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HEXO AT A GLANCE
Revenue (thousands)
Total gram equivalents sold
Revenue per gram
Cash and cash equivalents, and
short-term investments (thousands)
For the three months ended
For the 12 months ended
For the three months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
$
1,410
152,288
$
9.26
$
$
862
$
4,934
$
4,097
96,744
9.00
538,886
405,164
April 30, 2018
$
$
1,240
134,253
9.24
$
244,789
$
41,324
Operational Scalability
Operational Scalability
Invest in people, processes and systems to deliver on market
demands, adapt to new opportunities and provide users with high-
quality products at sustainable operating costs.
Top Two in Canada
Top Two in Canada
Our top priorities are to execute and
deliver on the SQDC contract, to serve
and expand large-scale distribution
across Canada and globally, and to
become a top two licensed producer
by market share in Canada.
Financial Highlights
• Revenue per gram increased to $9.26 per gram
equivalent from $9.24 in the prior quarter, and $9.00
in the fourth quarter of fiscal 2017.
Product Innovation
Product Innovation
Continue to innovate and lead the
market in identifying, developing and
launching new cannabis-based
products.
• Revenue increased 14% to $1,410,656 quarter over
quarter, and the volume of cannabis dried grams and
gram equivalents sold increased 13% to 152,288
from the third quarter of fiscal 2018.
• Ontario-based sales increased 15% during the
quarter ended July 31, 2018.
Brand Leadership
Brand Leadership
Further develop our house of brands
using data-driven, in-depth
knowledge of our customers and
their preferences, ensuring we meet
the full range of desired products
within the market.
• Cash and short-term investments were $244.8 million
as at July 31, 2018, and the balance sheet remained
debt free.
Corporate Highlights
• Formation of the joint venture “Truss” with Molson
• Supply agreements with the Ontario Cannabis Store and the
Canada to pursue opportunities to develop non-alcoholic,
cannabis-infused beverages for the Canadian market.
• First global foray by partnering with Greek company
Qannabos to establish a Eurozone processing, production and
distribution centre in Greece, including the development of
350,000 sq. ft. of licensed infrastructure.
British Columbia Liquor Distribution Branch to supply the award-
winning sublingual mist Elixir products; an additional Ontario
agreement to supply Fleur de Lune, an intimate cannabis oil.
• Partnership with Metro Supply Chain Group to manage a Montreal
warehouse and distribution centre for Quebec adult-use web
orders for the SQDC, in modern 58,000 sq. ft. facility.
• First harvests from new 250,000 sq. ft. greenhouse,
• Strategic investment of $10 million in the independent retailer
expected to increase annual production capacity to 25,000 kg
of dried cannabis.
Fire & Flower, through a convertible note receivable.
• Foundation and framing for a new 1,000,000 sq. ft. greenhouse
• Acquisition of a 25% interest in a 2,004,000 sq. ft. facility in
completed (project remains on schedule).
Belleville, Ontario, providing capacity for the manufacturing of
advanced cannabis products.
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We completed our first greenhouse in
December 2016, and have since broken
ground on multiple expansions.
MOMENTS LIKE THIS
HAPPEN ONCE IN A LIFETIME
By innovating today, HEXO Corp. is preparing for
the future of adult-use cannabis.
We are responsible, we are diligent, we are strategic.
We are also bold. And that’s how we are securing
long-term value for shareholders.
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A LETTER FROM THE CEO
Dear Shareholders,
Five years ago, Adam Miron and I sat in a basement
and envisioned a company. We were driven by a
belief that cannabis could have measurably positive
impacts for adults who use it responsibly. I had
experience in finance and operations. Adam brought
political acumen. Together, we would rally a team
with the right blend of marketing, branding, quality,
sales and product deployment expertise. We would
create HEXO Corp.
At the beginning of this past year, we had
grown our team to nearly 50 employees, had
45,000 sq. ft. of greenhouse space and were selling
24 different medical cannabis products under our
Hydropothecary brand. Less than a year later,
We aim to capitalize upon this favourable position
as we execute our plan to grow into an international
consumer packaged goods company. We will do so
through our four strategic pillars.
Top Two in Canada
We became a licensed producer (“LP”) in
March 2014, joining just over a dozen or so other
LPs, and sold our first product just over a year later.
Today, we have landmark supply agreements in
place with five provincial governments, including
a five-year contract with Quebec’s Société
québécoise du cannabis (“SQDC”) that’s worth
$1 billion or more in revenue. That represents
We are committed to
sustainable operations and
good governance that will
secure long-term value for our
communities, our employees
and our shareholders.
we have 270 employees and are on track to have
1.3 million sq. ft. of greenhouse space by year’s end.
And, of course, we are entering a whole new world
of legal adult-use cannabis.
I am proud to say that HEXO Corp. has the right
combination of history, momentum and enthusiasm
to enter the post-legalization world confidently and
boldly. Indeed, we are among a small number of
companies positioned to shape it.
Our Strategy
With your help, we have raised $316.5 million in
public markets since July 2017. And with zero debt
held, we are one of the best-capitalized companies
in our industry as we begin selling adult-use
cannabis in our home province of Quebec, as well
as other Canadian markets.
35% of the province’s adult-use sales in the first
year of legalization. In total, we have provincial or
private retail distribution agreements in most major
markets in Canada. Studies have estimated the
legal Canadian market will be $10 billion a year; we
anticipate having a 12%–15% market share in 2019.
In the coming year, our top priority is to serve
our home base through flawless execution of our
SQDC agreement, while deliberately expanding
our product offerings in other markets through our
house of brands strategy.
Canada is ultimately a platform for bigger things. As
a top licensed producer at home, we will position
ourselves as an international player – ready for other
adult-use markets to open up. We intend to secure
2% or more of what we expect will be a $250 billion
global market.
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Brand Leadership
We have served the medical market with award-
winning products for over three years through our
Hydropothecary brand. With our adult-use HEXO
brand, and strategic house of brands approach, we
will build upon our existing customer knowledge
with data-driven analysis and activation outreach.
By striving to understand adult-use consumers
and their preferences better than our competitors,
we will create a host of products geared toward
specific value segments. Varying in concentration,
price point and format, these new and exciting
products will be category leaders.
With a range of offerings that consumers want –
and that they can trust to deliver consistently great
experiences – we will put our brand at the top of
mind in every market we serve.
New Product Innovation
We are proud of our award-winning cannabis
products, and the loyalty of our customers. At the
same time, we know that cannabis products today
do not necessarily look like those of tomorrow.
Legalization and partnerships with leading
consumer packaged goods (“CPG”) companies
will drive research and innovation. By identifying,
developing and launching new products, we will
remain on the vanguard for years to come.
Operational Scalability
At the end of the day, creating new products,
building brand leadership and positioning ourselves
as a leading licensed producer all depend on
our ability to scale operations and deliver on our
promises. As our 2018 growth demonstrates, we
are actively investing in people, processes and
systems that ensure the highest-quality products
at sustainable operating costs.
Operational scalability also ensures that we can
honour the commitments we’ve made with
provincial and private partners, and guarantees the
uncompromised quality and safety of our products.
As our recent facility expansion proves, our track
record is best in class.
The Responsible Way Ahead
HEXO Corp. is helping shape an entirely new
legal market. That’s an exciting opportunity, but
also a humbling one. We have a responsibility
to ensure that we help educate our customer,
recognize the potential adverse effects of our
products, mitigate our environmental footprint
and give back to our community.
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Whether it’s through carbon and greenhouse gas
inventories of our facilities, working with Ottawa
Riverkeeper to protect our local watershed or
supporting the Campaign for Cannabis Amnesty
to help those convicted of simple possession
charges, we are committed to being a responsible
corporate citizen.
We also know that true responsibility goes beyond
photo-ops and oversized cheques. That’s why we
are committed to sustainable operations and good
governance that will secure long-term value for our
community, our employees and our shareholders.
As we sat in that basement, Adam and I didn’t
know what the future of cannabis had in store,
but we envisioned a $1 billion company that could
be part of that future. Having achieved that and
more, today we share a vision with you to build a
Fortune 500 CPG company – a true house of brands
for cannabis.
Sébastien St-Louis, CEO
October 25, 2018
Sébastien St-Louis, CEO
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Waves of
Change
We may be the first
G20 country to fully
decriminalize cannabis,
but Uruguay legalized
it five years ago. Many
of the country’s Latin
American neighbours
are also relaxing
prohibitions, especially
on medical cannabis.
Similarly, such European
countries as Germany,
Italy, Greece and the
United Kingdom are
paving the way for a
continental green rush
by relaxing bans on
medical use. From
our vantage point in
Canada, we know the
tide is turning.
THE MOMENT
Proudly based in Gatineau,
Quebec, we remain committed
to our home province.
Nearly 20 years ago, in 2001, Canada was at the forefront
of change when it became the first country to legalize
medical cannabis. Now, with its October 2018 legalization
of adult-use recreational cannabis, Canada has undone a
95-year-old ban and once again taken a major step forward.
In fact, as provinces and territories allow
adult-use sales from coast to coast, the country is
staking a strong leadership claim in an emerging
$250 billion global market. For those Canadian
companies prepared to make a difference, this is a
once-in-a-lifetime moment to shape an industry –
not just at home but around the world.
A Historic Relationship
Humans have cultivated cannabis for nearly
5,000 years for a reason: the flowering plant’s
molecular properties have tremendous social,
health and wellness benefits when used
responsibly. Indigenous to Central and
South Asia, the plant and its many applications
spread throughout the world – reaching the
Middle East and Africa thousands of years
ago and the Western Hemisphere by the
mid-sixteenth century.
But colonial restriction efforts throughout
Asia and Latin America, as well as efforts
in the United States and Canada in the early
20th century, culminated in widespread
prohibition and stigmatization of cannabis.
The Seeds of Change
Canada paved the way for medical cannabis
and was joined by such countries as Portugal,
Belgium, Chile, Brazil and the Czech Republic.
Just as jurisdictions followed Canada’s lead on
the medical front – allowing the use of cannabis
to treat pain, nausea and other conditions –
an increasing number are poised to similarly
decriminalize adult use. Soon, consumers around
the world will look for a whole host of products
that deliver consistently great experiences. And
they’ll turn to companies they can trust.
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Change Makers
With legalization, first on a national
then international scale, cannabis
will emerge from the shadows as
an amazingly adaptable consumer
good. Like other consumer
packaged goods – from coffee to
alcohol, chocolate to potato chips,
shampoo to cosmetics – it lends
itself to just a handful of truly
global players with expertise in
production, distribution, sales
and brand loyalty, and, importantly,
market-defining innovation.
We enter an age of adult-use
cannabis with both provincial and
private retail distribution deals.
The global cannabis market will inevitably consolidate. But in the not-so-distant future, lists
of $100 billion CPG businesses will include one or two companies that were able to fully
capitalize on this historic moment. These will be household names, with concentrated brand
value and name recognition on par with leaders in soft drinks and alcohol. There are only
a handful of cannabis companies with a credible shot of making that list – and we believe
HEXO Corp. is among them.
As a Canadian company with a first-mover advantage, we have methodically built a foundation
to shape and define the cannabis market – particularly in the minds of consumers and investors.
Our emulsification and formulation
technologies help ensure consistent
harvest quality.
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We offer decarb in
six different ways, all ready
for consumption.
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We are on track to have
1.3 million sq. ft. of completed
greenhouse space by December 2018.
OUR FOUNDATION
In June 2013, Canada enacted the Marihuana for Medical Purposes
Regulations (“MMPR”), which replaced earlier rules governing
access and use of medical cannabis. What became known
as HEXO Corp. was founded three months later, with the
creation of The Hydropothecary Corporation in August 2013.
In the months and years that followed, we
began harvesting plants, establishing lasting
relationships with medical patients and building
infrastructure unrivalled by any other licensed
producer in Canada. Put another way, we began
laying the groundwork to capitalize on the
inevitable legalization of adult-use cannabis at
home and around the world.
Scaling Up
With our culture of innovation, HEXO Corp. never
stands still. Just over a year after our founding,
we proved the viability of greenhouse cannabis
cultivation with our original first-of-its-kind facility
in Gatineau, Quebec. We soon needed much
more than 7,000 sq. ft., and we got to work.
Today, HEXO Corp.’s licensed facilities total
310,000 sq. ft., with an annual production
capacity of 25,000 kg of dried product. In addition
to our 35,000 sq. ft. greenhouse completed
in 2017 and one that totals 250,000 sq. ft.
completed in mid-2018, our facilities include
warehouse and distribution spaces, as well as
laboratories to advance cultivation methods and
develop products.
Of course, like the industry itself, our
infrastructure is expanding quickly: we
recently acquired space in Belleville, Ontario,
and have plans to establish a sizable facility in
Greece through our joint venture partnership
with Qannabos. HEXO Corp. is also on track
to open a 1 million sq. ft. greenhouse in
December 2018. The size of 17 football fields, the
new greenhouse will help increase our annual
production capacity to 108,000 kg.
We have a demonstrated record of hitting targets.
With our existing footprint and on-schedule
expansion plans, we are ready for the first year of
legalized cannabis – and to meet the needs of a
growing market.
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Meeting the Demand
Prudent infrastructure expansion,
along with regulatory know-how and
unmatched expertise, has positioned
us to meet demand while exceeding
expectations through our medical
brand, Hydropothecary, and its
diverse product line.
Backed by our reliable record, and
proven capacity to deliver orders,
HEXO Corp. enters the post-
legalization world with industry-
leading supply agreements.
A landmark contract with the
Société québécoise du cannabis
(“SQDC”), in our home province,
will supply Quebec with 200,000 kg
or more of cannabis over five years.
That accounts for a projected 35%
of provincial sales in the first year
of legalization – and represents
$1 billion in potential revenues.
Other agreements with provincial
bodies in Ontario, British Columbia
and Saskatchewan, as well as with
private retailer Fire & Flower, mean
that HEXO Corp. has among the
highest revenue visibility of any
cannabis company in Canada or
the world.
Distributing
the Product
The ability to cultivate cannabis is
essential, but so is the ability to
distribute innovative products to
retail partners and end-users.
In 2018, we established a
58,000 sq. ft. distribution and
storage centre in Montreal, which
the veteran logistics services
provider Metro Supply Chain Inc.
will operate on our behalf.
The partnership is just one way
HEXO Corp. is ensuring flawless
delivery – for end-users and
investors alike.
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We have a track record of
delivering infrastructure
projects on time.
We have grown from
50 employees to 270 in
less than a year.
Operational scalability is a
strategic cornerstone of
our success.
House
of Glass
Our continual harvest
strategy – which sees
sun-grown plants
harvested every
week – relies on
aggressive expansion
plans. Our advanced
greenhouses allow us
to scale production
while controlling capital
costs and ensuring
quality consistency.
They also mean we can
produce cannabis more
efficiently compared
to other methods. By
utilizing solar energy,
we consume less
electricity per gram.
We also require less
water. The approach
is good for the
plants, good for the
environment and good
for our bottom line.
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And the
Winner Is
We know how to
innovate products
that get people’s
attention. Two years
ago, for example, we
launched decarb, an
activated cannabis
powder designed for
oral consumption.
And last year, we
launched Elixir, Canada’s
first and only line of
cannabis peppermint
oil sublingual sprays.
Customers have
responded well to both
products, as has the
industry: decarb and
Elixir received multiple
recognitions at the 2017
Canadian Cannabis
Awards, with decarb
winning Best New
Cannabis Product.
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OUR EXECUTION
Whether we’re cultivating plants or
innovating products, we embrace
exacting scientific standards.
Having built a solid foundation – and with infrastructure
and distribution channels in place ahead of schedule –
HEXO Corp. enters the first year of legalization as a
vertically integrated CPG company with momentum.
We have already sold over 1 million grams of
cannabis to thousands of Canadian patients
who look to us for consistently safe, high-quality
products. With each sale, we deliver just that –
while building brand value and awareness.
A Name You Can Trust
At HEXO Corp., we are more than a cannabinoid
compound provider. We are a strategic market
leader with a solid history of technology,
innovation and branding – and the trust of our
customers. That makes us an attractive partner in
the post-legalization world.
Cannabis-based products will take many forms
in the coming years, including vapes, edibles and
other delivery methods we have yet to imagine.
But consider infused non-alcoholic beverages.
We went out to the marketplace and spoke
to leading beverage players looking to tap into
smokeless cannabis. We looked for a prospective
partner with a skill set and industry knowledge
that would complement our own. We found such
a partner in Molson Canada.
Through Truss – the joint venture we announced
with Molson Canada in August 2018 – we
are at the forefront of the cannabis-infused
beverage market. The partnership combines
Molson Canada’s storied industry experience
and distribution expertise with HEXO Corp.’s
proprietary emulsification and formulation
technologies and history of product innovation.
And for consumers, it will deliver products backed
by brand names with built-in trust.
A Eurozone Foothold
As we position ourselves for post-legalization
in Canada, we are also laying the groundwork
for adult-use markets elsewhere. Through our
joint venture with Qannabos, for example, we
will establish a 350,000 sq. ft. licensed facility
in Greece, which will increase our production
capacity and enable us to serve legal markets in
the United Kingdom, France and other jurisdictions.
By selling high-quality HEXO products in Europe
today, we can build brand recognition and loyalty
that will translate to our success in adult-use
markets tomorrow.
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Partnerships
That Will Shape
an Industry
HEXO Corp. enjoys an enviable
position – we are one of just
two licensed producers to have
partnered with a Fortune 500
company, and we are actively
exploring additional vertical
relationships in food, cosmetics
and other product areas. We
are reaching out to trusted CPG
brands and learning how we
can complement their cannabis
strategies in ways that drive
shared value.
Because we can offer licensed
infrastructure, innovative extraction
technologies, exciting products,
access to legal adult-use markets
and first-mover advantage – all
of it right out of the gate – we’re
demonstrating the true power
of HEXO.
Our joint venture with Molson
Canada is a game changer.
Our products undergo
thorough in-house and third
party chemical analysis.
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Whether through HEXO or Hydropothecary, we
offer rigorously tested cannabis products of
uncompromising quality.
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OUR FUTURE
We are building a
consumer-centric
house of brands.
Picture a day when two colleagues go for a business lunch
and instead of ordering two glasses of wine they order
a cannabis-infused beverage. They’ll enjoy a quick-onset,
quick-offset experience. And because the formulation will
be just right, they’ll return to work without feeling groggy.
Or imagine a day when an amateur athlete turns
to a cannabis-based product to treat inflammation
instead of ibuprofen. She’ll be back on the court
or running the trail without the side effects.
This is the face of adult-use cannabis.
More to Come
Through provincial and private retail agreements –
and by making strategic investments in our
people – we are actively leveraging our capacity
to scale production and distribution. Whether
through online or brick-and-mortar sales, millions
of Canadian consumers can enjoy premium
HEXO-branded products right from the start
of legalization.
At the start, we’re able to offer those consumers
dried product, sublingual sprays, intimate oils
and decarboxylated powders. But we
are constantly researching new ways of
consumption, different ways to unlock the
benefits of cannabis. In future, we will offer
soft-gel capsules, topicals, anti-inflammatories
and other products we haven’t imagined yet.
Guided by market research and good corporate
governance, we’ll develop quality products
and offer them throughout Canada, and in legal
adult-use markets around the world.
A Valuable House of Brands
When discerning consumers scan the shelves
(or menus) for a wide range of cannabis
products – from beverages to cosmetics, from
edibles to vapes – they will look for brand names
they know. They will look for brand names they
trust. They will look for HEXO.
By building a leading house of brands, one that
offers a range of price points and formulations,
we are establishing a strong market share and
positioning HEXO Corp. as a top earnings per
share company.
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Powering a Rare
Opportunity
Whether it’s in our greenhouses and
research facilities, in our face-to-face
interactions with pharmacists and
retail sales associates or through
our joint ventures with Fortune 500
companies, HEXO Corp. employees
have the enthusiasm, vision and
discipline to shape an entirely new
market from scratch.
At HEXO Corp., we are powering
a rare opportunity for our partners,
our customers and our investors.
HEXO activation programming
is helping cut through remaining
stigma around adult-use cannabis.
Through influencers and education
alike, we are reaching consumers
throughout Canada.
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Not the
Stereotype
HEXO consumers
have an explorer
mentality. More often
than not, they’re high-
earning professionals
between 35 and 45.
They’re educated,
curious and active.
We are connecting
with those consumers
through “activation
programming” like our
Never Jaded series. By
pairing brand awareness
with cultural events
they already enjoy –
things like music,
e-sports, celebrity chef
demonstrations – we
are reaching influencers
who will tell their
networks about adult-
use cannabis, generally,
and HEXO products,
specifically.
Management Discussion & Analysis
For the three and 12 months ended July 31, 2018
(In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)
This management discussion and analysis (“MD&A”) of the financial condition and results of operations of HEXO Corp. (formerly The Hydropothecary
Corporation) and our wholly owned subsidiaries (collectively, “we” or “us” or “our” or “Company” or “HEXO Corp.”) is for the three and 12 months
ended July 31, 2018 (“Fiscal 2018”). It is supplemental to, and should be read in conjunction with, our audited consolidated financial statements and the
accompanying notes for the fiscal year ended July 31, 2018. Our consolidated financial statements are prepared in accordance with International Financial
Reporting Standards (“IFRS”). All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure
Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at thehydropothecary.com
or hexo.com or through the SEDAR website at sedar.com.
Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities
legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “may”, “expect”, “intend”, “estimate”,
“anticipate”, “believe”, “should”, “plans”, “continue”, “objective”, or similar expressions suggesting future outcomes or events. They include, but are not limited
to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies,
beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of
customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance. Such statements are not historical
facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management
control. We have based these forward-looking statements on our current expectations about future events. Although the forward-looking statements
contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control,
and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ
materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general
economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including
tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from
time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from
current expectations, see “Risk Factors”. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such
forward-looking information whether as a result of new information, future events or otherwise, except as required by law.
