 days 942,893 393,945 31-60 days 54,547 143,378 61-90 days - 4,656 Greater than 90 days - 3,988 The Company s exposure to credit risk related to trade and other receivables is disclosed in Note 20. 997,440 545,967 5. Inventories December 31, $ $ Finished goods 314,845 253,471 Work-in-process 96,354 34,618 Packaging materials 246,495 165,907 Raw materials 553,620 416,851 1,211,314 870,847 During the three and nine months, inventories of $431,672 and $1,093,446 were expensed and included in the cost of goods sold (three and nine months - $266,189 and $961,756, respectively). Inventories as at and December 31, are recorded at cost. 7
and 6. Intangible assets Patents Development Costs Total $ $ $ Cost at: December 31, 131,858 264,504 396,362 Additions 64,859 11,121 75,980 196,717 275,625 472,342 Accumulated amortization at: December 31, 13,257-13,257 Additions 15,004-15,004 28,261-28,261 Net book value at: December 31, 118,601 264,504 383,105 168,456 275,625 440,081 As at, the balance of development costs in the amount of $275,625 (December 31, - $264,504) is not yet available for use. No amortization has been taken on this asset. As at, the total cost of development costs has been reduced by the amount of $nil (December 31, - $124,064), relating to the discounting of the ACOA 201210 loan to its estimated fair value, as disclosed in Note 9. The proceeds of the loan were specifically attributable to development cost additions. 7. Equipment Machinery and Equipment Leasehold Improvements Total $ $ $ Cost at: December 31, 769,385 25,320 794,705 Additions - - - 769,385 25,320 794,705 Accumulated amortization at: December 31, 174,870 14,969 189,839 Additions 56,699 6,330 63,029 231,569 21,299 252,868 Net book value at: December 31, 594,515 10,351 604,866 537,816 4,021 541,837 8. Accounts payable and accrued liabilities December 31, $ $ Trade payable 905,543 634,291 Accrued liabilities 420,750 214,298 The Company s exposure to currency and liquidity risk related to accounts payable is disclosed in Note 20. 1,326,293 848,589 8
and 9. Loans payable This note provides information about the contractual terms of the Company s loans and borrowings, which are measured at amortized cost. For more information regarding the Company s exposure to liquidity risk, see Note 20. December 31, $ $ ACOA 201210 944,320 817,522 ACOA 201246 29,653 50,491 ACOA 202454 74,767 85,153 ACOA 203110 148,021 160,717 ACOA 205145 40,776 51,567 ACOA 206091 66,582 74,857 ACOA 206924 78,893 83,692 ACOA 207593 272,993 250,410 Finance PEI #1 61,581 84,801 Finance PEI #2 36,751 79,997 1,754,337 1,739,207 Less: current portion 170,980 193,764 Non-current portion 1,583,357 1,545,443 The Company has eight unsecured repayable loans from the Atlantic Canada Opportunities Agency ( ACOA ) and two secured loans from Finance PEI. The loans payable as at and for the nine months are summarized below: Due Date Interest rate Effective interest rate Face value of loan Opening balance Proceeds Received Discount (c) Accretion Repayments Carrying value $ $ $ $ $ $ $ ACOA 201210 (a) 0% 16% 2,860,000 817,522 154,837 133,602 105,563-944,320 ACOA 201246 2019 0% 16% 33,678 50,491 - - 4,632 25,470 29,653 ACOA 202454 2022 0% 16% 98,500 85,153 - - 9,414 19,800 74,767 ACOA 203110 2024 0% 16% 217,950 160,717 - - 18,354 31,050 148,021 ACOA 205145 2020 0% 16% 48,100 51,567 - - 5,409 16,200 40,776 ACOA 206091 2022 0% 16% 86,700 74,857 - - 8,330 16,605 66,582 ACOA 206924 2025 0% 16% 126,400 83,692 - - 9,601 14,400 78,893 ACOA 207593 (b) 0% 16% 483,874 250,410 - - 31,073 8,490 272,993 Finance PEI #1 2020 Prime + 2% 9% 63,777 84,801 - - 2,045 25,265 61,581 Finance PEI #2 2019 Prime + 3% 13% 37,446 79,997 - - 3,109 46,355 36,751 4,056,425 1,739,207 154,837 133,602 197,530 203,635 1,754,337 The proceeds of the loans are being used by the Company to fund equipment purchases, scientific research on certain transdermal products and advertising and marketing campaigns. (a) The annual instalments are calculated as 10% of forecasted gross revenues from resulting products for the fiscal year immediately preceding the due date of the respective payment, with an estimated commencement date of August 31, 2020. (b) The annual instalments are calculated as 5% of forecasted gross revenues from resulting retail sales for the fiscal year immediately preceding the due date of the respective payment, with an estimated commencement date of August 31, 2021. (c) Discount represents the discounts recorded during the period on the initial day the funds were received. 9
