As filed with the Securities and Exchange Commission on December 20, 2018.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-10
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HEXO Corp.
(Exact name of Registrant as specified in its charter)
Ontario, Canada | 2833 | Not Applicable | ||
(Province or other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number, if applicable) |
490 Boulevard St-Joseph, Suite 204, Gatineau, Québec J8Y 3Y7, 1-844-406-1852
(Address and telephone number of Registrants principal executive offices)
CT Corporation System
1015 15 th Street N.W., Suite 1000
Washington, DC 20005
Telephone No.: (202) 572-3100
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
Approximate date of commencement of proposed sale of the securities to the public: From time to time after the effective date of this Registration Statement
Québec, Canada
(Principal jurisdiction regulating this offering)
It is proposed that this filing shall become effective (check appropriate box below):
A. | ☒ | upon filing with the Commission, pursuant to Rule 467(a) (if in connection with an offering being made contemporaneously in the United States and Canada). | ||||
B. | ☐ | at some future date (check the appropriate box below) | ||||
1. | ☐ | pursuant to Rule 467(b) on (date) at (time) (designate a time not sooner than 7 calendar days after filing). | ||||
2. | ☐ | pursuant to Rule 467(b) on (date) at (time) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on (date). | ||||
3. | ☐ | pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto. | ||||
4. | ☐ | after the filing of the next amendment to this Form (if preliminary material is being filed). |
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to the home jurisdictions shelf prospectus offering procedures, check the following box. ☒
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Amount to be
registered (1)(2)(3) |
Proposed
maximum
per unit (1)(4) |
Proposed maximum
aggregate
offering
|
Amount of
registration fee (3)(4)(5) |
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Common Shares (no par value) |
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Warrants to Purchase Common Shares |
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Subscription Receipts |
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Units |
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Total |
US$598,880,000 | US$598,880,000 | US$72,584.26 | |||||
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(1) |
There are being registered under this registration statement such indeterminate number of Common Shares, Warrants, Subscription Receipts or Units of the Registrant (collectively, the Securities) in any combination as shall have an aggregate initial offering price not to exceed US$598,880,000. Any Securities registered by this registration statement may be sold separately or as units with other Securities registered under this registration statement. The proposed maximum initial offering price per security will be determined, from time to time, by the Registrant in connection with the sale of the securities under this registration statement. |
(2) |
If, as a result of stock splits, stock dividends or similar transactions, the number of securities purported to be registered on this Registration Statement changes, the provisions of Rule 416 shall apply to this Registration Statement. |
(3) |
Based on a maximum aggregate offering price of C$800,000,000 and the Bank of Canada daily exchange rate on December 13, 2018 of US$0.7486 per C$1.00. |
(4) |
The proposed maximum initial offering price per Security will be determined, from time to time, by the Registrant in connection with the sale of the Securities registered under this Registration Statement. Prices, when determined, may be in U.S. dollars or the equivalent thereof in Canadian dollars. |
(5) |
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the U.S. Securities Act of 1933, as amended. |
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
This amended and restated short form prospectus is a base shelf prospectus. This amended and restated short form prospectus has been filed under legislation in each of the provinces and territories of Canada that permits certain information about these securities to be determined after this prospectus has become final and that permits the omission from this prospectus of that information. The legislation requires the delivery to purchasers of a prospectus supplement containing the omitted information within a specified period of time after agreeing to purchase any of these securities.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This amended and restated short form base shelf prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities.
Information has been incorporated by reference in this amended and restated short form base shelf prospectus from documents filed with securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of HEXO Corp. at 490 Boul. St-Joseph, Suite 204, Gatineau, Québec, J8Y 3Y7, telephone 1-844-406-1852, and are also available electronically at www.sedar.com.
New Issue |
December 14, 2018 |
AMENDED AND RESTATED SHORT FORM BASE SHELF PROSPECTUS DATED DECEMBER 14, 2018
(amending and restating the short form base shelf prospectus dated November 19, 2018)
HEXO CORP.
$800,000,000
COMMON SHARES
WARRANTS
SUBSCRIPTION RECEIPTS
UNITS
This amended and restated short form base shelf prospectus (the Prospectus ) relates to the offering for sale by HEXO Corp. (the Company or HEXO ) from time to time, during the 25-month period commencing November 19, 2018 that this Prospectus, including any amendments hereto, remains valid, of up to $800,000,000 (or the equivalent in other currencies based on the applicable exchange rate at the time of the offering) in the aggregate of: (i) common shares ( Common Shares ) in the capital of the Company; (ii) warrants ( Warrants ) to purchase other Securities (as defined below); (iii) subscription receipts ( Subscription Receipts ) convertible into other Securities; and (iv) units ( Units ) comprised of one or more of any of the other Securities, or any combination of such Securities (the Common Shares, Warrants, Subscription Receipts and Units are collectively referred to herein as the Securities ). The Securities may be offered in amounts, at prices and on terms to be determined based on market conditions at the time of sale and set forth in an accompanying prospectus supplement (each, a Prospectus Supplement ). In addition, the Securities may be offered and issued in consideration for the acquisition of other businesses, assets or securities by the Company or one of its subsidiaries. The consideration for any such acquisition may consist of the Securities separately, a combination of Securities or any combination of, among other things, Securities, cash and assumption of liabilities.
All shelf information permitted under applicable laws to be omitted from this Prospectus will be contained in one or more Prospectus Supplements that will be delivered to purchasers together with this Prospectus except in cases where an exemption from such delivery has been obtained. Each Prospectus Supplement will be incorporated by reference into this Prospectus for the purposes of securities legislation as of the date of the Prospectus Supplement and only for the purposes of the distribution of the Securities to which the Prospectus Supplement pertains.
The specific terms of any Securities offered will be described in the applicable Prospectus Supplement including, where applicable: (i) in the case of Common Shares, the number of Common Shares offered, the offering price, whether the Common Shares are being offered for cash, and any other terms specific to the Common Shares offered; (ii) in the case of Warrants, the number of Warrants being offered, the offering price, the designation, number and terms of the other Securities purchasable upon exercise of the Warrants, and any procedures that will result in the adjustment of those
numbers, the exercise price, the dates and periods of exercise, whether the Warrants are being offered for cash, and any other terms specific to the Warrants offered; (iii) in the case of Subscription Receipts, the number of Subscription Receipts being offered, the offering price, the terms, conditions and procedures for the conversion of the Subscription Receipts into other Securities, the designation, number and terms of such other Securities, whether the Subscription Receipts are being offered for cash, and any other terms specific to the Subscription Receipts offered; and (iv) in the case of Units, the number of Units being offered, the offering price, the number and terms of the Securities comprising the Units, whether the Units are being offered for cash, and any other terms specific to the Units offered. A Prospectus Supplement relating to a particular offering of Securities may include terms pertaining to the Securities being offered thereunder that are not within the terms and parameters described in this Prospectus. Where required by statute, regulation or policy, and where the Securities are offered in currencies other than Canadian dollars, appropriate disclosure of foreign exchange rates applicable to the Securities will be included in the Prospectus Supplement describing the Securities.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE SEC) NOR ANY U.S. STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
The Company is permitted, under a multi-jurisdictional disclosure system (the MJDS) adopted by the securities regulatory authorities in Canada and the United States, to prepare this Prospectus in accordance with Canadian disclosure requirements, which are different from those of the United States. HEXO prepares its financial statements, which are incorporated by reference in this Prospectus, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and such financial statements are subject to Canadian auditing and auditor independence standards. The Companys financial statements may not be comparable to the financial statements of United States issuers.
The enforcement by investors of civil liabilities under United States federal securities laws may be affected adversely because HEXO is a corporation existing under the laws of the Province of Ontario, Canada, and all of its executive offices, administrative activities and assets are located outside the United States. In addition, all of the directors and officers of the Company are residents of jurisdictions other than the United States and all or a substantial portion of the assets of those persons are or may be located outside the United States. See Enforceability of Civil Liabilities .
Prospective investors should be aware that the purchase of any Securities may have tax consequences that may not be fully described in this Prospectus or in any Prospectus Supplement, and should carefully review the tax discussion, if any, in the applicable Prospectus Supplement and in any event consult with their own tax advisers before purchasing any of the Securities.