This MD&A is dated October 25, 2018.
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The Company was founded in 2013 for the purpose of producing medical cannabis under Health Canada’s Marihuana for Medical Purposes
Regulations (“MMPR”). We became the 17th licensed producer in Canada in March 2014 and made our first sale of medical cannabis in
May 2015. We were the first licensed producer in Quebec and are the only publicly traded cannabis company headquartered in the province.
The MMPR was replaced by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in August 2016. Under our current
ACMPR license, we are authorized to produce and sell cannabis to medical patients and adult recreational users in dried and oil formats.
Our license has a term ending on October 15, 2019, and we are not currently aware of any circumstances that would impede renewal.
Ultimately, we are a vertically integrated consumer packaged goods company in the medical and emerging legal adult-use cannabis market.
Our primary business is to cultivate, process, package and distribute cannabis through our facilities in Gatineau, Quebec, in order to serve
the medical and adult-use cannabis markets across Canada and internationally where regulations allow. We have expanded operations to
include a corporate office location in Gatineau, Quebec, additional advanced processing and manufacturing space in Belleville, Ontario, and
a distribution centre located in Montreal, Quebec.
To date, we have sold over 1 million grams of medical cannabis to thousands of patients across Canada who count on us for safe, high-
quality products. We have developed an extensive and award-winning product range, as well as valuable experience and knowledge, while
serving these patients. This positions us well to serve the legal adult-use market. We currently possess the single largest and longest
national forward supply amount among all licensed producers, based upon the announced provincial supply agreements. In Quebec alone,
we will supply 20,000 kg in the first year of legalized adult-use cannabis and up to approximately 200,000 kg over the first five years of
legalized adult-use cannabis.
As at October 19, 2018, we hold 310,000 sq. ft. of licensed production space, with a 25,000 kg annual production capacity; an additional
1,000,000 sq. ft. under construction; 2,060,000 sq. ft. of commercial real estate for distribution and product research and development
needs; another 58,000 sq. ft. of leased distribution space in Montreal, Quebec, and leased commercial office spaces in downtown
Gatineau, Quebec.
We employ approximately 220 people, including 81 people in operations, manufacturing and processing; 53 in sales and marketing; 40 in
cultivation and harvesting; 39 in corporate services and executive; and seven in quality assurance and research and development.
We are among the cannabis industry’s top innovators, with products such as Elixir, Canada’s first and only line of cannabis peppermint
oil sublingual sprays, and the award-winning decarb, an activated cannabis powder designed for oral consumption. Further, we are
delivering on product innovation through our joint venture with Molson Canada, which positions us at the forefront of the cannabis-infused
beverage market.
Investors have responded positively to both our strategy and execution, as evidenced by the $316.5 million we have raised in public markets
since July 2017 and by our corresponding zero debt held, making us one of the best-capitalized companies in the industry.
We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from
the sale of cannabis or cannabis products in the United States or any other jurisdiction where the sale of cannabis is unlawful under
applicable laws.
Canadian Cannabis Market
According to Statistics Canada, nearly five million Canadians purchased approximately 760,000 kg of cannabis worth $5.7 billion in 2017,
mostly from illegal sources. The federal agency estimates that the average price was $7.50 per gram. Various market studies have estimated
the size of the legal Canadian cannabis market at over $10 billion per year. We are uniquely positioned to serve that market through holding
the largest forward supply contract of all licensed producers.
As of August 13, 2018, all provinces and territories have announced their cannabis market retail approach, ranging from privately owned
stores to government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through strategic
supply agreements with the Quebec, Ontario and British Columbia provincial governments, as well as through an investment in the private
cannabis retail sector, in order to offer our award-winning and innovative products across all channels throughout Canada.
13
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Anticipated retail distribution channels by province and territory:
Retail Stores
Government
Private
New Brunswick
Nova Scotia
Alberta
British Columbia
Manitoba
Nunavut
Prince Edward Island
Newfoundland
Saskatchewan
Quebec
Yukon
Northwest Territories
Ontario
We have established supply channels within five provinces – Quebec, Ontario, Saskatchewan, Alberta and British Columbia – through
supply agreements with both governmental boards and private retailers. We hold the single largest forward supply contract among licensed
producers, based upon announced agreements for year one of legalization, with 20,000 kg to be supplied to Quebec in the first year.
Fire & Flower
Retail store
locations expected
Fire & Flower
Two retail store
licenses
2018
14 store locations
and web sales
2019
50 stores expected
Supply channels obtained
Supply channels expected
Fire & Flower
Retail store
licenses expected
2018
Web sales obtained
2019
Retail stores
expected
14
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A QUEBEC
In Quebec, which has a population of 8.45 million, or approximately 23% of the Canadian population, the Société québécoise du cannabis
(“SQDC”) operates the distribution and sale of adult-use cannabis. The SQDC has established 15 retail locations throughout the province, for
in-store cannabis sales. It expects to increase this number to 50 locations within the first year of legalization. It will also sell cannabis online.
In the first year of legalization, we hold a 35% market share in Quebec. Our agreement with the SQDC spans a potential five-year period,
with us supplying 200,000 kg or more of cannabis, representing $1 billion in potential revenues.
In addition, we have reached a distribution agreement with the SQDC, in which we will house and distribute all of the SQDC’s online sales
to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC.
ONTARIO
In Ontario, which has a population of 14.4 million, or approximately 40% of the Canadian population, the government has announced that
it will offer consumers a variety of cannabis products through the Ontario Cannabis Store (“OCS”) online web sales in 2018. The province
will also allow privately owned retail locations that serve the adult-use market. Initially, products will include dried cannabis, oil and capsule
products, pre-rolled, and clones and seeds.
We have entered into a supply agreement with the OCS, in which we will supply the province with THC and CBD Elixir and Fleur de Lune
products, two of our most innovative oil-based and smokeless offerings. In the future, once our 1 million sq. ft. greenhouse expansion is
complete in December 2018, we will offer our full suite of products. This approach will allow us to initially serve the Ontario market for
smokeless cannabis products through the OCS.
BRITISH COLUMBIA
British Columbia, which has a population of 4.6 million, or approximately 13% of the Canadian population, will serve the adult-use
cannabis market through a dual private–government approach. The British Columbia Liquor Distribution Branch (“BCLDB”) will manage the
distribution of cannabis and cannabis-based products. We hold a supply agreement with the BCLDB, in which we will supply our THC and
CBD oil-based Elixir and Fleur de Lune products.
We have also aligned ourselves with Fire & Flower (“F&F”), a private cannabis retailer, through a strategic investment of a $10 million
convertible loan. F&F is expected to hold store locations throughout British Columbia, allowing HEXO products to be distributed via the
private retail route in tandem with the BCLDB.
OTHER CANADIAN PRIVATE MARKETS
We expect to enter the remaining private-sector Canadian cannabis markets via strategic investments in private retailers, such as our
investment in F&F. Currently, F&F holds two licenses for retail locations within Saskatchewan and is undergoing the licensing process in
Alberta, with 37 locations pending. F&F has also begun the process of acquiring licenses and locations in Manitoba.
15
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A CANADIAN LEGISLATIVE LANDSCAPE
Regulation of the sale of adult-use cannabis in retail and online environments is the responsibility of the provinces and territories. Only
licensed producers will be authorized to sell cannabis within the adult-use market. As at July 31, 2018, there are 114 licensed producers
under the ACMPR.
Quebec’s Bill 157, an
Act to constitute the
SQDC, to enact the
Cannabis Regulation
Act, became law
The Cannabis Act
Regulations were
published in the Canada
Gazette on July 11, 2018
Expected start
date of the sale
of edibles containing
cannabis and cannabis
concentrates
June 21,
2018
October 17,
2018
June 12,
2018
July 11,
2018
October 17,
2019
Bill C-45,
the Cannabis Act,
received Royal Assent
and became law
The sale of recreational
cannabis is permitted
Strategic Priorities
Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis markets. In everything
we do – cultivation, production, product development, innovation, distribution – we exercise rigour in order to offer medical cannabis
patients and adult recreational users uncompromising quality and safety, while earning and maintaining the trust of all of our stakeholders.
We believe that we can leverage our demonstrated success in Canada to global cannabis markets.
Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and
today’s limited but growing cultivation capacity, among other factors, we believe the initial years following legalization will be the most
critical in determining the future shape of the cannabis industry in Canada, and we believe early distribution and financial performance will
be critical to securing a market leader position.
For this and other reasons, we have deliberately set out to build a commanding position in our initial jurisdiction, Quebec, while making
strategic inroads in select other markets across the country through provincial supply agreements and private retail partnerships. Now
entering the adult-use market as one of the top producers and suppliers, we are looking beyond the Canadian border to take HEXO Corp.
international, where regulations permit. We are making continuous efforts to assess global opportunities in current and future medical and
adult-use markets, including Europe, where we are currently expanding into Greece.
We have positioned ourselves to meet the smokeless cannabis alternative market demand through our joint venture with Molson Canada,
and we continue to explore other opportunities for similar ventures in this market. Even as we continue to prove our business model and
operational excellence in Quebec and across the country, the Company has already established itself as a desirable business partner for
cannabis control authorities, private retail, and Fortune 500 joint-arrangement partners across Canada and globally.
Our uncompromising commitment to quality and safety is supported by our compliance with Health Canada’s stringent quality control
requirements, our pharmaceutical-grade production system, full seed-to-sale traceability, third party independent testing and an online
system to post our product testing results.
16
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Our overall strategy is built on four pillars: be a top two market share licensed producer in Canada, demonstrate brand leadership, innovate
products – and support that work through operational scalability. As we enter the adult-use market, we are focused on the execution of
these four strategic priorities.
Operational Scalability
Invest in people, processes and systems to deliver on market
demands, adapt to new opportunities and provide users with high-
quality products at sustainable operating costs.
Top Two in Canada
Our top priorities are to execute and
deliver on the SQDC contract, to serve
and expand large-scale distribution
across Canada and globally, and to
become a top two licensed producer
by market share in Canada.
Product Innovation
Continue to innovate and lead the
market in identifying, developing and
launching new cannabis-based
products.
Brand Leadership
Further develop our house of brands
using data-driven, in-depth
knowledge of our customers and
their preferences, ensuring we meet
the full range of desired products
within the market.
Top Two in Canada
After establishing a dominant presence within our home market of Quebec, we look to expand nationally on a larger scale. Our objective is
to execute on our supply agreements with the OCS and the BCLDB, as well as on our long-term supply agreement with the SQDC, and to
successfully manage our recently announced distribution centre responsible for all SQDC online sale–based cannabis distribution. We also
possess a strategic relationship with the private cannabis retailer F&F. This private retail presence will allow us to expand our expected
distribution presence across six provinces and secure a top two public forward sales contract ranking.
Forward Sales Contract Rank
Based on quantities announced in provincial supply agreements
60
50
40
30
20
10
)
g
k
(
d
n
a
s
u
o
h
T
Canopy
Aurora
HEXO
17
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
SQDC SUPPLY AGREEMENT
The strategic value of our SQDC relationship cannot be understated. We hold the single largest forward contract in the history of the
emerging cannabis industry with the SQDC and are the preferred supplier for cannabis products for the Quebec market for the first
five years following legalization. We will supply the SQDC with 20,000 kg of products in the first year, and we expect to supply 35,000 kg
and 45,000 kg in years two and three, respectively. Thereafter, based on an expected market growth rate of 10%, we intend to supply
49,500 kg and 54,450 kg in years four and five, respectively. The Company estimates the total volume to be supplied over the five-year
term of the agreement to be in excess of 200,000 kg. Based on the current agreements signed between the SQDC and five other licensed
producers, we have obtained the highest year one volume, representing approximately 35% market share within Quebec, and we are
aiming to remain the largest supplier in subsequent years.
Volume and Market Share % in the Province of Quebec
Year 4 & year 5
supply volumes
to be determined
40
30
20
10
)
g
k
(
d
n
a
s
u
o
h
T
35%market share
1
2
3
4
5
Year
18
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Brand
Since our inception as a medical cannabis producer in 2013, we have built a trusted brand. Our robust product development team has
introduced products that offer consumers a full range of experiences and price points, including a variety of ways to consume cannabis. This
team works hand-in-hand with our marketing team in leveraging these products to build brand awareness in a highly regulated environment.
HEXO – ADULT-USE
During this past quarter, the Company announced HEXO as the adult-use brand name that will serve the legalized Canadian adult-use market.
The goal of HEXO is to continue to offer a premium house of brands, signalling innovation, quality and consistency of experience, and become
a top two Canadian market share brand and obtain a 2% international market share. As a brand, HEXO shares the same focus on award-
winning product innovation and high-quality cannabis that the market has come to expect from its medical sister brand, Hydropothecary.
HYDROPOTHECARY – MEDICAL
Hydropothecary sells premium as well as mid-market medical cannabis, offering over 24 products in dried, decarb and oil formats.
Hydropothecary has been serving the medical market with its award-winning products for over three years, and will continue to serve our
medical patients with the utmost levels of quality and customer service.
HEXO PRODUCT OFFERINGS
Initially, HEXO will offer dried cannabis and cannabis-derived products under three product types: dried cannabis, cannabis oils and decarb.
Dried Cannabis – Premium and mid-range products offered under the Time of Day and H2 lines. Both lines offer a relatively wide spectrum
of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 15 dried marijuana products priced between $3 and
$15 a gram. Each product is carefully selected to treat symptoms universally reported by patients and meet the needs of adult consumers.
Oil-Based Products – Elixir, a cannabis oil sublingual mist product line, includes both a high THC and high CBD content, and is Canada’s
only peppermint-based cannabis oil product. Fleur de Lune is one of Canada’s first cannabis-based THC intimate oils. Both products provide
alternative, smokeless methods to consume cannabis. HEXO offers three oil-based products priced between $69 and $89 per bottle, as
well as an intimate-use oil product priced at $59 per 60 ml spray bottle.
Decarb – Decarb is an activated fine-milled cannabis powder product offered in a range of high to low CBD and THC content. Decarb is
offered in six products, priced between $3 and $15 a gram.
Decarb was voted “Top New Product’’ at the 2017 Canadian Cannabis Awards; Elixir received third place in the same category, as well as
second place in “Top High THC Oil”. We also received top honours in the packaging category.
Product Innovation
Our strategic priorities reflect our belief that companies that achieve large-scale distribution and high brand awareness will drive long-
term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being
recognized for delivering the best user experiences across the full spectrum of products, price points and delivery methods.
We continue to position ourselves to meet the expected edibles market demand and consumer-preferred products for October 2019. This
includes, but is not limited to, vapes; cosmetics; edibles such as confectionary and baked and dairy goods; and non-alcoholic beverages,
through our joint venture with Molson Canada.
Our focus on research, innovation and product development also reflects our strategic priorities. We are actively exploring ways to increase
our expertise related to cannabis applications and forms of delivery, and to expand our product range and brand portfolio. Activities include
current and potential partnerships, joint ventures and strategic acquisitions of intellectual property and related transactions.
19
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The cannabis industry has already recognized us as an innovative leader, as demonstrated by our award-winning and nominated products
Elixir and decarb. During the quarter, we launched Fleur de Lune, one of Canada’s first intimate-use cannabis oils.
Beyond the funds required for our currently planned investments in cultivation capacity, we expect to allocate the majority of our capital to
branding, product innovation, international expansion and production, while remaining alert for strategic transactions that create shareholder
value. Supporting this focus is the acquisition of the Belleville, Ontario, facility, which among other purposes will serve to house research
and development activities for the Company and its future products. This approach will directly support our continued leadership position in
the Canadian cannabis market – as both a distributor and a product innovator.
Scalability
We have been cultivating cannabis for four years under the ACMPR regulatory regime, growing and producing high-quality cannabis with
consistent yields. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies.
We chose to locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production. The key is an
abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people.
On the border of Canada’s two largest consumer markets, Quebec and Ontario, our main campus positions us in close proximity to two of
the country’s major urban areas, Greater Montreal and the National Capital Region. Furthermore, we have acquired facilities in Belleville,
Ontario, ideally situated between the National Capital Region and Toronto, and in Montreal, which conveniently serves central Quebec.
Our current licensed facilities total approximately 310,000 sq. ft. They include our original 7,000 sq. ft. greenhouse, a 35,000 sq. ft.
greenhouse completed in 2017, a 250,000 sq. ft. greenhouse completed in July 2018, a warehouse, two stand-alone laboratories and
two modular buildings for final packaging and customer service, all located on our 143-acre land parcel. The annual production capacity of
these facilities is estimated at approximately 25,000 kg of dried cannabis.
As of July 23, 2018, all 10 zones of the 250,000 sq. ft. greenhouse were fully licensed by Health Canada and plants were transferred in. The
corresponding first harvests were executed in mid-September. This expansion increased our annual production capacity by approximately
21,400 kg of dried cannabis to 25,000 kg.
In December 2017, we acquired an adjacent 78-acre land parcel upon which we are building a 1 million sq. ft. greenhouse. This newest
expansion is well underway, with the foundation and frame in place and the roof significantly completed. It is expected to be completed in
December 2018. Once completed and licensed by Health Canada, our total annual production capacity will rise to approximately 108,000 kg
of dried cannabis.
Subsequent to year-end, we announced a partnership to expand into Europe. A 350,000 sq. ft. licensed facility will be established in Greece
through our joint venture with Qannabos. This venture will result in additional production capacity and Eurozone foothold to serve legal
cannabis markets in the United Kingdom, France and other jurisdictions where regulations permit.
We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry
expertise and other relevant business knowledge derived from a variety of industries and markets.
20
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Distribution
In terms of processing and distribution capacity, we have significantly increased our capabilities in the three months ended July 31, 2018,
as annual production increased to approximately 25,000 kg with the activation and full licensing of our new 250,000 sq. ft. greenhouse.
Our extensive 1 million sq. ft. greenhouse project – which features a state-of-the-art processing, packaging and distribution centre and is on
target to be completed by calendar year-end – will further increase production capacity to approximately 108,000 kg.
The Company recently acquired a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture with a related party for the purposes of
manufacturing value-added cannabis products and increasing capacity for distribution and storage. The centralized location and the Company’s
first facility outside of Quebec is ideally situated along primary shipping routes to distribute our products and fulfill commitments across
Canada. This facility will provide a regulatory keyhole to our partners and future partners so that they may enter the cannabis industry with
HEXO Corp. and will have access to licensed infrastructure once the facility is licensed by Health Canada. This acquisition further delivers on
our national expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products, including cosmetics,
vapes, non-alcoholic beverages and other edibles.
Subsequent to year-end, the Company also bolstered its distribution capacity with the announcement of the newly established distribution
and storage centre formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility in Montreal, Quebec, was strategically acquired for
logistical purposes. Through it, we will supply cannabis for all direct-to-customer sales placed in Quebec through the SQDC’s online store.
Additionally, through the distribution centre we will house, supply and distribute direct-to-customers the cannabis products of all licensed
producers who have contracts with the SQDC.
The Company has positioned itself for the private retail distribution through an issued $10 million convertible note debenture as a
strategic investment in the private cannabis retailer F&F. F&F has applied for 37 retail store licenses in the province of Alberta, targeted
eight applications in British Columbia, identified 16 potential operations in Manitoba and been awarded two retail stores in the province
of Saskatchewan.
Distribution Strategy
Deliver to Quebec on
SQDC supply and
distribution agreements.
Positioning to reach 90% of
Canadian markets through
strategic product offerings
such as Elixir.
Roll out new cannabis
beverage products
nationally via the joint
venture with
Molson Canada.
Full product rollout across
all of Canada.
International expansion in
Latin America and Europe.
Enter the U.S. market,
subject to expected
approvals and
regulatory change.
21
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Corporate Highlights
Molson Canada Joint Venture – Truss
On August 1, 2018, we announced that we have entered into a definitive agreement to form a joint venture (the “JV”) with Molson Canada
(“Molson”), to pursue opportunities in the non-alcoholic, cannabis-infused beverages market. The JV was to be structured as a stand-alone
start-up with its own board of directors and an independent management team. Molson would have a 57.5% controlling interest, with the
Company owning the remaining balance. We and Molson closed the transaction to form the JV, called “Truss”, on these terms on October 4,
2018. In connection with the closing of the transaction, we issued 11,500,000 common share purchase warrants to an affiliate of Molson,
each of which is exercisable to purchase one common share of the Company at a price of $6.00 per share for three years. Molson brings
to the JV years of related beverage industry experience, product innovation and distribution expertise. This, paired with the Company’s
history of innovating and delivering quality cannabis products to the market, positions the Company to be at the forefront of the Canadian
cannabis beverage market.
Supply Agreement with the Ontario Cannabis Store
On August 20, 2018, we announced that we have entered into a supply agreement with the Ontario Cannabis Store (“OCS”). Under the
agreement, we will supply Ontario with our award-winning Elixir product line, which will be offered in several formulations such as THC,
CBD or 1:1, in either a peppermint oil or a medium-chain triglyceride (“MCT”) carrier oil. We will also supply the OCS with the newly
launched Fleur de Lune intimate-use cannabis oil. Both products are smokeless and easy to use, and will be sold in childproof packaging.
Expansion into Greece
On September 26, 2018, we announced the partnership with the Greek company Qannabos (“QNBS”). Together, we will create a
partnership supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing, processing
and distribution of medical cannabis. This expansion is our first international expansion and will allow us to serve the medical markets of the
United Kingdom, France and other European jurisdictions, where regulations permit, with our full suite of products.
