Table of Contents
INTRODUCTION ................................................................................................................................................................ 2
COMPANY OVERVIEW ..................................................................................................................................................... 3
M&A ACTIVITY .................................................................................................................................................................. 3
STRATEGY AND OUTLOOK ............................................................................................................................................ 4
OPERATIONAL EXCELLENCE ..................................................................................................................................................................................... 4
INNOVATION ............................................................................................................................................................................................................ 5
CONSUMER CENTRIC................................................................................................................................................................................................ 5
CANADIAN CANNABIS BUSINESS ................................................................................................................................. 6
TRUSS BEVERAGE CO. ................................................................................................................................................... 8
HEXO GROUP OF FACILITIES ......................................................................................................................................... 9
HEXO USA ....................................................................................................................................................................... 12
CORPORATE SOCIAL & ENVIRONMENTAL RESPONSIBILITY ................................................................................. 13
COVID-19 UPDATE ......................................................................................................................................................... 14
CORPORATE HIGHLIGHTS AND EVENTS ................................................................................................................... 14
FINANCIAL RESULTS ..................................................................................................................................................... 17
OPERATIONAL AND FINANCIAL HIGHLIGHTS ........................................................................................................... 18
SUMMARY OF RESULTS ............................................................................................................................................... 19
ADJUSTED EBITDA ........................................................................................................................................................ 28
FINANCIAL POSITION .................................................................................................................................................... 30
LIQUIDITY AND CAPITAL RESOURCES ....................................................................................................................... 31
GOING CONCERN ........................................................................................................................................................... 32
CAPITAL RESOURCES .................................................................................................................................................. 33
CAPITALIZATION TABLE ............................................................................................................................................... 35
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS ................................................... 36
FINANCIAL RISK MANAGEMENT.................................................................................................................................. 37
CRITICAL ACCOUNTING ASSUMPTIONS .................................................................................................................... 39
RELATED PARTY TRANSACTIONS .............................................................................................................................. 41
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING ....................................... 42
RISK FACTORS ............................................................................................................................................................... 45
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS .................................................... 50
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended
July 31, 2021
All dollar amounts in this MD&A are expressed in thousands of Canadian dollars, except for share and per share
amounts, and where otherwise indicated. Amounts expressed in United States dollars (“USD”) are expressed as USD$.
Introduction
This MD&A of the financial condition and results of operations of HEXO Corp and our subsidiaries (collectively, “we” or
“us” or “our” or “Company” or “HEXO”) is for the year ended July 31, 2021. HEXO is a publicly traded corporation,
incorporated in Ontario, Canada. The common shares of HEXO trade under the symbol “HEXO” on both the Toronto
Stock Exchange (“TSX”) and the National Association of Securities Dealers Automated Quotations (“Nasdaq”). This
MD&A is supplemental to, and should be read in conjunction with, our audited consolidated financial statements
(“financial statements”) for the year ended July 31, 2021. Our consolidated financial statements are prepared in
accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board.
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 hexocorp.com/investors or through the SEDAR website at sedar.com or the
EDGAR website at www.sec.gov/edgar.
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, cannabis products in any jurisdiction where the sale of cannabis is unlawful under
applicable laws. HEXO does not currently engage in any unlawful U.S. marijuana-related activities as defined in
Canadian Securities Administrators Staff Notice 51-352 (Revised) - Issuers with U.S. Marijuana-Related Activities and
will only do so in the future to the extent fully legal under all applicable U.S. federal or state laws.
Management estimates that the working capital as at July 31, 2021 and forecasted cash flows may require additional
capitalization in order to meet the Company’s obligations through October 29, 2022. Please see Note 2 of the financial
statements, and Liquidity and Capital Resources – Going concern section of this MD&A, for a more detailed discussion.
As at the date of this MD&A, the Company continues to assess the fair market value of the acquired net assets and
working through the purchase price allocation of Redecan and 48North Cannabis Corp. (“48North”). The Company will
account for both acquisitions under IFRS 3, using the acquisition method.
This MD&A is dated October 29, 2021.
2 MD&A
Company Overview
HEXO is a leading consumer-packaged goods (“CPG”) cannabis company with a top Canadian market share. We have
a history of developing innovative award-winning products driven by our deep passion for manufacturing and bringing to
market a diversified portfolio to our valued adult-use consumers and medical clients. We are keenly focused on delivering
a complete range of experiences to our consumers who count on us for safe, reputable high quality cannabis products.
Headquartered in Gatineau, Quebec, with facilities across North America, we are constantly assessing our product
development, cultivation, processing, marketing and sales practices to offer adult-use and medical cannabis products,
extracts and derivatives in accordance with the Cannabis Act in Canada and globally pursuant to all applicable
international regulations.
We manufacture and sell CBD Powered by HEXO® products in 17 states in the U.S. in partnership with Molson Coors
and have taken HEXO international with our medical cannabis product offerings.
M&A Activity
On June 1, 2021, we completed the acquisition of Zenabis Global Inc. (“Zenabis”), and subsequent to year end, we
completed the acquisition of Redecan and 48North Cannabis Corp.
Through our acquisition of Zenabis we have broadened our cultivation facilities with a state-of-the-art indoor grow facility
in Atholville, NB. We have strengthened our relationship with provincial sales boards and expanded our market share.
Redecan was Canada’s largest private licensed producer, with a strong brand following and market leading products.
They are known for leading manufacturing, automation and packaging capabilities, resulting in some of the most
consistent, efficiently produced products in the industry. Their highly efficient proprietary pre-roll technology has
supported some of the highest gross margins in the industry. 48North is allowing us the potential to expand our product
lines related to beauty, cosmetics and topicals.
Each of these acquisitions provides a unique strength to bolster our corporate strategy. As we integrate these companies
into the HEXO family, we are focused on ensuring that we implement the strengths of each company across the
organization, identify and resolve any weaknesses, and obtain synergistic value for the organization. We believe these
acquisitions will increase our market share, accelerate our path to profitability and EPS, as well as providing accretive
synergies.
Our new combined company has a top 2 market share in Canada, and holds the number one position in pre-rolls, oils,
capsules, beverages and customer loyalty.
3 MD&A
Strategy and Outlook
Our strategy is to maintain our position as an industry leader in Canada and achieve similar success internationally, by
delivering safe, high quality and innovative cannabis products to our consumers. We are focused on delivering long term
shareholder value by leveraging our scale, expertise and capabilities, as well as managing our operating expenses to
drive positive cash flow and earnings per share.
OPERATIONAL
EXCELLENCE
Invest in people, processes,
and systems to meet market
demands, adapt to new
opportunities and provide users
with high-quality products at
sustainable operating costs
INNOVATION
CONSUMER CENTRIC
Continue to innovate and lead the
market in identifying, developing
and launching new cannabis
products and formulations with
improved technology that enhance
the consumer experience through
“Powered by HEXO”
Using consumer insight to develop
purposeful brands to support
consumer needs across
categories and price points
Operational Excellence
In order to provide safe high-quality cannabis, with an efficient cost structure, we have invested considerable time
designing and building out our operations. We are constantly reviewing our processes, practices and technology to
ensure we are keeping our costs low and our yields high. We have been growing at our flagship Quebec greenhouses
since 2014. Establishing our primary cultivation operations in Quebec has offered us access to renewable electricity at
competitive rates, abundant water resources and a skilled workforce. Over the years, our facilities have grown from
7,000 sq. ft. to over 1 million sq. ft. Through our acquisitions, we have obtained a state-of-the-art indoor grow facility in
Atholville, New Brunswick, as well as a premier outdoor grow site in Cayuga, Ontario, through the acquisition of Redecan
on August 30, 2021.
We have also established our post-cultivation manufacturing Centre of Excellence in Belleville, Ontario for processing
and packaging. The site is designed to not only meet our needs today but will allow us, and our partners, room to expand
in the future. Through our acquisition of Redecan, we have acquired a state-of-the-art lean production facility with fully
automated packaging lines and proprietary pre-roll technology. Through our integration process we are reviewing this
technology and scaling it into our existing facilities.
We are investing in advanced manufacturing technologies and practices that compete directly with the technology at top
CPG companies across all industries. We have focused on the supply chain from seed to sale to ensure that we are
using the right people, technology, benchmark practices and services to consistently deliver fresh product to market. All
with the lowest capital deployed per % of market share by a leading LP 1.
1 Total Capital deployed defined as total assets less cash plus accumulated deficit. Market share calculated as the trailing 6 months as at July 31, 2021 based on
headset data. Calculated using the most recently available public information.
4 MD&A
Innovation
We are known for our history of innovation. Whether it’s creating new products (Canada’s first sublingual mist), identifying
market opportunities (Canada’s first value brand offering), or using advanced technology to improve products (creating
the number one selling cannabis infused beverage brand in Canada). Our focus on product development through
research, innovation and technology continues to be one of our core strategic priorities.
We believe that by investing in platform technologies we can create the next generation of cannabis products. As a
result of these technologies, we have one of the industry’s top IP portfolios.2 These products allow us to expand our
market share and target new consumers who are not currently participating in the legal market.
Our recent acquisitions complement this strategy. We are expanding our product offerings and incorporating new
technology into our production facilities to ensure we are bringing the best possible product portfolio to our consumers.
Our cultivation facilities now include greenhouses, a state of the art indoor, and an outdoor grow facility.
Part of being an innovator is being able to see a problem and identify a solution. Trim is a byproduct of the harvesting
process, it’s the leaves and little bits that are removed when we harvest the flower. There’s more of it than you would
think, and there’s cost associated with it. Prior to 2020 most of it was destroyed, written off or put into the vault (inventory).
This led to write-downs of inventory, increased cost of sales, and decreased gross margins, but we saw its potential. We
created a trim management initiative and thought of new ways that we could use this byproduct in our innovative products.
Today, trim is the main ingredient in OS.HASH (#1 in Canada), OS pre-rolls, OS.KLIK, OS.SHAKE (#1 15g SKU in QC)
and other advanced cannabis products. This helps us keep our costs low while continuing to supply award-winning
products to our consumers. We believe that Keystone Isolation Technologies (“KIT”) will allow us to do even more.
Building on our innovation platform, we have established KIT, a joint venture where we hold 60% of the ownership. This
top tier extraction and isolation technology will allow us to supply quality cannabis and hemp extracts to our CPG partners
to bring innovative products to market. We believe that the technology will allow us to scale up as required along with
providing consistent high potency and purity for our distillates and isolates. We plan to leverage this technology through
KIT’s sister entity in the U.S. (see section “HEXO USA”).
Consumer Centric
Since our establishment in 2013, we have had the goal of becoming a leader in the Canadian cannabis industry. Today,
as one of the Canadian market-share leaders, we are confident in our ability to shape the global cannabis industry by
focusing on consumers, and that by succeeding in Canada, we are well positioned to become a major global player. We
built a strong position in our initial jurisdiction, Quebec, where we maintain a top market share, and have expanded to all
ten provinces in Canada. We are continuing to increase our sales across Canada and diversify our reach outside of
Quebec, to increase our overall market share and have made significant gains in key markets such as Ontario and British
Columbia. We made strategic acquisitions of Zenabis, and subsequent to year end, Redecan and 48 North to continue
expanding our market share and build our diverse house of brands. We have focused on analyzing key consumer insights
and developing brands that resonate with consumers across market segments, and represent innovation, quality and
consistency.
2 Based upon a third-party report which compares the Company’s published patent applications relative to its peers in the Canadian Cannabis market using the recently
available public data.
5 MD&A
Canadian Cannabis Business
6 MD&A
7 MD&A
Truss Beverage Co.
Through Truss Beverage Co. (“Truss”), our business venture with Molson Coors Canada (“Molson Canada”) we have
positioned ourselves to meet the cannabis beverage market in Canada head on. Truss is committed to developing and
producing a range of cannabis beverages that focus on great taste, consistency and choice for consumers. We currently
offer one of the largest portfolios of cannabis infused beverages and extract products in the Canadian market.
The average consumer’s appetite for smoke free alternatives to cannabis
consumption3 continues to grow with the introduction of legal Cannabis 2.0
products into Canada. The total Canadian cannabis beverage category grew
31%, while the total cannabis sector grew by 13% 4. Although we only entered
the Canadian market at the beginning of this fiscal year, Truss products have
already had early success, most notably holding the top cannabis beverage
market position in Canada with almost 50% of sales 5. Truss products also hold
the number on beverage brand position in Canada, with XMG 6. We believe that
the beverage brand portfolio offers a range of experiences from the high CBD
found in Veryvell sparkling flavored water to XMG, which boasts 10mg of THC
per beverage, and ideally positions Truss to meet consumer demand and
maintain its position as an industry leader.
Truss’ CBD and THC products were developed with consumer input
throughout the entire process of bringing the products to market. The current
portfolio includes of the following five brands:
Little Victory: Vibrant, naturally flavoured sparkling beverages to toast to any of life’s little victories.
House of Terpenes: A range of terpene-forward sparkling tonics that celebrate the flavours of cannabis.
Mollo: Crisp with an easy drinking taste.
Veryvell: A complete line-up of products to support your self-care journey.
XMG: A range of high intensity flavoured beverages.
Truss beverages are produced and distributed from HEXO’s Belleville facility. Currently, the beverage related operations
are conducted by HEXO (through the operations of HEXO Cannabis Infused Beverages or “HEXO CIB”) under HEXO’s
licensing. Subsequent to year end, on October 1, 2021. Truss obtained its own processing license. We expect Truss to
acquire the appropriate selling license from Health Canada during fiscal year 20227, at which point sales and operations
will transfer to Truss. Truss submitted their independent application to Health Canada on October 26, 2020.
3 Per Deloitte’s “Seeding New Opportunities – Listening to Canada’s Cannabis Consumer” 2021 report.
4 Per Source: Headset Total Canada Category Sales from May 1 1, 2021 to July 31, 2021 compared to February 1, 2020 to April 30, 2021.
5 Per internal review of Headset sales data based on $ sold Sales from May 1, 2021 to July 31, 2021.
6 Per internal review of Headset sales data based on $ sold Sales from May 1, 2021 to July 31, 2021.
7 Due to the experienced delay in obtaining the Belleville facility’s sales license, in part, due to Health Canada and the COVID-19 pandemic related delays, the expected
timing for Truss acquiring their independent license has been delayed. The Company expects to receive licensing within the 2022 fiscal year. The assumption of acquiring
this licensing is derived through the Company’s internal expertise and historical experience in obtaining licensing from Health Canada.
8 MD&A
HEXO and Molson Coors Beverage Company have created an additional Truss
business venture, Truss CBD USA LLC, to explore opportunities for non-
alcoholic, hemp-derived CBD beverages in the state of Colorado. See the
section “HEXO USA” for additional information.
HEXO Group of Facilities
The following provides information about HEXO’s facilities as of July 31, 2021 unless otherwise noted. The table does
not reflect the facilities acquired through the Redecan and 48N acquisitions:
Location
Gatineau, Quebec
Primary
Purpose
Cultivation
9 MD&A
Description
The Company’s Gatineau, Quebec facility is its main cultivation
facility, featuring 1,292,000 sq. ft. of greenhouse cultivation space on
a 143-acre campus. The greenhouse space is comprised of a 7,000
sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2016, a
250,000 sq. ft. greenhouse completed in June 2018 and a 1 million
sq. ft. greenhouse completed in December 2018, known as B9.
Except as noted below, the facility is licensed by Health Canada
(Standard Cultivation, Standard Processing, Sale for Medical
Purposes, (the current license was amended effective April 7, 2020
and expires April 7, 2023), and Research (the previous license
obtained October 25, 2019 was amended to include the Belleville
and Vaughn facilities, with the result that the current license is
effective August 27, 2020 and expires October 25, 2024)) and is fully
operational.
On January 15, 2021, the final phase of B9 received licensing,
however, the space was not operational as at July 31, 2021. This
zone was previously expected to become operational by the end of
fiscal 2021, however the Company is undergoing further review of its
cultivation requirements in light of the three recent acquisitions of
licensed producers and redeploying capital as needed. As of the
date of this MD&A management estimates that the final fit ups will
begin in late FY22 to be finalized in FY23.
As at July 31, 2021 the Gatineau facility is operational and directly
and/or indirectly generates sales for the Company, with the
exception of the final phase of B9 as stated above. The approved
remaining budget was increased to $6,160 to online the asset to be
utilized as intended by management.
Atholville,
New Brunswick
Cultivation
The Company owns and operates the Atholville Facility, (obtained
through the acquisition of Zenabis on June 1, 2021) a 380,000 sq. ft.
indoor facility in Atholville, New Brunswick. The Atholville facility is fully
licensed by Health Canada for Standard Cultivation, Standard
Processing and Sale for Medical Purposes, (effective July 19, 2021
and expires July 19, 2025). In addition, a Research license has been
granted (effective December 14, 2020 and expires December 10,
2025) to conduct activities at the facility) and is currently operating at
a steady state of production. The facility received EU - GMP approval
from its Malta based European partner, ZenPharm Ltd. for operations.
This is Company’s first significant indoor grow facility.
Belleville, Ontario
(HEXO and Truss)
Belleville, Ontario
(KIT)
Manufacturing HEXO’s Belleville, Ontario facility is its centralized processing,
manufacturing and distribution centre, featuring 932,190 sq. ft. of
leased commercial space within a larger approximately 1.5 million sq.
ft. industrial facility, with rights of first offer and first refusal to lease the
remaining space in the facility. The facility acts as the Company’s main
production facility for processing, extraction and packaging, and the
manufacturing of cannabis derivative products. Truss Beverage Co,
the Company’s venture with Molson Canada, is planned to operate at
this facility once it obtains a separate license from Health Canada and
it currently effectively operates under HEXO’s license through HEXO
CIB. The Company has subleased 183,600 sq. ft. to Truss, which
Truss has then subleased back to HEXO CIB pending Truss’
licensing. The facility is owned by Belleville Complex Inc., 25% of
which is owned by the Company and the balance of which is owned
by Olegna Holdings Inc. a company affiliated with a director of the
Company, Vincent Chiara.
The Belleville facility is licensed by Health Canada for Standard
Processing and Sale for Medical Purposes (current license effective
October 21, 2020 and expiring October 21, 2023). The facility also has
a Cannabis Research license (effective August 27, 2020 and expires
October 25, 2024). HEXO received an amendment to the license to
authorize non-medical sale of additional cannabis product types,
including derivative products on May 29, 2020.
Accordingly, the facility is now operational manufacturing and selling
activity.
Manufacturing KIT is expected to operate out of a separate area within the Belleville
facility and provide the Company with high quality extraction
technology to facilitate production transformation for certain of the
Company’s cannabis derivative products. KIT will effectively operate
under the Company’s license as described in section ‘Belleville,
Ontario (HEXO)’. Previously management anticipated KIT to be
operational by the end of the calendar year, however, due to additional
construction required to zone the operations management now
expects to have KIT commissioned and ready for testing before the
end of Q2’22. Therefore, KIT remains non-operational as at July 31,
2021.
As at July 31, 2021 the remaining capital budget for KIT remains in
draft and is approximately $14,400 of incremental spend to prepare
the site and take KIT operational.
Fort Collins, CO, USA Manufacturing
In June 2021, the Company finalized the acquisition an approximate
50,000 sq.ft. facility in the state of Colorado. The Company’s first
10 MD&A
Stellarton,
Nova Scotia
Manufacturing
Brantford, Ontario
R&D
Vaughan, Ontario
R&D
international property allows for the necessary infrastructure to
expand our joint venture with Molson Coors, Truss CBD USA and
provide US CPG companies access
the Powered by
HEXO® technology and products.
to
The Company obtained the Stellarton Facility by way of the acquisition
of Zenabis on June 1, 2021. The 255,000 sq. ft. indoor facility in
Stellarton, Nova Scotia, is currently used as a packaging, processing
and value-added cannabis product manufacturing facility. The facility
is currently licensed by Health Canada for Standard Cultivation and
Standard Processing (effective May 29, 2020 and expiring March 1,
2022). In addition, a Research license has been granted (effective
December 14, 2020, and expiring December 10, 2025) to conduct
activities at the site.
HEXO’s Brantford, Ontario facility is currently serving as a strain
development site (with additional cultivation capability) facility,
featuring 14,000 sq. ft. of indoor growing space on 1 acre of land. The
facility was designed and engineered to permit pharmaceutical-quality
management standards utilized by Canada’s pharmaceutical
manufacturers to be used in the production of cannabis in all
acceptable forms. The facility is fully licensed by Health Canada
(Standard Cultivation, Standard Processing and Sale for Medical
Purposes (current license effective December 6, 2019 and expiring
December 6, 2022)).
Subsequent to July 31, 2021, management has decided to wind down
operations at the R&D facility and relocate this activity to the Masson
campus.
HEXO’s Vaughan, Ontario facility is its planned cannabis research
laboratory for the development of edible products and related
intellectual property, featuring 14,200 sq. ft. of leased commercial
space. The facility includes a sensory testing area and a complete
commercial kitchen. The facility received its Cannabis Research
license on August 27, 2020, which is effective until October 25, 2024.
Ottawa, Ontario
Other
HEXO leases approximately 40,036 sq. ft. of office space in Ottawa,
Ontario for its administrate and finance office space.
Montreal, Quebec
Other
Langley,
British Columbia
Other
11 MD&A
HEXO’s Montreal Quebec distribution facility is a warehouse and
distribution centre, featuring 58,000 sq. ft. of leased commercial
space. The facility serves as a warehouse and distribution centre for
Quebec adult-use webstore orders for the SQDC, which are managed
for the SQDC by HEXO and Metro Supply Chain Group Inc. It houses
product from all the licensed producers who have contracts with the
SQDC and serves as the sole distribution point for all direct-to-
consumer shipments within the Province of Quebec for orders placed
through the SQDC online webstore. This facility is fully operational and
is regulated by the SQDC and does not require licensing by Health
Canada.
The Langley Facility was acquired by the Company via the acquisition
of Zenabis on June 1, 2021. The facility was a leased 450,000 sq. ft.
greenhouse in Langley, British Columbia retrofitted for cannabis
production. The facility was licensed by Health Canada for Standard
Cultivation and Standard Processing (effective December 13, 2019
and expires August 2, 2022). In addition, a Research license has been
granted (effective December 14, 2020 and expires December 10,
2025) to conduct activities at this site. In August 2021, the Company
finalized the decision to close the facility as part of synergistic efforts
to streamline operations and reorganize under the new group of
entities.
As of the date of this MD&A, the Company has significantly completed
ending its operations at the Langley Facility. The cessation of
operations is in order to realize synergistic cost savings as intended
on acquisition.
HEXO USA
We believe that the U.S. cannabis market represents a significant opportunity to create a global company. As such, we
have taken some important first steps to begin entering this market.
Established HEXO USA Inc. (“HEXO USA”) – a wholly owned US based entity to facilitate our expansion into
the US hemp market. We have appointed a general manager for HEXO’s U.S operations whose role currently
includes standing up and commissioning production facilities, overseeing operations, supply chain and logistics,
and building the team.
Established KIT USA – Sister entity of KIT, which will allow for in state, HEXO controlled cannabis extraction
activity. In the future we aim to utilize this technology to offer our “Powered by HEXO” products to our future
partners.
Establish Truss CBD USA – We have created a second joint business venture, Truss CBD USA LLC (“Truss
CBD USA”) with Molson Coors Beverage Company (“Molson Coors”). Established in Colorado, Truss CBD
USA is majority owned by Molson Coors and operates as a stand-alone entity with its own board of directors,
management team, resources and go-to-market strategy. All production for Truss CBD USA will be kept within
Colorado state lines since it is one of a few states that has an established regulatory framework for hemp-
derived CBD in food and beverages.
During the current fiscal year, Truss CBD USA was rolled out across select grocery markets within Colorado.
Subsequent to year end, Truss CBD USA launched products in an additional 17 states. The operations of
Truss CBD USA are currently non-material. Truss CBD USA and HEXO’s activities in relation to it will be
conducted in accordance with all applicable laws.
Purchased facility - On June 28, 2021, we announced the completion the acquisition of a 50,000 sq. ft. facility
in Colorado to use for our U.S. expansion plans. The facility is zoned for production of a full range of cannabis
products and offers a variety of operational capabilities. The site is located along primary shipping routes and
will be retrofitted to support Powered by HEXO® initiatives across the country.
12 MD&A
Corporate Social &
Environmental Responsibility
At HEXO, our goal is to become one of the top three global cannabis products companies. We know that if we want to
achieve our goal, we need to think about more than just our products and prices. We must also examine the way our
operations impact the natural and social environment. We are monitoring and reporting on our greenhouse gas
emissions, setting targets to reduce them, and offsetting our footprint. Our Corporate Social Responsibility Charter
focuses on four priorities: People, Public, Products and Planet.
We recently entered into a partnership with Offsetters, a Vancouver-based organization that supports renewable energy
and carbon projects across the world, and became carbon neutral in September 2021, as well as offseting 100% of the
Company’s operational carbon emissions in addition to the personal emissions of our 1,200 employees 8. At home in
Canada, we are helping reduce old-growth tree harvesting by supporting the Great Bear Forest Carbon Project. This
landmark project balances human well-being and ecological integrity through carbon finance and is the first carbon
project in North America on traditional territory with unextinguished Aboriginal rights and title.
In addition to carbon emissions, we are also counteracting the use of plastic in our packaging. Working
alongside our primary packaging supplier Dymapak, in conjunction with Plastic Bank, we have supported Plastic Bank’s
ethical recycling ecosystems in coastal communities which collect and reprocess ocean-bound plastics for re-introduction
to the global manufacturing supply chain. In doing so, we have offset 71,000 kilograms of plastic – the total equivalent of
over 3.55 million plastic bottles.
For us, this is just the beginning, and for HEXO, forward starts at neutral.
8 Estimated personal emissions based on the average Canadian’s emissions from heating and powering their homes, driving and food consumption.
13 MD&A
COVID-19 Update
During the year ended July 31, 2021, certain Canadian provinces, enacted province wide restrictions and protocols as a
response to the rapid increase in COVID 19 cases, hospitalizations and new variants of the virus. Near the end of the
year provinces loosened restrictions as vaccination rates increased and cases counts decreased. Subsequent to this
loosening, some areas have reinstituted restrictions as a result of an increase in case counts. COVID-19 remains an
evolving situation that the Company continues to monitor closely for our employees, our customers, and our
stakeholders.
The current impact of COVID-19 and the various provincial restrictions cannot be accurately quantified and may have
materially impacted the Company’s earnings. Due to the speed with which the COVID-19 situation is developing and the
uncertainty of its magnitude, outcome and duration, it is not possible to estimate the future impact on our business,
operations or financial results. Refer to the section “Risk Factors” section for further COVID-19 related risks to the
business.
As of the date of this MD&A, the cannabis industry continues to be deemed an essential service to Canadians.
Corporate Highlights and Events
FOURTH QUARTER OF FISCAL 2021
Zenabis Acquisition
Zenabis is a Canadian-licensed producer of medical and recreational cannabis. They have a cannabis import, export
and processing joint venture, ZenPharm, operating out of Birżebbuġa, Malta. HEXO acquired all of the issued and
outstanding shares of Zenabis, which was previously listed on the TSX, on June 1, 2021 by way of plan of arrangement.
As of the date of this report, management’s evaluation of the Zenabis operations and their integration is still in process.
The directional strategy for each site and brand is being carefully assessed in order to maximize the proforma value of
the combined entity.
Establishment and Launch of At-the-Market Offering up to $150 Million
On May 11, 2021, HEXO established an at-the-market equity program (the “ATM Program”) that allows us to issue and
sell up to $150 million (or its U.S. dollar equivalent) of common shares in the capital of the Company (the “Common
Shares”) from treasury to the public, at the Company’s discretion. As at July 31, 2021, we had raised gross proceeds of
$46,987 through the issuance of 6,373,926 common shares.
14 MD&A
Public Offering of USD$360m Senior Secured Convertible Notes
On May 27, 2021, we closed an offering of USD$360 million aggregate principal amount of senior secured convertible
notes (the “Notes”) directly to an institutional purchaser and certain of its affiliates or related funds (collectively, the
“Purchaser”).
The Notes were sold at a purchase price of USD $327.6 million or approximately 91.0% of their principal amount. The
Notes will mature on May 1, 2023 (the “Maturity Date”). Subject to certain limitations, the Notes will be convertible into
freely tradeable common shares of the Company at the option of the Purchaser and, subject to conditions and limitations,
at the option of the Company. If not previously converted, all principal repayments of the Notes will made be at a price
equal to 110% of the principal amount of the Notes being repaid. The Notes will not bear interest except upon the
occurrence of an event of default. The Notes will be issued in registered form, without coupons, under a trust indenture
dated May 27, 2021, between HEXO and GLAS Trust Company LLC as trustee (the “Trustee”), as supplemented and
modified by resolutions of the board of directors of the Company.
Upon closing of the offering, 70% of the net proceeds have been placed into escrow with a third party. The escrow funds
were released in conjunction with the closing of the acquisition of Redecan.
SUBSEQUENT TO JULY 31, 2021
HEXO Transfers US Stock exchange Listing to the NASDAQ
On August 13, 2021, the Company applied to transfer its U.S. stock exchange listing from the New York Stock Exchange
to the Nasdaq. The transfer was completed on August 24, 2021, at which point the common shares of HEXO began
trading as a Nasdaq-listed security with the shares continuing to trade under the symbol “HEXO”.
USD$144.8M Underwritten Public Offering
On August 24, 2020, the Company closed an underwritten public offering for total gross proceeds to the Company of
US$144,786. The Company sold 49,080,024 units of the Company at a price of US$2.95 per Unit under this offering,
including 1,622,396 units sold pursuant to the partial exercise of the underwriters’ over-allotment option.
Each unit is comprised of one common share of the Company and one half of one common share purchase warrant of
the Company. Each full warrant is exercisable to acquire one common share of the Company for a period of 5 years
following the closing date of the Offering at an exercise price of US$3.45 per share, subject to adjustment in certain
events.
The Company used the net proceeds from the Offering to satisfy a portion of the cash component of the purchase price
payable to the Redecan shareholders on closing of the Redecan acquisition (see below) and for expenditures in relation
to the Company’s U.S. expansion plans.
Acquisition of 48North Cannabis Corp.
On September 1, 2021, HEXO completed the acquisition of 48North. HEXO acquired all issued and outstanding
commons shares of 48North at a conversion rate of one common share of 48North to 0.02366 of a HEXO common
share. The total number of shares acquired and reissued were 5,352,005. Shares of 48North were de-listed from the
TSX Venture Exchange on September 2, 2021
Acquisition of Redecan
On August 30, 2021, the Company completed its acquisition of all of the outstanding shares of the entities that carry on
the business of Redecan, Canada’s largest privately-owned licensed producer. At closing, HEXO paid the selling
shareholders of Redecan $400,000 in cash and delivered 69,721,116 newly issued common shares of HEXO with an
approximate value of $214,043. Upon closing the acquisition of Redecan, Peter James Montour joined the HEXO board
of directors. Will Montour will act as non-voting observer on the board of directors, until his election to the board in
accordance with the investor rights agreement undertaken at acquisition.
15 MD&A
Expansion of Global Leadership Team
The Company appointed Valerie Malone as Chief Commercial Officer, effective September 6, 2021. Valerie brings more
than 20 years of experience managing businesses across different verticals including consumer packaged goods,
technology and electronics, durable goods and consulting to her role at HEXO. As HEXO’s Chief Commercial Officer,
Valerie will oversee the Marketing, Sales and Product Development groups with a focus on commercial strategy and
development.
The Company also appointed Guillaume Jouët as Chief People & Culture Officer, effective September 8, 2021. Guillaume
brings more than 20 years of experience as a senior international executive leading human resources, sustainability,
public affairs and communications functions, to his role at HEXO. Recognized for successfully connecting growth and
sustainability strategies, talent and organization development, innovation, and business opportunities, Guillaume has a
proven record of driving engagement and performance. As HEXO’s Chief People & Culture Officer, Guillaume will
oversee the People & Culture group with a focus on developing and building an engaged workforce that supports the
company’s corporate goals.
Strategic Executive Change
On October 18, 2021, Sebastien St-Louis, Co-Founder and Chief Executive Officer, departed the Company. Mr. St-
Louis will remain on the Company’s board of directors. HEXO also announced the resignation of the Company's Chief
Operating Officer, Donald Courtney. He will remain as COO until a suitable replacement is identified.
On October 20, 2021, the Company appointed Scott Cooper as incoming President and Chief Executive Officer. The
Company’s Chairman, Dr. Michael Munzar will be acting in the capacity of the Chief Executive Officer until the
Company’s 2021 annual report is publicly filed, at which time, Mr. Cooper will effectively become the Company’s
President and Chief Executive Officer.
16 MD&A
Financial Results
17 MD&A
Operational and Financial Highlights
KEY FINANCIAL PERFORMANCE INDICATORS
Summary of results for the three months ended July 31, 2021, April 30, 2021 and July 31, 2020, and the years ended July 31, 2021,
2020 and 2019.
Income Statement Snapshot
Revenue from sale of goods
Excise taxes
Net revenue from sale of goods
Ancillary revenue
Total revenue
July 31,
2020
For the three months ended
July 31,
2021
April 30,
2021
$ $
33,082
(10,482)
22,600
60
53,022
(14,365)
38,657
103
38,760
36,140
(9,082)
27,058
87
22,660 27,145
For the twelve months ended
July 31,
2021
$ $
173,081
(49,583)
123,498
271
July 31,
2020
$
110,149
(29,598)
80,551
233
123,769 80,784
July 31,
2019
$
59,256
(11,914)
47,342
199
47,541
Gross profit before adjustments2
Gross profit/(loss) before fair value adjustments2
Gross profit/(loss)2
7,988
1,499
3,234
5,006
4,379
8,816
8,104
(36,012)
(34,690)
34,175
29,066
48,798
26,953
(46,421)
(57,975)
21,344
2,009
24,508
Operating expenses
Loss from operations
Other expenses and losses
Loss and comprehensive loss before tax
(63,116)
(59,882)
(9,630)
(69,512)
(24,906) (71,509)
(16,090) (106,199)
(63,333)
(20,711) (169,532)
(4,621)
(134,293)
(85,495)
(29,664)
(115,159)
(418,576)
(476,551)
(75,961)
(552,512)
(111,482)
(86,974)
(847)
(87,821)
18,213
Current and deferred tax recovery
–
Other comprehensive income
(69,608)
Total Net loss and comprehensive loss
1 The Company has adjusted the presentation of gross profit before fair value adjustments by removing inventory and biological asset write offs and
– 397
–
1,152
(20,708) (169,532) (113,610)
6,023
–
(546,489)
397
1,156
(67,959)
–
3
impairment losses.
2 See section ‘Cost of Sales, Excise Taxes and Fair Value Adjustments’ for reconciliation of gross profits
Quarterly Financial Significant Items
•
•
•
Total revenue growth of 71% quarter over quarter and 43% from the comparative quarter of fiscal 2020.
41% organic growth (exclusive of sales from acquisition) in total net sales during the period from Q3’21.
$6,800 of Zenabis contributed net sales for the post acquisition, two months ended July 31, 2021.
• Net adult-use revenue (exclusive of beverages) increased 28% quarter over quarter.
• Cannabis beverage net sales growth of 70% quarter over quarter and 161% from the prior fiscal year.
• Acquisition and transactions costs related to the M&A activity of Zenabis, 48North and Redecan were $14,869 and $17,174
in the three and twelve months ended July 31, 2021, respectively.
•
•
The recognized deferred day 1 loss on the senior secured convertible note was $9,229 in the three months ended July 31,
2021.
The Company has issued a going concern note (Note 2) within the financial statements for the year ended July 31, 2021
(see section ‘Going Concern.’)
18 MD&A
Summary of Results
Revenue
The following table represents the Company disaggregated gross and net revenues by sale stream for past rolling five fiscal
quarters.
For the three months ended
Units
Q4’21
Q3’21
Q2’21
Q1’21
Q4’20
ADULT-USE (EXCLUDING BEVERAGES)
Adult-use cannabis gross revenue
Adult-use excise taxes
Adult-use cannabis net revenue
Dried grams and gram equivalents sold (kg)
$
$
$
kg
ADULT-USE (BEVERAGES)
Adult-use cannabis gross revenue
Adult-use excise taxes
Adult-use cannabis net revenue
Dried grams and gram equivalents sold (kg)
$
$
$
kg
DOMESTIC MEDICAL
Domestic medical cannabis gross revenue
Domestic medical excise taxes
Domestic medical net revenue
Dried grams and gram equivalents sold (kg)
$
$
$
kg
WHOLESALE
Wholesale cannabis gross revenue
Wholesale non-cannabis gross revenue
Wholesale cannabis excise taxes
Wholesale cannabis net revenue
Dried grams and gram equivalents sold (kg)
INTERNATIONAL
International cannabis gross revenue
International cannabis excise taxes
International cannabis net revenue
Dried grams and gram equivalents sold (kg)
$
$
$
$
kg
$
$
$
kg
38,511
(13,954)
24,557
12,385
29,273
(10,122)
19,151
8,645
39,417 35,898 31,164
(11,554) (8,589)
(12,513)
26,904
22,575
24,344
10,450 11,241 7,661
5,541
(348)
5,193
5,934
261
(63)
198
73
1,899
–
–
1,899
2,264
6,810
–
6,810
2,600
3,330
(281)
3,049
3,461
430
(79)
351
79
20
29
–
49
4
–
–
–
–
3,648 3,302
(245)
(256)
3,057
3,392
3,782 3,872
2,386
(397)
1,989
334
504 574 644
(88) (96)
(82)
486 548
422
90
78
83
109 401
– –
– –
655
–
–
109 401 655
91 160 258
2,000 1,125
– –
2,000 1,125 1,291
800 450 493
1,291
–
ANCILLARY REVENUE1
Total net revenue
1 Revenue outside of the primary operations of the Company. These revenues are derived from a management agreement held by the Company with
arms-length partners.