No underwriter or agent has been involved in the preparation of this Prospectus or performed any review of the contents of this Prospectus.
The Company may offer and sell the Securities to or through underwriters or dealers purchasing as principals, and may also sell directly to one or more purchasers or through agents or pursuant to applicable statutory exemptions. See Plan of Distribution . The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent, as the case may be, engaged by the Company in connection with the offering and sale of the Securities, and will set forth the terms of the offering of such Securities, including, to the extent applicable, any fees, discounts or any other compensation payable to underwriters, dealers or agents in connection with the offering, the method of distribution of the Securities, the initial issue price (in the event that the offering is a fixed price distribution), the proceeds that the Company will, or expects to receive and any other material terms of the plan of distribution.
The Securities may be sold from time to time in one or more transactions at a fixed price or prices or at non-fixed prices. If offered on a non-fixed price basis, the Securities may be offered at market prices prevailing at the time of sale, at prices determined by reference to the prevailing price of a specified security in a specified market or at prices to be negotiated with purchasers, in which case the compensation payable to an underwriter, dealer or agent in connection with any such sale will be decreased by the amount, if any, by which the aggregate price paid for Securities by the purchasers is less than the gross proceeds paid by the underwriter, dealer or agent to the Company. The price at which the Securities will be offered and sold may vary from purchaser to purchaser and during the period of distribution.
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In connection with any offering of Securities, other than an at-the-market distribution (as defined under applicable Canadian securities legislation), unless otherwise specified in a Prospectus Supplement, the underwriters, dealers or agents, as the case may be, may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Securities at a level other than those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued at any time. A purchaser who acquires Securities forming part of the underwriters, dealers or agents over-allocation position acquires those Securities under this Prospectus and the Prospectus Supplement relating to the particular offering of Securities, regardless of whether the over-allocation position is ultimately filled through the exercise of the over-allotment option or secondary market purchases. See Plan of Distribution . No underwriter or dealer involved in an at-the-market distribution under this Prospectus, no affiliate of such an underwriter or dealer and no person or company acting jointly or in concert with such underwriter or dealer will over-allot Securities in connection with such distribution or effect any other transactions that are intended to stabilize or maintain the market price of the Securities.
The issued and outstanding Common Shares are listed for trading on the Toronto Stock Exchange (the TSX ) under the symbol HEXO. On December 13, 2018, the last trading day prior to the date of this Prospectus, the closing price of the Common Shares on the TSX was $4.99.
HEXO has applied to list the Common Shares on the NYSE American Exchange (the NYSE American ) under the symbol HEXO. Listing will be subject to HEXO fulfilling all the listing requirements of the NYSE American, and there can be no assurance that the Common Shares will be accepted for listing on the NYSE American.
Unless otherwise specified in the applicable Prospectus Supplement, each series or issue of Securities (other than Common Shares) will not be listed on any securities exchange. Accordingly, there is currently no market through which the Securities (other than Common Shares) may be sold and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of such Securities in the secondary market, the transparency and availability of trading prices, the liquidity of such Securities and the extent of issuer regulation. See Risk Factors .
Investing in the Securities is speculative and involves significant risks. Readers should carefully review and evaluate the risk factors contained in this Prospectus, the applicable Prospectus Supplement and in the documents incorporated by reference herein before purchasing any Securities. See Forward-Looking Information and Risk Factors .
The Company is not making an offer of the Securities in any jurisdiction where such offer is not permitted.
Unless otherwise specified in a Prospectus Supplement relating to any Securities offered, certain legal matters in connection with the offering of Securities may be passed upon on behalf of HEXO by DLA Piper (Canada) LLP as to legal matters relating to Canadian law and, if governed by United States law, by DLA Piper (US) LLP as to matters relating to United States law.
Market data and certain industry forecasts used in this Prospectus or any applicable Prospectus Supplement and the documents incorporated by reference herein or therein were obtained from market research, publicly available information and industry publications. The Company believes that these sources are generally reliable, but the accuracy and completeness of the information is not guaranteed. The Company has not independently verified this information and does not make any representation as to the accuracy of this information.
The Companys head office is located at 490 Boul. St-Joseph, Suite 204, Gatineau, Québec, J8Y 3Y7. The Companys registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2.
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CERTAIN CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS |
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Unless otherwise noted or the context indicates otherwise, the Company , HEXO , we , us and our refer to HEXO Corp. and its wholly-owned subsidiaries, and the terms cannabis , CBD , client , licence and THC have the meanings given to such terms in the Cannabis Act (Canada) (the Cannabis Act ) and the Cannabis Regulations made under the Cannabis Act (the Cannabis Regulations ).
Prospective investors should rely only on the information contained or incorporated by reference in this Prospectus and any applicable Prospectus Supplement in connection with an investment in the Securities. No person is authorized by the Company to provide any information or to make any representation other than as contained in this Prospectus or any Prospectus Supplement in connection with the issue and sale of the Securities offered hereunder. Prospective investors should assume that the information appearing in this Prospectus or any Prospectus Supplement is accurate only as of the date on the front of those documents and that information contained in any document incorporated by reference is accurate only as of the date of that document unless specified otherwise. The Companys business, financial condition, results of operations and prospects may have changed since those dates.
CURRENCY PRESENTATION AND EXCHANGE RATE INFORMATION
Unless otherwise noted herein and in the documents incorporated by reference, all dollar amounts refer to lawful currency of Canada. All references to US$ or U.S. dollars are to the currency of the United States.
The following table sets out, for the period indicated, certain exchange rates based upon the noon rate published by the Bank of Canada during the respective periods. The rates are set out as United States dollars per $1.00.
Quarter Ended
October 31, 2018 |
Fiscal Year Ended
July 31, 2018 |
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Low |
US$0.7583 | US$0.7513 | ||
High |
US$0.7811 | US$0.8425 | ||
Average |
US$0.7676 | US$0.7854 | ||
End |
US$0.7609 | US$0.7862 |
On December 12, 2018, the rate of exchange for the Canadian dollar, expressed in United States dollars, based on the Bank of Canada daily rate, was C$1.00 = $0.7493.
This Prospectus and the documents incorporated by reference herein contain certain forward-looking information and forward-looking statements (collectively, forward-looking statements ) which are based upon the Companys current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as expect, believe, plan, project, assume, likely, may, will, should, intend, or anticipate, potential, proposed, estimate and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions may or will happen, or by discussions of strategy. No assurance can be given that the expectations in any forward-looking statement will prove to be correct and, as such, the forward-looking statements included in this Prospectus or any Prospectus Supplement should not be unduly relied upon. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. Such forward-looking statements are made as of the date of this Prospectus, or in the case of documents incorporated by reference herein, as of the date of each such document. Forward-looking statements in this Prospectus and the documents incorporated by reference herein include, but are not limited to, statements with respect to:
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the competitive and business strategies of the Company; |
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the intention to grow the business, operations and potential activities of the Company; |
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the ongoing expansion of the Companys facilities, its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity; |
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the expected production capacity of the Company; |
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the expected sales mix of offered products; |
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the competitive conditions of the industry; |
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the establishment of the Companys joint venture with Molson Coors Canada and the future impact thereof; |
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the establishment of the Companys Eurozone processing, production and distribution centre in Greece and the future impact thereof; |
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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; |
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the applicable laws, regulations and any amendments thereof; |
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the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof; |
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the anticipated future gross margins of the Companys operations; and |
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the performance of the Companys business and operations. |
Forward-looking statements contained in certain documents incorporated by reference in this Prospectus are based on the key assumptions described in such documents. Certain of the forward-looking statements contained herein and in the documents incorporated by reference herein concerning the cannabis industry and the general expectations of HEXO concerning the cannabis industry and the Companys business and operations are based on estimates prepared by HEXO using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which HEXO believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While HEXO is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry involves risks and uncertainties and is subject to change based on various factors.