HEXO Brand
On May 24, 2018, we announced the launch of our new sister brand, HEXO, for the recreational adult-use cannabis market. HEXO will bring
the same award-winning product innovation and high-quality cannabis that the Hydropothecary brand has established over the past three
years. The Company will continue to deliver premium cannabis under the Hydropothecary brand to serve the medical market going forward.
Corporate Name Change
On August 28, 2018, the Company held a special meeting during which shareholders passed to change officially the legal name of
The Hydropothecary Corporation to HEXO Corp.
Graduation to the Toronto Stock Exchange
On June 22, 2018, we graduated from the TSX Venture Exchange (“TSXV”) to the Toronto Stock Exchange (“TSX”) and our common shares
and common share purchase warrants were listed and started trading on the TSX under the symbols “HEXO” and “HEXO.WT”, respectively.
Graduating to the TSX presents the opportunity for increased access to capital, greater market visibility, increased oversight, enhanced
reputation in meeting the required standards of a senior exchange and increased liquidity on world markets.
Supply Agreement with BC Liquor Distribution Board
On July 11, 2018, we announced that we have entered into a memorandum of understanding with British Columbia’s Liquor Distribution
Branch (“BCLDB”). The Company will supply the province through the BCLDB with its award-winning Elixir products.
250,000 Sq. Ft. B6 Greenhouse and B5 Expansion Are Fully Licensed and Operational
As of October 10, 2018, all 10 growing zones and warehouse of the new state-of-the-art 250,000 sq. ft. greenhouse and the B5 expansion
area have received final licensing from Health Canada, increasing annual production to approximately 25,000 kg of dried cannabis. The
advanced manufacturing facilities include areas for dewaxing, distillation, milling and extraction that will provide the Company the capability
to transform, manufacture and package cannabis in a wide range of products. The expansion also includes secondary trimming zones,
additional storage areas and cleaning rooms. The additional facilities and associated production capacity have positioned the Company to
meet the SQDC first-year demand of 20,000 kg.
22
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Fire & Flower
On July 26, 2018, we announced the $10 million strategic investment in the western-based Canadian retail operation Fire & Flower (“F&F”).
The investment was made through the purchase of a $10 million convertible debenture of F&F which entitles HEXO Corp. to convert the
principal amount of the debenture into common shares of F&F at the maturity date of July 31, 2019, or in the event of a triggering event as
defined by the debenture agreement. F&F has applied for 37 retail store licenses in Alberta and has been awarded two retail stores in the
province of Saskatchewan. We intend to secure additional distribution for our oil-based products in these provinces. This is another step
towards achieving our strategic goal of entering the national cannabis market on a large distribution scale.
Acquisition of 2 Million Sq. Ft. Facility in Belleville, Ontario
On September 10, 2018, we announced the acquisition of a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture established
with a related party, Olegna Holdings Inc. (“Olegna”). The Company acquired a 25% interest in the joint venture, with the remaining
balance belonging to Olegna. The joint venture purchased the facility in part by a $20 million loan issued by HEXO Corp. repayable within
120 days, bearing an annual 4% interest rate, payable monthly. As part of the agreement, HEXO Corp. will be the anchor tenant for a
period of 20 years. The facility will be utilized as a centre of research and development and manufacturing. This is the first HEXO Corp.
facility established outside of Quebec, further delivering on the Company’s national expansion strategy and providing capacity for the
manufacturing of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles to be supplied across
Canada. Furthermore, this facility provides a regulatory keyhole for current and future partners to immediately access the cannabis space
and licensed infrastructure.
Warehouse and Distribution Centre
On September 19, 2018, we announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (“Metro”). Under the
agreement, HEXO Corp. and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to house
and supply the cannabis products of all licensed producers who hold supply contracts with the Société québécoise du cannabis (“SQDC”).
The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within the province of Quebec for orders
placed through the SQDC.
Additionally, HEXO Corp. has attained accreditation from the Autorité des marchés financiers to contract with government organizations
such as the SQDC. This is a required authorization for companies conducting over $1 million in business with the government of Quebec for
both services and the supply of products.
Executive Appointments
During the quarter, we bolstered our executive team with the addition of two experienced professionals to our leadership team.
Nick Davies, Vice-President of Marketing – Nick is an accomplished marketing executive with over two decades of experience building
trusted global brands and market-leading products. Nick has been involved with several successful businesses, including Puma, Coleman,
Virgin and Corel. Nick has earned a reputation as an energetic marketing leader known for building high-quality consumer experiences.
As Executive Vice-President at Corel, he held global P&L responsibility for the graphics and productivity division, and led the company’s
expansion into new international markets. Nick is a graduate of the European Business School and holds an MBA from INSEAD.
Dominique Jones, Vice-President of Human Resources – Dominique offers more than 20 years’ experience in leading organizations through
periods of exceptional growth, with a career spanning six industries and three continents. Most recently, Dominique served as Chief Operating
Officer for an education software company and before that as Chief People Officer of Halogen Software, where she led the company’s people
through an IPO to sale. Of particular note, Dominique led significant culture change initiatives and designed and implemented award-winning
leadership and high-potential development programs. She brings to the team a passion for coaching and team-building.
23
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Non-IFRS Measures
We have included certain non-IFRS performance measures in this MD&A, including weighted average cash cost of dried inventory sold
per gram and adjusted gross margin, as defined in this section. We employ these measures internally to measure our operating and
financial performance.
We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable
investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.
As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and
accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS
measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with IFRS.
WEIGHTED AVERAGE CASH COST OF DRIED INVENTORY SOLD PER GRAM
Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing
of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality
assurance and testing of inventory sold in the period.
We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our competitors.
ADJUSTED GROSS MARGIN
We use adjusted gross margin to provide a better representation of performance in the period by excluding non-cash fair value
measurements as required by IFRS. We believe this measure provides useful information as it represents the gross margin for management
purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The
metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation
of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost
(“fair value cost adjustment”) recognized as cost of goods sold.
We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our competitors.
Operational and Financial Highlights
KEY FINANCIAL PERFORMANCE INDICATORS
Revenue
Dried grams and gram equivalents sold
Revenue/gram equivalent
Weighted average cash cost of dried inventory
sold per gram
$
$
$
INCREASED REVENUES
Q4 ’18
Q3 ’18
Q2 ’18
Q1 ’18
1,410
$
1,240
$
1,182
$
1,102
$
152,288
134,253
131,501
120,844
9.26
$
9.24
$
8.99
$
9.12
$
Q4 ’17
862
95,735
9.00
0.90
$
0.88
$
0.97
$
1.07
$
1.05
• Revenue per gram equivalent increased to $9.26 per gram equivalent from $9.24 in the prior quarter, and $9.00 in the fourth quarter of
fiscal 2017. Gram equivalents are utilized to provide a representation of dried grams utilized within our oil products. The gram equivalency
factor was an average of 6.73 dried grams per unit sold in the quarter.
• Revenue increased 64% to $1,410 compared to $862 in the fourth quarter of fiscal 2017. Higher revenue was driven mainly by increased oil
sales volume which command a higher revenue per gram equivalent than dried products as well as by an increase to dried product sales.
Compared to the prior quarter, the sequential revenue growth was 14% due to increased sales volume in both dried and oil products. This
was partially offset by a decrease in dried product revenue per gram of $0.12. Sales in Ontario increased by 15% in the quarter.
• Sales volume increased 59% to 152,288 gram equivalents, compared to 95,735 in the same prior year period. This is due to a higher
market acceptance and an increased consumer desire for smokeless products as oil sales increased to account for 21% of total sales
in the quarter. Dried grams sold increased 33% compared to the same prior year period. On a sequential basis, sales volume increased
13% compared to the third quarter of fiscal 2018, primarily driven by a 30% increase in oil sales.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
• Furthermore, sales were increased through new relationships with an additional eight clinics during the quarter, further expanding
and diversifying our patient base and medical market presence, which we continue to serve under the Hydropothecary brand. We had
relationships with 147 clinic locations as at the end of the quarter.
CASH COST PER GRAM
• Weighted average cash cost of dried inventory sold per gram as at July 31, 2018 increased 2% to $0.90, compared to $0.88 in the
prior quarter. These results reflect the start of the expected interim period of higher production costs to be realized as operations trend
towards full capacity with the utilization of the newly online facilities and equipment. Efficiencies of scale are expected once full capacity
and utilization is obtained.
ORGANIZATION’S HEADCOUNT
• As a result of the growing scale of operations, our headcount rose by 61% to 220 employees as at July 31, 2018 from the previous
quarter’s headcount of 137 on April 30, 2018.
FACILITY EXPANSION
• As of July 23, 2018, all 10 greenhouse zones of the new 250,000 sq. ft. B6 facility have been completed and fully licensed, as well as
the expansion project to the existing B5 facility. The new facility and expansion increase the current production capacity to 25,000 kg per
year. Along with the B9 expansion which is currently under construction, total expected production capacity will increase to 108,000 kg
annually. The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the
estimated square footage of cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical
output of the existing facilities and estimates of future production capabilities.
• Subsequent to the three months ended July 31, 2018, the Company expanded into Ontario through the acquisition of a 2,000,000 sq. ft.
facility in Belleville, Ontario, through a joint venture with a related party. The facility was acquired for the purpose of providing capacity for
further research and development over enhanced cannabis products as well as for its strategic logistical position to serve the province of
Ontario and Canada.
• Also, subsequent to the quarter ended July 31, 2018, the Company leased a 58,000 sq. ft. facility in Montreal, Quebec, for the purposes
of housing and distributing the cannabis products of all licensed producers supplying the SQDC with product for the adult-use market.
• Due to significant growth over the past fiscal year, in June 2018 we secured an additional office space in our current office building in
Gatineau, Quebec. The space will primarily house the executive team, as well as the finance, marketing, government relations, legal,
compliance and communications departments, with the possibility of further expansion as the Company and headcount continue to grow.
PRODUCT LINE EXPANSION
• On July 16, 2018, we launched Fleur de Lune, one of Canada’s first intimate-use cannabis oil products. With 7–10 mg/ml of THC per 60 ml
bottle, Fleur de Lune offers HEXO users a new and innovative method of use.
FINANCIAL POSITION
• As at July 31, 2018, we held cash and short-term investments of $244,789 and continued to hold no debt on our balance sheet.
25
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Summary of Results
Summary of results for the three- and 12-month periods ended July 31, 2018 and July 31, 2017:
Income statement snapshot
Revenue
Gross margin before fair value adjustments and amortization
Gross margin before amortization
Operating expenses
(Loss)/income from operations
Other income/(expenses)
Net income (loss)
For the three months ended
For the 12 months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
$
$
$
$
$
$
$
1,410
711
519
10,713
$
$
$
$
(10,194) $
(315) $
(10,509) $
862
751
3,062
2,347
716
219
935
$
$
$
$
$
$
$
4,934
2,841
6,400
24,367
$
$
$
$
(17,967) $
(5,383) $
(23,350) $
4,097
2,634
6,448
7,932
(1,483)
(10,934)
(12,418)
Weighted average shares outstanding
193,629,116
71,782,223
134,171,509
58,556,121
Net income (loss) per share
$
(0.05) $
(0.01) $
(0.17) $
(0.21)
* As a result of a business combination completed on March 15, 2017, pre-consolidation THCX shares were exchanged at a rate of six to one. Shares after this date have been
stated using post-consolidation figures. (See Note 4 to the consolidated financial statements for the year ended July 31, 2018.)
Revenue
Revenue
Total gram equivalents sold
For the three months ended
For the 12 months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
$
1,410 $
862
$
4,934
$
4,097
152,288
95,735
538,886
405,164
Revenue for the fourth quarter ended July 31, 2018 increased 64% to $1,410 compared to $862 in the same period in fiscal 2017. Higher
revenue was driven mainly by increased Elixir and H2 (mid-range line) sales volume, as Elixir was introduced in late Q4 ’17 and H2 sales
volume increased by 70%. Compared to the prior quarter, the sequential revenue increase was 14%, reflecting a higher total of volume
sold, primarily driven by a 31% increase in oil sales.
Sales volume increased 59% to 152,288 gram equivalents, compared to 95,735 in the same prior year period, due to an increase in our oil-
based products as the product mix purchased by customers shifted towards smoke-free alternatives. Total dried grams sold increased 33%.
Revenue per gram equivalent increased to $9.26 as compared to $9.00 in the same prior year period, mainly as a result of higher sales of
our Elixir product line, which contributes a higher revenue per gram equivalent than dried product.
On a sequential basis, sales volume increased 14% compared to the third quarter of fiscal 2018, essentially for the same reasons as
noted above.
For the 12 months ended July 31, 2018, revenue increased 20% to $4,934 compared to $4,097 in the same period in fiscal 2017. Sales
volume increased 33% to 538,886 gram equivalents, compared to 404,158 in the same prior year period.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Cost of Sales
Cost of goods sold includes the direct costs of materials and labour related to inventory sold, and includes harvesting, processing,
packaging and shipping costs.
Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to
cost of sales.
Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost
to complete and selling costs and includes certain management estimates.
For the three months ended
For the 12 months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
Cost of sales
$
700
$
Loss on write-down of inventory
Fair value adjustment on sale of inventory
Fair value adjustment on biological assets
Adjustment to net realizable value of inventory
Total fair value adjustment
$
–
455
(1,171)
906
190
111
139
78
(3,003)
–
$
2,093
$
1,463
–
2,289
(7,340)
1,491
613
577
(5,004)
–
$
(2,925) $
(3,560) $
(4,427)
Cost of sales for the quarter ended July 31, 2018 was $700, compared to $111 for the same quarter ended July 31, 2017. Included in
the cost of sales for the quarter ended July 31, 2017 is the $139 write-down of inventories due to the Company’s voluntary recall in
May 2017 and water-damaged inventory, which when excluded yields additional cost of sales of $613 for the 12 months ended July 31,
2017. The increase in cost of sales is the result of increased sales volumes and an increase to transformation, packaging and shipping costs.
Fair value adjustment on the sale of inventory for the fourth quarter ended July 31, 2018 was $455 compared to $78 for the same quarter
ended July 31, 2017. This is due to the increase in production scale and total sales. The adjustment to net realizable value of inventory
increased from the same quarter ended July 31, 2017 to $906 due to the decrease in the estimated market selling price input of inventory
valuation. This is due to the onset of the adult-use market and reflects competitive market prices. The increase in the 12 months ended
July 31, 2018 adjustment of $1,491 is also due to the above.
Fair value adjustment on biological assets for the fourth quarter ended July 31, 2018 was ($1,171) compared to ($3,003) for the same
quarter ended July 31, 2017. This is due to a significant decrease in the average dried gram market selling price input due to the onset of the
adult-use market. This decrease is offset by the increase in the total number of plants as the first harvests of the B6 greenhouse began in
July 2018. The increase in scale and total plants on hand is the result of preparing for the adult-use market, which began October 17, 2018.
Operating Expenses
General and administration
Marketing and promotion
Stock-based compensation
Amortization of property, plant and equipment
Amortization of intangible assets
For the three months ended
For the 12 months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
$
4,300
$
1,206
$
9,374
$
3,807
1,933
421
252
749
193
135
64
8,335
4,997
896
765
3,609
3,072
659
360
232
Total
$
10,713
$
2,347
$
24,367
$
7,932
Operating expenses include marketing and promotion, general and administrative, research and development, stock-based compensation,
and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries
for marketing and promotion staff, general corporate communications expenses, and research and development costs. General and
administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including
legal, insurance and professional fees.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4,300 in the fourth quarter, compared to $1,206 for the same period in fiscal 2017.
This increase reflects the general growing scale of our operations, including an increase in general, finance and administrative staffing
and additional rental space. Consulting and professional fees increased by $1,904 and $728, respectively, as a result of the increased
financial reporting and control-based regulatory requirements accompanying public status on the TSX-V and subsequently the TSX, as well
as increased compliance costs as a publicly listed company.
For the 12 months ended July 31, 2018, general and administrative expenses increased to $9,374 compared to $3,609 for the same period
in fiscal 2017. The increase is consistent with the explanation as stated above.
MARKETING AND PROMOTION
Marketing and promotion expenses increased to $3,807 in the fourth quarter, compared to $749 for the same period in fiscal 2017. This
primarily reflects additional marketing and promotional events undertaken in the quarter as we build brand recognition and establish HEXO
in the recreational cannabis market. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well
as advertisement costs. This is consistent with our focus to prepare for the legalization of the adult recreational market.
For the 12 months ended July 31, 2018, marketing and promotion expenses increased to $8,335, compared to $3,072 for the same period
in fiscal 2017. The increase is consistent with the explanation as stated above.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Amortization of property, plant and equipment increased to $421 in the fourth quarter, compared with $135 for the same period in
fiscal 2017. The increase is the direct result of the Company’s newly built greenhouses and cultivation equipment becoming operational.
Additionally, increases to cultivation and production equipment were incurred in order to support the larger production demands.
For the 12 months ended July 31, 2018, property, plant and equipment depreciation expenses increased to $896, compared to $360 for the
same period in fiscal 2017. The increase is consistent with the explanation as stated above.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $252 in the fourth quarter, compared with $64 for the same period in fiscal 2017. The increase
is the result of a change in the expected useful life of certain software as we prepared for the implementation of a new ERP system, which
will replace certain software programs we currently use and the establishment of an online sales platform.
For the 12 months ended July 31, 2018, intangible asset depreciation expenses increased to $765, compared to $232 for the same period in
fiscal 2017. The increase is consistent with the explanation as stated above.
Loss from Operations
Income/(loss) from operations for the fourth quarter was ($10,194), compared to $716 for the same period in fiscal 2017. The increased loss
from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepare for the legalization of the
adult recreational market.
For the 12 months ended July 31, 2018, loss from operations was ($17,967), compared to ($1,483) in the same prior year period for the
same reasons as the change for the three-month period.
Other Income/Expenses
Other income/(expense) was ($315) and ($5,383) for the three and 12 months ended July 31, 2018 ($219 and ($10,934) for the three and
12 months ended July 31, 2017, respectively). Revaluation of financial instruments of ($5,091) in the latest quarter reflects the revaluation of
an embedded derivative related to $3,275 of USD convertible debentures issued and converted in the prior year. Additionally, we incurred
interest income for the three months ended July 31, 2018 and July 31, 2017 of $854 and $61, respectively. Interest expenses of $Nil and
$75 were realized for the three months ended July 31, 2018 and July 31, 2017, respectively. This increase reflects the interest generated
from the acquired short-term investments during the quarter ended July 31, 2018.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Non-IFRS Measures
Weighted average cash cost of dried inventory sold per gram
Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing
of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality
assurance and testing of inventory sold in the period.
As there are no standardized methods of calculating this non-IFRS measure, our methods may differ from those used by others, and
accordingly, the use of this measure may not be directly comparable to similarly titled measures used by others. Accordingly, these non-
IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with IFRS.
Weighted average cash cost of dried inventory sold is calculated as follows:
Cost of goods sold
Less:
Order fulfillment costs1
Cannabis oil conversion costs
Recall of inventory write-down
Number of dried grams sold
Weighted average cash cost of dried
inventory sold (g)
Q4 ’18
Q3 ’18
Q2 ’18
Q1 ’18
700
$
479
$
451
$
463
$
(453) $
(133) $
–
114
$
$
(335) $
(43) $
–
101
$
$
(286) $
(41) $
–
124
$
$
(307) $
(32) $
–
124
$
$
Q4 ’17
663
(273)
(37)
(139)
214
127,252
114,968
127,769
115,768
95,735
0.90
$
0.88
$
0.97
$
1.07
$
2.23
$
$
$
$
$
$
1 Order fulfillment costs are excluded from the calculation of weighted average cash cost of dried inventory sold as this non-IFRS metric is utilized to demonstrate the
burdened cash cost of producing, cultivating and bringing a gram of dried inventory to the state of a finished good to be sold during the period.
Weighted average cash cost of dried inventory sold per gram declined 60% year over year to $0.90 for the fourth quarter ended July 31,
2018, compared to $2.23 for the same prior year quarter. Cost per gram sold has been trending downward cumulatively as a result of
improvements in the cultivation processes and economies of scale resulting from the full utilization of a higher production capacity.
The weighted average cash cost of dried inventory sold increased slightly to $0.90 from $0.88 as compared to the three months ended
April 30, 2018. This trend is expected to continue in the short term, as the Company moves towards full efficiencies of scale and utilization
of the new facilities as well as beginning increased levels of production to meet the demand of the adult recreational market.
During the prior year quarter ended July 31, 2017, the Company recorded a write-down of inventories related to the Company’s voluntary
recall and water-damaged goods.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Biological Assets – Fair Value Measurements
As at July 31, 2018, the changes in the carrying value of biological assets are as follows:
Carrying amount, beginning of period
Production costs capitalized
Net increase in fair value due to biological transformation less cost to sell
Transferred to inventory upon harvest
Carrying amount, end of period
July 31, 2018
July 31, 2017
$
1,504
$
993
7,340
(7,505)
$
2,332
$
121
659
5,004
(4,280)
1,504
Our biological assets consist of cannabis plants, from seeds all the way through to mature plants. As at July 31, 2018, the carrying amount
of biological assets consisted of $6 in seeds and $2,326 in cannabis plants ($6 in seeds and $1,498 in cannabis plants as at July 31, 2017).
The increase in the carrying amount of biological assets is attributable to an increase in plants on hand and offset by the market selling price
decrease as a result of the adult-use market. The significant estimates used in determining the fair value of cannabis on plants are as follows:
• yield by plant;
• stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value
per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets which have not yet been harvested;
• percentage of costs incurred for each stage of plant growth; and
• fair value selling price per gram less cost to complete and cost to sell.