53 55
32,880 29,468
60
22,660
103
38,760
87
27,145
$
$
The following table represents the Company disaggregated gross revenues by sale stream for the past three fiscal years.
For the years ended
Retail (excluding beverage)
Cannabis beverage retail
Medical
Wholesale
International
Total gross revenue from the sale of goods
HEXO CIB (Cannabis Infused Beverages)
July 31, 2021
$
143,098
15,821
1,769
2,458
9,935
173,081
July 31, 2020
$
101,713
2,851
3,299
995
1,291
110,149
July 31, 2019
$
53,590
–
5,288
378
–
59,256
Sales from the Company’s HEXO CIB revenue stream effectively represents the sales activity of the Company’s joint business
venture with Molson Canada, Truss LP. These sales began in the third quarter of the 2020 fiscal year. HEXO CIB was established in
order to manufacture, produce and sell cannabis beverage products until Truss LP obtains its own separate license from Health
19 MD&A
Canada. Subsequent to July 31, 2021, Truss LP obtained their Health Canada manufacturing license, effective October 1, 2021. As
of the date of this MD&A, the Company is in the process of establishing a new agreement between HEXO and Truss LP which may
result in the Company acting as an agent facilitating sales between Truss LP and our customers, and therefore HEXO would likely
cease recording such sales on a gross basis.
HEXO CIB currently operates under the Company’s cannabis licensing in compliance with Health Canada and the Cannabis Act’s
regulations. The Company has assessed that the CIB revenue stream remains to be presented on a gross basis as defined under
IFRS 15 (see the Company’s revenue recognition and presentation policy in the Company’s annual financial statements for the year
ended July 31, 2021). The Company will continue to operate HEXO CIB until Truss LP has obtained its independent licensing to sell
cannabis products from Health Canada, at which point these operations will shift to Truss.
ADULT-USE SALES
Non-Beverage Adult-Use Sales
During the three months ended July 31, 2021, the Company’s consolidated net adult-use revenue (exclusive of cannabis infused
beverages) grew 28% quarter over quarter. The key drivers of the fourth quarter’s growth as compared to the previous quarter were
the following:
• Net adult-use sales contributed by the brands formerly of Zenabis (acquired June 1, 2021); Namaste and Re-Up amounted
to $3,968.
•
The Company’s net adult-use sales in the major market of Alberta grew 76% or $1,658, led by Original Stash dried flower
as the stock limitations of the third quarter were alleviated.
• Net adult-use sales in Ontario also saw significant growth in the quarter at 31% or $1,549. This was on trend with the total
growth in the Ontario marketplace which increased 32.5% in the quarter as COVID restrictions eased.
•
Increased LP presence in Quebec, specifically in craft growers, as well as an inflow of new product offerings in the province
lead to an 19% decline or ($1,896) in the Company’s provincial sales. Provincial market share remained in a top two
position.
Adult-use net sales experienced organic growth (excluding the sales of Zenabis) of 9% from the fourth quarter of fiscal 2020. Key
factors contributing to the net increase were the following:
•
The newly launched brands within fiscal 2021; Bake Sale and Up! contributed net sales totalling $5,233.
• Offsetting the above was the decline in the Company’s premium brand HEXO Plus sales in Quebec due to additional
competition.
Total organic adult-use net sales in the 2021 fiscal year grew by 31% from fiscal year 2020 due to the following:
• New brands launched in the fiscal year contributed sales totalling $15,754;
•
The Company’s pre-roll line Original Stash Joints which launched in 2021 added sales of $3,595; and
• New cannabis 2.0 innovative products such as Hash (introduced in late fiscal 2020) and Klik contributed new net revenue
of $9,621.
Beverage Based Adult-Use Sales (see section ‘HEXO CIB’)
In the fourth quarter of fiscal 2021, the Company’s cannabis infused beverage net sales increased to $5,193, representing growth of
70% quarter over quarter. The growth was in part due to new product offerings amounting to $570 and increased sales of the
Company’s high THC brand, XMG which contributed additional sales of $1,310 from the previous quarter. Truss products retained a
number one market share at 38% per OCS shared data during the three months ended April 30, 2021. Cannabis beverage sales as
compared to the three months ended July 31, 2020, grew 161% due to a significantly larger and more diversified variety of offerings.
As of July 31, 2021, the Company carried a total of 28 beverage product offerings, an increase of 3 and 25 from the prior quarter
and the fourth quarter of fiscal 2020, respectively.
Quarter over quarter changes to beverage market share in the key Canadian provincial markets of Ontario, Quebec, Alberta and BC
for the three months ended July 31, 2021 were as follows:
• Ontario market share increased to 40% from 38.5%. Total Ontario market sales grew 48% in the fourth quarter which
helped drive the Company’s beverage sales;
• BC market share increased to 51% from 43%;
• Alberta market share increased to 53% from 44%; and
20 MD&A
• Quebec market share increased to 56% from 46%.
The Company recognized total beverage net revenues of $14,691, representing growth of 507% from fiscal 2020. The experienced
growth is a function of a full fiscal year of beverage sales in 2021 compared to just two quarters fiscal year 2020 as cannabis infused
beverages were launched in the early Spring of 2020.
The Company notes that on October 1, 2021, Truss received their Health Canada manufacturing licensing. As of the date of this
MD&A, the Company and Truss continue to work towards amending the TSSA between the entities and evaluate the potential for
Truss to begin to recognize the CIB revenues with HEXO acting as the agent to facilitate these sales. This arrangement would
effectively be in place until Truss receives their cannabis selling license which is expected in the latter half of fiscal 2022.
INTERNATIONAL SALES
In the fourth quarter of fiscal 2021 the Company realized $6,810 of international medical sales in Israel. In the previous quarter the
Company recognized no international medical cannabis sales due to revised prerequisite testing and an additional certification by
the Israeli government which caused a delay in the Company’s ability to export. During the period, the Company resumed its export
activity with Israel and effectively doubled international medical sales in the current period due to the catch up from the previous
quarter. The consolidated results of Zenabis provided an additional $935 for the period of June 1, 2021 to July 31, 2021.
Currently, international medical sales arise from a 24-month purchase agreement established with an Israel based medical cannabis
company in Q4’20 in which period the Company recognized $1,291 of initial sales. These sales are also free of excise taxes as this
burden belongs to the acquirer and ultimately the seller of the cannabis products and therefore by nature contribute a higher net
revenue per gram sold.
DOMESTIC MEDICAL SALES
Domestic medical net revenue decreased 44% to $198 from $351 quarter over quarter. The decline is the result of reduced average
prices of dry domestic medical grams sold by $0.90 per gram as volumes sold fell by 6%. During the comparable periods of the
three months ended July 31, 2020, net domestic medical sales decreased 64% from $644 as a result of decreasing average medical
product pricing to bring in line with the adult-use market.
Domestic net medical sales for the year ended July 31, 2021, fell 48% when compared to fiscal 2020 as a result of the above
mentioned decrease in average medical pricing along with reduced volumes sold of 46%.
WHOLESALE REVENUE
Wholesale activity consists of transactions held between the Company and other licensed producers. These sales are generally
large quantities at reduced prices per gram and gram equivalent which vary from sale to sale. These sales can include both
cannabis and non-cannabis products and are also free of excise taxes as this burden belongs to the acquirer and ultimately the
seller of the cannabis products and therefore possess a higher net revenue margin.
During the three months ended July 31, 2021 the Company recognized $1,899 of wholesaling revenue. Wholesale revenues during
the fourth quarter were driven by the acquisition of Zenabis, which accounted for significantly all of these revenues in the period, up
from $49 and $655 in the previous fiscal quarter and the fourth quarter of fiscal 2020.
In the year ended July 31, 2021, the Company’s wholesale revenue grew 147% from $995 in fiscal year 2020 due to the above
stated additional revenues derived from the acquisition of Zenabis.
For the years ended July 31, 2020 vs. 2019
The Company’s total medical sales have steadily declined year over year since legalization in early fiscal 2019, upon which the
Company realigned its focus and resources to the adult-use market.
Net sales of adult-use cannabis have increased significantly since 2019 due to the maturity and growth of the Canadian retail
market. Sales in fiscal 2019 were limited to the initial wave of legalized products (dry flower and certain oils) as well as constrained
by the slow roll out of retail brick and mortar cannabis outlets in key provinces.
The sale of cannabis infused beverages and the Company’s international sales activity began in fiscal year 2020 and as such there
were no sales in the fiscal year 2019.
Cost of Sales, Excise Taxes and Fair Value Adjustments
Cost of goods sold includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting,
processing, packaging, shipping costs, depreciation and applicable stock-based compensation and direct and indirect overhead.
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.
21 MD&A
The following table summarizes and reconciles the Company’s gross profit line items per IFRS to the Company’s selected non-IFRS
measures gross profit before adjustments and gross profit before fair value adjustments. Refer to section ‘Non-IFRS Measures’ for
definitions.
For the three months ended
For the years ended
Net revenue
Cost of sales
Gross profit before adjustments
Write off of biological assets and destruction costs
Write off of inventory
Write (down)/up of inventory to net realizable value
Gross (loss)/profit before fair value adjustments
July 31,
2021
$
38,760
(30,772)
7,988
–
(1,181)
(5,308)
1,499
Realized fair value amounts on inventory sold
Unrealized gain on changes in fair value of biological assets
Gross (loss)/profit
(14,148)
15,883
3,234
EXCISE TAXES
April 30,
2021
$
22,660
(17,654)
5,006
–
(627)
–
4,379
(6,426)
10,863
8,816
July 31,
2020
$
27,145
(19,041)
8,104
–
(2,217)
(41,899)
(36,012)
(6,656)
7,978
(34,690)
July 31,
2021
$
123,769
(89,594)
34,175
–
(2,182)
(2,927)
29,066
(31,767)
51,499
48,798
July 31,
2020
$
80,784
(53,831)
26,953
(663)
(4,392)
(68,319)
(46,421)
(40,910)
29,356
(57,975)
Excise taxes are applicable to the adult-use and medical sales. Excise taxes are presented against the revenue generated by the
sale of cannabis to derive the Company’s net revenues on cannabis sales. Excise taxes for flower-based products are a function of
fixed provincial and territorial rates based upon the gram equivalents sold as well as a variable ad valorem component which is
dependent upon the selling price of the products. Excise taxes for distillate, oil-based products, such as the adult-use cannabis
infused beverages are applied on the basis of a fixed amount per mg of THC, whereas CBD products are free of excise taxes.
Wholesale and International medical based sales are free of the excise tax burden.
Generally, increases to excise taxes are the result of increased adult-use sales when compared to fiscal 2020. As a percentage of
adult-use gross sales in the period, excise taxes have increased to 36% from 35% of gross revenue, quarter over quarter and from
28% in Q4’20. This increase in the ratio is due to the declining average flower selling prices and an average decreased sales mix
price due to increased market competition and competitive pricing strategies implemented in attempts to gain and hold market
share.
COST OF SALES & GROSS MARGIN BEFORE ADJUSTMENTS
The following table illustrates the breakout of gross profit before adjustments (non-IFRS measure) by sales stream for the current
the previous fiscal quarters.
For the three months ended
July 31, 2021
Net revenue
Cost of sales
Gross profit before adjustments ($)
Gross margin before adjustments (%)
Adult-Use
(excluding
beverages)
$
24,557
(21,652)
2,905
12%
$
198
(116)
82
41%
April 30, 2021
Net revenue
Cost of sales
Gross profit before adjustments ($)
Gross margin before adjustments (%)
$
19,151
(13,860)
5,291
28%
$
351
(128)
223
64%
July 31, 2020
Net revenue
Cost of sales
Gross profit before adjustments ($)
Gross margin before adjustments (%)
$
22,575
(13,663)
8,912
39%
$
548
(119)
429
78%
22 MD&A
Medical
International
Wholesale
Total
non-beverage
Adult-use
beverages
Company
total
$
6,810
(2,383)
4,427
65%
$
–
–
–
Nil%
$
1,291
(642)
649
50%
$
1,899
(3,125)
(1,226)
(65%)
$
49
(48)
1
2%
$
655
(222)
433
66%
$
33,464
(27,276)
6,188
18%
$
19,551
(14,036)
5,515
28%
$
25,069
(14,646)
10,423
42%
$
5,193
(3,496)
1,697
33%
$
38,657
(30,772)
7,885
20%
$
3,049
(3,618)
(569)
(19%)
$
22,600
(17,654)
4,946
22%
$
1,989
(4,395)
(2,406)
(121%)
$
27,058
(19,041)
8,017
30%
International
The Company resumed its international sales during the period (see section ‘Revenues – International Sales’). There is no excise
tax burden applicable to International sales and the gross margin remains consistent with that of the first and second quarters of
fiscal 2021. Previously, the Company realized no international sales during the three months ended April 30, 2021 due to new
logistical requirements imposed by the Israel government, which were ultimately satisfied in the current period. As compared to the
same period of fiscal 2020, the gross margin increased as the result of additional, onetime packaging costs required to be borne by
the Company in Q4’20. As, previously disclosed, the Company’s wholesale activity and the associated gross margins may vary from
period to period as they are dependent upon the specific wholesale agreements with other licensed producers.
Wholesale
Wholesale increased during the current quarter as the result of the Zenabis acquisition. However, the gross margin was negatively
impacted by the applicable business combinations accounting, in which the fair market value adjustments associated to the existing
inventory, were crystalized to the inventory’s cost base at the acquisition date. When normalized for the impact of these crystallized
fair value adjustments, gross margin improved to 21%. The negative impact to gross margin is transitory by nature as the acquired
inventory is sold through.
Adult-Use (excluding beverages)
The Company’s total non-beverage gross margin declined to 18% from 28% in the previous quarter. Excise taxes as a percentage
of sales increased 5% in the period which negatively impacted gross margin which was, in part, due to sales outside of the province
of Quebec increasing (Quebec has a lower excise tax burden relative to other major provincial markets). Also, the average selling
price decreased 10% as the result of more competitive market prices and there was an increased sales mix of the Company’s lower
margin, value brands.
Similar to what is disclosed above in ‘Wholesales’, the crystallization of fair value adjustments to the cost basis of inventory at the
acquisition date of Zenabis extended to the Company’s adult-use sales. When normalized for this, gross margins improve to 14%
from the above stated 12%,
As compared to the fourth quarter of fiscal 2020, the gross margin decreased significantly as the average selling prices have fallen
by 33% due to increasingly competitive market rates and the introduction of value brands such as Bake Sale.
Cannabis Infused Beverages
The adult-use beverage gross margin increased significantly to 33% during the quarter, from its previous level of break even and
below. These sales through the Company’s CIB division (see section ‘HEXO CIB’) which began material activity in the fourth quarter
of fiscal 2020, remain on the path of scaling to optimal production levels. As seen in the current period in which volume sold has
increased 71% the previously unabsorbable overhead output levels have been reduced.
Total cost of sales for the Company in the year ended July 31, 2021 increased 66% when compared to the year ended July 30, 2020
as the result of an incremental gross sales increase of 54%, as well as those factors noted above.
IMPAIRMENTS AND WRITE OFFS
During the three months ended July 31, 2021 the Company destroyed $1,181 of unsellable, aged, dried cannabis inventory and
$5,308 in write downs to net realizable value (“NRV”). The NRV write downs were due to obsolete packaging and raw materials as
well as aged finished goods which do not meet desired specifications.
The Company recorded $5,109 of write offs and net write downs to NRV in the year ended July 31, 2021. In addition to the above,
these net losses were due to the following;
•
The Company destroyed $2,182 of aged cannabis inventory; and incurred an additional $4,529 of impairment related to excess
and obsolete cannabis materials; and
• A reversal of impairment of $1,602 was due to the Company realizing sales of previously written down adult-use dried flower
product.
In the comparative period of the three months ended July 31, 2020 the Company incurred write downs on inventory to net realizable
value of $41,889 and write offs of $2,217. These losses were due to the following;
• The Company impaired $41,899 of inventory deemed to be in excess of external demand and internal utilization plans. The
largest component of the impairment was $29,540, related to outdated, older dry product, and is inclusive of $15,649 of trim. The
Company’s more recently grown trim is to be utilized in the trim management plan. The Company also impaired $5,503 of
purchased cannabis oil related to an onerous supply agreement; and
23 MD&A
• The Company switched to utilizing lower cost and more efficient pouches from traditional jars in the packaging process, resulting
in a write off of $2,217.
During the year ended July 31, 2020, the Company had write downs on inventory to NRV of $68,319. In addition to the above, total
impairment losses realized were due to the following;
• Write down of concentrated bulk purchase of $1,422 due to an excess supply which reduced the value relative to the contractual
obligation price.
• A reversal of impairment was recognized on previously written down cannabis trim of $1,241 due to the Company’s trim
utilization plan in which trim previously primarily used for extraction is being utilized for other US value added products.
• Write down of a surplus of cannabis trim (trim was primarily used for extraction purposes) and milled products the amount of
$17,098 due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;
• Write down of bulk purchased product of $16,166 due, in part, to an oversupply in the market of bulk products with lower
potencies as well as a relatively low value when compared to competing bulk goods with a higher potency in the current adult-
use market;
• Write down of oil based finished goods of $3,436 due a surplus of finished goods as oil-based products haven’t captured the
market share as originally estimated. Also contributing to the impairment is the decision made by certain provinces to return oil
products with packaged dates greater than 3 to 4 months old;
• Write down of finished goods of $1,186 which are required to be archived as at October 31, 2019 and possess a NRV of $nil;
and
• Write down in the amount of $1,241 was recognized due to costs related to packaging reconfiguration
The continuing evolution of the cannabis industry and market conditions represent ongoing uncertainties that may affect the
Company’s future financial results and impairments. See “Risk Factors” for additional economic and inventory risks.
FAIR VALUE ADJUSTMENTS
The unrealized gain on changes in fair value of biological assets for the current period increased 46% from the previous quarter. The
increase is the direct result of the additional $9,041 in unrealized gains on the write up of biological assets acquired via the business
combination of Zenabis. This is due to the realization of previous gains on biological assets at day one as mandated by IFRS 3. The
Company’s organic unrealized gain on changes in fair value of biological assets decreased by approximately $4,000 or 37% quarter
over quarter as the result of decreased average selling prices which adversely affected the value of its biological assets. Year over
year, the Company’s organic unrealized biological asset gains increased 45% due to higher average yields. This is the result of
more efficient cultivation and a larger bud to trim ratio. This increase is netted against the Company’s decreasing average weighted
selling prices year over year.
The realized fair value adjustment on inventory sold for the three months ended July 31, 2021 increased 120% compared to the
previous quarter and increased 113% for the comparable quarter of fiscal 2020. The increase is mainly attributable to an increase in
grams sold as well as an approximate $6,000 write-down of inventory; $4,500 related to project commissioning, and $1,500 for
obsolete inventory. In addition, year over year realized fair value adjustment on inventory sold decreased in FY21 by approximately
22%. This reduction is driven by a decrease in inventory write-downs.
Operating Expenses
Selling, general and administration1
Marketing and promotion
Share-based compensation
Research and development
Depreciation of property, plant and equipment
Amortization of intangible assets
Restructuring costs
Impairment of property, plant and equipment
Impairment of intangible assets
Impairment of goodwill
Realization of onerous contract
Disposal of long-lived assets
Loss/(gain) on disposal of property, plant and equipment
Acquisition transaction costs
Health Canada Recovery Fee’s1
Total
For the three months ended
July 31,
2020
$
12,436
2,375
4,373
677
1,179
249
(79)
46,414
2,000
–
1,763
122
–
–
–
71,509
April 30,
2021
$
11,178
2,452
2,715
730
1,612
371
336
16
–
–
–
–
(19)
1,871
3,644
24,906
July 31,
2021
$
19,160
3,665
827
934
1,728
1,002
1,562
19,350
–
–
–
–
19
14,869
–
63,116
July 31,
2021
$
54,543
10,348
11,731
3,835
6,097
2,050
3,283
20,230
–
–
–
1,294
64
17,174
3,644
134,293
For the years ended
July 31,
2019
$
45,947
31,191
28,008
2,822
1,747
1,767
–
–
–
–
–
–
–
–
–
111,482
July 31,
2020
$
52,793
12,474
25,790
4,639
6,072
3,939
4,767
79,418
108,189
111,877
4,763
3,855
–
–
–
418,576
1 The Company has adjusted the presentation of the Selling, General and Administrative expenses to breakdown the Health Canada Recovery Fee’s
for ease of user review and identification. This presentation differs from that of the Company’s interim financial statement for the year ended July 31,
2021.
24 MD&A
Operating expenses include general and administrative expenses, marketing and promotion, share-based compensation, research
and development, and depreciation/amortization expenses. Marketing and promotion expenses include customer acquisition costs,
customer experience costs, salaries for marketing, promotion and sales staff, and general corporate communications expenses.
Selling, general and administrative expenses include salaries for administrative staff and executive salaries as well as general
corporate expenditures including legal, insurance and professional fees.
SELLING, GENERAL AND ADMINISTRATIVE
During the three months ended July 31, 2021, the Company’s selling, general and administrative expenses increased 54%
compared to the fourth quarter of fiscal 2020. This increase is due to the following:
• Payroll related and other general expenses during the fourth quarter increased due to the addition of Zenabis operations
during the two months post June 1, 2021 acquisition and the associated increased headcount.
• Audit and legal related professional fees have increased as the Company has increased in both complexity and size year
•
•
over year, due to SEC filing status change and M&A activity.
Facility related expenses have increased due to the operations of three new facilities which began upon acquisition of
Zenabis June 1, 2021.
The Company’s commercial insurance expenses have also grown approximately 50% from Q4’20 due to increased size
and scale of the consolidated operations of HEXO.
As previously noted the Health Canada Licensing fee was expensed in full during the previous fiscal quarter.
As a percentage of total gross revenues, SG&A expenses, have improved by 13% from 48% as compared to the fiscal year ended
2020.
Total SG&A expenses for the year end July 31, 2021 increased significantly from that of 2020 due to the general increase in size,
scale and complexity of the Company and its operations. These include, increased uncapitalizable professional fees for US
expansion, regulatory and financing events, increased professional service fees, additional insurance coverage, increased payroll
related expenses and M&A activity. Included in SG&A in the three months ended July 31, 2021 is $5,849 of additional payroll,
professional, general and administrative expenses incurred due to the Zenabis operations.
MARKETING AND PROMOTION
Marketing and promotion expenses increased quarter over quarter and from the comparative period of fiscal 2020 because of
increased market research, marketing of the relaunched Up brand, expansion of the Bake Sale brand and new marketing required
for increased retail locations as provinces like Ontario have seen a significant increase in the number of retail stores in the past year.
Marketing and promotion expenses in the year ended July 31, 2021, decreased 17% as the result of decreased promotional
contracts, advertising campaigns, and programs.
RESEARCH AND DEVELOPMENT (“R&D”)
During the three months ended July 31, 2021 and compared to the same period of fiscal 2020, R&D expenses increased nominally
as the result of increased payroll related expenses and additional materials and supplies expenses related to new product testing in
the Company’s Brantford facility which was converted to an R&D facility in early fiscal 2021, where future strain development takes
place.
When compared to the twelve months ended fiscal year 2020, R&D decreased by 17% as a result of rightsizing of the R&D
departments in fiscal 2020.
SHARE-BASED COMPENSATION
In the three months ended July 31, 2021, share-based compensation expenses decreased from the previous quarter because of the
revalued cash-settlement based share liability which is revalued at each period end. The Company’s share price decreased from
$8.23 on April 30, 2021 to $4.95 on July 31, 2021 which resulted in a reduction to share-based expenses of $1,284. The share-
based compensation from traditional stock options remained consistent quarter over quarter.
When compared to the same period of fiscal 2020, share-based compensation decreased 81%, attributable to the vesting
structuring of high value stock option grants issued in fiscal 2019 winding down towards less expensive vesting periods. Share-
based expenses are weighted more significantly in the first twelve months after issuance due to their vesting structure, thus, critical
vesting milestones have been reached. Subsequent grants in fiscal 2020 possess a lower call option burden to the Company due to
lower market prices, and therefore lower contribution of expenses over time. During the year ended July 31, 2021, share-based
compensation was reduced by 47% primarily due to the above.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
For the three months ended July 31, 2021 and compared to the same period of fiscal 2020, depreciation of property, plant and
equipment in operating expenses increased primarily due to the additional depreciation of the Zenabis property plant and equipment
acquired.
25 MD&A
Compared to the fiscal year ended 2020, depreciation of property, plant and equipment remained flat as the non-production related
depreciable asset base remained consistent during the year.
AMORTIZATION OF INTANGIBLE ASSETS
During the three months ended July 31, 2021 the amortization of intangible assets increased due to the identified Cultivation License
and Brands intangible assets recorded upon acquisition of Zenabis.
The amortization of intangible assets decreased from fiscal year 2020. The decrease in the period is due to the amortizable asset
base of fiscal 2020 including $113,888 of cultivation and license assets that were impaired by $106,189. This resulted in $3,939 of
associated amortization expenses in fiscal 2020 compared to $2,050 in 2021.
RESTRUCTURING COSTS
During the current fiscal year the Company underwent a restructuring of certain departments and functions within the organization.
This began in the first quarter of fiscal 2021 in which $525 of executive severance was realized, then followed by the reorganization
of the Company human resources department in the second quarter amounting to $860. The current periods restructuring was due
to the severance incurred to restructure the former management of Zenabis and the associated severance payments. These
restructuring efforts continue to rescale the Company’s operations to the appropriate level in order to drive operating expenses
lower.
During the comparative periods of the three and twelve months ended July 31, 2020 the Company was undergoing its initial
restructuring efforts to rightsize the Company as previously disclosed in the Company’s annual MD&A of fiscal 2020 in section
‘Corporate Restructuring.’ These costs were primarily comprised of severance, consulting fees and other payroll related termination
costs.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company incurred impairment losses on property, plant and equipment during the period. The impairments were due to
redundant and obsolete cultivation and production equipment not required under the future operating plan.
During the comparative period in fiscal 2020, impairment losses amounted to $46,414 and 79,418 for the three and twelve months
ended respectively. These related to the impairment of the Niagara facility which was ultimately disposed of and certain idle assets
under construction and in progress as they were not required under the Company’s short term operational needs.
ONEROUS CONTRACT
The Company incurred no losses on onerous contracts during the three or twelve months ended July 31, 2021.
During the comparative periods twelve months ended July 31, 2020 the Company recognized onerous contract provisions of $4,763
relating to a fixed price supply agreement for the supply of certain cannabis products to which the Company is currently liable to
receive. The onerous portion of the supply agreement is the deemed excess contract price over the current market pricing. The
supply agreement is currently the subject of legal proceedings (see section – ‘Litigation’). The costs and purchase obligations under
the contract exceed the economic benefits expected to be received.
DISPOSAL OF LONG-LIVED ASSETS
During the periods of the three ended July 31, 2021, the Company did not dispose of any long-lived assets.
During the comparative periods of fiscal 2020, the Company disposed of certain equipment in the Niagara facility resulting in a loss
of $3,237.
ACQUISITION AND TRANSACTION COSTS
During the period, the Company began to realize expenses related to the then proposed acquisitions of 48North and Redecan (both
of which were finalized after the period). During the period the Company began realizing expenses related to these proposed
acquisitions including legal, due diligence, consulting, and other applicable costs. In addition to this, the Company continued to incur
expenses relating to the acquisition of Zenabis which closed June 1, 2021. These costs represent uncapitalizable expenses per IFRS
3 – Business Combinations. In the previous quarter, the Company realized similar costs related to the Zenabis acquisition.
26 MD&A
Other Income and Losses
Interest and financing expenses
Interest income
Interest income (expense), net
Revaluation of financial instruments gain
Loss from investment in associate and joint ventures
Loss on inducement of convertible debentures
Fair value gain/(loss) on convertible debenture
Fair value loss on senior secured convertible note
Realized gain (loss) on investments
Foreign exchange gain/(loss)
Other income
Non-operating income (expense), net
For the three months ended
For the year ended
July 31,
2021
$
(23,756)
544
(23,212)
7,304
(603)
–
514
(7,478)
790
12,944
252
13,723
April 30,
2021
$
(3,296)
349
(2,947)
(383)
(2,244)
746
–
544
–
(1,514)
1,177
(1,674)
July 31,
2020
$
(2,731)
662
(2,069)
(1,433)
(1,195)
(54,283)
(86)
(4,345)
–
(1,623)
2,369
(60,596)
July 31,
2021
$
(32,124)
1,601
(30,523)
(2,283)
(6,505)
–
1,260
(7,478)
1,994
9,108
4,763
859
July 31,
2020
$
(10,043)
1,902
(8,141)
6,533
(6,331)
(54,283)
(4,806)
(12,880)
24
1,392
2,531
67,820
July 31,
2019
$
(469)
5,187
4,718
(3,730)
(2,964)
1,737
–
(315)
(215)
(78)
–
(5,565)
INTEREST AND FINANCING EXPENSES
During the three months ended July 31, 2021 interest and financing expenses significantly increased compared to the prior quarter
and the same period of fiscal 2020. The increase was due to two events. The first being the acquisition of Zenabis on June 1, 2021
in which the acquired debt contributed approximately $3,000 of interest and financing fees. Secondly, approximately $18.8 million of
broker, advisory and legal fees were incurred upon the offering of the senior secured convertible note (see section ‘Capital
Resources’).
The increase in financing expenses for the year ended July 31, 2021 is attributable to those reasons as outlined above.
REVALUATION OF FINANCIAL INSTRUMENTS
The Company revalued certain of its financial instruments on July 31, 2021, resulting in a gain in the current period due to the
decrease to the Company’s share price from April 30, 2021 which fell from $8.26 to $3.10. The unrealized losses in the previous
quarter and the fourth quarter of fiscal 2020 were resultant of a lower volatility in the Company’s share price. The applicable financial
instruments are the Company’s USD denominated warrants, which are classified as a liability and remeasured at each period end
date.
Similarly, the revaluation gain of $6,533 in the twelve months ended July 31, 2020 was due to the decrease in the Company’s
underlying market price year over year, resulting in a reduction of the outstanding warrant liability.
SHARE OF LOSS FROM INVESTMENT IN ASSOCIATES AND JOINT VENTURES
The Company accounts for its interests in associates and joint venture under the equity method and as such recognizes the
applicable portion of their financial results onto the consolidated statement of comprehensive loss.
Quarter over quarter, these losses were reduced significantly by the Company’s share of rent recovery income through the BCI joint
venture and reduced share of losses from Truss LP due to an increase in non-cannabis revenues and reduced operating expenses.
Similarly, the decrease from the fourth quarter of fiscal 2020 due to the aforementioned.
When compared to the fiscal year ended 2020, the losses remained consistent.
LOSSES ON CONVERTIBLE DEBENTURES AND REVALUATION GAIN ON CONVERTIBLE DEBENTURES
In the three months ended July 31, 2021, the company did not recognize any losses on convertible debenture receivable. In the
previous quarter, the Company recognized a gain on revaluation of the $19,500 convertible debenture receivable extended to
Zenabis (the convertible debenture receivable is eliminated upon consolidation in the current period).
In the comparative period of fiscal 2020, an early inducement of $29,860 aggregate principal amount of the Company’s December
2019 convertible Debentures occurred. Offering under the early conversion was a reduction to the effective conversation ratio and
one-half warrant per common share, resulting in the loss.
During fiscal year 2020 the Company, in two tranches, converted $7,000 and $3,000 debenture receivables to common shares
which were immediately disposed of for realized losses of $4,806.
FAIR VALUE LOSS ON SENIOR SECURED CONVERTIBLE NOTE
During the period the Company issued a US$360 million senior secured convertible note. On Day 1 the Company recorded an
unrecognized loss of $96,202 to be recognized straight line over the life the note. The Day 1 loss is function of the premium paid to
secure the necessary funding to enter in the definitive agreement to acquire Redecan. During the period the Company recognized
27 MD&A
$9,229 of the Day 1 loss. At July 31, 2021 the note was revalued to its fair market value and the Company recognized a net fair
value gain of $1,751.
UNREALIZED GAIN/(LOSSES) ON INVESTMENTS
The Company’s level 1 investments in publicly held companies are marked-to-market at each period end date. During the three
months and twelve months ended July 31, 2021 the Company’s recorded gain on investments was due to the favorable increase in
the underlying markets prices.
The losses in the comparative periods for the three and twelve months ended July 31, 2020, were principally due to the write off of
two level 3 private investments which the Company obtained through a previous acquisition.
FOREIGN EXCHANGE GAIN/(LOSS)
Gains and losses are the outcome of favorable and unfavorable volatility in the CAD/USD FX rate period over period. As at July 31,
2021, the Company’s USD holdings increased significantly due to proceeds of the May 2021 “At the Market Offering” held for the
Redecan acquisition.
OTHER INCOME
During the three and twelve months ended July 31, 2021 the Company recognized recoveries on partnership as Other Income as
the result of the Company’s arrangement with Truss in which the Company recovers its net loss incurred due to the operations of
HEXO CIB (see section Cannabis Infused Beverage (“CIB”)”). This activity remained consistent period over period.
Tax Recovery
In the year ended July 31, 2020, the Company realized a tax recovery of $6,023 to offset the remaining differed tax liability
generated through the acquisition of Newstrike in fiscal year 2019. There were no material tax recoveries or expenses during the
three and twelve months ended July 31, 2021.
Adjusted EBITDA
As defined under section ‘Non-IFRS Measures’ Adjusted EBITDA is a non-GAAP financial measure that does not have any
standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The
Company calculates Adjusted EBITDA as total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense
(income), plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments
on the sale of in inventory and biological assets, plus (minus) restructuring and acquisition costs as these are the associated costs
for the severance and other payroll related expenses to restructure the Company in such a manner that they are not expected to be
a part of the Company’s continuous operations, plus (minus) certain non-cash items, as determined by management as follows:
Total net loss attributable to shareholders before tax
Q4’21
$
(69,512)
Q3’21
Q2’21
Q1’21
Q4’20
$
(20,708)
$
(20,839)
$ $
(169,532)
(4,197)
Finance expense (income), net
Depreciation, included in cost of sales
Depreciation, included in operating expenses
Amortization, included in operating expenses
Investment (gains) losses
Revaluation of financial instruments loss/(gain)
Share of loss from investment in joint venture
Loss/(gain) on convertible debentures
Unrealized loss/(gain) on investments
Realized loss/(gain) on investments
Foreign exchange loss/(gain)
Loss on inducement of convertible debentures
Non-cash fair value adjustments
23,211
2,308
1,728
1,002
(7,304)
602
6,964
(788)
–
(12,945)
–
2,947
1,502
1,612
371
383
2,244
(746)
(544)
–
1,514
–
2,472
2,385
1,679
342
9,937
2,584
–
(1,248)
–
1,862
–
1,895
2,406
1,078
331
(733)
1,073
–
587
–
461
–
2,069
1,254
1,179
249
1,433
1,863
86
4,345
–
1,623
54,283
Realized fair value amounts on inventory sold
Unrealized gain on changes in fair value of biological assets
14,148
(15,883)
6,426
(10,863)
6,387
(13,657)
4,806
(11,096)
6,656
(7,978)
Restructuring costs & acquisition costs
Restructuring costs
Acquisition costs
Other non-cash items
28 MD&A
1,562
14,869
336
1,871
860
436
525
–
(79)
–
Share-based compensation, included in operating expenses
Share-based compensation, included in cost of sales
Write-off of inventory
Write (up)/down of inventory to net realizable value
Impairment loss on right-use-assets
Gain on exit of lease
Impairment loss on property, plant and equipment
Recognition of onerous contract
Disposal of long-lived assets
Adjusted EBITDA
Q4’21
$
827
333
1,181
5,308
–
–
19,350
–
19
(13,020)
Q3’21
Q2’21
Q1’21
Q4’20
$
2,715
251
–
–
–
(88)
16
–
(19)
(10,780)
$
5,259
402
–
–
–
–
61
–
1,280
202
$ $
4,373
511
2,217
41,899
2,000
–
46,414
1,763
122
(3,250)
2,930
596
–
(1,543)
761
(419)
42
–
78
(419)
In the fourth quarter of fiscal 2021, the Company’s Adjusted EBITDA decreased from the previous quarter due to the reduction of
gross margin before fair value adjustments and increased operating expenses (see section ‘Cost of Sales Before Adjustments’ and
‘Operating Expenses’). Gross margin was impacted by the crystallization of fair value adjustments on inventory at Zenabis to its cost
base, thereby increasing the total COGS. Operating expenses also increased as the direct result of the acquisition of Zenabis (the
Company continues working towards establishing synergist cost savings on its consolidated operating expenses). The reduction of
adjusted EBITDA in Q3’21 was attributed decreased sales and gross margin quarter over quarter as well as a $3,644 in period
expense for Health Canada recovery fees. The Company reached Adjusted EBITDA positive in Q2’21 which was due to net revenue
increase of 12%. During Q1’21, the Company’s Adjusted EBITDA loss continued to improve as management works towards
profitability of the Company. This improvement was driven by increased gross margin before fair value adjustments, as well as
increased non-cash depreciation expensed through costs of sales due to the impact of produced inventory in periods with higher
depreciation being sold. (See section Revenue, Excise taxes and Cost of Sales).