and 9. Loans payable (continued) The loans with ACOA are through the Atlantic Innovation Fund for the specified projects, in which repayable contributions are received by the Company to a maximum amount based on the lesser of: (i) a percentage of eligible costs, plus a percentage of working capital requirements for the project in certain instances, and (ii) a specified amount. The authorized maximum specified amounts of the above-noted loans outstanding are as follows: - ACOA 201210 - $2,860,000 - ACOA 201246 - $170,000 - ACOA 202454 - $197,500 - ACOA 203110 - $372,500 - ACOA 205145 - $107,500 - ACOA 206091 - $132,825 - ACOA 206924 - $160,000 - ACOA 207593 - $495,000 The Company must meet certain conditions of assistance, which are specific to each agreement and project, including maintaining specified amounts of equity. As at and December 31,, the Company was in compliance with all required conditions or received a waiver. The loans payable with ACOA have been recognized initially at their estimated fair value, based on contractual cash flows, discounted at an interest rate of 16%, and subsequently measured at amortized cost using the effective interest rate ( EIR ) method. The interest rate was estimated based on interest rates available in the market on comparable debt issued to similar companies. For the three and nine months, the discounts on initial recognition were applied as follows as a reduction of the below expenses and non-current assets: $ $ $ $ Research and development expenses - 33,728 133,602 390,106 Selling, marketing and promotional expenses - - - 38,229 Intangible assets - 9,702-103,811 The loans with Finance PEI are secured by a registered General Security Agreement conveying an interest in all personal property of the Company s subsidiary, LivCorp Inc., and a limited guarantee by Delivra Inc. to a maximum of the principal amount of debt outstanding together with accrued interest. For the three and nine months, interest and accretion on the loans payable were applied as follows to the below expenses and non-current assets: $ $ $ $ Interest and accretion on loans payable 63,906 75,878 191,964 222,325 Intangible assets 3,855 3,512 11,121 9,071 Principal repayments on the undiscounted loans payable for the next five years are as follows: $ October 1, to 2019 235,548 October 1, 2019 to 2020 160,833 October 1, 2020 to 2021 189,040 October 1, 2021 to 2022 400,180 October 1, 2022 to 2023 619,474 Thereafter 2,451,350 4,056,425 10
and 10. Other liabilities The deferred compensation of $296,000 owing to an external financial consultant was initially recognized in 2015 at its estimated fair value of $208,433, based on contractual cash flows with repayments estimated to commence in January, being six months after the Company s shares have been listed on the TSX-V for 18 months, discounted at an interest rate of 16%. During the three months, the Company revised its estimates based on the repayment commencing on the later of i) the Company s shares being listed on the TSX-V for 18 months, and ii) the release of audited consolidated financial statements reaching a defined milestone in annual earnings before interest, taxes, depreciation and amortization. As such, the liability was re-measured as at to its estimated fair value of $155,745, based on contractual cash flows with repayments estimated to commence in July 2021, being six months after the Company reaches the defined milestone in annual earnings before interest, taxes, depreciation and amortization, discounted at an interest rate of 16%. This liability is subsequently measured at amortized cost using the EIR method. The interest rate was estimated based on interest rates available in the market on comparable debt issued to similar companies. 11. Convertible debentures On September 15, 2016, the Company completed an offering of $2,020,900 of convertible debentures. The convertible debentures bear interest at 6% per annum, which is payable on the last day of each month, and mature on September 15,. The Company also paid a finders fee of $100,495. The Company issued 404,180 subscriber warrants, at an exercise price of $0.75 per share, in conjunction with the offering. The grant date fair value of the 404,180 subscriber warrants was estimated to be $72,752 using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, expected volatility of 100%, risk-free interest rate of 0.57% and an expected life of 1.5 years. The Company also issued 182,718 finder warrants, at an exercise price of $0.55 per share, in conjunction with the offering. The grant date fair value of the 182,718 finder warrants was estimated to be $40,198 using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, expected volatility of 100%, risk-free interest rate of 0.57% and an expected life of 1.5 years. On January 16,, the convertible debentures principal balance of $2,020,900 automatically converted into Debenture Units, at a conversion price of $0.55 per Debenture Unit. A total of 3,674,358 Debenture Units were issued. Each Debenture Unit consisted of one common share of the Company and one-half of one (1/2) warrant. Each whole warrant is exercisable for one common share of the Company at a price of $0.80 per share, expiring July 16,. See Note 12 for the common share issuance and Note 13 for the warrants issuance. Prior to the automatic conversion, the convertible debentures were classified as a hybrid financial instrument, with the debt component being recorded at amortized cost using the effective interest rate method, and the conversion feature classified as an embedded derivative measured at fair value through profit or loss. The changes to the convertible debentures are as follows: Balance, beginning of year Accretion for the period Conversion of debentures Balance, end of period December 31, $ $ - 1,890,220-130,680 - (2,020,900) - - The changes to the embedded derivatives is as follows: December 31, $ $ Balance, beginning of year - 918,591 Estimated fair value change of embedded derivatives during the period - (220,462) Conversion of debentures - (698,129) Balance, end of period - - 11