We view our biological assets as Level 3 fair value estimates and estimate the probability of certain harvest rates at various stages
of growth. As at July 31, 2018, it is expected that our biological assets will yield approximately 4,373,775 grams (July 31, 2017 –
700,169 grams). Our estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes
in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on
selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of
growth at period end. Stage of growth is determined by reference to the plant’s life relative to the stages within the harvest cycle.
Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below:
Unobservable inputs
Input values
Sensitivity analysis
Average selling price
Obtained through actual retail prices
on a per strain basis
Yield per plant
Obtained through historical harvest
cycle results on a per strain basis
Stage of growth
Obtained through the estimates of stage
of completion within the harvest cycle
$4.66 per dried gram
50–235 grams per plant
Average of 32% completion
An increase or decrease of 5% applied to the
average selling price would result in a change
of approximately $329,000 to the valuation.
An increase or decrease of 5% applied to the
average yield per plant would not result in a
material change in valuation.
An increase or decrease of 5% applied to
the average stage of growth per plant would
result in a change of approximately $320,000
in valuation.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Quarterly Results
The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter
ended July 31, 2018. The information has been derived from our unaudited consolidated financial statements, which in management’s
opinion have been prepared on a basis consistent with the consolidated financial statements for the year ended July 31, 2018. Past
performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.
Revenue
Net income (loss)
Income (loss) per share – basic
Income (loss) per share – fully diluted
Revenue
Net income (loss)
Income (loss) per share – basic
Income (loss) per share – fully diluted
Q4 ’18
July 31, 2018
Q3 ’18
April 30, 2018
Q2 ’18
January 31, 2018
Q1 ’18
October 31, 2017
$
1,410
$
1,240
$
1,182
$
(10,194)
(0.05)
(0.05)
(1,971)
(0.01)
(0.01)
(8,952)
(0.10)
(0.10)
1,102
(1,918)
(0.03)
(0.03)
Q4 ’17
July 31, 2017
Q3 ’17
April 30, 2017
Q2 ’17
January 31, 2017
Q1 ’17
October 31, 2016
$
862
935
0.02
0.01
$
1,182
$
914
$
1,139
(11,808)
(0.17)
(0.17)
(1,114)
(0.02)
(0.02)
(430)
(0.01)
(0.01)
Financial Position
The following table provides a summary of our interim condensed financial position as at July 31, 2018 and July 31, 2017:
Total assets
Total liabilities
Share capital
Share-based payment reserve
Contributed surplus
Warrants
Deficit
Total Assets
July 31, 2018
July 31, 2017
$
334,997
$
12,124
347,233
6,139
–
12,635
(43,134)
56,179
23,739
45,159
1,562
1,775
3,728
(19,785)
Total assets increased to $334,997 as at July 31, 2018 from $56,179 as at July 31, 2017, primarily due to financings, capital asset additions
related to facility expansion and an increase in inventory as we move closer to the opening of the adult-use market. Since July 31, 2017,
we have raised gross proceeds of approximately $218,500 through two financings and $74,366 raised gross proceeds through exercised
warrants. At July 31, 2018, we had a cash balance of $39,342 and short-term investments of $205,447.
Total Liabilities
Total liabilities decreased to $12,124 as at July 31, 2018 from $23,739 as at July 31, 2017, primarily due to the conversion of the unsecured
convertible debentures from our July 2017 financing, partially offset by an increase to accounts payable as operations continue to grow. Total
liabilities include a warrant liability of $3,130 as at July 31, 2018, from $1,356 as at July 31, 2017, recorded at fair value, related to a private
placement completed in the prior year. The increase in the value of the fair value of the warrant liability is the result of changes in the share
price and foreign exchange rate in the period, partially offset by the reduction in the number of warrants outstanding.
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Share Capital
Share capital increased to $347,233 as at July 31, 2018 from $45,159 as at July 31, 2017, primarily due to the closing of the January 2018
financing, the conversion of the unsecured convertible debentures from our July 2017 and November 2017 financings, as well as warrant
exercises. During the three months period ended, the Company finalized the acceleration of the November 2017 outstanding warrants
expiry date. The resulting exercised warrants increased share capital by $40,873.
Liquidity and Capital Resources
Liquidity
Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund operating and organic growth
requirements, and to meet contractual obligations. Our ability to reach profitability is dependent on successful implementation of our
business strategy. While management is confident in the future success of the business, there can be no assurance that our products will
gain adequate market penetration or acceptance or generate sufficient revenue to reach profitability.
As at July 31, 2018, we had $39,342 of cash and cash equivalents on hand, $205,447 of short-term investments, $644 of trade receivables,
and $8,995 of accounts payable and accrued liabilities. As at July 31, 2017, we had $38,453 of cash and cash equivalents on hand, $2,872
of short-term investments, $351 of trade receivables, $1,672 of accounts payable and accrued liabilities, and $20,639 in 8% unsecured
convertible debentures.
Liquidity
Operating activities
Financing activities
Investing activities
Operating Activities
12 months ended
July 31, 2018
$
(22,185)
283,150
(260,077)
12 months ended
July 31, 2017
$
(5,311)
48,172
(6,339)
Net cash used in operating activities for the 12 months ended July 31, 2018 was $22,185 as a result of the net loss for the 12 months
ended of $23,350, and a decrease in non-cash working capital of $7,213, partially offset by non-cash expense of $8,738. In the same prior
year period, cash used in operating activities was $5,311, reflecting the net loss of $12,418, net non-cash income of $5,890, and a decrease
in working capital of $1,217. The change in cash flow reflects $7,340 of an unrealized change in the fair value of biological assets and
increased inventory stock and prepaid expenses of $2,503 and $4,003, respectively.
Financing Activities
Net cash received from financing activities for the 12 months ended July 31, 2018 was $283,150, reflecting the issuance of $149,500 in
units from the January 2018 equity financing, $69,000 from the November 2017 convertible debenture financing, and $74,366 related to the
exercise of warrants.
Investing Activities
For the 12 months ended July 31, 2018, we used $260,077 for investing activities, primarily due to the acquisition of $202,575 short-term
investments. The balance was used in the construction of our new 250,000 sq. ft. greenhouse and the continuing construction of our
1,000,000 sq. ft. greenhouse of approximately $45,721. During the period, we continued additions to our software, licenses and online
platforms of $1,780. Also during the period, a $10,000 convertible note receivable was issued to Fire & Flower.
Capital Resources
As at July 31, 2018, total current assets less accounts payable totalled $267,625. The exercise of all the issued and outstanding warrants, as
at July 31, 2018, would result in an increase in cash of approximately $115,251, and the exercise of all stock options would increase cash by
approximately $43,459.
Upon the completion of the Molson joint venture transaction, the Company issued 11,500,000 common share warrants with an exercise
price of $6.00 per warrant. This would increase cash by approximately $69,000.
Management believes that current working capital provides sufficient funds to fund current expansion projects and meet contractual
obligations for the next 12 months. We periodically evaluate the opportunity to raise additional funds through the public or private placement
of equity capital to strengthen our financial position and to provide sufficient cash reserves for growth and development of the business.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines the number of issued and
outstanding common shares, warrants and options as at July 31, 2017, July 31, 2018 and October 25, 2018.
Common shares
Warrants
Options
Total
October 25, 2018
July 31, 2018
July 31, 2017
197,092,917
193,629,116
76,192,990
34,931,058
14,938,837
26,425,504
20,994,123
14,388,066
5,748,169
246,962,812
234,442,686
102,935,282
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements.
We have certain contractual financial obligations related to service agreements and construction contracts for the construction in progress
shown in Note 8 of the consolidated financial statements and the accompanying notes for the three and 12 months ended July 31, 2018.
These contracts have optional renewal terms that we may exercise at our option. The annual minimum payments payable under these
contracts over the next five years are as follows:
Fiscal year
Amount
2019
2020
2021
2022
Total
$
61,766
$
891
$
854
$
801
$
64,311
Financial Risk Management
We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The
main objectives of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in
relation to these risks. The principal financial risks to which we are exposed are described below.
Interest Risk
Our exposure to interest rate risk only relates to any investments of surplus cash. We may invest surplus cash in highly liquid investments
with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at July 31, 2018, we had short term
investments of $205,447.
Credit Risk
Credit risk is the risk of financial loss to us if a customer or counterparty to a financial instrument fails to meet its contractual obligations and
arises principally from our trade receivables and convertible note receivable. As at July 31, 2018, we are exposed to credit-related losses in
the event of non-performance by the counterparties.
We provide credit to our customers in the normal course of business and have established credit evaluation and monitoring processes to
mitigate credit risk. Since the majority of the sales are transacted with clients covered under various insurance programs, we have limited
credit risk.
Credit risk from the convertible note receivable arises from the possibility that principal and/or interest due may become uncollectible. The
Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, short-term investments, trade receivables and convertible note receivable represents
the maximum exposure to credit risk and as at July 31, 2018, this amounted to $255,432. The cash and short-term investments are held
with well-established financial institutions in Canada. Since our inception, no losses have been incurred in relation to cash held by our
financial institution. The trade receivables balance is held with one of the largest medical insurance companies in Canada.
33
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due. We manage our liquidity risk by
reviewing on an ongoing basis our capital requirements. As at July 31, 2018, we had $244,789 of cash and short-term investments.
We are obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $8,995
due in the next 12 months.
The carrying values of cash, trade receivables, accounts payable and accrued liabilities approximate their fair values due to their short term
to maturity.
Critical Accounting Assumptions
Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in
applying these accounting policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of
contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological assets
and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets.
Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note 3 of the Company’s annual
audited consolidated financial statements for the fiscal year ended July 31, 2018, which is available under HEXO’s profile on SEDAR.
Upcoming Changes in Accounting Policies
The following are new and revised IFRS standards in issue, but not yet effective.
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. The Company adopted IFRS 9 effective August 1, 2018. The Company has completed its assessment of the impact
of this new standard and expects no changes.
IFRS 7, Financial Instruments: Disclosure
IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective
on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018. The Company adopted the amendments
to IFRS 7 on August 1, 2018 and does not expect the implementation will result in a significant effect to the financial statements.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which
is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying
performance obligations, principal versus agent considerations, and licensing. The Company adopted IFRS 15 effective August 1, 2018. The
Company has completed its assessment of the impact of this new standard and has noted beyond the required additional disclosures, there
exist no material changes to the financial statements or required retroactive adjustments to the retained earnings.
IFRS 16, Leases
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is assessing the
impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial statements.
34
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Related Party Transactions
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling our operations,
directly or indirectly. Our key management personnel are the members of the executive management team and Board of Directors, who
collectively control approximately 8.77% of the outstanding common shares as at July 31, 2018 (July 31, 2017 – 25.11%).
Compensation provided to key management for the three and 12 months ended July 31, 2018 and July 31, 2017 was as follows:
Salary and/or consulting fees
Stock-based compensation
Total
For the three months ended
For the 12 months ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
$
$
739
$
1,272
2,011
$
438
231
669
$
$
2,244
$
3,836
6,080
$
1,270
512
1,782
Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will
vest quarterly over two years thereafter.
On July 11, 2018, the Company granted certain of its directors and officers a total of 4,325,000 stock options with an exercise price of $4.89.
On April 16, 2018, the Company granted certain executives of the Company a total of 845,000 stock options with an exercise price of $4.27.
On March 12, 2018, the Company granted certain executives of the Company a total of 325,000 stock options with an exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives a total of 1,750,000 stock options with an exercise price of
$2.69, half of which vested immediately and the balance over a three-year period.
On September 8, 2017, the Company granted certain of our executives a total of 650,000 stock options with an exercise price of $1.37.
The Company leased a building to a related party for $0.7 per month as part of a usufruct agreement. The related party used this property
as a personal residence. On December 2, 2016, we reached an agreement with the related party to terminate the usufruct. In exchange, we
paid the related party $46. Gaining access to this building provides us with additional office space and thereby reduces the need to rent or
build additional offices in the short term.
Subsequent to the quarter ended July 31, 2018, the Company announced the acquisition of a new facility. The building is owned by
Belleville Complex Inc., a joint venture in which HEXO will hold a 25% interest and Olegna will hold a 75% interest. Olegna is controlled
by a HEXO director and a non–arm’s length related party. In addition to its initial lease of 500,000 sq. ft. of the space under a long-term
lease, HEXO will have rights of first offer and first refusal to lease the remaining space in the building. As part of the transaction, HEXO
has loaned $20,000 to Belleville Complex to acquire the building. The loan will be repaid within 120 days from September 7, 2018, and as of
October 7, 2018, bore interest at an annual rate of 4%, which interest shall be payable monthly. The loan is secured by a first mortgage over
the building. HEXO has also agreed to be the anchor tenant of the facility for a period of 20 years.
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration
established and agreed by the related parties.
Internal Controls over Financial Reporting
In accordance with National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, management is
responsible for establishing and maintaining adequate disclosure controls and procedures (“DCP”) and internal control over financial
reporting (“ICFR”). On June 22, 2018, the Company commenced trading on the TSX, graduating from the TSX Venture Exchange. The
Company’s CEO and CFO will be required to file certifications relating to DCP and ICFR for the Company in connection with its interim
and annual filings, commencing with the three months ended October 31, 2018, the second reporting period ended after the Company
became a non-venture issuer on the TSX.
35
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Risk Factors
Our overall performance and results of operations are subject to various risks and uncertainties which could cause actual performance, results
and achievements to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including,
without limitation, the following factors, which are discussed in our Annual Information Form dated October 26, 2018 available under our profile
on www.sedar.com, which risk factors are incorporated by reference into this document, and should be reviewed in detail by all readers:
• We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may
not be realized for a number of reasons. An investment in our securities is speculative and involves a high degree of risk and uncertainty.
• Reliance on management’s and key persons’ ability to execute on strategy. This exposes us to management’s ability to perform, as well
as the risk of management leaving the Company.
• We face intense competition from licensed producers and other companies, some of which may have greater financial resources and
more industry, manufacturing and marketing experience than we do.
• The number of licences granted, and the number of licensed producers ultimately authorized by Health Canada could have an impact
on our operations. We expect to face additional competition from new market entrants that are granted licences under the ACMPR or
existing licence holders which are not yet active in the industry.
• We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to
manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train
and manage our employee base.
• We maintain various types of insurance such as, but not limited to, errors and omissions insurance; directors’ and officers’ insurance;
property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo
insurance. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on us in
terms of damages awarded and the impact on our reputation.
• Given the nature of our business, we may from time to time be subject to claims or complaints from investors or others in the normal
course of business which could adversely affect the public’s perception of the Company.
• We may become party to litigation from time to time in the ordinary course of business which could adversely affect our business.
• Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition of conditions on licenses
to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition
of fines and censures.
• Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these
governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot
predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that
may be required by governmental authorities.
• While to the knowledge of our management, it is currently in compliance with all laws, regulations and guidelines relating to the
marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis and also including laws
and regulations relating to health and safety, the conduct of operations and the protection of the environment, changes to such laws,
regulations and guidelines due to matters beyond our control may cause adverse effects to our operations.
• Our business operations are dependent on our licence under the ACMPR. The licence must be renewed by Health Canada. Our current
licence expires on October 15, 2019. Failure to comply with the requirements of the licence or any failure to renew the licence would
have a material adverse impact on our business, financial condition and operating results.
• Our activities and resources are currently primarily focused on our production facilities on the Gatineau campus, and we will continue
to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau campus would have a
material and adverse effect on our business, financial condition and prospects.
• We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve profitability.
36
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A • Our growth strategy contemplates outfitting the Company’s multiple facilities with additional production resources. There is a risk that
these additional resources will not be completed on time, on budget, or at all.
• A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any agriculture business, such as
disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers.
• Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Rising or volatile energy
costs may adversely impact our business and our ability to operate profitably.
• We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the
cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory
investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance
that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be
favourable to the cannabis market or any particular product, or consistent with earlier publicity.
• As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent risk of exposure to
product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition,
the manufacture and sale of our products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties,
product contamination, unauthorized use by consumers or other third parties.
• Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons,
including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging
safety and inadequate or inaccurate labelling disclosure.
• Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to our growing
operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or
economics of the supply chain for key inputs could materially impact our business, financial condition and operating results.
• We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources
at this early stage of the medical marijuana industry in Canada.
• We have no earnings or dividend record and may not pay any dividends on our common shares in the foreseeable future.
• Our common shares are listed on the TSX; however, there can be no assurance that an active and liquid market for the common shares
will be maintained, and an investor may find it difficult to resell such shares.
• The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, including
governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our
business prospects, as well as many other factors that are beyond.
• We may issue additional common shares in the future, which may dilute a shareholder’s holdings in the Company.
• Our operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges
to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety.
We will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure
to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in
restrictions on our manufacturing operations.
• The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities
imposed by Health Canada.
• In the fiscal year 2018, the Company initiated the implementation of new ERP systems. The implementation is expected to be completed
in the fiscal year ended July 31, 2019. Upon full commencement of the implementation, the scoping, requirements definition, business
process definition, design and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays
and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting.
37
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A • We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal
activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities
to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and
abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data.
• Our TSX’s listing conditions required us to deliver an undertaking confirming that, while listed on the TSX, we will only conduct the
business of production, acquisition, sale and distribution of cannabis in Canada as permitted under the Health Canada license.
• The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations that may increase the
risk of non-compliance, which could adversely impact the Company, its market perception and valuation.
• The Company is subject to changed rules and regulations as implemented by a number of governmental and self-regulated bodies,
including, but not limited to, the Canadian Securities Administration, the TSX and the International Accounting Standards Board. These
rules and regulations continue to evolve in scope and complexity, creating many new requirements.
38
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Independent Auditors’ Report
To the Shareholders of HEXO Corp.:
We have audited the accompanying consolidated financial statements of HEXO Corp., which comprise the
consolidated statements of financial position as at July 31, 2018 and July 31, 2017, and the consolidated
statements of loss and comprehensive loss, changes in shareholders' equity and cash flows for the years then
ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, 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.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of HEXO Corp. as at July 31, 2018 and July 31, 2017, and its financial performance and its cash flows for the
years then ended in accordance with International Financial Reporting Standards.
Ottawa, Ontario
October 25, 2018
Chartered Professional Accountants
Licensed Public Accountants
39
800 – 1600 CARLING AVE, OTTAWA ON, K1Z 1G3
T: 613.691.4200 F: 613.726.9009 MNP.ca
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Consolidated Statements of
Financial Position
(in Canadian dollars)
As at
Assets
Current assets
Cash and cash equivalents
Short-term investments
Trade receivables
Commodity taxes recoverable
Convertible note receivable
Prepaid expenses
Inventory
Biological assets
Property, plant and equipment
Intangible assets and other longer-term assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Interest payable
Warrant liability
Unsecured convertible debentures
Shareholders’ equity
Share capital
Share-based payment reserve
Contributed surplus
Warrants
Deficit
Approved by the Board
/s/ Jason Ewart, Director
/s/ Michael Munzar, Director
The accompanying notes are an integral part of these consolidated financial statements.
40
Note
July 31, 2018
July 31, 2017
5
13
6
7
8
9
10
10, 11
10
11
11
11
$ 39,341,688 $ 38,452,823
205,446,830
2,871,550
643,596
4,237,465
10,000,000
351,207
495,783
–
4,203,693
200,677
10,414,624
3,689,239
2,331,959
1,504,186
276,619,855
47,565,465
54,333,051
5,849,695
4,044,527
2,763,764
$ 334,997,433 $ 56,178,924
$
8,994,789 $
1,672,406
–
72,511
3,129,769
1,355,587
12,124,558
3,100,504
–
20,638,930
$ 12,124,558 $ 23,739,434
$ 347,232,724 $ 45,159,336
6,139,179
1,561,587
–
1,774,880
12,635,339
3,728,255
(43,134,367)
(19,784,568)
$ 322,872,875 $ 32,439,490
$ 334,997,433 $
56,178,924
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Consolidated Statements of
Loss and Comprehensive Loss
(in Canadian dollars)
Note
July 31, 2018
July 31, 2017
$
4,933,952 $
4,096,841
6
6
7
6
6
11
8
9
16
10
4
2,093,043
1,462,522
2,840,909
2,288,975
2,634,319
576,872
(7,339,566)
(5,003,822)
1,491,070
–
–
613,074
$
6,400,430 $
6,448,195
9,374,438
3,608,595
8,335,083
3,072,802
4,996,513
895,714
765,238
658,620
359,967
231,685
$ 24,366,986 $
7,931,669
(17,966,556)
(1,483,474)
(5,091,460)
(9,169,275)
–
(951,024)
19, 20
(649,714)
10
–
(228,012)
(1,529,408)
2,115,351
–
(56,356)
(326,981)
(522,618)
92,158
$ (23,349,799) $
(12,417,570)
$
(0.17) $
(0.21)
12
134,171,509
58,556,121
For the years ended
Revenue
Cost of goods sold
Gross margin before fair value adjustments and amortization
Fair value adjustment on sale of inventory
Fair value adjustment on biological assets
Adjustment to net realizable value of inventory
Loss on write-down of inventory
Gross margin before amortization
Operating expenses
General and administrative
Marketing and promotion
Stock-based compensation
Amortization of property, plant and equipment
Amortization of intangible assets
Loss from operations
Revaluation of financial instruments gain/(loss)
RTO listing expense
Loss on investment
Loss on disposal of assets
Foreign exchange gain/(loss)
Interest expense
Interest income
Net loss and comprehensive loss attributable to shareholders
Net loss per share, basic and diluted
Weighted average number of outstanding shares
Basic and diluted
The accompanying notes are an integral part of these consolidated financial statements.
