2022
ANNUAL REPORT
Q4-22 CEO Letter
Dear stakeholders,
This past year was one of strategic realignment for HEXO. It was also a truly transformative chapter in our story – one that
we are confident made us stronger and more agile, and that ultimately laid the foundation for our future as one of North
America’s leading cannabis companies.
We focused on making the changes that will allow HEXO to maintain and expand its leadership position within the Canadian
cannabis market. This process required a significant reset, including the divestment of underperforming assets, the rightsizing
of the business and a refresh of our business model to focus on our core strengths. Difficult decisions were made, but we are
stronger as a business and as a formidable investment in the emerging cannabis industry.
A solid foundation for long-term success
Today we can confidently say that we took the necessary steps to position our business for long-term success. Refinancings
provided us with a clean balance sheet and boosted cash reserves to over $83M, allowing us to focus on profitable growth.
We reduced our personnel costs by $65M and set a minimum threshold for gross margin. We focused on cash flow and
improved logistics by divesting from businesses that no longer offered HEXO a competitive advantage, while upgrading our
product mix, enabling us to de-commoditize our portfolio so that everything we do, create, and sell is proprietary and
uniquely ours. To achieve this significant transformation, we also updated our processes and operations to accommodate our
new focus for the next decade.
With this solid foundation in place, HEXO now moves to a second phase of its transformation. We continue to commit to three
key priorities - aligning the company for success, resetting the organization for profit and growth, and delivering a preferred
cannabis experience for our customers and other stakeholders.
We are focused on producing the core cannabis brands our that customers want, leading in innovation, and reinforcing our
market share. We have evolved our leadership across the organization and are benefitting from strong integration across
our most successful brands. By concentrating on these products and ensuring that they do not compete against each other, we
have built a loyal customer following and refined what truly sets HEXO apart from its peers.
As a leading grower of high-quality cannabis, we are also continually evaluating our significant growing capacity and
determining the most strategic placement for this product, while remaining laser-focused on doing what we do best: delivering
a premium cannabis experience that puts the consumer first.
The now, the new, and the next
We perpetually optimize our portfolio to ensure that we are delivering to today’s market while also anticipating tomorrow’s.
We have the best “now” in our premium quality THC-based products, which also ensure consistent cash flow. We are always
evaluating the “new” in terms of where the market is headed – from recreational to medical and therapeutic products – as
well as identifying emerging market needs, from low-cost recession brands to top-shelf boutique or craft labels.
It is in HEXO’s nature to look ahead, and this transformative era of our business is no different. When we look to the “next”
frontier of cannabis, we will focus on research and innovation within the minor cannabinoids space. We believe that adding
these to our portfolio will revolutionize the marketplace. We are also keeping a close watch on the use of cannabis in other
products that lie beyond the horizon.
The standard of excellence in the cannabis industry
At HEXO’s core lies one guiding principle: excellence. We believe that the path to our success lies in continuing to provide a
premium cannabis experience that puts each and every customer first. Offering consistent, clean, and cost-effective products
that create the standard of excellence in our industry is what makes HEXO a leading North American cannabis company and
how we will continue to deliver value to our shareholders.
Charlie Bowman
President and Chief Executive Officer, HEXO Corp
Table of Contents
INTRODUCTION............................................................................................................................................................................ 2
COMPANY OVERVIEW .................................................................................................................................................................. 2
STRATEGY AND OUTLOOK ............................................................................................................................................................ 3
ZENABIS GROUP FILING FOR PROTECTION UNDER THE COMPANIES’ CREDITORS ARRANGEMENT ACT (“CCAA”) ........................ 4
HEXO CORP. HOUSE OF BRANDS .................................................................................................................................................. 5
TRUSS BEVERAGE CO. .................................................................................................................................................................. 6
HEXO USA .................................................................................................................................................................................... 6
OPERATIONAL AND FINANCIAL HIGHLIGHTS ................................................................................................................................ 7
SUMMARY OF RESULTS ................................................................................................................................................................ 8
ADJUSTED EBITDA ...................................................................................................................................................................... 16
FINANCIAL POSITION ................................................................................................................................................................. 17
LIQUIDITY AND CAPITAL RESOURCES ......................................................................................................................................... 19
GOING CONCERN ....................................................................................................................................................................... 23
CAPITAL RESOURCES .................................................................................................................................................................. 24
CAPITALIZATION TABLE .............................................................................................................................................................. 25
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS ............................................................................... 28
FINANCIAL RISK MANAGEMENT................................................................................................................................................. 29
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS ........................................................................................................... 31
RELATED PARTY TRANSACTIONS ................................................................................................................................................ 31
HEXO GROUP OF FACILITIES ....................................................................................................................................................... 32
RISK FACTORS ............................................................................................................................................................................ 37
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS .............................................................................. 42
2
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year
ended July 31, 2022
All dollar amounts in this Managements Discussions and Analysis (“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 US$.
Introduction
This MD&A of the financial condition and results of the operations of HEXO Corp and our subsidiaries (collectively, “we” or “us” or
“our” or the “Company” or “HEXO”) is for the year ended July 31, 2022. 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, 2022. 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 or 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 at July 31, 2022, and forecasted cash flows require additional capitalization in order
to meet the Company’s obligations for the foreseeable future. Please see Note 3 of the financial statements, and Liquidity and Capital
Resources – Going concern section of this MD&A, for a more detailed discussion.
This MD&A is dated October 31, 2022.
Company Overview
HEXO is a consumer-packaged goods (“CPG”) cannabis company with a leading adult-use market share in Canada. Our business
focuses on the cultivation, production, manufacturing and sale of cannabis and cannabis 2.0 derivative products. The Company’s
primary addressable markets are the Canadian adult-use market, the U.S. CBD medical state-level markets, the global medical market
(where permitted by regional legislation) and the Canadian medical market.
We pride ourselves in developing innovative award-winning products, which has been evident in our product offering from the
beginning. From our early innovation of Canadas first oil spray, Elixir to the introduction of the 28g format and straight edge pre-rolls,
we strive to develop the right products for the market at the right time. We are committed to putting consumers at the center of
everything we do by ensuring we understand them, and the needs that cannabis can address or enhance in their lives. This data
driven approach is at the core of our innovation pipeline and is coupled with our keen focus on delivering safe, reputable, high-quality
cannabis products to our customers and consumers.
HEXO is headquartered in Gatineau, Quebec, which is home to our first and largest cultivation campus. We also have cultivation and
manufacturing locations in the Niagara region of Ontario. The Company’s introductory footprint outside of Canada is the manufacturing
facility in Fort Collins, Colorado where we manufacture and sell CBD Powered by HEXO® products. Through a partnership with
Molson Coors, we have taken HEXO to 26 states in the U.S. with our cannabis product offerings.
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.
3
MD&A
Strategy and Outlook
In the second half of FY22, HEXO initiated a complete reset of the organization, bringing on a new management team and refreshing
the Board of Directors. The new management team conducted a holistic review of the Company’s strategy and operations, with the
goal of refocusing HEXO to concentrate on profitable growth and its role as a leader in the Canadian adult-use and medical cannabis
markets.
To accomplish this objective, HEXO management identified three critical pillars - aligning for success, delivering profit and growth,
and delivering the preferred cannabis experience to our customers and stakeholders.
Aligning For Success – HEXO is committed to refocusing the Company to serve and excel in the core Canadian markets, adult-use
and medical cannabis. The Company established a modified “made to order” cultivation practice to streamline demand planning and
enable the Company to meet the supply needs of its clients and customers with clean, consistent and cost-effective products. HEXO
has curated a leaner product portfolio, including the Company’s most popular and best-selling flower and pre-roll products; integrating
best cultivation practices gained through the Company’s business acquisitions, improving flower output and ensuring consistent THC,
terpenes, flavonoids and size throughout its consolidated operations.
Delivering Profit & Growth – The Canadian cannabis industry has shifted from prioritizing rapid expansion and growth, to becoming
leaner, more cost-efficient and having a sharper focus on achieving near-term profitability. HEXO has prioritized rightsizing operations
through the culling of underperforming assets and targeting an aggressive reduction in overhead expenses, including personnel.
Through the rigorous review of its products, HEXO is curating its product offerings to focus on top gross margin generating SKUs and
uses the “made to order” demand process to limit exposure to aged-out products and the associated impairments and inventory write-
downs. HEXO is also refocusing on the medical market, as the Company anticipates accretive opportunities to bolster net sales at
higher average gross margins, while better serving Canadian medical clients.
Preferred Cannabis Experience – HEXO’s goal is to provide the preferred cannabis experience for the three key tiers of its distribution
- the provincial boards, its retailers, and its end consumers. Establishing the Company as a long-term valued partner to the provincial
boards is key to longevity in the cannabis industry. HEXO will deliver a consistent, safe and affordable supply of its products while
complying with the highest quality standards that each market demands. Educating HEXO’s retailers on the products is also critical to
providing this preferred cannabis experience.
Acquisition of Senior Secured Convertible Note by Tilray Brands Inc. (“Tilray”)
On July 12, 2022, pursuant to a transaction agreement dated April 11, 2022 and amended pursuant to an amending agreement
dated June 14, 2022 (together, as amended, the “Note Transaction Agreement”) among HEXO, Tilray and HTI, the terms of the
outstanding Senior Secured Convertible Note were amended and restated (as amended and restated, the “Amended Note”) and the
Amended Note was immediately thereafter assigned to Tilray pursuant to the terms of an amended and restated assignment and
assumption agreement dated June 14, 2022 (the “Assignment and Assumption Agreement”, and together with the Note Transaction
Agreement and the Amended Note, the “Note Transaction”).
HEXO shareholders approved certain matters relating to the Note Transaction on July 4, 2022. The Company also received, in
respect of the Note Transaction, approval of the TSX.
Upon closing of the Note Transaction, Tilray acquired 100% of the remaining outstanding principal balance of US$173.7 million of
the Amended Note. The purchase price paid by Tilray to HTI for the Amended Note was US$155 million, reflecting a 10.8% discount
on the outstanding principal amount. As consideration for the Amended Note, HEXO issued 56,100,000 Common Shares and
11,674,266 rights exercisable for Common Shares to HTI, representing (x) 12% of the outstanding principal of the Amended Note at
the closing, divided by (y) $0.40. Pursuant to the Transaction Agreement, Tilray nominated two individuals to HEXO’s board of
directors. Tilray is also entitled to an observer to attend HEXO’s board of directors’ meetings.
The conversion price of the Amended Note of the US$ equivalent of $0.40 per share implies that, as of July 11, 2022, Tilray would
have the right to convert into approximately 48% of the Common Shares (on a non-diluted basis). HEXO did not receive any
proceeds as a result of Tilray’s purchase of the Amended Note from HTI.
Concurrently with the closing of the Note Transaction, HEXO and Tilray also finalized and entered into various commercial
agreements (collectively, the “Commercial Agreements”) covering the following key areas:
•
Co-Manufacturing: HEXO and Tilray have agreed to complete certain production and processing as a third-party manufacturer
of products for the other. The co-manufacturing agreement entered into by HEXO and Tilray initially contemplates the
manufacturing of V-Cone Pre-rolls in bulk format by Tilray for HEXO, using production equipment supplied by HEXO, and the
manufacturing of gummies and straight edge pre-rolls by HEXO for Tilray.
•
International Sales: HEXO and Tilray have agreed to leverage Tilray’s existing facility in Portugal and will negotiate a mutually
agreeable international supply agreement providing for the transfer by HEXO to Tilray of HEXO’s customers in certain
international markets, to the extent legally permitted, and in certain circumstances, HEXO will source and purchase all of its
cannabis products for international markets, excluding Canada and the United States, exclusively from Tilray.
4
MD&A
•
Procurement and Cost Savings: HEXO and Tilray have executed a procurement and cost savings agreement to identify and take
advantage of cost savings in their respective businesses. Under the agreement, the parties will share certain services to achieve
efficiencies and savings, including administrative services, third-party commercial services, procurement and internal distribution
services. The agreement creates an Efficiencies Committee, reflecting joint and equal representation from both companies, to
periodically identify additional cost savings and shared cost opportunities that can be realized in their respective operations. As
part of these initiatives, the parties have agreed to share in the resulting cost savings realized from HEXO’s Belleville facility,
with HEXO paying Tilray US$10 million fee for such shared savings and future access to Tilray production capacity, to be paid
in equal installments monthly over FY23.
•
Advisory Services and Monthly Fee: Under an advisory services agreement, Tilray may provide HEXO with certain advisory
services on an “as needed basis” in the areas of investor relations, internal audit, marketing and market positioning. HEXO has
agreed to pay Tilray a monthly fee of US$1.5 million for these advisory services (see section ‘Amended senior secured convertible
note (Tilray)’).
$180 million Equity Backstop Financing
In addition to the Note Transaction, HEXO has entered into an agreement with an affiliate of KAOS pursuant to which HEXO, KAOS
and such other parties included in the standby commitment (collectively, the “Standby Parties”). It is expected that the Standby
Agreement will permit HEXO to demand the Standby Parties to subscribe for a maximum aggregate of $5 million of Common
Shares per month over a period of 36 months. The Common Shares are expected to be issued at a 7% discount to the 20-day
volume weighted average price of HEXO’s shares on the Toronto Stock Exchange at the time the demand is made. The maximum
standby commitment is expected to be $180 million over the term of the Standby Agreement (the “Standby Commitment”). A 3%
Standby Commitment fee payable in Common Shares was due upon the execution of the Standby Agreement. As a result, the
Company issued 10,843,373 common shares to KAOS.
Approvals from the TSX and the Company’s shareholders and the exemptive relief order from the Autorité des Marchés Financiers
and each of the securities regulatory authority in each of the other provinces and territories of Canada were received by the
Company respectively on May 13, 2022, on June 14, 2022 and August 19, 2022. As at the date of this MD&A, the prospectus
supplement qualifying the Stand-By Commitment Shares had not been filed and the Stand-By Commitment has therefore not been
drawn upon.
Zenabis Group Filing for protection under the Companies’ Creditors Arrangement Act (“CCAA”)
On June 17, 2022 (the “CCAA Filing Date”), Zenabis as well as Zenabis’ direct and indirect wholly-owned subsidiaries (collectively,
“Zenabis”) commenced proceedings by filing a petition (the “CCAA Petition”) with the Superior Court of Québec (the “SCQ”) for
protection under the Companies’ Creditors Arrangement Act (“CCAA”) in order to restructure their business and financial affairs,
pursuant to an order granted by the SCQ on the same day. Said order was amended and restated by the Court on July 5, 2022
(collectively, as further amended or restated from time to time, the “Initial Order”). Pursuant to the Initial Order, Ernst & Young Inc., a
licensed insolvency trustee, was appointed as monitor in the CCAA Proceedings (in such capacity, the “Monitor”). The CCAA
Petition was limited to Zenabis and neither HEXO nor any of its subsidiaries, other than the members of Zenabis, are petitioners or
parties to the CCAA proceedings. On July 5, 2022, the SCQ granted an order (the “Bidding Procedures Order”), authorizing Zenabis
to undertake a sale and investment solicitation process (“SISP”) for the sale of their business, property, assets and undertaking
(collectively, the “Business”) of Zenabis. The SISP was conducted by the Monitor and Zenabis.
Among other things, the Bidding Procedures Order was: (a) approving the SISP and ratifying the fully binding and conditional
agreement of purchase and sale between the Petitioners, as vendors, and 2657408 Ontario Inc. (“265 Ontario” or the “Stalking
Horse Bidder”), as purchaser, dated June 16, 2022 (as amended on July 5, 2022, the “Stalking Horse Agreement”), subject to the
Stalking Horse Agreement and the transactions provided therein to be submitted to the Court for consideration in a subsequent
application upon completion of the SISP or upon termination thereof, (b) approving certain protections granted to the Stalking Horse
Bidder pursuant to the Stalking Horse Agreement; and (c) authorizing and directing the SISP to be conducted in accordance with the
bidding procedures (the “Bidding Procedures”) governing the solicitation of offers or proposals (each a “Bid”) for the acquisition of
the Business or some portion thereof. Pursuant to the Stalking Horse Agreement between the 265 Ontario and the Zenabis Group,
265 Ontario proposed to enter into a transaction whereby it would acquire all of almost all of the assets and business of Zenabis in
consideration of a credit bid of all or part of the amount outstanding on the Zenabis Debenture, the whole in accordance with the
terms and conditions of the Stalking Horse Agreement.
Since the implementation of the SISP on July 5, 2022, the Bidding Procedures required that 265 Ontario be consulted and consent
to material changes to the SISP. At the expiration of the SISP on August 15, 2022, 265 Ontario’s stalking horse bid was and
remained the only offer for the acquisition of Zenabis’ operations as a going concern. On October 7, 2022, the SCQ approved 265
Ontario’s stalking horse bid. As of the date of this MD&A, the transaction is expected to close either on October 31, 2022 or shortly
thereafter, following which the Company will no longer have any direct or indirect shareholdings in or corporate affiliation with the
Zenabis Group.
5
MD&A
Upon filing for CCAA, management determined that control of Zenabis was lost due to the cessation of management’s ability to have
the power to direct the relevant activities of Zenabis. Substantive rights were granted to other parties through the CCAA
proceedings that restricted the decision-making ability of HEXO to the extent that HEXO is unable to demonstrate power over
Zenabis. As a result, HEXO ceased to control Zenabis on the date that the investee filed for CCAA. As a result of the loss of control,
the Company has recognized a net gain on derecognition of the net assets of Zenabis in Other comprehensive income.
HEXO Corp. House of Brands
6
MD&A
Truss Beverage Co.
The Company currently serves the Canadian cannabis beverage market through Truss Beverage Co. (“Truss”), our business venture
with Molson Coors Canada (“Molson Canada”). Truss is a market leader in developing and producing a vast range of cannabis
beverages that focus on great taste, consistency, and choice for consumers.
Truss beverage products continue to be one of the top cannabis beverage market share positions in Canada with 36% of total sales1.
Cannabis beverage related operations were conducted by HEXO (through the operations of HEXO Cannabis Infused Beverages or
“HEXO CIB”) under HEXO’s licensing before October 1, 2021 when Truss obtained its own manufacturing and processing license.
Under the new arrangement, the Company purchases the manufactured goods from Truss LP and sells the beverages through to third
parties, as a principal in the arrangement. On May 2, 2022, Truss received its independent selling license from Health Canada and is
expected operationalize the license in Fiscal 2023.
As a part of the Company’s holistic review of its business plan and strategy, management is exploring its options regarding the future
of its investment in Truss. See section ‘Operating Expenses’ for impairment on Truss.
HEXO USA
We believe that the U.S. cannabis market represents a significant opportunity to create a global company. We’ve established HEXO
USA Inc. (“HEXO USA”) – a wholly owned US based entity created to facilitate our expansion into the US hemp market. We have also
created a second joint business venture, Truss CBD USA LLC (“Truss CBD USA2”) with 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. Truss CBD USA is now
present across select grocery markets within Colorado and offers products in an additional 25 states.
The Company’s new management is undergoing an assessment and revision of the HEXO USA business plan and sales strategy
which includes the research, development and formulation of creating unique cannabinoid cocktails (blends) tailored to specific
applications to maximize cannabinoid functionality at high level margins. This strategy can be applied to CBD and minor cannabinoid-
based products across both regulated markets and non-regulated markets as we await federal legalization. This includes the
formulation and development of cannabinoid beverages, topicals/vanity personal care products to edibles, gummies and infused pre-
rolls.
During Q4’22 management ceased its selling efforts of the Fort Collins facility and has concluded to continue to own and actively
operate its facility in Colorado.
1 Per HiFyre retailer sales data based on $ sold for the 12 months ended September 30, 2022.
2 The operations of Truss CBD USA are currently not significant to the financial results of HEXO. Truss CBD USA and HEXO’s activities in relation
to it will be conducted in accordance with all applicable laws.
7
MD&A
Acquisitions and Consolidations
The Company has completed three business acquisitions since Q4’21 and the acquisition dates and applicable periods of
consolidated results are stated in the table below:
Entity
Business
Acquisition Date
Effective Period of Financial Results
Q4’22
Q3’22
Q4’21
Zenabis*
June 1, 2021
Up to and including
July 16, 2022
Full period
June 1 – July 31,
2021
Redecan
August 30, 2021
Full period
Full period
Not applicable
48North
September 1, 2021
Full period
Full period
Not applicable
* See section ‘Zenabis Group Filing for Protection under the Companies Creditors Arrangement Act (CCAA).’
Operational and Financial Highlights
KEY FINANCIAL PERFORMANCE INDICATORS
Condensed summary of results for the three months ended July 31, 2022, April 30, 2022, and July 31, 2021, and the years ended
July 31, 2022 and July 31, 2021.
1Realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets.
2 Net interest expenses and non-operating income (expenses)
•
The Company’s Adjusted EBITDA loss was $7,467, an improvement of $10,870 quarter over quarter, from $18,337 as the result
of managements cost savings initiatives.
•
The Company’s general, administrative, selling, marketing and promotion and R&D expenses were reduced by $13,719or35%
quarter over quarter and by $5,967 or 25% from Q4’21.
•
On June 17, 2022, the Company’s subsidiary Zenabis filed for CCAA and as a result of the loss of control, the Company has
For the three months ended
For the year ended
CONDENSED FINANCIAL RESULTS
July 31,
2022
April 30,
2022
July 31,
2021
July 31,
2022
July 31,
2021
$ $
$ $
$
Revenue from sale of goods
60,227
63,590
53,022
265,418
173,081
Excise taxes
(17,910)
(18,021)
(14,365)
(74,717)
(49,583)
Net revenue from sale of goods
42,317
45,569
38,657
190,701
123,498
Ancillary revenue
177
–
103
402
271
Net revenue
42,494
45,569
38,760
191,103
123,769
Cost of goods sold
(83,432)
(55,179)
(37,261)
(282,985)
(94,703)
Gross loss before fair value adjustments
(40,938)
(9,610)
1,499
(91,882)
29,066
Fair value adjustments1
5,075
4,335
1,735
16,210
19,732
Gross profit/(loss)
(35,863)
(5,275)
3,234
(75,672)
48,798
Operating expenses
(73,903)
(127,704)
(63,116)
(992,053)
(134,293)
Loss from operations
(109,766)
(132,979)
(59,882)
(1,067,725)
(85,495)
Other expenses and losses2
3,592
(19,723)
(9,630)
(44,696)
(29,664)
Loss before tax
(106,174)
(152,702)
(69,512)
(1,112,421)
(115,159)
Current and deferred tax recovery
5,787
7,697
397
38,813
397
Other comprehensive income
(1,980)
(1,658)
1,156
17,323
1,152
Total net loss and comprehensive loss
(102,367)
(146,663)
(67,959) (1,056,285)
(113,610)
BALANCE SHEET
July 31,
2022
April 30,
2022
July 31,
2021
$ $
$
Operational Cash
83,238
63,590
67,462
Adjusted Working Capital
146,950
(228,697)
557,619
Inventory and Biological assets
82,315
152,385
149,611
Debt outstanding (undiscounted)
234,755
372,044
566,377
8
MD&A
deconsolidated the net assets of Zenabis. Inclusive of this, is the derecognition of the $51.7 million legacy, senior debt.
Summary of Results
Revenue
The following table represents the Company disaggregated net revenues by sale stream variances from the previous quarter and
the comparative quarter of the prior fiscal year.
For the three months ended
Units
Q4’22
Q3’22
Variance
($)
Variance
(%)
Q4’21
Variance
($)
Variance
(%)
ADULT-USE (EXCLUDING BEVERAGES)
Adult-use cannabis net revenue
$
34,519
31,125
3,394
11%
24,557
9,962
41%
Dried grams and gram equivalents sold (kg)
kg
23,306
18,481
4,825
26%
12,385 10,921
88%
ADULT-USE (BEVERAGES)
Adult-use cannabis net revenue
$
5,112
4,059
1,053
26% 5,193
(81)
(2%)
Dried grams and gram equivalents sold (kg)
kg
8,393
4,391
4,002
91% 5,934 2,459
41%
DOMESTIC MEDICAL
Domestic medical net revenue
$
612
672
(60)
(9%)
198
414
209%
Dried grams and gram equivalents sold (kg)
kg
108
138
(30)
(22%)
73
35
48%
WHOLESALE
Wholesale cannabis net revenue
$
2,240
3,267
(1,027)
(31%) 1,899
341
18%
Dried grams and gram equivalents sold (kg)
kg
2,526
3,157
(631)
(20%) 2,264
262
12%
INTERNATIONAL
International cannabis net revenue
$
(346)
6,446
(6,792)
(105%)
6,810 (7,156)
(105%)
Dried grams and gram equivalents sold (kg)
kg
461
2,407
(1,946)
(81%)
2,600 (2,139)
(82%)
Net revenue from sale of goods
$
42,317
45,569
(3,342)
(7%) 38,657
3,660
9%
The following table represents the Company disaggregated gross revenues by sale stream for the past three fiscal years.
For the years ended
July 31, 2022
July 31, 2021
July 31, 2020
$
$
$
Retail (excluding beverage)
211,744
143,098
101,713
Cannabis beverage retail
16,369
15,821
2,851
Medical
3,395
1,769
3,299
Wholesale
13,538
2,458
995
International
20,372
9,935
1,291
Total gross revenue from the sale of goods
265,418
173,081
110,149
ADULT-USE SALES
Non-Beverage Adult-Use Sales
The Company’s Q4’22 adult-use net sales experienced growth in the key markets of Ontario and Alberta of 22% and 29%,
respectively, due to greater availability of supply and increased velocity of highly demanded products. This resulted in improved net
sales of 11% quarter over quarter. Seasonality associated with the summer months (the Company’s fourth quarter each fiscal year)
also generally improves adult-use net sales when compared to the previous quarter.
Net sales grew 41% compared to Q4’21 due to $17,796 of accretive net sales contributed by business acquisitions.
The Company’s organic adult-use net sales declined by 32% from Q4’21 due to increased market competition and a reduction in
average market price per gram and gram equivalents sold. Net sales attributed to Zenabis in the period were $510.
Beverage Based Adult-Use Sales
Sales from the Cannabis Infused Beverages (“CIB’s”) revenue stream effectively represents the sales activity of the Company’s joint
business venture with Molson Canada, Truss. HEXO CIB was established in order to manufacture, produce and sell cannabis
beverage products until Truss obtains its own separate license from Health Canada. On October 1, 2021, Truss obtained their
Health Canada manufacturing license. Under the new arrangement, the Company purchases the manufactured goods from Truss
LP and sells the beverages through to third parties, as a principal in the arrangement. On May 2, 2022, Truss LP obtained its own
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MD&A
Cannabis selling license. However, the purchase arrangement has remained unchanged until Truss has operationalized its selling
license, which is expected in fiscal 2023.
In Q4’22 net beverage sales increased by 26% quarter over quarter as the result of newly launched products and higher summer
demand for beverages. Cannabis beverage sales remained flat as compared to Q4’21.
Following the receipt of their cannabis manufacturing license, Truss LP sells CIB’s to the Company which are then sold at a $nil
margin and are free of excise tax.
INTERNATIONAL SALES
During the period, international net revenues decreased 105% from the previous quarter. The Company recognized price
concessions of $1,654, as the result of a negotiated payment plan with an international client. Other factors included a velocity
slowdown in the Israel medical cannabis market and the impact of filing Zenabis for protection under the CCAA, which resulted in
recognizing $1,308 of sales from May 1, 2022 to June 16, 2022, as compared to $3,779 in the prior quarter. International sales are
subject to fluctuation quarter over quarter. While management monitors for international opportunities, under the Company’s revised
strategy, there is a refocused effort on the domestic Canadian market.
Similarly, international net sales decreased 105% when compared to Q4’21 as the result of the lower Israeli market demand.
DOMESTIC MEDICAL SALES
Domestic net medical revenue remained relatively consistent quarter over quarter. As compared to Q4’21, domestic net medical
revenue increased $414 due to the Company’s acquisition of Redecan in Q1’22, thereby expanding the Company’s Canadian
medical market share.
WHOLESALE REVENUE
Wholesale activity consists of transactions held between the Company and other licensed entities. These sales are generally large
quantities at competitive, bulk sale prices which vary from sale to sale. Wholesales are also free of excise taxes, as this burden
belongs to the purchaser.
During the quarter, the Company’s wholesale revenues declined 31% from Q3’22, as a result of shifting supply to service the adult-
use market. As compared to Q4’21, sales have increased by 18% due to fluctuations in the wholesale market. Sales attributed to
Zenabis in the period were $247.
By nature, the wholesale sales segment is subject to volatility. Management will assess wholesale agreement opportunities as they
arise. However, the Company’s focus remains on the adult-use market.
Excise Taxes
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 excise taxes.
As a percentage of gross sales in the period, excise taxes have increased to 2% from 27% in Q4’21 as the result of a 9% higher,
excise tax applicable, sales composition (adult-use and medical vs. international, wholesales and CIBs). Quarter-over-quarter,
excise taxes as a percentage of gross sales increased moderately by 1.4%, also due to a shift in excise tax applicable sales
composition.
Cost of Sales 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, net realizable adjustments, write offs, 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.
The crystallized fair value, as the result of the purchase price accounting resulting from mergers and acquisitions, and subsequent
sales have been removed from gross profit before adjustments below. These figures represent fair value adjustments which
otherwise would have been realized upon the sale of inventory on the statement of comprehensive income in ‘Realized fair value
amounts on inventory sold.’ However, per IFRS 3 requirements, the carried fair value adjustments were then capitalized to the
inventories cost base upon acquisition and are recorded in Cost of goods sold.
10
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.
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.
Adult-Use (excluding beverages)
The Company’s total non-beverage gross margin before adjustments has decreased from the previous quarter due unfavorable
variances and the under absorption rates at the Company’s Belleville, centralized production facility as it wound down throughout
the period. The non-beverage, adult-use adjusted gross margin remained relatively consistent when compared to Q4’21.