and 11. Convertible debentures (continued) The fair value of the embedded derivatives was estimated upon the initial measurement date and at each subsequent financial reporting date using the Black-Scholes option pricing model with the following assumptions: December 31, Expected stock price volatility - 100% Risk-free interest rate - 0.79% Expected life - - Grant date share price - $ 0.74 Exercise price - $ 0.55 Expected forfeiture rate - - Expected dividend yield - - 12. Share capital Authorized An unlimited number of common shares. Common shares issued and outstanding is as follows: December 31, $ $ Issued: 47,459,450 (December 31, : 43,023,027) common shares 16,118,773 14,757,476 Share issuances for the nine months On April 5,, the Company completed a non-brokered private placement, issuing 3,561,423 units, at a price per unit of $0.35, for gross proceeds of $1,246,498. Each unit consists of one common share and one common share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common share at a price of $0.50 for a period of 24 months from the date of closing, subject to the option of the Company, in the event that the closing price of shares on the TSX Venture Exchange equals or exceeds $0.90 per share for 10 consecutive days, to accelerate the expiry of warrants to 30 days after the acceleration notice ( Acceleration Option ). In connection with the non-brokered private placement, the Company paid to eligible institutional finders a commission consisting of $62,770 and the issuance of 179,343 finders` warrants exercisable into common shares at $0.35 per finders` warrant for a period of 24 months from the date of closing, subject to the Acceleration Option. During the nine months, 400,000 common shares were issued as a result of the exercise of stock options, for gross proceeds of $120,000. The stock options were exercised at a weighted average exercise price of $0.30 per option. All issued shares are fully paid. During the nine months, 475,000 common shares were issued as a result of the exercise of warrants, for gross proceeds of $118,750. The warrants were exercised at a weighted average exercise price of $0.25 per warrant. All issued shares are fully paid. Share issuances for the nine months On January 16,, the convertible debentures principal balance of $2,020,900 automatically converted into Debenture Units, at a conversion price of $0.55 per Debenture Unit. A total of 3,674,358 Debenture Units were issued. Each Debenture Unit consisted of one common share of the Company and one-half of one (1/2) warrant. Each whole warrant is exercisable for one common share of the Company at a price of $0.80 per share, expiring July 16,. See Note 11 for further details. During the nine months, 775,000 common shares were issued as a result of the exercise of stock options, for proceeds of $220,000. The stock options were exercised at a weighted average exercise price of $0.28 per option. All issued shares are fully paid. 12
and 13. Equity reserves Options The Company maintains a stock option plan ( the Plan ) whereby certain key employees, officers, directors and consultants may be granted stock options for common shares of the Company. The maximum number of common shares that are issuable under the Plan is fixed at 20% of the number of common shares issued and outstanding as of June 19,. As of September 30,, the maximum number of common shares that are issuable under the Plan is 8,141,890. The exercise price and vesting terms are determined by the Board of Directors. The following summarizes the stock option activity for the nine months and : Number Weighted average exercise price Number Weighted average exercise price # $ # $ Outstanding, beginning of year 4,299,757 0.58 5,489,841 0.55 Granted 1,800,000 0.45 137,500 0.46 Exercised (400,000) 0.30 (775,000) 0.28 Expired (450,000) 0.50 (85,917) 0.69 Forfeited - - (90,000) 0.74 Outstanding, end of period 5,249,757 0.56 4,676,424 0.58 Exercisable, end of period 2,951,007 0.61 3,662,258 0.55 The following table summarizes information of stock options outstanding as at : Options Outstanding Number of options outstanding Weighted average remaining contractual life Number of options exercisable Options Exercisable Weighted average