41
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Consolidated Statements of
Changes in Shareholders’ Equity
(in Canadian dollars)
Exercise of warrants
10, 11
27,897,087
75,254,494
For the years ended
July 31, 2018 and 2017
Balance, August 1, 2017
Issuance of 7% unsecured
convertible debentures
Issuance of units
Issuance costs
Issuance of broker/finder
warrants
Conversion of 8%
unsecured convertible
debentures
Conversion of 7%
unsecured convertible
debentures
Exercise of stock options
Exercise of broker/finder
warrants
Stock-based compensation
Net loss
Balance at July 31, 2018
Balance, August 1, 2016
Issuance of units
Private placement
Concurrent financing
Shares issued for reverse
acquisition
Share issuance costs
Issuance of broker/finder
warrants
Exercise of stock options
11
11
11
11
11
11
11
11
Exercise of warrants
10, 11
Issuance of 8% unsecured
convertible debentures
Conversion of secured
convertible debentures
Conversion of unsecured
convertible debentures
Stock-based compensation
Net loss
10
10
10
11
Note
Number
common shares
Share capital
Share-based
payment reserve
Warrants
Contributed
surplus
Deficit
Shareholders’
equity
76,192,990
$ 45,159,336
$
1,561,587
$
3,728,255
$
1,774,880
$ (19,784,568)
$ 32,439,490
10
11
11
11
10
10
11
–
–
37,375,000
139,029,262
–
–
(7,342,461)
–
15,853,887
23,462,232
31,384,081
61,555,345
–
–
–
–
–
–
907,273
1,008,775
(418,921)
3,529,770
7,283,084
10,470,738
–
(768,186)
(505,767)
2,351,615
–
–
–
–
–
10,812,854
149,500,000
(8,616,414)
2,351,615
–
(1,742,779)
–
21,719,453
4,018,798
9,105,741
–
–
–
–
4,996,513
–
–
–
193,629,116
$ 347,232,724
$
6,139,179
$ 12,635,339
$
–
–
–
–
(5,029,415)
(1,647,438)
(6,809,418)
–
–
–
–
–
–
–
–
–
–
–
54,745,927
589,854
70,225,079
7,458,303
4,996,513
(23,349,799)
(23,349,799)
$ (43,134,367)
$ 322,872,875
39,305,832
$ 12,756,262
$
937,065
$
1,370,579
$
89,601
$
(7,366,998)
$
7,786,509
338,274
192,253
8,571,432
5,000,002
20,010,000
15,007,501
–
–
–
1,837,770
1,378,332
70,253
–
–
(2,246,704)
–
–
–
162,504
828,694
1,033,772
136,603
(104,351)
–
–
4,678,494
11,570,911
459,990
330,404
–
–
–
–
658,620
–
–
–
–
–
61,453
–
–
–
–
1,236,428
–
(93,858)
–
–
–
–
–
–
–
–
1,084,433
1,742,779
–
–
69,220
(57,500)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
253,706
5,000,002
15,007,501
1,448,585
(2,246,704)
1,236,428
32,252
939,914
2,827,212
11,570,911
342,124
658,620
(12,417,570)
(12,417,570)
Balance at July 31, 2017
76,192,990
$ 45,159,336
$
1,561,587
$
3,728,255
$
1,774,880
$ (19,784,568)
$ 32,439,490
Outstanding number of shares has been retrospectively adjusted to reflect a share exchange in connection with the Qualifying Transaction (Note 1) six common shares of the
Company for every one share of The Hydropothecary Corporation, which was effected in March 2017.
The accompanying notes are an integral part of these consolidated financial statements.
42
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Consolidated Statements of
Cash Flows
(in Canadian dollars)
For the years ended
Operating activities
Net loss and comprehensive loss
Items not affecting cash
Amortization of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
Unrealized revaluation gain on biological assets
Foreign exchange
Fair value adjustment on inventory sold
Stock-based compensation
Non-cash interest expense
Accretion of convertible debt
RTO listing expense
Revaluation of foreign currency denominated warrants
Changes in non-cash operating working capital items
Trade receivables
Commodity taxes recoverable
Prepaid expenses
Inventory
Accounts payable and accrued liabilities
Interest payable
Cash and cash equivalents used in operating activities
Financing activities
Issuance of units
Issuance of common shares – Private Placement
Issuance of common shares – Concurrent Financing
Issuance of common shares – RTO
Issuance of secured convertible debentures
Issuance costs
Exercise of stock options
Exercise of warrants
Issuance of unsecured convertible debentures
Cash provided by financing activities
Investing activities
Acquisition of short-term investment
Convertible note receivable
Acquisition of property, plant and equipment
Purchase of intangible assets
Cash used in investing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
43
Note
July 31, 2018
July 31, 2017
$
(23,349,799)
$
(12,417,570)
8
9
7
11
10
10
11
11
11
10
10
11
9
5
13
8
9
895,714
765,238
–
(7,339,566)
–
2,288,975
4,996,513
312,043
1,368,014
–
5,091,460
(292,389)
(3,741,682)
(4,003,016)
(2,502,567)
3,399,059
(72,511)
(22,184,514)
149,500,000
–
–
–
69,000,000
(10,305,552)
589,854
74,366,104
–
283,150,406
(202,575,280)
(10,000,000)
(45,721,503)
(1,780,244)
(260,077,027)
888,865
38,452,823
359,967
231,685
56,356
(5,663,161)
(119,429)
–
658,620
198,533
201,447
796,475
9,169,275
692,158
(512,221)
(160,044)
1,121,828
75,034
–
(5,311,047)
503,717
5,000,002
15,007,501
647,214
4,403,893
(3,239,937)
32,252
716,926
25,100,000
48,171,568
(2,871,550)
–
(3,105,919)
(361,683)
(6,339,152)
36,521,369
1,931,454
$
39,341,688
$
38,452,823
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Notes to the Consolidated
Financial Statements
For the fiscal years ended July 31, 2018 and 2017
(in Canadian dollars)
1. Description of Business
HEXO Corp. (formerly The Hydropothecary Corporation), formerly BFK Capital Corp. (the “Company”), has one wholly owned subsidiary,
HEXO Operations Inc. (formerly 10074241 Canada Inc.) (“HOI”). HOI has three wholly owned subsidiaries: 167151 Canada Inc., Banta
Health Group and Coral Health Group (together “HEXO”). HEXO is a producer of cannabis and its site is licensed by Health Canada for
production and sale. Its head office is located at 240 – 490 Boulevard Sainte-Joseph, Gatineau, Quebec, Canada. The Company is a publicly
traded corporation, incorporated in Ontario. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”), under the
trading symbol “HEXO”.
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, HOI, 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.
(“HOI”). In connection with that amalgamation, HEXO 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 annual consolidated financial statements are in
the name of HEXO Corp. (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.
Shareholder approval of the Company’s name change to HEXO Corp. formerly The Hydropothecary Corporation occurred August 28, 2018.
See subsequent event details as presented in Note 24.
2. Basis of Presentation
Statement of Compliance
The annual consolidated financial statements have been prepared in compliance with International Financial Reporting Standards as issued
by the International Accounting Standards Board (“IFRS”).
These annual consolidated financial statements were approved and authorized for issue by the Board of Directors on October 25, 2018.
44
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Basis of Measurement and Consolidation
The annual consolidated financial statements have been prepared on a historical cost basis except for cash and cash equivalents, short-
term investments, biological assets, convertible note receivable, the warrant liability, and unsecured debenture 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, HOI (formerly 10074241 Canada Inc.). They also include 167151 Canada Inc., Banta
Health Group and Coral Health Group, three wholly owned subsidiaries of HEXO Operations Inc. They also include the accounts of 8980268
Canada Inc., a company for which HOI 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 annual 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 annual consolidated financial statements requires the use of certain critical accounting estimates, which requires
management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or
complexity, or areas where assumptions and estimates are significant to these annual consolidated financial statements, have been set out
in Note 3.
Functional and Presentation Currency
These annual consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its
subsidiaries.
3. Significant Accounting Policies
(a) Foreign Currency Translation
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets
and liabilities denominated in foreign currencies at the consolidated statement of financial position date are translated to Canadian dollars at
the foreign exchange rate applicable at that date. Realized and unrealized exchange gains and losses are recognized through profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate
at the date of the transaction.
(b) Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertibles into known amounts of cash
with original maturities of three months or less.
45
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A (c) Short-Term Investments
Short-term investments are comprised of liquid investments with maturities between three and 12 months. Short-term investments are
recognized initially at fair value and subsequently adjusted to fair value through profit or loss.
(d) Biological Assets
The Company measures biological assets consisting of cannabis plants using the income approach at fair value less costs to sell up to
the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. Biological assets are considered
Level 3 fair value estimates. The Company capitalizes all the direct and indirect costs as incurred related to the biological transformation
of the biological assets between the point of initial recognition and the point of harvest including labour-related costs, grow consumables,
materials, utilities, facilities costs, quality and testing costs. The identified capitalized direct and indirect costs of biological assets are
subsequently recorded within the line item “cost of goods sold” on the statement of loss and comprehensive loss in the period that the
related product is sold. Unrealized gains or losses arising from changes in fair value less cost to sell during the year are included in the
results of operations and presented on a separate line of statement of comprehensive loss of the related year.
(e) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories
of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the initial deemed cost of
the inventory. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value.
Subsequent costs include materials and labour involved in manicuring, drying, testing, irradiation, packaging and quality assurance. The
identified capitalized direct and indirect costs related to inventory are subsequently recorded within cost of goods sold on the statement
of loss and comprehensive loss at the time the product is sold, with the exclusion of realized fair value amounts included in inventory
sold, which are recorded as a separate line within gross margin before amortization on the statement of loss and comprehensive loss. Net
realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and
the estimated costs necessary to make the sale. Packaging and supplies are initially valued at cost and subsequently at the lower of cost
and net realizable value.
(f) Property, Plant and Equipment
Property, plant and equipment is measured at cost less accumulated amortization and impairment losses. Amortization is provided using
the following terms and method:
Land
Buildings
Leasehold improvements
Furniture and equipment
Not amortized
No term
Straight line
Straight line
Straight line
Cultivation and production equipment
Straight line
Vehicles
Computers
Construction in progress
Straight line
Straight line
Not amortized
5 to 20 years
Lease term
5 years
5 to 20 years
5 years
3 years
No term
An asset’s residual value, useful life and amortization method are reviewed at each financial year and adjusted if appropriate. When parts
of an item of equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and
equipment.
Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount
of the equipment and are recognized in profit or loss.
Construction in progress is transferred to property, plant and equipment when the assets are available for use and amortization of the
assets commences at that point.
46
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A (g) Finite Life Intangible Assets
Finite life intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. Amortization is
provided on a straight-line basis over the following terms:
Domain names
Health Canada licenses
Software
10 years
20 years
3 to 5 years
The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis.
(h) Investments at Cost
Investments in equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured are
recorded at cost.
(i) Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and intangible assets, are reviewed for impairment at the end of each financial
reporting period or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable
amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of
assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets
(the cash-generating unit, or “CGU”). The recoverable amount of an asset or a CGU is the higher of its fair value, less costs of disposal,
and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately
in profit or loss by the amount by which the carrying amount of the asset exceeds the recoverable amount. Where an impairment loss
subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the
carrying amount that would have been recorded had no impairment loss been recognized previously.
(j) Leased Assets
Leases are classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and rewards of
ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another
systematic basis is more representative of the time pattern in which the economic benefits are consumed.
(k) Revenue Recognition
The Company only ships product when there is a reasonable expectation of payment from the customer. Accordingly, the Company
recognizes revenue at the fair value when it has transferred the significant risks and rewards of ownership to its customers, the collection
of payment is reasonably assured, and the amount receivable is fixed or determinable.
(l) Cost of Goods Sold
Cost of goods sold includes cost of inventory expensed, packaging costs, shipping costs and related labour.
(m) Research and Development
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably,
the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has
sufficient resources to complete development to use or sell the asset. Other development expenditures are recognized in profit and loss as
incurred. To date, no development costs have been capitalized.
(n) Income Taxes
The Company uses the liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for accounting purposes, and
the irrespective tax bases. Deferred income tax assets and liabilities are measured using tax rates that have been enacted or substantively
enacted applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in statutory tax rates is recognized in profit or loss in the year of change. Deferred
income tax assets are recorded when their recoverability is considered probable and are reviewed at the end of each reporting period.
47
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A (o) Share-Based Compensation
The Company has an employee stock option plan. The Company measures equity settled share-based payments based on their fair value at
the grant date and recognizes compensation expense over the vesting period based on the Company’s estimate of equity instruments that
will eventually vest. Forfeitures are adjusted for on an actual basis. The impact of the revision of the original estimate is recognized in profit
or loss such that the cumulative expense reflects the revised estimate. The number of vested options ultimately exercised by holders does
not impact the expense recorded in any period. For stock options granted to non-employees, the compensation expense is measured at the
fair value of goods and services received except where the fair value cannot be estimated, in which case it is measured at the fair value of
the equity instruments granted. The fair value of share-based compensation to non-employees is periodically remeasured until counterparty
performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash
instead of paying with or using equity instruments. Consideration paid by employees or non-employees on the exercise of stock options is
recorded as share capital and the related share-based compensation is transferred from share-based payment reserve to share capital.
(p) Loss per Share
Loss per common share represents loss for the period attributable to common shareholders divided by the weighted average number of
common shares outstanding during the year. Diluted loss per common share is calculated by dividing the applicable loss for the year by the
sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding
if potentially dilutive common shares had been issued during the year.
(q) Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
All other borrowing costs are recognized in profit or loss in the period which they are incurred.
(r) Financial Instruments
Financial assets are classified into one of four categories: fair value through profit and loss (“FVTPL”), held-to-maturity (“HTM”), available for
sale (“AFS”), and loans and receivable.
(i) FVTPL FINANCIAL ASSETS
Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified
as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of loss. Transaction costs are
expensed as incurred. The fair values of financial assets in this category are determined by reference to active market transactions or by
using a valuation technique where no active market exists.
(ii) HTM INVESTMENTS
HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturity other than loans and
receivables. Investments are classified as HTM if the Company has the intention and ability to hold them until maturity. HTM investments
are recognized on a trade-date basis and are initially measured at fair value, including transaction costs, and subsequently at amortized cost
using the effective interest method.
(iii) AFS FINANCIAL ASSETS
AFS financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other
categories. Gains and losses arising from changes in fair value are recognized in other comprehensive income. When the asset is disposed
of or is determined to be impaired, the cumulative gain or loss recognized in other comprehensive income is reclassified from the equity
reserve to profit or loss.
(iv) LOANS AND RECEIVABLES
Loans and receivables are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market.
They are initially recognized at the transaction value and subsequently carried at amortized cost using the effective interest method less any
impairment losses. Discounting is omitted where the effect of discounting is immaterial.
48
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A (v) FINANCIAL LIABILITIES AND OTHER FINANCIAL LIABILITIES
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial liabilities at FVTPL are stated at fair
value, with changes being recognized through the consolidated statements of loss. The fair values of financial liabilities at FVTPL are determined
by reference to active market transactions or by using a valuation technique where no active market exists. Other financial liabilities are initially
measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method.
(vi) CLASSIFICATION OF FINANCIAL INSTRUMENTS
The Company classifies its financial assets and liabilities depending on the purpose for which the financial instruments were acquired, their
characteristics, and management intent as outlined below:
Instrument
Classification
Level
Fair value method
Cash and cash equivalents
Short-term investments
FVTPL
FVTPL
Level 1
Level 1
Trade receivables
Loans and receivables
n/a
Carrying amount (approximates fair value due to
short-term nature)
Carrying amount (approximates fair value due to
short-term nature)
Carrying amount (approximates fair value due to
short-term nature)
Convertible note receivable
FVTPL
Level 2
Discounted cash flow model
Accounts payable and accrued liabilities
Other financial liabilities n/a
Carrying amount (approximates fair value due to
short-term nature)
Convertible debentures
Other financial liabilities
Level 2
Black-Scholes-Merton model
Warrant liability
FVTPL
Level 1
Black-Scholes-Merton model
There have been no transfers between fair value levels during the current year and prior year. There were no unrealized or realized gains or
losses related to changes in fair value levels.
(vii) EMBEDDED DERIVATIVES
Derivatives are initially measured at fair value in conjunction with the host contract; no bifurcation is performed, and any directly attributable
transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, the entire instrument, including the
embedded derivative, is measured at fair value and changes therein are recognized in profit or loss. The Company has a convertible loan
receivable whereby the balance can be converted into equity. See Note 13 for transaction and valuation details.
(viii) COMPOUND INSTRUMENTS
The component parts of compound instruments (convertible debentures) issued by the Company are classified separately as financial
liabilities and equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an
equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the Company’s own equity instruments is an equity instrument.
At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible
instruments. This amount is recorded as a liability on an amortized cost basis using the effective interest rate method until extinguished
upon conversion or at the instrument’s maturity date.
The conversion option classified as equity is determined by deducting the amount of the liability component from the fair value of
the compound instrument as a whole. This is recognized and included in equity, and is not subsequently remeasured. In addition, the
conversion option classified as equity will remain in equity. No gain or loss is recognized in profit or loss upon conversion or expiration of
the conversion option.
Transaction costs that relate to the issue of the convertible debentures are allocated to the liability and equity components in proportion to
the allocation of the gross proceeds. Transaction costs relating to the equity component are recognized directly in equity. Transaction costs
relating to the liability component are included in the carrying amount of the liability component and are amortized over the term of the
convertible debentures using the effective interest method.
For compound instruments with non-equity derivatives, the fair value of the embedded derivative is determined first based on the
contractual terms, and the initial carrying amount of the host instrument is the residual amount after separating the embedded derivative.
49
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A (ix) EFFECTIVE INTEREST METHOD
The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of
the financial instrument or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
(x) TRANSACTION COSTS
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial
assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or
financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial
liabilities at fair value through profit or loss are recognized immediately in profit or loss.
(xi) IMPAIRMENT OF FINANCIAL ASSETS
Financial assets, other than those classified at fair value through profit and loss, are assessed for indicators of impairment at the end of the
reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events
that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
(s) Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual
results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised and in any future periods affected.
VALUATION OF BIOLOGICAL ASSETS AND INVENTORY
In calculating the value of the biological assets and inventory, management is required to make a number of estimates, including estimating
the stage of growth of the cannabis, harvesting costs, selling costs, sales price and expected yields for the cannabis plant. In calculating
final inventory values, management is required to determine an estimate of spoiled or expired inventory and compares the inventory cost
versus net realizable value.
ESTIMATED USEFUL LIVES AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS
Amortization of property, plant and equipment and intangible assets are dependent upon estimates of useful lives, which are determined
through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts
that take into account factors such as economic and market conditions and the useful lives of assets.
SHARE-BASED COMPENSATION
In calculating the share-based compensation expense, key estimates such as the value of the common share, the rate of forfeiture of
options granted, the expected life of the option, the volatility of the Company’s stock price and the risk-free interest rate are used.
WARRANTS
In calculating the value of the warrants, key estimates such as the value of the common share, the expected life of the warrant, the volatility
of the Company’s stock price and the risk-free interest rate are used.
All broker/compensation warrants were measured at the fair value of the equity instruments granted, as the fair value of the related
services cannot be reliably measured.
PROVISIONS
Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a previous event, if it is probable
that the Company will be required to settle the obligation and a reliable estimate can be made of the obligation. The amount recognized
is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, taking into account the
risks and uncertainties surrounding the obligations. Provisions are reviewed at the end of each reporting period and adjusted to reflect the
current best estimate of the expected future cash flows.
ALLOCATION OF PURCHASE PRICE
In determining the allocation of the purchase price, estimates are used based on market research and appraisal values.
50
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A CONVERTIBLE NOTE RECEIVABLE
The fair value of the convertible note receivable is determined using valuation techniques. The Company uses judgment to select the
methods used to make certain assumptions and in performing the fair value calculations in order to determine the values attributed to the
instrument at the time of their issuance and the subsequent measurement at fair value on a recurring basis. These valuation estimates
could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of the convertible
note receivable that are not quoted in an active market.
(t) Changes to Accounting Standards and Interpretations
NEW AND REVISED IFRS IN ISSUE BUT NOT YET EFFECTIVE
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. The Company will adopt IFRS 9 effective August 1, 2018. The Company has completed its assessment of the impact
of this new standard. Investments currently measured at cost will be measured at FVTPL, and the Company expects no significant changes
as a result of this or elsewhere in the application of the new standard.
IFRS 7, Financial Instruments: Disclosure
IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is
effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018. The Company intends
to adopt the amendments to IFRS 7 on August 1, 2018 and does not expect the implementation will result in a significant effect to the
financial statements.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which
is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying
performance obligations, principal versus agent considerations, and licensing. The Company will adopt IFRS 15 effective August 1, 2018. The
Company has completed its assessment of the impact of this new standard and has noted beyond the required additional disclosures, there
exist no material changes to the financial statements or required retroactive adjustments to the retained earnings.
IFRS 16, Leases
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted.
The Company is assessing the impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial
statements.
4. Reverse Acquisition
On March 15, 2017, BFK Capital Corp. completed its Qualifying Transaction, which was effected pursuant to an agreement between BFK
Capital Corp. and Hydropothecary. Pursuant to the agreement, BFK Capital Corp. acquired all of the issued and outstanding shares of
Hydropothecary. The former shareholders of Hydropothecary received an aggregate of 68,428,824 post-consolidation common shares of
BFK Capital Corp. for all the outstanding Hydropothecary common shares.
The transaction was a reverse acquisition of BFK Capital Corp. and has been accounted for under IFRS 2, Share-Based Payment.
