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Note 29 - Financial Risk Management and Financial Instruments

12 Months Ended

May 31, 2024

Notes to Financial Statements

Financial Instruments Disclosure [Text Block]

29.

Financial risk management and financial instruments

Financial instruments

The Company has classified its financial instruments as described in Note 3 (Significant accounting policies).

The carrying values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to their short periods to maturity.

The Company’s long-term debt of $3,568 (2023 - $3,280) and the principal portion of convertible debentures payable of $172,830 (2023 - $464,070) are subject to fixed interest rates.

Fair value hierarchy

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:

Level 1

Quoted prices (unadjusted) in active markets for identical assets and liabilities

Level 2

Inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data

Level 3

Inputs for assets and liabilities not based upon observable market data

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of May 31, 2024 and 2023 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

														*May 31,*
		*Level 1*				*Level 2*				*Level 3*				*2024*
Financial assets
Cash and cash equivalents		$	228,340			$	—			$	—			$	228,340
Marketable securities			32,182				—				—				32,182
Convertible notes receivable			—				—				32,000				32,000
Equity investments measured at fair value			919				1,440				5,500				7,859
Financial liabilities
Warrant liability			—				—				(3,253	)			(3,253	)
Contingent consideration			—				—				(15,000	)			(15,000	)
APHA 24 Convertible debenture			—				—				(330	)			(330	)
Total recurring fair value measurements		$	261,441			$	1,440			$	18,917			$	281,798

														*May 31,*
		*Level 1*				*Level 2*				*Level 3*				*2023*
Financial assets
Cash and cash equivalents		$	206,632			$	—			$	—			$	206,632
Marketable Securities			241,897				—				—				241,897
Convertible notes receivable			—				—				103,401				103,401
Equity investments measured at fair value			1,056				1,088				5,651				7,795
Financial liabilities
Warrant liability			—				—				(1,817	)			(1,817	)
Contingent consideration			—				—				(27,107	)			(27,107	)
APHA 24 Convertible debenture			—				—				(120,568	)			(120,568	)
Total recurring fair value measurements		$	449,585			$	1,088			$	(40,440	)		$	410,233

The Company’s financial assets and liabilities required to be measured on a recurring basis are its convertible notes receivable, equity investments measured at fair value, convertible debentures measured at fair value, acquisition-related contingent consideration, and warrant liability.

Convertible notes receivable and long-term investments are recorded at fair value. The estimated fair value is determined using the Black Scholes option pricing model, probability of legalization and is classified as Level 3.

Convertible debentures payable are recorded at fair value when elected or required under US GAAP. Specifically, the APHA 24 instrument's estimated fair value is determined using the Black-Scholes option pricing model and is classified as Level 3.

Certain equity investments recorded at fair value have quoted prices in active markets for identical assets and are classified as Level 1. The Company classified securities with observable inputs as level 2 and without a quoted market price as Level 3.

The warrants associated with the warrant liability are classified as Level 3 derivatives. Consequently, the estimated fair value of the warrant liability is determined using the Black-Scholes pricing model. Until the warrants are exercised, expire, or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity, the warrant liability (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded in change in fair value of warrant liability. Any significant adjustments to the unobservable inputs disclosed in the table below would have a direct impact on the fair value of the warrant liability.

The contingent consideration from the acquisition of Montauk due in December 2025, and upon the triggering event if met, and are payable in cash, was determined by discounting future expected cash outflows at a discount rate of 11%, and probability of achievement of 95%. The unobservable inputs into the future expected cash outflows result in a fair value measurement classified as Level 3. During the year ended May 31, 2024, a decrease in fair value of $15,528, inclusive of changes in foreign exchange, was recognized and was comprised of a decrease of fair value of $16,218 for the contingent consideration from the Sweetwater acquisition as a result of not achieving the incentive targets which was offset by an increase in fair value of $4,111 for the contingent consideration from the Montauk acquisition as a result of a higher probability of achieving the incentive targets and a decrease of $3,421 for the Truss contingent consideration that was recognized initially as $4,181 that has been settled in cash for $760 (CAD $1,041).