Quarterly Results Summary
The following table presents certain unaudited financial information for each quarter of the past three fiscal years. Past performance
is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.
Q4 ’21
July 31, 2021
$
38,760
(67,959)
142,018,176
(0.48)
(0.48)
Q3 ’21
April 30, 2021
$
22,660
(20,708)
122,397,731
(0.17)
(0.17)
Q2 ’21
January 31, 2021
$
32,880
(20,839)
122,022,069
(0.17)
(0.17)
Q1 ’21
October 31, 2020
$
29,468
(4,197)
120,849,754
(0.04)
(0.04)
Q4 ’20
Q3 ’20
Q2 ’20
July 31, 2020
$
27,145
(169,532)
77,376,174
(1.60)
(1.60)
April 30, 2020
$
22,132
(18,837)
73,852,844
(0.28)
(0.28)
January 31, 2020
$
17,007
(298,167)
65,835,852
(4.52)
(4.52)
Q4 ‘19
Q3 ’19
Q2 ’19
July 31, 2019
$
15,424
(44,729)
62,396,681
(0.80)
(0.80)
April 30, 2020
$
13,017
(7,751)
52,503,466
(0.20)
(0.20)
January 31, 2020
$
13,438
(4,325)
49,580,750
(0.10)
(0.10)
Q1 ’20
October 31, 2019
$
14,499
(60,016)
64,249,165
(0.92)
(0.92)
Q1 ’19
October 31, 2019
$
5,663
(12,803)
48,508,345
(0.32)
(0.32)
Net revenue
Total loss and comprehensive loss
Weighted average shares outstanding
Loss per share – basic
Loss per share – fully diluted
Net revenue
Total loss and comprehensive loss
Weighted average shares outstanding
Loss per share – basic
Loss per share – fully diluted
Net revenue
Total loss and comprehensive loss
Weighted average shares outstanding
Loss per share – basic
Loss per share – fully diluted
29 MD&A
Financial Position
The following table provides a summary of our condensed interim consolidated financial position at July 31st for past three fiscal
years:
Total assets
Total liabilities
Share capital
Share-based payment reserve
Warrants
Contributed Surplus
Non-controlling interest
Accumulated other comprehensive income and deficit
July 31, 2021
$
1,311,803
579,538
1,267,967
69,750
124,112
41,290
1,987
(772,841)
July 31, 2020
$
692,869
136,193
1,023,788
65,746
95,617
27,377
3,379
(659,231)
July 31, 2019
$
878,623
89,911
799,706
40,315
60,433
–
1,000
(112,742)
Total Assets
FY 2021 vs. FY 2020
On July 31, 2021 the Company’s total assets have increased by 89% from July 31, 2020. The following significant activities and
events resulted in the net reduction of assets during the twelve months ended July 31, 2021:
• Total assets increased due to the business combination of Zenabis, inclusive of $88,189 of Goodwill and $34,314 of acquired
intangible assets (brands and licenses).
• The Company’s cash and cash equivalents fell $116,711 (See section ‘Liquidity and Capital Resources’)
• Restricted cash significantly increased due to $385,474 of cash raised through the senior secured convertible note set aside for
the Redecan acquisition and certain other contractual obligations.
• Since July 31, 2021, inventory has increased as the result of significantly increased from Zenabis acquisition and the increase in
average yields of the Company’s biological assets as well as greater bud to trim yields;
• Biological assets increased due to expected yields increased period over period due to entering a higher yielding, increased
number of plants and weather favorable season to harvest;
• The acquired property, plant and equipment assets from Zenabis were $129,074. Outside of these acquired assets, property,
plant and equipment decreased as total depreciation and impairments losses exceeded the periods non business combination
related additions. This is reflective of reduced construction in progress and capital projects as operations approach scale;
• The Company made a capital contribution of $4,250 to Truss during the period, which was offset by the Company’s share of
losses in its joint venture and associates, resulting in a net decrease to the assets of $1,627;
FY 2020 vs. FY 2019
Total assets decreased to $692,869 as at July 31, 2020 from $878,623 as at July 31, 2019. The following activities and events
resulted in decreases to total assets during the year ended July 31, 2020:
• Goodwill was impaired to $nil resulting in a decrease of total assets of $111,877;
• An impairment of Niagara facilities cultivation and production licenses resulted in a reduction to intangible assets in the amount
of $108,189;
• Convertible debenture decreased to $nil from $13,354 from the comparative period as the Company has converted and
disposed of the underlying securities during the period;
• Cumulative write downs of inventory to net realizable value were $68,319 in the period, which contributed to the $18,921
reduction to inventory year over year;
• Short term investments decreased by $25,937, due to the liquidation of the Company’s GICs;
• Raised cash through various financings was $70,605;
• Property plant and equipment increased by $30,158 due to continued leasehold improvements to the Belleville facility,
capitalized right of use assets which contributed $20,705 (new in fiscal 2020 due to adoption of IFRS 16) and the associated
required additional production equipment required within the facility. The net additions to property, plant and equipment were
impacted by impairments and disposals of $75,833 and $11,506, respectively; and
• The Company contributed capital of $29,115 to Truss Beverage Co.
Total Liabilities
Current liabilities on July 31, 2021 increased year over year due to the following:
• Accounts payable and accrued liabilities approximately doubled as the result of:
o The additional payables obtained through the acquisition of Zenabis;
30 MD&A
Increased scale of operations at the Company’s CIB division; and
o
o Accrued transaction and agent fees related to acquisitions.
• The current portion of the unsecured convertible debenture acquired on business combination was $3,406;
• Current portions of loans and borrowings increased due to $50,159 of debt acquired on the business combination of Zenabis;
and
Issuance of a senior secured convertible note increased by $367,699 (see section ‘Capital Resources’).
•
Long term liabilities increased year over year due to the following:
• Convertible debt accretion amounted to $4,120; and
•
The long-term lease liability increased significantly due to the acquisition of capital leases on the business combination of
Zenabis.
FY 2020 vs. FY 2019
Long term liabilities on July 31, 2020 increased to $53,706 compared to $6,969 as at July 31, 2019. The variance was driven by the
following activities and events:
• An issuance of $70,000 of unsecured convertible debentures in December 2019, which had a carrying value of $28,969,
•
•
representing the discounted value of the remaining outstanding debentures;
The closing of two registered offerings for a combined USD$45,000 which resulted to an increased warrant liability valued at
$3,450; and
The adoption a new lease accounting standard (see section IFRS 16 – Leases) which resulted in the recognition of an assumed
long-term lease liability in the amount of $24,344.
Share Capital
During the year ended July 31, 2021, share capital increased $244,179 primarily due to $154,970 from the share issuance on the
Zenabis acquisition, 29,540 on senior convertible debenture, 45,257 on the May 2021 “At the Market Offering” and $9,932 on the
exercise of warrants.
Share-Based Payment Reserve
During the year ended July 31, 2021 the Company’s shares-based payment reserve increased on a net basis. The net increase is
the result of total share-based compensation issued of $13,150 and replacement stock options of $7,282 on the Zenabis acquisition.
This was offset by expired vested stock options of $12,891 and exercised options and equity settled RSUs of $3,537.
Warrants Reserve
During the year ended ended July 31, 2021, the warrant reserve was increased by $32,354 due to the replacement warrants issued
on the Zenabis acquisition, offset by $3,859 on the exercise of 2,146,931 warrants.
Contributed Surplus
The Company’s contributed surplus increased by $13,913 during the year months ended July 31, 2021 due to the expired warrants
and stock options as stated above.
Liquidity and Capital Resources
Liquidity
Our objective when managing our liquidity and capital structure is to maintain sufficient cash to fund our working capital needs,
capital project development and contractual obligations. During the period, the Company issued a US$360,000 senior secured
convertible note of which US$253,000 may be redeemable in cash upon demand in fiscal 2022, if certain conditions are met or
events occur (see section ‘May 2021 Senior Secured Convertible Note’). To date, all cash redemptions have been waived in place
of equity issuances, however, there can no total assurance that this will continue to the be case over the next twelve months (see
section ‘Going Concern’).
For the year ended
Operating activities
Financing activities
Investing activities
July 31, 2021
July 31, 2020
$
(43,068)
377,972
(451,615)
$
(94,554)
248,203
(83,044)
Operating Activities
Net cash used in operating activities for the year ended July 31, 2021 decreased to $43,068 from $94,554 in the comparative period
as a result following:
31 MD&A
• Net revenue increase of $42,985;
• The changes to items not affecting cash were $71,263 (July 31, 2020 – $508,484) and are composed primarily of;
o Unrealized gain on changes in fair value of biological assets was $51,499 (July 31, 2020- $29,356)
o
Impairment’s losses of property, plant and equipment and right of use assets were $20,230 (July 31, 2020 – $299,484 of
impairments and write offs of property, plant and equipment, goodwill, intangibles and inventory);
o Share-based compensation add back reduced to $14,859 (July 31, 2020 –$25,790)
• Changes to non-cash working capital of $431 (July 31, 2020 – ($56,549)) composed of;
o Net decrease of inventories and biological assets carried of $1,139 (July 31, 2020 – ($71,999)); and
o Decrease in cash collection of accounts receivable by $14,203 (July 31, 2020 – collected cash of $267).
Financing Activities
Net cash generated from financing activities for the year ended July 31, 2021 increased from the comparative period due to the
following events and transactions:
• Cash generated from issuance of the senior secured convertible note in May 2021 was $395,511 (During fiscal 2020 the Company
raised proceeds of $70,000 through the issuance of convertible debt);
• Increased exercising activity of options and warrants lead to increased cash generation of $3,611;
• Net proceeds from the May 2021 “At the Market Offering” were $45,257 (During fiscal 2020 the Company raised $196,843 in
proceeds from the issuance of common shares across several public and private financings); and
• During the fiscal year, the Company repaid its term loan in full and other debt repayments increased cash outflows by $34,915;
Investing Activities
Cash used for investing activities increased significantly in the year ended July 31, 2021 from the year ended July 31, 2020 due to
the following events and transactions:
• Restricted funds increased significantly, as the net proceeds raised through the senior secured convertible note were placed into
escrow to help fund Company’s acquisition of Redecan (closed August 30, 2021) and to settle certain acquired liabilities from the
acquisition of Zenabis during the period;
• The Company issued a convertible debenture of $19,500 during the period;
• Capital contributions to the Company’s joint ventures and investments in associates decreased by 25,500 during the current period
as operations continue to mature and scale; and
• The acquisition of property, plant and equipment was significantly reduced (approximately 75%) the Company’s capital needs to
fund core operations at the Masson campus and Belleville Centre of Excellence approach significant completion.
Going Concern
For the year ended July 31, 2021, the Company reported an operating loss of $85,495; cash outflows from operating activities of
$43,068 and an accumulated deficit of $773,993. In addition, the Cash held in escrow were released subsequent to year end to
finance the Redecan acquisition (Note 39).
Under the terms of the Senior Secured Convertible Note, the holder has the option to require monthly redemptions, which are settled
in either cash or equity. In order to retain the right to settle the monthly redemptions in either cash or equity, the Company must
maintain, for each of the 20 previous trading days, a daily volume weighted average price per common share on the Nasdaq Capital
Market (“VWAP”) above US$1.50, as well as meet certain other conditions. In the event that the Company’s daily VWAP falls below
US$1.50, the Company must seek a waiver from the holder in order to settle each monthly redemption in equity (the “Equity
Condition Waiver”). If the holder does not grant the waiver, the monthly redemption is required to be settled in cash. These monthly
redemptions may result in significant cash outflows over the next twelve months (Note 19).
On October 22, 2021, the Company negotiated an amendment to the terms of the Senior Secured Convertible Note which resulted
in reducing the daily VWAP attached to the equity waiver condition from US$5.00 to US$1.50. In addition, to date, when requested,
the holder has granted the equity waiver and has permitted settlement of the monthly redemptions in equity. However, there can be
no assurances that the daily VWAP will remain above US$1.50 or, in situations where the daily VWAP falls below US$1.50, that the
holder will continue to grant equity waivers to permit settlement of the monthly redemptions in equity. The Company has maintained
a positive relationship with the holder, with the holder having negotiated and agreed to two amendments favorable to the Company.
While there exists a risk that significant cash outflows may be required over the next twelve months under the terms of the Senior
Secured Convertible Note, the Company has been working with the Holder to renegotiate the terms of the Senior Secured
Convertible Note.
The Company has sufficient funding for ongoing working capital requirements, however, current funds on hand, combined with
operational cash flows, are not sufficient to also support funding potential cash requirements under the Senior Secured Convertible
Note, investments required to continue to develop cultivation and distribution infrastructure, and the future growth plans of the
Company. Management is exploring several options to secure the necessary financing, which could include the issuance of new
public or private equity or debt instruments, supplemented with operating cash inflows from operations. Nevertheless, there is risk
32 MD&A
that certain sources of additional future funding will not be available to the Company or will be available on terms which are
acceptable to management. In the meantime, Management continues to monitor and manage its cash flow in relation to its strategic
growth objectives and working capital requirements.
The financial statements and this MD&A do not reflect the adjustments to the carrying values of assets and liabilities and the
reported expenses and balance sheet classifications that would be necessary If the company were unable to realize its assets and
settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
Capital Resources
On July 31, 2021, working capital totaled $189,920. The exercise of all the in-the-money warrants and vested stock options of the
Company issued and outstanding as of July 31, 2021, using the closing market price of the common shares on the Nasdaq of $4.95
(as at July 30, 2021, the final trading day of the period), would result in an increase of cash of approximately $97,962 and $4,658,
respectively.
Subsequent to July 31, 2021, the Company established and closed an underwritten public offering for total gross proceeds of
USD$144,786 (see section “Other Corporate Highlights - Subsequent Events’). The Company utilized a portion the net proceeds
from the offering to fulfil the cash component of the purchase price payable on the Redecan acquisition August 30, 2021. The
balance of the raised funds is intended to be used relation to the Company’s U.S. expansion plans.
The Company is continuously assessing its capital and operational expenditures to streamline the business and cut down
operational losses each period on the path to generating earnings per share.
The following table provides information about the Company’s remaining funds from recent public offering and private placement
and the actual use of proceeds from those financings compared to the intended use of proceeds from the offerings. The remaining
cash related to financings raised for general corporate and working capital needs are prorated based timing of funds raised and the
current periods cash flow.
Date
Type
Gross
Proceeds
Initially Intended Use of Net Proceeds
Actual Use of Proceeds
May 21, 2020
Underwritten
public offering
$57,545
July 16, 2020 to
July 31, 2020
At-the-market
public offering
$34,551
The net proceeds generated from the
financing amounted to $54,493.
The Company expects to use the net
proceeds from the Offering for working
capital and other general corporate
purposes.
The net proceeds generated from the
financing amounted to $33,236.
The Company expects to use the net
proceeds from the ATM Program for
general corporate purposes, which may
include:
(i)
(ii)
(iii)
working capital;
capital expenditures; and
debt repayments.
May 11, 2021
At-the-market
public offering
$46,987
The net proceeds generated from the
financing were approximately $46,564.
The Company expects to use the net
proceeds from the ATM Program for:
33 MD&A
The Company has remained compliant
with its stated intended use as at July
31, 2021 and management has not
undertaken new direction over the
intended use of these funds as at the
reporting date.
Due to the timing of the financing the
Company utilizing raised funds for
general purposes on a first in, first out
basis, there is an estimated $9,169
remaining at period end.
The Company has remained compliant
with its stated intended use as at July
31, 2021 and management has not
undertaken new direction over the
intended use of these funds as at the
reporting date.
The Company repaid its $30,625
outstanding credit facility in full on April
30, 2021, along with $56 is closing fees
(which were applied against the
financing proceeds).
Due to the timing of the financing the
Company utilizing raised funds for
general purposes on a first in, first out
basis, there is an estimated $832
remaining at July 31, 2021.
The Company has remained compliant
with its stated intended use as at July
31, 2021 and management has not
undertaken new direction over the
intended use of these funds as at the
reporting date.
The raised proceeds through to July 31,
2021 remained on hand and were
subsequently utilized to acquire
Redecan on August 30, 2021.
(i)
(ii)
the
costs
the
associated with
Company’s U.S. expansion plans
including
contemplated
acquisition of a facility in the State
of Colorado and its subsequent
retrofitting and improvement;
including
capital expenditures,
potential capital expenditures to
make additional improvements to
the production
the
Company’s Belleville, Ontario
facility;
lines at
(iii) potential future acquisitions;
(iv) working
capital,
existing
including
replenishing
cash
resources and working capital
which will be used to fund certain
transaction and integration costs
and minimum debt repayments
related
the Company’s
proposed acquisition of Zenabis
Global Inc. (“Zenabis”); and
repayment of additional debts
owed by Zenabis following the
completion of
the Zenabis
acquisition.
to
(v)
May 27, 2021
Senior Secured
Convertible Note
USD$327,600
The approximate net proceeds before
closing fees from the financing were
USD$327,600.
The Company expected to use virtually all
the funds to finalize the acquisition of
Redecan.
Upon receipt, as agreed upon,
USD$229,320 of the funds were placed
into escrow. The remaining amount
was wired to the Company subject to a
covenant to restrict $80,000 of the
funds for the acquisition of Redecan.
The Company was in compliance with
the stated use of funds and the
required covenant at July 31, 2021.
The Company ultimately complied with
the stated intended use of the funds on
September 1, 2021 upon the close of
Redecan (see section ‘HEXO Acquires
Canadas Largest Private Cannabis
Licensed Producer Redecan’).
May 2020 Underwritten Public Offering
On May 21, 2020 the Company closed an underwritten public offering for total gross proceeds or $57,545 through the issuance of
63,940,000 units at a price of $0.90 per unit. Each unit contained one common share and one common share purchase warrant.
Total issuance costs amounted to $3,052.
June 2020 ATM Offering
On June 16, 2020 the Company established the ATM program allowing the Company to issue up to $34,500 (or its U.S. dollar
equivalent) of common shares to the public. The program closed on July 31, 2020 and a total of approximately $34,551 (after foreign
exchange gains were applied) was generated through the issuance of 32,942,479 common shares in the year ended July 31, 2020.
On July 31, 2020 a receivable of $883 remained for irrevocable sales which occurred prior to year-end and subsequently settled on
August 5, 2020, at which time the remaining 979,500 shares were issued. Total issuance costs and broker fees amounted to $1,288.
May 2021 ATM Offering
See section “Establishment and Launch of At-the-Market Offering up to $150 Million.”
May 2021 Senior Secured Convertible Note
On May 27, 2021 the Company closed an offering of USD$360,000 aggregate principal amount of senior secured convertible notes,
sold at a price of USD$327,600 representing a discount of 9%. The Notes will mature on May 1, 2023. If not previously converted,
34 MD&A
all principal repayments of the notes will made be at a price equal to 110% of the principal amount of the notes being repaid. See
Note 19 of the Company’s annual audited consolidated financial statements for full details.
On August 30, 2021, the Company utilized the senior secured convertible note’s net, unrestricted proceeds to fund a significant
portion of the $400 million cash component of acquiring Redecan. Management assessed the available financing options and
determined the issuance of the convertible note was appropriate and the best available option in order to secure the definitive
purchase agreement to acquire Canada’s largest private cannabis licensed producer.
Capitalization Table
The capitalization information in the table below presents the balances of issued and outstanding common shares and other
convertible securities as at the Company’s fiscal years ended of July 31, 2021 and 2020, and the date of this MD&A.
Common shares
Warrants
Options
Restricted share units
Convertible debentures
Senior convertible note1
Total
1 Estimated based on the assumption all remaining principal at 110% is converted at 88% of the current share price.
July 31, 2020
July 31, 2021
152,645,946 120,616,437
36,986,570 33,379,408
7,503,690
12,018,143
587,108
550,832
3,175,633
3,175,633
84,501,262
289,878,386
October 29, 2021
311,650,794
35,308,552
11,930,292
550,832
3,175,633
207,988,980
570,605,083
165,262,276
The following table summarizes the Company’s stock options outstanding as at July 31, 2021.
$2.32–$10.76
$15.56–$26.16
$28.52–$34.00
$47.36–$234.76
Number outstanding
8,292,550
1,576,409
2,141,186
7,998
12,018,143
Weighted average
remaining life (years)
8.82
7.79
7.40
0.35
Number exercisable
1,853,536
1,779,478
474,040
7,333
4,114,387
Weighted average
remaining life (years)
6.30
7.33
7.50
0.32
The following table summarizes RSU activity during the year ended July 31, 2021 and the year ended July 31, 2020.
Opening balance
Granted
Acquired and reissued through acquisition
Exercised - equity settled
Exercised - cash settled
Forfeited
Closing balance
Units
587,108
24,008
223,506
(223,506)
(25,483)
(34,801)
550,832
July 31, 2021
Value of units on
grant date
July 31, 2020
Value of units on
grant date
Units
$ 8.41
– $
3.17-7.17
8.61
8.61
5.62-8.60
11.76
$ 7.91
609,636
–
–
–
(22,528)
587,108 $
–
8.52
–
–
–
11.76
8.41
As at July 31, 2021, 155,513 RSU’s are vested and outstanding.
The following table summarizes warrant activity during the year ended July 31, 2021 and year ended July 31, 2020.
Outstanding, beginning of year
Expired and cancelled
Issued on acquisition
Issued
Exercised
Outstanding, end of year
Number of
warrants
33,379,408 $
(535,889)
5,970,370
–
(2,146,931)
July 31, 2021
Weighted average
exercise price1
7.60
4.09
14.59
–
4.10
36,666,958 $ 8.85
Number of
warrants
7,396,359 $
(3,889,871)
–
30,976,389
(1,103,469)
33,379,408 $
July 31, 2020
Weighted average
exercise price1
39.80
49.00
–
4.96
3.88
7.60
1 USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes
35 MD&A
Off-Balance Sheet Arrangements and Contractual Obligations
The Company does not have any off-balance sheet arrangements.
Commitments
The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental agreements
and construction contracts. 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:
Year ended July 31, 2021
2022 2023 – 2024 2025 – 2026 Thereafter
Accounts payable and accrued liabilities
Excise taxes payable
Onerous contract
Convertible debt
Lease obligations
Capital projects (1)
Service contracts
Lease based operating expenses (2)
$
$
$ $
63,557 – – –
6,591 – – –
4,763 – – –
33,089 – –
28,836
26 –
–
20
8,211 13,472
16,092 42,308
371,105
4,742
8,065
4,904
3,547
467,274
7,707
18
295
6,693
47,802
7,835
Total
$
63,557
6,591
4,763
404,194
49,120
8,109
5,219
31,923
573,476
(1) Note the Company presents in commitments on capital projects on the basis of committed amounts to enacted purchase
orders and therefore, inherently there may be differences between committed capital and approved budgets for capital
projects. Refer ‘HEXO GROUP OF FACILITIES” for a general summary of these projects and their respective remaining
approved capital budgets.
(2) Lease based operating expense represent the variable operating expenses associated with the lease obligation under IFRS
16, Under IFRS all amounts charged that have no minimum fixed charge are considered variable and not capitalized.
LITIGATION
Class Actions
As of July 31, 2021, the Company and its Chief Executive Officer are defendants in a putative class-action lawsuit pending in the
Québec Superior Court brought on behalf of certain purchasers of shares of the Company and filed on November 19, 2019. The
lawsuit asserts causes of action for misrepresentations under the Québec Securities Act and the Civil Code of Québec in connection
with certain statements contained in HEXO’s prospectus, public documents and public oral statements between April 11, 2018 and
November 15, 2019. The allegations relate to: (1) statements made by the Company regarding its agreement with the Province of
Québec to supply cannabis; (2) statements made by the Company regarding its acquisition of Newstrike, particularly the licensing of
the Newstrike facilities and the forecasted synergies and/savings from the Newstrike acquisition; (3) statements made by the Company
about the net revenues in Q4 2019 and fiscal year 2020; and (4) the certifications by Louis St-Louis and the underwriters of the
Company. The plaintiffs seek to represent a class comprised of Québec residents who acquired the Company’s securities either in an
Offering (primary market) or on the secondary market during such period and seek compensatory damages for all monetary losses
and costs. The amount claimed for damages has not been quantified.
As of July 31, 2021, the Company is named as a defendant in a proposed consumer protection class action filed on June 16, 2020,
in the Court of Queens’ Bench in Alberta on behalf of residents of Canada who purchased cannabis products over specified periods
of time. Several other licensed producers are also named as co-defendants in the action. The lawsuit asserts causes of action,
including for breach of contract and breach of consumer protection legislation, arising out of allegations that the
Tetrahydrocannabinol (THC) or Cannabidiol (CBD) content of medicinal and recreational cannabis products sold by the Company
and the other defendants to consumers was different from what was advertised on the products’ labels. Many of the cannabis
products sold by the Company and other defendants were allegedly sold to consumers in containers using plastic bottles or caps
that may have rapidly absorbed or degraded the THC or CBD content within them. By allegedly over-representing the true amount of
THC or CBD in the products, the plaintiff claims that consumers would be required to consume substantially more product than they
otherwise would have in order to obtain the desired effects or, in the alternative, would have consumed the product without obtaining
the desired effects. The action has not yet been certified as a class action.
MediPharm
As of July 31, 2020, the Company is subject to a lawsuit filed against HEXO Operations by Medipharm Labs Inc. (“Medipharm”)
seeking $9,800 for alleged non-payment of cannabis resin it supplied to HEXO Operations pursuant to a supply agreement dated
February 11, 2019 between Medipharm and HEXO Operations’ former subsidiary, Up Cannabis, which was a subsidiary of
36 MD&A
Newstrike and was amalgamated with HEXO Operations, together with Newstrike and certain other affiliates, in August 2019. HEXO
intends to vigorously defend itself against the claim and has filed a defence and counterclaim which alleges, among other things,
that the supply agreement is void as it was entered into in bad faith. The full amount of Medipharm’s claim is contested by the
Company, and the Company is seeking repayment of the full value of the supply agreement in the amount of $35,000 from
Medipharm in its counterclaim.
On June 1, 2021, by way of the business acquisition of Zenabis, the Company assumed senior notes payable and the following
litigation with the associated lender of the notes (Note 21b). Upon closing the acquisition of Zenabis, the Company was in default
under the debenture due to the failure to obtain the lenders consent for a change of control. On February 19, 2021, Zenabis filed a
petition in the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the debenture
and to obtain discharges of the debenture and related security. The lender took the position that the amount to discharge the
debenture and related securities was approximately $72,000. The Company believes the amount is approximately $53,000, which
has been provided for in the consolidated financial statements. Under the senior secured convertible note agreement (Note 19), the
Company has restricted funds to satisfy this liability (Note 6). The difference largely relates to whether a prepayment fee and default
fees are payable under the debenture and to the amount to buyout and discharge of a revenue based royalty liability. The petition
was heard on March 29, March 30, March 31, April 1, April 15 and May 14, 2021. The Judge’s decision remains on reserve and no
indication as to the likely timing of its release has been provided.
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.
Market Risk
Interest Risk
The Company has minimal exposure to interest rate risk related to any investments of cash and cash equivalents. The Company
may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such
investments. As at July 31, 2021, the Company has $50,159 in notes payable (July 31, 2020 – $29,930) (Note 21) that bear interest
at a fixed rate and therefore are not subject to interest risk (July 31, 2020 - not material). The Company hold senior secured
convertible debt (Note 19) that bears no cash interest and is repayable at a fixed rate of 110% of the face value.
Price Risk
Price risk is the risk of variability in fair value due to movements in equity or market prices.
Financial assets
The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future
values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities is
based on quoted market prices, which the shares of the investments can be exchanged for.
Financial liabilities
The Company elected an early conversion option in the year ended July 31, 2020 in which $29,860 of the aggregate principal
amount of its 8% unsecured convertible debentures (Note 18) were converted, which partially mitigates the Company’s Price Risk.
The Company obtained an amendment to the Senior secured convertible notes equity condition (subsequent to July 31, 2021)
effectively reducing the equity conditions market price threshold allowing the Company increased discretion over redemption
payments to be repaid in cash or equity (Note 19). The sensitivity of the Senior secured convertible note due to price risk is
disclosed in Note 19.
If the July 31, 2021 fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur
a related increase or decrease to Comprehensive loss of an estimated $37,100 (July 31, 2020 – no material impact). The price risk
exposure as at July 31, 2021 and July 31, 2020 is presented in the table below.
Financial assets
Financial liabilities
Total exposure
Credit Risk
37 MD&A
July 31, 2021
$
2,492
(373,432)
(370,940)
July 31, 2020
$
2,692
(3,450)
(758)
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 cash held in escrow, restricted cash and trade receivables. As at
July 31, 2021, the Company was exposed to credit related losses in the event of non-performance by the counterparties.
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 medical sales are transacted with clients that are covered
under various insurance programs, and adult use sales are transacted with crown corporations, the Company has limited credit risk.
Cash and cash equivalents, restricted funds and cash held in escrow are held with three Canadian commercial banks that hold Dun
& Bradstreet credit ratings of AA (July 31, 2020 – AA), an American commercial bank with a credit rating of A- and $111 is held with
a credit union that does not have a publicly available credit rating. Certain restricted funds in the amount of $29,999 are managed by
an insurer and are held as a cell captive within a Bermuda based private institution which does not have a publicly available credit
rating, however the utilized custodian is Citibank which holds a credit rating of A+.
The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario and Alberta. Creditworthiness of a
counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit
loss approach. The current expected credit loss for the year ended July 31, 2021 is $66 (July 31, 2020 - $35).
In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as
they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they have similar
credit risk characteristics. They have been grouped based on the days past due.
The carrying amount of cash and cash equivalents, cash held in escrow, restricted cash and trade receivables represents the
maximum exposure to credit risk and as at July 31, 2021; this amounted to $522,908 (July 31, 2020 – $211,860). Subsequent to
July 31, 2021 the cash held in escrow has been utilized to fund the Redecan acquisition (Note 38).
The following table summarizes the Company’s aging of trade receivables as at July 31, 2021 and July 31, 2020:
0–30 days
31–60 days
61–90 days
Over 90 days
Total
July 31, 2021
$
22,971
12,390
1,435
625
37,421
July 31, 2020
$
15,253
2,972
412
789
19,426
Economic Dependence Risk
Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial
performance of the Company. For the year ended July 31, 2021, the Company’s recorded sales to the crown corporations; Société
québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency
(“ALGC”) representing 42%, 20% and 14%, respectively (July 31, 2020 – one crown corporation representing 70%) of total
applicable periods net cannabis sales.
The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 13%, 29% and 13%,
respectively, of total trade receivable, respectively as at July 31, 2021 (July 31, 2020 – the two crown corporations SQDC and OCS
representing 47% and 25% of total trade receivables, respectively).
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due (See note 2 – Going
Concern). The Company manages liquidity risk by reviewing on an ongoing basis, its capital requirements. As at July 31, 2021, the
Company has $67,462 (July 31, 2020 – $184,173) of cash and cash equivalents and $37,421 (July 31, 2020 –$19,426) in trade
receivables. The Company has current liabilities of $503,638 on the statement of financial position. As well the Company has
contractual commitments of $18,244 due before July 31, 2022. The Company has restricted funds to satisfy debt of $50,159,
presented in current liabilities (Note 6). The maturity analysis of undiscounted cash flows for lease obligation and convertible
debentures is disclosed in Note 20 and Note 18 respectively.
Current financial liabilities include the Company’s obligation on the senior secured convertible note (Note 19). The Company plans
to settle this liability in equity. However, if the Company is unable to meet the requirements Equity Condition Waiver (Note 19) the
Holder may demand settlement in cash. The analysis of potential cash outflow to redeem the Note up to the earliest maturity date is
given below. Subsequent to the year-end, the Company settled the optional redemption payments for August 2021, September 2021
and October 2021 in equity. The Company has also received a cash settlement waiver for the May 2023 and November 2021
optional redemptions.
38 MD&A
The following table provides an analysis of contractual maturities for financial liabilities.
Fiscal year
Accounts payable and accrued liabilities
Excise taxes payable
Loans and borrowings
Convertible debentures
Undiscounted future lease payments
Senior secured convertible note1
Total
2022
$
63,557
6,591
60,297
6,716
6,155
143,316
315,289
458,605
2023
$
–
–
–
41,273
5,785
47,058
143,421
190,479
2024
$
–
–
–
–
6,073
6,073
–
6,073
2025
$
–
–
–
–
5,561
5,561
–
5,561
Thereafter
$
–
–
–
–
54,796
54,796
–
54,796
Total
$
63,557
6,591
60,297
47,989
78,370
256,804
458,710
715,514
1 The senior secured convertible note have been valued using the July 31, 2021 US/CAD foreign exchange rate. The Company’s
ability to settle the note in equity or cash is dependent upon the conditions as stated in Note 19.
Foreign Currency Risk
On July 31, 2021, the Company holds certain financial assets and liabilities denominated in United States Dollars (“US$”) which
consist of cash and cash equivalents, cash in escrow, restricted funds, the senior secured convertible note and warrant liabilities.
The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as
management has determined that this risk is not significant. The Company closely monitors relevant economic information to
minimize its net exposure to foreign currency risk. The Company is exposed to unrealized foreign exchange risk through its cash
and cash equivalents. As at July 31, 2021, approximately $434,838 (US$348,931) (July 31, 2020 – $42,981 (US$57,652)) of the
Company’s cash and cash equivalents was in US. A 1% change in the foreign exchange rate would result in a change of $4,348 to
the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of US denominated
warrants. Subsequent to year end, cash held in escrow has been utilized to fund the acquisition of Redecan (Note 38).
The Company’s Senior secured convertible note is denominated in US$. The Company plans to settle this debt in equity. However,
if the Company is unable to meet the equity settlement condition or secure cash settlement waivers, the settlement may entail cash
outflow. The sensitivity of the Senior secured convertible note due to foreign currency risk is disclosed in Note 19.
Critical Accounting Assumptions
Our critical accounting assumptions are presented in Note 4 of the Company’s annual audited consolidated financial statements for
the year ended July 31, 2021, and in certain cases the financial statement note itself. The annual audited consolidated financial
statements are available under HEXO’s profile on SEDAR and EDGAR.
Senior Secured USD$390 million Convertible Note
Senior Secured Convertible Note
Opening balance, beginning of the year
Issued at fair value
Early conversions
Redemptions
Gain on fair value adjustment
Foreign exchange loss
Ending balance, end of the year
Unrecognized Day 1 Loss
Opening balance, beginning of the year
Unrecognized loss at issuance
Recognized loss
Ending balance, end of the year
Total balance, end of year, net
Current portion
Non-current
July 31, 2021
US$
–
407,284
(413)
(27,500)
(14,524)
–
364,847
–
(79,684)
7,470
(72,214)
292,633
292,633
–
July 31, 2021
$
–
491,714
(497)
(33,525)
(18,100)
15,081
454,673
–
(96,203)
9,229
(86,974)
367,699
367,699
–
On May 27, 2021 (the “issuance date”), the Company issued a Senior Secured Convertible Note (the "Note") directly to an
institutional purchaser and certain of its affiliates or related funds (collectively, the “Holder”) at a principal amount of $434,628
(US$360,000). The Note was sold at a purchase price of $395,511 (US $327,600), or approximately 91% of the principal amount
(“transaction price”). The Note bears no periodic cash interest payments and is repayable on May 1, 2023 (the “maturity date”) at
110% of the principal amount (the “Redemption Amount”), if not converted or redeemed earlier. The Redemption Amount on
issuance date was $478,091 (US$396,000). The Company used a portion of the net proceeds of the Note to fund the Redecan
39 MD&A
Acquisition (Note 38). The Note is secured against the assets of HEXO Operations Inc. and, it’s subsidiaries, as well as the assets
of HEXO USA Inc and it’s subsidiaries.
The Note can be converted in full or in part by the Holder into freely tradeable common shares of the Company at any time before
the second last trading day before the maturity date at a conversion rate of 142.6533 common shares per US$1 (“conversion rate”).
The Note includes different conversion and redemption options (summarized below) available to the Holder and the Company,
subject to certain terms and limitations. At any given point, the beneficial ownership of the Holder in the Company is restricted to
9.99% (the “maximum ownership threshold”). Any conversion or redemption option exercised in common shares which would result
in the Holder exceeding the maximum ownership threshold is null and void. Any outstanding payments due on maturity date will be
settled in cash.
Other than the above-mentioned conversion feature, the Holder has the following conversion and redemption options available:
● Early Conversion Option: The Holder had the option to early convert the instrument up to $60,365 (US$50,000) at an early
conversion rate during the fifteen trading day period following the announcement of the acquisition of Redecan which occurred
on May 28, 2021. This was partially exercised by the Holder as shown in the table below. Under the terms of the Note, the
Company was required to pay a cash amount equal to 10% of the principal amount converted, such that the Company
effectively settled 110% of the principal amount.
● Optional Redemption Option: The Holder has the option to require monthly redemptions, of US$15,000 (or US$20,000 from
October 2021 to September 2022) of the principal amount, on a monthly basis, plus any amounts deferred from any previous
months up to US$50,000. These monthly redemptions can be settled in either cash or equity at 110% of the principal amount.
However, in order to retain the right to settle the monthly redemptions in equity, the Company must meet certain conditions
for each of the 20 previous trading days, including (i) a daily volume weighted average price per common share on the Nasdaq
Capital Market (“VWAP”) above US$5.00; (ii) a daily dollar trading volume (as reported on Bloomberg) of common shares over
US $10,000 on the Nasdaq Capital Market; and (iii) the related equity issuance cannot result in the Holder
exceeding a beneficial ownership greater than 9.99% of the common shares of the Company. In the event that
these conditions are not met, the Company must seek a waiver from the H older in order to settle each monthly
redemption in equity (“Equity Condition Waiver”). If the H older does not grant the Equity Condition W aiver, the
monthly redemption is required to be settled in cash. Subsequent to year end, on October 22, 2021, the Company
negotiated an amendment to the terms of the Note which resulted in reducing the daily VWAP attached to the Equity Condition
Waiver condition from US$5.00 to US$1.50.