International
Before the impact of $1,654 in price concessions recognized in the period, the Company’s adjusted international gross margin
remained relatively consistent quarter over quarter and has declined by 18 percentage points from Q4’21. The Company’s
international sales and the associated gross margins may vary from period to period as they are dependent upon the specific
purchase order arrangements.
For the three months ended
For the year ended
July 31,
2022
April 30,
2022
July 31,
2021
July 31,
2022
July 31,
2021
$
$
$
$
$
Net revenue from sale of goods
42,317
45,569
38,657
190,701
123,769
Adjusted cost of sales
(37,281)
(35,536)
(28,500)
(144,111)
(87,322)
Gross profit before adjustments
5,036
10,033
10,157
46,590
36,447
Gross margin before adjustments
12%
22%
26%
24%
29%
Write off of biological assets and destruction costs
–
–
–
(2,340)
–
Write off of inventory
(6,768)
(1,973)
(1,181)
(14,297)
(2,182)
Write (down)/up of inventory to net realizable value
(36,331)
(13,274)
(5,308)
(99,739)
(2,927)
Crystallization of fair value on business combination accounting
(3,052)
(4,396)
(2,272)
(22,498)
(2,272)
Gross (loss)/profit before fair value adjustments
(41,115)
(9,610)
1,396
(92,284)
29,066
Realized fair value amounts on inventory sold
(11,826)
(8,903)
(14,148)
(43,455)
(31,767)
Unrealized gain on changes in fair value of biological assets
16,901
13,238
15,883
59,665
51,499
Gross (loss)/profit
(36,040)
(5,275)
3,131
(76,074)
48,798
For the three months ended
Adult-Use
(excluding
beverages)
Medical
International
Wholesale
Total
non-beverage
Adult-use
beverages
Company
total
July 31, 2022
$
$
$
$
$
$
$
Net revenue from the sale of goods
34,519 612
(346) 2,420
37,204
5,112
42,317
Adjusted cost of sales
(29,314)
(287)
(682)
(1,886)
(32,169)
(5,112)
(37,281)
Gross profit before adjustments ($)
5,205
325
(1,028)
534
5,036
–
5,036
Gross margin before adjustments (%)
15%
53%
(297%)
22%
14%
0%
12%
April 30, 2022
$
$
$
$
$
$
$
Net revenue from the sale of goods
31,125 672 6,446 3,267
41,510
4,059
45,569
Adjusted cost of sales
(25,433)
(344)
(3,082)
(2,618)
(31,477)
(4,059)
(35,536)
Gross profit before adjustments ($)
5,692
328
3,364
649
10,033
–
10,033
Gross margin before adjustments (%)
18%
49%
52%
20%
24%
–
22%
July 31, 2021
$
$
$
$
$
$
$
Net revenue from the sale of goods
24,557
198
6,810
1,899
33,464
5,193
38,657
Adjusted cost of sales
(21,652)
(116)
(2,383)
(3,125)
(27,276)
(3,496)
(30,772)
Gross profit before adjustments ($)
2,905
82
4,427
(1,226)
6,188
1,697
7,885
Gross margin before adjustments (%)
12%
41%
65%
(65%)
18%
33%
20%
11
MD&A
Wholesale
The wholesale gross margin before adjustments moderately increased compared to Q3’22 and Q4’21. 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.
Cannabis Infused Beverages
The adult-use beverage gross margin amounts to $nil after the derecognition of CIB operations under the old services agreement,
and the recognition of certain production variances. As discussed in the Company’s CIB division section (see section ‘HEXO CIB’)
Truss received its cannabis manufacturing license on October 1, 2021 and selling license on May 2, 2022. However, Truss has not
operationalized its selling license or enabled the license to be able to sell into the provincial boards.
IMPAIRMENTS AND WRITE OFFS
During Q4’22 the Company incurred impairments of $36,331 related to aged out and excess inventories. The Company destroyed
and wrote off costs of $6,768 primarily associated with the shut down of the Belleville facility and unsellable stock. Management is
intent on mitigating the impact of future inventory impairments and write offs through the execution of its updated strategy,
specifically the modified ‘made to order’ demand planning cycle.
During the year ended July 31, 2022, along with the above impairments recognized in Q4’22, the Company recorded an additional
$63,408 of impairments, of which, $36,197 was due to the cessation of the KIT project which would have used significant biomass to
commission the equipment. During the year ended July 31, 2022, the Company also recorded $7,529 of write offs pertaining to aged
and unsellable inventory and certain stock associated with the decommissioning of facilities. The Company also destroyed and
wrote off $2,340 of biological assets upon the wind down of a facility and due to an overheating issue, which has since been
remediated.
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.
FAIR VALUE ADJUSTMENTS
During the three months ended July 31, 2022, the unrealized gain on changes in fair value of biological assets increased 6% from
Q4’21. The net growth is the result of higher average plants on hand due to business combinations, offset by a change in the
Company’s estimated trim value, which is now valued at $nil. The unrealized gain on changes in fair value of biological assets in
FY22 increased 16% from FY21 due to those reasons outlined above.
The realized fair value adjustment on inventory sold during the period decreased 16% relative to Q4’21 due to lower average selling
prices per gram sold as well as impact of inventory impairment due to general aged out stock. The realized fair value adjustment on
inventory sold during FY22 as compared to FY21 has increased 37%, on trend with the increase net sales and volumes sold, as well
as impacted by the impairment of general aged out stock.
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MD&A
Operating Expenses
For the three months ended
For the year ended
July 31,
2022
April 30,
2022
July 31,
2021
July 31,
2022
July 31,
2021
$
$
$
$
$
General and administration
12,586
23,605
19,160
81,243
54,543
Selling, marketing and promotion
4,975
5,366
3,665
22,932
10,348
Share-based compensation
786
5,769
827
14,396
11,731
Research and development
231
540
934
3,216
3,835
Depreciation of property, plant and equipment
2,652
1,579
1,728
7,428
6,097
Amortization of intangible assets
3,338
2,957
1,002
21,347
2,050
Restructuring costs
3,788
2,804
1,562
15,105
3,283
Impairment of property, plant and equipment
7,899
83,171
19,350
215,003
20,230
Impairment of intangible assets
–
–
–
140,839
–
Impairment of goodwill
–
–
–
375,039
–
Loss on onerous contract
1,000
–
–
1,000
–
Impairment of investment in joint venture and associates
30,835
–
–
57,760
–
Disposal of long-lived assets
–
–
–
–
1,294
Loss/(gain) on disposal of property, plant and equipment
396
(2,935)
19
(2,466)
64
Acquisition, integration and transaction costs
5,417
1,175
14,869
35,538
17,174
Health Canada recovery fee
–
3,673
–
3,673
3,644
Total
73,903
127,704
63,116
992,053
134,293
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.
general and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate
expenditures including legal, insurance and professional fees.
GENERAL AND ADMINISTRATIVE
The Company’s general and administrative expenses decreased 47% quarter over quarter as the result of management’s cost
savings initiatives. Most notably, management reduced net payroll expenses by 63% by rightsizing and restructuring the business,
inclusive of shutting down the Belleville facility and reducing consulting spend by replacing consultants with full time employees. Due
to the loss of control of Zenabis upon the filing of CCAA, savings of $911 were realized. Professional fees were tapered by 20% as
the legal and other professional fees associated with the closing the definitive agreement with Tilray and procedures for Zenabis
filing for CCAA wrapped up.
As compared to Q4’21, general and administrative expenses have decreased by 34%, driven by total net payroll reductions, as
stated above. Increases in professional fees, relating to audit costs, internal control engagements and legal fees were essentially
washed with net savings in general and facility expenses as the result of the Company closure of the Belleville, Langley and
Stellarton facilities throughout the fiscal year.
Audit, internal controls support, legal, consulting and professional fees have increased as the Company has increased in both
complexity and size (due to M&A activity) year over year.
Total general and administrative expenses for the year ended July 31, 2022 increased 49% when compared to fiscal 2021. The
increase is due to the increased scale and size of the Company, most notably due to the acquisition of Redecan in Q1’22. Also
contributing to the total increase was the increased involvement and reliance of consultants and the general increase of legal, audit
and other professional fees.
SALES, MARKETING AND PROMOTION
The Company’s net sales, marketing and promotion expenses decreased 7%, quarter over quarter as a result of cost savings
realized through the consolidation of the Company’s sales force.
The Company’s Q4’22, marketing and promotion expenses increased by 36% as compared to Q4’21 as the result of the acquisition
of Redecan and the associated additional sales, marketing and promotional costs to support the Redecan brands and business. The
Company’s organic marketing and promotion expenses decreased as the result of the above.
Compared to the year ended July 31, 2021, the increase of 122% was driven by the additional average headcount throughout the
period, and marketing programs following the acquisitions of Redecan, 48North and Zenabis.
SHARE-BASED COMPENSATION
Share-based compensation in Q4’22 diminished quarter over quarter on a net basis, as the result of a 54% decrease in the
Company’s share price and the resultant impact on the revaluation gain on the RSU and DSU liabilities. The Company incurred
13
MD&A
$1,126 of accelerated share-based compensation upon the termination of former executives. In Q3’22, share-based compensation
increased as a result of the granting of 4,088,386 deferred share units during the quarter.
When compared to the three and twelve months ended July 31, 2021, share based compensation increased due to a combination of
the issuance of deferred share units and acceleration of certain share-based awards to terminated executives and directors.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment in operating expenses has increased from Q3’22 and Q4’21 primarily as the result of
a change in accounting estimate, resulting in the acceleration of deprecation. This also contributed to the net increase in
depreciation during the year ended July 31, 2022 as compared to fiscal year 2021, along with the additional assets acquired through
business acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS
In Q4’22, amortization of intangible assets increased moderately from the previous quarter due to an accelerated useful life on the
Company’s outgoing ERP system.
The significant increases in amortization expenses during the three and twelve months ended July 31, 2022 when compared to the
comparative period of fiscal 2021 is due to the additional intangible assets, (cultivation license, brands and production Know-how
asset) acquired through business combinations.
RESTRUCTURING COSTS
In Q3’22, management announced the closure of the Belleville manufacturing center. During the three months ended July 31, 2022,
the Company decommissioned the facility and phased out the onsite processing operations, resulting in the recognition of
restructuring payroll related costs. The Company also recognized $1,150 in executive severance.
During the year ended July 31, 2022, the Company underwent significant restructuring activities in order to rightsize operations. This
included the shutdown of the Stellarton and Belleville manufacturing facilities, the operations of 48North and departmental
restructuring across the business. These actions are the result of management better positioning the Company’s headcount and
operational footprint to reduce expenses and drive towards profitability.
During the comparative three and twelve months ended July 31, 2021, the Company incurred expenses related to restructuring
Zenabis and its management team.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
During fiscal year 2022, the Company recognized significant impairment to property, plant and equipment as the Company
undertook necessary measures to reduce its operational footprint and align to a path to profitability.
In Q4’22, certain assets held for sale were revalued to their estimated recoverable amounts as a result of changing market
conditions. Certain cultivation equipment and leasehold improvements were also impaired as the result of exiting the leased
Belleville facility. During Q3’22, management announced the closing of the Belleville facility which was ultimately decommissioned
and exited in July 2022. As a result, in Q3’22, the Company impaired the related leasehold improvements, right of use asset, non-
transferable cultivation and production equipment and remaining construction in progress at the site. Additional impairments were
identified as a result of management’s assessment of future production capacity needs. This assessment resulted in the impairment
of certain buildings and equipment acquired as part of the Zenabis business combination and the reflection of their expected fair
market values. Also, during the fiscal year, in Q2’22, management canceled the KIT extraction project and all capitalized costs have
been impaired to $nil.
All recoverable amounts were 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.
During the three and twelve months ended July 31, 2021 the Company recognized impairment losses related to the abandonment of
the leased cultivation facility, acquired through business combination on June 1, 2021.
IMPAIRMENT OF INTANGIBLE ASSETS
During the year ended July 31, 2022, impairments to the Company’s acquired and capitalized brands, capitalized licenses from
acquired cultivation facilities recognized on business combinations and the production Know-how asset were recognized. The
impairments were the result of the Company’s new management reforecasting of the estimated future cash flows and the economic
benefits to be derived from said assets.
There were no impairments of intangible assets in Q4’22 or in the comparative three- and twelve-months ended July 31, 2021.
IMPAIRMENT OF GOODWILL
During the year ended July 31, 2022, the Company identified indicators of impairment as the Company’s carrying value of the
Company’s only material cash generating unit (the “Canadian Operations CGU”) exceeded market capitalization. The Company
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MD&A
performed an impairment test and valuation of the Canadian Operations CGU resulting in a full impairment of the goodwill arising
from the acquisitions of Zenabis, Redecan and 48North (see note 16 of the financial statements).
As a result of the above, the Company no longer carries Goodwill, and as such no further impairments were recognized in the
current period.
There were no impairments of goodwill during the comparative periods.
IMPAIRMENT OF INVESTMENT IN ASSOCIATE
On July 31, 2022, the Company identified additional indicators of impairment related to the Truss LP investment, as a result of a
further reduction in the financial outlook predicated on budget to actual trends and certain market data. The Company tested the
investment for impairment and recorded an impairment loss as outlined below. The recoverable amount was based on the estimated
fair value less costs of disposal, which was determined based on an income approach using discounted cash flows (“DCF”). In
addition, to further corroborate the DCF valuation, a secondary valuation was completed using adjusted net asset method
determined by measuring the underlying assets and liabilities on the balance sheet of Truss on the measurement date to their
respective fair value. The tangible non-financial assets are adjusted to reflect their current replacement cost using comparable
market data adjusted for economical obsolescence. As a result, an additional impairment loss of $30,835 was recorded.
On January 31, 2022, the Company recorded impairment on the investment in Truss LP as there existed indicators of impairment
and as such management performed discounted cash flow valuation which resulted in impairment down to its recoverable amount.
The historical carrying amount of the Truss LP investment included $42,300 related to the fair value of warrants issued to Molson
Canada as part of the initial investment in 2018. These warrants expired unexercised in October 2021.
There were no impairments during the comparative periods.
ACQUISITION, INTEGRATION AND TRANSACTION COSTS
During Q4’22, the Company realized expenses related to closing costs associated with executing the amending and reassignment of
the senior secured convertible note to Tilray.
During the Q3’22, the Company realized expenses related to the activity associated with executing the Definitive agreement. In the
first and second quarter of fiscal 2022, these expenses related to the acquisition and integration of Redecan, 48North and Zenabis.
include closing costs, legal expenses, broker compensation, costs associated with the special shareholders meeting to approve the
Redecan transaction, due diligence, consulting, integration, and other applicable costs.
The comparative period of fiscal 2021, the Company began incurring expenses relating to the acquisitions of 48North and Redecan
as well as integration costs associated with the acquisition of Zenabis.
Other Income and Losses
For the three months ended
For the year ended
July 31,
2022
April 30,
2022
July 31,
2021
July 31,
2022
July 31,
2021
$
$
$
$
$
Interest and financing expenses
(4,371)
(5,147)
(23,756)
(20,073)
(32,124)
Interest income
501
183
544
1,651
1,601
Net gain on extinguishment of debt
20,534
–
–
20,534
–
Finance income (expense), net
16,664
(4,964)
(23,212)
2,112
(30,523)
Revaluation of financial instruments gain
1,791
3,147
7,304
44,271
(2,283)
Share of loss from investment in associate and
joint ventures
(2,482)
(1,856)
(603)
(9,157)
(6,505)
Fair value gain/(loss) on convertible debenture
–
–
514
–
1,260
Fair value loss on senior secured convertible note
(2,812)
(2,948)
1,751
(45,820)
1,751
Amortization of day 1 loss
(49,878)
(12,162)
(9,229)
(86,974)
(9,229)
Gain on sale of interest in BCI
–
–
–
9,127
–
Loss on investments
(140)
–
790
(716)
1,994
Net gain on loss of control of subsidiary
25,009
–
–
25,009
–
Foreign exchange gain/(loss)
(1,058)
(527)
12,944
(666)
9,108
Other income and losses
16,498
(413)
252
18,118
4,763
Non-operating income (expense), net
(13,072)
(14,759)
13,723
(46,808)
859
15
MD&A
INTEREST AND FINANCING EXPENSES
As a part of amending the Definitive Agreement, the Company issued 67.7 million common shares to HTI, valued at $17,900. The
remaining balance of recognized interests and financing expenses remained flat quarter over quarter. In Q4’21, the Company paid
$17,564 closing and advisory fees related to the Senior secured convertible note.
Compared to the same three and nine-month period in fiscal 2021, interest and financing fees have increased due to the additional
interest-bearing debt instruments assumed through business combinations.
REVALUATION OF FINANCIAL INSTRUMENTS
The applicable financial instruments are the US$ denominated warrants which are classified as a liability and remeasured at each
period end date. The Q4’22, revaluation of the warrants resulted in a gain in the current period, due to the decrease to the
Company’s underlying share price. The decreased gain as compared Q3’22 and Q4’21, is due to lower share price volatility. The
number of outstanding US$ warrants remains consistent quarter over quarter.
Similarly, the significant revaluation gain for the year ended July 31, 2022 as compared to year ended July 31, 2021 is the result of a
greater volatility in the Company’s share price.
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 increased due to increase marketing and promotional expenses incurred by Truss as they
launched new products and continue to strive for increased market share in the cannabis beverage segment. During Q4’21, the
Company’s former joint venture, Belleville Complex Inc. recognized additional rental income and reduced net losses. The Company
disposed of this venture in the Q2’22 realizing a gain on disposal of $9,127. As a result, no equity loss pick up was realized in the
current period.
The losses from investments in associates and joint ventures for the year ended July 31, 2022, have increased compared to fiscal
2021 in conjunction with the increased size and scale of operations of Truss and Truss USA.
FAIR VALUE LOSS ON SENIOR SECURED CONVERTIBLE NOTE, AMORTIZATION OF DAY 1 LOSS & NET GAIN ON EXTINGUISHMENT
On July 12, 2022, the Company fully executed the Transaction Agreement in which the Note was amended and reassigned to Tilray
from HTI. Management assessed the changes made to the Senior secured convertible note and determined that the modification
should be accounted for as an extinguishment of the previous liability and then recorded the Amended Note at its fair value
determined as of the date of the modification.
The Company recognized a gain on termination of $259,981, less the fair value of common shares and share rights issued of
$17,900 and associated fees of $12,987. Upon extinguishment the remaining Day 1 loss was fully amortized, for an additional loss
of $49,878.
Upon inception, the Amended senior secured convertible note was recognized at a fair value in the amount of $208,560 (see section
‘Amended senior secured convertible note’ (Tilray)’) and the total net gain on extinguishment amounted to $20,534.
Quarter over quarter, the fair value gain recognized has remained relatively flat. The loss on revaluation is offset by the Company’s
$1,971 loss on credit spread, recognized through Other Comprehensive Income. The Q4’22 loss on credit spread is a function of the
decreased credit spread risk input to valuation of the note as compared to the previous period.
During the year ended July 31, 2022, the Company recognized a cumulative fair value loss of $45,820 and fully amortized the day 1
loss, realizing a total loss of $86,974. The loss on revaluation was offset by the Company’s $23,964 gain on credit spread,
recognized through Other Comprehensive Income.
NET GAIN ON LOSS OF CONTROL OF SUBSIDIARY
On June 17, 2022, the Company’s wholly owned subsidiary Zenabis Global Inc. (“Zenabis”) as well as its direct and indirect wholly-
owned subsidiaries (collectively, the “Zenabis Group”), filed a petition (the “CCAA Petition”) with the Superior Court of Québec for
protection under the Companies’ Creditors Arrangement Act (“CCAA”) in order to restructure their business and financial affairs. As
a result of the CCAA Petition and the resulting loss of control over the Zenabis Group, the Company deconsolidated the assets and
liabilities of Zenabis and effectively de-leveraged itself from the $50,732 senior note payable previously associated with Zenabis.
FOREIGN EXCHANGE GAIN/(LOSS)
Gains and losses are the outcome of favorable and unfavorable volatility in the CAD/USD FX rate period over period on the USD
denominated senior secured note and cash balances. The losses recognized during the period are due to the unfavorable quarter
over quarter change in the CAD/USD rate on the senior secured convertible note and the Company’s remaining USD cash balance.
The gain recognized in the fourth quarter of fiscal 2021 was the result of significantly increased US$ holdings due to proceeds of the
May 2021 “At the Market Offering” held for the Redecan acquisition.
16
MD&A
During the year ended July 31, 2022, the Company incurred a foreign exchange loss of $666, primarily attributable to rising
CAD/USD FX rates on the senior convertible note. This represents a decrease of $9,774compared to the prior year, where the gain
of $9,108 is driven by the Company’s increased restricted USD cash balance, stemming from the May 2021 “At the Market Offering”
and ultimately utilized to help fund the Redecan acquisition in Q1’22.
OTHER INCOME AND LOSSES
On July 31, 2022, the Company executed the lease surrender agreement with its former lessor, which is controlled by a director of
the Company. As a result, the Company wrote off the associated lease liability for a gain of $18,951. The gain was offset by a lease
surrender penalty of $2,380.
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 Loss and comprehensive loss attributable to shareholders before taxes, 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:
Q4’22 Q3’22 Q2’22
Q1’22
Q4’21
$
$
$
$
$
Loss and comprehensive loss attributable to
shareholders before tax
(106,174)
(152,702)
(736,104)
(117,427)
(69,512)
Finance expense (income), net
3,870
4,964
5,058
4,531
23,211
Depreciation, included in cost of sales
5,112
4,814
5,973
4,969
2,308
Depreciation, included in operating expenses
2,652
1,579
1,140
2,057
1,728
Amortization, included in operating expenses
3,338
2,957
6,895
8,158
1,002
Investment (gains) losses
Revaluation of financial instruments loss/(gain)
(1,791)
(3,147)
(11,866)
(27,467)
(7,304)
Share of loss from investment in joint venture
2,482
1,856
2,669
2,149
602
Fair value losses on senior secured convertible note
52,690
15,110
76,666
(11,670)
6,964
Unrealized loss/(gain) on investments
140
–
297
279
(788)
Realized gain on disposal of investment in BCI
–
–
(9,127)
–
–
Foreign exchange loss/(gain)
1,058
527
4,582
(5,504)
(12,945)
Net gain on debt extinguishment
(20,534)
–
–
–
–
Net gain/(loss) on loss of control of subsidiary
(25,009)
–
–
–
–
Non-cash fair value adjustments
Realized fair value amounts on inventory sold
11,826
8,903
9,966
12,760
14,148
Unrealized gain on changes in fair value of biological
assets
(16,901)
(13,238)
(15,945)
(13,581)
(15,883)
Crystalized fair value adjustment on PPA
3,052
4,396
7,127
7,923
2,272
Restructuring costs & acquisition costs
Restructuring costs
3,788
2,804
4,524
3,989
1,562
Acquisition, integration and transaction costs
5,417
1,175
4,569
24,374
14,869
Other non-cash items
Share-based compensation, included in operating
expenses
786
5,769
4,017
3,824
827
Share-based compensation, included in cost of sales
–
–
–
211
333
Write-off of biological assets and inventory
6,768
1,973
6,301
1,595
1,181
Write (up)/down of inventory to net realizable value
36,331
13,274
13,937
36,197
5,308
Impairment loss on goodwill
–
–
375,039
–
–
Impairment losses on property, plant and equipment
7,899
83,171
100,130
23,803
19,350
Impairment losses on intangible assets
–
–
140,839
–
–
Impairment of investment in associate
30,835
–
–
26,925
–
Recognition of onerous contract
1,000
–
–
–
–
(Gain)/loss of long-lived assets
396
(2,935)
(254)
329
19
Other income/(losses)
(16,498)
413
(2,031)
–
–
Adjusted EBITDA
(7,467)
(18,337)
(5,598)
(11,576)
(10,748)
17
MD&A
The Company’s Adjusted EBITDA was improved by $10,870, quarter over quarter. This was driven by the Company’s 51% total cost
savings in general, administrative, R&D, selling, marketing and promotion expense. The improvements are the result of the
restructuring efforts and rightsizing of its operations and headcount (payroll expenses) (see section ‘Operating expenses’). The
Company notes that the impact of the $3,673 Health Canada cannabis fee (a 2.3% levy based upon the Company’s total cannabis
sales from the period of April 1, 2021 to March 31, 2022, net of shipping and purchased cannabis costs) is recognized in the third
quarter each fiscal year. The Company’s ongoing operating expenses3 as a percentage of net sales in Q4’22 was 44%, an
improvement of 21 percentage points from the previous quarter. Offsetting the above improvements to Adjusted EBITDA is the lower
adjusted gross margin recognized in the period (see section ‘Cost of sales and gross margin before adjustments’).
Quarterly Results Summary
The following table presents certain unaudited financial information for each quarter of the past two 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 ’22
Q3 ’22
Q2 ’22
Q1 ’22
$
$
$
$
Net revenue
42,494
45,569
52,763
50,188
Total loss and comprehensive loss
(102,367)
(146,663)
(690,254)
(116,908)
Weighted average shares outstanding
515,390,016
432,918,608 355,752,174 251,805,870
Loss per share – basic
(0.20)
(0.34)
(1.94)
(0.46)
Loss per share – fully diluted
(0.20)
(0.34)
(1.94)
(0.46)
Q4 ’21
Q3 ’21
Q2 ’21
Q1 ’21
$
$
$
$
Net revenue
38,760
22,660
32,880
29,468
Total loss and comprehensive loss
(67,959)
(20,708)
(20,839)
(4,197)
Weighted average shares outstanding
142,018,176
122,397,731
122,022,069
120,849,754
Loss per share – basic
(0.48)
(0.17)
(0.17)
(0.04)
Loss per share – fully diluted
(0.48)
(0.17)
(0.17)
(0.04)
Q4 ’20
Q3 ’20
Q2 ’20
Q1 ’20
$
$
$
$
Net revenue
27,145
22,132
17,007 14,499
Total loss and comprehensive loss
(169,532)
(18,837)
(298,167)
(60,016)
Weighted average shares outstanding
77,376,174
73,852,844
65,835,852
64,249,165
Loss per share – basic
(1.60)
(0.28)
(4.52)
(0.92)
Loss per share – fully diluted
(1.60)
(0.28)
(4.52)
(0.92)
Financial Position
The following table provides a summary of our consolidated financial position as at July 31st for past three fiscal years:
July 31, 2022
July 31, 2021
July 31, 2020
$
$
$
Current assets
271,647
693,558
305,703
Non-current assets
409,302
618,245
387,166
Current liabilities
335,076
503,638
82,487
Non-current liabilities
32,181
75,900
53,706
Total shareholders’ equity attributable to HEXO Corp.
313,692
730,278
553,297
Current Assets
The following significant activities and events resulted in the net decrease of assets during the year ended July 31, 2022:
•
The Company’s cash and cash equivalents has increased by $15,776 and Restricted funds were reduced by $100,022 (see
section ‘Liquidity and Capital Resources’).
•
Cash held in escrow of $285,779 was utilized to acquire Redecan in Q1’22.
•
The Company’s inventory was reduced by 50%, from $135,327 as the result of the deconsolidation of Zenabis upon loss of
control, which represented $49,266 of inventory at July 31, 2021. The remaining reduction is the function of lower carried stock
of inventory to align to customer demand and reduce the risk of aged out product.
•
Assets were classified as held for sale in the amount of $22,540 (July 31, 2021 – $nil) as the result of the Company’s announced
exiting of certain cultivation and manufacturing facilities (see section ‘Facilities’).
3 General and administrative, marketing and promotion and research and development costs.
18
MD&A
Non-Current Assets
The following significant activities and events resulted in the net decrease of assets during the year ended July 31, 2022:
•
Non-current assets have decreased as a result of the $88,189 full impairment of the Zenabis acquisition goodwill as the result of
impairment of the HEXO CGU.
•
The Company capitalized $11,187 to its investments in associates during the period. These were offset by the Company’s share
of losses in its joint venture and associates and the $57,760 impairment of the Company’s investment in Truss LP.
•
The business combinations of Redecan and 48North added $198,837 of intangible assets. However, in the previous quarter the
Company impaired certain of these and other intangible assets in the amount of $140,839 (See section ‘Operating Expenses).
•
Similar to the above, the business combinations of Redecan and 48North added $135,527 of property, plant and equipment
assets. However, throughout the fiscal year the Company impaired certain of these and other assets in the amount of $215,003
(See section ‘Operating Expenses).
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.
•
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; and
•
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.
Current Liabilities
The following significant activities and events resulted in the net decrease of current liabilities during the year ended July 31, 2022:
•
Accounts payable and accrued liabilities remained consistent. The additional operations of two acquired entities resulted in an
increase of liabilities of $8,490. The Company also recognized additional accruals such as; the lease break penalty of Belleville,
executive severance and a broker success fee associated with the reassigning of the senior secured convertible note. Offsetting
this increase was the derecognition of liabilities attributable Zenabis upon the loss of control ($12,433 on July 31, 2021) and to
the Company’s CIB division after a change in the Company’s arrangement with Truss LP following the receipt of their cannabis
processing license (see ‘HEXO CIB (Cannabis Infused Beverages).
•
On July 12, 2022, the Company amended and reassigned the Senior secured convertible note from HTI to Tilray. Upon
extinguishment of the Senior secured convertible note and recognition of the Amended senior secured convertible note, a
$36,070 net decrease to the Company current debt was recognized.
•
The Company derecognized the Zenabis Debenture (see section ‘Litigation’) upon the loss of control when Zenabis filed for
CCAA. The debenture had a value of $50,159 of principal and $1,509 of accrued and unpaid interest at the date of
derecognition.
•
The fair value of the Company’s USD denominated warrant liabilities fell $5,016 as the result of a lower share price.
•
The Company’s December 2019 convertible debentures were reclassified as current liabilities from long term in the prior year, as
they mature December 2022. As of the date of this MD&A management is actively working on a refinancing plan to potentially
modify the debt arrangement and extend the maturity date beyond FY23.