Forward-looking statements are subject to numerous risks and uncertainties, including those relating to the Companys ability to execute its business plan, renew required permits and licences and related regulatory compliance matters, and other factors described under the heading Risk Factors and elsewhere in this Prospectus and the documents incorporated by reference herein. A number of factors could cause actual events, performance or results to differ materially from what is projected in forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of managements expectations, and such forward-looking statements may not be appropriate for any other purpose. Readers should not place undue reliance on forward-looking statements contained in this Prospectus, in any Prospectus Supplement or in any document incorporated by reference herein or therein. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The forward-looking statements contained in this Prospectus, any Prospectus Supplement and the documents incorporated by reference herein or therein are expressly qualified in their entirety by this cautionary statement. Holders of the Securities should read this entire Prospectus, and each applicable Prospectus Supplement, and consult their own professional advisers to ascertain and assess the income tax and legal risks and other aspects associated with holding Securities.
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The Company will be filing with the SEC a registration statement on Form F-10 of which this Prospectus forms a part. This Prospectus does not contain all the information set out in the registration statement. For further information about the Company and the Securities, please refer to the registration statement, including the exhibits to the registration statement.
The Company is currently subject to the information requirements under Canadian securities laws and, upon the effectiveness of the registration statement, the Company will become subject to certain information requirements of the U.S. Securities Exchange Act of 1934, as amended (the U.S. Exchange Act ). Consequently, HEXO files reports and other information with the securities regulatory authorities of the provinces and territories of Canada and will file reports and other information with the SEC. Under the MJDS, the Company may generally prepare these reports and other information in accordance with the disclosure requirements of Canada. These requirements are different from those of the United States. As a foreign private issuer ( FPI ) (as defined under United States securities laws), the Company is exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements, and officers, directors and principal shareholders of HEXO are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. In addition, the Company is not required to publish financial statements as promptly as United States companies.
The reports and other information to be filed by the Company with the SEC may be read and copied at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of the same documents can also be obtained from the public reference room of the SEC in Washington by paying a fee. Please call the SEC at 1-800- SEC-0330 for further information on the public reference room. The SEC also maintains a website (www.sec.gov) that makes available reports and other information that the Company files electronically with it, including the registration statement that HEXO has filed with respect hereto.
Copies of reports, statements and other information that the Company files with the applicable Canadian provincial and territorial securities regulatory authorities are available electronically on the System for Electronic Document Analysis and Retrieval ( SEDAR ) at www.sedar.com.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company exists under the laws of the Province of Ontario, Canada, and all of its executive offices, administrative activities and assets are located outside the United States. In addition, all of the directors and officers of the Company are residents of jurisdictions other than the United States and all or a substantial portion of the assets of those persons are or may be located outside the United States.
As a result, investors who reside in the United States may have difficulty serving legal process in the United States upon the Company or its directors or officers, as applicable, or enforcing judgments obtained in United States courts against any of them or the assets of any of them located outside the United States, or enforcing against them in the appropriate Canadian court judgments obtained in United States courts, including, but not limited to, judgments predicated upon the civil liability provisions of the federal securities laws of the United States, or bringing an original action in the appropriate Canadian courts to enforce liabilities against the Company or any of its directors or officers, as applicable, based upon United States federal securities laws.
In the United States, the Company will be filing with the SEC, concurrently with HEXOs registration statement on Form F-10, an appointment of agent for service of process on Form F-X. Under such Form F-X, the Company has appointed CT Corporation System, 111 Eighth Avenue, New York, New York 10011, as its agent for service of process in the United States in connection with any investigation or administrative proceeding conducted by the SEC, and any civil suit or action brought against the Company in a U.S. court arising out of or related to or concerning the offering of the Securities under the registration statement.
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this Prospectus from documents filed with the securities commissions or similar regulatory authorities in Canada. The following documents, each of which has been filed with the securities regulatory authorities in each of the provinces and territories of Canada and is available on SEDAR at www.sedar.com, are specifically incorporated by reference into, and form an integral part of, this Prospectus:
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(a) |
the annual information form (the AIF ) of the Company for the fiscal year ended July 31, 2018, dated October 25, 2018; |
(b) |
the Companys audited consolidated financial statements for the years ended July 31, 2018 and 2017, together with the independent auditors reports thereon and the notes thereto, as amended; |
(c) |
the Companys managements discussion and analysis for the year ended July 31, 2018; |
(d) |
the Companys unaudited condensed interim consolidated financial statements for the three month period ended October 31, 2018; |
(e) |
the Companys managements discussion and analysis for the three month period ended October 31, 2018; |
(f) |
the management information circular of the Company dated December 4, 2018 in connection with the annual meeting of shareholders of the Company to be held on January 16, 2019; and |
(g) |
the management information circular of the Company dated July 16, 2018 in connection with the special meeting of shareholders of the Company held on August 28, 2018. |
Any documents of the type referred to in paragraphs (a)-(g) above or similar material and any documents required to be incorporated by reference herein pursuant to National Instrument 44-101 Short Form Prospectus Distributions of the Canadian Securities Administrators, including any annual information form, all material change reports (excluding confidential reports, if any), all annual and interim financial statements and managements discussion and analysis relating thereto, or information circular or amendments thereto, if filed by the Company with any securities commission or similar regulatory authority in Canada after the date of this Prospectus and before the expiry of this Prospectus, are deemed to be incorporated by reference in this Prospectus.
Upon a new annual information form and annual consolidated financial statements being filed by the Company with the applicable Canadian securities commissions or similar regulatory authorities in Canada during the period that this Prospectus is effective, the previous annual information form, the previous annual consolidated financial statements and all interim consolidated financial statements and in each case the accompanying managements discussion and analysis, and material change reports, filed prior to the commencement of the financial year of the Company in which the new annual information form is filed shall be deemed to no longer be incorporated into this Prospectus for purpose of future offers and sales of Securities under this Prospectus. Upon interim consolidated financial statements and the accompanying managements discussion and analysis being filed by the Company with the applicable Canadian securities commissions or similar regulatory authorities during the period that this Prospectus is effective, all interim consolidated financial statements and the accompanying managements discussion and analysis filed prior to such new interim consolidated financial statements and managements discussion and analysis shall be deemed to no longer be incorporated into this Prospectus for purposes of future offers and sales of Securities under this Prospectus. In addition, upon a new management information circular for an annual meeting of shareholders being filed by the Company with the applicable Canadian securities commissions or similar regulatory authorities during the period that this Prospectus is effective, the previous management information circular filed in respect of the prior annual meeting of shareholders shall no longer be deemed to be incorporated into this Prospectus for purposes of future offers and sales of Securities under this Prospectus.
Any similar document filed by the Company with, or furnished by the Company to, the SEC pursuant to Section 13(a) or 15(d) of the U.S. Exchange Act after the date of this Prospectus shall be deemed to be incorporated by reference in this Prospectus and filed as exhibits to the registration statement of which this Prospectus forms a part (in the case of any Report on Form 6-K, if and to the extent expressly provided in such report).
A Prospectus Supplement containing the specific terms of any offering of the Securities will be delivered to purchasers of the Securities together with this Prospectus and will be deemed to be incorporated by reference in this Prospectus as of the date of the Prospectus Supplement and only for the purposes of the offering of the Securities to which that Prospectus Supplement pertains.
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In addition, certain marketing materials (as that term is defined in applicable Canadian securities legislation) may be used in connection with a distribution of Securities under this Prospectus and the applicable Prospectus Supplement(s). Any template version of marketing materials (as those terms are defined in applicable Canadian securities legislation) pertaining to a distribution of Securities, and filed by the Company after the date of the Prospectus Supplement for the distribution and before termination of the distribution of such Securities, will be deemed to be incorporated by reference in that Prospectus Supplement for the purposes of the distribution of Securities to which the Prospectus Supplement pertains.
Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, in any Prospectus Supplement hereto or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not constitute a part of this Prospectus, except as so modified or superseded. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document or statement that it modifies or supersedes. The making of such a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it is made.
The Company has not provided or otherwise authorized any other person to provide investors with information other than as contained or incorporated by reference in this Prospectus or any Prospectus Supplement. If an investor is provided with different or inconsistent information, such investor should not rely on it.
The following is a summary of information about HEXO and does not contain all the information about HEXO that may be important to prospective investors. Prospective investors should read the more detailed information including, but not limited to, the AIF, financial statements and managements discussion and analysis, that are incorporated by reference into and are considered to be a part of this Prospectus.