remaining contractual life Exercise Expiry date price $ # Years # Years November 10, 0.50 500,000 0.11 500,000 0.11 July 18, 2019 0.75 47,978 0.80 47,978 0.80 February 2, 2020 0.60 125,000 1.34 125,000 1.34 June 1, 2020 0.60 100,000 1.67 100,000 1.67 June 15, 2020 0.60 200,000 1.71 200,000 1.71 August 21, 2020 0.70 100,000 1.89 100,000 1.89 September 11, 2020 0.75 8,029 1.95 8,029 1.95 November 30, 2020 0.50 740,000 2.17 740,000 2.17 January 21, 2021 0.54 100,000 2.31 100,000 2.31 January 26, 2021 0.75 375,000 2.33 375,000 2.33 October 3, 2021 0.75 156,250 3.01 156,250 3.01 December 19, 2021 0.75 860,000 3.22 430,000 3.22 June 20, 2022 0.46 137,500 3.72 68,750 3.72 January 24, 2023 0.45 1,800,000 4.32-4.32 5,249,757 2.90 2,951,007 1.96 13
and 13. Equity reserves (continued) The Company used the Black-Scholes valuation model to estimate the grant date fair value of stock options issued during the period using the following weighted average assumptions: Expected stock price volatility 100% 100% Risk-free interest rate 2.05% 1.13% Expected life 5 years 5 years Grant date share price $ 0.45 $ 0.46 Estimated grant date fair value of options granted $ 0.34 $ 0.34 Expected forfeiture rate - - Expected dividend yield - - All stock options granted during the nine months vest in 2 equal amounts, with each ½ of the common shares underlying the option vesting on each of the first and second anniversary date following the date of grant. In making assumptions for expected volatility, the Company used the industry average as sufficient historical data was not available for the Company s stock price. The following summarizes the stock option equity reserve balance: $ $ Balance, beginning of year 2,054,068 1,987,197 Exercise of stock options (128,000) (258,465) Share-based compensation expense 409,115 261,002 Balance, end of period 2,335,183 1,989,734 Warrants The following summarizes the warrant activity for the nine months and : Number Weighted average exercise price Number Weighted average exercise price # $ # $ Outstanding, beginning of year 5,322,862 0.63 3,813,987 0.54 Issued 3,740,766 0.49 1,837,179 0.80 Exercised (475,000) 0.25 - - Expired (3,947,862) 0.68 (328,304) 0.66 Outstanding, end of period 4,640,766 0.51 5,322,862 0.63 Warrant issuances See Note 12. Warrant issuances See Note 11. The following summarizes the warrant equity reserve balance: $ $ Balance, beginning of year 2,012,295 1,565,095 Issuance of warrants 326,113 447,200 Exercise of warrants (168,150) - Balance, end of period 2,170,258 2,012,295 14
and 13. Equity reserves (continued) The following table summarizes information of warrants outstanding and exercisable as at : Number of warrants outstanding Weighted average remaining contractual life Exercise Expiry date price # $ Years October 31, 350,000 0.60 0.08 October 31, 350,000 0.61 0.08 May 2, 2019 200,000 0.60 0.59 April 5, 2020 3,561,423 0.50 1.52 April 5, 2020 179,343 0.35 1.52 4,640,766 0.51 1.26 The Company used the Black-Scholes valuation model to estimate the grant date fair value of warrants issued during the period using the following weighted average assumptions: Expected stock price volatility 100% 100% Risk-free interest rate 1.80% 0.79% Expected life 2 years 1.50 years Grant date share price $ 0.49 $ 0.80 Estimated grant date fair value of warrants granted $ 0.09 $ 0.24 Expected forfeiture rate - - Expected dividend yield - - Classification of share-based compensation by function: The Company separately discloses share-based compensation in the unaudited condensed interim consolidated statement of loss and comprehensive loss. Disclosure of share-based compensation by function for the three and nine months and is as follows: $ $ $ $ Cost of goods sold 869 2,610 2,580 7,733 General and administrative expenses 62,432 56,901 186,796 167,361 Research and development expenses 80,266 29,297 219,739 90,540 Selling, marketing and promotional expenses - - - (4,632) 14. Supplementary cash flow information 143,567 88,808 409,115 261,002 Supplemental cash flow information consists of the following for the three and nine months and : $ $ $ $ Loan discounts netted against intangible assets - 9,702-103,811 Borrowing costs capitalized to intangible assets - 3,512-9,071 Change in accrued intangible assets - (9,369) (8,889) 15,528 15