19
MD&A
Long-Term Liabilities
During year ended July 31, 2022 long-term liabilities decreased from July 31, 2022 due to the following:
•
The Company derecognized the lease liability upon exiting its Belleville facility lease arrangement. The Company had 11 years
remaining on the lease prior to the exit, amounting in a lease liability reduction of $23,430.
•
Due to the loss of control of Zenabis, the Company also derecognized a lease liability of $16,180 associated with the dormant
Langley leased facility.
•
The December 2019 convertible debentures were classified to a current liability as the debt approaches maturity in December
2022 as stated above.
•
In contrast to the above, the Company recognized a deferred tax liability of $28,144 (recognized on the business combination
of Redecan), offsetting the above long term liability reductions.
TOTAL Liabilities: FY 2021 vs. FY 2020
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;
o
Increased scale of operations at the Company’s CIB division; and
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.
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.
Shareholders’ Equity
During the year ended July 31, 2022, the net decrease to shareholders’ equity was due to the following:
• Share capital increased due to; $27,266 of share issuances on the Company’s ATM program (which ran until February 2022);
$230,232 of capital was issued on the Redecan and 48North transactions; $184,525 of capital was issued on senior secured
convertible note redemptions; and $135,645 of capital raised through the August 2021 underwritten public offering. The
Company issued $17,900 in equity consideration to HTI in association with the senior secured convertible note amendment and
reassignment.
•
On a net basis, the Company’s shares-based payment reserve increased as the result of compensation expenses of $12,263.
offsetting $9,513 of expired vested stock options.
•
Warrant reserve decreased by $42,486 mainly due to the expiry of warrants which had been issued as compensation in the
formation of Truss LP in October 2018. The warrant reserve was increased by $769 on the issuance of replacement warrants
associated with the acquisition of 48North.
•
The Company’s contributed surplus increased due to the expiry of warrants and stock options as stated above.
Liquidity and Capital Resources
Cash Flow Highlights
For the year ended
July 31, 2022
July 31, 2021
Cash (used)/generated through:
$
$
Operating activities
(116,686)
(43,068)
Financing activities
148,786
377,972
Investing activities
(16,324)
(451,615)
Ending cash balance
83,238
67,462
Operating Activities
Net cash used from operating activities for the year ended July 31, 2022 increased from $43,068 in the comparative period to
$116,686to the current period. Cash used through operating activities generally increased due to the increase in size and scope of
the Company. Other contributing factors include:
20
MD&A
• The Company’s general and administrative expenses increased by 46% (July 31, 2021 - $58,187), while marketing and promotion
expenses increased by 122% (July 31, 2021 - $10,348).
• Cash based acquisition and transaction costs related to M&A associated integration costs and refinancing of the senior debt
amounted to $35,538 (July 31, 2021 - $17,174) as well as restructuring costs of $15,105 (July 31, 2021 - $1,721).
Financing Activities
Net cash generated from financing activities for the year ended July 31, 2022 decreased from the comparative period due to the
following events and transactions:
• Net cash generated from issuance of common shares through the underwritten public offering in August 2021 was $174,900; and
$27,266 from the Company’s ATM program.
• During the period, the Company made cumulative principal and interest debt payments $15,060; and
• The Company also utilized the $10,111 of cash proceeds from the sale of its investment in BCI towards repayment of the Senior
secured convertible note.
• The Company made cash payments of $12,885 for the settlement of redemptions on the Senior secured convertible note.
Investing Activities
Net cash used for investing activities for the year ended July 31, 2022 increased from the comparative period due to the following
events and transactions:
• The Company’s $283,775 of Cash held in escrow, which had been raised through the Senior secured convertible note in May
2021, was fully utilized, as intended, to partially fund the $402,173 cash component of the Redecan transaction. The balance of
the cash component was derived from the cash raised in August 2021 underwritten public offering. The total net cash used in the
fiscal year for the acquisition of Redecan and 48North was $97,382;
• $111,589 of restricted funds were unrestricted upon the amending and reassigning of the senior secured convertible note.
• The Company received net proceeds from the sale of its investment in BCI of $10,111;
• The Company restricted funds of $7,341, generated by the sale of property as obligated by the terms of the senior secured
convertible note;
• Capital additions to property plant and equipment were reduced by $5,126 as capital projects were reduced during the fiscal year
upon restricting. This reduction has been offset by a $4,747 increase in intangible asset project spend, primarily associated with
the Company’s development and implementation of its new ERP; and
• Cash contributions of $11,221 (July 31, 2021 - $5,033) were made to Truss LP and Truss USA.
Senior Secured Convertible Note (HTI)
Pre-
Amendment
July 12,
2022
Pre-
Amendment
July 12,
2022
July 31,
2021
July 31,
2021
Senior Secured Convertible Note
US$
$
US$
$
Opening balance, beginning of the year
364,847
454,673
–
–
Issued at fair value
–
–
407,284
491,714
Early conversions
–
–
(413)
(497)
Redemptions
(177,017)
(223,148)
(27,500)
(33,525)
Gain on fair value adjustment
11,925
15,784
(14,524)
(18,100)
Foreign exchange loss
–
12,672
–
15,081
Balance upon amendment (Note 20)
199,755
259,981
364,847
454,673
Unrecognized Day 1 Loss
Opening balance, beginning of the year
(72,214)
(86,974)
–
–
Unrecognized loss deferred at issuance
–
–
(79,684)
(96,203)
Recognized loss during the period
72,214
86,974
7,470
9,229
Ending balance, end of the period
–
–
(72,214)
(86,974)
Total balance, end of period, net
199,755
259,981
292,633
367,699
On May 27, 2021 (the “Issuance date”), the Company issued a Senior Secured Convertible Note (the "Note") directly to an
institutional purchaser, HT Investments MA LLC (“HTI”), 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 bore no periodic cash interest payments and was due for payment 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 acquisition of Redecan (Note 15). The Note was secured against the assets of HEXO Operations Inc. and its
subsidiaries, as well as the assets of HEXO USA Inc and its subsidiaries. The Note was convertible, 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
21
MD&A
conversion rate of 142.6533 common shares per US$1.00. The Note included different conversion and redemption options available
to the Holder and the Company, subject to certain terms and limitations.
Fair Value Measurement
The Note represented a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, was
designated as FVTPL, as at least one of the derivatives significantly modified the cash flows of the Note and it was clear with limited
analysis that separation was not prohibited. The changes in fair value of the instrument were recorded in the statement of net loss
with changes in credit spread being recognized through Other comprehensive income.
The fair value of the Note was classified as Level 2 in the fair value hierarchy and was determined using the partial differential
equation method with the following inputs;
As at
July 12, 2022
As at
July 31, 2021
Initial recognition
May 21, 2021
Share price
US$0.20
US$3.98
US$6.53
Dividend
$nil
$nil
$nil
Volatility
81%
85%
85%
Risk free rate
3.57%
0.327%
0.227%
Credit spread
38.57%
15.44%
16.06%
During the year ended July 31, 2022 the gain on fair value adjustments related to changes in credit spread amounted to $27,906
(July 31, 2021 – $1,169).
The fair value of the Note at initial recognition was determined using a valuation technique that included 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 believed that time is a factor that market participants would take into account when pricing the note. Therefore, the
unrecognized Day 1 loss was recognized on a straight-line basis in the statement of net loss over the contractual life of the Note.
Upon extinguishment on July 12, 2022, the remaining amount of the Day 1 loss was accelerated and recognized in the statement of
net loss.
Event of Default
On January 31, 2022, the Company failed to meet a financial covenant under the Note which required the Company to achieve
positive adjusted EBITDA for the three-month period ended January 31, 2022. This was an event of default under the terms of the
Note. On March 13, 2022, the Holder of the Note agreed to an irrevocable waiver of their rights in relation to the event of default.
This waiver was then overridden by a forbearance to act upon the default event issued by the Holder as part of the Transaction
Agreement. As the Holder did not irrevocably waive the default event but rather waived the right to act upon the default event, the
Note remained in default through the period from January 31, 2022 to the date of extinguishment on July 12, 2022.
As a result of the default, the Holder obtained the option to declare the Note (or any portion thereof) to become due and payable
immediately for cash in an amount equal to the Event of Default Acceleration Amount, as defined in the Note. The Event of Default
Acceleration Amount is a cash amount equal to the greater of:
●
(A) 115% of the outstanding principal amount of the Note, including any accrued and unpaid interest; and
●
(B) 115% of the product of (i) the original conversion rate of 142.6533, (ii) the outstanding principal amount, including any
accrued and unpaid interest, and (iii) the greater of:
○
the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days
ending on, and including, the VWAP Trading Day immediately before the date the acceleration notice is delivered;
and
○
the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days
ending on, and including, the VWAP Trading Day immediately before the date the applicable Event of Default
occurred.
Subsequent to the event of default on January 31, 2022, and up until extinguishment on July 12, 2022, the Note was carried at the
amount payable on demand as under IFRS, the fair value of the note with a demand feature cannot be less than the amount
payable on demand, discounted from the first date that the amount could be required to be repaid. The demand amount was
calculated by reference to the Event of Default Acceleration amount, as defined in the agreement. Fair value was determined
through the use of a model using a valuation technique that includes unobservable inputs and was less the amount payable on
demand.
As the demand amount represented the higher amount, at the time of extinguishment on July 12, 2022 the Note was carried at its
demand amount of $219,730 (US $199,755), representing 115% of the outstanding principal on the date of extinguishment.
Amendment of the Note
On July 12, 2022, pursuant to a transaction agreement dated April 11, 2022, as amended on June 14, 2022 (the “Transaction
Agreement”) among HEXO, Tilray Brands and HT Investments MA LLC (“HTI”), the terms of the Note were amended and restated
22
MD&A
and the Note was immediately thereafter assigned to Tilray Brands, pursuant to the terms of an amended and restated assignment
and assumption agreement dated June 14, 2022. The amended note is hereinafter referred to as the Amended Senior Secured
Convertible Note (Note 20). As consideration for the amendment, HEXO issued 56,100,000 Common Shares and 11,674,266 rights
exercisable for Common Shares to HTI, representing 12% of the outstanding principal of the Amended Note at the closing at the
exercise price of CAD$0.40. On July 25, 2022, the rights were exercised.
Management assessed the changes made to the Note and determined that the modification should be accounted for as an
extinguishment of the previous liability and then recorded the Amended Note at its fair value determined as of the date of the
modification.
As a result, the consolidated statements of net loss and comprehensive loss for the year ended July 31, 2022, includes a net gain on
extinguishment of liabilities, detailed as follows:
$
Carrying value of Senior secured convertible note pre-amendment
259,981
Fair value of common shares and share rights issued on amendment
(17,900)
Transaction costs
(12,987)
Fair value of Amended senior secured convertible note
(208,560)
Net gain on extinguishment of debt
20,534
On January 18, 2022, the Company utilized cash proceeds from the sale of its interest in Belleville Complex Inc. to settle $10,111 of
optional redemptions at a rate of 110% of principal (Note 1011). No shortfall cash payments were issued in the year ended July 31,
2022.
Amended senior secured convertible note (Tilray)
July 31,
2022
July 31,
2022
US$
$
Balance upon amendment (Note 19)
160,246
208,560
Gain on fair value during the year
3,805
4,880
Foreign exchange loss
–
(3,061)
Ending balance, end of the year
164,051
210,379
On July 12, 2022, the Company entered into the Transaction Agreement (Note 19), the terms of the Note were amended and
restated and the Note was immediately thereafter assigned to Tilray Brands, pursuant to the terms of an amended and restated
assignment and assumption agreement dated June 14, 2022 (the “Amended Note”, or the “Amended Senior Secured Convertible
Note”).
Pursuant to the terms of the Transaction Agreement, Tilray Brands acquired 100% of the remaining outstanding principal balance of
US$173.7 million of the Amended Note and, concurrently, Hexo assumed an obligation to pay a US$1.5 million monthly fee, that
represents a finance cost, until the earlier of the date all obligations of the Company pursuant to the terms of the Amended Note
have been satisfied, extinguished or terminated, the conversion in full of the Amended Note, cancellation by Tilray and January 15,
2027.
The Amended Note matures on May 1, 2026, includes coupon interest at the fixed rate of five percent (5%) per annum, calculated
daily, and is payable by the Company to the Holder semi-annually on the last business day of each June and December (commencing
June, 2022). For the first year of the Amended Note, the Company is required to pay interest in cash. Unpaid interest at July 31, 2022
was $464 (July 31, 2022 - $nil). Thereafter, until the maturity date, in the event that the Company is not in compliance with the
Minimum Liquidity covenant, the Company shall be entitled to elect to add the amount of the interest to the Principal Amount of the
Amended Note as capitalized interest. Subject to the terms of the Amended Note, unless the principal amount and the capitalized
interest have previously been converted, on the maturity date, the Company shall pay the capitalized interest by way of conversion
consideration.
Subject to certain limitations and adjustments, the Amended Note is convertible into HEXO Common Shares at the Holder’s option at
any time prior to the second scheduled trading day prior to the maturity date, at a conversion price of CAD$0.40 per HEXO Common
share as determined the day before exercise, including all capitalized interest. HEXO has the ability to force the conversion if the daily
VWAP per common share is equal to or exceeds $3.00 per share for twenty consecutive trading days, subject to HEXO meeting the
terms of the equity condition, as set out in the terms of the Amended Note.
The Company is not able to redeem or repay the Amended Note prior to May 1, 2026, without the prior written consent of the Holder.
The Company is subject to certain financial and non-financial covenants as set out in the terms of the Amended Note. Among other
covenants, the Company is subject to a minimum liquidity covenant and is required to maintain an unrestricted cash amount equal to
or greater than US$20.0 million. In addition, as of the last day of each three-month period starting with the three-month period ending
23
MD&A
April 30, 2023, the Company is required to have Adjusted EBITDA of not less than US$1.00 for the three-month period ending on
such day. Adjusted EBITDA means for any fiscal quarter, the Adjusted EBITDA of the Company, calculated as: (i) total net income
(loss); (ii) plus (minus) income taxes (recovery); (iii) plus (minus) finance expense (income); (iv) plus depreciation; (v) plus
amortization; (vi) plus (minus) investment (gains) losses, including revaluation of financial instruments, share of loss from investment
in joint ventures, adjustments on warrants and other financial derivatives, unrealized loss on investments, and foreign exchange gains
and losses; (vii) plus (minus) fair value adjustments on inventory and biological assets; (viii) plus inventory write-downs and
provisions; (ix) plus (minus) non-recurring transaction and restructuring costs; (x) plus impairments to any and all long-lived assets;
(xi) plus all stock-based compensation; and (xii) plus any management or advisory fee paid by the Company to the Holder or any
Affiliate thereof during the applicable quarter.
On the occurrence of an Event of Default, the Amended Note becomes due and payable immediately at the Event of Default
Acceleration Amount, as defined under the Amended Note agreement. The Amended Note constitutes the senior secured obligation
of the Company.
Fair Value Measurement
The Note represents a hybrid instrument containing a conversion feature. The Amended Note, as a whole, has been designated as
FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Amended 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 net loss with
changes in fair value attributable to changes in credit risk being recognized through other comprehensive income.
The fair value of the Note is classified as Level 2 in the fair value hierarchy and was determined using the partial differential equation
method with the following inputs;
As at
July 31, 2022
Initial recognition
July 12, 2022
Share price
US$0.19
US$0.20
Dividend
$nil
$nil
Volatility
87.8%
80.7%
Credit spread
34.2%
38.6%
Conversion price
US$0.31
US$0.30- US$0.31
Risk free rates were selected based upon a SOFR curve at the valuation date. The curve’s period range was 3 months to 4 years.
A decrease of credit spread by 1% would increase the fair value of the instrument by $2,487.
Going Concern
During the year ended July 31, 2022, the Company reported an operating loss of $1,067,725; cash outflows from operating activities
of $116,686 and an accumulated deficit of $1,841,591 and has yet to generate positive cashflows or earnings. The Company had a
working capital deficiency of $63,429 and held cash and cash equivalents of $83,238 as at July 31, 2022 ($67,462 at July 31, 2021)
which management expects to be sufficient to meet the Company’s expected working capital and operating cash flow needs over
the next 12 months. However, the Company also has 8% convertible debentures that mature in December 2022, which will require a
cash repayment of $40,140 if the Company cannot extend the terms. Furthermore, the Company remains subject to, amongst
others, a minimum liquidity covenant of US$20 million under the Amended senior secured convertible note as well as a requirement
to achieve Adjusted EBITDA of not less than US$1.00 for each quarter beginning in the Company’s third quarter of FY23.
These circumstances 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. In recognition of these
circumstances, the Company has taken the following actions:
•
On July 12, 2022, the Company, Tilray Brands Inc. (“Tilray”) and HT Investments MA LLC (“HTI”) amended and restated
the terms of the outstanding senior secured convertible note originally issued by the Company to HTI (the “Note”). The
amended and restated convertible note (the “Amended senior secured convertible note”) was immediately assigned to
Tilray pursuant to the terms of an amended and restated assignment and assumption agreement (Note 20).
•
Concurrent with the debt restructuring, the Company received a non-binding Letter of Intent for a $180 million equity
purchase agreement (the “equity line of credit” or “ELOC”), from an affiliate of KAOS Capital Ltd (“KAOS”), which could
provide the Company access to $5 million capital per month over a 36-month period in order to help meet debt and interest
repayments under the amended and reassigned secured note. Under the terms of the ELOC, the Company is to utilize
60% of the acquired proceeds towards the debt and interest payments associated with the Amended senior secured
convertible note. The Company received conditional TSX approval on May 13, 2022, replaced and superseded by
subsequent approval on June 29, 2022. As of October 31, 2022, the Company has yet to file the prospectus supplement
qualifying the distribution and resale by the subscriber of the Put Shares and meet the minimum share price requirement of
$0.10 per common share in the first three months and $0.30 thereafter, thus has not been able to draw upon the ELOC.
24
MD&A
•
On June 17, 2022, the Company’s wholly owned subsidiary Zenabis Global Inc. (“Zenabis”) as well as its direct and indirect
wholly-owned subsidiaries (collectively, the “Zenabis Group”), filed a petition (the “CCAA Petition”) with the Superior Court
of Québec for protection under the Companies’ Creditors Arrangement Act (“CCAA”) in order to restructure their business
and financial affairs. As a result of the CCAA Petition and the resulting loss of control over the Zenabis Group, the
Company deconsolidated the assets and liabilities of Zenabis and effectively de-leveraged itself from the $50,732 senior
note payable previously associated with Zenabis.
•
On July 15, 2022, the Company commenced the termination of the captive insurance program which resulted in the release
of $29,994 in cash on September 1, 2022, that had previously been restricted (Note 6). The captive insurance program was
replaced by a traditional insurance program that will require annual premiums.
During the second half of the fiscal year, the Company’s new management identified and commenced certain opportunities and cost
savings initiatives to fundamentally realign the operating expenses and cashflows to address liquidity issues. These initiatives
include:
•
Entering into commercial agreements with Tilray including (i) a co-manufacturing agreement providing for manufacturing
services between the parties, and (ii) a procurement and cost-savings agreement for efficiencies to be achieved in the
business with respect to administrative services, third-party commercial services, procurement, internal distribution services on
an ongoing basis through creation of an Efficiencies Committee with joint representation from HEXO and Tilray, and agreeing
with Tilray to negotiate an agreement concerning international sales and supply arrangements.
•
Reducing of the Company’s total headcount and restructuring the organization for expected future operating and administrative
needs;
•
Minimizing the Company’s spend on third party service providers and reducing professional fees; and
•
Put in a plan to liquidate the Company’s previously announced decommissioned and available for sale assets.
Management believes that the above noted initiatives, combined with existing cash on hand will be sufficient to support operations
over the next 12 months. Management is also currently assessing alternative refinancing and settlement options to mitigate the
immediate cash payment requirement on the maturity of the 8% convertible notes.
However, there can be no assurances that financing alternatives will be available or available on terms that are acceptable to the
Company or that the Company’s initiatives will yield sufficient liquidity or generate positive Adjusted EBITDA, in order for the
Company toto meet its financial covenant requirements, and as such, 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.
These consolidated 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.
Capital Resources
On July 31, 2022, adjusted working capital (see ‘Non-IFRS Measures’) totaled $146,950. The Company had no “in-the-money”
warrants or vested stock options issued and outstanding as of July 31, 2022, using the closing market price of the common shares
on the TSX of $0.24.
As evidenced throughout the fiscal year, 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 the 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
Initiated in May
2021, then
resumed in
November 2021,
ending February
2022
At-the-market
public offering
$50,260
The net proceeds generated from the
financing were approximately $46,564.
The Company expects to use the net
proceeds from the ATM Program for:
(i)
costs
associated
with
the
Company’s U.S. expansion plans
including
the
contemplated
acquisition of a facility in the State of
The Company acquired US facility in
Colorado in May 2021 utilizing
proceeds of approximately $8.06
million.
The remaining raised proceeds from
the first round of financing (May 2021)
were used towards the funding of
working capital and debt repayments.
On a first in, first out basis, the funds
were fully utilized at October 31, 2021.
25
MD&A
Colorado
and
its
subsequent
retrofitting and improvement;
(ii) capital
expenditures,
including
potential capital expenditures to
make additional improvements to
the
production
lines
at
the
Company’s
Belleville,
Ontario
facility;
(iii) potential future acquisitions;
(iv) working
capital,
including
replenishing existing cash resources
and working capital which will be
used to fund certain transaction and
integration costs and minimum debt
repayments
related
to
the
Company’s proposed acquisition of
Zenabis Global Inc. (“Zenabis”); and
(v) repayment of additional debts owed
by Zenabis following the completion
of the Zenabis acquisition.
During the year ended July 31, 2022,
the Company raised an additional
$27,773 proceeds.
Management has not altered the
intended use of these funds since
inception in May 2021.
On a first in, first out basis, the funds
have been fully utilized for general
business purposes and $nil remained
outstanding at July 31, 2022.
The Company remained compliant with
its stated intended use as at July 31,
2022
May 27, 2021
Senior Secured
Convertible Note
US$327,600
The approximate net proceeds before
closing fees from the financing were
US$327,600.
The Company expected to use virtually all
the funds to finalize the acquisition of
Redecan.
Upon receipt, as agreed upon,
US$229,320 of the funds were placed
into escrow intended for the acquisition
of Redecan. The Company was subject
to a covenant to restrict US$80 million
of the funds for the future potential
settlement of the senior note assumed
on the acquisition of Zenabis May 24,
2021.
On August 30, 2021, the Company
utilized the unrestricted funds raised to
acquire Redecan.
Upon the close of Transaction
Agreement with Tilray on July 12, 2022,
the US$80,000 became unrestricted
and available for use.
On a first in, first out basis, the funds
have been fully utilized for general
business purposes and $nil remained
outstanding at July 31, 2022.
The Company was in compliance with
the stated use of funds throughout the
period.
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 date of this MD&A July 31, 2022 and July 31, 2021.
October 31, 2022
July 31, 2022
July 31, 2021
Common shares
600,988,447
600,988,447
152,645,946
Warrants
59,541,886
59,582,216
36,986,570
Options
24,510,835
24,687,068 12,018,143
Restricted share units
2,033,267
2,033,267
550,832
Deferred share units
4,088,386
4,088,386
–
Convertible debentures
3,175,633
3,175,633
3,175,633
Senior secured convertible note
–
–
92,668,816
Amended senior secured convertible note
598,621,767
556,882,200
–
Total
1,292,960,221
1,251,437,217
298,045,940
26
MD&A
The following table summarizes the Company’s stock options outstanding as at July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
Number of
Weighted
Number of
Weighted
options
exercise price
options
exercise price
Opening balance
12,018,143
$ 10.63
7,503,691
$ 16.30
Granted
17,851,906
0.73
5,273,906
5.21
Replacement options issued on acquisition
162,009
7.19
905,902
3.81
Forfeited
(4,714,233)
4.47
(630,473)
12.80
Expired
(613,733)
22.20
(624,832)
25.95
Exercised
(17,024)
2.54
(410,051)
3.00
Closing balance
24,687,068
$ 0.73
12,018,143
$ 10.63
The following table summarizes the stock option grants during the year ended July 31, 2022 and July 31, 2021:
Options granted
Grant date
Exercise price
($)
Executives and
directors
Non-executive
employees
Total
Vesting terms
Expiry period
October 30, 2020
3.88
349,652
315,358
665,010
Terms A
10 years
December 22, 2020
5.44
380,673
960,100
1,340,773
Terms A
10 years
April 28, 2021
7.54
–
85,389
85,389
Terms A
10 years
June 17, 2021
7.43
75,000
45,613
120,613
Terms A
10 years
July 29, 2021
5.24
580,164
2,481,957
3,062,121
Terms A
10 years
Total
1,385,489
3,888,417
5,273,906
November 1, 2021
1.86
2,327,613
947,580
3,275,193
Terms A
10 years
March 21, 2022
0.75
2,491,034
2,254,069
4,745,103
Terms A
10 years
April 28, 2022
0.51
2,839,660
178,157
3,017,817
Terms A
10 years
June 16, 2022
0.28
6,192,033
621,760
6,813,793
Terms A
10 years
Total
13,850,340
4,001,566
17,851,906
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, 2022.
Exercise price
Number outstanding
Weighted average
remaining life (years)
Number exercisable
Weighted average
remaining life (years)
$0.28–$0.75
13,984,612
9.78
1,925,669
9.65
$1.86–$9.92
7,422,273
7.90
5,497,265
7.55
$10.76–$34.00
3,280,183
6.46
3,237,557
6.46
24,687,068
10,660,491
The following table summarizes RSU activity during the year ended July 31, 2022 and the year ended July 31, 2020.
July 31, 2022
July 31, 2021
Value of units on
Value of units on
Units
grant date
Units
grant date
Opening balance
550,832
$ 7.91
587,108
$
8.41
Granted
1,517,236
1.74
24,008
3.17-7.17
Replacement units issued on acquisition
–
–
223,506
8.61
Exercised – equity settled
–
–
(223,506)
8.61
Exercised – cash settled
–
–
(25,483)
5.62-8.60
Forfeited
(34,801)
3.30
(34,801)
11.76
Closing balance
2,033,267
$ 3.34
550,832
$
7.91
27
MD&A
The following table summarizes the RSUs granted during the year ended July 31, 2022 and the year ended July 31, 2021.
RSUs granted
Grant date
Unit value
Executive and
directors
Non-executive
employees
Vesting terms
Expiry period
October 30, 2020
$3.16
7,161
–
Terms A
10 years
June 17, 2021
$7.17
9,413
–
Terms A
10 years
July 29, 2021
$5.38
7,434
–
Terms A
10 years
Total
24,008
November 1, 2021
$1.74
1,517,236
–
Terms A
10 years
Total
1,517,236
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.
The following table summarizes DSU activity during the years ended July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
Value of units on
Value of units on
Units
grant date
Units
grant date
Opening balance
–
$ –
–
$ –
Granted
4,088,386
0.72
–
–
Closing balance
4,088,386
$ 0.52
–
$ –
All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors. On July 31,
2022, there were no vested DSUs.
The following table summarizes warrant activity during the year ended July 31, 2022 and year ended July 31, 2021.
July 31, 2022
July 31, 2021
Number of
Weighted average
Number of
Weighted average
warrants
exercise price1
warrants
exercise price1
Outstanding, beginning of year
36,666,958
$
8.85
33,379,408
$
7.60
Expired and cancelled2
(3,179,074)
33.86
(535,889)
4.09
Issued on acquisition
1,554,320
22.43
5,970,370
14.59
Issued
24,540,012
4.35
–
–
Exercised
–
–
(2,146,931)
4.10
Outstanding, end of year
59,582,216
$
6.07
36,666,958
$
8.85
1 USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes.
2 Of the Company’s expired and canceled 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 canceled.
3 Replacement warrants issued upon business acquisition.
The following table summarizes the warrants issues during the years ended July 31, 2022 and July 31, 2021.
Issuance date
Exercise price
Warrants issued
Expiry period
June 01, 2021 (issued on acquisition)
$3.96-$155.19
5,970,370
0.17-4 years
August 24, 2021
US$3.45
24,540,012
5 years
September 1, 2021 (issued on acquisition)
$6.42-$72.70
1,554,320
1.63-2.59 years
28
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:
2023 2024 – 2025 2026 – 2027 Thereafter
Total
$
$
$ $
$
Accounts payable and accrued liabilities
72,581
–
–
–
72,581
Excise taxes payable
6,421
–
–
– 6,421
Onerous contract
5,763
–
–
– 5,763
Convertible debenture and interest
40,140
–
–
– 40,140
Amended senior secured convertible note (3)
34,176 68,352
250,270
– 352,798
Undiscounted lease obligations
1,026 1,174
300
1,200 3,700
Capital projects (1)
3,000
–
–
– 3,000
Service contracts
7,100 758 226
79 8,163
Tilray advisory and cost savings agreement(4)
9,982 2,972
15,425 – 28,379
180,189 73,256 266,221 1,279 520,945
(1) The Company’s stated capital projects commitments are disclosed on the basis of management's current capital budget and is
subject to change.
(2) Lease based operating expenses 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.
(3) Based on the cash payment at maturity of the total outstanding principal as at July 31, 2022 and assuming all interest are paid
when due.
(4) Commercial agreements executed with Tilray Brands on July 12, 2022, as apart of the Strategic Alliance initiative and
reassignment of the Company’s Senior secured convertible note.