● Fundamental Change Repurchase option: The Holder can also require the Company to repurchase the convertible note in
the event of a fundamental change as defined in the agreement.
The Company has the following conversion option:
● Forced Conversion: The Company has an option, subject to certain conditions, to force the holder to redeem the outstanding
principal at a forced conversion price if the Daily VWAP is greater than 150% of the conversion price on each of 20
consecutive trading days after the issue date. The Company may elect to redeem all or a portion of the Principal Amount into
common shares or cash. An additional amount of 5% of the Principal Amount at the time of the forced conversion will also be
payable in cash by the Company to the Holder unless the Daily VWAP exceeds 175% of the conversion price for five days for
each of the 20 previous trading days.
The conversion rate applied to equity settlements is calculated in reference to 88.0% of the lesser of (i) the average of the daily
VWAPs during the five VWAP trading day period ending on the VWAP trading day immediately prior to the settlement date, and (ii)
the fifteen VWAP trading day period ending on the VWAP trading day immediately prior to the settlement date.
Additionally, up until the date of shareholder approval of the Note, shortfall cash payments were required to be made by the
Company on any redemptions made under the terms of the Note. Shareholder approval was obtained on August 28, 2021, and as
such, no further cash shortfall payments will be required from that date. Shortfall cash payments settled in the period are disclosed
below.
The Note includes a number of financial and non-financial covenants, including:
●
a requirement to maintain US$95,000 on deposit with a collateral agent, a portion of which is set aside to fund the repayment
of the Senior notes payable (Note 21(b)). On July 23, 2021, the Note was amended to reduce the collateral amount on deposit
to US$80,000.
● Beginning for the quarter ending January 31, 2022, the Company will be subject to a minimum adjusted EBITDA covenant, as
defined in the agreement.
The Note represents a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, has been
designated as FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Note and it is clear with
limited analysis that separation is not prohibited. The changes in fair value of the instrument are recorded in the Statement of loss
40 MD&A
with changes in credit spread being recognized through Other comprehensive income. The transaction costs of $18,078
(US$14,975) have been recognized in the statement of loss during the period.
The fair value of the Note at inception was $491,714 determined using the partial differential equation method with the following
inputs; Share Price $6.53; Volatility 85%, Risk-free rate 0.227%; Credit spread 16.06%; Dividend yield $nil and Dilution 284.6 million
common shares. The partial differential equation determines the fair value of the note by using an iterative approach to solve the
differential equation that the instrument satisfies. The Note is classified as Level 2 in the fair value hierarchy.
The fair value of the Note at initial recognition was determined using a valuation technique that includes unobservable inputs. The
Company identified a difference between the transaction price and the fair value of $96.2 million (US$79.7 million) (the “Day 1 loss”).
The Company believes that time is the factor that market participants would take into account when pricing the note. Therefore, the
unrecognized Day 1 loss is recognized on a straight line basis in the statement of net loss over the contractual life of the Note.
The following table represents the movement of redemption amounts in the year ended July 31, 2021. As disclosed above,
redemptions are made at 110% of the principal amount owed.
Balance, beginning of year
Issuances:
Initial issuance
Settlements:
Early conversion option
Optional redemption options
Foreign exchange loss
Balance, end of year
Shares
Issued
Redemption
Amount
$
–
53,495
4,548,746
478,091
(497)
(33,525)
14,641
458,710
1Shortfall cash payments of $3,893 are presented as share issuance costs in shareholders’ equity.
At July 31, 2021 the fair value of the Note was determined to be $454,673 and was fair valued using the following inputs; Share
Price $3.98; Volatility 85%, Risk-free rate 0.327%; Credit spread 15.44%; and a Dividend $nil. The gain on fair value adjustments
related to changes in credit spread amounted to $1,590 (July 31, 2020 - $nil).
An increase/decrease in the US$/CA$ foreign exchange rate of 1% would result in a foreign exchange loss/gain adjustment of
$4,547. Further, an increase/decrease of credit spread by 1% and share price of the Company by 10% would change the fair value
of the instrument by $2,614 and $7,443 respectively.
The following table depicts amounts that can be demanded by the Holder in accordance with the monthly redemption option up to
the instrument’s maturity date, reflective of 110% of the principal amount of Note.
Fiscal Year
2022
2023
Total
Related Party Transactions
Redemption
amount
US$
253,000
115,087
368,087
Redemption
amount
$
315,289
143,421
458,710
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. Other significant related party transactions and presented in Note 29 of the Company’s
2021 annual consolidate financial statements.
41 MD&A
Compensation provided to key management during the period was as follows:
For the year ended
Salary and/or consulting fees
Termination benefits
Bonus compensation
Stock-based compensation
Total
July 31, 2021
$
2,321
1,008
800
6,800
10,929
July 31, 2020
$
3,069
1,043
42
15,702
19,856
Management’s Report on Internal Controls over Financial Reporting
Internal Controls over Financial Reporting
In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”) and
Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 within the U.S., the establishment and maintenance of
Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the responsibility of
management. DCP and ICFR has been designed by management to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with International Financial
Reporting Standards (“IFRS”).
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent
limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the
controls will prevent or detect all misstatements due to errors or fraud, if any.
Management has assessed the effectiveness of our internal control over financial reporting based on the criteria set forth in the
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). The scope of management’s assessment of internal control over financial recording excludes 14% of our consolidated
total assets and 5% of our consolidated net revenues related to Zenabis Global Inc., which was acquired on June 1, 2021.
Management concluded that internal control over financial reporting was not effective as of July 31, 2021 as a result of material
weaknesses in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or
detected on a timely basis. In connection with the assessment of the effectiveness of our internal control over financial reporting, our
management identified material weaknesses that existed as of July 31, 2021. For the year ended July 31, 2020, the Company
identified material weaknesses in the control environment, risk assessment processes, information technology general controls, the
functionality of the enterprise resource planning (ERP), reliance on complex spreadsheets, procurement, fixed assets and period
end financial reporting. While these material weaknesses remain unremediated, as a result of improvements in our monitoring
processes, we have identified additional areas of material weakness and have expanded our disclosure to present these under three
main areas: (i) Control environment, (ii) Control activities and (iii) Information Technology General Controls.
(i) Control Environment
The Company did not design or implement adequate oversight processes and structures, or an organizational design to support the
achievement of the Company’s objectives in relation to internal controls. The Company identified multiple deficiencies in internal
controls, primarily due to the control environment not being mature enough to support the increasing complexity of the business and
rapid expansion through acquisitions. As a result, pervasive issues exist within the control environment that impact the ability of the
Company to maintain effective internal control over financial reporting. In addition, accountability for adherence to policies and
processes across the organization was not consistently enforced; and as such, there is increased likelihood of misstatements
occurring. This material weakness contributed to the following further material weaknesses:
42 MD&A
● Risk assessment procedures did not fully identify risks of misstatement that could, individually or in combination with
others, increase the vulnerability of the Company to material misstatements to the financial statements, whether intentional
or unintentional.
● Monitoring activities did not operate effectively to identify control gaps and control deficiencies in significant processes in a
timely manner. In addition, monitoring activities did not operate to identify new risks related to changes in the business, and
as such, these risks were not assessed or responded to in the internal control environment.
● While the Company is not aware of any material fraud or suspected fraud, anti-fraud control activities were not designed to
effectively mitigate the risk of fraud events occurring or not being detected in a timely manner to an acceptable level.
Control deficiencies were identified in both the fraud risk assessment and the design and monitoring of Company’s
whistleblower hotline.
●
Information and communication processes did not effectively operate to ensure that appropriate and accurate information
was available to financial reporting personnel on a timely basis to fulfill their roles and responsibilities.
These entity level control deficiencies did not result in a misstatement to the financial statements; however, when aggregated, could
impact the ability of the Company to maintain a system of effective internal control, including an effective anti-fraud program. These
deficiencies could potentially reduce the likelihood of preventing or detecting misstatements, which could impact multiple financial
statement accounts and disclosures. Accordingly, management has determined the above deficiencies constitute a material
weakness, both individually and in aggregate
(ii) Control Activities
We previously identified material weaknesses in our internal control over financial reporting that continue to exist. Through the
period, the Company did not design and maintain an effective control environment commensurate with its financial reporting
requirements. Specifically, the Company did not reassess resource requirements to support the increasing complexity of the
business and rapid expansion through acquisitions. As a result, there was not a complement of personnel with an appropriate level
of internal controls and accounting knowledge, training and experience commensurate with our financial reporting requirements
throughout the fiscal period. This resulted in an inability to consistently establish appropriate authorities and responsibilities in
pursuit of financial reporting objectives and insufficient segregation of duties in our finance and accounting functions. This material
weakness contributed to the following further material weaknesses:
● The Company did not design and maintain effective controls over the period-end financial reporting process to achieve
complete, accurate and timely financial accounting, reporting and disclosures. Specifically, the Company did not
consistently maintain formal accounting policies, procedures and appropriate controls over the preparation and review of
account reconciliations and journal entries.
● The Company did not design and consistently maintain effective controls to achieve reasonable assurance that
transactions are properly initiated, authorized, recorded and reported. Specifically, the Company did not design and
consistently maintain controls over a number of significant processes, including loans and borrowings, convertible
debentures purchases to pay, inventory, biological assets, property, plant and equipment, intangible assets, leases,
investments, tax and equity.
● The Company did not design and maintain processes and controls to analyze, account for and disclose non-routine,
unusual or complex transactions. Specifically, the Company did not design and maintain controls to timely analyze and
account for the senior secured convertible note, impairment of non-financial assets, and non-routine complex transactions
including the accounting and reporting related to the acquisition of Zenabis Global Inc.
These material weaknesses resulted in audit adjustments to loans and borrowings, senior secured convertible note, leases, and
related right of use assets, accruals, various expense line items and related financial statement disclosures, which were recorded
prior to the issuance of the consolidated financial statements as of and for the year ended July 31, 2021. Additionally, these material
weaknesses, individually and in the aggregate, could result in a material misstatement of the Company’s accounts or disclosures
that would not be prevented or detected.
(iii) Information Technology General Controls
The Company did not design and maintain effective controls over information technology (“IT”) general controls for information
systems that are relevant to the preparation of its financial statements, specifically, with respect to: (i) program change management
controls for financial systems to ensure that IT program and data changes affecting financial IT applications and underlying
accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate
segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to
appropriate company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and the design
and operating effectiveness of controls at service organisations are evaluated on a timely basis, and (iv) testing and data validation
43 MD&A
controls for program development to ensure that new software and application development is aligned with business and IT
requirements.
These IT deficiencies did not result in a misstatement to the financial statements; however, the deficiencies, when aggregated, could
impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated
controls that address the risk of material misstatement to one or more assertions, along with the IT general controls and underlying
data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all
financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined
these deficiencies in the aggregate constitute a material weakness.
Status of Remediation Plan
As disclosed in the prior year, management, with the assistance of external consultants, began reviewing and revising our internal
control over financial reporting. Management is committed to implementing changes to our internal control over financial reporting to
ensure that the control deficiencies that contributed to the material weaknesses are remediated. The following remedial activities are
in process:
● We are in the process of implementing additional ongoing oversight, training and communication programs for
management and personnel to reinforce the Company’s standard of conduct, enhance understanding of assessed risks,
and clarify individual responsibility for control activities at various levels within the Company.
● We have increased the number of finance and accounting personnel and have redesigned financial reporting structures
within the organization to establish clear responsibility and accountability for key financial reporting processes and controls.
We have identified the need for additional financial reporting personnel with an appropriate level of internal controls and
accounting knowledge, training and experience commensurate with our financial reporting requirements, and are actively
working to identify additional resources.
● We have established an internal audit function and engaged external consultants to assist management with the design
and implementation of internal controls, including IT general controls. As a result, a substantial project was commenced to
reassess risks related to financial reporting, understand and document significant financial reporting processes, and to re-
assess the design and operation of key controls. This project is expected to continue until management has determined
that deficiencies have been remediated and are operating effectively over a full fiscal period.
● We are in the process of assessing and designing a more robust anti-fraud program, inclusive of transitioning service
providers for the monitoring of the Whistleblower hotline to ensure prompt, competent, and confidential review,
investigation, and resolution of instances of non-compliance and allegations involving fraud and misconduct. Subsequent
procedures were performed to ensure appropriate, independent investigation and resolution throughout the fiscal period.
• We are in the design and development stage of an ERP and IT ecosystem project, including a new cultivation management
software application, which will be implemented in the next fiscal year and replace our existing ERP system. This will
improve functionality, with an additional focus on ensuring that system design addresses the existing IT general control
deficiencies relating to system development, data migration and change and user access management. This will also
support remediation of material weaknesses relating to control activities.
● We commenced a full ERP user access review to identify any instances of inappropriate access, as well as assess any
instances where users have been assigned incompatible duties and responsibilities. Moving forward this will be performed
on a quarterly basis. User access deficiencies are not fully remediated as access controls have not been subject to
operating effectiveness testing.
• We implemented automated purchase-to-pay approval workflows and authorization of journal entries within the existing
ERP in the current fiscal period to assist in addressing segregation of duties. While management determined that the
design of both purchase-to-pay and journal entry authorization controls were effective, the IT general control deficiencies in
aggregate adversely impacted the operating effectiveness of these controls, as both are IT-dependent.
While we believe these actions will remediate the material weaknesses, we have not completed all the corrective processes,
procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate
the material weaknesses, we may need to take additional measures to address the control deficiencies. Until the remediation steps
set forth above, including the efforts to implement any additional control activities identified through our remediation processes, are
fully implemented and concluded to be operating effectively, the material weaknesses described above will not be considered fully
remediated.
The effectiveness of the Company’s internal control over financial reporting as of July 31, 2021 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
44 MD&A
Other than disclosed above, there have been no changes in the Company's internal control over financial reporting during the
Company's fiscal quarter ended July 31, 2021 that have materially affected or are reasonably likely to materially affect its internal
control over financial reporting.
Risk Factors
Our overall performance and results of operations are subject to various risks and uncertainties that may materially and adversely
affect our business, products, financial condition and operations and may 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, some of which, as well as other factors, are discussed in our Annual Information Form dated
October 29, 2021 available under our profile on www.sedar.com, which risk factors should be reviewed in detail by all readers:
• Existing funds on hand, when combined with operational cash flow, are not sufficient to fund existing debt repayments, capex
budgets, and potential cash requirements under the Senior Secured Convertible Note. Management is exploring several options
to secure the necessary financing, which could include the issuance of new public or private equity or debt instruments,
supplemented with operating cash inflows from operations. Nevertheless, there is no assurance that certain sources of additional
future funding will be available to the Company or will be available on terms which are acceptable to management. These
circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its obligations as
they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The
Company's ability to continue as a going concern is dependent upon its ability to fund the repayment of existing borrowings,
secure additional financing and to generate positive cash flows from operations. These financial statements do not reflect the
adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would
be necessary If the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of
operations. Such adjustments could be material.
• Our business operations are dependent on our licence under the Cannabis Regulations. These licenses expire on various dates
and must be renewed by Health Canada. Failure to comply with the requirements of our licenses or any failure to renew the
license would have a material adverse impact on our business, financial condition and operating results.
• 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, the Company is currently in compliance with all laws, regulations and guidelines
relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis as well as
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.
• 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.
• The volatile Canadian cannabis industry has resulted in several of the Company’s peers to undergo rightsizing efforts which could
saturate the market with similar assets the Company may intend to sell. This could result in further future losses and/or the
inability for the Company to liquidate certain of its unneeded assets.
• If the principal amount of the Senior Secured Convertible Notes is not converted into Common Shares or the Company does not
pay or is not able to pay for any redemptions of the Senior Secured Convertible Notes in Common Shares, servicing the debt under
the Senior Secured Convertible Notes requires a significant amount of cash, and the Company may not have sufficient cash flow
from its business to pay its obligations under the Senior Secured Convertible Notes.
• The Company’s ability to make scheduled payments of principal or to pay redemption payments or other amounts payable under
the Senior Secured Convertible Notes or to refinance the Senior Secured Convertible Notes depends on our future performance,
which is subject to economic, financial, competitive and other factors, some of which are beyond our control. The terms of the
Senior Secured Convertible Notes require us to pay approximately USD$396.0 million to repay or redeem the full principal amount
of the Notes at maturity, and the Purchaser has the right to require the Company to pay the Optional Redemption Payments and
certain other amounts under the Senior Secured Convertible Notes. The Company’s business may not generate cash flow from
operations in the future sufficient to satisfy our obligations under the Notes. If we are unable to generate such cash flow, we may be
required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets,
refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Senior
Secured Convertible Notes will depend on the capital markets and our financial condition at such time. We may not be able to
engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Senior
Secured Convertible Notes.
• The conversion of the Senior Secured Convertible Notes or the satisfaction of redemption payments and other amounts payable
under the Senior Secured Convertible Notes in Common Shares will dilute the ownership interests of existing shareholders to the
extent we deliver shares upon conversion or redemption of the Senior Secured Convertible Notes. Any sales in the public market of
45 MD&A
the Common Shares issuable upon such conversion or redemption could adversely affect prevailing market prices of our Common
Shares. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the
Senior Secured Convertible Notes or the satisfaction of redemption payments and other amounts payable under the Senior
Secured Convertible Notes in Common Shares could be used to satisfy short positions, or anticipated conversion or satisfaction of
redemption payments and other amounts payable under the Senior Secured Convertible Notes in Common Shares could depress
the price of our Common Shares.
• The Fundamental Change repurchase and redemption features of the Notes may delay or prevent an otherwise beneficial attempt
to take over the Company. The terms of the Senior Secured Convertible Notes require us to repurchase the Notes in the event of a
Fundamental Change. A takeover of the Company would trigger an option of the Purchaser to require us to repurchase the Senior
Secured Convertible Notes. This may have the effect of delaying or preventing a takeover of the Company that would otherwise be
beneficial.
• The Company will be subject to certain covenants set forth in the Senior Secured Convertible Notes. The Notes will contain
customary events of default, including for non-payment, misrepresentation, breach of covenants, defaults under other material
indebtedness, material adverse change, bankruptcy, change of control and material judgments. Among other things, we will be
required to maintain a minimum liquidity of at least USD$35.0 million at all times, and in some cases, of at least USD$95.0 million.
Upon an Event of Default, the outstanding principal amount of the Notes plus any other amounts owed under the Notes will become
immediately due and payable. In such a circumstance, the Company may not be able to make accelerated payments required
under the Senior Secured Convertible Notes, and the Purchaser could foreclose on the Company’s assets. An Event of Default
would also likely significantly diminish the market price of our Common Shares.
• There is no guarantee that an investment in the Notes will earn any positive return in the short or long term. A purchase of Senior
Secured Convertible Notes under the Offering involves a high degree of risk and should be undertaken only by investors whose
financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their
investment.
• There is no established trading market for the Senior Secured Convertible Notes, and the Company does not expect such a
market to develop. The Company does not plan on making an application to list the Senior Secured Convertible Notes on the
TSX, NYSE, or any other securities exchange or other trading system. This may affect the pricing of the Senior Secured
Convertible Notes in the secondary market, the transparency and availability of trading prices, the liquidity of the Senior
Secured Convertible Notes, and the extent of issuer regulation. In addition, the Senior Secured Convertible Notes are initially
issued in registered form, and there is no obligation to deposit the notes with a Canadian or U.S. depository, which may create
complicate the process of transferring the physical Notes. Investors in the Notes may not be able to sell the Notes at prices or
in amounts they desire, or at all.
• The Company may not be successful in the integration of acquisitions into our business (see ‘Cautionary Statement Regarding
Forward-Looking Statements’).
• We have identified multiple material weaknesses in our internal controls as of July 31,2021, and if we fail to maintain an effective
system of internal controls, our ability to accurately and timely report our financial results or prevent fraud may be adversely
affected, and investor confidence and the market price of HEXO's shares may be adversely affected. In the course of preparing
and auditing our consolidated financial statements for the year ended July 31, 2021, we and our independent registered public
accounting firm identified multiple material weaknesses in our internal control over financial reporting as of July 31, 2021. In
accordance with reporting requirements set forth by the SEC, a material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of
our Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The
material weaknesses are identified in "Management's Report on Internal Control over Financial Reporting" section of this
MD&A. We have begun and will continue to implement measures to address the material weaknesses. However, the
implementation of those measures may not fully remediate the material weaknesses in a timely manner. In the future, we may
determine that we have additional material weaknesses or other deficiencies, or our independent registered public accounting firm
may disagree with our management’s assessment of the effectiveness of our internal controls. Our failure to correct these
material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our
financial statements and impair our ability to comply with the applicable financial reporting requirements and related regulatory
filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to
prevent fraud.
• The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many
of which are beyond HEXO’s control. Companies in the cannabis sector, including HEXO, have also been experiencing extreme
volatility in their trading prices. This volatility may affect the ability of holders of Common Shares to sell their securities at an
advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to
meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse
changes in general market or industry conditions or economic trends, acquisitions, dispositions or other material public
announcements by the Company or its competitors, the COVID-19 pandemic, or a variety of other factors. These broad market
fluctuations may adversely affect the trading price of the Common Shares.
46 MD&A
• Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the
market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying
asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the
Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other
related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment
losses. Continuing fluctuations in price and volume may occur. If such increased levels of volatility and market turmoil continue,
the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially and
adversely affected.
• We may issue additional securities to finance future activities outside of the Offering. The Company’s articles permit the issuance
of an unlimited number of Common Shares, and shareholders will have no pre-emptive rights in connection with such further
issuances. The directors of the Company have discretion to determine the price and the terms of further issuances. Moreover,
additional Common Shares will be issued by the Company on any exercise of options or other security-based compensation
awards outstanding or issued by the Company, upon any exercise of outstanding common share purchase warrants, and upon
any conversion or repayment in Common Shares of the principal amount of the Company’s outstanding convertible debentures.
We cannot predict the size of future issuances of securities or the effect, if any, that future issuances and sales of securities will
have on the market price of the Common Shares. Sales or issuances of substantial numbers of Common Shares, or the
perception that such sales could occur, may adversely affect prevailing market prices of the Common Shares. In connection with
any issuance of Common Shares, investors will suffer dilution to their voting power and we may experience dilution in our
earnings per share.
• The continued spread of COVID-19 nationally and globally could also disrupt our cultivation and processing activities, supply
chains and sales channels, and result in a reduction in supply of, or demand for, the company’s products as a result of travel
restrictions, work refusals by and mandatory accommodations for employees, changing demand by consumers, mass
quarantines, confinements, lock-downs or government-imposed closures in Canada or abroad, which could adversely impact
materially the company’s business, operations or financial results.
• Since the latter part of February 2020, financial markets have experienced significant volatility in response to the developing
COVID-19 pandemic and equity markets in particular have experienced significant declines. The continued spread of COVID-19
nationally and globally may impact the Company’s ability raise sufficient capital.
• We operate within a still young and evolving industry and are exposed to certain risks surrounding the fair value inputs related to
the valuation of our biological assets and inventories, which may lead to certain impairments and write-offs. These inputs include
but are not limited too market pricings, external and internal demand for cannabis and cannabis products and by-products.
• Reliance on management 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.
• 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.
• Conversely, we may be subject to growth decline related risks including reduced capacity needs and inactivity of our internal
systems and related assets. Our ability to manage growth volatility effectively will require us to continue to monitor our external
industry environment and modify our internal operations accordingly.
• 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 are currently a party to certain class action and other lawsuits as discussed elsewhere in this MD&A and we may become
party to additional 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.
• The potential expansion into international operations will result in increased operational, regulatory and other risks.
• There may be a risk of corruption and fraud in any emerging markets in which the Company expands too.
• The Company’s ability to successfully identify and make beneficial acquisitions and/or establish joint ventures or investments in
associates, as well as successfully integrate these future acquisitions into the Company’s operations.
• The development of our business and operating results may be hindered by applicable restrictions on sales and marketing
activities imposed by Health Canada.
47 MD&A
• Adverse changes or developments affecting the Company’s’ facility’s and sites may have a material and adverse effect on our
business, financial condition and prospects.
• The adult-use cannabis industry has encountered and may continue to encounter price compressions, which may adversely
impact the Company’s profitability. In addition, such price compressions, as well as, or together with, oversupply of certain types
of inventory in the industry, may result in the Company incurring additional impairment losses on inventory in the event the cost of
our inventory exceeds its net realizable value. The continuing evolution of these market conditions represent ongoing
uncertainties that may affect the Company’s future financial results.
• We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve
profitability.
• 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.
• 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.
• Conflicts of interest may arise between the Company and its directors.
• We may not pay any dividends on our common shares in the foreseeable future.
• The Company may be at risk as a result of breaches of security at its facilities or in respect of electronic documents, data storage
and risks related to breaches of applicable privacy laws, cyber security risks, loss of information and computer systems.
• Our common shares are listed on the TSX and Nasdaq; 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.
• There is no assurance the Company will continue to meet the listing requirements of the TSX and/or Nasdaq.
• The Company is subject to restrictions from the TSX and Nasdaq which may constrain the Company’s ability to expand its
business internationally.
• 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 our control. The Company must rely largely on
its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage
of the recreational marijuana industry in Canada.
• An investment in our securities is speculative and involves a high degree of risk and uncertainty.
• We may issue additional common shares in the future, which may dilute a shareholder’s holdings in the Company.
• The Company may be unable to successfully achieve the objectives of our strategic alliances.
• The Company’s operations are subject to increased risk as a result of international expansion.
• The Company operates in a highly regulated industry which could discourage any takeover offers.
• We maintain or self-insure 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,
48 MD&A
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.
• Based upon the nature of the Company’s current business activities, the Company does not believe it is currently an “investment
company” (“IC”) under the U.S. Investment Company Act of 1940. However, the tests for determining IC status are based upon
the composition of the assets of the Company and its subsidiaries and affiliates from time to time, and it is difficult to make
accurate predictions of future assets. Accordingly, there can be no assurance that the Company will not become an IC in the
future. A corporation generally will be considered an IC if; more than 40% of the value of its total assets excluding cash and U.S.
government securities are comprised of investment securities, which generally include any securities of an entity the corporation
does not control. If the Company were to become an IC, it would not be able to conduct public offerings of securities in the U.S.
• 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 Company’s ERP may impact 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.
• The Company may not be able to develop and maintain strong internal controls and be SOX compliant by the mandated deadline.
• 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.
• 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 expects to incur a number of infrequent transaction-related costs associated with completing the Acquisitions that
will be incurred whether or not the Acquisitions completed.
Non-IFRS Measures
The Company has included certain non-IFRS performance measures in this MD&A, 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.
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“Adjusted EBITDA”)
The Company has identified Adjusted EBITDA as a relevant industry performance indicator. Adjusted EBITDA is a non-GAAP
financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar
measures presented by other companies. The Company calculates Adjusted EBITDA as Total net loss, plus (minus) income taxes
(recovery), plus (minus) finance expense (income) net, plus depreciation, plus amortization, plus (minus) investment (gains) losses,
plus (minus) non-cash fair value adjustments, plus (minus) infrequent expenses, plus (minus) other non-cash items. See Adjusted
EBITDA table for those items comprising investment (gains)/losses, non-cash fair value adjustments, infrequent expenses and other
non-cash items. Management believes this measure provides useful information as it is a commonly used measure in the capital
markets to approximate operating earnings.
GROSS PROFIT BEFORE ADJUSTMENTS
This measure is utilized for those reasons as presented in “Gross profit before fair value adjustments” with the adjustment that this
metric excludes the write-offs of inventory and biological assets, write downs to net realizable value and destruction costs. The
Company has identified this metric as useful and relevant information as it represents the gross profit for operational purposes
based on costs to produce, package and ship inventory sold, exclusive of impairments and other write downs due to changes to
internal or external influences impacting the net realizable value of inventory and inventory disposal costs.
Key Operating Performance Indicators
49 MD&A
We have included certain key operating performance indicators within this MD&A, as defined in this section. We utilize these metrics
internally for a range of purposes such as critical inputs in fair valuation techniques to evaluating the operating performance results
in a given period.
EXPECTED PLANT YIELD
The expected plant yield is utilized in the valuation of biological assets on hand as at the period end. This represents an
unobservable input to a level 3 fair value estimate and is derived from the Company’s historical harvests as well as the expertise of
the appropriate personnel. A sensitivity analysis over this input was performed and included in the ‘Biological Assets – Fair Value
Measurement’ section below.
PRODUCTION CAPACITY
The production capacity disclosed within this MD&A represents management’s best estimate and is derived from the historical
actual output of production as well as the use of cultivation expertise existing within the Company.
KILOGRAMS HARVESTED
The kilograms harvested during the period representing the amount of dried gram and dried gram equivalents harvested and
produced from biological assets but not necessarily sold during the period.
ORGANIC GROWTH/VARIANCES
This refers the Company’s period over period results of the legacy HEXO operations and does not include financial contributions
from business acquisitions during the specified periods.
Other Defined Additional IFRS Measure
We have included the below additional IFRS measures as these represent cannabis industry financial statement line items and are
present within the Company’s statement of loss and comprehensive loss for the three and nine months ended April 30, 2021.
GROSS PROFIT BEFORE FAIR VALUE ADJUSTMENTS
We utilize this measure to provide a representation of performance in the period by excluding the fair value measurements as
required by IFRS, realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets. We
believe this measure provides useful information as it represents the gross profit 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. In accordance with CSA Staff Notice 51-357 issued in October 2018, we utilize
an adjusted gross profit to provide a 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 profit 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 as well as fair value adjustments to net realizable
value, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods
sold.
ADULT-USE NON-BEVERAGE REVENUES & BEVERAGE REVENUES
We utilize this differentiation to allow the user to identify the revenue streams generated by the Company’s perpetual sales activity
vs. the future “to be” discontinued sales stream, cannabis infused beverages. As discussed in section ‘Beverage Based Adult-Use
Sales,’ the cannabis infused beverage revenues, as at the date of this MD&A, are intended to cease to be recognized by the
Company as direct sales at the point in time when the business venture Truss obtains the appropriate cannabis licensing under
Health Canada.
Cautionary Statement Regarding Forward-Looking Statements
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, as well as
statements with respect to:
•
•
the competitive and business strategies of the Company;
the intention to grow the business, operations and potential activities of the Company, including entering into joint ventures and
partnerships and leveraging the brands of third parties through joint ventures and partnerships;
50 MD&A
•
•
•
•
•
•
•
•
•
•
•
the ongoing expansion of the Company’s facilities, its costs and receipt of approval from Health Canada to complete such
expansion and increase production and sale capacity;
the expansion of business activities, including current and potential acquisitions;;
the Company’s acquisition of Zenabis Global Inc. and the future impact thereof;
the Company’s proposed acquisition of 48North Cannabis Corp. and the future impact thereof;
the Company’s proposed acquisition of Redecan. and the future impact thereof;
the expected sales mix of offered products;
the development and authorization of new products, including cannabis edibles, beverages and extract products (“cannabis
derivatives”), and the timing of launch of such new products;
the competitive conditions of the industry, including the Company’s ability to maintain or grow its market share;
the Company’s Truss and Truss CBD USA business ventures with Molson Coors and the future impact thereof;
the Company’s Keystone Isolation Technologies business venture and the future impact thereof;
the expansion of the Company’s business, operations and potential activities outside of the Canadian market, including but not
limited to the U.S., Europe and other international jurisdictions;
the event of a default event and whether the Company has the ability to fund arising obligations;
•
• whether the Company will have sufficient working capital and its ability to raise additional financing required in order to develop
its business and continue operations;
the applicable laws, regulations and any amendments thereof;
the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments
thereof;
the filing of trademark and patent applications and the successful registration of same;
the anticipated future gross margins of the Company’s operations;
the performance of the Company’s business and operations;
securities class action and other litigation to which the Company is subject; and
the impact of the COVID-19 coronavirus pandemic on the operations of the Company.
•
•
•
•
•
•
•
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 and certain assumptions including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the Company’s ability to implement its growth strategies;
the Company’s ability to complete the conversion, improvements or buildout of its owned and leased facilities on time and on
budget;
the Company’s competitive advantages;
the development of new products and product formats for the Company’s products;
the Company’s ability to obtain and maintain financing on acceptable terms;
the impact of competition;
the changes and trends in the cannabis industry;
changes in laws, rules and regulations;
the Company’s ability to maintain and renew required licences;
the Company’s ability to maintain good business relationships with its customers, distributors and other strategic partners;
the Company’s ability to keep pace with changing consumer preferences;
the Company’s ability to protect intellectual property;
the Company’s ability to manage and integrate acquisitions;
the Company’s ability to retain key personnel; and
the absence of material adverse changes in the industry or global economy, including as a result of the COVID-19 pandemic.
Although any 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.
51 MD&A
HEXO Corp.
Consolidated Financial Statements
For the years ended
July 31, 2021 and 2020
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of HEXO Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of HEXO Corp. and its
subsidiaries (together, the Company) as of July 31, 2021 and 2020, and the related consolidated
statements of net loss and comprehensive loss, of changes in shareholders’ equity and of cash flows for
the years then ended, including the related notes (collectively referred to as the consolidated financial
statements). We also have audited the Company's internal control over financial reporting as of
July 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of July 31, 2021 and 2020, and its financial
performance and its cash flows for the years then ended in conformity with International Financial
Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the
Company did not maintain, in all material respects, effective internal control over financial reporting as of
July 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the COSO because material weaknesses in internal control over financial reporting existed as of that date
related to the Company's control environment, risk assessment procedures, monitoring activities, anti-
fraud control activities, information and communication processes, control activities, period-end financial
reporting, non-routine, unusual or complex transactions, transaction-level control activities, and
information technology general controls.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. The material weaknesses referred
to above are described in Management’s Report on Internal Controls over Financial Reporting included in
the 2021 Management's Discussion & Analysis. We considered these material weaknesses in determining
the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial
statements, and our opinion regarding the effectiveness of the Company’s internal control over financial
reporting does not affect our opinion on those consolidated financial statements.
Substantial Doubt about the Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has had cash outflows from operating activities,
and has financial liabilities that may require significant cash outflows over the next twelve months, that
raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to
these matters are also described in note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
99 Bank Street, Suite 710, Ottawa, Ontario, Canada K1P 1E4
T: +1 613 237 3702, F: +1 613 237 3963
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership
Change in Accounting Principle
As discussed in note 4 to the consolidated financial statements, the Company changed the manner in
which it accounts for leases as of August 1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in management’s report referred to above. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Controls over Financial Reporting, management has
excluded Zenabis Global Inc. from its assessment of internal control over financial reporting as of
July 31, 2021 because it was acquired by the Company in a purchase business combination during 2021.
We have also excluded Zenabis Global Inc. from our audit of internal control over financial reporting.
Zenabis Global Inc. is a wholly-owned subsidiary whose total assets and total revenues excluded from
management’s assessment and our audit of internal control over financial reporting represent 14% and
5%, respectively, of the related consolidated financial statement amounts as of and for the year ended
July 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the audit
committee and that (i) relate to accounts or disclosures that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Fair value component of biological assets harvested into dried cannabis inventory
As described in notes 4, 9 and 10 to the consolidated financial statements, the Company measures
biological assets using the income approach at fair value less costs to sell at the point of harvest (fair
value component), which becomes the basis for the cost of related inventories after harvest. The
Company transferred $89.8 million from biological assets to dried cannabis inventory for the year ended
July 31, 2021. The dried cannabis inventory cost as of July 31, 2021 includes a fair value component of
$24.3 million which represents the fair value less cost to sell of the biological asset at the point of harvest.
Determining the fair value component requires management to make significant estimates, judgment and
assumptions in the fair value less cost to sell model relating to expected yields for the cannabis plants,
sales price and expected post-harvesting costs.
The principal considerations for our determination that performing procedures relating to the fair value
component of biological assets harvested into dried cannabis inventory is a critical audit matter are the
significant judgment by management when determining the fair value less cost to sell of the biological
asset at the point of harvest which includes assumptions when determining the fair value less costs to sell.
As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting”
section, material weaknesses were identified related to this matter. This led to a high degree of auditor
judgment, subjectivity, and effort in performing procedures to evaluate management’s determination of the
fair value component and the significant assumptions related to expected yields for the cannabis plants,
sales price and expected post-harvesting costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included, among
others, testing management’s process for determining the fair value component; evaluating the
appropriateness of the method and model used to calculate the fair value component; testing the
completeness and accuracy of the underlying data used in the model; and evaluating the reasonableness
of the significant assumptions used by management. Evaluating the reasonableness of the significant
assumptions used by management related to expected yields for the cannabis plants, sales price and
expected post-harvesting costs involved evaluating whether the assumptions used by management were
reasonable by considering actual historical information; consistency with evidence obtained in other areas
of the audit; recent market data; and considering sensitivities over significant assumptions.
Valuation of the acquired cultivation and processing license as part of the acquisition of Zenabis
Global Inc.
As described in notes 4 and 15 to the consolidated financial statements, the Company completed the
acquisition of Zenabis Global Inc. (acquired business) for a purchase consideration of $211.8 million. The
net assets acquired included a $28.9 million cultivation and processing license. Management applied
judgment in estimating the fair value of the acquired cultivation and processing license. The Company
recorded the acquired cultivation and processing license at fair value using a discounted cash flow
methodology, which involved significant assumptions such as forecasted gross margin and estimated time
to obtain a license and complete cultivation and production ramp-up.