Corporate Structure
The Company was incorporated under the Business Corporations Act (Ontario) (the OBCA ) on October 29, 2013 as BFK Capital Corp. ( BFK ). The Company completed an initial public offering as a Capital Pool Company under Policy 2.4 of the TSX Venture Exchange (the TSX-V ) on November 12, 2014 and its Common Shares commenced trading on the TSX-V under the symbol BFK.P on November 17, 2014.
On March 15, 2017, pursuant to a Qualifying Transaction (the Qualifying Transaction ) in accordance with Policy 2.4 of the TSX-V, BFK acquired all the issued and outstanding common shares of The Hydropothecary Corporation ( Hydropothecary ). In connection with the completion of the Qualifying Transaction, the Company filed articles of amendment under the OBCA on March 15, 2017 to consolidate, prior to the acquisition of the common shares of Hydropothecary, its Common Shares on a 1 post-consolidation share for every one-and-a-half (1.5) pre-consolidation shares basis (the Consolidation ), and to change its name to The Hydropothecary Corporation. As a result of the Qualifying Transaction, the Company met the TSX-V listing requirements for a Tier 1 issuer and the Common Shares commenced trading on the TSX-V under the symbol THCX on March 21, 2017.
On June 21, 2018, the Company received approval from the TSX to graduate from the TSX-V and list the Common Shares on the TSX. The Common Shares commenced trading on the TSX under the symbol HEXO on June 22, 2018. Certain common share purchase warrants of the Company also commenced trading on the TSX under the symbol HEXO.WT.
On August 29, 2018, the Company filed articles of amendment under the OBCA to change its name to HEXO Corp.
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The Companys head office is located at 490 Boul. St-Joseph, Suite 204, Gatineau, Québec, J8Y 3Y7. The Companys registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2.
Inter-Corporate Relationships
HEXO has two wholly-owned subsidiaries, being HEXO Operations Inc. ( HEXO Operations or HOI ), and Coral Health Group Inc.
In addition to these subsidiaries, the Company, indirectly through HEXO Operations, owns all of the preferred shares of 8980268 Canada Inc. ( 898 Canada ) and has an irrevocable right to acquire the one issued and outstanding common share of 898 Canada, which is jointly owned by Michael Munzar and Vincent Chiara, directors of the Company. See Description of the BusinessThe Companys Facilities in the AIF for further details.
The following chart illustrates, as of the date hereof, the Companys corporate structure including details of the jurisdiction of formation of each subsidiary.
On October 4, 2018, the Company finalized a joint venture with Molson Coors Canada. The joint venture has been established through a stand-alone entity named Truss Limited Partnership, in which HOI holds a 42.5% interest, and the remaining 57.5% interest is held by Molson Coors Canada. The joint venture company possesses a separate board of directors and management team from HEXO.
On October 30, 2018, HEXO acquired a 25% interest in Belleville Complex Inc., a joint venture with Olegna Holdings Inc., which owns a building in Belleville, Ontario. HEXO will initially lease 579,000 sq. ft. of the building for advanced processing and manufacturing space under a long-term lease. HEXO has a right to acquire an additional 10% interest in the company upon achieving certain milestones.
Business of the Company
The Company is in the business of producing, marketing and selling cannabis through its wholly-owned subsidiary, HEXO Operations, from its facilities in Gatineau, Québec. HEXO Operations is a licensed producer under the Cannabis Act. HEXO Operations license has a term ending on October 15, 2019, and the Company is not currently aware of any circumstances that would impede renewal.
Ultimately, the Company is a vertically integrated consumer packaged goods company in the medical and emerging legal adult-use cannabis market across Canada and internationally where regulations allow. Its primary business is to cultivate, process, package and distribute cannabis through its 143-acre facilities in Gatineau, Québec, in order to serve these markets. The Company serves the legalized Canadian adult-use market through its HEXO brand, while it serves the medical cannabis market through its Hydropothecary brand.
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The Companys current licensed facilities total approximately 310,000 sq. ft., including 292,000 sq. ft. of greenhouse space, and HEXO is in the process of expanding to add an additional 1,000,000 sq. ft. of greenhouse space, which is on track to be completed in December 2018. The Companys current production capacity is capable of yielding 25,000 kg of quality dried cannabis and dried cannabis equivalent products and is expected to rise to 108,000 kg annually with the completion of its additional 1,000,000 sq. ft. of space expected in December 2018. The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the estimated square footage of cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities and estimates of future production capabilities. The Company has also recently expanded operations to include a corporate office location in Gatineau, Québec, additional advanced processing and manufacturing space in Belleville, Ontario, and a distribution centre located in Montreal, Québec.
HEXO was the first licensed producer in Québec and is the only publicly traded cannabis company headquartered in the province. In addition to supply contracts in certain other provinces of Canada, the Company has entered into a commercial agreement with the Société des alcools du Québéc to be the preferred supplier of cannabis products for the Québec market for the first five years post-legalization, with an option to extend the term for an additional year. Under the agreement, the Company will supply 20,000 kg of products in the first year of the agreement and is expected to supply 35,000 kg in the second year and 45,000 kg in the third. The volumes for the final two years of the agreement will be established at a later date based on the sales generated in the first three years. The supply arrangement covers the full range of the Companys products and brands.
HEXO has entered into a joint venture with Molson Coors Canada, the Canadian business unit of Molson Coors Brewing Company (NYSE: TAP; TSX: TPX), to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market. Under the joint venture, HEXO and Molson Coors Canada have formed a stand-alone entity named Truss Limited Partnership with its own board of directors and an independent management team led by former Molson Coors executive, Brett Vye, in the role of Chief Executive Officer. The Company holds a 42.5% interest in the entity, while Molson Coors Canada holds the remaining 57.5% interest. The five-member board of directors for the company is comprised of Frederic Landtmeters, President and CEO of Molson Coors Canada, Paul Holden, VP of Legal and Industry Affairs of Molson Coors Canada, Scott Cooper, VP, Global Innovation of Molson Coors (and Chairman of the Truss board), Sébastien St-Louis, Chief Executive Officer and co-founder of HEXO, and Ed Chaplin, Chief Financial Officer of HEXO.
As part of HEXOs plans to enter into the European cannabis market, the Company is in the process of establishing a Eurozone processing, production and distribution centre in Greece through a partnership with Greek company Qannabos ( QNBS ), which the Company expects to catalyze a vertically integrated cannabis enterprise to capitalize on the current medical markets. The Company expects the move to provide it with a presence in Europe and position it to supply a full suite of brands in France, the United Kingdom, and other European markets if and when regulations permit. The agreement between HEXO and QNBS contemplates the development of a 350,000 sq. ft. licensed facility that will be used for manufacturing, processing and distribution of medical cannabis products, powered by HEXO, destined for the European market.
HEXO does not engage in any U.S. marijuana-related activities as defined in Canadian Securities Administrators Staff Notice 51-352 (Revised) dated February 8, 2018. To the extent that the Company pursues international expansion, it will only conduct business in jurisdictions outside of Canada where such operations are legally permissible in accordance with the laws of the jurisdiction and applicable Canadian regulatory and stock exchange obligations.
The following summary addresses the primary Canadian federal and provincial laws and regulations associated with the production and distribution of legal cannabis and related products. It does not address the laws and regulations of any other jurisdiction. The Company believes that, as of the date of this Prospectus, it is in material compliance with all laws and regulations summarized below.
Background
On October 17, 2018, the Cannabis Act and the Cannabis Regulations came into force, legalizing the sale of cannabis for adult recreational use. Prior to the Cannabis Act and the Cannabis Regulations coming into force, only the sale of medical cannabis was legal and was regulated by the Access to Cannabis for Medical Purposes Regulations (Canada) (the ACMPR ) made under the Controlled Drugs and Substances Act (Canada) (the CDSA ), and the Cannabis Act and the Cannabis Regulations also replaced the CDSA and the ACMPR as the governing laws and regulations in respect of the production, sale and distribution of medical cannabis and related oil extract. Given that the Cannabis Act and the
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Cannabis Regulations are very new, the impact of such regulatory changes on the Companys business is unknown. See Risk Factors Changes in Laws, Regulations and Guidelines .