LITIGATION
Zenabis was previously a claimant and a respondent in a petition filed by Zenabis on February 19, 2021 for a determination of the
amount required to repay and terminate a senior secured convertible debenture initially issued by Zenabis Investment Ltd. to 265
and held by Sundial Growers Inc. ("Sundial"). Following a strategic investment announced on December 30, 2020 by Sundial
whereby Sundial acquired 265, the agent and nominee for lenders from time to time under the Amended and Restated Debenture
(Fifth Amendment) (the “Zenabis Debenture”) dated June 18, 2020 issued by ZenInv, 265 Ontario claimed that Zenabis was in
default under the Zenabis Debenture. None of the alleged defaults are for failure to make payments of principal or interest under the
Debenture. On February 19, 2021, Zenabis filed a petition for a determination of the amount required to repay and terminate the
Zenabis Debenture and to obtain discharges of the Zenabis Debenture and related security. 265 Ontario has taken the position that
the amount to discharge the Zenabis Debenture and related security interests was approximately $69,000,000. Zenabis believes the
amount is approximately $53,000,000. The difference largely relates to whether a prepayment fee and default fees are payable
under the Zenabis Debenture and to the amount to buy out and discharge the amended royalty contemplated by the Debenture. 265
Ontario believes the amount to buy out and discharge the amended royalty is approximately $13,700,000. Zenabis believes the
amount is $0. The petition was heard on March 29, March 30, March 31, April 1, April 15 and May 14, 2021 On December 17, 2021,
the Supreme Court of British Columbia rendered judgment in the petition proceedings. The Court concluded that the proceedings
have not been determinative of the issues raised by the parties since those issues are not suitable for disposition by petition, and
that while the petition hearing may have clarified some of those issues, those issued have yet to be tried and the merits of these
issues have yet to be determined. The Court further disposed that, should Zenabis still want to have those issues determined on
their merits, it may prosecute them by way of action as commenced by filing notice of civil claim
Class Actions
As of July 31, 2022, the Company and its former 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
March 27, 2020. 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) HEXO’s management of its inventories. 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, 2022 (July 31, 2021 - $nil).
29
MD&A
As of July 31, 2022, 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 Onerous contract
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
Newstrike and was amalgamated with HEXO Operations, together with Newstrike and certain other affiliates, in August 2019. On
July 25, 2022, the Company received a judgment from the court awarding the claim to the counterparty. In response, management
has initiated an appeal from the decision and, as a result, the onerous contract liability remains as at July 31, 2022.
Financial Risk Management
HEXO is exposed to risks of varying degrees of significance which could affect the Company’s ability to achieve its strategic
objectives for growth. The main objectives of the Company’s 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 HEXO is exposed are
described below.
Market Risk
Interest Risk
The Company has minimal exposure to interest rate risk related to the investment of cash, cash equivalents and restricted cash. The
Company may, from time to time, 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, 2022, the Company has $210,379 of outstanding principal on the amended
and reassigned senior secured convertible note (Note 20) bearing interest of 5% per annum, paid semi-annually. The amended and
reassigned senior secured convertible note bears a fixed interest rate and therefore is not subject to interest risk.
Price Risk
Price risk is the risk of variability in fair value due to movements in equity or market prices.
Financial liabilities
During the year ended July 31, 2022 the Company terminated the Senior secured convertible note with HTI (Note 19) and
reassigned the note to Tilray brands (Note 20). One aspect of this debt restructuring is the elimination of the optional redemption
feature providing the Company with relief from the risk of forced cash-settlements under the previous Senior secured convertible
note. The sensitivity of the Amended senior secured convertible note due to price risk is disclosed in Note 20.
If the fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur a related net
increase or decrease to Comprehensive loss of an estimated $22,335 (July 31, 2021 – $37,100). The following table presents the
Company’s price risk exposure as at July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
$
$
Financial assets
504
2,492
Financial liabilities
(211,096)
(373,432)
Total exposure
(210,592)
(370,940)
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, 2022, 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.
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MD&A
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, 2021 – AA) and an American commercial bank with a credit rating of A-. Certain restricted
funds in the amount of $29,994 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+.
Subsequent to July 31, 2022, management entered into a new directors and officers insurance program which released the $29,994
from restricted funds.
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 at July 31, 2022 is $1,927(July 31, 2021 – $66).
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, restricted cash and trade receivables represents the maximum exposure to
credit risk and as at July 31, 2022 and amounted to $158,461 (July 31, 2021 – $522,908). During the year ended July 31, 2022 the
Company fully utilized the July 31, 2021 cash held in escrow balance to partially fund the acquisition of Redecan (Note 15).
The following table summarizes the Company’s aging of trade receivables as at July 31, 2022 and July 31, 2021:
July 31,
July 31,
2022
2021
$
$
0–30 days
24,661
22,971
31–60 days
11,808
12,390
61–90 days
2,177
1,435
Over 90 days
4,353
625
Total
42,999
37,421
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, 2022, 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
(“AGLC”) representing 17%, 30% and 15%, respectively (July 31, 2021 – SQDC, OCS and AGLC representing 42%, 20% and 14%,
respectively) of total applicable periods gross cannabis sales.
The Company holds trade receivables from the crown corporations OCS and the AGLC representing 42% and 23%, respectively, of
total trade receivables as at July 31, 2022 (July 31, 2021 – the three crown corporations SQDC, OCS and AGLC representing 13%,
29% and 13% 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 working capital requirements. As at July 31,
2022, the Company has $83,238 (July 31, 2021 – $67,462) of cash and cash equivalents and $42,799 (July 31, 2021 – $37,421) in
trade receivables. The Company has current liabilities of $335,076 (July 31, 2021 – $503,638) on the statement of financial position.
As well, the Company has remaining contractual commitments of $44,147 due before July 31, 2023.
Current financial liabilities include the Company’s obligation on the Amended senior secured convertible note . As stated in Note 2,
the Company has amended and reassigned the senior note to Tilray resulting in the extension of the notes maturity by 36-months as
well as removing the optional redemptions clauses of the previous note. The notes are classified as current due to the noteholders
ability to convert the note into equity at any time during the life of the note, and therefore does not reflect a cash based current
liability as at July 31, 2022.
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MD&A
The following table provides an analysis of undiscounted contractual maturities for financial liabilities.
Fiscal year
2023
2024
2025
2026
2027
Thereafter
Total
$
$
$
$
$
$
$
Accounts payable and accrued liabilities
72,581
–
–
–
–
–
72,581
Excise taxes payable
6,421
–
–
–
–
–
6,421
Convertible debentures (Note 18)
40,431
–
–
–
–
–
40,431
Undiscounted lease payments (Note 21)
1,026
587
587
150
150
1,200
3,700
120,459
587
587
150
150
1,200
123,133
Amended senior secured convertible note
(Note 20)
34,176
34,176
34,176
250,270
0
0
352,798
Total
154,635
34,763
34,763
250,420
150
1,200
475,931
Foreign Currency Risk
On July 31, 2022, the Company holds certain financial assets and liabilities denominated in United States Dollars which consist of
cash and cash equivalents, 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,
2022, approximately $104,215 (US$81,266) (July 31, 2021 – $434,838 (US$348,931)) of the Company’s cash and cash equivalents
was in US$. A 1% change in the foreign exchange rate would result in a change of $1,042 to the unrealized gain or loss on foreign
exchange or on the gain or loss on financial instrument revaluation of US$ denominated warrants.
The Company’s Amended senior secured convertible note is denominated in US$. The note bears an interest rate of 5%, payable in
cash on a semi-annual basis. The sensitivity of the Amended senior secured convertible note due to foreign currency risk is
disclosed in Note 20. As of the date of this report, the Company remains in the process of executing the Equity line of credit
agreement with KOAS, which will provide the Company access to $5 million monthly, up to $180 million over a 36-month period, of
which 60% is to be utilized towards the settlement of the Amended senior secured convertible note.
Critical Accounting Estimates and Assumptions
HEXO’s critical accounting assumptions are presented in Note 4 of the Company’s annual audited consolidated financial statements
for the year ended July 31, 2022, 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.
Related Party Transactions
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
July 31, 2022
July 31, 2021
$ $
Salary and/or consulting fees
2,520
2,321
Termination benefits1
10,914
1,008
Bonus compensation
1,400
800
Stock-based compensation
7,051
6,800
Total
21,285
10,929
1 Inclusive of non-cash, share-based compensation in the amount of $3,975 (July 31, 2021 - $nil)
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 held a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc. (“Olegna”), a
company owned and controlled by a director of the Company, holding the remaining 75% in BCI. On January 18, 2022, the
Company sold its 25% interest in BCI to the related party partner Olegna for net proceeds of $10,111 which were immediately used
to partially repay the February 2022 optional redemption. On July 31, 2022, the Company terminated the lease with Olegna. The
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MD&A
Company previously leased the facility as a 15-year anchor tenant from a related party. Under the lease surrender terms the
Company incurred a penalty fee of $2,380 payable on July 31, 2022.
Initial consideration for the 25% interest on the joint venture was deemed $nil, the carrying value of BCI at disposal was $984 and
therefore as a result of the above transaction the Company recognized a gain on sale of $9,127, recognized in other income and
losses during the year ended July 31, 2022. Under this lease arrangement, the Company incurred $5,436 in lease and operating
expenses during the year ended July 31, 2022 (July 31, 2021 - $5,369). This lease liability is recognized on the Company’s balance
sheet under IFRS 16.
Truss LP
The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate.
The Company subleases a section of its Belleville lease to Truss LP. This sublease is recognized as a finance lease receivable
on the Company’s balance sheet.
Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produced, and packaged cannabis
infused beverages in the Cannabis Infused Beverage (“CIB”) Facility (located at the Belleville facility) and in the Gatineau Facility.
The Company continues to market and sell beverages for the adult-use markets in Canada, in each case subject to the terms of its
regulatory approvals and applicable laws. On October 1, 2021, Truss LP received a cannabis manufacturing and processing license
under the Cannabis Act (Canada) and commenced manufacturing by producing CIBs within the Belleville facility. Under a new
arrangement and until Truss LP receives its cannabis selling license, the Company purchases the manufactured goods from Truss
LP and sells the beverages through to third parties, as a principal in the arrangement. Truss LP received its license for the selling of
cannabis on May 2, 2022.
During the year ended July 31, 2022, the Company purchased $912 (July 31, 2021 – $7,624) of raw materials from Truss LP under
the previous TSSA arrangement and $14,308 (July 31, 2021 – $nil) of manufactured products under the new arrangement.
HEXO Group of Facilities
The following provides information about HEXO’s consolidated group of facilities as of the date of this MD&A:
Location
Purpose
Description
Masson, Quebec
(Corporate
Headquarters)
Cultivation &
Manufacturing
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 for Standard Cultivation, Standard Processing, Sale for Medical
Purposes and the current license expires April 7, 2023. The facility is also licensed for
cannabis research and the current research license expires October 25, 2024.
Fenwick,
Ontario
Cultivation &
Manufacturing
The approximately 400,000 sq. ft. owned Fenwick Facility is where all central administrative
functions of Redecan are located including accounting, purchasing and quality assurance.
The facility is licensed for Standard Cultivation, Standard Processing and Sale for Medical
and Adult-use Purposes (effective September 25, 2020 to September 25, 2023). The facility
is also licensed for cannabis research and the current research license expires October 25,
2024.
This facility accounts for the majority of Redecan’s processing (extraction, bud drying,
trimming and bulk bagging), manufacturing (capsule, pre-roll), and packaging (vape filling
and packaging, oil bottling and packaging, capsule bottling and packaging, bud bottling and
packaging, pre-roll packaging) activities.
Cayuga,
Ontario
Cultivation &
Manufacturing
The owned Cayuga Facility operates a seasonal annual crop cycle, operating outside and
under hoophouses. The crops are planted in the spring and harvested in the fall. The Cayuga
Facility is licensed by Health Canada for Standard Cultivation effective until May 1, 2023.
The primary functions of the site are cultivation of annual seasonal crops for pre-roll bud and
shake for extraction, drying, trimming, bulk bagging, and storage of bulk harvested cannabis
materials.
Ottawa,
Ontario
Other
HEXO leases approximately 40,036 sq. ft. of office space in Ottawa, Ontario for its
administrative and finance functions.
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MD&A
Effingham,
Ontario
Propagation,
Mother
plant
maintenance,
Medical sales
distribution
The Effingham Facility’s cultivation activities are utilized for vegetative plant propagation and
mother plant maintenance. The facility produces plants to transfer to the Cayuga Facility and
Fenwick Facility for cultivation and harvesting. The Effingham Facility also acts as the center
for direct to patient medical sales order fulfillment and patient enrollment, management, and
record keeping. The facility is licensed for Standard Cultivation, Processing and Selling
purposes, with the current license expiring June 26, 2023. The facility is also licensed for
cannabis research and the current research license expires October 25, 2024.
FACILITIES DECOMMISSIONED AND/OR DISPOSED OF (OR IN THE PROCESS THEREOF)
Location
Status
Description
Belleville,
Ontario
Exited
The Belleville, Ontario facility, was a 932,190 sq. ft. leased commercial space and served as
its centralized processing, manufacturing and distribution centre.
On April 21, 2022, management announced the closing of the Belleville facility and the
intention to shift the manufacturing and processing operations to the Masson and Fenwick
facilities in order to streamline operations and reduce overhead. The site was
decommissioned over the course of Q4’22 and the Company ceased operations in July 2022.
On July 31, 2022 the Company formally surrendered the lease through an agreement with
the related party and lessor, Olegna (a director-controlled entity).
Truss Beverage Co, (licensed for cannabis manufacturing effective October 1, 2021)
continues to operate their 183,600 sq. ft. of subleased space under their own license at the
facility.
Brantford,
Ontario
Non-operational
(formerly R&D)
HEXO’s Brantford Facility previously served 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 previously fully licensed by Health Canada (Standard Cultivation,
Standard Processing and Selling) but the license was terminated by the Company on
November 17, 2021 as the operations were moved to Masson to reduce costs.
The building remains held for sale as at July 31, 2022 on the Company’s consolidated
financial statements.
Kirkland
Lake, Ontario
Currently
non-operational
(formerly
cultivation &
manufacturing)
The Kirkland Lake Facility is located on 800 acres of land owned by DelShen Therapeutics
Corp. (a subsidiary of 48North) and comprises approximately 40,000 sq. feet of indoor
cannabis cultivation and processing facility. The facility’s license issued by Health Canada
for Standard Cultivation and expired on February 11, 2022.
On November 9, 2021, management announced the decommissioning and closure of the
facility, and this was completed January 31, 2022. The closure took place to centralize
cannabis cultivation, manufacturing, and distribution to core facilities and for synergistic value
purposes. During Q4’22 management classified the facility as held for sale as at July 31,
2022, and as of the date of this MD&A the facility is not apart of the Company’s go-forward
operations.
Brant County,
Ontario
(Good
House)
Non-operational
(formerly
cultivation &
manufacturing)
The Good House Facility is a 100-acre farm located in Brant County, Ontario, which was
acquired as part of the 48North acquisition. The facility’s license was issued by Health
Canada for Standard Cultivation, expired on February 4, 2022.
On November 9, 2021, management announced the decommissioning and closure effective
January 31, 2022. The closure took place to centralize product cultivation, manufacturing,
and distribution to core facilities and for synergistic value purposes.
The continues to be classified as held for sale as at July 31, 2022 on the Company’s
consolidated financial statements.
Vaughan,
Ontario
Exited
HEXO’s Vaughan, Ontario facility a leased facility that housed a cannabis research laboratory
for the development of edible products and related intellectual property, and featured 14,200
sq. ft. of leased commercial space. The facility included a sensory testing area and a
complete commercial kitchen.
Atholville,
New
Brunswick
Cultivation
(ownership
lost
through Zenabis
CCAA filing)
The Company owned a facility in Atholville NB, (obtained through the acquisition of Zenabis
on June 1, 2021) which is a 380,000 sq. ft. indoor growing facility in Atholville, New
Brunswick.
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MD&A
The Company lost its right of use of the asset upon the closing of the CCAA filing process on
September 30, 2022.
Stellarton,
Nova Scotia
Non-operational
(ownership
lost
through Zenabis
CCAA filing)
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, was used as a
packaging, processing and value-added cannabis product manufacturing facility. In Q1’22
management announced the closure of Stellarton, to centralize product cultivation,
manufacturing, and distribution to core facilities and for cost saving purposes.
The Company lost its right of use of the asset upon the closing of the CCAA filing process on
September 30, 2022.
Langley,
British
Columbia
Non-operational
(ownership
lost
through Zenabis
CCAA filing)
The Langley Facility was acquired by the Company through the acquisition of Zenabis on
June 1, 2021. The facility was a leased 450,000 sq. ft. greenhouse located in Langley, British
Columbia which was previously retrofitted for cannabis cultivation and processing.
The Company has terminated operations at the Langley Facility in order to realize synergistic
cost savings, as intended upon acquisition.
The Company lost its right of use of the asset upon the closing of the CCAA filing process on
September 30, 2022.
Management’s Report on Internal Controls over Financial Reporting
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”) as issued by the International Accounting Standards Board.
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”).
On August 30, 2021, the Company acquired Redecan, and therefore the scope of management’s assessment of internal control
over financial reporting at July 31, 2022 excludes 28% of consolidated total assets and 31% of consolidated net revenues,
attributable to Redecan.
Management concluded that internal control over financial reporting was not effective as of July 31, 2022 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,
management identified material weaknesses that existed as of July 31, 2022. For the year ended July 31, 2022, the Company
identified material weaknesses in the Company's control environment, risk assessment procedures, monitoring activities, anti-fraud
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MD&A
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. While improvements have
been made, these material weaknesses remain unremediated at July 31, 2022 and we continue to provide disclosure of these
material weaknesses 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:
•
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 the 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. Significant changes to the
composition of the board and senior management have also impacted information and communication, as well as the overall
control environment.
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. Throughout the
period, the Company was not able to maintain an effective control environment commensurate with its financial reporting
requirements. Specifically, the Company was impacted by a material level of employee turnover, both voluntary and involuntary. The
Company was also impacted by lean available talent pool which is driven by certain macro-economic factors, this proved it difficult to
find suitable talent to replace these vacancies. 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 adequately maintain controls over a
number of significant processes, including purchases-to-pay, revenue and receivables, treasury, inventory, biological assets,
property, plant and equipment, borrowings, business acquisitions, intangible assets, leases, equity accounted investments,
equity and financial reporting close processes.
•
The Company did not maintain processes and controls to analyze, account for and disclose non-routine, unusual or complex
transactions. Specifically, the Company failed 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
material acquisitions.
These material weaknesses resulted in audit adjustments to inventory, loans and borrowings, senior secured convertible note,
leases, and related right of use assets, accruals, revenue, various expense line items and related financial statement disclosures,
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MD&A
which were recorded prior to the issuance of the consolidated financial statements as of and for the year ended July 31, 2022.
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 some information technology (“IT”) general controls for information
systems that are relevant to the preparation of its financial statements, specifically, with respect to:
● User access controls, as although user access termination controls were designed during the current year, these controls were
not operating effectively at year end. In addition, user access provisioning and review controls have not been designed
properly and as a result have not operated effectively; and
● Testing and data validation controls for program development to ensure that new software and application development is
aligned with business and IT requirements.
We have determined that program change management controls for financial systems and the related controls over computer
operations that were previously ineffective have now been remediated.
The IT deficiencies did not result in a misstatement to the financial statements; however, the deficiencies, when aggregated, could
impact 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 specialists, 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 progress:
•
We are continuing to implement 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.
•
As of the date of this MD&A, we have bolstered the collective finance and accounting departments internal controls and
accounting knowledge with new full-time employees. Management has also restructured the organizational chart to more
clearly defined roles and responsibilities as needed to meet the needs of the internal control environment.
•
We have engaged external specialists to assist management with the testing of internal controls and provide advisory services
for the remediation efforts. As a result, we continue to assess risks related to financial reporting, understand and document
significant financial reporting processes, and reassess the design and operation of key controls. We have also strengthened
monitoring controls, by implementing internal control oversight meetings with our Audit Committee as we work through our
remediation plan.
•
Beginning in November 2021, we designed a more robust anti-fraud program, including the transitioning to a third-party service
providers for the monitoring of the Whistleblower hotline. Management has implemented an annual review and
acknowledgment of the Code of Ethics for all personnel.
•
We continue to be in the design and development stage of an ERP and IT ecosystem project, which will be implemented in the
next fiscal year and replace our existing ERP systems. The new ERP is expected to provide the basis for a more standardized
approach to ICFR across the Company, improve functionality and reduce reliance on manual spreadsheets. We are in the
process of redesigning system development life cycle controls, and in particular those controls over testing and data validation
for program development to ensure that the new ERP is aligned with business and IT requirements.
While we believe these actions will contribute to the remediation of 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, 2022 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
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Changes in Internal Control Over Financial Reporting
Other than disclosed above, there have been no changes in the Company's internal control over financial reporting during the
Company's quarter ended July 31, 2022 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. The Company’s fulsome discussion over its risk factors are
disclosed in the annual Managements Discussion & Analysis and Annual Information Form dated October 31, 2022 available under
our profile on www.sedar.com and www.edgar.com.
• The Company's ability to continue as a going concern is dependent upon its ability to fund the repayment of existing borrowings,
,to generate positive cash flows from operations and to comply with the financial and non-financial covenants associated with
Convertible notes payable. The 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.
• The Company’s ability to make scheduled payments of interest under the Amended senior secured convertible note or repay upon
maturity of the note in May 2026. The Company’s business may not generate cash flow from operations in the future sufficient to
satisfy our obligations under the note. The Company is in the process of securing an equity line of credit to be utilized towards the
payment of interest on the Amended senior secured convertible note. However, as of the date of this MD&A the line of credit has
not been secured and there can be no guarantee that regulatory clearance will be provided.
• The Company is subject to certain financial and non-financial covenants set forth in the Amended senior secured convertible note.
The note contains 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. The Company
remains subject to, amongst others, a minimum liquidity covenant of US$20 million under the Amended senior secured
convertible note as well as a requirement to achieve Adjusted EBITDA of not less than US$1.00 for each quarter beginning in the
Company’s third quarter of FY23. Upon an event of default under the Senior Notes, the outstanding principal amount of the Senior
Notes plus any other amounts owed under the Senior Notes will become immediately due and payable. In such a circumstance, the
Company may not be able to make accelerated payments required under the Amended senior secured convertible note, and the
Secured Noteholder could foreclose on the Company’s assets. An event of default would also likely significantly diminish the
market price of our Common Shares.
• If the principal amount of the Amended senior secured convertible note is not converted into Common Shares or the Company
does not pay for accrued interest under the Amended senior secured convertible note in equity, there will be a requirement for 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.
• Starting on December 1, 2021, the Company began experiencing trading days when its Common Shares have traded below
US$1.00. On January 25, 2022, the Company was notified by the Nasdaq that the closing bid price of the Common Shares had
fallen below US$1.00 per share over a period of 30 consecutive business days, with the result that the Company was not in
compliance with the Minimum Share Price Listing Standard. The Nasdaq notice provided that the Company had 180 calendar
days following receipt of such notice to regain compliance with the Minimum Share Price Listing Standard (the “Initial Cure
Period”). The Company’s deadline for regaining compliance with the Minimum Share Price Listing Standard was July 25, 2022
(the “Initial Cure Deadline”). On July 26, 2022, with the Company not having regained compliance by the Initial Cure Deadline, the
Company received an extension of 180 calendar days to regain compliance with the Minimum Share Price Listing Standard (the
“Supplemental Cure Period”). The Nasdaq determination was based on the Company meeting the continued listing requirement
for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq with the exception of
the Minimum Share Price Listing Standard, and the Company’s written notice of its intention to cure the deficiency during the
Supplemental Cure Period by effecting a share consolidation, if necessary. As a result of the extension, the Company now has
until January 23, 2023, to regain compliance with the Minimum Share Price Listing Standard. If at any time before January 23,
2023, the bid price of the Common Shares closes at or above US$1.00 per share for a minimum of ten consecutive business
days, Nasdaq will provide written notification to the Company that it has achieved compliance with the Minimum Share Price
Listing Standard.
• 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
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MD&A
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.
• The volatile Canadian cannabis industry has resulted in HEXO and it licensed producer 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.
• The Company has experienced a high volume of voluntary and involuntary turnover of its employees across all levels of
management and departments. The Company may not be successful in the retention or replacement of key personnel which
may result in a variety of risks, including but not limited too and failure to meet the Company’s financial reporting obligations,
failure to adhere to the Company’s internal control framework (see section ‘Management’s Report on Internal Controls over
Financial Reporting’).
• 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 31,2022 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. While preparing and
auditing our consolidated financial statements for the year ended July 31, 2022, we and our independent registered public
accounting firm identified multiple material weaknesses in our internal control over financial reporting as of July 31, 2022. 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 Company may not be able to develop and/or maintain strong internal controls and be SOX compliant by the mandated
deadline.
• 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, or a variety of other factors. These broad market fluctuations may adversely
affect the trading price of the Common Shares.
• 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
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MD&A
any issuance of Common Shares, investors will suffer dilution to their voting power and we may experience dilution in our
earnings per share.
• HEXO has in the past made and may in the future make acquisitions and investments that could divert management’s attention,
result in operating difficulties and dilution to our shareholders and otherwise disrupt our operations and HEXO may have difficulty
integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects. Although HEXO has
conducted and will conduct due diligence in connection with potential strategic acquisitions or investment opportunities and
potential vendors have, may or will provide a number of representations and warranties in favour of the Company in connection
with these acquisitions, an unavoidable level of risk remains regarding any undisclosed or unknown liabilities of or issues
concerning the acquired entities.
• 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.
• The Company is subject to restrictions from the TSX and Nasdaq which may constrain the Company’s ability to expand its
business internationally.
• 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.
• We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our
ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and
to expand, train and manage our employee base.
• We 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.
• 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.
• 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 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.
• 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.
• 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
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MD&A
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.
• 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.
• 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 operates in a highly regulated industry which could discourage any takeover offers.
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.” The adjustment begins with
the IFRS additional measure Gross profit before fair value adjustments. The cost of goods sold is then modified to remove the
impact of write-offs of inventory and biological assets, write downs to net realizable value, destruction costs and the crystalized fair
value adjustments from purchase price accounting. 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
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.
ORGANIC GROWTH/VARIANCES
Organic growth is representative of the Company’s results and earnings adjusted to eliminate the financial impact from mergers and
acquisitions when comparing results to a past period.
CRYSTALIZED FAIR VALUE OR CRYSTALLIZATION
The crystallized fair value is the result of the purchase price accounting of Redecan and Zenabis. This represents the fair value
adjustments which otherwise would have been realized upon the sale of inventory on the statement of comprehensive income in
‘Realized fair value amounts on inventory sold’ but per IFRS 3 requirements, the fair value adjustments are capitalized to the
inventory’s day one cost on the acquisition date.
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MD&A
WORKING CAPITAL
Defined as the Company’s current assets less current liabilities net of the fair value of the Amended senior secured convertible note
but inclusive of the US$18m FY23 advisory fees. The note is classified as a current liability as the lender possess the ability to
unilaterally convert the note to equity and therefore does not represent a cash-based liability to the Company within one-year of July
31, 2022. Working capital is utilized as a key metric for management in assessing the Company’s ability to meet its future
obligations.
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 six months ended January 31, 2022.
ADJUSTED COST OF GOODS SOLD
Management utilizes this measure to analyze the cost of goods sold in the period excluding the impact of destructions, write offs,
and impairments and to support the below gross profit before fair value adjustments measure. Management believes the measure is
beneficial to provide insight to the costs of goods sold applicable to the periods revenue, and free of the impact of aged out stock
and unsellable inventory written off during the period.
GROSS PROFIT BEFORE FAIR VALUE ADJUSTMENTS
Management utilizes 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 operationalizes its cannabis selling license.
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MD&A
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 Company’s ability to implement its revised business strategy and realize the intended cost savings and benefits;
•
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 Company’s ability to manage and integrate acquisitions;
•
the expansion of the Company’s business, operations and potential activities outside of the Canadian market, including but not
limited to the U.S.;
•
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;
•
whether the Company has the ability to fund arising obligations;
•
the impact of competition;
•
the Company’s Truss and Truss CBD USA business ventures with Molson Coors and the future impact thereof;
•
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 protect intellectual property;
•
the Company’s ability to retain key personnel;
•
securities class action and other litigation to which the Company is subject; 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” in the Company’s 2022
Annual MD&A and Annual Information Form filed October 31, 2022. 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.
HEXO Corp.
Consolidated Financial Statements
For the years ended
July 31, 2022 and 2021
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.
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, 2022 and 2021, 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,
2022, 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, 2022 and 2021, 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, 2022, 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 (ITGCs).
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 2022 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 2022 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 negative cash outflows from operating
activities, and has financial liabilities that may require significant cash outflows over the next twelve
months, and as such, these circumstances create material uncertainties that lend substantial doubt about
its ability to continue as a going concern. Management’s actions and 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.
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 the entities that carry on the business of Redecan (Redecan) from its assessment of internal
control over financial reporting as of July 31, 2022 because it was acquired by the Company in a purchase
business combination during the year ended July 31, 2022. We have also excluded Redecan from our
audit of internal control over financial reporting. Redecan is a wholly-owned group of entities whose total
assets and total revenues excluded from management’s assessment and our audit of internal control over
financial reporting represent 28% and 31%, respectively, of the related consolidated financial statement
amounts as of and for the year ended July 31, 2022.
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 $119.4 million from biological assets to dried cannabis inventory for the year ended
July 31, 2022. The dried cannabis inventory cost as of July 31, 2022 includes a fair value component of
$23.6 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 and know-how intangible asset as part of the
acquisition of Redecan
As described in notes 4 and 15 to the consolidated financial statements, the Company completed the
acquisition of Redecan for a purchase consideration of $616.2 million to be settled in cash and common
shares. The net assets acquired included a $73.1 million cultivation and processing license as well as a
$27.3 million know-how intangible asset. Management applied significant judgment in estimating the fair
value of the acquired cultivation and processing license and know-how intangible asset. The fair value of
the acquired cultivation and processing license is estimated by management using a with-or-without
approach in an income based discounted cash flow model. The model estimates the value of the
cultivation and processing license as the difference between the present value of the future cash flows of
the facility with-or-without a cultivation and processing license in place. Significant assumptions in the
model include the forecasted gross margin and estimated time to obtain a license and complete cultivation
and production ramp-up. The fair value of the acquired know-how intangible asset is estimated by
management using a with-or-without approach in an income based discounted cash flow model. The
model estimates the value of the know-how intangible asset as the difference between the present value
of the future cash flows of pre-rolls with and without the know-how intangible asset in place. The
significant assumption in the model is the incremental margin.