The principal considerations for our determination that performing procedures relating to the valuation of
the acquired cultivation and processing license as part of the acquisition of Zenabis Global Inc. is a critical
audit matter are the judgment by management when developing the fair value of the acquired cultivation
and processing license, the significant audit effort in evaluating the significant assumptions related to
forecasted gross margin and estimated time to obtain a license and complete cultivation and production
ramp-up, and the audit effort involved the use of professionals with specialized skill and knowledge. As
described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting”
section, a material weakness was identified related to this matter. This led to the high degree of auditor
judgment and subjectivity in performing procedures relating to the fair value of the acquired cultivation and
processing license and the significant assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included, among
others, reading the purchase agreement, and testing management’s process for estimating the fair value
of the cultivation and processing license acquired. Testing management’s process included evaluating the
appropriateness of the valuation method, testing the completeness and accuracy of the underlying data
used in the valuation method, and evaluating the reasonableness of significant assumptions used by
management. Evaluating the reasonableness of the significant assumption used by management related
to forecasted gross margin involved considering the past performance of the acquired business, other
comparable peer data, as well as assessing whether this assumption was consistent with evidence
obtained in other areas of the audit. Evaluating the reasonableness of the significant assumption used by
management related to estimated time to obtain a license and complete cultivation and production ramp-
up involved considering the past experience in developing licensed facilities and other comparable peer
data. Professionals with specialized skill and knowledge were used to assist in evaluating the
appropriateness of the Company’s valuation method and the reasonableness of the forecasted gross
margin assumption.
Accounting for the Day 1 loss in the senior secured convertible note
As described in notes 4 and 19 to the consolidated financial statements, on May 27, 2021 the Company
issued a US$ denominated senior secured convertible note (the Note) at a principal amount of $434.6
million (US$360.0 million). The Note was sold at a transaction price of $395.5 million (US$327.6 million).
The Note includes multiple embedded derivatives and has been designated in its entirety as a financial
liability at fair value through profit and loss. Management determined that the fair value of the Note on
issuance does not equal the transaction price, which was attributed, among other things, to a premium
paid as a result of the limited time available to close the financing required to secure the Redecan
acquisition. The fair value of the Note at initial recognition, determined using a valuation technique that
includes unobservable inputs, was $491.7 million (US$407.3 million), resulting in a difference between the
transaction price and the fair value of $96.2 million (US$79.7 million) (Day 1 loss). Management
determined that the Day 1 loss cannot be recognized in the consolidated statement of net loss and
comprehensive loss on initial recognition of the Note but should be deferred and recognized as a loss only
to the extent that it arises from a change in a factor that market participants would take into account when
pricing the Note. Management determined that time is such a factor specific to the Note and the Day 1
loss is recognized on a straight line basis in the consolidated statement of net loss and comprehensive
loss over the contractual life of the Note. Management used significant judgment to determine the
accounting for the Day 1 loss in the Note.
The principal considerations for our determination that performing procedures relating to the accounting
for the Day 1 loss in the senior secured convertible note is a critical audit matter are the significant
judgment by management in determining the accounting for the Day 1 loss in the Note. As described in
the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a
material weakness was identified related to this matter. This led to a high degree of auditor judgment,
subjectivity and effort in performing procedures and evaluating audit evidence related to management’s
assessment of the accounting for the Day 1 loss in the Note.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included, among
others, reading the Note agreement; evaluating whether the key terms in management’s accounting
memorandum have been appropriately identified; evaluating the reasonableness of management’s
assessment that unobservable inputs in the valuation technique led to the deferral of the Day 1 loss in the
Note by considering the limited time available to close the financing required to secure the Redecan
acquisition, the factors specific to the transaction and the Note, the inputs applied in the fair value of the
Note, and consistency with evidence obtained in other areas of the audit; evaluating the reasonableness
of management’s assessment that time is the factor that market participants would take into account when
pricing the Note by considering the terms of the Note agreement; and evaluating the sufficiency of the
Company’s consolidated financial statement disclosures related to this matter.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Canada
October 29, 2021
We have served as the Company's auditor since 2020.
HEXO Corp. 2021 Consolidated Financial Statements
Table of Contents
Consolidated Statements of Financial Position ........................................................................................................... 1
Consolidated Statements of Net Loss and Comprehensive Loss .................................................................................. 2
Consolidated Statements of Changes in Shareholders’ Equity ..................................................................................... 3
Consolidated Statements of Cash Flows ..................................................................................................................... 4
Notes to the Consolidated Financial Statements:
1. Description of Business ...................................................................................................................................................................7
2. Going Concern ................................................................................................................................................................................7
3. Basis of Preparation ........................................................................................................................................................................8
4. Significant Accounting Policies and Pronouncements ......................................................................................................................10
5. Cash and Cash Equivalents .............................................................................................................................................................21
6. Restricted Funds ...........................................................................................................................................................................21
7. Cash Held in Escrow ......................................................................................................................................................................21
8. Commodity Taxes Recoverable and Other Receivables ....................................................................................................................21
9. Inventory ......................................................................................................................................................................................21
10. Biological Assets ..........................................................................................................................................................................22
11. Investments in Associates & Joint Ventures ..................................................................................................................................23
12. Long-term Investments ................................................................................................................................................................24
13. Property, Plant and Equipment ...................................................................................................................................................25
14. Intangible Assets .........................................................................................................................................................................27
15. Business Acquisition ....................................................................................................................................................................27
16. Goodwill .....................................................................................................................................................................................29
17. Warrant Liabilities .......................................................................................................................................................................30
18. Convertible Debentures ...............................................................................................................................................................31
19. Senior Secured Convertible Note ..................................................................................................................................................32
20. Lease Liabilities ...........................................................................................................................................................................35
21. Loans and Borrowings..................................................................................................................................................................35
22. Share Capital ...............................................................................................................................................................................37
23. Common Share Purchase Warrants ..............................................................................................................................................38
24. Share-based Compensation..........................................................................................................................................................39
25. Net Loss per Share .......................................................................................................................................................................41
26. Financial Instruments ..................................................................................................................................................................42
27. Operating Expenses by Nature .....................................................................................................................................................44
28. Other Income and Losses .............................................................................................................................................................44
29. Related Party Disclosure ..............................................................................................................................................................45
30. Capital Management ...................................................................................................................................................................45
31. Commitments and Contingencies .................................................................................................................................................46
32. Fair Value of Financial Instruments ...............................................................................................................................................47
33. Non-Controlling Interest ..............................................................................................................................................................48
34. Revenue from Sale of Goods ........................................................................................................................................................48
35. Segmented Information ...............................................................................................................................................................49
36. Operating Cash Flow ....................................................................................................................................................................49
37. Income Taxes ..............................................................................................................................................................................50
38. Subsequent Events ......................................................................................................................................................................51
HEXO Corp. 2021 Consolidated Financial Statements
Consolidated Statements of Financial Position
(expressed in thousands of Canadian Dollars)
As at
Assets
Current assets
Cash and cash equivalents
Restricted funds
Cash held in escrow
Trade receivables
Commodity taxes recoverable and other receivables
Prepaid expenses
Inventory
Biological assets
Non-current assets
Property, plant and equipment
Intangible assets
Investment in associate and joint ventures
Lease receivable
License and prepaid royalty
Long-term investments
Prepaid expenses
Goodwill
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Excise taxes payable
Warrant liabilities
Lease liability
Loans and borrowings – current
Convertible debentures – current
Senior secured convertible note
Onerous contract
Non-current liabilities
Lease liability
Convertible debentures
Deferred income tax liability
Other long-term liabilities
Total liabilities
Shareholders’ equity
Share capital
Share-based payment reserve
Warrant reserve
Contributed surplus
Accumulated deficit
Accumulated other comprehensive income
Total equity attributable to shareholders of HEXO Corp.
Non-controlling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
Going Concern (Note 2)
Commitments and contingencies (Note 31)
Subsequent events (Note 38)
Approved by the Board of Directors
/s/ Jason Ewart, Director
/s/ Michael Munzar, Director
Note
July 31, 2021
$
July 31, 2020
$
5
6
7
26
8
9
10
13
14
11
12
16
17
20
21
18
19
31
20
18
37
22
24
23
33
67,462
132,246
285,779
37,421
13,549
7,490
135,327
14,284
693,558
393,902
50,608
74,679
4,453
–
2,492
3,922
88,189
1,311,803
63,557
6,591
5,733
1,730
50,159
3,406
367,699
4,763
503,638
42,155
33,089
136
520
579,538
1,267,967
69,750
124,112
41,290
(773,993)
1,152
730,278
1,987
732,265
1,311,803
184,173
8,261
–
19,426
16,733
4,606
64,933
7,571
305,703
285,366
16,008
76,306
3,865
1,020
3,209
1,392
–
692,869
32,451
7,121
3,450
4,772
29,930
–
–
4,763
82,487
24,344
28,969
–
393
136,193
1,023,788
65,746
95,617
27,377
(659,231)
–
553,297
3,379
556,676
692,869
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Net Loss and Comprehensive Loss
(expressed in thousands of Canadian Dollars, except per share data)
For the year ended
Revenue from sale of goods
Excise taxes
Net revenue from sale of goods
Ancillary revenue
Net revenue
Cost of goods sold
Gross profit/(loss) before fair value adjustments
Fair value component in inventory sold
Unrealized gain on changes in fair value of biological assets
Gross profit/(loss)
Operating expenses
Selling, general and administrative
Marketing and promotion
Share-based compensation
Research and development
Depreciation of property, plant and equipment
Amortization of intangible assets
Restructuring costs
Impairment of property, plant and equipment
Impairment of intangible assets
Impairment of goodwill
Recognition of onerous contract
Disposal of long-lived assets
Loss/(gain) on disposal of property, plant and equipment
Acquisition and transaction costs
Loss from operations
Interest income (expense), net
Non-operating income (expense), net
Loss and comprehensive loss attributable to shareholders
before tax
Current and deferred tax recovery
Net loss
Other comprehensive income
Foreign currency translation
Gain on fair value due to changes in credit spread, net of tax
Net loss and comprehensive loss
Comprehensive loss attributable to:
Shareholders of HEXO Corp.
Non-controlling interest
Net loss and comprehensive loss per share, basic and diluted
Weighted average number of outstanding shares
Basic and diluted
Note
34
9,24
9
10
27
27
13
14
13
14
28
28
37
July 31, 2021
July 31, 2020
173,081
(49,583)
123,498
271
123,769
94,703
29,066
31,767
(51,499)
48,798
58,187
10,348
11,731
3,835
6,097
2,050
3,283
20,230
–
–
–
1,294
64
17,174
134,293
(85,495)
(30,523)
859
(115,159)
397
(114,762)
(17)
1,169
(113,610)
(113,477)
(133)
(113,610)
(0.89)
110,149
(29,598)
80,551
233
80,784
127,205
(46,421)
40,910
(29,356)
(57,975)
52,793
12,474
25,790
4,639
6,072
3,939
4,767
79,418
108,189
111,877
4,763
–
3,855
–
418,576
(476,551)
(8,141)
(67,820)
(552,512)
6,023
(546,489)
–
–
(546,489)
(546,489)
–
(546,489)
(7.08)
25
127,300,903
77,376,174
The accompanying notes are an integral part of these consolidated financial statements
HEXO Corp. 2021 Consolidated Financial Statements
Consolidated Statements of Changes in Shareholders’ Equity
(expressed in thousands of Canadian Dollars, except per share data)
For the year ended
Balance at July 31, 2019
June 2020 at the market offering
May 2020 at the market offering
April 2020 underwritten offering
$70m private placement unsecured convertible debenture
USD$25m registered offering
USD$20m registered offering
Early conversion of debentures
Issuance fees
Expiry of warrants
Exercise of warrants
Exercise of stock options
Expiry of stock options
Equity-settled share-based payments
Non-controlling interest
Net loss
Balance at July 31, 2020
June 2020 at the market offering
May 2021 at the market offering, net
Acquisition of Zenabis Global Inc
Transaction costs
Senior secured convertible note, net
Exercise of stock options
Exercise of equity settled RSUs
Expiry of stock options
Exercise of warrants
Expiry of warrants
Equity-settled share-based payments
Other comprehensive income
Non-controlling interest
Net loss
Balance at July 31, 2021
Number of
common
shares
Note
Share
capital
Share-based
payment
reserve
Warrant
reserves
Contributed
surplus
Accumulated
OCI
Accumulated
deficit
Non-controlling
interest
Total
equity
64,245,441
8,235,620
15,985,000
14,950,000
–
3,742,516
2,994,012
9,331,250
–
–
1,103,469
29,133
–
–
–
–
120,616,441
244,875
6,373,926
17,579,336
448,639
4,602,241
410,051
223,506
–
2,146,931
–
–
–
–
–
152,645,946
$
799,706
33,263
43,495
22,928
–
25,229
21,073
72,005
–
–
5,866
223
–
–
–
–
1,023,788
–
45,257
151,358
3,612
29,540
3,213
1,267
–
9,932
–
–
–
–
–
1,267,967
$
40,315
–
–
–
–
–
–
–
–
–
–
(89)
(5,983)
31,503
–
–
65,746
–
–
7,282
–
–
(1,983)
(1,554)
(12,891)
–
–
13,150
–
–
–
69,750
$
60,433
–
10,998
20,182
–
–
–
13,354
–
(7,881)
(1,469)
–
–
–
–
–
95,617
–
–
32,354
–
–
–
–
–
(3,126)
(733)
–
–
–
–
124,112
$
–
–
–
–
23,902
–
–
(10,362)
(27)
7,881
–
–
5,983
–
–
–
27,377
–
–
–
–
–
–
–
12,891
–
733
–
–
289
–
41,290
24
18,21
22
22
15
15
24
23
24
33
The accompanying notes are an integral part of these consolidated financial statements
$ $ $ $
–
788,712
–
33,263
–
54,493
–
43,110
–
23,902
–
25,229
–
21,073
–
74,997
–
(27)
–
–
–
4,397
–
134
–
–
–
31,503
2,379
–
–
(546,489)
556,676
–
–
–
45,257
–
189,654
–
3,612
–
29,540
–
1,230
–
(287)
–
–
–
6,806
–
–
–
13,150
–
1,152
1,152
289
–
(114,814)
–
732,265
1,152
(112,742)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(546,489)
(659,231)
–
–
–
–
–
–
–
–
–
–
–
–
–
(114,762)
(773,993)
1,000
–
–
–
–
–
–
–
–
–
–
–
–
–
2,379
–
3,379
–
–
(1,340)
–
–
–
–
–
–
–
–
–
–
(52)
1,987
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian Dollars)
For the year ended
Operating activities
Net loss
Items not affecting cash
Changes in non-cash operating working capital items
Cash used in operating activities
Financing activities
Proceeds from issuance of senior secured note, net
Proceeds from issuance of common shares, net
Shortfall payments and other transaction costs
Proceeds from the exercise of stock options
Payments on RSU exercise
Proceeds from the exercise of warrants
Repayments of term loan
Interest paid on term loan
Lease payments
Issuance of unsecured convertible debentures
Interest paid on unsecured convertible debentures
Cash provided financing activities
Investing activities
Settlement of short-term investments
Proceeds from sale of investments
Cash outflows to restricted cash
Cash outflows to cash held in escrow
Net cash acquired on business combination
Issuance of convertible debenture receivable
Proceeds from sale of property, plant and equipment
Acquisition of property, plant and equipment
Purchase of intangible assets
Investment in associates and joint ventures
Cash used in investing activities
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cashflow information in Note 36
Note
36
36
19
24
24
23
21
20
18
18
6
7
15
15
11
July 31, 2021
July 31, 2020
$ $
(546,489)
(114,762)
508,484
71,263
(56,549)
431
(94,554)
(43,068)
377,433 –
186,673
46,140
(4,482) –
134
1,230
(287) –
4,291
6,806
(3,500)
(38,415)
(1,849)
(2,035)
(4,341)
(4,835)
70,000
–
(3,205)
(3,583)
248,203
377,972
25,420
–
7,871
–
13,089
(120,985)
(276,654) –
2,804 –
(19,500) –
10,966
93
(109,040)
(30,004)
(856)
(2,336)
(30,494)
(5,033)
(83,044)
(451,615)
(116,711) 70,605
113,568
184,173
184,173
67,462
The accompanying notes are an integral part of these consolidated financial statements.
HEXO Corp. 2021 Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the years ended July 31, 2021 and 2020
(expressed in thousands of Canadian Dollars, except share amounts or where otherwise stated)
1. Description of Business
HEXO Corp. (“HEXO” or the “Company”), is a publicly traded corporation, incorporated in Ontario, Canada. HEXO is licensed to
produce and sell cannabis and cannabis products under the Cannabis Act. The head office is located at 120 Chemin de la Rive,
Gatineau, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the National
Association of Securities Dealers Automated Quotations (“Nasdaq”), both under the trading symbol “HEXO”. The Company was
listed on the New York Stock Exchange up to August 24, 2021, at which time the Company transferred its US listing to the Nasdaq.
2. Going Concern
These consolidated financial statements have been prepared using International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board applicable to a going concern, which assumes that the Company will be able to
continue its operations and will be able to realize its assets and settle its liabilities in the normal course of business as they come
due in the foreseeable future.
For the year ended July 31, 2021, the Company reported an operating loss of $85,495; cash outflows from operating activities of
$43,068 and an accumulated deficit of $773,993. In addition, the Cash held in escrow were released subsequent to year end to
finance the Redecan acquisition (Note 38).
Under the terms of the Senior Secured Convertible Note, the holder has the option to require monthly redemptions, which are
settled in either cash or equity. In order to retain the right to settle the monthly redemptions in either cash or equity, the Company
must maintain, for each of the 20 previous trading days, a daily volume weighted average price per common share on the Nasdaq
Capital Market (“VWAP”) above US$1.50, as well as meet certain other conditions (Note 19). In the event that these conditions are
not met, the Company must seek a waiver from the holder in order to settle each monthly redemption in equity (the “Equity
Condition Waiver”). If the holder does not grant the Equity Condition Waiver, the monthly redemption is required to be settled in
cash. These monthly redemptions may result in significant cash outflows over the next twelve months (Note 19).
On October 22, 2021, the Company negotiated an amendment to the terms of the Senior Secured Convertible Note which resulted
in reducing the daily VWAP attached to the Equity Condition Waiver from US$5.00 to US$1.50. In addition, to date, when
requested, the holder has granted the Equity Condition Waiver and has permitted settlement of the monthly redemptions in equity.
However, there can be no assurances that the Equity Conditions Waiver will continue to be met, or if they are not met, that the
holder will continue to grant equity waivers to permit settlement of the monthly redemptions in equity. As such, there exists a risk
that significant cash outflows may be required over the next twelve months under the terms of the Senior Secured Convertible
Note.
Existing funds on hand, when combined with operational cash flow, are not sufficient to fund existing debt repayments, capex
budgets, and potential cash requirements under the Senior Secured Convertible Note. Management is exploring several options to
secure the necessary financing, which could include the issuance of new public or private equity or debt instruments, supplemented
with operating cash inflows from operations. Nevertheless, there is no assurance that certain sources of additional future funding
will be available to the Company or will be available on terms which are acceptable to management.
These circumstances create material uncertainties that lend substantial doubt as to the ability of the Company to meet its
obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going
concern. The Company's ability to continue as a going concern is dependent upon its ability to fund the repayment of existing
borrowings, secure additional financing and to generate positive cash flows from operations. These financial statements do not
reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications
that would be necessary If the company were unable to realize its assets and settle its liabilities as a going concern in the normal
course of operations. Such adjustments could be material.
7
HEXO Corp. 2021 Consolidated Financial Statements
3. Basis of Preparation
i. Statement of Compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (‘IASB”).
These consolidated financial statements were approved and authorized for issue by the Board of Directors on October
29, 2021.
ii. Basis of Measurement
The consolidated financial statements have been prepared on a historical cost basis except for certain financial
instruments which are carried at fair value and biological assets carried at fair value less cost to sell, as detailed in the
Company’s accounting policies.
iii. Functional and Presentation Currency
The consolidated financial statements are presented in Canadian dollars, which is the parent’s functional currency.
Each entity within the Company determines its own functional currency based on the primary economic environment in
which it operates.
iv. Uncertainty of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. More recently,
outbreaks of COVID-19 variants across the globe continue to prolong the pandemic. In response to the outbreak,
governmental authorities in Canada and internationally have introduced various recommendations and measures to try
to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-
isolations, shelters-in-place and social distancing. These measures are continuously monitored and modified by the
applicable governmental authorities in Canada and certain of these remained in effect as at July 31, 2021.
The production and sale of cannabis in Canada was deemed an essential service throughout the year ended July 31,
2021 and 2020. However, the industry was impacted by the COVID-19 restriction of limited in store shopping at
retailers. The Company regularly monitors the impact of the ongoing pandemic on all aspects of its business and
operations and as of July 31, 2021, we have not observed any material changes to the Company’s operations.
v. Share Consolidation
The Company finalized a share consolidation on the basis of four pre-consolidation common shares for one post-
consolidation common share (4:1) by way of shareholder approval at the annual and special meeting of shareholders
held December 11, 2020 (the “Share Consolidation”). The Share Consolidation was effected by the filing of articles of
amendment to the Company’s articles under the Business Corporations Act (Ontario) on December 18, 2020. All
balances of common shares, common share purchase warrants, stock options and restricted share units herein are
reflective of the Share Consolidation (unless otherwise noted).
Basis of Consolidation
SUBSIDIARIES
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or
indirectly, to govern the financial and operating policies of an entity and be exposed to, or have rights to, the variable
returns from its activities. The financial statements of subsidiaries are consolidated from the date that control
commences until the date that control ceases. All intercompany transactions, balances, and unrealized gains and losses
are eliminated upon consolidation.
Non-controlling interest ("NCI") represents the portion of equity ownership in subsidiaries not attributable to the
Company’s shareholders. NCI is initially measured as the proportionate share of its interest in the acquiree's identifiable
net assets as at the date of acquisition and subsequently adjusted for the proportionate share of net earnings and other
comprehensive income (loss) attributable to the NCI, as well as any dividends or distributions paid to the NCI. Non-
controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of loss
and comprehensive loss, statements of changes in equity and balance sheets respectively.
8
HEXO Corp. 2021 Consolidated Financial Statements
PRINCIPAL OPERATING SUBSIDIARIES
HEXO Operations Inc.
JURISDICTION
Quebec,
Canada
INTEREST HELD
100%
PRINCIPAL ACTIVITY
To produce and sell cannabis and cannabis
products under the Cannabis Act.
HEXO USA Inc.
Zenabis Global Inc.
Keystone Isolation
Technologies Inc. (“KIT’’)
Keystone Isolation
Technologies USA LLC.
(“KIT USA’’)
Delaware,
USA
British
Columbia,
Canada
Ontario,
Canada
Colorado,
USA
100%
To facilitate expansion into the US market.
100%
60%
100%
To produce and sell cannabis and cannabis
products under the Cannabis Act.
To provide the Company with extraction
technology to supply of CBD and THC to supply
the Canadian and global market for cannabis
derivatives
To allow for in state, HEXO controlled cannabis
extraction activity to support the manufacturing of
CBD beverages and future products in the U.S.
(where permissible)
JOINT ARRANGEMENTS AND ASSOCIATES
Investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the
contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Company currently
holds interests in joint ventures but has no interest in joint operations.
Joint ventures
Interests in joint ventures are accounted for using the equity method (see “Equity Method” below), after initially being recognized at
cost in the consolidated balance sheet.
The following are the Company’s joint venture however, none are considered material to the Company:
JOINT VENTURE
JURISDICTION
INTEREST HELD
PRINCIPAL ACTIVITY
Belleville Complex Inc.
Ontario, Canada
25%
The venture was established to manage
the property of the Belleville facility.
Associate
Associates are all entities over which the Company has significant influence but not control or joint control. This is generally the
case where the Company holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the
equity method of accounting (see “Equity Method” below), after initially being recognized at cost.
The following associates are significant to the Company; however, only Truss Limited Partnership is considered material to the
Company:
SIGNIFICANT ASSOCIATES
JURISDICTION
INTEREST HELD
PRINCIPAL ACTIVITY
Truss Limited Partnership
(“Truss LP”)
Truss CBD USA LLP (“Truss
CBD US”)
EQUITY METHOD
Ontario, Canada
42.5%
Colorado USA
42.5%
To pursue opportunities to develop non-
alcoholic, cannabis infused beverages
for the Canadian market.
To explore opportunities for non-
alcoholic hemp derived CBD beverages
in the State of Colorado.
Under the equity method of accounting, investments in associate and joint ventures are initially recognized at cost
and adjusted thereafter to recognize the Company’s share of the post-acquisition profits or losses of the investee in
profit or loss, and the Company’s share of movements in other comprehensive income of the investee in other
comprehensive income. Dividends received or receivable from associates and joint ventures are recognized as a
reduction in the carrying amount of the investment.
9
HEXO Corp. 2021 Consolidated Financial Statements
Where the Company’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity,
including any other unsecured long-term receivables, the Company does not recognize further losses, unless it has
incurred obligations or made payments on behalf of the other entity.
Unrealized gains on transactions between the Company and its associates and joint ventures are eliminated to the
extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred. Accounting policies of equity-accounted investees have
been changed where necessary to ensure consistency with the policies adopted by the Company.
The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in
note 4(m).
OPERATING SEGMENTS
An operating segment is a component of the Company for which discrete financial information is available and whose
operating results are regularly reviewed by the entity's chief operating decision maker, the board of directors, to make
decisions about resources to be allocated to the segment and assess its performance, and that engages in business
activities from which it may earn revenue and incur expenses. The Company only has one operating segment.
4. Significant Accounting Policies and Pronouncements
(a) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into
known amounts of cash with original maturities of three months or less.
(b) RESTRICTED FUNDS
Restricted funds represent cash that is pledged as collateral or guarantees for certain of the Company’s projects, obligations,
and agreements.
Funds related to the Company’s captive insurance program are included in restricted funds. Captive Insurance is coverage for
the Company’s directors and officers that has been secured through a Captive Cell program (“the Captive Program”). The
Captive Program was effected by entered into a participation agreement with a registered insurer for the purposes of holding
and managing the Company’s coverage funds through a separate cell account (the “Cell Captive”). Captive Program funds
are held as cash in the Cell Captive with the possibility of reinvestment into short-term investments and/or marketable
securities in the future. As the funds cannot be transferred to other parts of the group without providing 6 month notice, the
funds are disclosed as Restricted cash. The Company recognizes gains and losses from, interest, foreign exchange activity
and/or fair market value adjustments through the Statement of Loss and Comprehensive Loss.
(c) CASH HELD IN ESCROW
Cash held in escrow is cash that is held by independent escrow agents to fund future acquisitions but restricted by certain
release conditions.
(d) SHORT TERM INVESTMENTS
Short term investments are comprised of liquid investments with maturities between 3 and 12 months. Short term
investments are measured at amortized cost using the effective interest method, less loss allowance.
(e) TRADE RECEIVABLES
Trade receivables are recognized initially at the amount of consideration that is unconditional, unless they contain
significant financing components when they are recognized at fair value. Trade receivables are subsequently
measured at amortized cost using the effective interest method, less loss allowance.
(f) COMMODITY TAX RECOVERABLES & OTHER RECEIVABLES
Commodity tax recoverable and other receivables are initially measured at fair value fair value and subsequently
measured at amortized cost, less any provisions for impairment.
(g) BIOLOGICAL ASSETS
The Company measures biological assets consisting of cannabis plants using the income approach at fair value
less costs to sell at the point of harvest, which becomes the basis for the cost of related inventories after harvest.
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
(including share-based compensation), grow consumables, materials, utilities, facilities costs, depreciation,
overhead, quality and testing costs. The identified capitalized direct and indirect costs of biological assets are
10
HEXO Corp. 2021 Consolidated Financial Statements
subsequently recorded within the line item ‘costs 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 period are included in the results of operations and presented on a separate line of
statement of comprehensive loss of the related period.
(h)
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 (“Dried 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,
overhead, depreciation, amortization, and labor related costs (including share-based compensation) involved in
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 profit. 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.
(i)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Cost
includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the item will flow to the group and the cost of
the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is
derecognized when replaced. All other repairs and maintenance are charged to profit or loss during the reporting
period in which they are incurred.
Construction in progress is transferred to a depreciable asset class property, plant and equipment when the
assets are available for use and depreciation of the assets commences at that point.
Depreciation is provided using the following terms and methods:
Asset
Land
Buildings
Leasehold improvements
Furniture and equipment
Cultivation and production equipment
Vehicles
Computers
Method
Not depreciated
Straight line
Straight line
Straight line
Straight line
Straight line
Straight line
Term
No term
5 to 40 years
lease term
5 years
5 to 20 years
5 years
3 years
An asset’s residual value and useful life are reviewed at each reporting date 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.
(j)
FINITE LIFE INTANGIBLE ASSETS
Finite life intangible assets are measured at cost less accumulated amortization and accumulated impairment losses.
Amortization is provided on a straight-line basis over the following terms:
Asset
Domain names
Health Canada licenses
Software
Patents
Finite life, brands
Method
Straight line
Straight line
Straight line
Straight line
Straight line
Term
10 years
20 years
3-5 years
20 years
3 years
The estimated useful life is reviewed at the end of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis.
11
HEXO Corp. 2021 Consolidated Financial Statements
Research expenditure and development expenditure that do not meet the recognition criteria for intangible assets
are recognized as an expense as incurred. Development costs previously recognized as an expense are not
recognized as an asset in a subsequent period.
(k)
INDEFINITE LIFE INTANGIBLE ASSETS
Indefinite intangible assets are deemed to have no foreseeable limit over which the asset is expected to generate net cash
inflows. Following initial recognition, intangible assets with indefinite useful lives are carried at cost less any accumulated
impairment losses and are tested annually for impairment, or more frequently if events or changes in circumstances indicate
that they might be impaired. The Company intends to utilize the brand indefinitely. The capitalized indefinite life brand consists
of the Company’s premium Up brand, which was recognized upon the acquisition of Newstrike in May 2019.
Brand
(l) GOODWILL
Not amortized
Indefinite
Goodwill is not amortized but it is tested for impairment annually, or more frequently if events or changes in
circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses.
Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The allocation is
made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the
goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for
internal management purposes, being the Company’s single operating segment.
(m)
IMPAIRMENT OF NON-FINANCIAL ASSETS
Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested
annually for impairment, or more frequently if events or changes in circumstances indicate that they might be
impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s or
CGU’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs of disposal (“FVLCD”) and value in use (“VIU”). For the purposes of assessing impairment, assets
are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely
independent of the cash inflows from other assets or groups of assets (CGUs) Non-financial assets other than
goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each
reporting period.
The estimated useful life is reviewed at the end of each reporting period, with the effect of any changes in
estimate being accounted for on a prospective basis.
Research expenditure and development expenditure that do not meet the recognition criteria for intangible assets
are recognized as an expense as incurred. Development costs previously recognized as an expense are not
recognized as an asset in a subsequent period.
In assessing the VIU, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that
reflects current market assessments of the time value of money to the Company and the risks specific to the asset. In
determining FVLCD an appropriate valuation model is used. Where the carrying amount of a CGU exceeds its recoverable
amount, the CGU is considered impaired and is written down to its recoverable amount. Any impairment loss is recorded in
earnings and previously recognized impairment losses (excluding the impairment of Goodwill) are reversed or partially
reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last
impairment loss was recognized, in which case, the carrying amount of the asset is increased to its recoverable amount. The
new carrying amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no
impairment loss been recognized.
(n) BUSINESS ACQUISITIONS
The acquisition method is used to account for all business combinations, regardless of whether equity instruments or
other assets are acquired. Operating results are included in the consolidated financial statements as of the
acquisition date. The consideration transferred for the acquisition comprises the:
•
•
fair values of the assets transferred;
liabilities incurred to the former owners of the acquired business;
• equity interests issued by the Company;
•
•
fair value of any asset or liability resulting from a contingent consideration arrangement; and
fair value of any pre-existing equity interest in the subsidiary.
12
HEXO Corp. 2021 Consolidated Financial Statements
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date, with the exceptions of leases under IFRS 16 and
deferred taxes. The Company recognizes any non-controlling interest in the acquired entity on an acquisition-by-
acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s
net identifiable assets. The Company has one year from the acquisition date to finalize the estimates and
assumptions that support the finalized fair value analysis and purchase price allocation. Until this time, these
values reported are subject to change. Changes to fair values and allocations are retrospectively adjusted in
subsequent periods.
Acquisition-related costs are expensed as incurred and are presented under ‘Acquisition and transaction costs’ in the
consolidated statements of loss and comprehensive loss.
The excess of the consideration transferred, amount of any non-controlling interest in the acquired entity, and acquisition-date
fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is
recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the
difference is recognized directly in profit or loss as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted
to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing
rate, being the rate at which a similar borrowing could be obtained from an independent financier under
comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial
liability are subsequently remeasured to fair value, with changes in fair value recognized in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held
equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from
such remeasurement are recognized in profit or loss.
(o) NON-CURRENT ASSETS (OR DISPOSAL GROUPS) HELD FOR SALE
Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered
principally through a sale transaction rather than through continuing use and a sale is considered highly probable.
They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such
as deferred tax assets, assets arising from employee benefits, financial assets and investment property that are
carried at fair value and contractual rights under insurance contracts, which are specifically exempt from this
requirement.
An impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair
value less costs to sell. A gain is recognized for any subsequent increases in fair value less costs of disposal of
an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognized. A gain or
loss not previously recognized by the date of the sale of the non-current asset (or disposal group) is recognized at
the date of derecognition.
Non-current assets (including those part of a disposal group) are not depreciated or amortized while they are
classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as
held for sale continue to be recognized.
Non-current assets classified as held for sale are presented separately from the other assets in the balance sheet.
The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the
balance sheet.
(p) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities represent liabilities for goods and services provided to the Company prior
to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days
of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12
months after the reporting period. Accounts payable and accrued liabilities are recognized initially at their fair
value and subsequently measured at amortized cost using the effective interest method.
(q) REVENUE RECOGNITION
Revenue from the direct sale of cannabis to customers for a fixed price is recognized when the Company
transfers the control of the good(s) to the customer upon delivery and acceptance by the customer. The Company
recognizes revenue in an amount that reflects the consideration which the Company expects to receive taking into
13
HEXO Corp. 2021 Consolidated Financial Statements
account the impact which may arise from any rights of return on sales, price concessions or similar obligations.
Net revenue is presented net of taxes, estimated returns, allowances and discounts.
Canada Revenue Agency (“CRA”) levies excise taxes on the sale of medical and adult-us cannabis products. The
Company becomes liable for these excise duties when cannabis products are delivered to the customer. The
excise taxes payable is the higher of (i) a flat-rate duty which is imposed when a cannabis product is packaged,
and (ii) an ad valorem duty that is imposed when a cannabis product is delivered to the customer.
Effective May 1, 2019, excise tax calculated on edible cannabis products, cannabis extracts and cannabis topicals
will prospectively be calculated as a flat rate based on the quantity of total tetrahydrocannabinol (THC) contained
in the final product. There were no changes in the legislation in calculating excise taxes for fresh cannabis, dried
cannabis, seeds and plants. Net revenue from sale of goods, as presented on the consolidated statements of
comprehensive (loss) income, represents revenue from the sale of goods less applicable excise taxes.
(r) COST OF GOODS SOLD
Cost of goods sold includes cost of inventory expensed, packaging costs, shipping costs and related labor.
(s)
INCOME TAXES
The income tax expense or recovery for the period is the tax payable on the current period’s taxable income,
based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and
liabilities attributable to temporary differences and to unused tax losses.
The current income tax expense or recovery is calculated on the basis of the tax laws enacted or substantively
enacted at the end of the reporting period in the countries where the Company and its subsidiaries and associates
operate and generate taxable income. Management periodically evaluates positions taken in tax returns with
respect to situations in which applicable tax regulation is subject to interpretation and considers whether it is
probable that a taxation authority will accept an uncertain tax treatment. The Company measures its tax balances
either based on the most likely amount or the expected value, depending on which method provides a better
prediction of the resolution of the uncertainty.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However,
deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. Deferred income tax is
also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business
combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by
the end of the reporting period and are expected to apply when the related deferred income tax asset is realized
or the deferred income tax liability is settled.
(t)
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.
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. 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..
(u) RESTRICTED SHARE UNITS (“RSU’s”)
RSUs are cash or equity settled share-based payments granted to certain employees, directors and executives
within the Company. RSUs are measured at their initial fair value on the date of the grant utilizing the Black-
Scholes Merton model. The fair value of cash-settled RSUs is revalued at each period end and is recognized as
share-based compensation expense over the vesting period with a corresponding adjustment to the liability.
Upon the settlement of cash based RSUs, which are valued at the market value at the time of exercise, the related
liability is transferred to share capital. The fair value of equity-settled RSUs are recognized in the share- based
reserve at the grant date. Upon the settlement of equity-based payments, RSUs are settled in the form of common
shares and the related share-based reserve is transferred to share capital.
Amounts recorded for forfeited RSUs are transferred to the accumulated deficit in the year of forfeiture or expiry.
14
HEXO Corp. 2021 Consolidated Financial Statements
(v) 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. The calculation of diluted loss per share excludes the effects of
various conversions and exercise of options and warrants that would be anti-dilutive.
(w) 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.
(x) FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provision of
the respective instrument.
The Company classifies its financial assets in the following measurement categories:
•
•
those to be measured subsequently at fair value (either through OCI or through profit or loss), and
those to be measured at amortized cost.