The Cannabis Act provides a licensing and permitting scheme for the production, importation, exportation, testing, packaging, labelling, sending, delivery, transportation, sale, possession and disposal of cannabis for non-medicinal (i.e., adult use) use, to be implemented by regulations made under the Cannabis Act. The Cannabis Act maintains separate access to cannabis for medical purposes, including providing that import and export licenses and permits will only be issued in respect of cannabis for medical or scientific purposes or in respect of industrial hemp.
The Cannabis Regulations, among other things, set out regulations relating to the following matters: (1) Licences, Permits and Authorizations; (2) Security Clearances; (3) Cannabis Tracking System; (4) Cannabis Products; (5) Packaging and Labelling; (6) Cannabis for Medical Purposes; and (7) Drugs Containing Cannabis.
Transitional provisions of the Cannabis Act provide that every license issued under Section 35 of the ACMPR that was in force immediately before the day on which the Cannabis Act came into force (being October 17, 2018) was deemed to be a licence issued under the Cannabis Act, and that such licence will continue in force until it is revoked or expires.
Licences, Permits and Authorizations
The Cannabis Regulations establish six classes of licenses under the Cannabis Act: cultivation licenses; processing licenses; analytical testing licenses; sales for medical purposes licenses; research licenses; and cannabis drug licenses. The Cannabis Regulations also create subclasses for cultivation licenses (standard cultivation, micro-cultivation and nursery) and processing licenses (standard processing and micro-processing). Different licenses and each subclass therein, carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each license category and each subclass. The Cannabis Regulations provide that all licences issued under the Cannabis Act will be valid for a period of no more than five years.
The Cannabis Regulations permit cultivation license holders to conduct both outdoor and indoor cultivation of cannabis, however no licensed activities (except for destruction, antimicrobial treatment and distribution) can take place in a dwelling-house. The implications of the proposal to allow outdoor cultivation are not yet known, but such a development could be significant as it may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices as capital expenditure requirements related to growing outside are typically much lower than those associated with indoor growing.
Security Clearances
Certain people associated with cannabis licensees, including individuals occupying a key position such as directors, officers, large shareholders and individuals identified by the Minister of Health (the Minister ), must hold a valid security clearance issued by the Minister. Under the Cannabis Regulations, the Minister may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. This was largely the approach in place under the ACMPR and other related regulations governing the licensed production of cannabis for medical purposes. Individuals who have histories of non-violent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the discretion of the Minister and such applications will be reviewed on a case-by-case basis.
Security clearances issued under the ACMPR are considered to be security clearances for the purposes of the Cannabis Act and Cannabis Regulations. In addition, the Cannabis Regulations provide a three-month grace period for current licence holders to identify those individuals that require security clearances and to apply for such security clearances (i.e., until January 17, 2019).
Cannabis Tracking System
Under the Cannabis Act, the Minister is authorized to establish and maintain a national cannabis tracking system. The purpose of this system will be to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the legal market. The Cannabis Regulations provide the Minister with the authority to make a ministerial
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order that would require certain persons named in such order to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister. The Minister has introduced the Cannabis Tracking and Licensing System, and licence holders are required to use this system to submit monthly reports to the Minister, among other things.
Cannabis Products
The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level and permit the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as pre-rolled and capsule products. The THC content and serving size of cannabis products is limited by the Cannabis Regulations. The sale of edible cannabis products and concentrates (such as hashish, wax and vaping products) are currently prohibited but expected to be permitted within one year following the Cannabis Act coming into force. The Cannabis Regulations acknowledge that a range of product forms should be enabled to help the legal industry displace the illegal market. Additional product forms that are mentioned under the Cannabis Regulations include vaporization cartridges manufactured with dried cannabis. Specific details related to these new products are to be set out in a subsequent regulatory proposal.
Packaging and Labelling
The Cannabis Regulations set out requirements pertaining to the packaging and labelling of cannabis products which are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth and promoting safe consumption. These requirements require plain packaging for cannabis products, including strict requirements for logos, colours and branding, as well as packaging that is tamper-proof and child-resistant. The Cannabis Regulations further require mandatory health warnings, standardized cannabis symbol and specific product information. Cannabis package labels must include specific information, such as: (i) product source information, including the class of cannabis and the name, phone number and email of the cultivator; (ii) a mandatory health warning, rotating between Heath Canadas list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. The Cannabis Regulations provide a six-month transitional period to allow licensed holders to sell cannabis products labelled in accordance with the ACMPR.
Advertising
The Cannabis Act introduces restrictions regarding the promotion of cannabis products. Subject to a few exceptions, all promotions of cannabis products are prohibited unless authorized by the Cannabis Act.
Health Products and Cosmetics Containing Cannabis
Health Canada has taken a scientific, evidenced-based approach for the oversight of health products with cannabis that are approved with health claims, including prescription and non-prescription drugs, natural health products, veterinary drugs and veterinary health products, and medical devices. Under the Cannabis Regulations, the use of cannabis-derived ingredients (other than certain hemp seed derivatives containing no more than 10 parts per million THC) in cosmetics is permitted and will be subject to provisions of the Cannabis Act.
Cannabis for Medical Purposes
With the Cannabis Act and the Cannabis Regulations coming into force on October 17, 2018, the medical cannabis regime migrated from the CDSA and the ACMPR to the Cannabis Act and the Cannabis Regulations. The medical cannabis regulatory framework under the Cannabis Act and the Cannabis Regulations remains substantively the same as existed under the CDSA and the ACMPR, with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system.
Under Part 14 of the Cannabis Regulations, patients have three options for obtaining cannabis for medical purposes: (i) they can continue to access cannabis by registering with licensed producers; (ii) they can register with Health Canada to produce a limited amount of cannabis for their own medical purposes; or (iii) they can designate someone else to produce cannabis for them. With respect to (ii) and (iii), starting materials, such as marijuana plants or seeds, must be obtained
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from licensed producers. It is possible that (ii) and (iii) could significantly reduce the addressable market for the Companys products and could materially and adversely affect the business, financial condition and results of operations of the Company. However, management of the Company believes that many patients may be deterred from opting to proceed with options (ii) or (iii) since such steps require applying for and obtaining registration from Health Canada to grow cannabis, as well as the up-front costs of obtaining equipment and materials to produce such cannabis.
Provincial Regulatory Framework
While the Cannabis Act provides for the regulation of the commercial production of cannabis for recreational purposes and related matters by the federal government, the Cannabis Act provides that the provinces and territories of Canada have authority to regulate other aspects of recreational cannabis (similar to what is currently the case for liquor and tobacco products), such as sale and distribution, minimum age requirements, places where cannabis can be consumed, and a range of other matters.
At present, the Company has entered into supply agreements with distributors in the provinces of Québec, Ontario, Alberta and British Columbia.
All Canadian provinces and territories have announced proposed regulatory regimes for the distribution and sale of cannabis for recreational purposes within those jurisdictions. There are essentially three general frameworks that the provinces and territories have proposed: (i) private cannabis retailers licensed by the province; (ii) government run retail stores; or (iii) a combination of both frameworks (e.g., privately licensed bricks and mortar retail stores, while online retail stores are operated by the applicable provincial government). Regardless of the framework, the recreational cannabis market is ultimately supplied by federally licensed cultivators and processors. In many cases, the provinces that have or propose to have privately licensed retailers will have a government run wholesaler. Such privately licensed retail stores are or will be required to obtain their cannabis products from the wholesalers, while the wholesalers, in turn, acquire the cannabis products from the federally licensed cultivators and processors. In addition, each of these Canadian jurisdictions has established a minimum age of 19 years old, except for Québec and Alberta, where the minimum age is 18.
Québec: In Québec, all recreational marijuana must be managed and sold through outlets of the Société québécoise du cannabis, a subsidiary of the Société des alcools du Québec, and its online site.