Accordingly, the transaction has been accounted for at the fair value of the equity instruments granted by the shareholders of
Hydropothecary to the shareholders and option holders of BFK Capital Corp. The difference between the fair value of the consideration
(including the outstanding options) and the fair value of BFK Capital Corp.’s net assets has been recognized as a listing expense in the
consolidated statements of comprehensive loss for the fiscal year ended July 31, 2017. The options were valued using the Black-Scholes-
Merton option pricing model with the following variables: share price of $0.75; expected life of two years; $Nil dividends; 100% volatility;
and risk-free interest rate of 1.34%. Additional legal and consulting fees of $154,549 were incurred to complete the transaction.
51
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The results of operations of BFK Capital Corp. are included in the condensed interim consolidated financial statements of HEXO from the
date of the reverse acquisition, March 15, 2017.
The following represents management’s estimate of the fair value of the net assets acquired and total consideration transferred at
March 15, 2017 as a result of the reverse acquisition.
Fair value of BFK shares prior to transaction (1,837,770 at $0.75 per share)
Options
Total consideration transferred
Net assets acquired
Excess attributed to cost of listing
Professional, consulting and other fees
RTO listing expense
Net assets acquired include:
Cash
Prepaid expense
Total net assets acquired
$ 1,378,332
70,253
1,448,585
(652,110)
796,475
154,549
$
951,024
$
647,214
4,896
$
652,110
5. Short-Term Investments
Short-term investments consist of in various guaranteed investment certificates, term deposits, and fixed income securities that mature on
dates between January 27, 2019 and June 21, 2019 with annual interest rates ranging from 0.45% to 2.30%.
Short-term investments are comprised of liquid investments with maturities of less than 12 months. Short-term investments are recognized
initially at fair value and subsequently adjusted to fair value through profit or loss. The Company intends to hold the high interest savings
funds for a period greater than three months. Short-term investments contain restricted funds of $3,117,000 due to a held letter of credit
(see Note 19).
Interest rate
Maturity date
July 31, 2018
July 31, 2017
Guaranteed investment certificates
0.45%–0.5%
January 27, 2019 to June 21, 2019
$
712,284
$
2,871,550
Term deposits
1.2%–1.75%
To desired term
49,483,945
High interest savings accounts
1.4%–4.25%
April 26, 2019 to desired term
155,250,602
–
–
$ 205,446,830
$
2,871,550
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
6. Inventory
Dried cannabis
Oils
Packaging and supplies
July 31, 2018
July 31, 2017
Capitalized cost
Biological
asset fair value
adjustment
Total
Total
$
2,115,464 $
4,440,195 $
6,555,659 $
3,517,609
2,280,780
881,432
3,162,212
696,753
–
696,753
106,893
64,737
$
5,092,997 $
5,321,627 $ 10,414,624 $
3,689,239
The inventory expensed to cost of goods sold in the year ended July 31, 2018 was $964,956 (July 31, 2017 – $952,968).
Included in inventory expensed to cost of goods sold is the fair value adjustment on the sale of inventory of $2,288,975 for the year ended
July 31, 2018 (July 31, 2017 – $576,872).
During the year ended July 31, 2018, the Company recorded an adjustment to the net realizable value of inventories of $1,491,070 (July 31,
2017 – $Nil). This was due to the decrease in the estimated market selling price input of the inventory valuation which was caused by the
onset of the adult-use market and is reflective of competitive market prices.
During the year ended July 31, 2017, the Company recorded a write-down of inventories in the amount of $613,074, of which $494,810
related to the Company’s voluntary recall and $118,264 as a result of a flood at the Company’s facility.
7. Biological Assets
The Company’s biological assets consist of cannabis plants, from seeds all the way through to mature plants. The changes in the carrying
value of biological assets are as follows:
Carrying amount, beginning of period
Production costs capitalized
Net increase in fair value due to biological transformation less cost to sell
Transferred to inventory upon harvest
Carrying amount, end of period
July 31, 2018
July 31, 2017
$
1,504,186
$
120,667
993,469
7,339,566
659,339
5,003,822
(7,505,262)
(4,279,642)
$
2,331,959
$
1,504,186
As at July 31, 2018, the fair value of biological assets included $6,200 in seeds and $2,325,759 in cannabis plants ($6,200 in seeds and
$1,497,986 in cannabis plants as at July 31, 2017). The significant estimates used in determining the fair value of cannabis plants are as follows:
• yield by plant;
• stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value
per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested;
• percentage of costs incurred for each stage of plant growth; and
• fair value selling price per gram less cost to complete and cost to sell.
All biological assets are classified as current assets on the balance sheet and are considered Level 3 fair value estimates (Note 2). As at
July 31, 2018, it is expected that the Company’s biological assets will yield approximately 4,373,775 grams of cannabis (July 31, 2017 –
700,169 grams of cannabis). The Company’s estimates are, by their nature, subject to change. Changes in the anticipated yield will be
reflected in future changes in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on
selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of
growth at period end. Stage of growth is determined by reference to the plant’s life relative to the stages within the harvest cycle.
53
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below:
Unobservable inputs
Input values
Sensitivity analysis
Average selling price
Obtained through actual retail prices
on a per strain basis
$4.66 per dried gram
An increase or decrease of 5% applied to the average selling
price would result in a change of approximately $329,000 to
the valuation.
Yield per plant
Obtained through historical harvest
cycle results on a per strain basis
Stage of growth
Obtained through the estimates
of stage of completion within the
harvest cycle
50–235 grams per plant
An increase or decrease of 5% applied to the average yield per
plant would not result in a material change in valuation.
Average of 32% completion
An increase or decrease of 5% applied to the average stage
of growth per plant would result in a change of approximately
$320,000 in valuation.
8. Property, Plant and Equipment
Cost
Land
Buildings
Leasehold improvements
Furniture and equipment
Cultivation and production equipment
Vehicles
Computers
Construction in progress
Accumulated amortization
Land
Buildings
Leasehold improvements
Furniture and equipment
Cultivation and production equipment
Vehicles
Computers
Net carrying value
Balance at
July 31, 2017
Additions
Adjustments
Balance at
July 31, 2018
$
358,405 $
680,315 $
– $
1,038,720
3,744,759
3,930,217
24,860,752
32,535,728
–
205,456
–
205,456
900,395
379,992
113,926
233,685
1,232,613
3,165,199
32,900
425,117
(472,320)
486,438
4,425
–
1,660,688
4,031,629
151,251
658,802
605,015
39,707,253
(24,879,295)
15,432,973
$
6,336,177 $ 49,379,070 $
– $ 55,715,247
Balance at
July 31, 2017
Amortization
Adjustments
Balance at
July 31, 2018
$
– $
– $
– $
–
194,187
338,993
–
165,086
23,068
25,589
78,552
8,313
195,086
213,075
30,203
110,044
–
–
167,384
(167,384)
–
–
533,180
8,313
527,556
68,759
55,792
188,596
$
$
486,482 $
895,714 $
– $
1,382,196
5,849,695
$ 54,333,051
As at July 31, 2018, there was $3,920,069 (July 31, 2017 – $262,502) of property, plant and equipment in accounts payable and
accrued liabilities.
Buildings consist of $993,611 (July 31, 2017 – $72,000) of capitalized borrowing costs. Adjustments reflect the activation of an asset’s
useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification. Adjustments, as well,
consist of re-classifications.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Cost
Land
Buildings
Furniture and equipment
Cultivation and production equipment
Vehicles
Computers
Construction in progress
Accumulated amortization
Land
Buildings
Furniture and equipment
Cultivation and production equipment
Vehicles
Computers
Net carrying value
Balance at
July 31, 2016
Additions
Disposals
Adjustments
Balance at
July 31, 2017
$
105,000 $
253,405 $
– $
– $
358,405
917,087
1,212,399
320,586
–
37,537
91,298
1,647,017
649,189
373,249
76,389
160,147
605,014
(25,000)
(69,380)
–
–
(17,760)
1,640,273
3,744,759
–
6,743
–
–
900,395
379,992
113,926
233,685
605,015
–
(1,647,016)
$
3,118,525 $
3,329,792
$
(112,140) $
– $
6,336,177
Balance at
July 31, 2016
Amortization
Disposals/
adjustments
Adjustments
Balance at
July 31, 2017
$
–
$
– $
– $
– $
–
54,095
67,224
–
15,535
45,445
146,414
133,334
23,068
10,054
47,097
(3,420)
(38,292)
–
–
(14,072)
(2,902)
2,820
–
–
82
194,187
165,086
23,068
25,589
78,552
$
$
182,299 $
359,967 $
(55,784) $
– $
486,482
2,936,226
$
5,849,695
9. Intangible Assets and Other Longer-Term Assets
Cost
ACMPR license
Software
Domain names
Investments held at cost
Capitalized transaction costs
Accumulated amortization
ACMPR license
Software
Domain name
Net carrying value
Balance at
July 31, 2017
Additions
Disposals/
adjustments
Balance at
July 31, 2018
$
2,544,696 $
–
$
651,247
1,148,892
–
–
–
585,283
100,000
211,826
–
–
–
–
–
$
2,544,696
1,800,139
585,283
100,000
211,826
$
3,195,943 $
2,046,001 $
– $
5,241,944
Balance at
July 31, 2017
Amortization
Disposals/
adjustments
Balance at
July 31, 2018
$
276,909 $
126,181 $
– $
403,090
155,270
629,302
–
9,755
432,179 $
765,238 $
2,763,764
$
$
–
–
–
784,572
9,755
$
$
1,197,417
4,044,527
Software includes $647,311 and $257,666 relating to an enterprise resource planning software and online sales platform, respectively, that
are not yet available for use. Accordingly, no amortization has been taken during the fiscal year ended July 31, 2018. The Company expects
that both assets will be fully available for use in the first quarter of fiscal 2019.
As at July 31, 2018, there was $265,757 (July 31, 2017 – $Nil) of intangible assets in accounts payable and accrued liabilities.
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
Capitalized transaction costs are those incurred with respect to the definitive agreement to form a joint venture subsequent to the year
ended July 31, 2018 (Note 24).
Cost
ACMPR license
Software
Domain names
Accumulated amortization
ACMPR license
Software
Domain name
Net carrying value
Balance at
July 31, 2016
Additions
Disposals/
adjustments
Balance at
July 31, 2017
$
2,544,696 $
– $
– $
2,544,696
289,564
361,683
–
651,247
6,596
–
(6,596)
–
$
2,840,856 $
361,683 $
(6,596) $
3,195,943
Balance at
July 31, 2016
Amortization
Disposals/
adjustments
Balance at
July 31, 2017
$
149,008
127,901 $
51,486
6,596
103,784
–
6,596
–
–
$
276,909
155,270
–
$
$
207,090 $
231,685 $
6,596 $
432,179
2,633,766
$
2,763,764
During the fiscal year ended July 31, 2018, the Company conducted a review of its intangible assets, which resulted in changes in the
expected usage of its software. Certain assets, which management previously intended to use for five years from the date of purchase,
were replaced during the fiscal year as well as September 2018. As a result, the expected useful lives of these assets decreased. The effect
of these changes on actual and expected depreciation expense, in current and future years, respectively, is as follows.
(Decrease) increase in
amortization expense
$
309,253
$
(87,478) $
(119,136) $
(99,874) $
(2,765) $
–
2018
2019
2020
2021
2022
Later
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
2017 secured
convertible
debentures
2017 unsecured
convertible
debentures 8%
2017 unsecured
convertible
debentures 7%
10. Convertible Debentures
Balance at July 31, 2016
Gross proceeds
Issuance costs
Warrants, net of issuance costs
Conversion feature, net of issuance costs
Accretion
Foreign exchange
Conversion of debenture
Balance at July 31, 2017
Gross proceeds
Issuance costs
Warrants, net of issuance costs
Conversion feature, net of issuance costs
Accretion
Conversion of debenture
Balance at July 31, 2018
2016 Unsecured Convertible Debentures
2016 unsecured
convertible
debentures
306,205
–
–
–
–
–
–
4,403,893
25,100,000
(718,661)
(1,703,602)
(461,065)
(1,084,433)
(557,009)
(1,742,779)
–
–
20,638,930
35,919
215,875
69,744
–
(119,429)
(132,124)
(2,763,624)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
306,205
29,503,893
(12,422,263)
(1,545,478)
(2,299,788)
321,538
(119,429)
(3,105,748)
20,638,930
–
–
–
–
–
–
–
–
–
–
–
–
–
69,000,000
69,000,000
(4,791,642)
(4,791,642)
(3,284,648)
(3,284,648)
(6,777,317)
(6,777,317)
814,304
553,710
1,368,014
(21,453,234)
(54,700,103)
(76,153,337)
–
–
–
In March 2017, debenture holders converted their debentures to equity. The debentures had a book value of $342,124 ($345,000 face value)
and contributed surplus (equity component) of $57,500. The conversion resulted in the issuance of 459,990 units at a price of $0.75 per unit.
The 459,990 warrants issued were valued at $69,220 using the Black-Scholes-Merton option pricing model and the following variables: stock
price of $0.60; expected life of two years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.59%. Accordingly, share capital was
increased at the date of conversion by the carrying value of the debentures of $342,124, which included $35,919 of accreted interest.
2017 Secured Convertible Debentures
In November 2016, the Company issued $4,403,893 (US$3,275,000) principal amount of secured debentures through a brokered private
placement. The debentures bear interest at 8% per annum and mature on December 31, 2019. Interest for the first year of the term of
the debentures will be accrued and paid in arrears, following which, interest will be accrued and paid quarterly in arrears. The debentures
are convertible into common shares of the Company at US$0.70 at the option of the holder. The debentures will automatically convert to
common shares after the Company becomes a reporting issuer on a Canadian or United States exchange and maintains a volume weighted
average trading price equal to or exceeding the conversion price of the debentures for 15 days. The obligations of the Company under
the debentures are secured by a first priority security interest against all of the assets of the Company. The debenture holders received
2,339,208 warrants, one for every two common shares that would be issued assuming full conversion of the debentures. The warrants have
a three-year term, expiring November 13, 2019, and have an exercise price of US$0.76.
The Company identified embedded derivatives related to the above described debentures. These embedded derivatives included variable
conversion feature liability and the warrant liability. The accounting treatment of the derivative financial instruments requires that the Company
record the fair value of the derivatives as at the inception date of the debentures and to fair value as at each subsequent reporting date.
The Company allocated the proceeds first to the warrant liability and the conversion feature liability based on their fair value, and the
residual proceeds represented the fair value of the debentures. The fair values of the embedded derivatives were determined using the
Black-Scholes-Merton option pricing model.
57
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
The warrant liability was valued with a fair value of $550,955 (US$409,723) using the following assumptions:
• stock price of $0.75 (US$0.56);
• exchange rate of 1.3447;
• expected life of three years;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.25%.
The conversion feature liability was initially valued with a fair value of $665,632 (US$495,004) using the following assumptions:
• stock price of $0.75 (US$0.56);
• expected life of 15 months;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.25%.
The residual proceeds of $3,187,306 (US$2,370,273) represent the fair value of the debenture.
In connection with the closing of the debentures, the Company paid a placement agent fee of $560,152 (US$416,563) from the gross
proceeds of the financing and incurred an additional $62,996 of financing costs. The Company also issued broker warrants exercisable to
acquire 62,381 common shares at an exercise price of US$0.70 per share.
The broker warrants were attributed a fair value of $95,513 (US$71,029) based on the Black-Scholes-Merton option pricing model with the
following assumptions:
• stock price of $0.75 (US$0.56);
• expected life of three years;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.25%.
The total financing costs amounted to $718,661 and were allocated on a pro-rata basis as follows: debenture – $520,128, conversion
liability – $108,623, and warrant liability – $89,910. The issue costs allocated to the conversion feature liability and the warrant liability,
totalling $198,533, were included in financing charges on the statement of comprehensive loss.
Pursuant to the debenture agreement, on April 11, 2017 (“the date of conversion”) the debentures automatically converted to
4,678,494 common shares at a conversion price of US$0.70 after the Company became a reporting issuer on the TSX-V and by maintaining
a volume weighted average trading price equal to or exceeding the conversion price of the debentures for 15 days.
Up to and including the date of conversion, the accreted interest on the debentures was $145,628 (US$109,232), and $70,247 for the
deferred financing fees, for the fiscal year ended July 31, 2017; both are recorded as interest expense on the statement of comprehensive
loss. Additionally, as the debentures are a monetary liability, they were re-translated on the date of conversion, resulting in a value of
$3,213,505 (US$2,261,041), and a foreign exchange gain of $119,429 was recorded in foreign exchange on the statement of comprehensive
loss. Accordingly, the debentures at the date of conversion were valued at $2,763,624, which consisted of the debenture value of
$3,213,505 less unamortized financing fees of $449,881.
58
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The conversion liability was revalued on the date of conversion using the Black-Scholes-Merton option pricing model. The conversion liability
was revalued to $8,807,287 (US$6,606,126):
• stock price of $2.79 converted to US$2.09;
• expected life of 12.6 months;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.25%;
• USD/CAD exchange rate of 1.3332.
Accordingly, the loss on the revaluation of the conversion liability was $8,141,655, which is recorded in the revaluation of financial
instruments account on the statement of comprehensive loss. Therefore, on April 11, 2017, the conversion of the debentures and the
corresponding conversion liability resulted in an increase to share capital of $11,570,911 for the 4,678,494 common shares issued.
During the fiscal year ended July 31, 2017, 285,708 of the warrants were exercised, for total proceeds of $292,302 (US$217,138, based
on an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton
option pricing model. Overall, the value of the warrants exercised was $222,988 (US$165,182) using the following variables: stock price of
US$1.26–$1.32; expected life of 12 months; $Nil dividends; 60% volatility; risk-free interest rate of 1.25%; and USD/CAD exchange rate of
1.3490–1.3503. The exercise of these warrants resulted in an increase to share capital of $515,290.
During the fiscal year ended July 31, 2018, 1,124,958 warrants were exercised, for total proceeds of $1,076,576 (US$844,828, based on
an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option
pricing model. Overall, the liability value of the warrants exercised was $3,317,278 (US$2,633,514) using the following variables:
• stock price of various;
• expected life of 12 months;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 0.75%;
• USD/CAD exchange rate of various.
The exercise of these warrants resulted in an increase to share capital of $4,393,854.
The remaining warrant liability was revalued on July 31, 2018 using the Black-Scholes-Merton option pricing model. The warrant liability was
revalued to $3,129,769 (US$2,404,370) with a stock price of US$3.34; expected life of 12 months; $Nil dividends; 60% volatility; risk-free
interest rate of 0.75%; and USD/CAD exchange rate of 1.3017. The (loss)/gain on the revaluation of the warrant liability for the three and
12 months ended July 31, 2018 was $173,890 and $5,091,460, which is recorded in the revaluation of financial instruments account on the
statement of comprehensive loss.
The following table summarizes warrant liability activity during the fiscal years ended July 31, 2018 and July 31, 2017.
Opening balance
Granted
Expired
Exercised
Revaluation due to foreign exchange
Closing balance
59
July 31, 2018
July 31, 2017
$
1,355,587 $
–
–
–
–
–
(3,317,278)
(7,813,688)
5,091,460
9,169,275
$
3,129,769 $
1,355,587
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
2017 Unsecured Convertible Debentures 8%
On July 18, 2017, the Company issued $25,100,000 principal amount of unsecured debentures through a brokered private placement.
The debentures bear interest at 8% per annum and mature on June 30, 2019. Interest will be accrued and paid semi-annually in arrears.
The debentures are convertible into common shares of the Company at $1.60 at the option of the holder. Beginning after November 19,
2017, the Company may force the conversion of the debentures on 30 days’ prior written notice should the daily weighted average trading
price of the common shares of the Company be greater than $2.25 for any 15 consecutive trading days. The debenture holders received
7,856,300 warrants: 313 for every $1,000 unit. The warrants have a two-year term, expiring July 18, 2019, and have an exercise price of
$2.00. Beginning after November 19, 2017, the Company has the right to accelerate the expiry of the warrants should the closing trading
price of the common shares of the Company be greater than $3.00 for any 15 consecutive trading days.
On initial recognition, the residual method was used to allocate the fair value of the warrants and conversion option. The fair value of the
liability component was calculated as $22,066,925 using a discount rate of 16%. The residual proceeds of $3,033,075 were allocated
between the warrants and conversion option on a pro-rata basis relative to their fair values. The fair values of the warrants and conversion
option were determined using the Black-Scholes-Merton option pricing model.
The warrants were valued with a fair value of $1,929,098 using the following assumptions:
• stock price of $1.26;
• expected life of two years;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.27%.
The conversion option was valued with a fair value of $3,100,227 using the following assumptions:
• stock price of $1.26;
• expected life of one year;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.27%.
Based on the fair value of the warrants and conversion option, the residual proceeds of $3,033,075 were allocated as $1,163,396 to the
warrants and $1,869,679 to the conversion option.
In connection with the closing of the debentures, the Company paid a placement fee of $1,292,010 from the gross proceeds of the
financing and incurred an additional $218,990 of financing costs. The Company also issued broker warrants exercisable to acquire
784,375 common shares at an exercise price of $2.00 per share.
The broker warrants were attributed a fair value of $192,602 based on the Black-Scholes-Merton option pricing model with the following
assumptions:
• stock price of $1.26;
• expected life of two years;
• $Nil dividends;
• 60% volatility;
• risk-free interest rate of 1.27%.
The total financing costs amounted to $1,703,602 and were allocated on pro-rata basis as follows: debt – $1,497,739, conversion option –
$126,900, and the warrants – $78,963.