The principal considerations for our determination that performing procedures relating to the valuation of
the acquired cultivation and processing license and know-how intangible asset as part of the acquisition of
Redecan is a critical audit matter are the significant judgment by management when developing the fair
value of the acquired cultivation and processing license and the know-how intangible asset. 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 the high degree of auditor judgment,
subjectivity and effort in performing procedures to evaluate the significant assumptions related to
forecasted gross margin and estimated time to obtain a license and complete cultivation and production
ramp-up, and the incremental margin, and the audit effort involved the use of professionals with
specialized skill and knowledge.
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 acquired cultivation and processing license and know-how intangible asset. Testing management’s
process included evaluating the appropriateness of the valuation approach, testing the completeness and
accuracy of the underlying data used in the valuation models, 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 Redecan, external market and industry data, as well as assessing whether the assumption
was consistent with evidence obtained in other areas of the audit. Evaluating the reasonableness of the
significant assumption used by management related to the estimated time to obtain a license and
complete cultivation and production ramp-up involved considering past experience in developing licensed
facilities and external market and industry data. Evaluating the reasonableness of the significant
assumption used by management related to the incremental margin involved considering the historical
margin of Redecan and external market and industry data. Professionals with specialized skill and
knowledge were used to assist in evaluating the appropriateness of the Company’s valuation models.
Impairment of goodwill
As described in notes 4 and 16 to the consolidated financial statements, the Company recorded a goodwill
impairment loss for the year ended July 31, 2022 of $375 million resulting in goodwill balance of nil as of
July 31, 2022. Management conducts an impairment test annually, or more frequently if events or
circumstances indicate that the carrying value of goodwill may be impaired. An impairment loss is
recognized for the amount by which the asset’s or cash generating unit’s (CGU) carrying amount exceeds
its recoverable amount. On January 31, 2022, the carrying amount of the Company’s total net assets
significantly exceeded the Company’s market capitalization. In addition, the Canadian Cannabis market
experienced adverse changes, which were reflected in significant revisions to management’s own
forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result of
these factors, management performed an indicator-based impairment test of goodwill. The recoverable
amount of the HEXO Corporate CGU, to which the goodwill balance is allocated, is estimated by
management using a discounted cash flow model. Management’s cash flow projections for the HEXO
Corporate CGU included significant judgments and assumptions relating to future forecasted cash flows,
terminal value growth rate and post-tax discount rate.
The principal considerations for our determination that performing procedures relating to impairment of
goodwill is a critical audit matter are the significant judgment by management when developing the
recoverable amount of the HEXO Corporate CGU. 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 audit effort in
performing procedures to evaluate the significant assumptions related to forecasted cash flows, terminal
value growth rate and post-tax discount rate, and, the audit effort involved the use of professionals with
specialized skill and knowledge.
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 (i) testing management’s process for developing the recoverable amount of the HEXO Corporate
CGU; (ii) testing the completeness and accuracy of underlying data used in the discounted cash flow
model; (iii) evaluating the reasonableness of the significant assumptions used by management, related to
the future forecasted cash flows, terminal value growth rate and post-tax discount rate. Evaluating
management’s significant assumption related to the future forecasted cash flows involved evaluating
whether the assumption used by management was reasonable considering the current and past
performance of the HEXO Corporate CGU, external market and industry data and whether this
assumption was consistent with evidence obtained in other areas of the audit. Professionals with
specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuation
methods and models and the reasonableness of the post-tax discount rate and terminal value growth rate.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Canada
October 31, 2022
We have served as the Company’s auditor since 2020.
HEXO Corp. 2022 Consolidated Financial Statements
Table of Contents
Consolidated Statements of Financial Position ........................................................................................................... 3
Consolidated Statements of Net Loss and Comprehensive Loss .................................................................................. 4
Consolidated Statements of Changes in Shareholders’ Equity ..................................................................................... 5
Consolidated Statements of Cash Flows ..................................................................................................................... 6
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. Property, Plant and Equipment ...................................................................................................................................................25
13. Assets Held for Sale .....................................................................................................................................................................26
14. Intangible Assets ........................................................................................................................................................................27
15. Business Acquisitions and Loss of Control .....................................................................................................................................28
16. Goodwill .....................................................................................................................................................................................33
17. Warrant Liabilities .......................................................................................................................................................................34
18. Convertible Debentures ...............................................................................................................................................................35
19. Senior Secured Convertible Note ..................................................................................................................................................36
20. Amended Senior Secured Convertible Note ..................................................................................................................................38
21. Lease Liabilities ...........................................................................................................................................................................39
22. Senior Notes Payable ...................................................................................................................................................................39
23. Share Capital ...............................................................................................................................................................................40
24. Common Share Purchase Warrants ..............................................................................................................................................41
25. Share-based Compensation..........................................................................................................................................................42
26. Net Loss per Share .......................................................................................................................................................................45
27. Financial Instruments ..................................................................................................................................................................45
28. Operating Expenses by Nature .....................................................................................................................................................47
29. Other Income and Losses .............................................................................................................................................................47
30. Related Party Disclosure ..............................................................................................................................................................48
31. Capital Management ...................................................................................................................................................................48
32. Commitments and Contingencies .................................................................................................................................................49
33. Fair Value of Financial Instruments ...............................................................................................................................................50
34. Non-Controlling Interest ..............................................................................................................................................................50
35. Revenue from Sale of Goods ........................................................................................................................................................51
36. Segmented Information ...............................................................................................................................................................51
37. Operating Cash Flow Supplement .................................................................................................................................................52
38. Income Taxes ..............................................................................................................................................................................53
HEXO Corp. 2022 Consolidated Financial Statements
Consolidated Statements of Financial Position
(expressed in thousands of Canadian Dollars)
As at
Note
July 31, 2022
July 31, 2021
Assets
$
$
Current assets
Cash and cash equivalents
5
83,238
67,462
Restricted funds
6
32,224
132,246
Cash held in escrow
7
–
285,779
Trade receivables
27
42,999
37,421
Commodity taxes recoverable and other receivables
8
7,411
13,549
Prepaid expenses
18,339
7,490
Inventory
9
66,409
135,327
Biological assets
10
15,906
14,284
Assets held for sale
13
5,121
–
271,647
693,558
Non-current assets
Property, plant and equipment
12
285,866
393,902
Intangible assets
14
94,343
50,608
Investment in associate and joint ventures
11
17,999
74,679
Lease receivable
–
4,453
Long-term investments
504
2,492
Prepaid expenses
10,590
3,922
Goodwill
16
–
88,189
Total assets
680,949
1,311,803
Liabilities
Current liabilities
Accounts payable and accrued liabilities
72,581
63,557
Excise taxes payable
6,421
6,591
Warrant liabilities
17
717
5,733
Lease liability
21
914
1,730
Senior notes payable
22
–
50,159
Convertible debentures – current
18
38,301
3,406
Senior secured convertible note
19,20
210,379
367,699
Onerous contracts
32
5,763
4,763
335,076
503,638
Non-current liabilities
Lease liability
21
1,926
42,155
Convertible debentures
18
–
33,089
Deferred income tax liability
38
28,846
136
Other long-term liabilities
1,409
520
Total liabilities
367,257
579,538
Shareholders’ equity
Share capital
23
1,889,768
1,267,967
Share-based payment reserve
25
73,657
69,750
Warrant reserve
24
82,395
124,112
Contributed surplus
90,981
41,290
Accumulated deficit
(1,841,584)
(773,993)
Accumulated other comprehensive income
18,475
1,152
Total equity attributable to shareholders of HEXO Corp.
313,692
730,278
Non-controlling interest
34
–
1,987
Total shareholders’ equity
313,692
732,265
Total liabilities and shareholders’ equity
680,949
1,311,803
Going Concern (Note 2)
Commitments and contingencies (Note 32)
Approved by the Board of Directors
/s/ Helene Fortin, Director
/s/ Mark Attanasio, Director
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
Note
July 31, 2022
July 31, 2021
Revenue from sale of goods
35
265,418
173,081
Excise taxes
(74,717)
(49,583)
Net revenue from sale of goods
190,701
123,498
Ancillary revenue
402
271
Net revenue
191,103
123,769
Cost of goods sold
9
282,985
94,703
Gross profit/(loss) before fair value adjustments
(91,882)
29,066
Fair value component in inventory sold
9
43,455
31,767
Unrealized gain on changes in fair value of biological assets
10
(59,665)
(51,499)
Gross profit/(loss)
(75,672)
48,798
Operating expenses
General and administrative
28
84,916
58,187
Selling, marketing and promotion
22,932
10,348
Share-based compensation
28
14,396
11,731
Research and development
3,216
3,835
Depreciation of property, plant and equipment
12
7,428
6,097
Amortization of intangible assets
13
21,347
2,050
Restructuring costs
15,105
3,283
Impairment of property, plant and equipment
12
215,003
20,230
Impairment of intangible assets
13
140,839
–
Impairment of goodwill
375,039
–
Recognition of onerous contract
1,000
–
Impairment of investment in associate
11
57,760
–
Disposal of long-lived assets
–
1,294
(Gain) Loss on disposal of property, plant and equipment
(2,466)
64
Acquisition, integration and transaction costs
35,538
17,174
992,053
134,293
Loss from operations
(1,067,725)
(85,495)
Interest income (expense), net
29
2,112
(30,523)
Non-operating income (expense), net
29
(46,808)
859
Net loss before tax
38
(1,112,421)
(115,159)
Current and deferred tax recovery
38,813 397
Net loss
(1,073,608)
(114,762)
Other comprehensive income
Foreign currency translation
232
(17)
Gain on fair value due to changes in credit spread, net of tax
17,091
1,169
Net loss and comprehensive loss
(1,056,285)
(113,610)
Comprehensive loss attributable to:
Shareholders of HEXO Corp.
(1,050,268)
(113,477)
Non-controlling interest
34
(6,017)
(133)
(1,056,285)
(113,610)
Net loss and comprehensive loss per share, basic and diluted
(2.72)
(0.89)
Weighted average number of outstanding shares
Basic and diluted
26
388,605,394
127,300,903
The accompanying notes are an integral part of these consolidated financial statements
HEXO Corp. 2022 Consolidated Financial Statements
Consolidated Statements of Changes in Shareholders’ Equity
(expressed in thousands of Canadian Dollars, except per share data)
For the year ended
Note
Number of
common
shares
Share
capital
Share-based
payment
reserve
Warrant
reserves
Contributed
surplus
Accumulated
OCI
Accumulated
deficit
Total to
HEXO Corp.
Non-
controlling
interest
Total
equity
$
$
$
$
$ $
$ $ $
Balance at July 31, 2020
120,616,441
1,023,788
65,746
95,617
27,377
–
(659,231)
553,297
3,379
556,676
June 2020 at the market offering
23
244,875
–
–
–
–
–
–
–
–
–
May 2021 at the market offering, net
23
6,373,926
45,257
–
–
–
–
–
45,257
–
45,257
Acquisition of Zenabis Global Inc
15
17,579,336
151,358
7,282
32,354
–
–
–
190,994
(1,340)
189,654
Transaction costs
15
448,639
3,612
–
–
–
–
–
3,612
–
3,612
Senior secured convertible note, net
4,602,241
29,540
–
–
–
–
–
29,540
–
29,540
Exercise of stock options
25
410,051
3,213
(1,983)
–
–
–
–
1,230
–
1,230
Exercise of equity settled RSUs
25
223,506
1,267
(1,554)
–
–
–
–
(287)
–
(287)
Expiry of stock options
25
–
–
(12,891)
–
12,891
–
–
–
–
–
Exercise of warrants
24
2,146,931
9,932
–
(3,126)
–
–
–
6,806
–
6,806
Expiry of warrants
24
–
–
–
(733)
733
–
–
–
–
–
Equity-settled share-based payments
25
–
–
13,150
–
–
–
–
13,150
–
13,150
Other comprehensive income
–
–
–
–
–
1,152
–
1,152
–
1,152
Non-controlling interest
34
–
–
–
–
289
–
–
289
–
289
Net loss
–
–
–
–
–
–
(114,762)
(114,762)
(52)
(114,814)
Balance at July 31, 2021
152,645,946
1,267,967
69,750
124,112
41,290
1,152
(773,993)
730,278
1,987
732,265
At-the-Market program, net of costs
23
24,290,117
27,266
–
–
–
–
–
27,266
–
27,266
August 2021 public offering, net
23
49,080,024
135,645
–
–
–
–
–
135,645
–
135,645
Business acquisitions, net
15
75,073,121
230,232
18
769
–
–
–
231,019
–
231,019
Senior secured convertible note, net
19
202,224,566
199,818
–
–
–
–
–
199,818
–
199,818
Amended and restated senior secured
convertible note, net
20
67,774,266
17,900
–
–
–
–
–
17,900
–
17,900
Equity line of credit
23
10,843,373
3,795
–
–
–
–
–
3,795
–
3,795
Advisor and broker compensation
23
19,040,010
6,998
–
–
–
–
–
6,998
–
6,998
Exercise of stock options
25
17,024
147
(104)
–
–
–
–
43
–
43
Expiry of stock options
25
–
–
(9,513)
–
9,513
–
–
–
–
–
Expiry of warrants
24
–
–
–
(42,486)
42,486
–
–
–
–
–
Equity-settled share-based payments
25
–
–
13,506
–
–
–
–
13,506
–
13,506
Other comprehensive income
–
–
–
–
–
17,323
–
17,323
–
17,323
Non-controlling interest
34
–
–
–
–
(2,308)
–
–
(2,308)
2,308
–
Loss of control of subsidiary
15
–
–
–
–
–
–
–
–
1,722
1,722
Net loss
–
–
–
–
–
–
(1,067,591)
(1,067,591)
(6,017)
(1,073,608)
Balance at July 31, 2022
600,988,447
1,889,768
73,657
82,395
90,981
18,475
(1,841,584)
313,692
–
313,692
The accompanying notes are an integral part of these consolidated financial statements
HEXO Corp. 2022 Consolidated Financial Statements
6
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian Dollars)
For the year ended
Note
July 31, 2022
July 31, 2021
Operating activities
$ $
Net loss before tax
(1,112,421) (115,159)
Items not affecting cash or presented outside of operating activities
37
1,000,302 71,660
Changes in non-cash operating working capital items
37
(4,567)
431
Cash used in operating activities
(116,686) (43,068)
Financing activities
Proceeds from issuance of senior secured note, net
20
–
377,433
Proceeds from issuance of common shares, net
202,166
46,140
Shortfall payments and issuance fees
(334)
(4,482)
Senior convertible note transaction costs
(8,979)
–
Proceeds from the exercise of stock options
25
43
1,230
Payments on RSU exercise
25
–
(287)
Proceeds from the exercise of warrants
24
–
6,806
Repayments of debt
22
(6,754)
(38,415)
Interest paid on debt
(5,095)
(2,035)
Lease payments
21
(6,054)
(4,835)
Interest paid on unsecured convertible debentures
18
(3,211)
(3,583)
Cash-settlements of senior secured convertible note
19
(22,996)
–
Cash provided financing activities
148,786
377,972
Investing activities
Settlement of short-term investments
1,241
–
Proceeds from sale of interest in BCI
10
10,111
–
Net Cash inflows/(outflows) to restricted funds
6
104,248
(120,985)
Cash outflows to cash held in escrow
7
–
(276,654)
Cash received from escrow
7
283,775
–
Cash payment on business acquisition, net of cash acquired
15
(381,157)
2,804
Issuance of convertible debenture receivable
15
–
(19,500)
Proceeds from sale of property, plant and equipment
14,794
93
Acquisition of property, plant and equipment
(27,612)
(30,004)
Purchase of intangible assets
(7,084)
(2,336)
Investment in associates and joint ventures
11
(11,221)
(5,033)
Cash derecognized on loss on control of subsidiary
15
(3,419) –
Cash used in investing activities
(16,324)
(451,615)
(Decrease)/increase in cash and cash equivalents
15,776
(116,711)
Cash and cash equivalents, beginning of year
67,462
184,173
Cash and cash equivalents, end of year
83,238
67,462
Supplemental cashflow information in Note 37.
The accompanying notes are an integral part of these consolidated financial statements.
HEXO Corp. 2022 Consolidated Financial Statements
7
Notes to the Consolidated Financial Statements
For the years ended July 31, 2022 and 2021
(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 (“IASB”) 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.
During the year ended July 31, 2022, the Company reported an operating loss of $1,067,725; cash outflows from operating
activities of $116,686 and an accumulated deficit of $1,841,584 and has yet to generate positive cashflows or earnings. The
Company had a working capital deficiency of $63,429 and held cash and cash equivalents of $83,238 as at July 31, 2022 ($67,462
at July 31, 2021) which management expects to be sufficient to meet the Company’s expected working capital and operating cash
flow needs over the next 12 months. However, the Company also has 8% convertible debentures that mature in December 2022,
which will require a cash repayment of $40,140 if the Company cannot extend the terms. Furthermore, the Company remains
subject to, amongst others, a minimum liquidity covenant of US$20 million under the Amended senior secured convertible note as
well as a requirement to achieve Adjusted EBITDA of not less than US$1.00 for each quarter beginning in the Company’s third
quarter of FY23.
These circumstances 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. In recognition of these
circumstances, the Company has taken the following actions:
•
On July 12, 2022, the Company, Tilray Brands Inc. (“Tilray”) and HT Investments MA LLC (“HTI”) amended and restated
the terms of the outstanding senior secured convertible note originally issued by the Company to HTI (the “Note”). The
amended and restated convertible note (the “Amended senior secured convertible note”) was immediately assigned to
Tilray pursuant to the terms of an amended and restated assignment and assumption agreement (Note 20).
•
Concurrent with the debt restructuring, the Company received a non-binding Letter of Intent for a $180 million equity
purchase agreement (the “equity line of credit” or “ELOC”), from an affiliate of KAOS Capital Ltd (“KAOS”), which could
provide the Company access to $5 million capital per month over a 36-month period in order to help meet debt and
interest repayments under the amended and reassigned secured note. Under the terms of the ELOC, the Company is to
utilize 60% of the acquired proceeds towards the debt and interest payments associated with the Amended senior secured
convertible note. The Company received conditional TSX approval on May 13, 2022, replaced and superseded by
subsequent approval on June 29, 2022. As of October 31, 2022, the Company has yet to file the prospectus supplement
qualifying the distribution and resale by the subscriber of the Put Shares and meet the minimum share price requirement
of $0.10 per common share in the first three months and $0.30 thereafter, thus has not been able to draw upon the ELOC.
•
On June 17, 2022, the Company’s wholly owned subsidiary Zenabis Global Inc. (“Zenabis”) as well as its direct and
indirect wholly-owned subsidiaries (collectively, the “Zenabis Group”), filed a petition (the “CCAA Petition”) with the
Superior Court of Québec for protection under the Companies’ Creditors Arrangement Act (“CCAA”) in order to restructure
their business and financial affairs. As a result of the CCAA Petition and the resulting loss of control over the Zenabis
Group, the Company deconsolidated the assets and liabilities of Zenabis and effectively de-leveraged itself from the
$50,732 senior note payable previously associated with Zenabis.
•
On July 15, 2022, the Company commenced the termination of the captive insurance program which resulted in the
release of $29,994 in cash on September 1, 2022, that had previously been restricted (Note 6). The captive insurance
program was replaced by a traditional insurance program that will require annual premiums.
HEXO Corp. 2022 Consolidated Financial Statements
8
During the second half of the fiscal year, the Company’s new management identified and commenced certain opportunities and
cost savings initiatives to fundamentally realign the operating expenses and cashflows to address liquidity issues. These initiatives
include:
•
Entering into commercial agreements with Tilray including (i) a co-manufacturing agreement providing for manufacturing
services between the parties, and (ii) a procurement and cost-savings agreement for efficiencies to be achieved in the
business with respect to administrative services, third-party commercial services, procurement, internal distribution services
on an ongoing basis through creation of an Efficiencies Committee with joint representation from HEXO and Tilray, and
agreeing with Tilray to negotiate an agreement concerning international sales and supply arrangements.
•
Reducing of the Company’s total headcount and restructuring the organization for expected future operating and
administrative needs;
•
Minimizing the Company’s spend on third party service providers and reducing professional fees; and
•
Put in a plan to liquidate the Company’s previously announced decommissioned and available for sale assets.
Management believes that the above noted initiatives, combined with existing cash on hand will be sufficient to support operations
over the next 12 months. Management is also currently assessing alternative refinancing and settlement options to mitigate the
immediate cash payment requirement on the maturity of the 8% convertible notes.
However, there can be no assurances that financing alternatives will be available or available on terms that are acceptable to the
Company or that the Company’s initiatives will yield sufficient liquidity or generate positive Adjusted EBITDA, in order for the
Company toto meet its financial covenant requirements, and as such, 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.
These consolidated 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.
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
31, 2022.
ii. Basis of Measurement
The consolidated financial statements have been prepared on a historical cost basis except for certain financial
instruments which are measured at fair value, biological assets carried at fair value less cost to sell, and assets held for
sale measured at the lower of carrying amount and fair value less costs 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.
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
HEXO Corp. 2022 Consolidated Financial Statements
9
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.
PRINCIPAL OPERATING SUBSIDIARIES
JURISDICTION
INTEREST HELD
PRINCIPAL ACTIVITY
HEXO Operations Inc.
Quebec,
Canada
100%
To produce and sell cannabis and cannabis
products under the Cannabis Act.
HEXO USA Inc.
Delaware,
USA
100%
To facilitate expansion into the US market.
5048963 Ontario Inc.
(Redecan)
Ontario,
Canada
100%
To produce and sell cannabis and cannabis
products under the Cannabis Act.
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.
Associates
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:
SIGNIFICANT ASSOCIATES
JURISDICTION
INTEREST
HELD
PRINCIPAL ACTIVITY
Truss Limited Partnership
(“Truss LP”)
Ontario, Canada
42.5%
To pursue opportunities to develop non-
alcoholic, cannabis infused beverages for the
Canadian market.
Truss CBD USA LLP
(“Truss CBD US”)
Colorado USA
42.5%
To explore opportunities for non-alcoholic hemp
derived CBD beverages in the State of Colorado.
EQUITY METHOD
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.
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(k).
HEXO Corp. 2022 Consolidated Financial Statements
10
CHANGE IN OWNERSHIP
When the Company ceases to consolidate or equity account for an investment because of a loss of control, joint control
or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying
amount recognized in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously
recognized in other comprehensive income in respect of that entity are accounted for as if the group had directly
disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive
income are reclassified to profit or loss
On June 17, 2022, the Company lost control of Zenabis Global Inc. and certain of its subsidiaries (“Zenabis”) when it filed
to commence proceedings under the Companies’ Creditors Arrangement Act (CCAA) (Note 15).
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 (CODM), 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 affected by entering 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. The Company recognizes gains and losses from, interest, foreign exchange activity and/or fair market
value adjustments through the Statement of Net Loss and Comprehensive Loss. The Captive Program was discontinued
subsequent to July 31, 2022.
(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)
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 allowance for expected credit losses, which the Company estimates on the basis
of historical collection rates and observable changes in credit risk.
(e)
COMMODITY TAX RECOVERABLES & OTHER RECEIVABLES
Commodity tax recoverable and other receivables are initially measured at fair value and subsequently measured at
amortized cost, less any provisions for impairment.
(f)
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 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
HEXO Corp. 2022 Consolidated Financial Statements
11
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.
(g)
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
labour 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.
(h)
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
Method
Term
Land
Not depreciated
No term
Buildings
Straight line
5 to 20 years
Leasehold improvements
Straight line
lease term
Furniture and equipment
Straight line
5 years
Cultivation and production equipment
Straight line
5 to 20 years
Vehicles
Straight line
5 years
Computers
Straight line
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.
(i)
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
Method
Term
Domain names
Straight line
10 years
Health Canada licenses
Straight line
20 years
Software
Straight line
3-5 years
Patents/Production Know-How
Straight line
6-20 years
Brands
Straight line
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.
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.
The Company holds no intangible assets with an indefinite life.
HEXO Corp. 2022 Consolidated Financial Statements
12
(j)
GOODWILL
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.
(k)
IMPAIRMENT OF NON-FINANCIAL ASSETS
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization 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.
(l)
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.
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.
HEXO Corp. 2022 Consolidated Financial Statements
13
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.
(m)
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.
(n)
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.
(o)
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 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 statement of net loss, represents revenue from the sale of goods
less applicable excise taxes.
(p)
COST OF GOODS SOLD
Cost of goods sold includes cost of inventory expensed, packaging costs, shipping costs and related labour.
HEXO Corp. 2022 Consolidated Financial Statements
14
(q)
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.
(r)
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.
(s)
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.
RSUs may be exercised for cash, equity or a combination of both at the discretion of the holder once vested as per the terms
of the award grant.
Amounts recorded for forfeited RSUs are transferred to contributed surplus in the year of forfeiture or expiry.
(t)
DEFERRED SHARE UNITS (“DSU’s”)
DSUs are cash or equity settled share-based payments granted to certain of the Company’s directors. DSUs do not possess
a vesting period but are rather dependent upon on certain conditions and/or events in order to vest. DSUs are measured at
the market value on the date of grant. The fair value of cash-settled DSUs ais revalued at each period end and is recognized
as share-based compensation over the period with a corresponding adjustment to the liability.
Upon the settlement of cash-based DSUs, which are valued at the market value at the time of exercise, the related liability is
transferred to share capital. The fair value of any equity-settled DSUs is to be recognized in the share-based reserve at the
grant date. Upon the settlement of equity-based payments, DSUs are settled in the form of common shares and the related
share-based reserve is transferred to share capital.
DSUs may be exercised for cash, equity or a combination of both at the discretion of the holder once vested as per the terms
of the award grant.
HEXO Corp. 2022 Consolidated Financial Statements
15
Amounts recorded for forfeited DSUs are transferred to contributed surplus in the year of forfeiture or expiry.
(u)
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.
(v)
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provision of the respective
instrument. All financial assets and financial liabilities are initially measured at fair value, net of transaction costs, except for
financial instruments classified as fair value through profit or loss ("FVTPL"), where transaction costs are recognized immediately
in profit or loss.
The Company classifies its financial assets in the following measurement categories:
•
those to be measured subsequently at fair value, either through other comprehensive income (“FVOCI”) or through
profit or loss (“FVTPL”), and
•
those to be measured at amortized cost.
The classification depends on the Company’s business model for managing the financial assets and the contractual terms of
the cash flows.
The Company has made the following classifications:
IFRS 9 Classification
Financial assets
Cash and cash equivalents
Amortized cost
Restricted funds
Amortized cost
Trade receivables
Amortized cost
Convertible debenture receivable
FVTPL
Long term investments
FVTPL
Financial liabilities
Accounts payable and accrued liabilities
Amortized cost
Warrant liabilities
FVTPL
Convertible debentures
Amortized cost
Senior secured convertible note
FVTPL
Senior notes payable
Amortized cost
Lease liabilities
Amortized cost
Loans and borrowings
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 FVOCI. 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.
(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.
HEXO Corp. 2022 Consolidated Financial Statements
16
(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 derivatives, are stated at fair value, with changes being recognized through the
statements of net 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.
The Senior secured convertible note (including the Amended senior secured convertible note) (the “Note”) was issued in
currency other than the functional currency of the Company is classified entirely as liabilities. As the Note contains equity and
non-equity embedded derivatives, it is 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 removed from the balance sheet when the obligation specified in the contract is discharged, cancelled
or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to
another party and the consideration paid, including any noncash assets transferred or liabilities assumed, is recognized in the
statement of net loss as other income (loss).
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 issuance 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.
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
HEXO Corp. 2022 Consolidated Financial Statements
17
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.
(w)
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.
(x)
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 evaluated 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. Up until October 1, 2021, the
Company’s control was 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. On October 1, 2021,
Truss LP received its cannabis manufacturing and processing license under the Cannabis Act (Canada) and was therefore
able to possess the cannabis-inclusive CIBs. Truss LP then received its cannabis selling license on May 2, 2022. However, as
of July 31, 2022, Truss LP has not operationalized its cannabis selling license, and does not possess the ability to sell
cannabis products to its customers. An arrangement remains in place in which the Company purchases the manufactured
goods from Truss LP and sells the CIBs to third parties, as a principal in the arrangement. This is evidenced by the Company
possessing the sole ability to monetize the sale of CIB’s through the sales agreements and purchase orders with customers.
The Company therefore 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 did 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”) was 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 was recorded in the statement of net loss only to the extent 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. Upon amendment of the Note on July 12 2022, the remaining value of the Day 1 loss
was recognized in the statement of net loss.
HEXO Corp. 2022 Consolidated Financial Statements
18
Amended senior secured convertible note
Management used significant judgement in evaluating its rights and obligations under commercial agreements executed
concurrently with amending and reassigning the senior secured convertible note to Tilray and in assessing the impact of these
agreements on the contractual cash flows under the Amended senior secured convertible note. Where an unavoidable
contractual obligation to deliver cash in the future was identified, management used financial contract combination guidance
in accounting for the Amended senior secured convertible note.
Loss of control of subsidiary
On June 1, 2022, Zenabis filed a petition with the Superior Court of Québec for protection under the Companies’ Creditors
Arrangement Act (“CCAA”) in order to restructure their business and financial affairs. Management applied judgement in
assessing whether this event represented a loss of control of Zenabis. As a result of the CCAA filing, the most relevant activity
of Zenabis became the settlement of the Zenabis Senior Note Payable through the sale of the business or its assets. On filing
of CCAA, which included the a request for an order to approve a sale and investment solicitation process and to approve a
stalking horse agreement of purchase and sale, management concluded that the Company ceased to have the power to
direct the relevant activity of Zenabis because substantive rights were granted to other parties through the CCAA proceedings
that restricted the decision making ability of the Company to the extent that the Company was unable to demonstrate power
over Zenabis. As a result, the Company accounted for a loss in control and Zenabis was deconsolidated on June 17, 2022
(Note 15).