Ontario: In Ontario, the distribution and retail sale of recreational cannabis is to be conducted through the Ontario Cannabis Retail Corporation ( OCRS ), a subsidiary of the Liquor Control Board of Ontario, while recreational cannabis is sold online through the Ontario Cannabis Store platform. Ontario will allow the sale of recreational cannabis by private retailers with a target date of April 1, 2019. In addition, the regulatory regime in Ontario:
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requires private retailers to obtain both a retail operator license and a retail store authorization. Retail store authorizations are only to be issued to persons holding a retail operator license. Separate retail store authorizations are to be required for each cannabis retail store, but a licensed retail operator may hold more than one retail store authorization and operate multiple stores. Private retailers are not permitted to sell cannabis on-line, but may only sell cannabis in person at an authorized retail store; |
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requires anyone who supervises employees, oversees cannabis sales, manages compliance or has signing authority to purchase cannabis, enters into contracts or hires employees to have a cannabis retail manager license; |
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limits federally licensed producers (and their affiliates) to operating one retail cannabis store, which must be located at the site listed on such producers federal license. The term affiliate is not currently defined, although it may be in future regulations. The definition of affiliate may have the effect of limiting the ability of federally licensed producers from entering into the consumer retail market in Ontario; |
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prohibits federally licensed producers from promoting their products by way of providing any material inducement to cannabis retailers; |
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permits municipalities and reserve band councils to opt out of the retail cannabis market by resolution. Municipalities have until January 22, 2019 to pass such by-laws. Municipalities that opt out may later lift the prohibition on retail cannabis stores by subsequent resolution. Municipalities may not pass a bylaw providing for a further system of licensing over the retail sale of cannabis; and |
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imposes further restrictions through future regulation. Cannabis retail store operators are only permitted to purchase cannabis from the OCRS, which may set a minimum price for cannabis or classes of cannabis. |
British Columbia: In British Columbia, recreational cannabis is to be sold through both public and privately operated stores, with the provincial Liquor Distribution Branch handling wholesale distribution.
Alberta: In Alberta, cannabis products are sold by private retailers that receive their products from a government-regulated distributor, similar to the distribution system currently in place for alcohol in the province. Only licensed retail outlets are to be permitted to sell cannabis with online sales run by the Alberta Gaming and Liquor Commission.
Saskatchewan: In Saskatchewan, recreational cannabis is sold by private retailers. The Saskatchewan Liquor and Gaming Authority is to issue approximately 60 retail permits to private stores located in roughly 40 municipalities and First Nation communities across the province, with municipalities having the option of opting out of having a cannabis store if they choose.
Manitoba: In Manitoba, a hybrid model for cannabis distribution applies where the supply of cannabis is secured and tracked by the Manitoba Liquor and Lotteries Corp.; however, licensed private retail stores will be permitted to sell recreational cannabis.
New Brunswick: In New Brunswick, recreational cannabis is sold through a network of tightly-controlled, stand-alone stores through the New Brunswick Liquor Corporation.
Nova Scotia: In Nova Scotia, the Nova Scotia Liquor Corporation is responsible for the regulation of cannabis in the province, and recreational cannabis is only to be sold publicly through government-operated storefronts and online sales.
Prince Edward Island: In Prince Edward Island, similar to Nova Scotia, cannabis must be sold publicly, through government stores and online.
Newfoundland and Labrador: In Newfoundland and Labrador, recreational cannabis must be sold through licensed private stores, with its crown-owned liquor corporation, the Newfoundland and Labrador Liquor Corp. (the NLC ), overseeing the distribution to private sellers who may sell to consumers. The NLC controls the possession, sale and delivery of cannabis, and sets prices. It is also the initial online retailer, although licenses may later be issued to private interests. The Government of Newfoundland and Labrador has issued a request for proposals for private retailers.
Yukon: The Yukon limits the initial distribution and sale of recreational cannabis to government outlets and government-run online stores, and allows for the later licensing of private retailers.
Northwest Territories: The Northwest Territories relies on the N.W.T. Liquor Commission to control the importation and distribution of cannabis, whether through retail outlets or by mail order service run by the liquor commission. Communities in the Northwest Territories will be able to hold a plebiscite to prohibit cannabis, similar to options currently available to restrict alcohol in the Northwest Territories.
The authorized capital of the Company consists of an unlimited number of Common Shares and an unlimited number of special shares issuable in series. As of the date of this Prospectus, there are 198,172,020 Common Shares issued and outstanding.
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The holders of the Common Shares are entitled to one vote per share at all meetings of the shareholders of the Company either in person or by proxy. The holders of Common Shares are also entitled to dividends, if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company. The Common Shares rank equally as to all benefits which might accrue to the holders thereof, including the right to receive dividends, voting powers, and participation in assets and in all other respects, on liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other disposition of the assets of the Company among its shareholders for the purpose of winding up its affairs after the Company has paid out its liabilities. The Common Shares are not subject to call or assessment rights or any pre-emptive or conversion rights. There are no provisions for redemption, purchase for cancellation, surrender or purchase of funds.
There have been no material changes to the Companys share and loan capitalization on a consolidated basis since October 31, 2018, the date of the Companys most recent financial statements, except the following:
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Subsequent to October 31, 2018, a total of 668,617 Common Shares were issued pursuant to the exercise of stock options for gross proceeds of $440,253; |
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Subsequent to October 31, 2018, a total of 136,812 Common Shares were issued pursuant to the exercise of warrants for gross proceeds of $123,844; and |
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Subsequent to October 31, 2018, a total of 440,000 stock options were granted on November 22, 2018 having an exercise price of $5.92 per share and expiring on November 22, 2028. |
The applicable Prospectus Supplement will describe any material change, and the effect of such material change, on the share and loan capitalization of the Company that will result from the issuance of Securities pursuant to such Prospectus Supplement.
The use of proceeds from the sale of Securities will be described in the applicable Prospectus Supplement relating to a specific offering and sale of Securities. Among other potential uses, the Company may use the net proceeds from the sale of Securities for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay indebtedness outstanding from time to time, capital projects and potential future acquisitions, including in relation to international expansion.
Management of the Company will retain broad discretion in allocating the net proceeds of any offering of Securities under this Prospectus and the Companys actual use of the net proceeds will vary depending on the availability and suitability of investment opportunities and its operating and capital needs from time to time. All expenses relating to an offering of Securities and any compensation paid to underwriters, dealers or agents as the case may be, will be paid out of the proceeds from the sale of such Securities, unless otherwise stated in the applicable Prospectus Supplement. See Risk FactorsDiscretion in the Use of Proceeds.
The Company may, from time to time, issue securities (including Securities) other than pursuant to this Prospectus.
The Company may from time to time during the 25-month period that this Prospectus, including any amendments hereto, remains valid, offer for sale and issue up to an aggregate of $800,000,000 in Securities hereunder.
The Company may offer and sell the Securities to or through underwriters or dealers purchasing as principals, and may also sell directly to one or more purchasers or through agents or pursuant to applicable statutory exemptions. The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent, as the case may be, engaged by the Company in connection with the offering and sale of the Securities, and will set forth the terms of the offering of such Securities, including, to the extent applicable, any fees, discounts or any other compensation
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payable to underwriters, dealers or agents in connection with the offering, the method of distribution of the Securities, the initial issue price, the proceeds that the Company will receive and any other material terms of the plan of distribution. Any initial offering price and discounts, concessions or commissions allowed or re-allowed or paid to dealers may be changed from time to time.
In addition, the Securities may be offered and issued in consideration for the acquisition of other businesses, assets or securities by the Company or one of its subsidiaries. The consideration for any such acquisition may consist of the Securities separately, a combination of Securities or any combination of, among other things, Securities, cash and assumption of liabilities.
The Securities may be sold from time to time in one or more transactions at a fixed price or prices or at prices which may be changed or at market prices prevailing at the time of sale, at prices related to such prevailing prices or at negotiated prices, including sales in transactions that are deemed to be at-the-market distributions as defined in National Instrument 44-102 Shelf Distributions of the Canadian Securities Administrators, including sales made directly on the TSX or other existing trading markets for the Common Shares. The price at which the Securities will be offered and sold may vary from purchaser to purchaser and during the period of distribution.
In connection with the sale of the Securities, underwriters, dealers or agents may receive compensation from the Company or from other parties, including in the form of underwriters, dealers or agents fees, commissions or concessions. Underwriters, dealers and agents that participate in the distribution of the Securities may be deemed to be underwriters for the purposes of applicable Canadian securities legislation and any such compensation received by them from the Company and any profit on the resale of the Securities by them may be deemed to be underwriting commissions. In connection with any offering of Securities, except as otherwise set out in a Prospectus Supplement relating to a particular offering of Securities and other than in relation to an at-the-market distribution, the underwriters, dealers or agents, as the case may be, may over-allot or effect transactions intended to fix, stabilize, maintain or otherwise affect the market price of the Securities at a level other than those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued at any time.