The classification depends on the entity’s business model for managing the financial assets and the contractual
terms of the cash flows.
The Company has made the following classifications:
Financial assets
Cash and cash equivalents
Restricted funds
Short-term investments
Trade receivables
Convertible debenture receivable
Long term investments
Financial liabilities
Accounts payable and accrued liabilities
Warrant liabilities
Deferred rent liability
Convertible debentures
Senior secured convertible note
Lease liabilities
Loans and borrowings
IFRS 9 Classification
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
FVTPL
Amortized cost
FVTPL
Amortized cost
Amortized cost
FVTPL
Amortized cost
Amortized cost
(i) Fair Value Through Profit or Loss (“FVTPL”) Financial Assets
Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at
amortized cost or at FVTOCI. This category includes debt instruments whose cash flow characteristics are not
solely payments of principal and interest (“SPPI”) or are not held within a business model whose objective is either
to collect contractual cash flows, or to both collect contractual cash flows and sell the financial asset.
(ii) Amortized Cost Financial Assets
Financial assets at amortized cost are non-derivative financial assets which are held within a business model whose
objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal amount outstanding. An amortized cost
financial asset is initially measured at fair value, including transaction costs and subsequently at amortized cost using
the effective interest rate.
15
HEXO Corp. 2021 Consolidated Financial Statements
(iii) 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 each 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.
(iv) Financial Liabilities and Other Financial Liabilities
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial
liabilities mandatory classified at FVTPL, such derivates, are stated at fair value, with changes being recognized
through the consolidated statements of loss. 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.
Senior secured convertible note issued in currency other than the functional currency of the Company are
classified entirely as liabilities. As the Note contains equity and non-equity embedded derivatives, they are
designated at fair value through profit or loss on initial recognition when embedded features are not separated.
The component of fair value changes relating to the Company’s own credit risk is recognized in other
comprehensive loss. Amounts recorded in other comprehensive loss related to credit risk are not subject to
recycling in profit or loss but are transferred to retained earnings when realized. Financial liabilities are classified
as current when the Company does not retain an unconditional right to defer settlement, due to a conversion
feature or otherwise, beyond 12 months from the reporting date.
(v) Derivatives
Derivatives are initially measured at fair value and are subsequently measured at FVTPL. If the transaction price does not
equal to fair value at the point of initial recognition, management measures the fair value of each component of the investment
and any unrealized gains or losses at inception are either recognized in profit or loss or initially unrecognized and recognized
over the term of the investment, depending on whether the valuation inputs are based on observable market data. The
resulting unrealized gain or loss at inception and subsequent changes in fair value are recognized in profit or loss for the
period. Transaction costs, which are directly attributable to the acquisition of the investment, are expensed as incurred.
(vi) Convertible Debentures
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.
(vii) 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
16
HEXO Corp. 2021 Consolidated Financial Statements
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.
Fair value on initial recognition
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique. If, after considering the
terms of the transaction, the Company determines that the fair value of a financial instrument at initial recognition differs from
the transaction price, the difference is recognized as a gain or loss in the statement of loss only if fair value is evidenced by
quoted prices or based on a valuation technique that uses only data from observable markets. In all other cases, the
difference is deferred and recognized systematically to the extent that it arises from a change in a factor (including time) that
market participants would consider in setting a price. Any subsequent measurement of the instrument excludes the balance of
the deferred day one gain or loss.
(y) 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.
Foreign Operations
The assets and liabilities of foreign operations are translated to the presentation currency at exchange rates at the reporting
date. The income and expenses of foreign operations are translated to the presentation currency using average exchange
rates for the month during which the transactions occurred. Foreign currency differences are recognized in Other
Comprehensive Loss in the Accumulated Other Comprehensive Loss account.
(z) SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the consolidated financial statements in conformity with IFRS requires management to make
judgements, 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.
Significant Accounting Judgements
Impairment of non-financial assets
Non-financial asset impairment tests require the allocation of assets to CGUs or CGU groups, which requires significant
judgement and interpretation with respect to the integration between assets, the existence of active markets, similar exposure
to market risks, shared resources and assets, and the way in which management monitors the operations.
Non-financial asset impairment tests require the determination of whether there is an indication of impairment. The
assessment of whether there is any indication of impairment is performed at the end of each reporting period, and requires
the application of judgement, historical experience, and use of external and internal sources of information
Revenue – Principal versus Agent
The Company evaluates whether it is the principal (reports on gross basis) or agent (reports on a net basis) for revenues
generated by the direct sale of cannabis infused beverages (“CIB’s). The Company control’s the CIB’s prior to the sale to its
customers as regulated and mandated under the Cannabis Act and Health Canada legislation. The Company’s control is
evidenced by our sole ability to possess the CIB’s once the cannabis distillate has been added and thus establishing the
inventory as a cannabis product requiring it to be held by a licensed producer. It is further evidenced by the Company
possessing the sole ability to monetize the sale of CIB’s through the held sales agreements and purchase orders with
customers. The Company presents the revenues from the sale of CIBs on a gross basis.
Senior Secured Convertible Note
Management used significant judgement to determine that the fair value of the Note on issuance does not equal the
transaction price, which was attributed, among other things, to a premium paid as a result of the limited time available to close
the financing required to secure the Redecan acquisition. The resulting difference between the transaction price and the fair
value on initial recognition (the “Day 1 loss”) is deferred as the fair value of the Note is based on a valuation technique where
not all the inputs are observable. The unrecognized Day 1 loss will be recorded in the statement of net loss only to the extent
17
HEXO Corp. 2021 Consolidated Financial Statements
that it arises from a change in factor that market participants would take into account when pricing the Note. The Company
believes that time is such a factor specific to the Note and the Day 1 loss is recognized on a straight line basis in the
statement of net loss over the contractual life of the note.
Going Concern and Liquidity
In assessing the Company’s ability to continue as a going concern, management utilizes significant estimates in the
forecasting of future cash flows. Critical input estimates such as economic conditions, market demands, production quality,
integrated operating activities, capital project expenditures and convertible debt repayments are used.
Significant Accounting Estimates
Valuation of Biological Assets
In determining the fair value less costs to sell of biological assets, management is required to make a number of significant
estimates, judgement and assumptions, including estimating the expected yields for the cannabis plants, sales price and
expected post-harvesting costs.
A weighted average of current observable market sales prices for cannabis derived products, less costs to sell, is used to
estimate the sales price input in the fair value less costs to sell model.
Valuation of Inventory
In calculating the net realizable value (NRV) of inventory, management determines the selling prices based on current
observable market sales prices, selling costs, and includes an estimate of spoiled or expired inventory based on the most
reliable evidence available at the time, to record inventory at the lower of cost or net realizable value.
Impairment of non-financial assets
Non-financial asset impairment tests require the estimation of the recoverable amount of the asset or CGU, which is the
higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on
available data from binding sales transactions conducted at arm's length for similar assets, valuation appraisals, or observable
market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash
flow model. The cash flows are derived from the Company’s approved budget for the first year and the Company’s forecast for
the next four years and do not include restructuring activities that the Company is not yet committed to, or significant future
investments that will enhance the performance of the asset or CGU being tested. The recoverable amount is sensitive to the
discount rate used for the discounted cash flow model as well as the expected future cash flows and the growth rate used for
extrapolation purposes. These estimates are most relevant to goodwill, property, plant and equipment and intangible assets.
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.
Business Combination
Management performs a valuation analysis to allocate the purchase price based on the acquisition date fair values of the
identifiable assets acquired and liabilities assumed. Determining the fair value of identifiable assets acquired and liabilities
assumed on the acquisition date, require the use of judgement and estimates. The significant estimates related to estimating
the fair value of the acquired cultivation and processing license intangible asset, involved significant assumptions such as
forecasted gross margin, and the delay in cultivation and production ramp-up. Management also exercises judgement in
estimating the probability and timing of future cash flows and uses a discounted cash flow methodology as the basis for
estimating fair value. Valuations are highly dependent on the inputs used and assumptions made by management regarding
the future performance of these assets and any changes in the discount rate applied.
Determining the fair value of the assumed debenture required the use of significant judgement given the default claims of the
Debenture at acquisition and the legal proceedings underway with the lender (see Note 31). As the lender claimed the
debenture is in default, management also exercised judgement in estimating the amount required to repay and terminate the
Debenture and contingencies attached to the claim.
Convertible Debentures
Convertible debentures are financial instruments which are accounted for separately dependent on the nature of their
components: a financial liability and an equity instrument. The identification of such components embedded within a
convertible debenture requires significant estimates including discount rates and future cash flows. The conversion option has
a fixed conversion rate thus the financial liability, which represents the obligation to pay coupon interest on the convertible
debentures in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual
balance, or conversion feature is accounted for as equity at issuance. Transaction costs are apportioned to the debt liability
and equity component in proportion to the allocation of proceeds.
18
HEXO Corp. 2021 Consolidated Financial Statements
New and Amended Standards
Effective August 1, 2020, the Company adopted the following accounting pronouncements:
Amendments to IFRS 3: Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of
a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business
combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of
integrated activities is not a business. The amendments are effective for business combinations occurring on or after the
beginning of the first annual reporting period beginning on or after January 1, 2020. The Company adopted the Amendments to
IFRS 3 effective August 1, 2020 with no impact to the Company’s consolidated financial statements.
Amendments to IFRS 9, IASB 39 and IFRS 7: Interest Rate Benchmark Reform
The amendments revise the existing requirements for hedge accounting and are designed to support the provision of useful
financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks
such as Interbank Offered Rates (“IBOR”). The amendments modify some specific hedge accounting requirements to provide
relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to
provide additional information to investors about their hedging relationships which are directly affected by these uncertainties.
The amendments are effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. The
Company adopted the Amendments to IFRS 9, IAS 39 and IFRS 7 effective August 1, 2020 with no impact on the Company’s
consolidated financial statements.
New Accounting Policies Not Yet Effective
The following IFRS standards have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to
have a significant impact have been excluded.
Amendments to IAS 1: Classification of Liabilities as Current or Non-current
The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current in
the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or
non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or
timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1,
2022. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial
statements
Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising from a Single Transaction
The amendment narrowed the scope of certain recognition exemptions so that it no longer applies to transactions that, on initial
recognition, give rise to equal taxable and deductible temporary differences. An entity applies the amendments to transactions
that occur on or after the beginning of the earliest comparative period presented. It also, at the beginning of the earliest
comparative period presented, recognizes deferred tax for all temporary differences related to leases and decommissioning
obligations and recognizes the cumulative effect of initially applying the amendments as an adjustment to the opening balance
of retained earnings (or other component of equity, as appropriate) at that date. The amendment is effective for annual periods
beginning on or after January 1, 2023 with early application permitted. The Company is currently evaluating the potential impact
of these amendments on the Company’s consolidated financial statements.
Amendments to IAS 37: Onerous Contracts and the Cost of Fulfilling a Contract
The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that
relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate
directly to fulfilling contracts. The amendment is effective for annual periods beginning on or after January 1, 2022 with early
application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s
consolidated financial statements.
Amendments to IAS 16: Property Plant and Equipment: Proceeds before intended use
The amendment clarifies the accounting for the net proceeds from selling any items produced while bringing an item of property
plant and equipment into use. The amendment prohibits a company from deducting from the cost of property plant and
equipment proceeds from selling items produced while the company is preparing that assets for its intended use. The company
will recognize such sales proceeds and related costs in profit and loss. The amendment is effective for annual periods
beginning on or after January 1,2022 with early application permitted. The Company is currently evaluating the potential impact
of this amendment on the Company’s financial statements.
19
HEXO Corp. 2021 Consolidated Financial Statements
Previously Adopted Accounting Policies Effective August 1, 2019
IFRS 16, LEASES
The Company adopted IFRS 16 Leases on August 1, 2019, which introduces a new approach to lease accounting. The
Company adopted the standard using the modified retrospective approach, which recognized the cumulative impact on the
opening balance sheet and applies the standard prospectively. This cumulative impact is included in the comparative
information in Note 13.
At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy
is applied to contracts entered, or modified, on or after August 1, 2019.
Practical expedients
Effective August 1, 2019, the IFRS 16 transition date, the Company elected to use the following practical expedients under the
modified retrospective transition approach:
• Leases with lease terms of less than twelve months (short-term leases) and leases of low-value assets (less than $5,000
U.S. dollars) (low-value leases) that have been identified at transition were not recognized in the consolidated statement of
financial position;
• Right-of-use assets on transition were measured at the amount equal to the lease liabilities at transition, adjusted by the
amount of any prepaid or accrued lease payments;
• For certain leases having associated initial direct costs, the Company, at initial measurement on transition, excluded these
directs costs from the measurement of the right-of-use assets;
• Application of a single discount rate to portfolios of leases with similar characteristics on transition; and
• Any provision for onerous lease contracts previously recognized at the date of adoption of IFRS 16 has been applied to
the associated right-of-use asset recognized upon transition.
The Company as a lessee
Where the Company is a lessee, a right-of-use asset representing the right to use the underlying asset with a corresponding lease
liability is recognized when the leased asset becomes available for use by the Company.
The right-of-use asset is recognized at cost and is depreciated on a straight-line basis over the shorter of the estimated useful life
of the asset and the lease term. The cost of the right-of-use asset is based on the following:
the amount of initial recognition of related lease liability;
•
• adjusted by any lease payments made on or before inception of the lease;
•
• decreased by lease incentives received and any costs to dismantle the leased asset.
increased by any initial direct costs incurred; and
The lease term includes consideration of an option to extend or to terminate if the Company is reasonably certain to exercise
that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
Lease liabilities are initially recognized at the present value of the lease payments. The lease payments are discounted using
the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate.
Generally, the Company uses its incremental borrowing rate as the discount rate. Subsequent to recognition, lease liabilities are
measured at amortized cost using the effective interest rate method. Lease liabilities are remeasured when there is a change in
future lease payments arising mainly from a change in an index or rate, if there is a change in the Company’s estimate of the
amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will
exercise a purchase, renewal or termination option.
The payments related to short-term leases and low-value leases are recognized as other expenses over the lease term in the
statement of loss and comprehensive loss.
The Company as a lessor
The Company's consolidated financial statements were not impacted by the adoption of IFRS 16 Leases in relation to lessor
accounting. Lessors will continue with the dual classification model for recognized leases with the resultant accounting
remaining unchanged from IAS 17, Leases.
Impact of Change in Accounting Policy
On August 1, 2019, the Company recognized $21,360 of right-of-use assets and $21,360 of operating lease liabilities. The
Company applied its weighted average incremental borrowing rate as at August 1, 2019 to determine the amount of lease
liabilities. The effect of the adjustment to the amounts recognized in the Company's consolidated statement of financial position
at August 1, 2019.
20
HEXO Corp. 2021 Consolidated Financial Statements
5. Cash and Cash Equivalents
Interest rate
–
0.60%
Operating cash
High interest savings accounts
Cash and cash equivalents
6. Restricted Funds
Debt service reserve account – Term loan (Note 21a)
Letters of credit, collateral and guarantees for purchases
Restricted cash under terms of the Senior Secured Convertible Note (Note 19)
Cash restricted in captive insurance subsidiary
Total
7. Cash Held in Escrow
July 31, 2021
$
31,702
35,760
67,462
July 31, 2020
$
70,318
113,855
184,173
July 31, 2021
$
–
2,552
99,696
29,998
132,246
July 31, 2020
$
8,191
70
–
–
8,261
On May 27, 2021, the Company issued US$360 million in a senior secured convertible note at a purchase price of US$327.6
million (Note 19). Under the senior secured convertible note agreement, US$229.32 million of the proceeds were immediately
placed into an escrow account. The Cash held in escrow was used subsequent to year-end to partially fund the acquisition of all of the
outstanding shares of the entities that carry on the business of Redecan (the “Redecan Acquisition”)(Note 38).
8. Commodity Taxes Recoverable and Other Receivables
Commodity taxes recoverable
Lease receivable – current1
Receivable on conversion of Inner Spirit Holdings Shares (Note 12)
Loan receivable2
Other receivables
Total
July 31, 2021
$ 56
107
2,698
5,000
5,688
$ 13,549
1 A related party capital lease receivable related to Truss Limited Partnership (Note 29).
2 A short term bridge loan issued to 48North who was subsequently acquired by the Company on September 1, 2021 (Note 38).
July 31, 2020
12,821
630
–
–
3,282
16,733
$
$
9. Inventory
Dried cannabis
Purchased dried cannabis
Extracts
Purchased extracts
Packaging and supplies
Dried cannabis
Purchased dried cannabis
Extracts
Purchased extracts
Hemp derived distillate
Packaging and supplies
Capitalized
cost
Biological asset fair
value adjustment
$
$
81,784 $
24,257 $
1,754
11,945
2,247
8,929
106,659 $
–
4,411
–
–
28,668 $
As at July 31, 2021
Total
106,041
1,754
16,356
2,247
8,929
135,327
As at July 31, 2020
Capitalized
cost
29,702
1,956
4,828
5,977
566
4,538
47,567
$
$
Biological asset fair
value adjustment
16,981 $
$
–
385
–
–
–
17,366 $
$
Total
46,683
1,956
5,213
5,977
566
4,538
64,933
The Company recognizes the costs (capitalized cost and biological asset fair value adjustment) of harvested cannabis inventory
expensed in two separate lines on the consolidated statement of net loss: (i) Capitalized costs relating to inventory expensed and
included in Cost of goods sold amounted to $94,703 for the year ended July 31, 2021 (July 31, 2020 – $127,205) (ii) The fair value
component (biological asset fair value adjustments) of inventory sold on the consolidated statement of net loss was $31,767 for
21
HEXO Corp. 2021 Consolidated Financial Statements
the year ended July 31, 2021, (July 31, 2020 – $40,910). During the year ended July 31, 2021, the Company reversed previous
inventory write downs of $2,927, (July 31, 2020 – $nil) recorded in costs of good sold $688 (July 31, 2020 – $nil) recorded in fair
value component on inventory sold on the statement of loss.
Total share-based compensation capitalized in inventory in the year ended July 31, 2021 was $1,505 (July 31, 2020 – $6,105).
Total depreciation capitalized in inventory in the year ended July 31, 2021 was $15,677 (July 31, 2020 – $11,988).
10. Biological Assets
The Company’s biological assets consist of cannabis plants throughout the growth cycle, from mother plants to plants in propagation,
vegetative and flowering stages. The changes in the carrying value of biological assets are as follows:
For the years ended
Balance, beginning of year
Acquired on business combination
Production costs capitalized
Net increase in fair value due to biological transformation and estimates
Harvested cannabis transferred to inventory
Disposal of biological assets
Balance, end of year
July 31, 2021
$
7,571
8,892
36,156
51,499
(89,834)
–
14,284
July 31, 2020
$
7,371
–
38,638
29,356
(67,131)
(663)
7,571
The valuation of biological assets is based on an income approach (Level 3) 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 (growing plants), the fair value at the point of
harvest is adjusted based on the stage of growth at period-end. Harvested cannabis is transferred from biological assets at their fair
value at harvest.
The inputs and assumptions used in determining the fair value of cannabis plants are as follows:
•
•
•
•
•
yield per plant;
stage of growth percentage, estimated as age of plant from date of harvest as a percentage of total days in an average
growing cycle, as applied to the estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value
for estimated biological assets to be harvested;
selling price per gram;
post-harvest cost (cost to complete and cost to sell) per gram; and
destruction/wastage of plants during the harvesting and processing process.
The table below summarized the significant inputs and assumptions used in the fair value model, their weighted average range of value
and sensitivity analysis:
Significant inputs and assumptions
Weighted average selling price
Derived from actual retail prices on a per product basis
using the expected Flower and Trim yields per plant.
Which is expected to approximate future selling prices and
where applicable, considering strains.
Input values
An increase or decrease of 5% applied to the
unobservable input would result in a change
to the fair value of approximately
July 31, 2021
July 31, 2020
July 31, 2021
July 31, 2020
$3.05 per dried
gram
$3.23 per dried
gram
$746
$550
Yield per plant
Derived from historical harvest cycle results on a per strain
basis, which is expected to be harvested from plants.
24-116 grams per
plant
46 – 135 grams
per plant
$460
$376
Post-harvest cost
Derived from historical costs of production activities on a
per product basis.
$0.67-$0.84 per
dried gram
$0.26-$0.81 per
dried gram
$636
$219
22
HEXO Corp. 2021 Consolidated Financial Statements
11. Investments in Associates & Joint Ventures
July 31, 2021
Opening Balance
Cash contributed to investment
Capitalized transaction costs
Share of net (loss)
Impairment
Foreign exchange loss through OCI
Ending Balance
Truss LP
$
74,966
4,250
–
(6,343)
–
–
72,873
Other
$
1,340
783
Total
$
76,306
5,033
–
(162)
–
(155)
1,806
–
(6,505)
–
(155)
74,679
Truss LP
$
51,786
29,155
–
(5,975)
–
–
74,966
Other
$
1,063
1,231
109
(356)
(707)
–
1,340
July 31, 2020
Total
$
52,849
30,386
109
(6,331)
(707)
–
76,306
Truss LP
The Truss LP was formed between the Company and Molson Coors Canada (the “Partner”) and is a standalone entity,
incorporated in Canada, with its own board of directors and an independent management team. The Partner holds 57,500 common
shares representing 57.5% controlling interest in Truss LP with the Company holding 42,500 common shares and representing the
remaining 42.5%. Truss LP is a private limited partnership and its principal operating activities consist of pursuing opportunities to
develop non-alcoholic, cannabis-infused beverages.
As at
Statement of Financial Position
Cash and cash equivalents
Other current assets
Non- current assets
Current liabilities
Non-current liabilities
Year ended
Statement of Comprehensive Loss
Revenue
Operating expenses excluding depreciation and amortization
Depreciation and amortization
Other expenses
Loss from operations
Other income
Interest expenses
Income tax expenses
Total comprehensive loss
Truss LP
July 31, 2021
$
6,757
14,182
July 31, 2020
$
19,561
7,867
67,766
11,184
8,667
66,863
11,112
8,903
July 31, 2021
July 31, 2020
6,498(1)
705(1)
(14,261)
(4,884)
–
(14,643)
130
(412)
–
(14,925)
(12,647)
(617)
(7)
(13,827)
1
(233)
–
(14,059)
1The revenues of Truss LP are rental fees paid by the Company for the HEXO CIB sublease it has with the sub-lessor, Truss LP.
The following table is a reconciliation of summarized financial information of the Company’s’ significant investment in Truss LP to the
carrying amount of the investment for the year ended July 31, 2021 and 2020.
For the year ended
July 31, 2021
Opening net assets
Acquisition of associate/capital calls
Total comprehensive loss
Closing net assets
Interest in associate
Interest in associate value
Fair value of warrant consideration
Capitalized transaction costs
Total interest in associate value
$
74,964
10,000
(14,925)
70,039
42.5%
29,767
42,386
720
72,873
23
July 31,
2020
$
20,423
68,600
(14,059)
74,964
42.5%
31,860
42,386
720
74,966
HEXO Corp. 2021 Consolidated Financial Statements
12. Long-term Investments
Level 1 Investments
Fire and Flower common shares
Sundial Growers Inc. common shares
Inner Spirit Holdings Ltd common shares
Other long-term investments
Level 3 Investments
Segra International Corp.
Total
Level 1 Investments
Fire and Flower common shares
Inner Spirit common shares
Other long-term investments
Level 2 Investments
Inner Spirit common share purchase warrants
Level 3 Investments
Greentank Technologies
Neal Brothers Inc.
Segra International Corp.
Total
Fair value
July 31,
2020
1,292
–
1,260
517
140
3,209
Fair value
July 31,
2019
$
–
3,000
–
403
6,574
4,000
300
14,277
Transfer
$
Divestiture
$
–
720
(720)
–
–
–
(2,698)
(13)
Change in
fair value
$
(65)
(99)
2,158
–
–
–
–
(2,711)
–
1,994
Investment
$
Divestiture
$
1,232
–
517
–
(643)
–
Change in
fair value
$
60
(1,097)
–
Fair value
July 31,
2021
$
1,227
621
–
504
140
2,492
Fair value
July 31,
2020
$
1,292
1,260
517
–
–
(403)
–
–
–
–
1,749
–
–
–
(643)
(6,574)
(4,000)
(160)
(12,174)
–
–
140
3,209
The Company’s Level 1 publicly traded investments were initially acquired as strategic investments in Canadian cannabis private
retailers and are held for the long term. The investments have been classified as non-current.
Fire & Flower Holdings Corp.
On November 30, 2019, the Company obtained 1,000,000 common shares in Fire & Flower Holdings Corp., a publicly traded company,
through the conversion of its $800 zero interest bearing convertible debentures, at a conversion rate of $0.80 per common share. The
fair value of the shares upon conversion was $920.
On February 11, 2020, the Company received an additional 319,377 common shares of Fire & Flower as settlement for accrued and
unpaid interest on the Fire and Flower convertible debentures. The fair value of the shares on settlement was $1,232.
The Company holds 1,319,377 common shares in Fire & Flower at July 31, 2021 (July 31, 2020 - 1,319,377). The common shares
were revalued to $1,227 using the quoted share price at July 31, 2021 of $0.93 (July 31, 2020 - $0.98).
Sundial Growers Inc. / Inner Spirit Holdings Ltd.
On May 24, 2019, on acquisition of Newstrike, the Company acquired 15,000,000 common shares in Inner Spirit Holdings Ltd., which
were valued at $2,850 on initial recognition. During the year ended July 31, 2020, the Company disposed of 6,005,500 common shares,
at prices ranging from $0.09-$0.15 per share, resulting in a gain of $24. The remaining 8,994,500 shares held at July 31, 2020 were
valued based upon the market price of $0.14 per share resulting in a fair value of $1,260 at July 31, 2020.
On July 21, 2021, Sundial Growers Inc. ("Sundial") acquired all of the issued and outstanding common shares of Inner Spirit Holdings
Ltd. The consideration per Inner Spirit common share consisted of (i) $0.30 in cash and (ii) 0.0835 of a common share of Sundial.
The Company received 751,041 common shares of Sundial and a cash component of $2,698, which is presented in Other receivables.
The Sundial shares were fair valued on July 21, 2021 (initial recognition) and July 31, 2021 at quoted share prices of $0.87 and $0.82,
respectively.
24
HEXO Corp. 2021 Consolidated Financial Statements
13. Property, Plant and Equipment
Cost
At July 31, 2019
Additions
Disposals
Transfers
At July 31, 2020
Business acquisition
Additions
Disposals
Transfers
At July 31, 2021
Land
$
5,339
–
(3,683)
–
1,656
1,100
–
–
–
2,756
Buildings
$
150,834
24,432
(18,260)
7,943
164,949
95,788
1,213
1
3,951
265,902
Leasehold
improvements
$
627
1,395
–
22,417
24,439
–
63
–
17,649
42,151
Cultivation
and production
equipment
$
42,029
14,969
(13,402)
(10,135)
33,461
6,154
2,284
(67)
884
42,716
Furniture,
computers,
vehicles and
equipment
$
10,368
9,404
(909)
8
18,871
8,578
294
–
1,388
29,131
Construction
in progress
$
57,550
66,246
(5,428)
(20,233)
98,135
395
16,960
–
(23,544)
91,946
Right-of-Use
assets
$
–
24,405
–
–
24,405
17,059
–
(1,055)
–
40,409
Accumulated depreciation and impairments
At July 31, 2019
Depreciation
Transfers
Disposals
Impairments
At July 31, 2020
Depreciation
Transfers
Disposals
Impairments
At July 31, 2021
–
–
–
–
307
307
–
–
–
–
307
4,392
7,395
–
(17,081)
19,006
13,712
7,981
(110)
–
160
21,743
130
879
–
–
–
1,009
2,173
(16)
–
85
3,251
2,216
3,702
271
(7,435)
9,937
8,691
5,145
(78)
–
2,104
15,862
1,216
3,562
(271)
(366)
–
4,141
4,229
(277)
–
61
8,154
–
–
–
–
48,990
48,990
–
–
–
–
48,990
–
2,522
–
–
1,178
3,700
2,246
–
(964)
17,820
22,802
Total
$
266,747
140,851
(41,682)
–
365,916
129,074
20,814
(1,121)
328
515,011
7,954
18,060
–
(24,882)
79,418
80,550
21,774
(481)
(964)
20,230
121,109
Net book value
At July 31, 2019
At July 31, 2020
At July 31, 2021
5,339
1,349
2,449
146,442
151,237
244,159
497
23,430
38,900
39,813
24,770
26,854
9,152
14,730
20,977
57,550
49,145
42,956
–
20,705
17,607
258,793
285,366
393.902
During the year ended July 31,2021, the Company capitalized $15,677 (July 31, 2020 – $11,988) of depreciation to inventory. During
the year ended July 31, 2021, depreciation expensed to the consolidated statement of loss and comprehensive loss was $6,097 (July
31,2020 – $6,072).
Capitalized borrowing costs to buildings in the year ended July 31, 2021 was $1,269 (July 31, 2020 – $2,385) at an average interest
rate of 5.6% (July 31, 2020 – 7.22%). Transfers from construction in progress during the year reflect the activation of an asset’s useful
life, transitioning from construction in progress to the appropriate property, plant and equipment classification.
Impairment of right of use assets
During the year ended July 31, 2021, the Company impaired $17,820 (July 31, 2020 - $1,178) of right of use assets related to the
Company’s Langley and Montreal facilities.
Subsequent to the acquisition of Zenabis (Note 15), the Company in order to recognize the synergies, assessed the output capacity of
its production and cultivation facilities and made the decision to exit the Langley lease. As a result, the carrying amount of the
associated right of use asset of $17,059 was impaired as the Company has assessed the recoverable amount at $nil. During the year
ended July 31, 2021 the Company identified it’s Montreal research lab lease, which resulted in impairment losses of $761. The
recoverable amount of the assets was determined to be nil, as the assets have no continuing use to the Company. The associated
lease liabilities remain as at July 31, 2021 (Note 20).
Impairment of cultivation and production equipment
During the year ended July 31, 2021, the Company identified impairments of certain packaging equipment that is no longer expected to
be used. As a result of this, impairment losses of $2,104 (July 31, 2020 - $9,937) were recorded.
25
HEXO Corp. 2021 Consolidated Financial Statements
Impairment and Sale of Niagara Facility
On March 2, 2020, the Company completed a strategic review of its cultivation capacity and made the decision to market the Niagara
facility for sale. As a result, the carrying amount of the Niagara facility was expected to be recovered principally through its sale. The
Niagara facility was acquired from Newstrike in May 2019 and consists primarily of equipment, cultivation and processing facilities and
land assets that are included within property, plant and equipment, as well as related cultivation and processing licenses that are
recorded as intangible assets. These assets were previously included in the HEXO CGU.
The recoverable amount was determined by reference to fair value less costs of disposal using a market approach. The market
approach was based on comparable transactions for similar assets, which is categorized within Level 2 of the fair value hierarchy. As a
result, an impairment loss of $31,606 was recorded in property, plant and equipment. Additional impairment losses were recorded for
cultivation and processing licenses (Note 14). On June 17, 2020, the Company closed the sale of the Niagara Facility for proceeds of
$12,250 and a loss on disposal of $2,219 for the year ended July 31, 2020.
Impairment of Certain Optimization Projects
During the year ended July 31, 2020, the Company identified an impairment indicator for certain capital assets and expenditures made
as a result of suspending certain optimization projects that were under construction. As a result, the Company recorded an impairment
loss of $43,585 relating to redundant and idle capital assets, as well as excess leasehold improvement expenditure that is not expected
to contribute to future cash flows of the Company. The recoverable amount of the assets was determined to be zero, as the assets
have no continuing use to the Company and negligible value would be derived from sale as the assets were highly customised for a
specific purpose and location.
Impairment of HEXO CGU
At July 31, 2021, no indicators of impairment were identified for the HEXO CGU.
During the year ended July 31, 2020, an indicator of impairment was identified for the HEXO CGU as the carrying amount of the
Company’s total net assets significantly exceeded the Company’s market capitalization. The HEXO CGU consists of the Company’s
Canadian cultivation and production facilities.
The recoverable amount of the CGU was determined based on fair value less cost of disposal using a market-based approach (Level 3)
based on an income based discounted cash flow analysis (DCF). The Company uses its market capitalization and comparative market
multiples to aid in validating the discounted cash flow results. The significant assumptions in the DCF analysis were as follows:
i.
ii.
iii.
iv.
Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry
and market trends. A discrete four year period was forecasted with an extended 5 year period calculated using the H-Model
which is an alternative dividend discount model that assumes the growth rate will fall linearly to the terminal value with a short-
term growth rate of 10% in the first year, declining each year over the 5 years to a terminal growth rate of 3%. If all other
assumption were held constant and the short-term growth rate in the first year was decreased by 1%, the recoverable amount
would decrease by approximately $24,000;
Revenue and gross margin: Forecast revenues and resulting gross margin are based on internal projections, developed with
reference to historical experience and external market information. If all other assumptions were held constant and forecasted
revenues and resulting gross margin declined by 3%, the recoverable amount would decrease by approximately $34,000;
Terminal value growth rate: Management used a 3% terminal growth rate which is based on historical and projected consumer
inflation, historical and projected economic indicators, and projected industry growth. If all other assumption were held
constant and the terminal growth rate was decreased by 1%, the recoverable amount would decrease by approximately
$38,000;
Discount rate: Management used a 14.1% post-tax discount rate which is reflective of an industry Weighted Average Cost of
Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium based on a direct comparison
approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields. If all other
assumption were held constant and the discount rate was in increased by 1%, the recoverable amount would decrease by
approximately $59,000; and
v.
Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation
date.
26
HEXO Corp. 2021 Consolidated Financial Statements
14. Intangible Assets
Cost
At July 31, 2019
Additions
Disposals
At July 31, 2020
Additions
Business acquisition
Disposals
At July 31, 2021
Accumulated amortization and impairments
At July 31, 2019
Amortization
Impairment
At July 31, 2020
Amortization
Disposals
At July 31, 2021
Net book value
At July 31, 2019
At July 31, 2020
At July 31, 2021
Cultivating and
processing license
$
116,433
–
–
116,433
–
28,914
–
145,347
1,601
3,167
106,189
110,957
765
–
111,722
Brands
$
8,440
–
–
8,440
–
5,400
–
13,840
–
–
2,000
2,000
170
–
2,170
114,832
5,476
33,625
8,440
6,440
11,670
Software
$
3,558
702
(550)
3,710
1,546
–
(872)
4,384
1,269
697
–
1,966
922
(872)
2,016
2,289
1,744
2,368
Domain
names
$
585
–
–
585
–
–
–
585
66
59
–
125
59
–
184
519
460
401
Patents
$
1,231
875
(173)
1,933
790
–
–
2,723
29
16
–
45
134
–
179
Total
$
130,247
1,577
(723)
131,101
2,336
34,314
(872)
166,879
2,965
3,939
108,189
115,093
2,050
(872)
116,271
1,202
1,888
2,544
127,282
16,008
50,608
Research and development expenses in the year ended July 31, 2021 were $3,835, (July 31, 2020 - $4,639).
Impairment
The Company recognized no intangible asset impairment losses during the year ended July 31, 2021.
In connection with the impairment loss recorded in the second quarter of fiscal 2020, for the Niagara facility, the Company recorded an
impairment loss of $106,189 relating to cultivation and processing licenses associated with the Niagara facility. The acquired brand
from the 2019 acquisition of Newstrike Brands Limited was also impaired by $2,000 as result of an impairment test as at July 31, 2020.
15. Business Acquisition
Acquisition of Zenabis Global Inc.
On June 1, 2021, pre-market open, the Company acquired 100% of the issued and outstanding common shares of Zenabis Global Inc.
(“Zenabis”) pursuant to an arrangement agreement entered into on February 15, 2021. Zenabis is a Canadian-licensed cultivator and
seller of medical and adult-use cannabis. Zenabis was acquired for its key brands, indoor growing capability and its established
additional market share. Under the arrangement, each former Zenabis common share was exchanged for 0.01772 of a HEXO common
share. In addition, all issued and outstanding stock options and compensation units of Zenabis were replaced with HEXO backed units,
having the same terms but adjusted for the exchange ratio, and all issued and outstanding common share purchase warrants of
Zenabis became exercisable for HEXO common shares adjusted for the exchange ratio.
The following table summarizes the purchase consideration and preliminary values of the net assets acquired from Zenabis on the
acquisition date:
Consideration
Shares issued
Replacement warrants outstanding
Replacement stock options issued
Replacement RSU’s and DSU’s issued
Settlement of pre-existing debt
Total fair value of consideration
Units
Unit Price Fair Value
($)
($)
(i)
(ii)
(iii)
(iv)
17,579,336
5,196,164
905,902
223,497
n/a
8.61
151,358
32,354
5,727
1,554
20,760
211,753
27
HEXO Corp. 2021 Consolidated Financial Statements
Net assets acquired
Current assets
Cash and cash equivalents
Accounts receivable
Other receivables
Excise taxes receivable
Inventory
Biological assets
Non-current assets
Property, plant and equipment
Prepaid expenses
Cultivation and processing license
Brands
Goodwill
Total assets
Current liabilities
Accounts payable and accrued liabilities
Loans
Convertible debentures
Non-current liabilities
Lease Liability
Deferred tax liabilities
Total liabilities
Non-controlling interest
Total net assets acquired
Note 16
Note 21
2,804
3,822
198
86
40,636
8,892
129,074
5,670
28,914
5,400
88,189
313,685
(22,161)
(52,194)
(11,724)
(17,059)
(134)
(103,272)
1,340
211,753
(i) As the acquisition closed pre-markets on June 1, 2021, the share price is based upon the closing HEXO Corp. TSX market price
of common shares on May 31, 2021.
