The accompanying consolidated financial statements of Aleafia Health Inc. and its subsidiaries (the "Company") were prepared by management, which is responsible for the integrity and fairness of the information presented, including the many amounts that out of necessity are based on estimates and judgements. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards.
In fulfilling its responsibilities, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded, and financial records are properly maintained to provide reliable information for the preparation of these consolidated financial statements.
The Board of Directors oversees the responsibilities of management for financial reporting through an Audit Committee, which is composed entirely of independent directors. This Audit Committee reviews the consolidated financial statements and recommends them to the Board of Directors for approval. They meet regularly with management to review internal control procedures and advise directors on accounting matters and financial reporting issues.
Chief Executive Officer
Chief Financial Officer
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Aleafia Health, Inc.
We have audited the accompanying consolidated financial statements of Aleafia Health Inc. and its subsidiaries (collectively, the "Company"), which comprise the consolidated statement of financial position as at March 31, 2022 and the consolidated statements of loss and comprehensive loss, changes in shareholders' equity and cash flows for the 15-month period then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at March 31, 2022, and its consolidated financial performance and cash flows for the 15-month period then ended in accordance with International Financial Reporting Standards ("IFRS").
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the 15-month period ended March 31, 2022. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters to be communicated in our auditors' report are as follows:
Impairment of goodwill, intangible assets and property, plant and equipment
We draw attention to Notes 3(b), 7 and 8 to the consolidated financial statements. Goodwill and indefinite lived intangible assets are not amortized, but are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that the carrying amount of a cash generating unit ("CGU") exceeds its recoverable amount. Intangible assets with finite lives and property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. During the 15-month period ended March 31, 2022, the Company recorded an impairment charge of $11.3 million for goodwill, $53.1 million for intangible assets and $28.8 million for property, plant and equipment. Estimating the recoverable amount of CGUs and intangible assets is complex and is subject to significant judgments in relation to assumptions used by management. Significant assumptions used by management to estimate the recoverable amount include growth and discount rates, as well as future revenues, gross margins and recoverable values.
We identified the evaluation of the impairment of goodwill and intangible assets as a key audit matter as significant auditor judgment and the involvement of professionals with specialized skill and knowledge
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were required to evaluate the Company's methods and use of estimates, assumptions and judgments in estimating the recoverable amount of the Company's CGUs.
Our audit response to the key audit matter was as follows:
We obtained an understanding of the controls and control activities in place related to the determination and management's review of significant assumptions used in the calculation.
We performed sensitivity testing to consider the impact of changes in certain assumptions on the estimate of recoverable amount.
With the assistance of a valuation specialist:
We evaluated whether the valuation techniques used in estimating the recoverable amounts were appropriate.
We compared the discount rate used to the weighted average cost of capital and evaluated the reasonableness based on publicly available information for comparable companies.
We compared growth rates used by management to historical information, approved budgets, the Company's production capacity, as well as industry standards.
Valuation of biological assets and cannabis inventory
We draw attention to Notes 3(a), 13 and 14 to the consolidated financial statements. Biological assets are measured at fair value less cost to sell at the stage of completion. The Company values inventories of harvested bulk cannabis and finished goods at the lower of cost and net realizable value.
In estimating the fair value of biological assets, management is required to make a number of estimates, including estimating the stage of growth of the cannabis up to the point of harvest, average yield per plant, harvesting costs, selling costs, selling price, and the allocation of indirect costs, which form part of the standard cost per gram to complete production. In calculating final inventory values, management is required to determine an estimate of spoiled or expired inventory and compares the inventory cost to estimated net realizable value.
We identified measurement of the fair value of biological assets and net realizable value of cannabis inventory as key audit matters as a high degree of auditor judgment was required to evaluate the significant assumptions and estimates made by management.
Our audit response to the key audit matter was as follows:
We performed sensitivity analyses over the Company's significant assumptions used to determine the fair value of biological assets to assess the impact of changes in those assumptions on the Company's determination of fair value.
We tested the stage of growth by observing the plants at year-end.
We tested the average expected yield per plant by comparing actual results of the current year to historical results of operations.
We tested the average selling price per gram by comparing to estimates used by management to actual sales prices per gram in actual sales transaction during and subsequent to year-end.
We also tested the net realizable value of inventory by comparing the carrying value of inventory to the prices earned from sales transactions near and subsequent to year-end.
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Emphasis of Matter - Restated Comparative Information
We draw attention to note 23 to the consolidated financial statements, which explains that certain comparative information presented for the year ended December 31, 2020 has been restated. Our opinion is not modified in respect of this matter.
The consolidated financial statements of the Company for the year ended December 31, 2020, excluding the adjustments that were applied to restate certain comparative information as described in note 23, were audited by another auditor who expressed an unqualified opinion on those statements on March 24, 2021.
As part of our audit of the consolidated financial statements for the period ended March 31, 2022, we also audited the adjustments that were applied to restate certain comparative information for the year ended December 31, 2020 as described in note 23. In our opinion, such adjustments are appropriate and have been properly applied.
Management is responsible for the other information, which comprises the information included in the Company's Management's Discussion and Analysis to be filed with the relevant Canadian securities commissions.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion on thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management's Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going-concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
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