Underwriters, dealers or agents who participate in the distribution of the Securities may be entitled, under agreements to be entered into with the Company, to indemnification by the Company against certain liabilities, including liabilities under Canadian securities legislation and the United States Securities Act of 1933, as amended, or to contribution with respect to payments which such underwriters, dealers or agents may be required to make in respect thereof. Such underwriters, dealers and agents may be customers of, engage in transactions with, or perform services for, the Company in the ordinary course of business.
Unless otherwise specified in the applicable Prospectus Supplement, each series or issue of Securities (other than Common Shares) will be a new issue of Securities with no established trading market. Accordingly, there is currently no market through which the Securities (other than Common Shares) may be sold and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of such Securities in the secondary market, the transparency and availability of trading prices, the liquidity of such Securities and the extent of issuer regulation. See Risk Factors .
The following is a brief summary of certain general terms and provisions of the Securities as at the date of this Prospectus. The summary does not purport to be complete and is indicative only. The specific terms of any Securities to be offered under this Prospectus, and the extent to which the general terms described in this Prospectus apply to such Securities, will be set forth in the applicable Prospectus Supplement. Moreover, a Prospectus Supplement relating to a particular offering of Securities may include terms pertaining to the Securities being offered thereunder that are not within the terms and parameters described in this Prospectus.
Common Shares
The following is a brief summary of the material attributes of the Common Shares. This summary does not purport to be complete. Common Shares may be sold separately or together with other Securities, as the case may be.
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The holders of the Common Shares are entitled to one vote per share at all meetings of the shareholders of the Company either in person or by proxy. The holders of Common Shares are also entitled to dividends, if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company. The Common Shares rank equally as to all benefits which might accrue to the holders thereof, including the right to receive dividends, voting powers, and participation in assets and in all other respects, on liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other disposition of the assets of the Company among its shareholders for the purpose of winding up its affairs after the Company has paid out its liabilities. The Common Shares are not subject to call or assessment rights or any pre-emptive or conversion or exchange rights. There are no provisions for redemption, retraction, purchase for cancellation or surrender, and there are no sinking or purchase fund provisions.
Warrants
The following is a brief summary of certain general terms and provisions of the Warrants that may be offered pursuant to this Prospectus. This summary does not purport to be complete. The particular terms and provisions of the Warrants as may be offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement pertaining to such offering of Warrants, and the extent to which the general terms and provisions described below may apply to such Warrants will be described in the applicable Prospectus Supplement.
Warrants may be offered separately or together with other Securities, as the case may be. Each series of Warrants may be issued under a separate warrant indenture or warrant agency agreement to be entered into between the Company and one or more banks or trust companies acting as Warrant agent or may be issued as stand-alone contracts. The applicable Prospectus Supplement will include details of the Warrant agreements, if any, governing the Warrants being offered. The Warrant agent, if any, will be expected to act solely as the agent of the Company and will not assume a relationship of agency with any holders of Warrant certificates or beneficial owners of Warrants. A copy of any warrant indenture or any warrant agency agreement relating to an offering of Warrants will be filed by the Company with the relevant securities regulatory authorities in Canada after it has been entered into by the Company.
Each applicable Prospectus Supplement will set forth the terms and other information with respect to the Warrants being offered thereby, which may include, without limitation, the following (where applicable):
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the designation of the Warrants; |
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the aggregate number of Warrants offered and the offering price; |
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the designation, number and terms of the other Securities purchasable upon exercise of the Warrants, and procedures that will result in the adjustment of those numbers; |
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the exercise price of the Warrants; |
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the dates or periods during which the Warrants are exercisable including any early termination provisions; |
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the designation, number and terms of any Securities with which the Warrants are issued; |
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if the Warrants are issued as a unit with another Security, the date on and after which the Warrants and the other Security will be separately transferable; |
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whether such Warrants are to be issued in registered form, book-entry only form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; |
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any minimum or maximum amount of Warrants that may be exercised at any one time; |
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whether such Warrants will be listed on any securities exchange; |
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any terms, procedures and limitations relating to the transferability, exchange or exercise of the Warrants; |
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certain material Canadian and United States tax consequences of owning the Warrants; and |
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any other material terms and conditions of the Warrants. |
Subscription Receipts
The following is a brief summary of certain general terms and provisions of the Subscription Receipts that may be offered pursuant to this Prospectus. This summary does not purport to be complete. The particular terms and provisions of the Subscription Receipts as may be offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement pertaining to such offering of Subscription Receipts, and the extent to which the general terms and provisions described below may apply to such Subscription Receipts will be described in the applicable Prospectus
14
Supplement. Subscription Receipts may be offered separately or together with other Securities, as the case may be.
The Subscription Receipts may be issued under a subscription receipt agreement. The applicable Prospectus Supplement will include details of the subscription receipt agreement, if any, governing the Subscription Receipts being offered. The Company will file a copy of any subscription receipt agreement, if any, relating to an offering of Subscription Receipts with the relevant securities regulatory authorities in Canada after it has been entered into by the Company.
Each applicable Prospectus Supplement will set forth the terms and other information with respect to the Subscription Receipts being offered thereby, which may include, without limitation, the following (where applicable):
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the aggregate number of Subscription Receipts offered; |
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the price at which the Subscription Receipts will be offered; |
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the terms, conditions and procedures for the conversion of the Subscription Receipts into other Securities; |
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the dates or periods during which the Subscription Receipts are convertible into other Securities; |
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the designation, number and terms of the other Securities that may be exchanged upon conversion of each Subscription Receipt; |
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the designation, number and terms of any other Securities with which the Subscription Receipts will be offered, if any, and the number of Subscription Receipts that will be offered with each Security; |
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whether such Subscription Receipts are to be issued in registered form, book-entry only form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; |
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terms applicable to the gross or net proceeds from the sale of the Subscription Receipts plus any interest earned thereon; |
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certain material Canadian and United States tax consequences of owning the Subscription Receipts; and |
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any other material terms and conditions of the Subscription Receipts. |
Units
The following is a brief summary of certain general terms and provisions of the Units that may be offered pursuant to this Prospectus. This summary does not purport to be complete. The particular terms and provisions of the Units as may be offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement pertaining to such offering of Units, and the extent to which the general terms and provisions described below may apply to such Units will be described in the applicable Prospectus Supplement. Units may be offered separately or together with other Securities, as the case may be.
Each applicable Prospectus Supplement will set forth the terms and other information with respect to the Units being offered thereby, which may include, without limitation, the following (where applicable):
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the aggregate number of Units offered; |
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the price at which the Units will be offered; |
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the designation, number and terms of the Securities comprising the Units; |
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whether the Units will be issued with any other Securities and, if so, the amount and terms of these Securities; |
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terms applicable to the gross or net proceeds from the sale of the Units plus any interest earned thereon; |
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the date on and after which the Securities comprising the Units will be separately transferable; |
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whether the Securities comprising the Units will be listed on any securities exchange; |
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whether such Units or the Securities comprising the Units are to be issued in registered form, book-entry only form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; |
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any terms, procedures and limitations relating to the transferability, exchange or exercise of the Units; |
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certain material Canadian and United States tax consequences of owning the Units; and |
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any other material terms and conditions of the Units. |
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Information in respect of prior sales of the Common Shares or other Securities distributed under this Prospectus and for securities that are convertible or exchangeable into the Common Shares or such other Securities within the previous 12-month period will be provided, as required, in a Prospectus Supplement with respect to the issuance of the Common Shares or other Securities pursuant to such Prospectus Supplement.
The Common Shares are currently listed on the TSX under the trading symbol HEXO. Trading price and volume of the Common Shares will be provided, as required, in each Prospectus Supplement. HEXO has applied to list the Common Shares on the NYSE American under the symbol HEXO. Listing will be subject to HEXO fulfilling all the listing requirements of the NYSE American, and there can be no assurance that the Common Shares will be accepted for listing on the NYSE American.
In addition to the Common Shares, the common share purchase warrants of the Company expiring on January 30, 2020 are currently listed on the TSX under the trading symbol HEXO.WT. Trading price and volume of these warrants will be provided, as required, in each Prospectus Supplement.