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, 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. By-products, such as
trim, are measured at their net-realizable-value (“NRV”) at point of harvest which is management has determined to be $nil.
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.
Cash flow projections for the HEXO Corporate CGU included significant judgments and assumptions relating to future
forecasted cash flows, terminal value growth rate and post-tax discount rate
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, 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.
The significant estimate related to estimating the fair value of know-how intangible asset is the incremental margin. 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.
HEXO Corp. 2022 Consolidated Financial Statements
19
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 32). As the lender claimed the
debenture was 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.
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.
New and Amended Standards
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 adopted the Amendments to IAS 1 effective August 1, 2021 with no impact to 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 adopted the Amendments to IAS 37 effective August 1, 2021 with no impact to 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 adopted the Amendments to
IAS 16 effective August 1, 2021 with no impact to 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 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.
HEXO Corp. 2022 Consolidated Financial Statements
21
5. Cash and Cash Equivalents
Interest rate
July 31, 2022
July 31, 2021
$
$
Operating cash
–
75,819
31,702
High interest savings accounts
1.80%
7,419
35,760
Cash and cash equivalents
83,238
67,462
6. Restricted Funds
July 31, 2022
July 31, 2021
$
$
Letters of credit, collateral and guarantees for purchases
2,230
2,552
Restricted cash under terms of the Senior Secured Convertible Note (Note 19)
–
99,696
Cash restricted in captive insurance subsidiary
29,994
29,998
Total
32,224
132,246
The Company’s restricted cash had been held for the settlement of the senior note payable, acquired from the business acquisition of
Zenabis (Note 22), as contractually obligated under the terms of the senior secured convertible note (Note 19). On July 12, 2022, under
the Senior secured convertible notes amending agreement (Note 19), the restricted cash under the terms of the Senior secured
convertible note were unrestricted and made available for operational use upon the notes. On September 1, 2022, the Company
unrestricted the cash previously held in the captive insurance subsidiary.
7. Cash Held in Escrow
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. On August 30, 2021, the Cash held in escrow was used, in full, towards funding the acquisition of all
of the outstanding shares of the entities that carry on the business of Redecan (Note 15).
8. Commodity Taxes Recoverable and Other Receivables
July 31, 2022
July 31, 2021
$
$
Commodity taxes recoverable
7,411
56
Lease receivable – current1
–
107
Cash receivable on settlement of marketable securities
–
2,698
Loan receivable2
–
5,000
Other receivables
–
5,688
Total
7,411
13,549
1 A related party capital lease receivable related to Truss Limited Partnership (Note 30).
2 A short term bridge loan issued to 48North who was acquired by the Company on September 1, 2021 (Note 15).
9. Inventory
As at July 31, 2022
Capitalized
Biological asset fair
cost
value adjustment
Total
Dried cannabis
$
30,636
$
23,600
$ 54,236
Purchased dried cannabis
662
–
662
Extracts
3,928
–
3,928
Purchased extracts
478
–
478
Packaging and supplies
7,105
–
7,105
$
42,809
$
23,600
$ 66,409
As at July 31, 2021
Capitalized
Biological asset fair
cost
value adjustment
Total
Dried cannabis
$
81,784
$
24,257
$
106,041
Purchased dried cannabis
1,754
–
1,754
Extracts
11,945
4,411
16,356
Purchased extracts
2,247
–
2,247
Packaging and supplies
8,929
–
8,929
$
106,659
$
28,668
$
135,327
HEXO Corp. 2022 Consolidated Financial Statements
22
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 $282,985 for the year ended
July 31, 2022 (July 31, 2021 – $94,703) which include;
•
Write downs of inventory to the net realizable value of $104,038 (July 31, 2021 – $4,470); and
•
Write-offs of inventory of $14,297 (July 31, 2021 – $2,182) which relate to the impairment of the Keystone Isolation
Technology extraction capital project (intended to utilize inventory during the commissioning phase), destroyed and
unsellable inventory and cultivation facility shutdowns; and
•
Reversal of impairment of $4,299 (July 31, 2021 – $1,543) to its net realizable value.
(ii) The fair value component (biological asset fair value adjustments) of inventory sold on the consolidated statement of
net loss was $43,455 for the year ended July 31, 2022, (July 31, 2021 – $31,767).
Total depreciation capitalized in inventory in the year ended July 31, 2022, was $23,715 (July 31, 2021 – $15,677). Total share-based
compensation capitalized in inventory in the year ended July 31, 2022, was $nil (July 31, 2021 – $1,505).
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
July 31, 2022
July 31, 2021
$
$
Balance, beginning of year
14,284
7,571
Acquired on business combination
8,352
8,892
Production costs capitalized
62,489
36,156
Net increase in fair value due to biological transformation and estimates
59,665
51,499
Harvested cannabis transferred to inventory
(119,432)
(89,834)
Disposal of biological assets
(3,086)
–
Derecognized on loss of control of subsidiary (Note 15)
(6,366)
–
Balance, end of year
15,906
14,284
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. During the year ended July 31, 2022, the Company disposed of $3,086 (July 31, 2021 – $nil) of biological
assets due to the closure of a cultivation facility as well as damaged plants due to a heating issue.
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 summarizes the significant inputs and assumptions used in the fair value model, their weighted average range of value
and sensitivity analysis:
Significant inputs and assumptions
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, 2022
July 31, 2021
July 31, 2022
July 31, 2021
Weighted average selling price
Derived from actual retail prices on a per product basis
using the expected Flower per plant. Which is expected to
approximate future selling prices and where applicable,
considering strains.
$2.73 per dried
gram
$3.05 per dried
gram
$1,190
$746
HEXO Corp. 2022 Consolidated Financial Statements
23
Yield per plant
Derived from historical harvest cycle results on a per strain
basis, which is expected to be harvested from plants.
82-1,307 grams
per plant1
24-116 grams
per plant
$803
$460
Post-harvest cost
Derived from historical costs of production activities on a
per product basis.
$0.19-$0.63 per
dried gram
$0.67-$0.84 per
dried gram
$303
$636
1 Significant increase in the estimated yield per plant due to the addition of the outdoor cultivation site acquired on the Redecan acquisition on
September 1, 2022 (Note 15).
11. Investments in Associates & Joint Ventures
July 31, 2022
July 31, 2021
Truss LP
Other
Total
Truss LP
Other
Total
$
$
$
$
$
$
Opening Balance
72,873
1,806
74,679
74,966
1,340
76,306
Cash contributed to investment
8,500
2,721
11,221
4,250
783
5,033
Disposal
–
(984)
(984)
–
–
–
Share of net (loss)
(7,613)
(1,544)
(9,157)
(6,343)
(162)
(6,505)
Impairment
(57,760)
–
(57,760) –
–
–
Foreign exchange loss through OCI
–
–
–
–
(155)
(155)
Ending Balance
16,000
1,999
17,999
72,873
1,806
74,679
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.
On October 31, 2021, the Company noted indicators of impairment related to the Truss LP investment, notably, a reduced financial
outlook and an additional requirement for capital to sustain operations. The Company tested the investment for impairment and
recorded an impairment loss as outlined below. The recoverable amount was based on the estimated fair value less costs of disposal.
The fair value less costs of disposal was estimated utilizing an income based discounted cash flows (“DCF”) analysis. As a result, an
impairment loss of $26,925 was recorded.
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 five-year period was forecasted with an extended five-year period calculated using a discount model that
assumes the growth rate of will decrease linearly to the terminal value growth rate of 3%;
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 assumptions were held constant
and the terminal growth rate was decreased by 1%, the impairment loss would increase by $3,098; and
iii.
Discount rate: Management used a 15% 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 assumptions were
held constant and the discount rate increased by 1%, the impairment loss would increase by $8,394.
On July 31, 2022, the Company identified additional indicators of impairment related to the Truss LP investment, as a result of a further
reduction in the financial outlook predicated on budget to actual trends and certain market data. The Company tested the investment for
impairment and recorded an impairment loss as outlined below. The recoverable amount was based on the estimated fair value less
costs of disposal, which was determined based on an income approach using discounted cash flows (“DCF”). In addition, to further
corroborate the DCF valuation, a secondary valuation was completed using adjusted net asset method determined by measuring the
underlying assets and liabilities on the balance sheet of Truss on the measurement date to their respective fair value. The tangible non-
financial assets are adjusted to reflect their current replacement cost using comparable market data adjusted for economical
obsolescence. As a result, an additional impairment loss of $30,835 was recorded.
The significant assumption in the depreciated replacement cost value of assets approach was the estimated market recoverability
rate. The Company utilized a rate of 53%. If all other assumptions were held constant, a 1% decrease in the market recoverability
rate would result in an impairment loss of $300.
HEXO Corp. 2022 Consolidated Financial Statements
24
Truss LP
As at
July 31, 2022
July 31, 2021
Statement of Financial Position
$
$
Cash and cash equivalents
12,640
6,757
Other current assets
11,562
7,867
Non- current assets
63,305
67,766
Current liabilities
8,145
11,112
Non-current liabilities
8,420
8,667
For the year ended
July 31, 2022
July 31, 2021
Statement of Comprehensive Loss
Revenue
13,516
6,498
Operating expenses excluding depreciation and amortization
(16,265)
(14,261)
Depreciation and amortization
(6,486)
(4,884)
Other expenses
–
–
Loss from operations
(17,289)
(14,643)
Other income
(64)
130
Interest expenses
(560)
(412)
Income tax expenses
–
–
Total comprehensive loss
(17,913)
(14,925)
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 years ended July 31, 2022 and July 31, 2021.
For the year ended
July 31, 2022
July 31, 2021
$
$
Opening net assets
70,039
74,964
Acquisition of associate/capital calls
20,000
10,000
Total comprehensive loss
(17,913)
(14,925)
Closing net assets
72,126
70,039
Interest in associate
42.5%
42.5%
Interest in associate value
30,654
29,767
Fair value of warrant consideration
42,386
42,386
Capitalized transaction costs
720
720
Impairment loss
(57,760)
–
Total interest in associate value
16,000
72,873
HEXO Corp. 2022 Consolidated Financial Statements
25
12. Property, Plant and Equipment
Cost
Land
Buildings
Leasehold
improvements
Cultivation
and production
equipment
Furniture,
computers,
vehicles and
equipment
Construction
in progress
Right-of-
Use
assets
Total
$
$
$
$
$
$
$
$
At July 31, 2020
1,656
164,949
24,439
33,461
18,871
98,135
24,405
365,916
Business acquisition
1,100
95,788
–
6,154
8,578
395
17,059
129,074
Additions
–
1,213
63
2,284
294
16,960
–
20,814
Disposals
–
1
–
(67)
–
–
(1,055)
(1,121)
Transfers
–
3,951
17,649
884
1,388
(23,544)
–
328
At July 31, 2021
2,756
265,902
42,151
42,716
29,131
91,946
40,409
515,011
Business acquisitions
8,941
59,856
545
58,063
2,053
4,076
1,993
135,527
Additions
61
602
(36)
15,511
141
11,333
–
27,612
Disposals
–
(971)
(587)
(3,946)
(3,577)
(223)
(20,460)
(29,764)
Transfers
(307)
(523)
546
(2,106)
(3,070)
(1,033)
(350)
(6,843)
Held for sale
(1,766)
(11,967)
–
(7,944)
(3,151)
(393)
–
(25,221)
Loss of control1
(592)
(84,865)
–
(8,428)
(3,013)
411
(17,059)
(113,546)
At July 31, 2022
9,093 228,034
42,619
93,866
18,514
106,117
4,533
502,776
Accumulated depreciation and impairments
At July 31, 2020
307
13,712
1,009
8,691
4,141
48,990
3,700
80,550
Depreciation
–
7,981
2,173
5,145
4,229
–
2,246
21,774
Transfers
–
(110)
(16)
(78)
(277)
–
–
(481)
Disposals
–
–
–
–
–
–
(964)
(964)
Impairments
– 160
85
2,104
61
–
17,820
20,230
At July 31, 2021
307
21,743
3,251
15,862
8,154
48,990
22,802
121,109
Depreciation
–
11,143
2,028
11,931
4,245
–
1,796
31,143
Transfers
(307)
(329)
(5)
(4,328)
138
(5,405)
(350)
(10,586)
Disposals
–
–
(498)
(260)
(612)
–
(20,300)
(21,670)
Impairments
462
89,581
37,084
11,470
5,698
48,746
15,524
208,565
Held for sale
–
(1,868)
–
(2,188)
(884)
–
–
(4,940)
Loss of control1
(462)
(79,602)
–
(13,933)
153
4,192
(17,059)
(106,711)
At July 31, 2022
–
40,668
41,860
18,554
16,892
96,523
2,413
216,910
Net book value
At July 31, 2020
1,349
151,237
23,430
24,770
14,730
49,145
20,705
285,366
At July 31, 2021
2,449
244,159
38,900
26,854
20,977
42,956
17,607
393,902
At July 31, 2022
9,093
187,366
759
75,312
1,622
9,594
2,120
285,866
1 Derecognized on loss of control of the Zenabis subsidiary (Note 15).
During the year ended July 31, 2022, the Company capitalized $23,715 (July 31, 2021 – $15,677) of depreciation to inventory. During
the year ended July 31, 2022, depreciation expensed to the consolidated statement of loss and comprehensive loss was $7,428 (July
31, 2021 – $6,097).
Capitalized borrowing costs to buildings in the year ended July 31, 2022, was $nil (July 31, 2021 – $1,269 at an average rate of 5.6%).
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 depreciable asset class.
Impairments during the year ended July 31, 2022
On October 31, 2021, the Company identified impairment to its Keystone Isolation Technology (KIT) capital project which was
suspended. The KIT capital project related to the development and commissioning of new cannabis extraction and isolation equipment.
During the year ended July 31, 2022, the Company recognized impairments on the associated equipment for an impairment loss of
$13,377.
On January 31, 2022, indicators of impairment were identified as a result of significant revisions to management’s own forecasts of
future net cash inflows and earnings from previous budgets and forecasts. As a result, certain cultivation facilities, including the
cultivation and manufacturing facilities of Zenabis, as well as the related equipment and capital projects were considered redundant and
tested for impairment at the asset level resulting in an impairment loss of $98,022 being recorded.
HEXO Corp. 2022 Consolidated Financial Statements
26
During the three months ended April 30, 2022, management announced the planned cessation of operations at the leased, centralized
manufacturing and processing facility, Belleville and as at July 31, 2022, the Company has terminated operations at the Belleville facility
and has migrated to other existing facilities. As a result of the above, the Company recognized impairment losses of $87,412. Certain
identified cultivation equipment was also transferred to alternative sites. The leasehold improvements, remaining construction in
progress, and redundant equipment has been impaired to their recoverable amounts. In addition, impairment losses were identified for
the Atholville Facility. 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. Additional impairment losses were recorded for intangible assets related to the cultivation and processing licenses held
for the Atholville Facility (Note 14).
Impairments during the year ended July 31, 2021
During the year ended July 31, 2021, the Company impaired $17,820 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. 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
remained recognized as at July 31, 2021 (Note 21).
During the year ended July 31, 2021, the Company identified impairments of certain packaging equipment that was no longer expected
to be used. As a result of this, impairment losses of $2,104 were recorded.
13. Assets Held for Sale
Net book value
Land
Buildings
Cultivation
and production
equipment
Furniture,
computers,
vehicles and
equipment
Construction
in progress
Total
$
$
$
$
$
$
At July 31, 2021
–
–
–
–
–
–
Business acquisition (Note 15)
1,873
366
274
–
–
2,513
Additions
1,765
10,100
5,756
2,267
393
20,281
Disposals
(974)
(3,246)
–
(14)
–
(4,234)
Impairment loss
(794)
–
(5,185)
(379)
(80)
(6,438)
Loss of control of subsidiary (Note 15)
(508)
(5,938)
–
(241)
(313)
(7,001)
At July 31, 2022
1,362
1,281
845
1,633
–
5,121
On September 1, 2021, the Company acquired 48North Cannabis Corp. and recognized the Good Farm cultivation facility as held
for sale on the acquisition date. The facility was sold during the year ended July 31, 2022.
Throughout the year ended July 31, 2022, management completed a strategic review of its total cultivation capacity and made the
decision to exit the Good House, Kirkland Lake, Brantford R&D, and Stellarton facilities and dispose of certain associated equipment.
As such, these assets have been classified as held for sale on the statement of financial position as of July 31, 2022. The assets have
been recognized at their individual recoverable amounts. Management assessed the related assets for further impairment upon
classification as assets held for sale and determined that no further impairment losses were required to be recorded as the carrying
amounts are expected to be recovered through sale.
The Atholville facility and Stellarton manufacturing facility have been derecognized due to the loss of control of Zenabis on June 17,
2022 (Note 15).
HEXO Corp. 2022 Consolidated Financial Statements
27
14. Intangible Assets
Cost
Cultivating and
processing license
Brands
Software
Domain
names
Patents/
Know-how
Total
$
$
$
$
$
$
At July 31, 2020
116,433
8,440
3,710
585
1,933
131,101
Additions
–
–
1,546
–
790
2,336
Business acquisition
28,914
5,400
–
–
–
34,314
Disposals
–
–
(872)
–
–
(872)
At July 31, 2021
145,347
13,840
4,384
585
2,723
166,879
Additions
–
–
6,494
–
590
7,084
Business acquisitions
73,079
97,200
1,221
–
27,337
198,837
Loss of control
(28,914)
(5,400)
–
–
–
(34,314)
At July 31, 2022
189,512
105,640
12,099
585
30,650
338,486
Accumulated amortization and impairments
At July 31, 2020
110,957
2,000
1,966
125
45
115,093
Amortization
765
170
922
59
134
2,050
Disposals
–
–
(872)
–
–
(872)
At July 31, 2021
111,722
2,170
2,016
184
179
116,271
Amortization
6,561
7,862
3,527
59
3,338
21,347
Impairment
72,950
56,450
–
–
11,439
140,839
Loss of control
(28,914)
(5,400)
–
–
–
(34,314)
At July 31, 2022
162,319
61,082
5,543
243
14,956
244,143
Net book value
At July 31, 2020
5,476
6,440
1,744
460
1,888
16,008
At July 31, 2021
33,625
11,670
2,368
401
2,544
50,608
At July 31, 2022
27,193
44,558
6,556
342
15,694
94,343
Research and development expenses in the year ended July 31, 2022 were $3,216 (July 31, 2021 – $3,835).
During the year ended July 31, 2022, the Company adjusted the estimated useful life of its previously indefinite life brand to a three-
year period based on new available information such as market comparatives and market sales data.
IMPAIRMENT
On January 31, 2022, indicators of impairment were identified as a result of adverse changes in the Canadian Cannabis market
experienced throughout the three months ended January 31, 2022, which resulted in significant revisions to management’s own
forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result, the Company recorded aggregate
impairment losses of $140,839 on intangible assets within the Canadian Cannabis CGU. The following details the impairment of the
applicable assets to their individual recoverable amounts:
•
The Company has valued the cultivation and processing licenses associated with the acquired facilities of Redecan (Note 15),
using a fair value less costs of disposal model which 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 January 31, 2022 using management’s revised
estimates of expected future cash flows and gross margins.
•
The recoverable amount was $26,556, requiring an impairment loss of $45,000. If all other assumptions were held constant, and
the forecasted gross margin rate was decreased by 10%, the recoverable amount of the cultivation and processing license would
decrease by $6,771. In the with-or-without approach, reducing the estimated time to obtain a license and complete cultivation and
production ramp up by six months would reduce the recoverable amount of the license by $8,066. In connection with the
impairment loss recorded the Atholville facility (Note 12), the Company recorded an impairment loss of $27,950 relating to
cultivation and processing licenses associated with the facility. The Atholville Facility was part of the Zenabis Group and the
remaining carrying value was de-recognized as part of the accounting for loss of control (Note 15).
•
The Company revalued the brand asset acquired in the Redecan transaction (Note 15) as at January 31, 2022, using
management’s revised estimates of expected future revenues. Recoverable amount was determined to be $47,000, requiring an
impairment loss of $43,754. Recoverable amount was determined with reference to fair value less cost of disposal, which utilized
a relief from royalty approach model (Level 3). If all other assumptions were held constant, and the forecasted royalty rate was
decreased by 10%, the recoverable amount of the brand would decrease by $5,061. The Company also impaired certain other
acquired brands to their recoverable amounts, resulting in an impairment loss of $12,697.
•
The Company has valued the production Know-How asset, acquired from the Redecan transaction (Note 15) as at January 31,
2022, using management’s revised estimates of expected future cash flows and related gross margins (Note 15). The recoverable
amount was determined to be $14,000, requiring an impairment loss of $11,438. Recoverable amount was determined with
HEXO Corp. 2022 Consolidated Financial Statements
28
reference to fair value less costs of disposal using a with-or-without approach based on an income based DCF valuation model
(Level 3). The model estimates the value of the asset as the difference between the present value of the future cash flows of pre-
rolls, with-or-without the unique Know-how as at the acquisition date. The significant estimate in the model is the initial incremental
margin, which depletes over time, representing an advantageous increase to gross margin due to the process. In the with-or-
without approach, increasing the estimated incremental margin by 5% would not impact the assets valuation materially.
15. Business Acquisitions and Loss of Control
Goodwill arising from the acquisitions represented the expected synergies, future income and growth, and other intangibles that do not
qualify for separate recognition at the date of acquisition. None of the goodwill arising from the acquisitions is expected to be deductible
for tax purposes.
Acquisition of 48North Cannabis Corp.
On September 1, 2021, pre-market open, the Company acquired 100% of the issued and outstanding common shares of 48North
Cannabis Corp. (“48North”). 48North was a Canadian-licensed cultivator and seller of medical and adult-use cannabis. 48North was
acquired for select intellectual properties and its established market share. Under the arrangement, each former 48North common
share was exchanged for 0.02366 (the “exchange ratio”) of a HEXO common share. In addition, all issued and outstanding stock
options and compensation units of 48North 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 48North became exercisable for HEXO common
shares adjusted for the exchange ratio.
The following table summarizes the purchase consideration and values of the net assets acquired from 48North on the acquisition
date.
Units
Unit Price
Fair Value
($)
($)
Consideration
Shares issued
(i)
5,352,005
3.10
16,591
Replacement warrants outstanding
(ii)
1,554,320
769
Replacement stock options issued
(iii)
17,766
18
Settlement of pre-existing debt
(iv)
n/a
5,000
Total fair value of consideration
22,378
Net assets acquired
Current assets
Cash and cash equivalents
989
Accounts receivable
1,263
Other receivables
259
Prepaid expenses
2,962
Inventory
5,040
Biological assets
875
Assets held for sale
2,513
Non-current assets
Property, Plant and Equipment
9,683
Intangible assets - brands
2,500
Goodwill
Note 16
11,453
Total assets
37,537
Current liabilities
Accounts payable and accrued liabilities
(10,580)
Excise taxes payable
(555)
Lease Liability
(178)
Non-current liabilities
Lease Liability
(553)
Term loan
(3,293)
Total liabilities
(15,159)
Total net assets acquired
22,378
(i)
As the acquisition closed pre-markets on September 1, 2021, the share price is based upon the closing HEXO Corp. TSX market
price of common shares on August 31, 2021.
HEXO Corp. 2022 Consolidated Financial Statements
29
(ii) Warrants were valued using the Black-Scholes option pricing model as at the acquisition date September 1, 2021, using the
following assumptions:
•
Risk free rate of 0.39%-0.53%
•
Expected life of 1 – 3 years
•
Volatility rate of 101%; determined using historical volatility data
•
Exercise prices of $6.34-$72.70
•
Share price of $3.10
(iii) All vested and replaced stock options were valued using the Black-Scholes option pricing model as at the acquisition date of
September 1, 2021, using the following assumptions and inputs;
•
Risk free rate of 0.31% – 0.51%
•
Expected life of 0.16 – 2.59 years
•
Volatility rate of 101%; determined using historical volatility data
•
Exercise prices of $6.33 – $46.03
•
Share price of $3.10
(iv) Prior to the transaction’s closing date, the Company issued a $5,000 subordinated secured bridge loan with a 6-month term to
48North. For purposes of the acquisition accounting the loan, which had a fair value of $5,000, was effectively settled at the
acquisition date and included in purchase consideration.
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.
During the year ended July 31, 2022, 48North contributed net revenue of $2,209 and a comprehensive net loss attributed to
shareholders of $26,634 to the Company’s consolidated results since the date of acquisition. If the acquisition had occurred on
August 1, 2021 management estimates that the Company’s consolidated net revenue and the comprehensive net loss would not
have been materially impacted.
Acquisition of Redecan
On August 30, 2021, the Company acquired 100% of the outstanding shares of the entities that carry on the business of Redecan.
Redecan was acquired for its brands, growing capability (including outdoor growing capability) intellectual properties and its established
market share.
The following table summarizes the purchase consideration and values of the net assets acquired from Redecan on the acquisition
date.
Units
Unit Price
Fair Value
($)
($)
Consideration
Cash
(i)
402,173
Shares issued
(ii)
69,721,116
3.07
214,044
Total fair value of consideration
616,217
Net assets acquired
Current assets
Cash and cash equivalents
20,027
Accounts receivable
9,795
Prepaid expenses
4,366
Excise taxes receivable
2,566
Inventory
37,229
Biological assets
7,476
Income tax recoverable
4,947
Non-current assets
Property, plant and equipment
125,844
Cultivation and processing license
73,079
Brands
94,700
Know-how intangible asset
27,337
Intangible assets - software
1,221
HEXO Corp. 2022 Consolidated Financial Statements
30
Goodwill
Note 16
275,397
Total assets
683,984
Current liabilities
Accounts payable and accrued liabilities
(4,340)
Excise taxes payable
(1,125)
Lease liability – current
(144)
Income Tax Payable
(188)
Non-current liabilities
Lease Liability
(1,117)
Deferred tax
(60,853)
Total liabilities
(67,767)
Total net assets acquired
616,217
(i)
Cash consideration of $402,173 was paid upon the closing of the acquisition on August 30, 2021. Under the share purchase
agreement, the $400,000 cash consideration includes a variable component based upon a $4,500 working capital estimate.
Upon closing of the transaction, the working capital of Redecan was estimated at a surplus of $2,173 above the $4,500 amount.
As at July 31, 2022, $5,000 of the cash consideration remains held in escrow with a third party agent. Per the share purchase
agreement, the Company had a period of 60 days after closing the transaction to settle the working capital balance as at August
30, 2021 however, as of the date of these consolidated financial statements, finalization of the working capital component of the
purchase has not yet occurred.
(ii)
As the acquisition closed intraday on August 30, 2021, the share price is based upon the closing HEXO Corp. TSX market price
of common shares on August 30, 2021.
The identified cultivation and processing license (“the license”) enables the Company to cultivate and produce cannabis products
for sale and was valued at $73,079 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
gross margin and the estimated time to obtain a license 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 $18,300. In the with-or-without approach, reducing the estimated time to obtain a license and complete
cultivation and production ramp up by six months would reduce the valuation of the license by $21,800.
The identified Brand asset which allows the Company immediate access to accretive market share and product offerings has been
valued at $94,700 using a relief from royalty approach model (Level 3). If all other assumptions were held constant, and the
forecasted revenue growth rate was decreased by 10%, the valuation of the brand would decrease by $9,500.
The identified Know-How intangible asset, related to the unique pre-roll process, provides the Company immediate access to
scaled, efficient pre-roll technology and production capability and has been valued at $27,337. The asset was valued using a with-
or-without approach in an income based DCF valuation model (Level 3). The model estimates the value of the asset as the
difference between the present value of the future cash flows of pre-rolls, with-or-without the unique Know-how as at the acquisition
date. The significant estimate in the model is the incremental margin, which depletes over time, representing an advantageous
increase to gross margin due to the process. In the with-or-without approach, increasing the estimated incremental margin by 5%
would increase the valuation of the asset by $12,426.
During the year ended July 31, 2022, Redecan contributed net revenue of $60,011 and comprehensive net income attributed to
shareholders of $5,699 to the Company’s consolidated results since the date of acquisition. If the acquisition had occurred on
August 1, 2021 management estimates that the Company’s consolidated net revenue would have increased by an estimated
$6,787 and the comprehensive net loss would have increased by $810 for the year ended July 31, 2022.
The Company recognized transaction costs (primarily broker fees) of $22,636 related to the acquisition in Acquisitions and transaction
costs in the statement of comprehensive income.
Upon shareholder approval of the Redecan acquisition transaction the Company issued 256,776 common shares as broker
compensation.
HEXO Corp. 2022 Consolidated Financial Statements
31
Acquisition of Zenabis Global Inc.& Loss of Control
On June 1, 2021, pre-market open, the Company acquired 100% of the issued and outstanding common shares of Zenabis Global Inc.
(“Zenabis”) pursuant to an arrangement agreement entered into on February 15, 2021. Zenabis is a Canadian-licensed cultivator and
seller of medical and adult-use cannabis. Zenabis was acquired for its key brands, indoor growing capability and its established
additional market share. Under the arrangement, each former Zenabis common share was exchanged for 0.01772 of a HEXO common
share. In addition, all issued and outstanding stock options and compensation units of Zenabis were replaced with HEXO backed units,
having the same terms but adjusted for the exchange ratio, and all issued and outstanding common share purchase warrants of
Zenabis became exercisable for HEXO common shares adjusted for the exchange ratio.