60
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Pursuant to the agreement, on November 22, 2017 the Company announced that it had elected to exercise its right to convert all of the
outstanding principal amount of the debentures and unpaid accrued interest thereon into common shares. The Company became entitled
to force the conversion of the 8.0% Debentures on November 19, 2017 on the basis that the volume weighted average price (“VWAP”)
of the common shares on the TSXV for 15 consecutive trading days was equal to or exceeded $2.25. For the 15 consecutive trading days
preceding November 19, 2017, the VWAP of the common shares was $2.56. The Company provided the holders of the 8.0% Debentures
with the required 30 days’ advance written notice of the conversion, and the effective date for the conversion was December 27, 2017.
Pursuant to the conversion of the 8.0% Debentures, holders of the 8.0% Debentures received 625 common shares for each $1,000 principal
amount of 8.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 8.0% Debentures
for the period from issuance on July 18, 2017 to, but excluding, the conversion date was $36.00, and 8.0% Debenture holders received an
additional 22.5 common shares for each $1,000 principal amount of 8.0% Debentures held on account of accrued and unpaid interest, for a
total of 647.5 common shares for each $1,000 principal amount of 8.0% Debentures held at the conversion date. Accordingly, at the date of
conversion, the carrying value of the debentures of $21,453,234, interest payable paid through shares of $266,219 and the conversion feature
of $1,742,779 resulted in the cumulative increase to share capital of $23,462,232.
Interest expensed to the statement of loss and comprehensive loss was $417,718 and interest capitalized to property, plant and
equipment was $921,611 for the year ended July 31, 2018 (2017 – $70,255 and $72,000, respectively). Accretion for the fiscal year
ended July 31, 2018 was $814,304 (2017 – $69,744). During the year, the Company paid $266,219 of interest owing through shares, and
$331,317 of interest owing in cash (2017 – $Nil). The accrued interest payable as at July 31, 2018 was $Nil (2017 – $72,511).
2018 UNSECURED CONVERTIBLE DEBENTURES 7%
On November 24, 2017, the Company issued $69,000,000 principal amount of unsecured debentures through a brokered private placement.
The debentures bear interest at 7% per annum and mature on November 24, 2020. Interest will be accrued and paid semi-annually in
arrears. The debentures were convertible into common shares of the Company at $2.20 at the option of the holder. The Company may force
the conversion of the debentures on 30 days’ prior written notice should the daily weighted average trading price of the common shares of
the Company be greater than $3.15 for any 10 consecutive trading days. The debenture holders received 15,663,000 warrants, 227 for every
$1,000 unit. The warrants have a two-year term, expiring November 24, 2019, and have an exercise price of $3.00. The Company has the
right to accelerate the expiry of the warrants should the closing trading price of the common shares of the Company be greater than $4.50
for any 10 consecutive trading days.
On initial recognition, the residual method was used to allocate the fair value of the warrants and conversion option. The fair value of the
liability component was calculated as $58,187,146 using a discount rate of 14%. The residual proceeds of $10,812,854 were allocated
between the warrants and conversion option on a pro-rata basis relative to their fair values. The fair values of the warrants and conversion
option were determined using the Black-Scholes-Merton option pricing model.
The warrants were valued with a fair value of $8,647,797 using the following assumptions:
• stock price of $2.62;
• expected life of one year;
• $Nil dividends;
• 65% volatility;
• risk-free interest rate of 1.25%.
The conversion option was valued with a fair value of $17,843,269 using the following assumptions:
• stock price of $2.62;
• expected life of three months;
• $Nil dividends;
• 65% volatility;
• risk-free interest rate of 1.25%.
Based on the fair value of the warrants and conversion option, the residual proceeds of $10,812,854 were allocated as $3,529,770 to the
warrants and $7,283,084 to the conversion option, less allocation of issuance costs.
61
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A In connection with the closing of the debentures, the Company paid a placement fee of $3,450,000 from the gross proceeds of the
financing and incurred an additional $475,824 of issuance costs. The Company also issued broker warrants exercisable to acquire
1,568,181 common shares at an exercise price of $3.00 per share.
The broker warrants were attributed a fair value of $865,818 based on the Black-Scholes-Merton option pricing model with the following
assumptions:
• stock price of $2.62;
• expected life of one year;
• $Nil dividends;
• 65% volatility;
• risk-free interest rate of 1.25%.
The total issuance costs amounted to $4,791,642 and were allocated on pro-rata basis as follows: debt – $4,040,753, conversion option –
$505,767, and the warrants – $245,122.
On December 15, 2017, the Company announced that it had elected to exercise its right to convert all of the outstanding principal amount
of the Company’s 7.0% Debentures and unpaid accrued interest thereon into common shares. The Company became entitled to force
the conversion of the 7.0% Debentures on December 13, 2017 on the basis that the VWAP of the common shares on the TSXV for
10 consecutive trading days was equal to or exceeded $3.15. For the 10 consecutive trading days preceding December 13, 2017, the VWAP
of the common shares was $3.32. The Company provided the holders of the 7.0% Debentures with the required 30 days’ advance written
notice of the conversion, and the effective date for the conversion was January 15, 2018.
Pursuant to the conversion of the 7.0% Debentures, holders of the 7.0% Debentures received 454.54 common shares for each $1,000 principal
amount of 7.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 7.0% Debentures for the
period from December 31, 2017 (the interest payment scheduled for December 31, 2017 was paid in cash) up to, but excluding, the conversion
date, was $2.92, and 7.0% Debenture holders received an additional 1.33 common shares for each $1,000 principal amount of 7.0% Debentures
held on account of accrued and unpaid interest, for a total of 455.87 common shares for each $1,000 principal amount of 7.0% Debentures held.
Accordingly, at the date of conversion, the carrying value of the debentures of $54,700,103, interest payable paid through shares of $45,824 and
the conversion feature of $6,809,418 resulted in the cumulative increase to share capital of $61,555,345.
Interest expensed to the statement of loss and comprehensive loss was $1,111,690 (2017 – $Nil). Accretion for the fiscal year ended
July 31, 2018 was $553,710 (2017 – $Nil). During the year, the Company paid $45,824 of interest owing through shares, and $512,156 of
interest owing in cash (2017 – $Nil). The accrued interest payable as at July 31, 2018 was $Nil (2017 – $Nil).
The unsecured convertible debentures balance net of interest payable was $Nil and $20,638,930 for the fiscal years ended July 31, 2018
and July 31, 2017, respectively.
11. Share Capital
(a) Authorized
An unlimited number of common shares
(b) Issued and Outstanding
During the first quarter of fiscal 2017, the Company issued 338,274 units in a private placement at $0.75 per unit, generating gross proceeds
of $253,706. A unit provides the holder with one common share and one common share purchase warrant. The warrant entitles the holder
the option to buy a share at the price of $0.83 for three years from date of issuance. The value of the warrants was estimated using the
Black-Scholes-Merton option pricing model with the following variables: stock price of $0.57; expected life of three years; $Nil dividends;
64.5% volatility; and risk-free interest rate of 0.60%. The value of the warrants was estimated to be $61,453. As a result, the residual value
of the common shares was calculated to be $192,253.
62
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A Share issue costs relating to the equity financing in the first quarter of fiscal 2017 amounted to $6,308. $617 of the costs were related to
2,664 warrants issued that have an $0.83 exercise price and expire in five years. These warrants were issued to a broker in relation to the
sale of 338,274 units. The warrants were valued using the Black-Scholes-Merton option pricing model and the following variables: stock
price of $0.52; expected life of five years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.60%. $97 of the costs were related
to 798 warrants issued that have a $0.75 exercise price and expire in one year. These warrants were issued to a financing consultant in
relation to a finder’s fee for the sale of 13,332 units. The warrants were valued using the Black-Scholes-Merton option pricing model and
the following variables: stock price of $0.63; expected life of one year; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.69%.
In both cases, the warrants issued provide the holders with the option to purchase one common share.
During the second quarter of fiscal 2017, the Company issued 4,285,716 common shares at $0.58 per common share for total proceeds
of $2,500,001 from a group of private investors (“Investors”). As part of the private placement, the Investors have the right to nominate
up to two directors supported by an agreement between certain shareholders. The Investors have a call option to purchase another
4,285,716 common shares at a price of $0.58 per share prior to May 31, 2017. The Company also has a put option to purchase another
4,285,716 common shares at the subscription price of $0.58 prior to June 30, 2017, so long as the Company attains revenues of $3,500,000
between January 1, 2017 and May 31, 2017.
In connection with the closing of this placement, the Company incurred share issuance costs of $147,014 and issued 342,852 broker
warrants with an exercise price of $0.75 and a five-year term. The warrants were valued using the Black-Scholes-Merton option pricing
model and the following variables: stock price of $0.75; expected life of five years; $Nil dividends; 73.2% volatility; and risk-free interest
rate of 0.75%. The value of the broker warrants was estimated to be $152,890. The broker warrants were measured at the fair value of the
equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the second quarter of fiscal year 2017, the Company completed a concurrent financing through an agent, pursuant to which it issued
17,517,042 common shares at a price of $0.75 per share for gross proceeds of $13,137,782 (“Concurrent Financing”). In connection with
the closing of the Concurrent Financing, the Company paid the agent a cash commission of $803,487, equal to 7% of the gross proceeds
from the Concurrent Financing, subject to a reduced commission of 3.5% for certain subscribers on a President’s List of the Company.
The Company also issued to the agent warrants exercisable to acquire 1,071,318 common shares, being that number of common shares
as was equal to 7% of the number of common shares sold under the Concurrent Financing, subject to a reduced percentage of 3.5%
for certain subscribers on the President’s List, at an exercise price of $0.75 per share and a two-year term. The warrants were valued at
$323,653 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of two years;
$Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. Additional transaction costs of $82,329 were included in share issuance
costs. The Company also issued 44,940 broker warrants with an exercise price of $0.75 and a two-year term. The warrants were valued at
$13,576 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of two years;
$Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%.
These warrants were recorded as a share issuance cost in the statement of changes in shareholders’ equity. The agent warrants and
broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be
measured reliably.
During the second quarter of fiscal 2017, the Company also issued the following warrants:
• 203,202 warrants in exchange for services rendered by two service providers:
• The Company issued 120,000 warrants with an exercise price of US$0.70 and expiring in May 2018. The warrants were valued at
$24,411 (US$18,760) using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected
life of 18 months; $Nil dividends; 73.2% volatility; risk-free interest rate of 1.25%; and USD/CAD exchange rate of 1.3447. 30,000
warrants were exercised on April 28, 2017. These warrants were recorded as a share issuance cost in the statements of changes in
shareholders’ equity.
• The Company issued another 83,202 warrants with an exercise price of $0.75 and expiring in three years. The warrants were valued at
$30,184 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of three
years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. These warrants were recorded as a share issuance cost in
the statements of changes in shareholders’ equity.
During the third quarter of fiscal 2017, the Company issued 2,492,958 shares for $0.75 per share for gross proceeds of $1,869,719. These
shares were issued pursuant to an agent’s option under the Concurrent Financing completed in December 2016, in which 17,400,000 shares
were offered, which allowed the agent to sell an additional number of shares equal to 15% of the number of offered shares.
63
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The Company paid share issuance costs of $146,792 and issued 174,504 warrants to the broker. The warrants have an exercise price of
$0.75 and expire in two years. The warrants were valued at $167,222 using the Black-Scholes-Merton option pricing model and the following
variables: stock price of $1.55; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. These
warrants were recorded as a share issuance cost in the statements of shareholders’ equity. The broker warrants were measured at the fair
value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the third quarter of fiscal 2017, the Company issued 4,285,716 common shares at a price of $0.58 per share, for total proceeds of
$2,500,001, pursuant to a call option issued to a group of private investors on November 4, 2016.
As described in Note 10, Convertible Debentures, the Company issued unsecured debentures in the third and fourth quarters of fiscal 2016.
On March 16, 2017, $345,000 of the debentures held by six individuals were converted into 459,990 common shares at a price of $0.75 per
unit. In relation to the conversion of this debt, 459,990 warrants were issued. The warrants were valued at $69,220 using the Black-Scholes-
Merton option pricing model and the following variables: stock price of $0.60; expected life of two years; $Nil dividends; 64.5% volatility;
and risk-free interest rate of 0.59%.
As described in Note 10, Convertible Debentures, the Company issued secured debentures in the second quarter of fiscal 2017. On April 11,
2017, the debentures automatically converted to 4,678,494 common shares at a conversion price of US$0.70 after the Company became
a reporting issuer on the TSX-V and maintained a volume weighted average trading price equal to or exceeding the conversion price of the
debentures for 15 days.
As described in Note 10, Convertible Debentures, during the fourth quarter of 2017, 7,856,300 warrants were issued in relation to the
issuance of convertible debt. The allocation of the proceeds to these warrants was $1,163,396. In relation to this financing, the Company
issued 784,375 broker agent warrants that have an exercise price of $2.00 and expire in two years. The warrants were valued at $192,602
using the Black-Scholes-Merton option pricing model and the following variables: stock price of $1.52; expected life of two years; $Nil
dividends; 73.2% volatility; and risk-free interest rate of 1.27%. The value of the broker warrants, and other financing costs, were allocated
on a pro-rata basis based on the allocated fair value of each component of this financing, as detailed in Note 10, Convertible Debentures.
The broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be
measured reliably.
In relation to the third quarter of fiscal 2017 issuance of 4,285,716 common shares, during the fourth quarter of fiscal 2017 the Company
issued 342,852 broker warrants with an exercise price of $0.75 and a five-year term from the date of listing. The warrants were valued at
$238,753 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $1.25; expected life of two years;
$Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. The broker warrants were measured at the fair value of the equity
instruments granted, as the fair value of the related services cannot be measured reliably.
During the first quarter of fiscal 2018, 481,896 warrants with exercise prices of $0.75 and US$0.70 were exercised for proceeds of
$405,778, resulting in the issuance of 481,896 common shares.
During the second quarter of fiscal 2018, the Company issued 15,687,500 common shares from the conversion of the 8% unsecured
convertible debentures and 166,387 common shares in lieu of accrued interest, as described in Note 10, Convertible Debentures.
On January 2, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date of the common share
purchase warrants issued under the 8% convertible debentures. The Company became entitled to accelerate the expiry date of the warrants
on December 27, 2017 on the basis that the closing trading price of the common shares on the TSXV exceeded $3.00 for 15 consecutive
trading days. The expiry date for the warrants was accelerated from July 18, 2019 to February 1, 2018. During the second quarter of fiscal 2018,
the Company issued 7,799,960 common shares related to the exercise of warrants associated with the 8% convertible debentures.
During the second quarter of fiscal 2018, the Company issued 31,363,252 common shares from the conversion of the 7% unsecured
convertible debentures and 20,829 common shares in lieu of accrued interest, as described in Note 10, Convertible Debentures. The
Company issued 2,922,393 common shares related to the exercise of warrants from the 7% unsecured convertible debentures.
During the second quarter of fiscal 2018, in addition to common shares issued related to the exercise of warrants associated with the
convertible debentures, 5,025,627 warrants with exercise prices of $0.75 and US$0.70 were exercised, resulting in the issuance of
5,021,940 common shares. Total proceeds from the exercise of warrants were $30,936,897.
64
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A On January 30, 2018, the Company closed a bought deal public offering of 37,375,000 units at a price of $4.00 per unit for gross proceeds
of $149,500,000. Each unit consisted of one common share and one-half of one share purchase warrant of the Company. Each warrant is
exercisable into one common share at a price of $5.60 per share for a period of two years. The fair value of the warrants at the date of grant
was estimated at $0.56 per warrant based on the following weighted average assumptions:
• stock price of $3.93;
• expected life of one year;
• $Nil dividends;
• 65% volatility;
• risk-free interest rate of 1.25%.
Total cash share issue costs amounted to $6,379,728, which consisted of underwriters’ commissions of $5,980,000, underwriters’
expenses of $10,000, underwriters’ legal fees of $96,522 and incurred $311,206 of additional cash issuance costs. In addition, the Company
issued an aggregate of 1,495,000 compensation warrants to the underwriters at a fair value of $1,485,797. The compensation warrants have
an exercise price of $4.00 and expire January 30, 2020. The fair value of the compensation warrants at the date of grant was estimated at
$0.99 per warrant based on the following weighted average assumptions:
• stock price of $3.93;
• expected life of one year;
• $Nil dividends;
• 65% volatility;
• risk-free interest rate of 1.25%.
The Company allocated $7,342,461 of the issuance costs to the common shares and $523,064 to the warrants.
During the third quarter of fiscal 2018, 2,474,813 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for
proceeds of $4,422,747, resulting in the issuance of 2,474,813 common shares.
On May 24, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date governing the common
share purchase warrants issued November 24, 2017. Pursuant to the terms of the warrant indenture, the Company elected its right to
accelerate the expiry date of the remaining 5,261,043 warrants from November 24, 2019 to June 25, 2018. As at the date of expiry, all
warrants were exercised. The accelerated expiry date also applied to the remaining 1,568,181 compensation warrants originally issued
to certain investment banks on November 24, 2017. As at the date of expiry, 1,505,453 compensation warrants were exercised and
62,728 warrants expired.
During the fourth quarter of fiscal 2018, 13,214,883 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised
for proceeds of $38,600,682, resulting in the issuance of 13,214,883 common shares.
As at July 31, 2018, there were 193,629,116 common shares outstanding and 26,425,504 warrants outstanding.
65
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The following is a summary of warrants on July 31, 2018.
Warrants issued with $0.75 units
Exercise price of $0.83 expiring April 28, 2019
Exercise price of $0.83 expiring May 19, 2019
Exercise price of $0.83 expiring June 2, 2019
Exercise price of $0.83 expiring June 6, 2019
Exercise price of $0.83 expiring June 8, 2019
Exercise price of $0.83 expiring June 23, 2019
Exercise price of $0.83 expiring June 28, 2019
Exercise price of $0.83 expiring July 21, 2019
Exercise price of $0.83 expiring July 25, 2019
Exercise price of $0.83 expiring July 28, 2019
Exercise price of $0.83 expiring August 12, 2019
Exercise price of $0.83 expiring August 18, 2019
Exercise price of $0.83 expiring August 31, 2019
Exercise price of $0.83 expiring September 26, 2019
Exercise price of $0.83 expiring October 17, 2019
2015 secured convertible debenture warrants
Exercise price of $0.75 expiring July 15, 2019
2016 unsecured convertible debenture warrants
Exercise price of $0.83 expiring July 18, 2019
2018 Equity financing
Number
outstanding
Book value
13,332
$
19,332
333,330
144,000
2,389
3,457
59,598
25,747
1,333,332
261,998
66,672
266,670
100,008
66,672
420,000
33,336
266,676
39,600
72,000
60,000
11,921
47,680
17,881
11,921
75,095
6,056
47,681
7,194
13,080
10,900
1,318,332
253,155
100,002
15,047
Exercise price of $5.60 expiring January 30, 2020
18,570,500
9,981,561
Broker/consultant warrants
Exercise price of $0.75 expiring March 15, 2019
Exercise price of $0.75 expiring November 9, 2019
Exercise price of US$0.70 expiring November 14, 2019
Exercise price of $0.75 expiring November 3, 2021
Exercise price of $0.75 expiring March 14, 2022
Exercise price of $4.00 expiring January 30, 2020
2016 secured convertible debenture warrants
Exercise price of US$0.76 expiring November 14, 2019
66
302,861
158,308
41,598
45,143
244,284
144,282
15,091
11,147
108,935
100,474
1,495,000
1,389,023
25,496,962
$ 12,635,339
928,542
3,129,769
26,425,504
$ 15,765,108
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The following table summarizes warrant activity during the fiscal years ended July 31, 2018 and July 31, 2017.
Outstanding, beginning of period
Expired during period
Issued during period
Exercised during period
Outstanding, end of period
Stock Option Plan
Number of
warrants
20,994,123
(62,728)
37,413,681
(31,919,572)
26,425,504
July 31, 2018
Weighted
average
exercise price
1.31
3.00
4.34
2.33
4.35
July 31, 2017
Weighted
average
exercise price
0.86
–
1.95
1.16
1.31
Number of
warrants
7,504,062
–
14,335,563
(845,502)
20,994,123
The Company has a share option plan (the “Plan”) that is administered by the Board of Directors, who establish exercise prices and expiry
dates, which are up to 10 years from issuance as determined by the Board at the time of issuance. Unless otherwise determined by
the Board, options issued under the Plan vest over a three-year period except for options granted to consultants or persons employed in
investor relations activities (as defined in the policies of the TSX), which vest in stages over 12 months with no more than one-quarter of the
options vesting in any three-month period. The maximum number of common shares reserved for issuance for options that may be granted
under the Plan is 19,362,911 common shares as at July 31, 2018.
The following table summarizes the stock option grants during the fiscal year ended July 31, 2018.
Grant date
September 8, 2017
November 6, 2017
December 4, 2017
January 29, 2018
March 12, 2018
April 16, 2018
June 8, 2018
July 11, 2018
Options granted
Exercise price
Executive and
directors
Non-executive
employees
Vesting terms
Vesting period
$
$
$
$
$
$
$
$
1.37
2.48
2.69
4.24
3.89
4.27
5.14
4.89
650,000
125,000
1,750,000
–
325,000
845,000
–
1,000
3,000
20,000
261,000
–
61,500
441,000
4,325,000
1,366,500
Terms A
Terms A
Terms B
Terms A, C
Terms A
Terms A
Terms A
Terms A
10 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
Vesting terms A – One-third of the options will vest on the one-year anniversary of the date of grant, and the balance will vest quarterly over two years thereafter.
Vesting terms B – Half of the options will vest immediately, and the balance will vest annually over three years thereafter.
Vesting terms C – Based upon organizational milestones.
67
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The following table summarizes stock option activity during the fiscal years ended July 31, 2018 and July 31, 2017.