(ii) Warrants were valued using the Black-Scholes option pricing model as at the acquisition date June 1, 2021, using the following
assumptions:
•
•
•
•
•
Risk free rate of 0.31%-0.74%
Expected life of 0.32 – 4.35 years
Volatility rate of 96%; determined using historical volatility data
Exercise prices of $3.96-$151.24
Share price of $8.61
(iii) All vested and replaced stock options were valued using the Black-Scholes option pricing model as at the acquisition date
of June 1, 2021, using the following assumptions and inputs;
•
•
•
•
•
Risk free rate of 0.31%-0.74%
Expected life of 0.25 – 4.49 years
Volatility rate of 96%; determined using historical volatility data
Exercise prices of $2.54 – $234.7
Share price of $8.61
(iv) Prior to the transaction closing date, the Company entered into a convertible debt agreement with Zenabis in which the
Company advanced $19,500 in convertible debentures which bear interest of 8% annually and mature February 15, 2023. Both
the issuer and lender accounted for the debentures as FVTPL. For purpose of the acquisition accounting the debentures, which
had a fair value of $20,760, were effectively settled at the acquisition date.
The fair value of the vested share based compensation as at the acquisition date was deemed consideration paid in the transaction.
The fair value of those options not yet vested at the acquisition date was added to the Company’s share-based payment reserve to
be expensed over the remaining vesting period of the options as permitted under IFRS 3 – Business Combinations.
The identifiable cultivation and processing license (“the license”) enables the Company to cultivate and produce cannabis products
for sale, and was valued at $28,914 using a with-or-without approach in an income based discounted cash flow (“DCF”) valuation
model (Level 3). The model estimates the value of the license as the difference between the present value of the future cash flows
of the facility with-or-without a license in place, as at the acquisition date. Significant estimates in the model include the forecast
28
HEXO Corp. 2021 Consolidated Financial Statements
gross margin and the estimated time to obtain a licence and complete cultivation and production ramp up. The significant estimates
in the DCF analysis were the forecasted gross margin and the estimated time to obtain a licence and complete cultivation and
production ramp up. If all other assumptions were held constant, and the forecasted gross margin rate was decreased by 10%, the
valuation of the cultivation and processing license would decrease by $6,336. In the with-or-without approach, reducing the
estimated time to obtain a licence and complete cultivation and production ramp up by six months would reduce the valuation of the
license to $18,665.
During the year ended July 31, 2021, Zenabis contributed net revenue of $6,800 and a comprehensive net loss attributed to
shareholders of $1,513 to the Company’s consolidated results since the date of acquisition. If the acquisition had occurred on
August 1, 2020 management estimates that the Company’s consolidated net revenue would have increased by $54,746 and the
comprehensive net loss would have increased by $9,078 for the year ended July 31, 2021.
Goodwill arising from the acquisition represents the expected synergies, future income and growth, and other intangibles that do
not qualify for separate recognition. None of the goodwill arising from the acquisition is expected to be deductible for tax purposes.
The Company recognized transaction costs of $9,634 related to the acquisition (inclusive of $3,614 in share-based compensation for
issuance of 448,639 common shares).
16. Goodwill
At July 31 ,2019
Impairment
At July 31, 2020
Acquisition (Note 15)
Balance as at July 31, 2021
Zenabis
Newstrike Brands
Ltd
$
111,877
(111,877)
–
–
–
Zenabis Global
Ltd
$
–
–
–
88,189
88,189
Total
$
111,877
(111,877)
–
88,189
88,189
Goodwill was recognized on acquisition of Zenabis on June 1, 2021 and was allocated to the company-wide level aggregated CGU
level (“HEXO Corporate CGU”). Goodwill arising from the acquisition represents the expected synergies, future income and growth
potential, and all other intangibles that do not qualify for separate recognition.
Management performed the annual impairment test of goodwill as at July 31, 2021 and no impairment loss was required to be
recorded. The recoverable amount was determined based on fair value less cost of disposal using a market-based approach (Level 2)
with reference to an adjusted current market capitalization of the Company.
The calculation of the adjusted market capitalization was based on a 20-day volume weighted average share price of the Company on
July 31, 2021, adjusted for a control premium of 5%, which was estimated by reference to premiums in recent acquisitions involving
control, and from data on empirical control premium studies that considered industry, pricing, background, deal size, and timing of the
observed premiums. If all other assumptions were held constant, and the share price declined by 5%, the recoverable amount would
have decreased by $45,087. If all other assumptions were held constant and the control premium was increased by 5%, the
recoverable amount would have increased by $42,941.
Newstrike Brands Ltd.
Goodwill was initially recognized on acquisition of Newstrike Brands Limited (“Newstrike”) on May 24, 2019 and was monitored at the
operating segment level, which is a company-wide level (“HEXO Corporate CGU”). On January 31, 2020, the carrying amount of the
Company’s total net assets significantly exceeded the Company’s market capitalization. In addition, slower than expected retail store
roll outs in Canada and delays in government approval for cannabis derivative products resulted in a constrained distribution channel,
which have adversely affected overall market sales and profitability. As a result of these factors, management performed an indicator-
based impairment test of goodwill as at January 31, 2020. The recoverable amount was determined based on fair value less cost of
disposal using a market-based approach (Level 2) which considered both the adjusted current market capitalization of the Company
and an income based discounted cash flow analysis (DCF).
The calculation of the adjusted market capitalization was based on the share price of the Company on January 31, 2020, adjusted for a
control premium of 10%, which was estimated by reference to premiums in recent acquisitions involving control, and from data on
empirical control premium studies that considered industry, pricing, background, deal size, and timing of the observed premiums. If all
other assumptions were held constant, and the share price declined by 5%, the impairment loss would increase by $26,647.
If all other assumption were held constant and the control premium was decreased by 5%, the impairment loss would increase by
$24,283. An income based Discounted cash flow (“DCF”) analysis (Level 3) was also used to corroborate the results of the adjusted
29
HEXO Corp. 2021 Consolidated Financial Statements
market capitalisation-based valuation. The significant assumptions in the DCF analysis were as follows:
i. Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and
market trends. A discrete four-and-a-half-year period was forecasted with an extended 5 year period calculated using the H-Model
which is an alternative dividend discount model that assumes the growth rate will fall linearly to the terminal value with a short-
term growth rate of 10% in the first year, declining each year over the 5 years to a terminal growth rate of 3%. If all other
assumption were held constant and the short-term growth rate in the first year was decreased by 1%, the impairment loss would
increase by $12,598;
ii. Terminal value growth rate: Management used a 3% terminal growth rate which is based on historical and projected consumer
inflation, historical and projected economic indicators, and projected industry growth. If all other assumption were held constant
and the terminal growth rate was decreased by 1%, the impairment loss would increase by $27,000;
iii. Post-tax discount rate: Management used a 15.9% post-tax discount rate which is reflective of an industry Weighted Average Cost
of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium based on a direct comparison
approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields. If all other
assumption were held constant and the discount rate was in increased by 1%, the impairment loss would increase by $53,933;
and
iv. Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation
date.
As a result, during the year ended July 31, 2020 management concluded that the carrying value of the HEXO Corporate CGU was
higher than the recoverable amount and recorded a goodwill impairment loss of $111,877.
17. Warrant Liabilities
Opening balance as at August 1, 2019
Issued
Exercised
(Gain) on revaluation of financial instruments
Balance as at July 31, 2020
Loss on revaluation of financial instruments
Balance as at July 31, 2021
2017 Unsecured
Convertible
Debentures
$
493
–
(106)
(387)
–
–
–
US$25,000
Registered
Direct Offering
$
–
5,629
–
(3,712)
1,917
1,269
3,186
US$20,000
Registered
Direct Offering
$
–
3,967
–
(2,434)
1,533
1,014
2,547
Total
$
493
9,596
(106)
(6,533)
3,450
2,283
5,733
The warrants are classified as a liability because the exercise price is denominated in US dollars, which is different to the functional
currency of the Company. Losses (gains) on revaluation of the warrant liabilities are presented in Non-operating income (expenses) on
the consolidated statements of loss and comprehensive loss.
USD$20,000 Registered Direct Offering – Warrants
On January 21, 2020, the Company closed a registered direct offering with institutional investors for gross proceeds of US$20,000.
Under this offering, the Company originally issued 5,988,024 common share purchase warrants with an exercise price of US$2.45 per
share with a five year-term. As a result of the share consolidation completed on December 18, 2020 (Note 22), the number of warrants
outstanding was reduced to 1,497,007 and the exercise price was increased to US$9.80 per share. The warrant liability was measured
at fair value using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:
Number of warrants
Share price
Expected life
Dividend
Volatility
Risk free rate
Exchange rate (USD/CAD)
As at
July 31, 2021
As at
July 31, 2020
Initial recognition
January 20, 2020
1,497,007
US$3.97
2.5 years
US $nil
95%
0.38%
1.2462
1,497,007
US$2.72
2.5 years
US $nil
97%
0.22%
1.3404
1,497,007
US$5.80
2.5 years
US $nil
80%
1.57%
1.3116
30
HEXO Corp. 2021 Consolidated Financial Statements
US$25,000 Registered Direct Offering – Warrants
On December 31, 2019, the Company closed a registered direct offering with institutional investors for gross proceeds of US$25,000.
Under this offering, the Company originally issued 7,485,032 common share purchase warrants with an exercise price of US$2.45 per
share with a five year-term. As a result of the share consolidation completed on December 18, 2020 (Note 22), the number of warrants
outstanding was reduced to 1,871,259 and the exercise price was increased to US$9.80 per share. The warrant liability was measured
at fair value using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:
Number of warrants
Share price
Expected life
Dividend
Volatility
Risk free rate
Exchange rate (USD/CAD)
As at
July 31, 2021
As at
July 31, 2020
1,871,259
US$3.97
2.5 years
US $nil
95%
0.38%
1.2462
1,871,259
US$2.72
2.5 years
US $nil
97%
0.22%
1.3404
Initial recognition
December 31,
2019
1,871,259
US$6.36
2.5 years
US $nil
79%
1.71%
1.2988
2017 Unsecured Convertible Debenture – Warrants
During the year ended July 31, 2020, 17,856 warrants were exercised prior to the expiry date of November 14, 2019, for cash proceeds
of $72 (US$54), based on an exercise price of US$3.04.
18. Convertible Debentures
Unsecured convertible debenture- March 2019
Unsecured convertible debenture- December 2019
Unsecured convertible notes
Total convertible debentures
Current
Non-Current
(a) Unsecured Convertible Debenture March 2019
Balance as at July 31, 2020
Acquired on business combination
Interest payments
Interest expense
Balance as at July 31, 2021
Note
(a)
(b)
(c)
July 31,2021
$
3,406
33,089
–
36,495
3,406
33,089
July 31,2020
$
–
28,969
–
28,969
–
28,969
$
$
–
3,722
(372)
56
3,406
On June 1, 2021, the Company completed its business acquisition of Zenabis (Note 15) which included the assumption of Zenabis'
unsecured convertible debentures issued in March 2019. The debentures bear interest, payable in cash only, from the date of issue at
6.0% per annum, payable semi-annually on June 30 and December 31 of each year and are convertible at a price of $147.29 The
convertible debenture is convertible, at the option of the holder, into common shares of the Company at any time prior to the close of
business on the last business day immediately preceding the maturity date. During the two months ended July 31, 2021, the accretion
expense recognized in interest expense was $56, and no unsecured convertible debentures were converted into common shares.
Subsequent to year end, the debentures were repaid in full in cash of $3,461.
(b) Unsecured Convertible Debenture December 2019
Balance as at July 31, 2019
Issued at amortized cost, net issuance costs
Conversion
Interest expense
Interest paid
Balance as at July 31, 2020
Interest expense
Interest paid
Balance as at July 31, 2021
31
$ –
45,922
(20,602)
6,854
(3,205)
28,969
$
7,331
(3,211)
$ 33,089
HEXO Corp. 2021 Consolidated Financial Statements
On December 5, 2019, the Company closed a $70,000 private placement of convertible debentures. The Company issued a total of
$70,000 principal amount of 8.0% unsecured convertible debentures maturing on December 5, 2022 (the “Debentures”). The
Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of
$12.64 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the
then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the
daily volume weighted average trading price of the common shares of the Company is greater than $30.00 for any 15 consecutive
trading days.
The Company had the option to at any time on or before December 4, 2020, to repay all, but not less than all, of the principal amount of
the Debentures, plus accrued and unpaid interest. Upon maturity, the holders of the Debentures have the right to require the Company
to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such
amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the five trading days
immediately preceding the payment date.
Early Conversion Inducement (common shares presented in pre 4:1 share consolidation figures)
In May 2020, the Company provided notice to all holders of the Debentures of an option to voluntarily convert their Debentures into
units of the Company (the “Conversion Units”) at a discounted early conversion price of $0.80 (the “Early Conversion Price”) calculated
based on the 5-day volume weighted average HEXO Corp. share price (the “VWAP”) preceding the announcement. The VWAP utilised
data from both the TSX and NYSE. Each Conversion Unit provided the holder one common share and one half common share
purchase warrant (with an exercise price of $1.00 and term of three years). The early conversion occurred in two phases, the first being
on June 10, 2020 followed by the second and final phase June 30, 2020. During phases one and two, $23,595 principal amount and
$6,265 principal amount of the Debentures were converted under the Early Conversion Price into 29,493,750 and 7,831,250 common
shares and 14,746,875 and 3,915,625 common share purchase warrants of HEXO Corp., respectively. The reduction of the conversion
price to induce early conversion resulted in a loss of $54,283 during the year ended July 31, 2020, which is presented in Non-operating
income (expense) in the statement of net loss. The loss is calculated as the difference between the fair value of the consideration the
holders received on conversion under the revised terms and the fair value of the consideration the holders would have received under
the original terms of the agreement.
On July 31, 2021, there remains $40,140 in principal debentures (July 31, 2020 - $40,140) outstanding. The accrued and unpaid
interest as at July 31, 2021 was $483 (July 31, 2020 - $202).
(c) Unsecured Convertible Notes
Balance as at July 31, 2020
Acquired on business combination
Debt repayment
Balance as at July 31, 2021
$
$
–
7,790
(7,790)
–
On June 1, 2021, the Company completed its business acquisition of Zenabis (Note 15) and acquired unsecured convertible notes. The
unsecured convertible notes were originally issued by the acquiree in October 2018 and matured on June 30, 2021. The notes bore
interest of 6% and a conversion rate of $147.86. The notes were repaid subsequent to the close of the acquisition.
19. Senior Secured Convertible Note
Senior Secured Convertible Note
Opening balance, beginning of the year
Issued at fair value
Early conversions
Redemptions
Gain on fair value adjustment
Foreign exchange loss
Ending balance, end of the year
Unrecognized Day 1 Loss
Opening balance, beginning of the year
Unrecognized loss at issuance
Recognized loss
Ending balance, end of the year
Total balance, end of year, net
Current portion
Non-current
July 31, 2021
US$
–
407,284
(413)
(27,500)
(14,524)
–
364,847
–
(79,684)
7,470
(72,214)
292,633
292,633
–
July 31, 2021
$
–
491,714
(497)
(33,525)
(18,100)
15,081
454,673
–
(96,203)
9,229
(86,974)
367,699
367,699
–
On May 27, 2021 (the “issuance date”), the Company issued a Senior Secured Convertible Note (the "Note") directly to an institutional
purchaser and certain of its affiliates or related funds (collectively, the “Holder”) at a principal amount of $434,628 (US$360,000). The
32
HEXO Corp. 2021 Consolidated Financial Statements
Note was sold at a purchase price of $395,511 (US $327,600), or approximately 91% of the principal amount (“transaction price”). The
Note bears no periodic cash interest payments and is repayable on May 1, 2023 (the “maturity date”) at 110% of the principal amount
(the “Redemption Amount”), if not converted or redeemed earlier. The Redemption Amount on issuance date was $478,091
(US$396,000). The Company used a portion of the net proceeds of the Note to fund the Redecan Acquisition (Note 38). The Note is
secured against the assets of HEXO Operations Inc. and, it’s subsidiaries, as well as the assets of HEXO USA Inc and it’s subsidiaries.
The Note can be converted in full or in part by the Holder into freely tradeable common shares of the Company at any time before the
second last trading day before the maturity date at a conversion rate of 142.6533 common shares per US$1 (“conversion rate”). The
Note includes different conversion and redemption options (summarized below) available to the Holder and the Company, subject to
certain terms and limitations. At any given point, the beneficial ownership of the Holder in the Company is restricted to 9.99% (the
“maximum ownership threshold”). Any conversion or redemption option exercised in common shares which would result in the Holder
exceeding the maximum ownership threshold is null and void. Any outstanding payments due on maturity date will be settled in cash.
Other than the above-mentioned conversion feature, the Holder has the following conversion and redemption options available:
● Early Conversion Option: The Holder had the option to early convert the instrument up to $60,365 (US$50,000) at an early
conversion rate during the fifteen trading day period following the announcement of the acquisition of Redecan which occurred on
May 28, 2021. This was partially exercised by the Holder as shown in the table below. Under the terms of the Note, the Company
was required to pay a cash amount equal to 10% of the principal amount converted, such that the Company effectively settled
110% of the principal amount.
● Optional Redemption Option: The Holder has the option to require monthly redemptions, of US$15,000 (or US$20,000 from
October 2021 to September 2022) of the principal amount, on a monthly basis, plus any amounts deferred from any previous
months up to US$50,000. These monthly redemptions can be settled in either cash or equity at 110% of the principal amount.
However, in order to retain the right to settle the monthly redemptions in equity, the Company must meet certain conditions for
each of the 20 previous trading days, including (i) a daily volume weighted average price per common share on the Nasdaq
Capital Market (“VWAP”) above US$5.00; (ii) a daily dollar trading volume (as reported on Bloomberg) of common shares over
US$10,000 on the Nasdaq Capital Market; and (iii) the related equity issuance cannot result in the Holder exceeding a beneficial
ownership greater than 9.99% of the common shares of the Company. In the event that these conditions are not met, the
Company must seek a waiver from the Holder in order to settle each monthly redemption in equity (“Equity Condition Waiver”). If
the Holder does not grant the Equity Condition Waiver, the monthly redemption is required to be settled in cash. Subsequent to
year end, on October 22, 2021, the Company negotiated an amendment to the terms of the Note which resulted in reducing the
daily VWAP attached to the Equity Condition Waiver condition from US$5.00 to US$1.50.
● Fundamental Change Repurchase option: The Holder can also require the Company to repurchase the convertible note in the
event of a fundamental change as defined in the agreement.
The Company has the following conversion option:
● Forced Conversion: The Company has an option, subject to certain conditions, to force the holder to redeem the outstanding
principal at a forced conversion price if the Daily VWAP is greater than 150% of the conversion price on each of 20 consecutive
trading days after the issue date. The Company may elect to redeem all or a portion of the Principal Amount into common shares
or cash. An additional amount of 5% of the Principal Amount at the time of the forced conversion will also be payable in cash by
the Company to the Holder unless the Daily VWAP exceeds 175% of the conversion price for five days for each of the 20 previous
trading days.
The conversion rate applied to equity settlements is calculated in reference to 88.0% of the lesser of (i) the average of the daily VWAPs
during the five VWAP trading day period ending on the VWAP trading day immediately prior to the settlement date, and (ii) the fifteen
VWAP trading day period ending on the VWAP trading day immediately prior to the settlement date.
Additionally, up until the date of shareholder approval of the Note, shortfall cash payments were required to be made by the Company
on any redemptions made under the terms of the Note. Shareholder approval was obtained on August 28, 2021, and as such, no
further cash shortfall payments will be required from that date. Shortfall cash payments settled in the period are disclosed below.
The Note includes a number of financial and non-financial covenants, including:
●
a requirement to maintain US$95,000 on deposit with a collateral agent, a portion of which is set aside to fund the repayment of
the Senior notes payable (Note 21(b)). On July 23, 2021, the Note was amended to reduce the collateral amount on deposit to
US$80,000.
● Beginning for the quarter ending January 31, 2022, the Company will be subject to a minimum adjusted EBITDA covenant, as
defined in the agreement.
The Note represents a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, has been
designated as FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Note and it is clear with limited
analysis that separation is not prohibited. The changes in fair value of the instrument are recorded in the Statement of loss with
33
HEXO Corp. 2021 Consolidated Financial Statements
changes in credit spread being recognized through Other comprehensive income. The transaction costs of $18,078 (US$14,975) have
been recognized in the statement of loss during the period.
The fair value of the Note at inception was $491,714 determined using the partial differential equation method with the following inputs;
Share Price $6.53; Volatility 85%, Risk-free rate 0.227%; Credit spread 16.06%; Dividend yield $nil and Dilution 284.6 million common
shares. The partial differential equation determines the fair value of the note by using an iterative approach to solve the differential
equation that the instrument satisfies. The Note is classified as Level 2 in the fair value hierarchy.
The fair value of the Note at initial recognition was determined using a valuation technique that includes unobservable inputs. The
Company identified a difference between the transaction price and the fair value of $96.2 million (US$79.7 million) (the “Day 1 loss”).
The Company believes that time is the factor that market participants would take into account when pricing the note. Therefore, the
unrecognized Day 1 loss is recognized on a straight line basis in the statement of net loss over the contractual life of the Note.
The following table represents the movement of redemption amounts in the year ended July 31, 2021. As disclosed above, redemptions
are made at 110% of the principal amount owed.
Balance, beginning of year
Issuances:
Initial issuance
Settlements:
Early conversion option
Optional redemption options
Foreign exchange loss
Balance, end of year
Shares
Issued
Redemption
Amount
$
–
53,495
4,548,746
478,091
(497)
(33,525)
14,641
458,710
Shortfall cash payments of $3,893 are presented as share issuance costs in shareholders’ equity.
At July 31, 2021 the fair value of the Note was determined to be $454,673 and was fair valued using the following inputs; Share Price
$3.98; Volatility 85%, Risk-free rate 0.327%; Credit spread 15.44%; and a Dividend $nil. The gain on fair value adjustments related to
changes in credit spread amounted to $1,590 (July 31, 2020 - $nil).
An increase/decrease in the US$/CA$ foreign exchange rate of 1% would result in a foreign exchange loss/gain adjustment of $4,547.
Further, an increase/decrease of credit spread by 1% and share price of the Company by 10% would change the fair value of the
instrument by $2,614 and $7,443 respectively.
The following table depicts amounts that can be demanded by the Holder in accordance with the monthly redemption option up to the
instrument’s maturity date, reflective of 110% of the principal amount of Note.
Fiscal Year
2022
2023
Total
Redemption
amount
US$
253,000
115,087
368,087
Redemption
amount
$
315,289
143,421
458,710
34
HEXO Corp. 2021 Consolidated Financial Statements
20. Lease Liabilities
The following is a continuity schedule of lease liabilities for the years ended July 31, 2021 and 2020:
Balance at July 31, 2019
Adjustment on adoption of IFRS 16
Balance at August 1, 2019
Lease additions
Lease payments
Interest expense on lease liabilities
Balance at July 31, 2020
Assumed on business combination (Note 15)
Lease disposals
Lease payments
Interest expense on lease liabilities
Balance at July 31, 2021
Current
Non-current
$
–
21,360
21,360
9,030
(4,341)
3,067
29,116
17,059
(789)
(4,835)
3,334
43,885
1,730
42,155
The Company’s leases consist of administrative real estate leases and a production real estate property. Effective August 1, 2020, the
Company exited two real estate leases and the related lease liability was reduced, resulting in a gain of $181 recognized in Other
income and losses on the consolidated statements of loss. During the year ended July 31, 2021 the associated right of use assets were
impaired for a loss of 17,820 (Note 13). The Company expensed variable lease payments of $3,885 for the year ended July 31, 2021
(July 31, 2020 – $3,769).
The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at July 31, 2021:
Fiscal year
Lease obligations
21. Loans and Borrowings
2022 2023 – 2024 2025 – 2026 Thereafter
$
49,522
$
11,858
$
10,835
$
6,155
Total
$
78,370
The following table is the Company’s loans and borrowings as at July 31, 2021
(A)
Term Loan
Senior notes payable
(B)
RDC Loan
(C)
Total Loans and Borrowings
Current
Non-current
July 31, 2021
$
–
50,159
–
50,159
50,159
–
July 31, 2020
$
29,930
–
–
29,930
29,930
–
A. Term Loan
On February 14, 2019, the Company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce (“CIBC”) as
Sole Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as Co-Lead Arranger and Syndication Agent
(together “the Lenders”). The Lenders provided the Company with up to $65,000 in secured debt financing at a rate of interest that is
expected to average in the mid-to-high 5% per annum range. The credit facility consisted of an up to $50,000 term loan (“Term Loan”)
and up to a $15,000 in a revolving credit facility which is limited to the Company’s working capital assets available to support funded
balances. The credit facility had a maturity date of February 14, 2022 and was secured against the Company’s property, plant and
equipment. The Company was to repay at minimum 2.5% of the initial amount drawn each quarter per the terms of the credit facility
agreement. On February 14, 2019, the Company received $35,000 on the Term Loan and incurred financing costs of $1,347.
On July 31, 2020 the Company was not in compliance with an administrative banking covenant which mandated that the Company
does not utilize a Canadian dollar operating bank account with any institution other than the Lenders. The Company was subject to the
covenant 90 days after entering the syndicated credit facility on February 14, 2019. The Company received an amendment on October
29, 2020 allowing it to rectify this administrative breach by April 27, 2021. Due to the amendment being received after July 31, 2020 and
within the three months ended October 31, 2020 the Company classified its Term Loan as a current liability on July 31, 2020. On April
30, 2021, the Company repaid the credit facility in full and therefore is no longer subject to the credit facility’s financial or administrative
covenants.
35
HEXO Corp. 2021 Consolidated Financial Statements
In the year ended July 31, 2021, total interest expenses were $990 (July 31, 2020 - $723) and total interest capitalized was $419 (July
31, 2020 - $896).
The following table illustrates the continuity schedule of the term loan as at July 31, 2021 and July 31, 2020:
Term loan
Opening balance
Repayments
Ending balance
Deferred financing costs
Opening balance
Additions
Amortization of deferred finance costs
Ending balance
Total term loan
Current portion
Long-term portion
B. Senior Notes Payable
July 31, 2021
$
30,625
(30,625)
–
$
(695)
(98)
793
–
–
–
–
July 31, 2020
$
34,125
(3,500)
30,625
$
(751)
(445)
501
(695)
29,930
29,930
–
On June 1, 2021 as part of the Zenabis acquisition, the Company assumed senior notes which have a principal amount owing of
$51,875 and a maturity date of March 31, 2025. The senior notes bear interest at 14% per annum calculated and compounded monthly
in arrears and payable to the lender on the first day of each month. The debt is secured against the assets of Zenabis Global Inc and
it’s subsidiaries.
Prior to the business acquisition of Zenabis, certain covenants were claimed by the lender to be in breach, and a demand for repayment
was received by the borrower. Zenabis filed a petition on February 19, 2021 for a determination of the amount required to repay and
terminate the senior notes and to obtain discharges of the debenture and related security (Note 31). Further, the senior notes contain a
covenant that requires lender permission for a change in control event. This was not obtained prior to the close of the acquisition of
Zenabis and as such, the debt remains in default. Accordingly, the senior notes have been classified as current debt and recorded
initially at fair value at the business acquisition date and amortized cost thereafter.
The following table illustrates the continuity schedule of the senior notes payable as at July 31, 2021 and July 31, 2020:
Opening Balance
Assumed on business combination
Interest paid
Interest expense
Closing Balance
Current portion
Long-term portion
July 31,2021
$
July 31, 2020
$
50,138
(1,210)
1,231
50,159
50,159
–
–
–
–
–
–
–
The following table represents the loans and borrowings repayment schedule as at July 31, 2021:
July 31, 2022
Thereafter
C. RDC Loan
$ 51,875
–
$ 51,875
Balance as at July 31, 2020
Acquired on business acquisition
Debt repayment
Balance as at July 31, 2021
$
$
–
2,056
(2,056)
–
On June 1,2021 the Company completed its business acquisition of Zenabis (Note 15) and assumed a loan payable. The loan payable
was originally issued by the acquiree in August 2017 and matures on August 30, 2027. The loan bore interest of 6%. The loan was
repaid subsequent to the close of the acquisition.
36
HEXO Corp. 2021 Consolidated Financial Statements
22. Share Capital
(a) Authorized
An unlimited number of common shares and an unlimited number of special shares, issuable in series.
(b) Share Consolidation
The Company finalized the share consolidation on the basis of four pre-consolidation common shares for one post-consolidation
common share (4:1) by way of shareholder approval at the annual and special meeting of shareholders held December 11, 2020 (the
“Consolidation”). The Consolidation was effected by the filing of articles of amendment to the Company’s articles under the Business
Corporations Act (Ontario) on December 18, 2020. The purpose of the proposed share consolidation was to increase the Company’s
common share price to regain compliance with the US$1.00 minimum share price continued listing standard of the New York Stock
Exchange.
All balances of common shares, common share purchase warrants, stock options and restricted share units herein are reflective of the
Consolidation (unless otherwise noted).
(c) Issued and Outstanding
As at July 31, 2021, a total of 152,645,946 (July 31, 2020 – 120,616,441) common shares were issued and outstanding. No special
shares have been issued or are outstanding.
Balance at July 31, 2019
June 2020 at the market offering
May 2020 underwritten public offering
April 2020 underwritten public offering
January 2020 registered offering
December 2019 registered offering
December 2019 private placement
Exercise of options
Exercise of warrants
Balance at July 31, 2020
May 2021 at the market offering, net
June 2020 at the market offering
Senior secured convertible note3, net
Acquisition shares - Zenabis
Transaction costs2
Exercise of warrants
Exercise of stock options
Exercise of equity settled RSUs
Balance at July 31, 2021
(ii)
(iii)
(iv)
(v)
(vi)
Note 18
Note 24
Note 23
(i)
(ii)
Note 19
Note 15
Note 15
Note 23
Note 24
Note 24
Number of shares
64,245,441 $
Share Capital
799,706
33,263
43,495
22,928
21,073
25,229
72,005
223
5,866
1,023,788
45,257
–
29,540
151,358
3,612
9,932
3,213
1,267
152,645,946 $ 1,267,967
8,235,620
15,985,000
14,950,000
2,994,012
3,742,516
9,331,250
29,133
1,103,469
120,616,441 $
6,373,926
244,875
4,602,241
17,579,336
448.639
2,146,931
410,051
223,506
1 Comparatives have been revised to reflect the December 8, 2020 4:1 share consolidation
2 Common shares issued as commission payment to brokers on business acquisition.
3 Issuance of equity on optional redemption payments.
(i) May 2021 At-the-market (“ATM”) Offering
On May 11, 2021, the Company established an ATM equity program allowing the Company to issue up to $150,000 (or its US
equivalent) of common shares to the public. The program ceased activity on May 25, 2021 and a total of approximately $46,987, (after
foreign exchange gains) was generated through the issuance of 6,373,926 common shares in the year ended July 31, 2021. Issuance
costs in the year ended July 31, 2021 were $1,730.
(ii) June 2020 At-the-market (“ATM”) Offering
On June 16, 2020, the Company established an ATM equity program allowing the Company to issue up to $34,500 (or its US
equivalent) of common shares to the public. The program closed on July 31, 2020 and a total of approximately $34,551 (after foreign
exchange gains) was generated through the issuance of 8,235,620 common shares in the year ended July 31, 2020. On July 31, 2020
a receivable of $883 remained for irrevocable sales which occurred prior to year end and subsequently settled on August 5, 2020, at
which time the remaining 244,875 shares were issued.
(iii) May 2020 Underwritten Public Offering
On May 21, 2020 the Company closed an underwritten public offering for total gross proceeds or $57,545 through the issuance of
15,985,000 units at a price of $3.60 per unit. Each unit contained one common share and one half common share purchase warrant at
37
HEXO Corp. 2021 Consolidated Financial Statements
an exercise price of $4.20. The net contribution to share capital, after warrant reserve adjustment, was $46,547 and total issuance
costs amounted to $3,052.
(iv) April 2020 Underwritten Public Offering
On April 13, 2020, the Company closed an underwritten public offering in which 14,950,000 units were issued at $3.08 a unit for total
gross proceeds of $46,046. Each unit consisted of one common share and one common share purchase warrant at an exercise price of
$3.84. The net contribution to share capital after warrant reserve was $25,863 and total issuance costs amounted to $2,936.
(v) January 2020 Registered Direct Offering
On January 22, 2020, the Company closed a registered direct offering in which 2,994,012 common shares were issued at US$6.68
each for total gross proceeds of $26,290 (US$20,000). Investors also received one half common share purchase warrant for each
common share purchased at an exercise price of US$9.80. The net contribution to share capital, after warrant reserve adjustment, was
$22,323 and total issuance costs amounted to $1,250.
(vi) December 2019 Registered Direct Offering
On December 31, 2020, the Company closed a registered direct offering in which 3,742,516 common shares were issued at US$6.68
each for total gross proceeds of $32,411 (US$25,000). Investors also received one half common share purchase warrant for each
common share purchased at an exercise price of US$9.80.
23. Common Share Purchase Warrants
The following table summarizes warrant activity during the year ended July 31, 2021 and year ended July 31, 2020.
Outstanding, beginning of year
Expired and cancelled
Issued on acquisition
Issued
Exercised
Outstanding, end of year
warrants
33,379,408 $
(535,889)
5,970,370
–
(2,146,931)
July 31, 2021
Number of Weighted average
exercise price1
7.60
4.09
14.59
–
4.10
8.85
36,666,958 $
Number of
warrants
7,396,354 $
(3,889,871)
–
30,976,394
(1,103,469)
33,379,408 $
July 31, 2020
Weighted average
exercise price1
39.80
49.00
–
4.96
3.88
7.60
1 USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes.
Of the Company’s expired and cancelled warrants in the year ended July 31, 2021, 509,089 cancellations were due to cashless
exercises of the Company's April 2020 and May 2020 warrants. In lieu of cash equal to the number of warrants exercised multiplied by
the exercise price, the warrant holder forgoes the corresponding number of warrants which are effectively cancelled.
The following table summarizes the warrants issues during the years ended July 31, 2021 and July 31, 2020.
Issuance date
December 31, 2019
January 22, 2020
April 13, 2020
May 21, 2020
June 10, 2020
June 30, 2020
Total issued during the year ended July 31, 2020
June 01, 2021
Total issued during the year ended July 31, 2021
Exercise price
US$9.80
US$9.80
$3.84
$4.20
$4.00
$4.00
$3.96-$155.19
Warrants
issued
1,871,259
1,497,007
14,950,000
7,992,500
3,686,721
978,907
30,976,394
5,970,370
5,970,370
Expiry period
5 years
5 years
5 years
5 years
3 years
3 years
0.17-4 years
All warrants issued during the year ended July 31, 2021 are related to replacement warrants issued upon the acquisition of Zenabis
(Note 15).
The following is a consolidated summary of warrants outstanding as at July 31, 2021 and July 31, 2020.
38
HEXO Corp. 2021 Consolidated Financial Statements
Classified as Equity
June 2019 financing warrants
Exercise price of $63.16 expiring June 19, 2023
April 2020 underwritten public offering warrants
Exercise price of $3.84 expiring April 13, 2025
May 2020 underwritten public offering warrants
Exercise price of $4.20 expiring May 21, 2025
Conversion Unit warrants
Exercise price of $4.00 expiring June 10, 2023
Exercise price of $4.00 expiring June 30, 2023
Broker / Consultant warrants
Exercise price of $3.00 expiring November 3, 2021
Exercise price of $3.00 expiring March 14, 2022
Exercise price of $63.16 expiring June 19, 2023
Molson warrants
Exercise price of $24.00 expiring October 4, 2021
Issued in connection with business acquisition
Exercise price of $3.96 expiring April 23, 2025
Exercise price of $5.64 expiring September 23, 2025
Exercise price of $8.47 expiring October 30, 2025
Exercise price of $9.03 expiring June 25, 2025
Exercise price of $11.29 expiring January 27, 2023
Exercise price of $78.16 expiring August 21, 2022
Exercise price of $102.71 expiring August 21, 2022
Exercise price of $151.24 expiring September 27, 2021
Exercise price of $155.19 expiring April 17, 2022
Classified as Liability
US$25m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring December 31, 2024
US$20m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring January 22, 2025
24. Share-based Compensation
Omnibus Plan
Number
outstanding
July 31, 2021
Book value
Number
outstanding
July 31, 2020
Book value
$
$
546,135
10,022
546,135
10,022
11,830,075
15,971
14,004,375
18,906
7,591,876
10,446
7,852,513
10,805
3,686,721
978,907
11,427
1,928
3,686,721
978,907
11,426
1,928
18,905
23,571
15
34
66
–
43,905
23,571
15
78
66
–
2,875,000
42,386
2,875,000
42,386
631,322
1,228,873
43,856
3,205,378
356,689
15,992
24,338
14,617
226,422
4,232
7,902
261
18,236
1,195
3
2
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
33,298,692
124,112
30,011,142
95,617
1,871,259
3,185
1,871,259
1,917
1,497,007
3,368,266
36,666,958
2,548
5,733
129,845
1,497,007
3,368,266
33,379,408
1,533
3,450
99,067
The Company has a share option plan (the “Former Plan”), adopted in July 2017, that was administered by the Board of Directors who
established exercise prices and expiry dates. Expiry dates are up to 10 years from issuance, as determined by the Board of Directors at
the time of issuance. On June 28, 2018, the Board of Directors put forth a new share option plan (the “Omnibus Plan”) which was
approved by shareholders on August 28, 2019. Unless otherwise determined by the Board of Directors, options issued under both the
Former Plan and Omnibus Plan vest over a three-year period. The maximum number of common shares reserved for issuance for
options that may be granted under the Omnibus Plan is 10% of the issued and outstanding common shares or 15,264,595 common
shares as at July 31, 2021 (July 31, 2020 – 12,061,644). The Omnibus plan is subject to cash and equity settlement, the Former Plan ,
Newstrike plan and Zenabis plan are subject to equity settlements. Options issued prior to July 2018 under the outgoing plan and the
options assumed through the acquisition of Newstrike and Zenabis do not contribute to the available option pool reserved for issuance.