and 15. Related party transactions (a) Subsidiaries Details of the Company s subsidiaries at the reporting date are as follows: Ownership interest Country of incorporation December 31, Delivra Inc. Canada 100% 100% Delivra Pharmaceuticals Inc. Canada 100% 100% LivCorp Inc. Canada 100% 100% LivCorp International Inc. Canada 100% 100% LivVet Inc. Canada 100% 100% PortaPack Ltd. Canada 100% 100% (b) Transactions with related parties Key management personnel compensation The remuneration of directors and other members of key management personnel during the three and nine months and were as follows: $ $ $ $ Short-term employee benefits 40,000 55,000 120,000 120,000 Research and development fees 53,600 53,600 160,800 160,800 Board fees 32,888 43,913 116,750 129,520 Share-based compensation 139,960 68,207 397,983 199,526 266,448 220,720 795,533 609,846 During the year December 31,, the Company entered into a rent agreement for its head office premises with a member of management. The Company can terminate the rent agreement after the initial two years. The annual rent for the premise is $27,000, which has been included in Note 16. 16. Commitments The Company is committed to minimum annual lease payments for its premises and research facility and consulting services, as follows: October 1, to 2019 October 1, 2019 to 2020 Total $ $ $ Operating leases 52,600 4,500 57,100 Consulting services 194,498 78,508 273,006 247,098 83,008 330,106 The Company has also agreed to pay a success fee to another external consultant. The success fee will be provided, should any introduction be made by the external consultant, upon which a transaction takes place. An introduction is defined as identifying or providing information concerning prospective parties who wish to enter into a transaction with the Company, and once confirmed by the Company, to successfully arrange for introductory communications between the Company and the prospective party. The Company has entered into certain agreements for product development which subject certain future sales to royalty payments. 16
and 16. Commitments (continued) The Company is party to certain management contracts. These contracts require that additional payments up to $660,000 be made upon i) the occurrence of a change in control and ii) the employee is terminated within twelve months of the change in control. As a triggering event has not taken place, the contingent payments have not been reflected in these consolidated financial statements. The Company is subject to various claims, lawsuits and other complaints arising in the ordinary course of business. The Company records provisions for losses when claims become probable and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company s financial condition, operations or liquidity. 17. General and administrative expenses The Company s general and administrative expenses incurred for the three and nine months and are as follows: $ $ $ $ Bank charges and interest 977 2,563 5,987 7,214 Amortization 26,099 13,978 78,033 63,667 Insurance 19,453 13,361 55,606 46,525 Office and general (i) 43,685 (58,364) 128,330 78,384 Salaries and wages 43,577 63,835 133,606 156,238 Board fees 32,888 43,913 116,750 129,520 Compliance and investor relations 15,122 41,715 112,605 161,852 Professional fees 20,283 4,125 79,031 132,060 202,084 125,126 709,948 775,460 (i) For the three and nine months, office and general was reduced by $108,805 and $88,595, respectively, relating to the revised management estimates in other liabilities, as described in Note 10. 18. Government assistance During the nine months, the Company received $11,174 (nine months - $122,165) of government grants. Government grants have been recorded as a reduction of the corresponding expenses as follows: September 30, $ $ $ $ Research and development salaries and wages - 24,226 11,174 81,108 Research and development - 6,116-41,057 19. Research and development expenses Research and development expenses have been reduced by government assistance as follows: - 30,342 11,174 122,165 $ $ $ $ Research and development expenses 213,299 312,687 653,251 905,123 Government assistance (Note 18) - (30,342) (11,174) (122,165) Discount on loans payable (Note 9) - (33,728) (133,602) (390,106) Investment tax credits (51,959) - (51,959) - Net expenses 161,340 248,617 456,516 392,852 17
and 20. Financial instruments The Company s risk exposures and the impact on the financial instruments are summarized below. There have been no material changes to the risks, objectives, policies and procedures during the nine months and the year December 31,. (a) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company s trade accounts receivable. The Company's credit risk is primarily attributable to cash and cash equivalents and trade and other receivables. The Company monitors the credit risk and credit standing of its customers on a regular basis. See Note 4 for an aging analysis of trade receivables. The Company s revenues are primarily derived from a small number of customers who operate pharmacy and grocery chains, or distribute to pharmacy and grocery chains, within Canada. The Company has three customers who represented 45%, 16% and 28% of revenues, respectively, for the three months (three months three customers with 41%, 27% and 19% of revenues, respectively) and represented 43%, 22% and 24% of revenues, respectively, for the nine months (nine months three customers with 41%, 27% and 19%, respectively). There can be no assurance that all or any of the Company s customers will continue to purchase the Company s products for resale in