Opening balance
Granted
Expired
Forfeited
Exercised
Closing balance
July 31, 2018
Weighted
average
July 31, 2017
Weighted
average
Options issued
exercise price
Options issued
exercise price
5,748,169 $
10,174,000
–
(626,830)
(907,273)
14,388,066 $
0.68
4.16
–
3.44
0.65
1.05
3,481,896 $
2,428,777
–
–
(162,504)
5,748,169 $
0.49
0.92
–
–
0.19
0.68
The weighted average share price at the time of exercise during the period was $4.31 (July 31, 2017 – $0.76).
The following table summarizes information concerning stock options outstanding as at July 31, 2018.
Exercise price
Number outstanding
Weighted average remaining
contractual life (years)
Number exercisable
Weighted average remaining
contractual life (years)
$
$
0.16
0.58
0.75
1.27
1.37
2.48
2.69
3.89
4.24
4.27
4.89
5.14
570,000
1,241,900
2,248,996
606,670
651,000
128,000
1,695,000
325,000
258,000
885,000
5,667,500
111,000
14,388,066
0.01
0.05
0.12
0.05
0.06
0.02
0.32
0.09
0.08
0.26
1.93
0.04
570,000
1,241,900
1,466,496
202,670
–
–
885,000
–
–
–
–
–
4,366,066
0.11
1.81
2.64
0.42
–
–
1.89
–
–
–
–
–
Stock-based Compensation
For the fiscal year ended July 31, 2018, the Company recorded $4,996,513 respectively (July 31, 2017 – $658,620) in stock-based
compensation expense related to employee options, which are measured at fair value at the date of grant and are expensed over the
vesting period. In determining the amount of stock-based compensation, the Company used the Black-Scholes-Merton option pricing model
to establish the fair value of options granted by applying the following assumptions:
Exercise price
Risk-free interest rate
Expected life of options (years)
Expected annualized volatility
July 31, 2018
July 31, 2017
$1.37–$5.14
$0.16–$1.55
2.06%–2.37%
1.27%–1.73%
7
65%
3–7
65%–73%
Volatility was estimated using the average historical volatility of the comparable companies in the industry that have trading history and
volatility history.
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12. Net Loss per Share
The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share
because their effect was anti-dilutive:
2017 unsecured convertible debentures
Options
Warrants issued with $0.75 units
2015 secured convertible debenture warrants
2015 secured convertible debenture amendment warrants
2015 unsecured convertible debenture amendment warrants
2016 unsecured convertible debenture warrants
2016 secured convertible debenture warrants
2017 8% unsecured convertible debenture warrants
2017 7% unsecured convertible debenture warrants
2018 equity warrants
Convertible debenture broker/finder warrants
July 31, 2018
July 31, 2017
–
15,687,500
14,388,066
3,234,960
1,318,332
–
–
100,002
928,542
–
–
18,570,500
5,748,169
4,911,186
2,210,358
237,612
38,100
426,660
2,053,500
7,856,300
–
–
2,273,168
3,260,407
40,813,570
42,429,792
13. Convertible Note Receivable
On July 26, 2018, the Company lent $10,000,000 to an unrelated entity, Fire and Flower (“FF”), in the form of an unsecured and
subordinated convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures July 31, 2019 and includes
the right to convert the debenture into common shares of FF at the lesser of $1.15 or 90% of the deemed price per common share upon
maturity or a triggering event as defined within the agreement.
The option to settle the loan in common shares represents a call option to the Company and is included in the fair value of the loan. There
existed an insignificant difference in fair value between the initial recognition date of July 26, 2018 and the reporting date of July 31, 2018,
and accordingly the transaction price approximated the fair value of the note.
As at July 31, 2018, the Company’s note receivable from FF did not earn any interest.
14. Segmented Information
The Company operates in one operating segment.
All property, plant and equipment and intangible assets are located in Canada.
15. Financial Instruments
Interest Risk
The Company’s exposure to interest rate risk only relates to any investments of surplus cash. The Company may invest surplus cash in
highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at July 31,
2018, the Company had short-term investments of $205,446,830.
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 receivables and convertible note receivable. As at July 31, 2018, the Company
was exposed to credit-related losses in the event of non-performance by the counterparties.
69
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring
processes to mitigate credit risk. Since the majority of the sales are transacted with clients that are covered under various insurance
programs, the Company has limited credit risk.
Cash and cash equivalents are held by one of the largest co-operative financial groups in Canada. The short-term investments are held in
various guaranteed investment certificates, term deposits, and fixed income securities. Since the inception of the Company, no losses
have been incurred in relation to cash held by the financial institution. The trade receivable balance is held with one of the largest medical
insurance companies in Canada. Credit risk from the convertible note receivable arises from the possibility that principal and/or interest due
may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, short-term investments, trade receivables and convertible note receivable represents
the maximum exposure to credit risk, and as at July 31, 2018, this amounted to $255,432,114.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its
liquidity risk by reviewing on an ongoing basis its capital requirements. As at July 31, 2018, the Company had $244,788,518 of cash and
cash equivalents and short-term investments.
The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to
$8,994,789 due in the next 12 months.
The carrying values of cash, trade receivables, accounts payable and accrued liabilities approximate their fair values due to their short term
to maturity.
16. Operating Expenses by Nature
July 31, 2018
July 31, 2017
$
6,992,321 $
3,092,745
4,996,513
3,659,069
2,447,069
1,761,437
1,441,830
919,799
895,714
765,238
487,996
658,620
285,081
1,234,807
547,300
786,021
499,642
359,468
231,685
236,300
$ 24,366,986
$
7,931,669
Salaries and benefits
Stock-based compensation
Consulting
Marketing and promotion
Professional fees
General and administrative
Facilities
Amortization of property, plant and equipment
Amortization of intangible assets
Travel
Total
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A 17. Related Party Disclosure
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s
operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and
Board of Directors, and they control approximately 8.77% of the outstanding shares of the Company as at July 31, 2018 (July 31, 2017 –
25.11%).
Compensation provided to key management during the period was as follows:
Salary and/or consulting fees
Stock-based compensation
July 31, 2018
July 31, 2017
$
2,244,006 $
1,269,825
3,835,733
512,056
$
6,079,739 $
1,781,881
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration
established and agreed by the related parties.
Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will
vest quarterly over two years thereafter.
On July 11, 2018, the Company granted certain directors and executives of the Company a total of 4,325,000 stock options with an exercise
price of $4.89.
On April 16, 2018, the Company granted certain directors and executives of the Company a total of 845,000 stock options with an exercise
price of $4.27.
On March 12, 2018, the Company granted certain directors and executives of the Company a total of 325,000 stock options with an
exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives of the Company a total of 1,750,000 stock options with an
exercise price of $2.69, of which half of the options will vest immediately, and the balance will vest annually over three years thereafter.
On November 6, 2017, the Company granted certain directors of the Company a total of 125,000 stock options with an exercise price of $2.48.
On September 8, 2017, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $1.37.
On July 24, 2017, the Company granted certain directors and executives of the Company a total of 125,000 stock options with an exercise
price of $1.27. On November 15, 2016, the Company granted certain directors and executives of the Company a total of 1,227,000 stock
options with an exercise price of $0.75.
The Company leased a building to a related party for $700 per month as part of a usufruct agreement. The related party used this property
as a personal residence. On December 2, 2016, the related party and the Company reached an agreement to terminate the usufruct. In
exchange for abandoning the usufruct, the Company paid the related party $46,000. Gaining access to this building provides the Company
with additional office space and thereby reduces the need to rent or build additional offices.
18. Capital Management
The Company’s objective is to maintain sufficient capital so as to maintain investor, creditor and customer confidence and to sustain
future development of the business and provide the ability to continue as a going concern. Management defines capital as the Company’s
shareholders’ equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not
paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements.
As at July 31, 2018, total managed capital was comprised of shareholders’ equity of $322,872,875 (July 31, 2017 – $32,439,490). There
were no changes in the Company’s approach to capital management during the period.
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19. Commitments and Contingencies
The Company has certain contractual financial obligations related to service agreements, purchase agreements and construction contracts.
Some of these contracts have optional renewal terms that the Company may exercise at its option. The annual minimum payments payable
under these obligations over the next five years are as follows:
Fiscal year
Amount
Letter of Credit
2019
2020
2021
2022
2023
Total
$ 61,765,917
$
890,659
$
853,851
$
800,569
$
Nil
$ 64,310,996
On June 28, 2018, the Company executed a letter of credit with a Canadian credit union as required under an agreement with a public utility
provider entitling the Company up to a maximum limit of $3,117,000, subject to certain operational requirements. The letter of credit has a
one-year expiry from the date of issue. The credit facility is secured by a guaranteed investment certificate (“GIC”). As at July 31, 2018, the
letter of credit has not been drawn upon and is in compliance with the specified requirements.
Surety Bond
On June 28, 2018, the Company entered into an indemnity agreement to obtain a commercial surety bond with a North American insurance
provider entitling the Company up to a maximum of $2,000,000. The bond bears a premium at 0.1% annually. The Company obtained the
surety bond as required under the Canada Revenue Agency’s excise tax laws for the transporting of commercial goods throughout Canada.
Litigation and Contingent Recovery
The Company is currently taking legal action to recover an investment loss incurred during the three months ended July 31, 2018. There is
no reasonable estimate for the amount of financial recovery, and no financial asset has been recognized as at the year ended July 31, 2018.
20. Loss on Investment
During the fiscal year ended July 31, 2018, the Company realized a loss on investment activities in the amount of $649,714. The Company is
currently taking legal action to recover the loss.
21. Fair Value of Financial Instruments
The carrying values of the financial instruments as at July 31, 2018 are summarized in the following table:
Assets
Cash and cash equivalents
Short-term investments
Trade receivables
Convertible note receivable
Liabilities
Accounts payable and accrued liabilities
Convertible debentures
Warrant liability
Loans and
receivables
$
–
–
Financial assets
designated
as FVTPL
$
39,341,688
205,446,830
643,596
–
–
$
–
–
–
10,000,000
$
–
–
–
Other financial
liabilities
Financial
liabilities
designated
as FVTPL
$
–
–
–
–
$
8,994,789
–
–
Total
$
39,341,688
205,446,830
643,596
10,000,000
$
8,994,789
–
$
–
–
–
–
$
–
–
3,129,769
3,129,769
The carrying values of trade receivables and accounts payable and accrued liabilities approximate their fair values due to their relatively short
periods to maturity.
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22. Income Taxes
Income tax expense recognized in comprehensive loss consists of the following components:
Current tax for the year
Adjustments of previous years
Total
Components of deferred income tax expense (recovery)
Origination and reversal of temporary differences
Difference between statutory tax rate and deferred tax rate
Change in temporary differences for which no deferred tax assets are recorded
Deferred income tax (recovery)
July 31, 2018
July 31, 2017
$
$
– $
–
– $
–
–
–
July 31, 2018
July 31, 2017
$
(6,779,861) $
130,384
(6,771)
6,786,632
(471,075)
340,691
$
– $
–
The Company’s expected tax rate is different from the combined federal and provincial income tax rate in Canada. These differences result
from the following elements:
Expected tax rate
Earnings before income taxes
Expected tax benefit resulting from loss
Adjustments for the following items:
Tax rate differences
Changes in foreign tax rates
Foreign exchange
Permanent differences
Change in temporary differences for which no tax assets are recorded
True up and other
July 31, 2018
July 31, 2017
26.9%
26.9%
$ (23,349,799) $
(10,263,937)
(6,281,096)
(3,327,909)
(6,771)
–
–
–
–
–
3,094,793
2,922,013
2,400,826
792,248
340,691
65,205
$
– $
–
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CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
The following is a reconciliation of the deferred tax assets and liabilities recognized by the Company.
Deductible temporary differences
Taxable temporary differences
Biological assets
Inventory
Loss carryforward
Share issue costs
Intangible assets
Revaluation of financial instruments – Equity
Deferred tax assets
Loss carryforward
Share issue costs – Equity
Deferred tax liabilities
Revaluation of financial instruments – Equity
Opening
August 1, 2017
Recognized
in income
Recognized in
Equity/OCI
Ending
July 31, 2018
$
812,864
$
–
$
(812,864) $
–
–
–
–
–
–
–
(812,864)
–
$
(117,094)
(457,986)
(1,431,518)
2,006,598
–
–
–
–
–
–
–
–
–
–
812,864
$
–
$
(117,094)
(457,986)
(1,431,518)
2,006,598
–
–
–
–
Opening
August 1, 2016
Recognized
in income
Recognized in
Equity/OCI
Ending
July 31, 2017
$
$
$
–
–
–
–
–
–
–
–
–
–
–
$
812,864
$
812,864
–
–
–
–
–
–
(812,864)
(812,864)
$
–
$
–
$
–
$
Deferred income taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. At July 31, 2018, deductible temporary differences and unused tax
losses for which no deferred tax assets have been recognized are attributable to the following:
Losses carried forward
Research and development expenditures
Share issue costs
Accounting amortization in deficit (excess) of tax
July 31, 2018
July 31, 2017
$ 20,671,803 $
8,198,562
265,821
13,351,528
74,000
–
–
1,201,803
$ 34,289,152 $
9,474,365
The Company has approximate non-capital losses available to reduce future years’ federal and provincial taxable income, which expires
as follows:
2034
2035
2036
2037
2038
74
$
763,471
2,143,509
2,944,011
3,182,286
19,098,000
$
28,131,277
CEO LetterThe MomentOur FoundationOur ExecutionOur FutureFinancialsMD&A
23. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the current presentation, none of which were material.
24. Subsequent Events
Molson Coors Canada Joint Venture – Truss
On August 1, 2018, the Company announced it had entered into a definitive agreement to form Truss, a joint venture with Molson Coors
Canada (the “Partner”), the Canadian business unit of Molson Coors Brewing Company, to pursue opportunities in the non-alcoholic,
cannabis-infused beverages market. Truss will be structured as a stand-alone start-up company with its own board of directors and an
independent management team. The Partner will have a 57.5% controlling interest with the Company controlling the remaining balance.
On October 4, 2018, the transaction was finalized. In connection with the transaction, HEXO has issued the Partner 11,500,000 common
share warrants at an exercise price of $6.00 for a period of three years.
Amalgamation of Subsidiary
On August 1, 2018, the operating subsidiary amalgamated with its previously wholly owned subsidiary, 167151 Canada Inc., pursuant to a
vertical amalgamation. The resulting entity retained the name HEXO Operations Inc.
Supply Agreement with Ontario Cannabis Store
On August 20, 2018, the Company announced that it had entered into a supply agreement with the Ontario Cannabis Store (“OCS”).
Under the agreement, the Company will supply the province with product which will be offered in several formulations.
Shareholder Approval of Corporate Name Change
On August 28, 2018, following a special meeting of the shareholders, the proposed change of the Company’s name to HEXO Corp. and
implementation of the new omnibus plan was approved through a majority vote.
Acquisition of 2 Million Sq. Ft. Facility in Belleville, Ontario
On September 10, 2018, the Company announced the acquisition of a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture
established with a related party, Olegna Holdings Inc. (entity under the control of a HEXO board member, “Olegna”). The Company
acquired a 25% interest in the joint venture with the remaining balance belonging to Olegna. The joint venture purchased the facility in
part by a $20,000,000 loan issued by HEXO repayable within 120 days, bearing an annual 4% interest rate, payable monthly. As part of the
agreement, the Company will be the anchor tenant for a period of 20 years.
Warehouse and Distribution Centre
On September 19, 2018, the Company announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (“Metro”).
Under the agreement, HEXO and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to
house and supply the cannabis products of all licensed producers who hold supply contracts with the Société québécoise du cannabis
(“SQDC”). The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within the province of Quebec
for orders placed through the SQDC.
Expansion into Greece
On September 26, 2018, we announced the partnership with the Greek company Qannabos (“QNBS”). Together we will create a joint
venture supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing, processing
and distribution of medical cannabis.
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STRONG GOVERNANCE
BOARD OF DIRECTORS
NATHALIE BOURQUE
Member of the Audit Committee, Chair of the Human Resources and
Corporate Governance Committee
Ms. Bourque is a member of the board of Alimentation Couche-Tard and Héroux-Devtek. She held the position
of Vice-President, Public Affairs and Global Communications at CAE Inc. from 2005 until her retirement in
February 2015. Prior to joining CAE, Ms. Bourque was a partner at NATIONAL Public Relations where she was
responsible for numerous clients in the financial, biopharmaceutical, retail and entertainment areas. Previously,
she worked for various communications companies and has also worked for accounting firms in marketing.
She was a member of the Board of Financial Services of the Caisse de dépôt et placement du Québec and
Horizon Science and Technology. She also served as President of the MBA Association and Le Cercle Finance
et Placement du Québec. She was also a Governor of McGlll University and was on the board of Maison
MarieVincent. Ms. Bourque has a BA from Laval University and an MBA from McGill University.
VINCENT CHIARA
Director, Member of the Human Resources and Corporate Governance Committee
Mr. Chiara is the President and sole owner of Groupe Mach Inc. (“Mach”). He began his career in 1984
as a lawyer specializing in real estate transactions and corporate litigation. In 1999, he ceased practising law
and focused on real estate acquisitions and property development through Mach, a private holding company.
Mach and its affiliates hold significant investments representing approximately 26 million sq. ft. of real
estate (office, retail, residential, industrial and hotel) located primarily in Montreal and Quebec City, including
the Stock Exchange Tower, the CIBC Tower, the Sun Life Building, the CBC Tower and the University
Complex. Mach continues to acquire and redevelop properties across North America while maintaining its
institutional reputation within the market.
JASON EWART
Director, Chair of the Audit Committee, Member of the Audit Committee
Mr. Ewart is a corporate director who was the co-founder and the former Chief Executive Officer and
Chief Operating Officer of Fountain Capital Corporation from 2003 until October 2017. Mr. Ewart was
a market analyst with A&E Capital Funding Inc. and Bradstone Equity Partners Inc. between 1998 and
2002 and Vice-President of Quest Investment Corporation between 2002 and 2003. He has experience
with bridge financing, financial analysis, quantitative modelling, equities trading and mergers and
acquisitions. Mr. Ewart holds an economics degree from McGill University.
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Financials
BOARD OF DIRECTORS, Continued
ADAM MIRON
Chief Brand Officer and Director
Mr. Miron has been the Chief Brand Officer of HEXO since August 2013. Mr. Miron is the co-founder
of iPolitics.ca and was its Chief Information Officer from 2010 to 2013. He was also the National Director
of the Federal Liberal Commission from 2007 to 2009 and was responsible for the Liberal Party of Canada’s
online election campaigns. He has experience with online marketing and sales, and brand development.
Mr. Miron has also run political campaigns in Canada and abroad.
DR. MICHAEL MUNZAR
Director, Chairman of the Board, Member of the Audit Committee, Member of the
Human Resources and Corporate Governance Committee
Dr. Munzar is a clinician and is currently serving as Medical Director of Statcare medical clinic in Pointe
Claire, Quebec. In addition, Dr. Munzar is on the board of directors of Osta Biotechnologies Inc., and
has held the position of Vice-President of Medical and Regulatory Affairs at Osta since 2005. He served
as Medical Director of Nymox Pharmaceutical Corporation (NASDAQ:NYMX) from 1996 to 2004 and as
the President of Serex Inc., a wholly owned subsidiary of Nymox, from 2000 to 2004. Dr. Munzar has
experience in the regulatory development of drugs and medical devices. He obtained his MDCM from
McGill University in 1979.
SÉBASTIEN ST-LOUIS
President and Chief Executive Officer and Director
Sébastien St-Louis is an entrepreneur with strong leadership abilities, financial acumen and operational
expertise. Sébastien has wide-ranging business experience in manufacturing, distribution, trade finance and
commercial lending. He has advised Canadian business owners and CEOs across multiple industry sectors,
while structuring and closing $200 million in financing to support their export and growth initiatives.
Sébastien co-founded HEXO Corp. with one goal in mind: to create a world-class company based on
the highest standards of product quality and safety. Since 2013, he has secured more than $260 million
in financing for the company. His leadership has been instrumental in navigating the company through
regulatory, financing and start-up challenges en route to becoming the only significant licensed cannabis
producer in Quebec and, upon completion of two fully funded expansion projects currently underway, one
of the largest in Canada. Sébastien holds an MBA in Finance from the Université du Québec à Montréal and
completed his Bachelor of Arts (Economics) from the University of Ottawa in 18 months.
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MD&A
General Corporate Information
Corporate Office
490 Boul. St-Joseph
Offices 102 and 204
Gatineau, QC J8Y 3W9
Phone: 1-866-438-8429
Auditors
MNP LLP
mnp.ca/en
Registrar and Transfer Agent
TSX Trust Company
301 – 100 Adelaide Street West
Toronto, ON M5H 4H1
Phone: 1-866-393-4891 ext. 205
tmxeinvestorservices@tmx.com
Stock Exchange Listing
HEXO Corp. trades on the TSX under the ticker symbol “HEXO”.
Shares cannot be purchased directly from the Company.
Investor Relations Inquiries
Email:
invest@HEXO.com
Website:
ir.hexo.com
Additional financial information has been filed electronically
with various securities regulators in Canada through the
System for Electronic Document Analysis and Retrieval (SEDAR),
sedar.com.
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Co-founders
Sébastien St-Louis, left, and
Adam Miron, right.
“Consumer-centric brand companies capable of delivering
consistently great experiences – that’s the future of cannabis.
It’s a future for true leaders. A future for HEXO Corp.”
- Sébastien St-Louis, CEO
Concept and Design: THE WORKS DESIGN COMMUNICATIONS worksdesign.com