The following table summarizes the purchase consideration and values of the net assets acquired from Zenabis on the acquisition
date:
Units
Unit Price
Fair Value
($)
($)
Consideration
Shares issued
(i)
17,579,336
8.61
151,358
Replacement warrants outstanding
(ii)
5,970,370
32,354
Replacement stock options issued
(iii)
905,902
5,727
Replacement RSU’s and DSU’s issued
223,497
1,554
Settlement of pre-existing debt
(iv)
n/a
20,760
Total fair value of consideration
211,753
Net assets acquired
Current assets
Cash and cash equivalents
2,804
Accounts receivable
3,822
Other receivables
198
Excise taxes receivable
86
Inventory
40,636
Biological assets
8,892
Non-current assets
Property, plant and equipment
129,074
Prepaid expenses
5,670
Cultivation and processing license
28,914
Brands
5,400
Goodwill
Note 16
88,189
Total assets
313,685
Current liabilities
Accounts payable and accrued liabilities
(22,161)
Loans
Note 22
(52,194)
Convertible debentures
(11,724)
Non-current liabilities
Lease Liability
(17,059)
Deferred tax liabilities
(134)
Total liabilities
(103,272)
Non-controlling interest
1,340
Total net assets acquired
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
HEXO Corp. 2022 Consolidated Financial Statements
32
(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
gross margin and the estimated time to obtain a license 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 license 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 license 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. 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).
LOSS OF CONTROL AND THE DECONSOLIDATION OF ZENABIS
On June 17, 2022, Zenabis Global Inc. and certain of its subsidiaries, namely ZGI Acquisition Corp., Zenabis Investments Ltd.,
Zenabis Real Estate Holdings Ltd., Zenabis Annacis Ltd., Zenabis Atholville Ltd., Zenabis Stellarton Ltd., Zenabis Housing Ltd.,
Zenabis IP Holdings Ltd., Zenabis Retail Holdings Ltd., Zenabis Ventures Inc., Zenabis Operations LI td., Zenabis Ltd., Vida
Cannabis (Canada) Ltd., Zenabis Hemp Company Ltd. and Zen Craft Grow Ltd. (collectively Zenabis) obtained an initial order from
the Quebec Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act ("CCAA"), which is a
Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course
with minimal disruption to its customers, suppliers and employees.
Ernst & Young Inc. was appointed as monitor of Zenabis in the CCAA proceedings. The administration of the CCAA process,
principally relating to the powers provided to the court and the court appointed monitor, as well as the secured debtholder interests,
removed certain elements of control of the business from HEXO. As a result, HEXO has determined that it no longer has a
controlling financial interest over Zenabis as defined in IFRS 10 - Consolidations, and therefore has deconsolidated Zenabis as of
the date of the CCAA filing.
Following the deconsolidation, the carrying value of assets and liabilities of Zenabis were removed from the Company’s
consolidated statements of financial position. The total amount deconsolidated from HEXO’s balance sheet was $82 million,
including $3.4 million of cash, $29.6 million of inventory and biological assets, $13.8 million of property, plant and equipment and
assets held for sale, $55.5 million of secured debenture and ($21.0) million of other assets and liabilities, net. The Company
recognized a gain on derecognition of the net assets of Zenabis in non-operating income totalling $25.0 million.
HEXO Corp. 2022 Consolidated Financial Statements
33
The remaining Zenabis entities, outside of the CCAA proceedings, ZenPharm Limited, a Malta based legal entity and two inactive
subsidiaries based in the US were excluded from the filing but were historically part of the Zenabis group of companies. In the
context of the CCAA filing, there are no remaining liabilities related to these entities.
Zenabis is party to transactions with HEXO and its consolidated subsidiaries entered into in the normal course of business; these
transactions include recharge of various corporate expenses for services benefiting Zenabis. Up to the date of the CCAA filing,
these transactions were eliminated on consolidation and had no impact on HEXO’s consolidated statement of earnings. After
deconsolidating Zenabis, these transactions are treated as third-party transactions in HEXO’s financial statements. The amount of
these related-party transactions during the period of June 17, 2022 to July 31, 2022 were $1,763.
16. Goodwill
$
Balance as at July 31, 2020
–
Acquisition – Zenabis (Note 15)
88,189
Balance as at July 31, 2021
88,189
Acquisition – Redecan (Note 15)
275,397
Acquisition – 48North (Note 15)
11,453
Impairment
(375,039)
Balance as at July 31, 2022
–
Goodwill was recorded on the acquisition of Zenabis Brands Inc. on June 1, 2021, Redecan on August 30, 2021 (Note 15) and 48North
on September 1, 2021 (Note 15) and is monitored at the company-wide level aggregated CGU level (“HEXO Corporate CGU”).
On January 31, 2022, the carrying amount of the Company’s total net assets significantly exceeded the Company’s market
capitalization. In addition, the Canadian Cannabis market experienced adverse changes, which were reflected in significant revisions to
management’s own forecasts of future net cash inflows and earnings from previous budgets and forecasts. As a result of these factors,
management performed an indicator-based impairment test of goodwill as at January 31, 2022.
The significant assumptions in the DCF analysis were as follows:
a. Cash flows: Estimated cash flows were projected based on forecasted operating results from internal sources as well as industry
and market trends. A discrete five-year period was forecasted with terminal value forecasted using the Gordon Growth Method. The
growth rate will fall linearly to the terminal value, declining each year over the 5 years to a terminal exit enterprise value of x8.9. If all
other assumption were held constant and the short-term growth rate in the first year was decreased by 5%, the recoverable amount
would decrease by $26,931;
ii. Terminal value growth rate: Management used a 2% terminal growth rate which is based on historical and projected consumer
inflation, historical and projected economic indicators, and projected industry growth. If all other assumptions were held constant
and the terminal growth rate was decreased by 1%, the recoverable amount would decrease by $31,806;
iii. Post-tax discount rate: Management used a 14.3% 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 the Duff & Phelps
method, and after-tax cost of debt based on select peer debt. If all other assumption were held constant and the discount rate was
in increased by 1%, the recoverable amount would decrease by $28,383; and
The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date.
The calculation of the adjusted current market capitalization was based on the share price of the Company on January 31, 2022,
adjusted for a control premium of 20%, 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
$18,000. If all other assumptions were held constant and the control premium was decreased by 5%, the recoverable amount would
decrease by $15,000.
As a result, management concluded that the carrying value of the HEXO Corporate CGU was higher than the recoverable amount, and
recorded a goodwill impairment loss of $375,039, resulting in Goodwill being reduced to $nil and the HEXO Corporate CGU’s carrying
value falling within the recoverable amount acceptable range.
The Company’s goodwill impairment loss for the year ended July 31, 2022 was $375,039 (July 31, 2021 – $nil).
At July 31, 2022, no indicators of impairment were identified for the HEXO Corporate CGU.
HEXO Corp. 2022 Consolidated Financial Statements
34
17. Warrant Liabilities
US$25,000
Registered
Direct Offering
US$20,000
Registered
Direct Offering
August 2021
Underwritten
Public Offering
Total
$
$
$
$
Opening balance as at August 1, 2020
1,917
1,533
–
3,450
Loss on revaluation of financial instruments
1,269
1,014
–
2,283
Balance as at July 31, 2021
3,186
2,547
–
5,733
Issued
–
–
39,255
39,255
Gain on revaluation of financial instruments
(3,178)
(2,541)
(38,552)
(44,271)
Balance as at July 31, 2022
8
6
703
717
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.
August Underwritten Public Offering
On August 24, 2021, the Company closed an underwritten public offering for gross proceeds of US$144,800. Under this offering, the
Company issued 24,540,012 warrants with an exercise price of US$3.45 per share. The warrant liability was measured at fair value
using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:
As at
July 31, 2022
Initial recognition
August 24, 2021
Number of warrants
24,540,012
24,540,012
Share price
US$0.19
US$2.58
Expected life
3 years
2.5 years
Dividend
US $nil
US $nil
Volatility
101%
96%
Risk free rate
2.98%
0.84%
Exchange rate (USD/CAD)
$1.2824
$1.2608
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 issued 1,497,007 warrants with an exercise price of 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:
As at
July 31, 2022
As at
July 31, 2021
Initial recognition
January 20, 2020
Number of warrants
1,497,007
1,497,007
1,497,007
Share price
US$0.19
US$3.97
US$5.80
Expected life
2.41 years
2.5 years
2.5 years
Dividend
US $nil
US $nil
US $nil
Volatility
101%
95%
80%
Risk free rate
2.98%
0.38%
1.57%
Exchange rate (USD/CAD)
$1.2824
1.2462
1.3116
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 issued 1,871,259 warrants with an exercise price of 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:
As at
July 31, 2022
As at
July 31, 2021
Initial recognition
December 31,
2019
Number of warrants
1,871,259
1,871,259
1,871,259
Share price
US$0.19
US$3.97
US$6.36
Expected life
2.41 years
2.5 years
2.5 years
Dividend
US $nil
US $nil
US $nil
Volatility
101%
95%
79%
Risk free rate
2.98%
0.38%
1.71%
Exchange rate (USD/CAD)
$1.2824
1.2462
1.2988
HEXO Corp. 2022 Consolidated Financial Statements
35
18. Convertible Debentures
Note
July 31, 2022
July 31, 2021
$
$
Unsecured convertible debenture- March 2019
(a)
–
3,406
Unsecured convertible debenture- December 2019
(b)
38,301
33,089
Total convertible debentures
38,301
36,495
Current
38,301
3,406
Non-Current
–
33,089
(a) Unsecured Convertible Debenture March 2019
Balance as at July 31, 2020
$
–
Acquired on business combination
3,722
Interest payments
(372)
Interest expense
56
Balance as at July 31, 2021
$
3,406
Interest expense
55
Debt repayment
(3,461)
Balance as at July 31, 2022
$
–
On June 1, 2021, the Company completed its business acquisition of Zenabis which included the assumption of Zenabis' unsecured
convertible debentures issued in March 2019. The debentures bore 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 were convertible at a price of $147.29. The convertible
debentures were 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. On September 27, 2021, the Company repaid, in full, the outstanding
principal and interest.
(b) Unsecured Convertible Debenture December 2019
Balance as at July 31, 2020
$
28,969
Interest expense
7,331
Interest paid
(3,211)
Balance as at July 31, 2021
$ 33,089
Interest expense
8,423
Interest paid
(3,211)
Balance as at July 31, 2022
$ 38,301
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.
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.
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 $3.20 (the “Early Conversion Price”) calculated
based on the 5-day volume weighted average HEXO Corp. share price (the “VWAP”) preceding the announcement. The VWAP utilized
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 $4.00 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 and into common shares and 3,686,721
and 978,907 common share purchase warrants of HEXO Corp., respectively.
On July 31, 2022 there remains $40,140 in principal debentures (July 31, 2021 - $40,140) outstanding. The accrued and unpaid interest
as at July 31, 2022 was $291 (July 31, 2021 - $483).
HEXO Corp. 2022 Consolidated Financial Statements
36
19. Senior Secured Convertible Note
Pre-
Amendment
July 12,
2022
Pre-
Amendment
July 12,
2022
July 31,
2021
July 31,
2021
Senior Secured Convertible Note
US$
$
US$
$
Opening balance, beginning of the year
364,847
454,673
–
–
Issued at fair value
–
–
407,284
491,714
Early conversions
–
–
(413)
(497)
Redemptions
(177,017)
(223,148)
(27,500)
(33,525)
Gain on fair value adjustment
11,925
15,784
(14,524)
(18,100)
Foreign exchange loss
–
12,672
–
15,081
Balance upon amendment July 31, 2022 (Note 20) / Balance
end of period (July 31, 2021)
199,755
259,981
364,847
454,673
Unrecognized Day 1 Loss
Opening balance, beginning of the year
(72,214)
(86,974)
–
–
Unrecognized loss deferred at issuance
–
–
(79,684)
(96,203)
Recognized loss during the period
72,214
86,974
7,470
9,229
Ending balance, end of the period
–
–
(72,214)
(86,974)
Total balance, end of period, net
199,755
259,981
292,633
367,699
On May 27, 2021 (the “Issuance date”), the Company issued a Senior Secured Convertible Note (the "Note") directly to an institutional
purchaser, HT Investments MA LLC (“HTI”), 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 bore no periodic cash interest payments and was due for payment 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 acquisition of
Redecan (Note 15). The Note was secured against the assets of HEXO Operations Inc. and its subsidiaries, as well as the assets of
HEXO USA Inc and its subsidiaries. The Note was convertible, 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$1.00. The Note included different conversion and redemption options available to the Holder and the Company, subject to
certain terms and limitations.
Fair Value Measurement
The Note represented a hybrid instrument with multiple embedded derivatives requiring separation. The Note, as a whole, was
designated as FVTPL, as at least one of the derivatives significantly modified the cash flows of the Note and it was clear with limited
analysis that separation was not prohibited. The changes in fair value of the instrument were recorded in the statement of net loss with
changes in credit spread being recognized through Other comprehensive income.
The fair value of the Note was classified as Level 2 in the fair value hierarchy and was determined using the partial differential equation
method with the following inputs;
As at
July 12, 2022
As at
July 31, 2021
Initial recognition
May 21, 2021
Share price
US$0.20
US$3.98
US$6.53
Dividend
$nil
$nil
$nil
Volatility
81%
85%
85%
Risk free rate
3.57%
0.327%
0.227%
Credit spread
38.57%
15.44%
16.06%
During the year ended July 31, 2022 the gain on fair value adjustments related to changes in credit spread amounted to $23,964 (July
31, 2021 – $1,590).
The fair value of the Note at initial recognition was determined using a valuation technique that included 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 believed that time is a factor that market participants would take into account when pricing the note. Therefore, the
unrecognized Day 1 loss was recognized on a straight-line basis in the statement of net loss over the contractual life of the Note. Upon
extinguishment on July 12, 2022, the remaining amount of the Day 1 loss was accelerated and recognized in the statement of net loss.
Event of Default
On January 31, 2022, the Company failed to meet a financial covenant under the Note which required the Company to achieve positive
adjusted EBITDA for the three-month period ended January 31, 2022. This was an event of default under the terms of the Note. On
March 13, 2022, the Holder of the Note agreed to an irrevocable waiver of their rights in relation to the event of default. This waiver was
then overridden by a forbearance to act upon the default event issued by the Holder as part of the Transaction Agreement. As the
HEXO Corp. 2022 Consolidated Financial Statements
37
Holder did not irrevocably waive the default event but rather waived the right to act upon the default event, the Note remained in default
through the period from January 31, 2022 to the date of extinguishment on July 12, 2022.
As a result of the default, the Holder obtained the option to declare the Note (or any portion thereof) to become due and payable
immediately for cash in an amount equal to the Event of Default Acceleration Amount, as defined in the Note. The Event of Default
Acceleration Amount is a cash amount equal to the greater of:
●
(A) 115% of the outstanding principal amount of the Note, including any accrued and unpaid interest; and
●
(B) 115% of the product of (i) the original conversion rate of 142.6533, (ii) the outstanding principal amount, including any
accrued and unpaid interest, and (iii) the greater of:
○
the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending
on, and including, the VWAP Trading Day immediately before the date the acceleration notice is delivered; and
○
the highest Daily VWAP per Common Share occurring during the thirty (30) consecutive VWAP Trading Days ending
on, and including, the VWAP Trading Day immediately before the date the applicable Event of Default occurred.
Subsequent to the event of default on January 31, 2022, and up until extinguishment on July 12, 2022, the Note was carried at the
amount payable on demand as under IFRS, the fair value of the note with a demand feature cannot be less than the amount payable on
demand, discounted from the first date that the amount could be required to be repaid. The demand amount was calculated by
reference to the Event of Default Acceleration amount, as defined in the agreement. Fair value was determined through the use of a
model using a valuation technique that includes unobservable inputs and was less the amount payable on demand.
As the demand amount represented the higher amount, at the time of extinguishment on July 12, 2022 the Note was carried at its
demand amount of $259,981 (US $199,755), representing 115% of the outstanding principal on the date of extinguishment.
Amendment of the Note
On July 12, 2022, pursuant to a transaction agreement dated April 11, 2022, as amended on June 14, 2022 (the “Transaction
Agreement”) among HEXO, Tilray Brands and HT Investments MA LLC (“HTI”), the terms of the Note were amended and restated and
the Note was immediately thereafter assigned to Tilray Brands, pursuant to the terms of an amended and restated assignment and
assumption agreement dated June 14, 2022. The amended note is hereinafter referred to as the Amended Senior Secured Convertible
Note (Note 20). As consideration for the amendment, HEXO issued 56,100,000 Common Shares and 11,674,266 rights exercisable for
Common Shares to HTI, representing 12% of the outstanding principal of the Amended Note at the closing at the exercise price of
CAD$0.40. On July 25, 2022, the rights were exercised.
Management assessed the changes made to the Note and determined that the modification should be accounted for as an
extinguishment of the previous liability and then recorded the Amended Note at its fair value determined as of the date of the
modification.
As a result, the consolidated statements of net loss and comprehensive loss for the year ended July 31, 2022, includes a net gain on
extinguishment of liabilities, detailed as follows:
$
Carrying value of Senior secured convertible note pre-amendment
259,981
Fair value of common shares and share rights issued on amendment
(17,900)
Transaction costs
(12,987)
Fair value of Amended senior secured convertible note
(208,560)
Net gain on extinguishment of debt
20,534
On January 18, 2022, the Company utilized cash proceeds from the sale of its interest in Belleville Complex Inc. to settle $10,111 of
optional redemptions at a rate of 110% of principal (Note 11). No shortfall cash payments were issued in the year ended July 31, 2022.
HEXO Corp. 2022 Consolidated Financial Statements
38
20. Amended Senior Secured Convertible Note
July 31,
2022
July 31,
2022
US$
$
Balance upon amendment (Note 19)
160,246
208,560
Gain on fair value during the year
3,805
4,880
Foreign exchange loss
–
(3,061)
Ending balance, end of the year
164,051
210,379
On July 12, 2022, the Company entered into the Transaction Agreement (Note 19), the terms of the Note were amended and restated
and the Note was immediately thereafter assigned to Tilray Brands, pursuant to the terms of an amended and restated assignment and
assumption agreement dated June 14, 2022 (the “Amended Note”, or the “Amended Senior Secured Convertible Note”).
Pursuant to the terms of the Transaction Agreement, Tilray Brands acquired 100% of the remaining outstanding principal balance of
US$173.7 million of the Amended Note and, concurrently, HEXO assumed an obligation to pay a US$1.5 million monthly fee, that
represents a finance cost, until the earlier of the date all obligations of the Company pursuant to the terms of the Amended Note have
been satisfied, extinguished or terminated, the conversion in full of the Amended Note, cancellation by Tilray and January 15, 2027.
The Amended Note matures on May 1, 2026, includes coupon interest at the fixed rate of five percent (5%) per annum, calculated daily,
and is payable by the Company to the Holder semi-annually on the last business day of each June and December (commencing June,
2022). For the first year of the Amended Note, the Company is required to pay interest in cash. Unpaid interest at July 31, 2022 was $464
(July 31, 2022 - $nil). Thereafter, until the maturity date, in the event that the Company is not in compliance with the Minimum Liquidity
covenant, the Company shall be entitled to elect to add the amount of the interest to the Principal Amount of the Amended Note as
capitalized interest. Subject to the terms of the Amended Note, unless the principal amount and the capitalized interest have previously
been converted, on the maturity date, the Company shall pay the capitalized interest by way of conversion consideration.
Subject to certain limitations and adjustments, the Amended Note is convertible into HEXO Common Shares at the Holder’s option at any
time prior to the second scheduled trading day prior to the maturity date, at a conversion price of CAD$0.40 per HEXO Common share as
determined the day before exercise, including all capitalized interest. HEXO has the ability to force the conversion if the daily VWAP per
common share is equal to or exceeds $3.00 per share for twenty consecutive trading days, subject to HEXO meeting the terms of the
equity condition, as set out in the terms of the Amended Note.
The Company is not able to redeem or repay the Amended Note prior to May 1, 2026, without the prior written consent of the Holder.
The Company is subject to certain financial and non-financial covenants as set out in the terms of the Amended Note. Among other
covenants, the Company is subject to a minimum liquidity covenant and is required to maintain an unrestricted cash amount equal to or
greater than US$20.0 million. In addition, as of the last day of each three-month period starting with the three-month period ending April
30, 2023, the Company is required to have Adjusted EBITDA of not less than US$1.00 for the three-month period ending on such day.
Adjusted EBITDA means for any fiscal quarter, the Adjusted EBITDA of the Company, calculated as: (i) total net income (loss); (ii) plus
(minus) income taxes (recovery); (iii) plus (minus) finance expense (income); (iv) plus depreciation; (v) plus amortization; (vi) plus (minus)
investment (gains) losses, including revaluation of financial instruments, share of loss from investment in joint ventures, adjustments on
warrants and other financial derivatives, unrealized loss on investments, and foreign exchange gains and losses; (vii) plus (minus) fair
value adjustments on inventory and biological assets; (viii) plus inventory write-downs and provisions; (ix) plus (minus) non-recurring
transaction and restructuring costs; (x) plus impairments to any and all long-lived assets; (xi) plus all stock-based compensation; and (xii)
plus any management or advisory fee paid by the Company to the Holder or any Affiliate thereof during the applicable quarter.
On the occurrence of an Event of Default, the Amended Note becomes due and payable immediately at the Event of Default Acceleration
Amount, as defined under the Amended Note agreement. The Amended Note constitutes the senior secured obligation of the Company.
Fair Value Measurement
The Amended Note represents a hybrid instrument containing a conversion feature. The Amended Note, as a whole, has been
designated as FVTPL, as at least one of the derivatives does significantly modify the cash flows of the Amended 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 net
loss with changes in fair value attributable to changes in credit risk being recognized through other comprehensive income.
The fair value of the Note is classified as Level 2 in the fair value hierarchy and was determined using the partial differential equation
method with the following inputs;
As at
July 31, 2022
Initial recognition
July 12, 2022
Share price
US$0.19
US$0.20
Dividend
$nil
$nil
Volatility
87.8%
80.7%
Credit spread
34.2%
38.6%
HEXO Corp. 2022 Consolidated Financial Statements
39
Conversion price
US$0.31
US$0.30- US$0.31
Risk free rates were selected based upon a SOFR curve at the valuation date. The curve’s period range was 3 months to 4 years.
A decrease of credit spread by 1% would increase the fair value of the instrument by $2,487.
21. Lease Liabilities
The following is a continuity schedule of lease liabilities for the years ended July 31, 2022 and 2021:
$
Balance at July 31, 2020
29,116
Assumed on business combination (Note 15)
17,059
Lease disposals
(789)
Lease payments
(4,835)
Interest expense on lease liabilities
3,334
Balance at July 31, 2021
43,885
Assumed on business combination (Note 15)
1,992
Lease additions
29
Lease terminations
(24,300)
Lease payments
(6,054)
Interest expense on lease liabilities
4,197
Derecognition due to loss of control (Note 15)
(16,909)
Balance at July 31, 2022
2,840
Current
914
Non-current
1,926
On July 31, 2022, the Company terminated its lease of the Belleville Ontario, manufacturing and processing centre. The Company
previously leased the facility as a 15-year anchor tenant from a related party (Note 30). Under the lease surrender terms the Company
incurred a penalty fee of $2,380, payable on July 31, 2022. Also, under the surrender terms the Company agreed to surrender certain
fixed assets with an estimated fair market value of $160. As at July 31, 2022, the Company has a remaining $525 accrued for the
associated liabilities of transferring the lease back to the lessor. The Company recognized a gain on lease termination of $22,680
recorded in other income.
The Company expensed variable lease payments of $3,200 in the year ended July 31, 2022 (July 31, 2021 –$3,885).
The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at July 31, 2022:
Fiscal year
2023
2024 – 2025 2026 – 2027 Thereafter
Total
$
$
$
$
$
Lease obligations
1,026
1,174
300
1,200
3,700
22. Senior Notes Payable
The following table illustrates the continuity schedule of the senior notes payable for the years ended July 31, 2022 and July 31, 2021:
July 31, 2022
July 31, 2021
$
$
Opening Balance
50,159
–
Assumed on business combination
–
50,138
Interest paid
(5,095)
(1,210)
Interest expense
6,604
1,231
Deconsolidated due to loss of control (Note 15)
(51,668)
–
Closing Balance
–
50,159
Current portion
–
50,159
Long-term portion
–
–
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 was secured against the assets of Zenabis.
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 . Further, the senior notes contain a covenant
HEXO Corp. 2022 Consolidated Financial Statements
40
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. The senior notes were recorded at fair value at the business acquisition date and amortized cost
thereafter.
The senior notes were derecognized upon the loss of control of Zenabis on June 17, 2022 (Note 15).
23. 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).
During the year ended July 31, 2022 the Company failed to the meet the NASDAQ’s US$1.00 minimum share price. On July 27, 2022,
the Company received an 180 day extension to regain compliance status.
(c) Issued and Outstanding
As at July 31, 2022, a total of 600,988,447 (July 31, 2021 – 152,645,946) common shares were issued and outstanding. No special
shares have been issued or are outstanding.
Number of shares
Share Capital
Balance at July 31, 2020
120,616,441 $
1,023,788
May 2021 at the market offering, net
(i)
6,373,926
45,257
June 2020 at the market offering
(ii)
244,875
–
Senior secured convertible note1, net
Note 19
4,602,241
29,540
Acquisition shares - Zenabis
Note 15
17,579,336
151,358
Transaction costs
Note 15
448,639
3,612
Exercise of warrants
Note 24
2,146,931
9,932
Exercise of stock options
Note 25
410,051
3,213
Exercise of equity settled RSUs
Note 25
223,506
1,267
Balance at July 31, 2021
152,645,946
$ 1,267,967
Acquisition shares – Redecan, net
Note 15
69,721,116
213,746
Acquisition shares – 48North, net
Note 15
5,352,005
16,486
At-the-Market program, net of costs
(iv)
24,290,117
27,266
August 2021 Underwritten Public Offering
(iii)
49,080,024
135,645
Redemptions of senior secured convertible note1, net
Note 19
202,224,566
199,818
Amended senior secured convertible note
Note 20
67,774,266
17,900
Equity line of credit standby commitment fee
(v)
10,843,373
3,795
Advisor and broker compensation
(vi)
19,040,010
6,998
Exercise of stock options
Note 25
17,024
147
Balance as at July 31, 2022
600,988,447
$ 1,889,768
1 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 on August 5, 2020, the Company issued the
final shares.
HEXO Corp. 2022 Consolidated Financial Statements
41
(iii) August 2021 Underwritten Public Offering
On August 24, 2021, the Company closed an underwritten public offering for total gross proceeds of $183,103 (US$144,786)
were generated through the issuance of 49,325,424 units comprising 49,325,424 common shares and 24,540,012 common share
purchase warrants. The warrants were fair valued at $39,255 on the grant date and recorded as a Warrant liability (Note 17).
Associated issuance costs in the year ended July 31, 2022, were $8,069. In connection with the underwritten public offering, the
Company issued 245,400 common shares with a value of $834 as broker compensation.
(iv) At-the-Market (“ATM”) Program
On November 17, 2021, the Company resumed the ATM program initially launched in May 2021 allowing the Company to issue up to
$150,000 (or its US equivalent) of common shares to the public. Upon resumption, the Company raised additional gross proceeds of
$27,869 on the issuance of 24,290,117 common shares. Associated issuance costs in the year ended July 31, 2022 were $603.
(v)
Equity line of credit – Standby commitment fee
On May 12, 2022, the Company issued 10,843,373 common shares with a market value of $3,795, as a Standby Commitment Fee to
KAOS Capital Inc and an affiliate of KAOS Capital Inc in connection to non-binding Letter of Intent for a $180 million equity backstop
agreement (the “Equity line of credit”). As at July 31, 2022, the Equity line of credit’s prospectus supplement qualifying the Stand-By
Commitment Shares had not been filed and the line of credit has not been drawn upon.
(vi) Advisor and broker compensation
In connection with the closing of the Amended and restated senior secured convertible note, the Company issued 18,537,834 common
shares as broker compensation with a value of $4,913 (Note 20). Another 256,776 common shares with a value of $1,251 were issued
as advisor compensation in connection to the closing of Redecan.
24. Common Share Purchase Warrants
The following table summarizes warrant activity during the year ended July 31, 2022 and year ended July 31, 2021.
July 31, 2022
July 31, 2021
Number of
Weighted average
Number of
Weighted average
warrants
exercise price1
warrants
exercise price1
Outstanding, beginning of year
36,666,958
$
8.85
33,379,408
$
7.60
Expired and cancelled2
(3,179,074)
33.86
(535,889)
4.09
Issued on acquisition
1,554,320
22.43
5,970,370
14.59
Issued
24,540,012
4.35
–
–
Exercised
–
–
(2,146,931)
4.10
Outstanding, end of year
59,582,216
$
6.07
36,666,958
$
8.85
1 USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes.
2 Of the Company’s expired and canceled 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 canceled.
3 Replacement warrants issued upon business acquisition (Note 15).
The following table summarizes the warrants issues during the years ended July 31, 2022 and July 31, 2021.