As of July 31, 2021, the Company had 10,624,759 issued and outstanding under the Omnibus Plan, 780,429 issued and outstanding
under the Former Plan and 612,955 issued and outstanding under the assumed plan from business combinations.
39
HEXO Corp. 2021 Consolidated Financial Statements
Stock Options
The following table summarizes stock option activity during the year ended July 31, 2021 and the year ended July 31, 2020.
Number of
options
July 31, 2021
Weighted
exercise price
Opening balance
Granted
Replacement options issued on acquisition
Forfeited
Expired
Exercised
Closing balance
5.21
7,503,691 $ 16.30
5,273,906
905,902
(630,473)
(624,832)
(410,051)
3.81
12.80
25.95
3.00
12,018,143 $ 10.63
Number of
options
6,072,245 $
2,986,507
–
July 31, 2020
Weighted average
exercise price
23.48
6.48
–
22.20
36.64
4.60
7,503,691 $ 16.30
(1,145,610)
(380,318)
(29,133)
The following table summarizes the stock option grants during the year ended July 31, 2021 and July 31, 2020:
Grant date
October 29, 2019
January 29, 2020
April 28, 2020
June 26, 2020
July 28, 2020
Total
October 30, 2020
December 22, 2020
April 28, 2021
June 17, 2021
July 29, 2021
Total
Exercise price
($)
13.20
7.20
2.76
4.08
3.84
Executives and
directors
207,259
–
225,000
763,756
–
3.88
5.44
7.54
7.43
5.24
1,196,015
349,652
380,673
-
75,000
580,164
1,385,489
Options granted
Non-executive
employees
683,068
73,255
641,331
183,103
209,735
1,790,492
315,358
960,100
85,389
45,613
2,481,957
3,888,417
Total
890,327
73,255
866,331
946,859
209,735
2,986,507
665,010
1,340,773
85,389
120,613
3,062,121
5,273,906
Vesting terms
Terms A
Terms A
Terms A
Terms A
Terms A
Expiry period
10 years
10 years
10 years
10 years
10 years
Terms A
Terms A
Terms A
Terms A
Terms A
10 years
10 years
10 years
10 years
10 years
Vesting terms A – One-third of the options will vest on each of the one-year anniversaries of the date of grant over a three-year period.
The following table summarizes information concerning stock options outstanding as at July 31, 2021.
Exercise price
Number outstanding
$2.32–$10.76
$15.56–$26.16
$28.52–$34.00
$47.36–$234.76
8,292,550
1,576,409
2,141,186
7,998
12,018,143
Weighted average
remaining life (years)
8.82
7.79
7.40
0.35
Number exercisable
1,853,536
1,779,478
474,040
7,333
4,114,387
Weighted average
remaining life (years)
6.30
7.33
7.50
0.32
Restricted Share Units (“RSUs”)
Under the Omnibus Plan, the Board of Directors is authorized to issue RSUs up to 10% of the issued and outstanding common shares,
inclusive of the outstanding stock options. At the time of issuance, the Board of Directors establishes conversion values and expiry
dates, which are up to 10 years from the date of issuance. The restriction criteria of the units are at the discretion of the Board of
Directors and from time to time may be inclusive of Company based performance restrictions, employee-based performance restrictions
or no restrictions to the units.
The following table summarizes RSU activity during the year ended July 31, 2021 and the year ended July 31, 2020.
Opening balance
Granted
Replacement units issued on acquisition
Exercised – equity settled
Exercised – cash settled
Forfeited
Closing balance
Units
587,108
24,008
223,506
(223,506)
(25,483)
(34,801)
550,832
40
July 31, 2021
Value of units on
grant date
Units
$ 8.41
– $
3.17-7.17
8.61
8.61
5.62-8.60
11.76
$ 7.91
609,636
–
–
–
(22,528)
587,108 $
July 31, 2020
Value of units on
grant date
–
8.52
–
–
–
11.76
8.41
HEXO Corp. 2021 Consolidated Financial Statements
The following table summarizes the RSUs granted during the year ended July 31, 2021 and the year ended July 31, 2020.
Grant date
October 29,2019
June 26, 2020
Total
October 30, 2020
June 17, 2021
July 29, 2021
Total
RSUs granted
Unit value
11.76
3.96
$3.16
7.17
5.38
Executive and
directors
357,111
252,525
609,636
7,161
9,413
7,434
24,008
Non-executive
employees
–
–
Vesting terms
Terms A
Terms A
Expiry period
10 years
10 years
–
–
–
Terms A
Terms A
Terms A
10 years
10 years
10 years
Vesting terms A – One-third of the units vest on each of the one-year anniversaries for the first three years after the grant date.
Share-based Compensation
Share-based compensation is measured at fair value at the date of grant and are expensed over the vesting period. In determining the
amount of share-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of
stock options and RSUs granted at the grant date by applying the following assumptions:
Exercise price (weighted average)
Share price (weighted average)
Risk-free interest rate (weighted average)
Expected life (years) of options (weighted average)
Expected annualized volatility (weighted average)
July 31, 2021
$17.03
$17.19
1.24%
5
85%
July 31, 2020
$26.04
$26.44
1.79%
5
75%
Volatility was estimated using the average historical volatility of the Company and comparable companies in the industry that have
trading history and volatility history.
For the year ended July 31, 2021, the Company allocated to inventory $1,506, (July 31, 2020 – $6,105) of share-based compensation
applicable to direct and indirect labour in the cultivation and production process.
The cash-settled share-based compensation liability is presented in Other liabilities. The following table summarizes the Company’s
equity-settled and cash-settled share- based payments for the year ended July 30, 2021 and 2020.
Stock option share-based compensation
RSU share-based compensation
Total equity-settled share-based compensation
RSU share-based compensation
Total cash-settled share-based compensation
25. Net Loss per Share
July 31, 2021
$
12,863
287
13,150
July 31, 2020
$
31,503
–
31,503
127
127
393
393
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:
Instrument
Stock options
RSUs
Acquired and reissued warrants
2019 June financing warrants
US$25m registered direct offering warrants
US$20m registered direct offering warrants
2020 April underwritten public offering warrants
2020 May underwritten public offering warrants
Warrants issued under conversion of debentures
Joint venture issued warrants
Convertible debenture broker/finder warrants
41
July 31, 2021
12,018,143
550,832
5,747,487
546,135
1,871,259
1,497,007
11,830,075
7,591,876
4,665,628
2,875,000
42,491
49,235,933
July 31, 2020
7,503,690
587,108
-
546,135
1,871,259
1,497,007
14,004,375
7,852,513
4,665,628
2,875,000
67,491
41,470,206
HEXO Corp. 2021 Consolidated Financial Statements
26. Financial Instruments
Market Risk
Interest Risk
The Company has minimal exposure to interest rate risk related to any investments of cash and cash equivalents. The Company may
invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such
investments. As at July 31, 2021, the Company has $50,159 in notes payable (July 31, 2020 – $29,930) (Note 21) that bear interest at
a fixed rate and therefore are not subject to interest risk (July 31, 2020 - not material). The Company hold senior secured convertible
debt (Note 19) that bears no cash interest and is repayable at a fixed rate of 110% of the face value.
Price Risk
Price risk is the risk of variability in fair value due to movements in equity or market prices.
Financial assets
The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future
values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities is
based on quoted market prices, which the shares of the investments can be exchanged for.
Financial liabilities
The Company elected an early conversion option in the year ended July 31, 2020 in which $29,860 of the aggregate principal amount
of its 8% unsecured convertible debentures (Note 18) were converted, which partially mitigates the Company’s Price Risk.
The Company obtained an amendment to the Senior secured convertible notes equity condition (subsequent to July 31, 2021)
effectively reducing the equity conditions market price threshold allowing the Company increased discretion over redemption payments
to be repaid in cash or equity (Note 19). The sensitivity of the Senior secured convertible note due to price risk is disclosed in Note 19.
If the July 31, 2021 fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur a
related increase or decrease to Comprehensive loss of an estimated $37,100 (July 31, 2020 – no material impact). The price risk
exposure as at July 31, 2021 and July 31, 2020 is presented in the table below.
Financial assets
Financial liabilities
Total exposure
July 31, 2021 July 31, 2020
$
$
2,692
2,492
(3,450)
(373,432)
(370,940) (758)
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 cash held in escrow, restricted cash and trade receivables. As at July 31, 2021,
the Company was exposed to credit related losses in the event of non-performance by the counterparties.
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 medical sales are transacted with clients that are covered under various
insurance programs, and adult use sales are transacted with crown corporations, the Company has limited credit risk.
Cash and cash equivalents, restricted funds and cash held in escrow are held with three Canadian commercial banks that hold Dun &
Bradstreet credit ratings of AA (July 31, 2020 – AA), an American commercial bank with a credit rating of A- and $111 is held with a
credit union that does not have a publicly available credit rating. Certain restricted funds in the amount of $29,999 are managed by an
insurer and are held as a cell captive within a Bermuda based private institution which does not have a publicly available credit rating,
however the utilized custodian is Citibank which holds a credit rating of A+.
The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario and Alberta. Creditworthiness of a
counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss
approach. The current expected credit loss for the year ended July 31, 2021 is $66 (July 31, 2020 - $35).
In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as
they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they have similar
credit risk characteristics. They have been grouped based on the days past due.
The carrying amount of cash and cash equivalents, cash held in escrow, restricted cash and trade receivables represents the maximum
exposure to credit risk and as at July 31, 2021; this amounted to $522,908 (July 31, 2020 – $211,860). Subsequent to July 31, 2021 the
cash held in escrow has been utilized to fund the Redecan acquisition (Note 38).
42
HEXO Corp. 2021 Consolidated Financial Statements
The following table summarizes the Company’s aging of trade receivables as at July 31, 2021 and July 31, 2020:
0–30 days
31–60 days
61–90 days
Over 90 days
Total
July 31,
2021
$
22,971
12,390
1,435
625
37,421
July 31,
2020
$
15,253
2,972
412
789
19,426
Economic Dependence Risk
Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial
performance of the Company. For the year ended July 31, 2021, the Company’s recorded sales to the crown corporations; Société
québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency (“ALGC”)
representing 42%, 20% and 14%, respectively (July 31, 2020 – one crown corporation representing 70%) of total applicable periods net
cannabis sales.
The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 13%, 29% and 13%,
respectively, of total trade receivable, respectively as at July 31, 2021 (July 31, 2020 – the two crown corporations SQDC and OCS
representing 47% and 25% of total trade receivables, respectively).
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due (See note 2 – Going
Concern). The Company manages liquidity risk by reviewing on an ongoing basis, its capital requirements. As at July 31, 2021, the
Company has $67,462 (July 31, 2020 – $184,173) of cash and cash equivalents and $37,421 (July 31, 2020 –$19,426) in trade
receivables. The Company has current liabilities of $503,638 on the statement of financial position. As well the Company has
contractual commitments of $18,244 due before July 31, 2022. The Company has restricted funds to satisfy debt of $50,159, presented
in current liabilities (Note 6). The maturity analysis of undiscounted cash flows for lease obligation and convertible debentures is
disclosed in Note 20 and Note 18 respectively.
Current financial liabilities include the Company’s obligation on the senior secured convertible note (Note 19). The Company plans to
settle this liability in equity. However, if the Company is unable to meet the requirements Equity Condition Waiver (Note 19) the Holder
may demand settlement in cash. The analysis of potential cash outflow to redeem the Note up to the earliest maturity date is given
below. Subsequent to the year-end, the Company settled the optional redemption payments for August 2021, September 2021 and
October 2021 in equity. The Company has also received a cash settlement waiver for the May 2023 and November 2021 optional
redemptions.
The following table provides an analysis of contractual maturities for financial liabilities.
Fiscal year
Accounts payable and accrued liabilities
Excise taxes payable
Loans and borrowings
Convertible debentures
Undiscounted future lease payments
2022
$
63,557
6,591
60,297
6,716
6,155
143,316
2023
$
–
–
–
41,273
5,785
47,058
2024
$
–
–
–
–
6,073
6,073
2025
$
–
–
–
–
5,561
5,561
Thereafter
$
–
–
–
–
54,796
54,796
Total
$
63,557
6,591
60,297
47,989
78,370
256,804
Senior secured convertible note1
Total
458,710
715,514
1 The senior secured convertible note has been valued using the July 31, 2021 US/CAD foreign exchange rate. The Company’s ability
to settle the note in equity or cash is dependent upon meeting certain conditions as stated in Note 19.
315,289
458,605
143,421
190,479
–
54,796
–
6,073
–
5,561
Foreign Currency Risk
On July 31, 2021, the Company holds certain financial assets and liabilities denominated in United States Dollars (“US$”) which consist
of cash and cash equivalents, cash in escrow, restricted funds, the senior secured convertible note and warrant liabilities. The
Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management
has determined that this risk is not significant. The Company closely monitors relevant economic information to minimize its net
exposure to foreign currency risk. The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents.
As at July 31, 2021, approximately $434,838 (US$348,931) (July 31, 2020 – $42,981 (US$57,652)) of the Company’s cash and cash
equivalents was in US. A 1% change in the foreign exchange rate would result in a change of $4,348 to the unrealized gain or loss on
foreign exchange or on the gain or loss on financial instrument revaluation of US denominated warrants. Subsequent to year end, cash
held in escrow has been utilized to fund the acquisition of Redecan (Note 38).
43
HEXO Corp. 2021 Consolidated Financial Statements
The Company’s Senior secured convertible note is denominated in US$. The Company plans to settle this debt in equity. However, if
the Company is unable to meet the equity settlement condition or secure cash settlement waivers, the settlement may entail cash
outflow. The sensitivity of the Senior secured convertible note due to foreign currency risk is disclosed in Note 19.
27. Operating Expenses by Nature
The following table disaggregates the selling, general and administrative expenses as presented on the Statement of Loss and
Comprehensive Loss into specified classifications based upon their nature:
For the year ended
Salaries and benefits
Professional fees
Facilities
Selling, general and administrative
Consulting
Travel
Total
July 31, 2021
July 31, 2020
$
$
21,116
11,962
6,550
13,915
4,379
265
58,187
12,202
9,811
6,895
14,409
7,425
2,051
52,793
The following table summarizes the nature of share-based compensation in the period:
For the year ended
General and administrative related share-based compensation
Marketing and promotion related share-based compensation
Total operating expense related share-based compensation
Share based compensation capitalized to inventory
Total share-based compensation
The following table summarizes the total payroll related wages and benefits by nature in the period:
For the year ended
General and administrative related wages and benefits
Marketing and promotion related wages and benefits
Research and development related wages and benefits
Total operating expense related wages and benefits
Wages and benefits capitalized to inventory
Total wages and benefits
28. Other Income and Losses
For the year ended
Interest and financing expenses
Interest income
Interest income (expense), net
Revaluation of warrant liabilities
Share of loss from investment in associates and joint ventures
Loss on Unsecured Convertible Debentures – December 2019
Fair value gain/(loss) on convertible debenture
Fair value loss on senior secured convertible note
Unrealized gain/(loss) on investments
Realized gain on investments
Foreign exchange gain/(loss)
Other income
Non-operating income (expense), net
44
July 31, 2021
$
July 31, 2020
$
10,945 24,650
1,140
25,790
6,105
31,895
786
11,731
1,505
13,236
July 31, 2021
$
21,116
5,543
2,706
29,365
14,993
44,358
July 31, 2020
$
12,202
5,625
2,717
20,544
21,128
41,672
July 31, 2021
$
(32,124)
1,601
(30,523)
July 31, 2020
$
(10,043)
1,902
(8,141)
(2,283)
(6,505)
–
1,260
(7,478)
1,994
–
9,108
4,763
859
6,533
(6,331)
(54,283)
(4,806)
–
(12,880)
24
1,392
2,531
(67,820)
HEXO Corp. 2021 Consolidated Financial Statements
29. Related Party Disclosure
Compensation of Key Management
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.
Compensation provided to key management during the year was as follows:
For the year ended
Salary and/or consulting fees
Termination benefits
Bonus compensation
Stock-based compensation
Total
July 31, 2021
$
2,321
1,008
800
6,800
10,929
July 31, 2020
$
3,069
1,043
42
15,702
19,856
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.
Related Parties and Transactions
Belleville Complex Inc.
The Company holds a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc., a company owned
and controlled by a director of the Company, holding the remaining 75% in BCI. BCI purchased a configured 2,004,000 sq. ft. facility
through a $20,279 loan issued and repaid during the year ended July 31, 2019. The Company will be the anchor tenant for a 15-year
lease, with an option to renew for 15 years and additional space to rent. The Company has also subleased a portion of the space to
Truss Limited Partnership (Note 11). Consideration for the 25% interest on the joint venture is deemed $nil. The carrying value of BCI
as at July 31, 2021 is $798 (July 31, 2020 - $nil).
The Company leases a space in Belleville from a related party BCI, that supports its manufacturing activities and is based in Belleville,
Ontario. Under this lease arrangement, the Company incurred $5,369 in lease and operating expenses during the year ended July 31,
2021 (July 31, 2020 - $7,511). This lease liability is recognized on the Company’s balance sheet under IFRS 16 (Note 20).
Truss LP
The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 11).
The Company subleases section of its Belleville lease to Truss LP this sublease is recognized as a finance lease receivable
on the Company’s balance sheet (Note 8). The Company recognizes a recovery on its partnership with Truss LP in Other
receivables and Other income.
Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produces and packages cannabis infused
beverages in the CIB Facility (located at the Belleville Facility) and in the Gatineau Facility, an markets and sells beverages for the legal
adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws, all for its own account
and as a stand-alone division of HEXO. Truss LP applied to be a licensed producer of Cannabis during the period, but until the time
where Truss LP obtains all regulatory approval required under the Cannabis Act (Canada), the TSSA will remain in place. Under the
TSSA, Truss LP will be an exclusive supplier to the Company of all property and all services required to carry on the business, other
than specific services which are required to be provided by HEXO.
As a result of this arrangement, there is a net payable to Truss of $6,928 at July 31, 2021 (July 31, 2020 – $1,247). During the year
ended July 31, 2021, the Company purchased $7,624 (July 31, 2020 – $2,159) of raw materials from Truss LP under the arrangement
and received $1,844 (July 31, 2020 – $2,531) of Income.
30. Capital Management
The Company’s objectives when managing capital are to (1) safeguard their ability to continue as a going concern, so that they can
continue to provide returns for shareholders and benefits for other stakeholders, and (2) maintain an optimal capital structure to reduce
the cost of capital.
Management defines capital as the Company’s shareholders’ equity and interest-bearing debt. 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 other than the covenants related to the Company’s debt
instruments as set out in Notes 18 and 19.
As at July 31, 2021, total managed capital was $732,265 (July 31, 2020 – $556,676).
45
HEXO Corp. 2021 Consolidated Financial Statements
31. Commitments and Contingencies
COMMITMENTS
The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental 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 fiscal years and thereafter are as follows:
July 31, 2022
July 31, 2023
July 31, 2024
July 31, 2025
July 31, 2026
Thereafter
$
18,244
3,846
3,474
2,429
5,802
13,472
47,267
See Note 20 for recognized contractual commitments regarding the Company’s lease obligations under IFRS 16.
LETTERS OF CREDIT
The Company holds a five-year letter of credit with a Canadian financial institution to provide a maximum of $250 that amortizes $50
annually until its expiry on July 14, 2024. As at July 31, 2021, the remaining balance of the letter of credit is $200, was not drawn upon
and is secured by cash held in collateral (Note 6).
On August 1, 2020, the Company reissued a pre-existing letter of credit with a Canadian financial institution under an agreement with a
public utility provider entitling the utility provider to a maximum of $2,581, subject to certain operational requirements. The letter of credit
has a one-year expiry from the date of issuance with an auto renewal feature. On January 1, 2021, the letter of credit was reduced to
$2,352 by way of amendment. The letter of credit has not been drawn upon as at July 31, 2021. The letter of credit is secured by cash
held in collateral (Note 6).
CONTINGENCIES
The Company may be, from time to time, subject to various administrative and other legal proceedings arising in the ordinary course of
business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability
can be reasonably estimated. While the following matters are ongoing, the Company disputes the allegations and intends to continue to
vigorously defend against the claims.
As of July 31, 2021, the Company and its Chief Executive Officer are defendants in a putative class-action lawsuit pending in the
Québec Superior Court brought on behalf of certain purchasers of shares of the Company and filed on November 19, 2019. The lawsuit
asserts causes of action for misrepresentations under the Québec Securities Act and the Civil Code of Québec in connection with
certain statements contained in HEXO’s prospectus, public documents and public oral statements between April 11, 2018 and
November 15, 2019. The allegations relate to: (1) statements made by the Company regarding its agreement with the Province of
Québec to supply cannabis; (2) statements made by the Company regarding its acquisition of Newstrike, particularly the licensing of the
Newstrike facilities and the forecasted synergies and/savings from the Newstrike acquisition; (3) statements made by the Company
about the net revenues in Q4 2019 and fiscal year 2020; and (4) the certifications by Sebastien St-Louis and the underwriters of the
Company. The plaintiffs seek to represent a class comprised of Québec residents who acquired the Company’s securities either in an
Offering (primary market) or on the secondary market during such period and seek compensatory damages for all monetary losses and
costs. The amount claimed for damages has not been quantified and no accrual has been made as at July 31, 2021 (July 31, 2020 -
$nil).
As of July 31, 2021, the Company is named as a defendant in a proposed consumer protection class action filed on June 16, 2020, in
the Court of Queens’ Bench in Alberta on behalf of residents of Canada who purchased cannabis products over specified periods of
time. Several other licensed producers are also named as co-defendants in the action. The lawsuit asserts causes of action, including
for breach of contract and breach of consumer protection legislation, arising out of allegations that the Tetrahydrocannabinol (THC) or
Cannabidiol (CBD) content of medicinal and recreational cannabis products sold by the Company and the other defendants to
consumers was different from what was advertised on the products’ labels. Many of the cannabis products sold by the Company and
other defendants were allegedly sold to consumers in containers using plastic bottles or caps that may have rapidly absorbed or
degraded the THC or CBD content within them. By allegedly over-representing the true amount of THC or CBD in the products, the
plaintiff claims that consumers would be required to consume substantially more product than they otherwise would have in order to
obtain the desired effects or, in the alternative, would have consumed the product without obtaining the desired effects. The action has
not yet been certified as a class action.
On June 1, 2021, by way of the business acquisition of Zenabis, the Company assumed senior notes payable and the following
litigation with the associated lender of the notes (Note 21b). Upon closing the acquisition of Zenabis, the Company was in default under
the debenture due to the failure to obtain the lenders consent for a change of control. On February 19, 2021, Zenabis filed a petition in
46
HEXO Corp. 2021 Consolidated Financial Statements
the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the debenture and to obtain
discharges of the debenture and related security. The lender took the position that the amount to discharge the debenture and related
securities was approximately $72,000. The Company believes the amount is approximately $53,000, which has been provided for in the
consolidated financial statements. Under the senior secured convertible note agreement (Note 19), the Company has restricted funds to
satisfy this liability (Note 6). The difference largely relates to whether a prepayment fee and default fees are payable under the
debenture and to the amount to buyout and discharge of a revenue based royalty liability. The petition was heard on March 29, March
30, March 31, April 1, April 15 and May 14, 2021. The Judge’s decision remains on reserve and no indication as to the likely timing of
its release has been provided.
ONEROUS CONTRACT
During the year ended July 31, 2020, the Company recognized a $4,763 onerous contract provision related to a fixed price supply
agreement for the supply of certain cannabis products. The supply agreement is currently the subject of legal proceedings as disclosed
above. The costs and purchase obligations under the contract exceed the economic benefits expected to be received. The related loss
has been included in operating expenses in the year ended July 31, 2020. The onerous contract liability remains as at July 31, 2021.
32. Fair Value of Financial Instruments
The fair values of the financial instruments as at July 31, 2021 are summarized in the following table:
Assets
Cash and cash equivalents
Restricted funds
Trade receivables
Commodity taxes recoverable and other receivables
Lease receivable – long term
Long – term investments
Liabilities
Accounts payable and accrued liabilities
Warrant liability
Convertible debt- current
Convertible debt
Senior secured convertible note – current
Loans and borrowings – current
Other long-term liabilities1
1 Financial liability designated as FVTPL.
Amortized
cost
$
67,462
132,246
37,421
13,549
4,453
–
$
63,557
–
3,406
33,089
–
50,159
–
The fair values of the financial instruments as at July 31, 2020 are summarized in the following table:
Assets
Cash and cash equivalents
Restricted funds
Trade receivables
Commodity taxes recoverable and other receivables
Lease receivable – long term
Long – term investments
Liabilities
Accounts payable and accrued liabilities
Warrant liability
Convertible debentures
Term loan – current
Other long-term liabilities1
1 Financial liability designated as FVTPL.
Amortized
cost
$
184,173
8,261
19,426
16,773
3,865
–
$
32,451
–
28,969
29,930
–
FVTPL
$
–
–
–
–
–
2,492
$
–
5,733
–
367,699
520
FVTPL
$
–
–
–
–
–
3,209
$
–
3,450
–
–
393
Total
$
67,462
132,246
37,421
13,549
4,453
2,492
$
63,557
5,733
3,406
33,089
367,699
50,159
520
Total
$
184,173
8,261
19,426
16,773
3,865
3,209
$
32,451
3,450
28,969
29,930
393
The carrying values of cash and cash equivalents, restricted funds, cash held in escrow, short term investments, trade and other
receivables, lease receivables, accounts payable and accrued liabilities, lease liabilities and term loan approximate their fair values due
to their relatively short periods to maturity.
47
HEXO Corp. 2021 Consolidated Financial Statements
33. Non-Controlling Interest
The change in non-controlling interests is as follows.
Balance, Beginning of year
Non-controlling interest acquired on business combination
Partnership contributions
Share of comprehensive loss for the period
Balance, End of year
Keystone Isolation Technology Inc
July 31, 2021
$
3,379
(1,340)
81
$
(133)
1,987
July 31, 2020
$
–
–
3,379
–
$ 3,379
The Company holds a 60% interest in Keystone Isolation Technology Inc. (“KIT”) which is intended to principally operate out of
Belleville Facility, and the remaining 40% represents the non-controlling interest held by Chroma Global Technologies Ltd (the
“Partner”). Under the terms of the shareholder agreement, the Company has contributed cash of $4,699 (USD$3,100). During the year
ended July 31, 2021, the Partner contributed capital equipment in-kind of $371 as required under the terms of the shareholders
agreement. There remains approximately $325 of an in-kind commissioning contribution to satisfy the acquisition terms of the
shareholders agreement. KIT had no revenues or expenses during the year ended July 31, 2021 and the year ended July 31, 2020.The
following table summarizes the information relating to the Company’s non-controlling interest in KIT.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Non-controlling interest (%)
Non-controlling interest
July 31, 2021
–
8,651
–
–
40%
3,460
July 31, 2020
$
–
7,455
–
–
40%
$ 3,379
$
$
ZenPharm Limited
The Company holds a 60% interest in ZenPharm Limited ("ZenPharm") obtained through the acquisition of Zenabis on June 1, 2021.
ZenPharm was formed to service the European medical cannabis market. The following table is the summarized financial information of
ZenPharm.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Accumulated deficit
Non-controlling interest (%)
Non-controlling interest
July 31, 2021
313
141
(3,233)
–
(133)
40%
(1,475)
$
$
34. Revenue from Sale of Goods
The Company disaggregated its revenues from the sale of goods between sales of cannabis beverages (“Cannabis beverage sales”)
and dried flower, vapes, and other cannabis products (“Cannabis sales excluding beverages”). The Company’s cannabis beverage
sales are derived from the Cannabis Infused Beverage (“CIB”) line, which was established in order to manufacture, produce and sell
cannabis beverage products. CIB operates under the Company’s cannabis licensing and in compliance with Health Canada and the
Cannabis Act’s regulations. The Company has assessed the beverage revenue stream to be realized by the Company and presented
on a gross basis as defined under IFRS 15. The Company will continue to operate CIB until Truss has obtained its independent
licensing to cultivate and manufacture cannabis, at which point the operations will shift to Truss.
For the year ended
July 31, 2021
July 31, 2020
Revenue stream
Total
$
158,919
1,769
2,458
9,935
173,081
1 See Note 38 Subsequent Event – Truss Beverage Received Manufacturing Cannabis Licensing.
Retail
Medical
Wholesale
International
Total revenue from sale of goods
Cannabis sales
excluding
beverages
$
143,098
1,769
2,458
9,935
157,260
Cannabis
beverage
sales1
$
15,821
–
–
–
15,821
Cannabis sales
excluding
beverages
$
101,713
3,299
995
1,291
107,298
Cannabis
beverage
sales
$
2,851
–
–
–
2,851
Total
$
104,564
3,299
995
1,291
110,149
48
HEXO Corp. 2021 Consolidated Financial Statements
During the year ended July 31, 2021 the Company incurred $3,736 (July 31, 2020 - $6,942) of net sales provisions and price
concessions.
35. Segmented Information
The Company operates under one material operating segment. Substantially all property, plant and equipment and intangible assets
are located in Canada.
36. Operating Cash Flow
The following items comprise the Company’s operating cash flow activity for the periods herein.
For the year ended
Items not affecting cash
Income tax recovery
Depreciation of property, plant and equipment
Depreciation of property, plant and equipment in cost of sales
Amortization of intangible assets
Loss on convertible debentures
Unrealized gain on changes in fair value of biological assets
Unrealized fair value adjustment on investments
Amortization of deferred financing costs
Interest and other income
Loss on induced conversion of debenture
Accretion of convertible debenture
Non-cash finance and transaction fees
Loss on investment
License depreciation and prepaid royalty expenses
Write-off of inventory and biological assets
Write down of inventory to net realizable value
Realized fair value amounts on inventory sold
Loss from investment in associate and joint ventures
Share-based compensation
Revaluation of financial instruments (gain)/loss
Impairment losses
Loss on onerous contract
Loss on long lived assets and disposal of property, plant and equipment
Gain on exit of lease
Foreign exchange gain
Total items not affecting cash
Changes in non-cash operating working capital items
Trade receivables
Commodity taxes recoverable and other receivables
Prepaid expenses
Inventory
Biological assets
Accounts payable and accrued liabilities
Excise taxes payable
Total non-cash operating working capital
Additional supplementary cash flow information is as follows:
For the year ended
Property, plant and equipment in accounts payable
Right-of-use asset additions
Capitalized borrowing costs
Interest paid
49
July 31, 2021
$
July 31,2020
$
(397)
6,097
8,601
2,050
6,218
(51,499)
(1,994)
793
5,837
–
4,075
21,690
–
118
2,182
2,927
31,767
6,505
14,859
2,283
20,230
–
1,358
(789)
(11,648)
71,263
(6,023)
6,072
3,567
3,939
4,806
(29,356)
12,880
56
9,921
54,283
–
–
(24)
389
5,055
68,319
40,910
6,331
25,790
(6,533)
299,484
4,763
3,855
–
–
508,484
(14,203)
5,197
(106)
(52,539)
53,678
8,848
(444)
431
267
(784)
5,717
(100,492)
28,493
6,623
3,627
(56,549)
July 31, 2021
$
1,152
17,059
1,269
5,618
July 31, 2020
$
19,751
24,405
2,385
2,527
HEXO Corp. 2021 Consolidated Financial Statements
37. 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):
$
July 31, 2021
22
–
July 31, 2020
$ –
–
$ 22 $ –
Origination and reversal of temporary differences
Difference between statutory tax rate and deferred tax rate
Change in temporary difference for which no deferred tax assets are recorded
Deferred income tax (recovery)
July 31, 2021
July 31, 2020
$ (14,659) $ (98,141)
2,555
(249)
89,563
14,489
$ (419) $ (6,023)
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
Permanent differences
Change in temporary differences for which no tax assets are recorded
True up and other
July 31, 2021
26.50%
$ (115,159)
July 31, 2020
26.54%
$ (552,512)
(30,517)
(146,637)
(652)
8,696
22,148
(72)
$ (397)
2,555
48,965
89,094
–
$ (6,023)
The following is a reconciliation of the deferred tax assets and liabilities recognized by the Company:
Taxable temporary differences
Biological assets
Inventory
Loss carryforward
Financing costs
Intangible assets
Net deferred tax asset (liability)
Taxable temporary differences
Biological assets
Inventory
Loss carryforward
Financing costs
Intangible assets
Net deferred tax asset (liability)
Opening
August 1, 2020
$
10,415
(1,330)
(5,088)
–
–
(3,997)
–
Recognize
Business
in income Combination
$
(310)
–
(7,276)
14,665
2,738
(9,951)
(134)
$
(14,701)
724
1,514
14,028
(2,738)
1,592
419
Opening
August 1, 2019
$
6,858
(1,514)
(2,920)
23,369
721
(32,537)
(6,023)
Recognized in
income
$
3,557
184
(2,168)
(23,369)
(721)
28,540
6,023
Recognized in
equity
Ending
July 31, 2021
$ $
(5,017)
(606)
(10,850)
28,693
–
(12,356)
(136)
(421)
–
–
–
–
–
(421)
Ending
Recognized in
July 31, 2020
equity
$ $
10,415
(1,330)
(5,088)
–
–
(3,997)
–
–
–
–
–
–
–
–
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, 2021 deductible temporary differences and
unused tax losses for which no deferred tax assets have been recognized are attributable to the following:
50
HEXO Corp. 2021 Consolidated Financial Statements
Deductible temporary differences
Taxable temporary differences
Investments
Losses carried forward
Research and development expenditures
Fixed Assets, intangibles and other assets
Financing costs
July 31, 2020
July 31, 2021
$
11,556
26,444
17,030
$
8,328
8,412
14,890
278,115 255,635
1,817 669
114,384 52,852
40,401 22,599
363,385
489,747
The Company has approximated non-capital losses available to reduce future years' federal and provincial taxable income which
expires as follows:
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
Indefinite
$
219
281
164
748
632
104
2,092
1,350
75
2,867
3,018
4,030
1,772
2,413
12,889
37,244
64,821
57,938
157,595
24,764
1,179
376,195
38. Subsequent Events
Transfer of US Stock exchange Listing from NYSE to the Nasdaq
On August 13, 2021, the Company applied to transfer its U.S. stock exchange listing from the New York Stock Exchange to the
Nasdaq. The transfer was completed on August 24, 2021, at which point the common shares of HEXO began trading as a Nasdaq-
listed security with the shares continuing to trade under the symbol “HEXO”.
Closing of Underwritten Public Offering for US$144.8M
On August 24, 2021, the Company closed an underwritten public offering for total gross proceeds of US$144,786. The Company sold
49,080,024 units of the Company at a price of US$2.95 per unit under this offering. Each unit is comprised of one common share of the
Company and one half of one common share purchase warrant of the Company. Each full warrant is exercisable to acquire one
common share of the Company for a period of five years following the closing date of the Offering at an exercise price of US$3.45.
Acquisition of Redecan
On August 30, 2021 the Company completed its acquisition of all of the outstanding shares of the entities that carry on the business of
Redecan, a privately-owned licensed producer which serves the Canadian adult-use and medical markets. At closing, HEXO paid the
selling shareholders of Redecan $400,000 in cash and delivered 69,721,116 newly issued common shares of HEXO with an
approximate value of $214,043. Upon closing the acquisition of Redecan, Peter James Montour joined the Company board of directors.
Will Montour will act as non-voting observer on the board of directors, until his election to the board in accordance with the investor
rights agreement undertaken at acquisition.
The transaction is expected to be treated as business acquisition under IFRS 3, accounted for using the acquisition method.
Acquisition of 48North Cannabis Corp.
On September 1, 2021, HEXO completed the acquisition of 48North Cannabis Corp. (“48North”), a licensed cannabis producer that
serves the Canadian medical and adult-use markets with a brand portfolio that includes: 48North, Trail Mix and Latitude.
51
HEXO Corp. 2021 Consolidated Financial Statements
The Company acquired all issued and outstanding common shares of 48North at a conversion rate of one common share of 48North to
0.02366 of a HEXO common share. The total number of shares acquired and reissued were 5,352,005 with an approximate value of
$16,951. Shares of 48North were de-listed from the TSX Venture Exchange on September 2, 2021.
The transaction is expected to be treated as business acquisition under IFRS 3, accounted for using the acquisition method.
Truss Beverage Co. Receives Manufacturing Cannabis Licensing
On October 1, 2021, Truss LP received their cannabis manufacturing licenses from Health Canada. As of the date of these financial
statements, the Company continues to assess the financial and accounting impact of Truss Beverage Co. receiving their cannabis
manufacturing license. The Company is in the process of establishing a new agreement between the Company and Truss LP which
may result in the Company acting as an agent, facilitating sales between Truss LP and our customers, and therefore the Company
would likely cease recording such sales on a gross basis.
52