The balances of assets and liabilities categorized within Level 3 of the fair value hierarchy measured at fair value on a recurring basis are reconciled, as follows:

																		*APHA 24*
		*Convertible*				*Equity*				*Warrant*				*Contingent*				*Convertible*
		*notes receivable*				*Investments*				*Liability*				*Consideration*				*Debt*
Balance, May 31, 2023		$	103,401			$	5,651			$	(1,817	)		$	(27,107	)		$	(120,568	)
Additions/(Repayments)			—				—				—				(4,181	)			136,410
Redemption			(28,720	)			—				—				760				—
Unrealized gain (loss) on fair value			—				(151	)			(1,436	)			15,528				(16,172	)
Impairments			(42,681	)			—				—				—				—
Balance, May 31, 2024		$	32,000			$	5,500			$	(3,253	)		$	(15,000	)		$	(330	)

The unrealized gain (loss) on fair value for the Convertible Debenture, warrant liability, contingent consideration and convertible notes payable are recognized in non-operating income (loss) and other comprehensive income for the convertible notes receivable using the following inputs:

			Significant
	*Valuation*		*unobservable*
Financial asset / financial liability	*technique*		*input*		*Inputs*
APHA Convertible debentures	Black-Scholes		Volatility,		50%
			expected life (in years)		0.0
Warrant liability	Black-Scholes		Volatility,		50%
			expected life (in years)		1.3
Contingent consideration	Discounted cash flows		Discount rate,		11%
			achievement		95%

Items measured at fair value on a non-recurring basis

The Company's prepayments and other current assets, long lived assets, including property and equipment, goodwill and intangible assets are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.

Financial risk management

The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; interest rate price; equity price risk; and capital management risk.

(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. The maximum credit exposure at May 31, 2024, is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other current assets and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions in Canada, Australia, Portugal, Germany, Colombia, Argentina and the United States. To date, the Company has not experienced any losses on its cash deposits. Accounts receivable are unsecured, and the Company does not require collateral from its customers.

The Company evaluates the collectability of its accounts receivable and maintains an allowance for credit losses at an amount sufficient to absorb losses inherent in the existing accounts receivable portfolio as of the reporting dates based on the estimate of expected net credit losses.

Trade receivables included an allowance for doubtful accounts and credit loss provision of $7,714 at May 31, 2024 (2023-$6,641) and are broken out below as follows:

		*Total*				*0-30 days*				*31-60 days*				*61-90 days*				*90+ days*
Accounts receivable, net		$	101,695			$	86,435			$	3,042			$	893			$	11,325
							85	%			3	%			1	%			11	%

		*Balance at the beginning of period*				Movement during the year⁽¹⁾				*Balance at end of period*
Fiscal year ended May 31, 2024
Allowance for doubtful accounts and credit loss provision			$ 6,641				$ 1,073				$ 7,714
Fiscal year ended May 31, 2023
Allowance for doubtful accounts and credit loss provision			5,404				1,237				6,641
Fiscal year ended May 31, 2022
Allowance for doubtful accounts and credit loss provision			4,571				833				5,404

(1)

Included in movements for the period is the total movements for foreign exchange, additions to the provisions and utilization of the credit loss provision and allowance for doubtful accounts.

(b)

Liquidity risk

As at May 31, 2024, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have contractual maturity dates within one-year, long-term debt, and convertible debentures which have contractual maturities over the next five years.

The Company maintains a minimum deposit on certain cash operating accounts tied to loans secured by its Aphria One, SweetWater, and craft beverage facilities. The Company maintains debt service charge and leverage covenants on certain loans secured by its Aphria Diamond facilities and ABC Group that are measured quarterly. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate being in breach of any of its financial covenants.

The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital position at May 31, 2024, management regards liquidity risk to be low.

(c)

Currency rate risk

As at May 31, 2024, a portion of the Company’s financial assets and liabilities held in Canadian dollars and Euros consist of cash and cash equivalents, convertible notes receivable, and long-term investments. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant at this point in time.

(d)

Interest rate risk

The Company’s exposure to changes in interest rates relates primarily to the Company’s outstanding debt. The Company manages interest rate risk by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the sensitivity of the portfolio to the impact of interest rate fluctuations.

(e)

Capital management

The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash equivalents and marketable securities as capital.