Issuance date
Exercise price
Warrants issued
Expiry period
June 01, 2021 (issued on acquisition)
$3.96-$155.19
5,970,370
0.17-4 years
August 24, 2021
US$3.45
24,540,012
5 years
September 1, 2021 (issued on acquisition)
$6.42-$72.70
1,554,320
1.63-2.59 years
HEXO Corp. 2022 Consolidated Financial Statements
42
The following is a consolidated summary of warrants outstanding as at July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
Number
outstanding
Book value
Number
outstanding
Book value
Classified as Equity
$
$
June 2019 financing warrants
Exercise price of $63.16 expiring June 19, 2023
546,135
10,023
546,135
10,022
April 2020 underwritten public offering warrants
Exercise price of $3.84 expiring April 13, 2025
11,830,075
15,971
11,830,075
15,971
May 2020 underwritten public offering warrants
Exercise price of $4.20 expiring May 21, 2025
7,591,876
10,446
7,591,876
10,446
Conversion Unit warrants
Exercise price of $4.00 expiring June 10, 2023
3,686,721
11,427
3,686,721
11,427
Exercise price of $4.00 expiring June 30, 2023
978,907
1,928
978,907
1,928
Broker / Consultant warrants
Exercise price of $3.00 expiring November 3, 2021
–
–
18,905
34
Exercise price of $3.00 expiring March 14, 2022
–
–
23,571
66
Exercise price of $63.16 expiring June 19, 2023
15
–
15
–
Molson warrants
Exercise price of $24.00 expiring October 4, 2021
–
–
2,875,000
42,386
Issued in connection with business acquisition
Exercise price of $151.24 expiring September 27, 2021
–
–
14,617
–
Exercise price of $155.19 expiring April 17, 2022
–
–
226,422
1
Exercise price of $78.16 expiring August 21, 2022
15,992
3
15,992
3
Exercise price of $102.71 expiring August 21, 2022
24,338
2
24,338
2
Exercise price of $11.29 expiring January 27, 2023
356,689
1,195
356,689
1,195
Exercise price of $10.99 expiring April 16, 2023
680,877
398
–
–
Exercise price of $12.68 expiring May 4, 2023
602,804
322
–
–
Exercise price of $72.70 expiring April 2 2024
250,080
49
–
–
Exercise price of $3.96 expiring April 23, 2025
631,322
4,232
631,322
4,232
Exercise price of $9.03 expiring June 25, 2025
3,205,378
18,236
3,205,378
18,236
Exercise price of $5.64 expiring September 23, 2025
1,228,873
7,902
1,228,873
7,902
Exercise price of $8.47 expiring October 30, 2025
43,856
261
43,856
261
31,673,938
82,395
33,298,692
124,112
Classified as Liability
US$25m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring December 31, 2024
1,871,259
8
1,871,259
3,185
US$20m Registered Direct Offering Warrants
Exercise price of US$9.80 expiring January 22, 2025
1,497,007
6
1,497,007
2,548
August 2021 Underwritten Public Offerings Warrants
Exercise price of US$3.45 expiring August 24, 2026
24,540,012
703
–
–
27,908,278
717
3,368,266
5,733
59,582,216
83,112
36,666,958
129,845
25. Share-based Compensation
Omnibus Plan
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 60,098,845 common
shares as at July 31, 2022 (July 31, 2021 – 15,264,595). The Omnibus plan is subject to cash and equity settlement, the Former Plan,
Zenabis plan are subject to equity settlements. Options issued prior to July 2018 under the outgoing plan and the options assumed
through the acquisitions of 48North and Zenabis do not contribute to the available option pool reserved for issuance. As of July 31,
2022, the Company had 23,415,128 issued and outstanding under the Omnibus Plan, 747,244 issued and outstanding under the
Former Plan and 524,696 issued and outstanding under the assumed plans from business combinations.
HEXO Corp. 2022 Consolidated Financial Statements
43
Stock Options
The following table summarizes stock option activity during the year ended July 31, 2022 and the year ended July 31, 2021.
July 31, 2022
July 31, 2021
Number of
Weighted average
Number of
Weighted average
options
exercise price
options
exercise price
Opening balance
12,018,143
$ 10.63
7,503,691
$ 16.30
Granted
17,851,906
0.73
5,273,906
5.21
Replacement options issued on acquisition
162,009
7.19
905,902
3.81
Forfeited
(4,714,233)
4.47
(630,473)
12.80
Expired
(613,733)
22.20
(624,832)
25.95
Exercised
(17,024)
2.54
(410,051)
3.00
Closing balance
24,687,068
$ 0.73
12,018,143
$ 10.63
The following table summarizes the stock option grants during the year ended July 31, 2022 and July 31, 2021:
Options granted
Grant date
Exercise price
($)
Executives and
directors
Non-executive
employees
Total
Vesting terms
Expiry period
October 30, 2020
3.88
349,652
315,358
665,010
Terms A
10 years
December 22, 2020
5.44
380,673
960,100
1,340,773
Terms A
10 years
April 28, 2021
7.54
-
85,389
85,389
Terms A
10 years
June 17, 2021
7.43
75,000
45,613
120,613
Terms A
10 years
July 29, 2021
5.24
580,164
2,481,957
3,062,121
Terms A
10 years
Total
1,385,489
3,888,417
5,273,906
November 1, 2021
1.86
2,327,613
947,580
3,275,193
Terms A
10 years
March 21, 2022
0.75
2,491,034
2,254,069
4,745,103
Terms A
10 years
April 28, 2022
0.51
2,839,660
178,157
3,017,817
Terms A
10 years
June 16, 2022
0.28
6,192,033
621,760
6,813,793
Terms A
10 years
Total
13,850,340
4,001,566
17,851,906
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, 2022.
Exercise price
Number outstanding
Weighted average
remaining life (years)
Number exercisable
Weighted average
remaining life (years)
$0.28–$0.75
13,984,612
9.78
1,925,669
9.65
$1.86–$9.92
7,422,273
7.90
5,497,265
7.55
$10.76–$34.00
3,280,183
6.46
3,237,557
6.46
24,687,068
10,660,491
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, 2022 and the year ended July 31, 2020.
July 31, 2022
July 31, 2021
Value of units on
Value of units on
Units
grant date
Units
grant date
Opening balance
550,832
$ 7.91
587,108
$
8.41
Granted
1,517,236
1.74
24,008
3.17-7.17
Replacement units issued on acquisition
–
–
223,506
8.61
Exercised – equity settled
–
–
(223,506)
8.61
Exercised – cash settled
–
–
(25,483)
5.62-8.60
Forfeited
(34,801)
3.30
(34,801)
11.76
Closing balance
2,033,267
$ 3.24
550,832
$
7.91
HEXO Corp. 2022 Consolidated Financial Statements
44
The following table summarizes the RSUs granted during the year ended July 31, 2022 and the year ended July 31, 2021.
RSUs granted
Grant date
Unit value
Executive and
directors
Non-executive
employees
Vesting terms
Expiry period
October 30, 2020
$3.16
7,161
–
Terms A
10 years
June 17, 2021
$7.17
9,413
–
Terms A
10 years
July 29, 2021
$5.38
7,434
–
Terms A
10 years
Total
24,008
November 1, 2021
$1.74
1,517,236
–
Terms A
10 years
Total
1,517,236
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.
On at July 31, 2022, the Company had 2,195,909 vested RSUs.
Deferred Share Units (“DSUs”)
Under the Omnibus Plan, the Board of Directors is authorized to issue DSUs (in conjunction with all share-based compensation) up to
10% of the issued and outstanding common shares, net of the outstanding share-based awards. 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 deferral 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 DSU activity during the years ended July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
Units
Value of units
Units
Value of units
Opening balance
–
$ –
–
$ –
Granted
4,088,386
0.72
–
–
Closing balance
4,088,386
$ 0.24
–
$ –
All DSUs have been issued to directors of the Company and fully vest upon the termination of their tenure as directors. On July 31,
2022, there were no vested DSUs.
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:
July 31, 2022
July 31, 2021
Exercise price (weighted average)
$6.84
$17.03
Share price (weighted average)
$6.69
$17.19
Risk-free interest rate (weighted average)
0.98%
1.24%
Expected life (years) of options (weighted average)
5
5
Expected annualized volatility (weighted average)
93%
85%
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, 2022, the Company allocated $211 in share-based compensation to inventory (July 31, 2021 – $1,506).
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 years ended July 31, 2022 and 2021.
July 31, 2022
July 31, 2021
$
$
Stock option share-based compensation
13,506
12,863
RSU share-based compensation
–
287
Total share-based compensation
13,506
13,150
RSU cash-settled compensation
(189)
127
DSU cash-settled compensation
1,079
–
Total cash-settled compensation
890
127
HEXO Corp. 2022 Consolidated Financial Statements
45
26. Net Loss per Share
The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per
share because their effect was anti-dilutive:
Instrument
July 31, 2022
July 31, 2021
Stock options
24,687,068
12,018,143
RSUs
2,033,267
550,832
DSUs
4,088,386
–
Acquired and reissued warrants
7,040,209
5,747,487
2019 June financing warrants
546,135
546,135
US$25m registered direct offering warrants
1,871,259
1,871,259
US$20m registered direct offering warrants
1,497,007
1,497,007
2020 April underwritten public offering warrants
11,830,075
11,830,075
2020 May underwritten public offering warrants
7,591,876
7,591,876
2021 August underwritten public offering warrants
24,540,012
–
Warrants issued under conversion of debentures
4,665,628
4,665,628
Joint venture issued warrants
–
2,875,000
Convertible debenture broker/finder warrants
15
42,491
Senior secured convertible note
–
92,668,816
Amended senior secured convertible note
556,882,200
–
647,273,137
141,904,749
27. Financial Instruments
Market Risk
Interest Risk
The Company has minimal exposure to interest rate risk related to the investment of cash, cash equivalents and restricted cash. The
Company may, from time to time, 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, 2022, the Company has $210,379 of outstanding principle on the amended and
reassigned senior secured convertible note (Note 20) bearing interest of 5% per annum, paid semi-annually. The amended and
reassigned senior secured convertible note bears a fixed interest rate and therefore are not subject to interest risk.
Price Risk
Price risk is the risk of variability in fair value due to movements in equity or market prices.
Financial liabilities
During the year ended July 31, 2022 the Company amended and reassigned the Senior secured convertible note (Note 19) from HTI to
Tilray (Note 20). One aspect of this debt restructuring is the elimination of the optional redemption feature providing the Company with
relief from the risk of forced cash-settlements under the Senior secured convertible note. The sensitivity of the Amended senior secured
convertible note due to price risk is disclosed in Note 20.
If the fair value of these financial assets and liabilities were to increase or decrease by 10% the Company would incur a related net
increase or decrease to Comprehensive loss of an estimated $22,335 (July 31, 2021 – $37,100). The following table presents the
Company’s price risk exposure as at July 31, 2022 and July 31, 2021.
July 31, 2022
July 31, 2021
$
$
Financial assets
504
2,492
Financial liabilities
(211,096)
(373,432)
Total exposure
(210,592)
(370,940)
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, 2022,
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, 2021 – AA) and an American commercial bank with a credit rating of A-. Certain restricted
HEXO Corp. 2022 Consolidated Financial Statements
46
funds in the amount of $29,994 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+.
Subsequent to July 31, 2022, management entered into a new directors and officers insurance program which released the $29,994
from restricted funds.
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 at July 31, 2022 is $1,927 (July 31, 2021 – $66).
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, restricted cash and trade receivables represents the maximum exposure to credit
risk and as at July 31, 2022 and amounted to $158,461 (July 31, 2021 – $522,908). During the year ended July 31, 2022 the Company
fully utilized the July 31, 2021 cash held in escrow balance to partially fund the acquisition of Redecan (Note 15).
The following table summarizes the Company’s aging of trade receivables as at July 31, 2022 and July 31, 2021:
July 31,
July 31,
2022
2021
$
$
0–30 days
24,661
22,971
31–60 days
11,808
12,390
61–90 days
2,177
1,435
Over 90 days
4,353
625
Total
42,999
37,421
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, 2022, 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 (“AGLC”)
representing 17%, 30% and 15%, respectively (July 31, 2021 – SQDC, OCS and AGLC representing 42%, 20% and 14%, respectively)
of total applicable periods net cannabis sales.
The Company holds trade receivables from the crown corporations OCS and the AGLC representing 42% and 23%, respectively, of
total trade receivables as at July 31, 2022 (July 31, 2021 – the three crown corporations SQDC, OCS and AGLC representing 13%,
29% and 13% 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 working capital requirements. As at July 31,
2022, the Company has $83,238 (July 31, 2021 – $67,462) of cash and cash equivalents and $42,999 (July 31, 2021 – $37,421) in
trade receivables. The Company has current liabilities of $335,076 (July 31, 2021 – $503,638) on the statement of financial position. As
well, the Company has remaining contractual commitments of $44,147 due before July 31, 2023.
Current financial liabilities include the Company’s obligation on the Amended senior secured convertible note. As stated in Note 2, the
Company has amended and reassigned the senior note to Tilray resulted in the extension of the notes maturity by 36-months and as
well as removing the optional redemptions clauses of the previous note. The notes are classified as current due to the noteholders
ability to convert the note into equity at any time during the life of the note, and therefore does not reflect a cash based current liability
as at July 31, 2022.
The following table provides an analysis of undiscounted contractual maturities for financial liabilities.
Fiscal year
2023
2024
2025
2026
2027
Thereafter
Total
$
$
$
$
$
$
$
Accounts payable and accrued liabilities
72,581
–
–
–
–
–
72,581
Excise taxes payable
6,421
–
–
–
–
–
6,421
Convertible debentures (Note 18)
40,431
–
–
–
–
–
40,431
Undiscounted lease payments (Note 21)
1,026
587
587
150
150
1,200
3,700
120,459
587
587
150
150
1,200
123,133
Amended senior secured convertible note
(Note 20)
34,176
34,176
34,176
250,270
–
–
352,798
Total
154,635
34,763
34,763
250,420
150
1,200
475,931
HEXO Corp. 2022 Consolidated Financial Statements
47
Foreign Currency Risk
On July 31, 2022, the Company holds certain financial assets and liabilities denominated in United States Dollars which consist of cash
and cash equivalents, 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, 2022, approximately
$104,215 (US$81,266) (July 31, 2021 – $434,838 (US$348,931)) of the Company’s cash and cash equivalents was in US$. A 1%
change in the foreign exchange rate would result in a change of $1,042 to the unrealized gain or loss on foreign exchange or on the
gain or loss on financial instrument revaluation of US$ denominated warrants.
The Company’s Amended senior secured convertible note is denominated in US$. The note bears an interest rate of 5%, payable in
cash on a semi-annual basis. The sensitivity of the Amended senior secured convertible note due to foreign currency risk is disclosed in
Note 20. As of the date of this report, the Company remains in the process of executing the Equity line of credit agreement with KOAS,
which will provide the Company access to $5 million monthly, up to $180 million over a 36-month period, of which 60% is to be utilized
towards the settlement of the Amended senior secured convertible note.
28. 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
July 31, 2022
July 31, 2021
$
$
Salaries and benefits
22,628
21,116
General and administrative
32,914
20,730
Professional fees
22,837
11,962
Consulting
6,537
4,379
Total
84,916
58,187
The following table summarizes the total payroll related wages and benefits by nature in the period:
For the year ended
July 31, 2022
July 31, 2021
$
$
General and administrative related wages and benefits
22,628
21,116
Marketing and promotion related wages and benefits
6,959
5,543
Research and development related wages and benefits
2,034
2,706
Total operating expense related wages and benefits
31,621
29,365
Wages and benefits capitalized to inventory
31,041
14,993
Total wages and benefits
62,662
44,358
29. Other Income and Losses
For the year ended
July 31, 2022
July 31, 2021
$
$
Interest and financing expenses
(20,073)
(32,124)
Interest income
1,651
1,601
Net gain on extinguishment of debt (Note 19)
20,534
–
Finance income (expense), net
2,112
(30,523)
Revaluation of warrant liabilities
44,271
(2,283)
Share of loss from investment in associates and joint ventures
(9,157)
(6,505)
Fair value gain/(loss) on convertible debenture
–
1,260
Fair value (loss)/gain on senior secured convertible note
(45,820)
1,751
Amortization of day 1 loss (Note 19)
(86,974)
(9,229)
Gain on sale of interest in BCI (Note 10)
9,127
–
(Loss)/gain on investments
(716)
1,994
Net gain on loss of control of subsidiary (Note 15)
25,009
–
Foreign exchange gain/(loss)
(666)
9,108
Other income
18,118
4,763
Non-operating income (expense), net
(46,808)
859
HEXO Corp. 2022 Consolidated Financial Statements
48
30. 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
July 31, 2022
July 31, 2021
$ $
Salary and/or consulting fees
2,520
2,321
Termination benefits1
10,914
1,008
Bonus compensation
1,400
800
Stock-based compensation
7,051
6,800
Total
21,285
10,929
1 Inclusive of non-cash, share-based compensation in the amount of $3,975 (July 31, 2021 - $nil)
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 held a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc. (“Olegna”), a company
owned and controlled by a director of the Company, holding the remaining 75% in BCI. On January 18, 2022, the Company sold its
25% interest in BCI to the related party partner Olegna for net proceeds of $10,111 which were immediately used to partially repay the
February 2022 optional redemption. On July 31, 2022, the Company terminated the lease with Olegna. The Company previously leased
the facility as a 15-year anchor tenant from a related party (Note 21). Under the lease surrender terms the Company incurred a penalty
fee of $2,380 payable on July 31, 2022.
Initial consideration for the 25% interest on the joint venture was deemed $nil, the carrying value of BCI at disposal was $984 and
therefore as a result of the above transaction the Company recognized a gain on sale of $9,127, recognized in other income and losses
during the year ended July 31, 2022. Under this lease arrangement, the Company incurred $5,436 in lease and operating expenses
during the year ended July 31, 2022 (July 31, 2021 - $5,369). This lease liability is recognized on the Company’s balance sheet under
IFRS 16 (Note 21).
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 subleased a section of its Belleville lease to Truss LP up to July 31, 2022, at which time the sublease was
terminated (Note 21).
Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produced, and packaged cannabis infused
beverages in the Cannabis Infused Beverage (“CIB”) Facility (located at the Belleville facility) and in the Gatineau Facility. The
Company continues to market and sell beverages for the adult-use markets in Canada, in each case subject to the terms of its
regulatory approvals and applicable laws. On October 1, 2021, Truss LP received a cannabis manufacturing and processing license
under the Cannabis Act (Canada) and commenced manufacturing by producing CIBs within the Belleville facility. Under a new
arrangement and until Truss LP operationalizes is cannabis selling license, the Company purchases the manufactured goods from
Truss LP and sells the beverages through to third parties, as a principal in the arrangement. Truss LP received its license for the selling
of cannabis on May 2, 2022, however, they have not enabled the license to be utilized and have no ability to sell to their customers.
Truss LP is expected to operationalize its license in fiscal year 2023. For the period ended July 31, 2022, the Company continues to act
as the principal in the arrangement.
During the year ended July 31, 2022, the Company purchased $912 (July 31, 2021 – $7,624) of raw materials from Truss LP under the
previous TSSA arrangement and $14,308 (July 31, 2021 – $nil) of manufactured products under the new arrangement.
31. Capital Management
The Company’s objectives when managing capital is to safeguard their ability to continue as a going concern, so that they can provide
returns for shareholders and reach cashflow positivity.
Management defines capital as the Company’s shareholders’ equity. The Board of Directors does not establish quantitative return on
capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any
externally imposed capital requirements other than the covenants related to the Company’s debt instruments as set out in Notes 17 and
18.
HEXO Corp. 2022 Consolidated Financial Statements
49
As at July 31, 2022, total managed capital was $313,692 (July 31, 2021 – $732,265).
32. 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, 2023
44,147
July 31, 2024
24,536
July 31, 2025
26,448
July 31, 2026
23,326
July 31, 2027
11,771
Thereafter
1,200
131,428
See Note 21 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, 2022, the remaining balance of the letter of credit is $150, 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. During the year ended July 31, 2022, the letter of credit
was amortized to $2,080. The letter of credit has not been drawn upon as at July 31, 2022. The letter of credit is secured by cash held
in collateral (Note 5).
CONTINGENCIES
The Company may be, from time to time, subject to various administrative and other legal proceedings. 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, 2022, the Company and its former 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 March
27, 2020. 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) HEXO’s management of its inventories. 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, 2022 (July 31, 2021 - $nil).
As of July 31, 2022, 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.
HEXO Corp. 2022 Consolidated Financial Statements
50
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 costs and purchase obligations under the contract exceed the economic
benefits expected to be received. The related loss was realized in operating expenses in the year ended July 31, 2020. On July 25,
2022, the Company received a judgment from the court awarding the claim to the counterparty. In response, management has initiated
an appeal from the decision and, as a result, the onerous contract liability remains as at July 31, 2022.
33. Fair Value of Financial Instruments
The fair values of the financial instruments as at July 31, 2022 are summarized in the following table:
Amortized
cost
FVTPL
Total
Assets
$
$
$
Cash and cash equivalents
83,238
–
83,238
Restricted funds
32,224
–
32,224
Long – term investments
–
504
504
Liabilities
$
$
$
Warrant liability
–
717
717
Convertible debt
38,301
–
38,301
Amended senior secured convertible note
–
223,132
223,132
Other long-term liabilities1
–
1,409
1,409
1 Financial liability designated as FVTPL.
The fair values of the financial instruments as at July 31, 2021 are summarized in the following table:
Amortized
cost
FVTPL
Total
Assets
$
$
$
Cash and cash equivalents
67,462
–
67,462
Restricted funds
132,246
–
132,246
Long – term investments
–
2,492
2,492
Liabilities
$
$
$
Warrant liability
–
5,733
5,733
Convertible debt – current
3,406
–
3,406
Convertible debt
33,089
–
33,089
Senior secured convertible note – current
–
367,699
367,699
Senior notes payable – current
50,159
–
50,159
Other long-term liabilities1
–
520
520
1 Financial liability designated as FVTPL.
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.
34. Non-Controlling Interest
The change in non-controlling interests is as follows.
July 31, 2022
July 31, 2021
$
$
Balance, Beginning of year
1,987
3,379
Non-controlling interest acquired on business combination
–
(1,340)
Partnership contributions
2,308
81
Share of comprehensive loss for the period
(6,017)
(133)
Loss of control
1,722
–
Balance, End of year
–
1,987
Keystone Isolation Technology Inc
The Company held a 60% interest in Keystone Isolation Technology Inc. (“KIT”) which was intended to principally operate out of
Belleville Facility, and the remaining 40% represents the non-controlling interest held by Chroma Global Technologies Ltd. During the
year ended July 31, 2022, management terminated the KIT project and the associated assets were impaired (Note 12). On June 22,
2022, the Company disposed of its investment in KIT for a nominal amount. KIT had no revenues or other expenses during the year
ended July 31, 2022 or the year ended July 31, 2021.
HEXO Corp. 2022 Consolidated Financial Statements
51
The following table is the summarized financial information of Keystone Isolation Technology Inc.
July 31, 2022
July 31, 2021
$
$
Current assets
–
–
Non-current assets
–
8,651
Current liabilities
–
–
Non-current liabilities
–
–
Impairment
(4,504)
-
Non-controlling interest (%)
40%
40%
Non-controlling interest
–
3,460
ZenPharm Limited
The Company’s 60% interest in ZenPharm Limited ("ZenPharm") was obtained through the acquisition of Zenabis on June 1, 2021.
ZenPharm was formed to service the European medical cannabis market. On June 17, 2022, the Company lost of control of Zenabis
and by extension the interest in ZenPharm (Note 15).
35. 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 CIB division, which was established in order to manufacture, produce and sell cannabis beverage products.
The CIB division operated under the Company’s cannabis manufacturing licensing, in compliance with Health Canada and the
Cannabis Act’s regulations until Truss LP received its cannabis manufacturing license on October 1, 2021 (Note 30) and its selling
license on May 2, 2022. The Company continues to act as a principal in the sale of CIBs to customers and therefore, continues to
present revenue from CIB on a gross basis. The Company expects to continue to recognize CIB revenue on a gross basis at least until
Truss LP operationalizes its cannabis selling license.
For the year ended
July 31, 2022
July 31, 2021
Revenue stream
Cannabis sales
excluding
beverages
Cannabis
beverage
sales
Total
Cannabis sales
excluding
beverages
Cannabis
beverage
sales
Total
$
$
$
$
$
$
Retail
211,744
16,369
228,113
143,098
15,821
158,919
Medical
3,395
–
3,395
1,769
–
1,769
Wholesale
13,538
–
13,538
2,458
–
2,458
International
20,372
–
20,372
9,935
–
9,935
Total revenue from sale of goods
249,049
16,369
265,418
157,260
15,821
173,081
During the year ended July 31, 2022 the Company incurred $6,059 (July 31, 2021 – $3,736) of net sales provisions and price
concessions.
36. Segmented Information
The Company operates under one material operating segment. Substantially all property, plant and equipment and intangible assets
are located in Canada.
HEXO Corp. 2022 Consolidated Financial Statements
52
37. Operating Cash Flow Supplement
The following items comprise the Company’s operating cash flow activity for the periods herein.
For the year ended
July 31, 2022
July 31,2021
$
$
Items not affecting cash
Depreciation of property, plant and equipment
7,428
6,097
Depreciation of property, plant and equipment in cost of sales
20,868
8,601
Amortization of intangible assets
21,347
2,050
Loss on convertible debentures
131,602
6,218
Unrealized gain on changes in fair value of biological assets
(59,665)
(51,499)
Unrealized fair value adjustment on investments
747
(1,994)
Amortization of deferred financing costs
–
793
Interest and other income
14,347
5,837
Accretion of convertible debenture
5,167
4,075
Non-cash finance and transaction fees
5,190
21,690
License depreciation and prepaid royalty expenses
–
118
Write-off of inventory and biological assets
14,297
2,182
Write down of inventory to net realizable value
99,739
2,927
Realized fair value amounts on inventory sold
43,455
31,767
Loss from investment in associate and joint ventures
9,157
6,505
Share-based compensation
14,607
14,859
Revaluation of financial instruments (gain)/loss
(44,271)
2,283
Net gain on extinguishment of debt
(28,321)
–
Impairment losses
790,981
20,230
Loss on long lived assets and disposal of property, plant and equipment
(2,466)
1,358
Net gain on loss of control of subsidiary
(25,009)
–
Gain on sale of BCI
(9,127)
–
Gain on exit of lease
(17,189)
(789)
Foreign exchange gain
7,418
(11,648)
Total items not affecting cash
1,000,302
71,660
Changes in non-cash operating working capital items
Trade receivables
825
(14,203)
Commodity taxes recoverable and other receivables
3,963
5,197
Prepaid expenses
6,514
(106)
Lease receivable
27
–
Inventory
(81,571)
(52,539)
Biological assets
57,688
53,678
Accounts payable and accrued liabilities
10,317
8,848
Excise taxes payable
(1,951)
(444)
Income tax recoverable
(379)
–
Total non-cash operating working capital
(4,567)
431
Additional supplementary cash flow information is as follows:
For the year ended
July 31, 2022
July 31, 2021
$
$
Property, plant and equipment in accounts payable
1,292
1,152
Right-of-use asset additions
1,993
17,059
Capitalized borrowing costs
–
1,269
Interest paid
8,306
5,618
HEXO Corp. 2022 Consolidated Financial Statements
53
38. Income Taxes
Income tax expense recognized in comprehensive loss consists of the following components:
July 31, 2022
July 31, 2021
$
$
Current tax for the year
89
22
Adjustments of previous years
(80)
–
Total
9
22
Components of deferred income tax expense (recovery):
July 31, 2022
July 31, 2021
$
$
Origination and reversal of temporary differences
(215,230)
(14,659)
Difference between statutory tax rate and deferred tax rate
4,843
(249)
Change in temporary difference for which no deferred tax assets are recorded
171,565
14,489
Deferred income tax (recovery)
(38,822)
(419)
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:
July 31, 2022
July 31, 2021
Expected tax rate
26.50%
26.50%
$
$
Earnings before income taxes
(1,112,421)
(115,159)
Expected tax benefit resulting from loss
(294,791)
(30,517)
Adjustments for the following items:
Tax rate differences
4,843
(652)
Permanent differences
96,743
8,696
Change in temporary differences for which no tax assets are recorded
154,392
22,076
(38,813)
(397)
The following is a reconciliation of the deferred tax assets and liabilities recognized by the Company:
Opening
Recognized
Business
Recognized
Business
Ending
August 1, 2021
in income
Combination
in equity Deconsolidation
July 31, 2022
$
$
$
$
$
Taxable temporary differences
(5,017)
7,944
(7,001)
(6,825)
3,254
(7,645)
Biological assets
(606)
(472)
(1,974)
–
–
(3,052)
Inventory
(10,850)
3,342
(4,185)
–
10,039
(1,654)
Loss carryforward
28,693
(5,027)
4,248
–
(22,974)
4,940
Financing costs
–
(337)
337
–
–
–
Intangible assets
(12,356)
33,372
(52,278)
–
9,828
(21,434)
Net deferred tax asset (liability)
(136)
38,822
(60,853)
(6,825)
147
(28,845)
Opening
Recognize
Business
Recognized in
Ending
August 1, 2020
in income
Combination
equity
July 31, 2021
$
$
$
$
$
Taxable temporary differences
10,415
(14,701)
(310)
(421)
(5,017)
Biological assets
(1,330)
724
–
–
(606)
Inventory
(5,088)
1,514
(7,276)
–
(10,850)
Loss carryforward
–
14,028
14,665
–
28,693
Financing costs
–
(2,738)
2,738
–
–
Intangible assets
(3,997)
1,592
(9,951)
–
(12,356)
Net deferred tax asset (liability)
–
419
(134)
(421)
(136)
HEXO Corp. 2022 Consolidated Financial Statements
54
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, 2022 deductible temporary differences and
unused tax losses for which no deferred tax assets have been recognized are attributable to the following:
July 31, 2022
July 31, 2021
$
$
Deductible temporary differences
26,952
11,556
Taxable temporary differences
–
26,444
Investments
288,958
17,030
Losses carried forward
594,890
278,115
Research and development expenditures
3,148
1,817
Fixed Assets, intangibles and other assets
243,665 114,384
Financing costs
38,313 40,401
1,195,926
489,747
The Company has approximated non-capital losses available to reduce future years' federal and provincial taxable income which
expires as follows:
$
2023
–
2024
–
2025
–
2026
–
2027
–
2028
946
2029
75
2030
2,867
2031
3,018
2032
2,489
2033
820
2034
2,240
2035
10,687
2036
23,807
2037
30,477
2038
8,028
2039
71,455
2040
148,402
2041
63,097
2042
232,499
Indefinite
5,637
606,544