their stores to their own customers. The loss of any such customer, whether with respect to all of the Company s products, or one or more of the Company s products, may have a materially negative impact on the Company business conditions and financial results. Cash is generally invested in cash accounts or short-term interest-bearing securities issued by the Canadian chartered banks. At, the Company had $50,000 invested in term deposits. Management believes the risk of loss associated with these assets to be remote. Management believes that the credit risk concentration with respect to financial instruments included in assets has been reduced to the extent presently practicable. (b) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company s reputation. The Company endeavors to have sufficient cash on demand to meet expected operational expenses, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot be reasonably predicted. At, the Company has a cash and cash equivalents balance of $652,604 (December 31, - $637,438) to settle current liabilities of $1,497,273 (December 31, - $1,042,353). All the Company s financial liabilities generally have contractual maturities of less than 30 days and are subject to normal trade terms, except for loans payable (Note 9) and other liabilities (Note 10). In addition to the commitments disclosed in Note 16, the Company is obligated to the following contractual maturities of undiscounted cash flows as at : October 1, to 2019 October 1, 2019 to 2021 October 1, 2021 to 2023 Thereafter Carrying amount Contractual cash flows $ $ $ $ $ $ Accounts payable and accrued liabilities 1,326,293 1,326,293 1,326,293 - - - Other liabilities (Note 10) 182,576 296,000-148,000 148,000 - Loans payable (Note 9) 1,754,337 4,056,425 235,548 349,873 1,019,654 2,451,350 Total 3,263,206 5,678,718 1,561,841 497,873 1,167,654 2,451,350 18
and 20. Financial instruments (continued) (c) Currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to foreign exchange risk as certain materials are purchased from vendors located outside of Canada, in US dollars and Euros. The Company is therefore subject to gains and losses due to fluctuations in the US dollar and Euro relative to the Canadian dollar. (d) Interest rate risk The Company has cash balances with rates that fluctuate with the prevailing market rate. The Company s current policy is to invest excess cash in cash accounts or short-term interest-bearing securities issued by Canadian chartered banks. The Company periodically monitors the investments it makes and is satisfied with the credit ratings of its banks. The Company s Finance PEI loans are interest bearing debt with rates that fluctuate with the prevailing prime lending rate from a Canadian chartered bank from time to time. The Company closely monitors interest rates to determine the appropriate course of action to be taken by the Company. The Company does not use any derivative instrument to reduce its exposure to interest rate risk. (e) Fair value of financial instruments The carrying amounts for cash and cash equivalents, trade and other receivables, and accounts payable and accrued liabilities on the consolidated statements of financial position approximate fair value because of the limited term of these instruments. The carrying amount and estimated fair value of the Company s loans payable are both $1,761,887. The fair value of the loans payable has been estimated based on discounted future principal and interest payments using estimated interest rates. The fair value of the convertible debentures and derivative liabilities were estimated based on the assumptions disclosed in Note 11. The Company classifies fair value measurements 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: - Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and - Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). As at and December 31,, the Company does not have any financial instruments measured at fair value after initial recognition, except for derivative liabilities which are calculated using Level 2 inputs. The estimated fair value of the Company s loans disclosed above has been calculated using Level 3 inputs. (f) Capital management The capital structure of the Company consists of loans payable and equity. The equity is attributable to shareholders and includes share capital and equity reserves. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support its operations, research and development activities, general and administrative expenses, working capital and overall capital expenditures. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders. The Company s strategy remains unchanged for the nine months and the year December 31,. The Company manages the capital structure and makes adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue new shares, or issue or pay down debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements, other than as disclosed in Note 9. 19