HEXO has never paid any dividends on its Common Shares. While HEXO is not restricted from paying dividends other than pursuant to certain solvency tests prescribed under the OBCA, HEXO does not intend to pay dividends on any of its Common Shares in the foreseeable future.
CERTAIN CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Owning any of the Securities may subject holders to tax consequences. The applicable Prospectus Supplement may describe certain Canadian federal income tax consequences to an initial investor who is a resident of Canada or a non-resident of Canada of acquiring, owning and disposing of any of the Securities offered thereunder. The applicable Prospectus Supplement may also describe certain United States federal income tax consequences of the acquisition, ownership and disposition of any of the Securities offered thereunder by an initial investor who is a U.S. Person (within the meaning of the U.S. Internal Revenue Code of 1986, as amended). Prospective investors should consult their own tax advisers prior to deciding to purchase any of the Securities.
Before deciding to invest in any Securities, prospective investors of the Securities should consider carefully the risk factors and the other information contained and incorporated by reference in this Prospectus and the applicable Prospectus Supplement relating to a specific offering of Securities before purchasing the Securities, including those risks identified and discussed under the heading Risk Factors in the AIF, which is incorporated by reference herein. See Documents Incorporated by Reference .
An investment in the Securities offered hereunder is speculative and involves a high degree of risk. The risks and uncertainties described or incorporated by reference herein are not the only ones the Company may face. Additional risks and uncertainties, including those that the Company is unaware of or that are currently deemed immaterial, may also become important factors that affect the Company and its business. If any such risks actually occur, the Companys business, financial condition and results of operations could be materially adversely affected.
Prospective investors should carefully consider the risks below and in the AIF and the other information elsewhere in this Prospectus and the applicable Prospectus Supplement and consult with their professional advisers to assess any investment in the Company.
Return on Securities is not Guaranteed
There is no guarantee that the Securities will earn any positive return in the short term or long term. A holding of Securities is speculative and involves a high degree of risk and should be undertaken only by holders whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their
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investment. A holding of Securities is appropriate only for holders who have the capacity to absorb a loss of some or all of their holdings.
Discretion in the Use of Proceeds
Management of the Company will have broad discretion with respect to the application of net proceeds received by the Company from the sale of Securities under this Prospectus or a future Prospectus Supplement and may spend such proceeds in ways that do not improve the Companys results of operations or enhance the value of the Common Shares or its other securities issued and outstanding from time to time. Any failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on the Companys business or cause the price of the securities of the Company issued and outstanding from time to time to decline.
Dilution
The Company may sell additional Common Shares or other Securities that are convertible or exchangeable into Common Shares in subsequent offerings or may issue additional Common Shares or other Securities to finance future acquisitions. The Company cannot predict the size or nature of future sales or issuances of securities or the effect, if any, that such future sales and issuances will have on the market price of the Common Shares. Sales or issuances of substantial numbers of Common Shares or other Securities that are convertible or exchangeable into Common Shares, or the perception that such sales or issuances could occur, may adversely affect prevailing market prices of the Common Shares. With any additional sale or issuance of Common Shares or other Securities that are convertible or exchangeable into Common Shares, investors will suffer dilution to their voting power and economic interest in the Company. Furthermore, to the extent holders of the Companys stock options or other convertible securities convert or exercise their securities and sell the Common Shares they receive, the trading price of the Common Shares may decrease due to the additional amount of Common Shares available in the market.
Volatile Market Price of the Common Shares
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 the Companys control. 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 Companys 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 conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market 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 Companys 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. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Companys operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
Trading Markets and Liquidity
There is currently no market through which the Securities, other than the Common Shares, may be sold and, unless otherwise specified in the applicable Prospectus Supplement, none of the Warrants, Subscription Receipts or Units will be listed on any securities or stock exchange or any automated dealer quotation system. As a consequence, purchasers may not be able to resell Warrants, Subscription Receipts or Units purchased under this Prospectus or any Prospectus Supplement. This may affect the pricing of the Securities, other than the Common Shares, in the secondary market, the transparency and availability of trading prices, the liquidity of these securities and the extent of issuer regulation. There can be no assurance that an active trading market for the Securities, other than the Common Shares, will develop or, if developed, that any such market, including for the Common Shares, will be sustained.
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The Common Shares are currently listed in Canada on the TSX, but are not currently listed on any United States securities exchange, so there has been a limited public market in the United States for the Common Shares. While HEXO has applied to list the Common Shares on the NYSE American, listing will be subject to HEXO fulfilling all the listing requirements of the NYSE American. Moreover, as liquidity and trading patterns of securities listed on the TSX may be substantially different from those of securities listed on a securities exchange in the United States, historical trading prices may not be indicative of the prices at which the Common Shares may trade in the future if and when they are listed on a securities exchange in the United States. There is no assurance that the Common Shares will be listed on the NYSE American or any other securities exchange in the United States or, if such a listing is obtained, that an active trading market for the Common Shares will develop or be sustained in the United States following the listing. If an active market for the Common Shares does not develop, it may be difficult for United States shareholders to sell their Common Shares without depressing the market price for such shares, or at all.
Shareholders of the Company may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, or that the Company will continue to meet the listing requirements of the TSX or achieve or maintain listing on the NYSE American or any other public listing exchange.
Regulatory Risks
Achievement of the Companys business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all regulatory approvals, where necessary, for the sale of its products. The Company cannot predict the impact of the compliance regime Health Canada is implementing for the Canadian adult-use and medical cannabis industries under the Cannabis Regulations. Similarly, the Company cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. The impact of Health Canadas compliance regime, any delays in obtaining, or failure to obtain regulatory approvals may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the business, results of operations and financial condition of the Company.
The Company will incur ongoing costs and obligations related to regulatory compliance, including regulations relating to continuous disclosure and other applicable securities laws. Failure to comply with regulations may result in additional costs for corrective measures, penalties or restrictions on the Companys operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Companys operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Changes in Laws, Regulations and Guidelines
The Companys operations are subject to various laws, regulations and guidelines relating to the manufacture, management, packaging/labelling, advertising, sale, transportation, storage and disposal of medical cannabis but also including laws and regulations relating to drugs, controlled substances, health and safety, the conduct of operations and the protection of the environment. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may cause adverse effects business, financial condition and results of operations of the Company. The Company endeavours to comply with all relevant laws, regulations and guidelines. To the best of the Companys knowledge, the Company is in compliance or in the process of being assessed for compliance with all such laws, regulations and guidelines.
The Cannabis Act and Cannabis Regulations came into force on October 17, 2018. The Cannabis Act and Cannabis Regulations prohibit testimonials, lifestyle branding and packaging that is appealing to youth. The restrictions on advertising, marketing and the use of logos and brand names could have a material adverse impact on the Companys business, financial condition and results of operation. The legislative framework pertaining to the Canadian adult-use cannabis market is uncertain. In addition, the governments of every Canadian province and territory have, to varying degrees, announced regulatory regimes for the distribution and sale of cannabis for adult-use purposes within those jurisdictions. There is no guarantee that provincial legislation regulating the distribution and sale of cannabis for adult-use purposes will be enacted according to all the terms announced by such provinces and territories, or at all, or that any such legislation, if enacted, will create the growth opportunities that the Company currently anticipates. While the impact of any new legislative framework for the regulation of the Canadian adult-use cannabis market is uncertain, any of the foregoing could result in a material adverse effect of the Companys business, financial condition and results of operation.
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As an FPI, HEXO is Subject to Different United States Securities Laws and Rules Than a Domestic United States Issuer. HEXO is also an emerging growth company and may take advantage of certain exemptions available to emerging growth companies.
The Company is an FPI. As a result, although upon effectiveness of the registration statement, HEXO will become subject to the informational requirements of the U.S. Exchange Act, as an FPI, HEXO will be exempt from certain informational requirements of the U.S. Exchange Act to which domestic issuers in the United States are subject, including the proxy rules under the U.S. Exchange Act. The Company will also not be required to file the same reports that a U.S. domestic issuer would file with the SEC, although the Company is required to file with or furnish to the SEC the continuous disclosure documents that the Company is required to file in Canada under Canadian securities laws. Furthermore, the insider reporting and short-profit provisions under Section 16 of the U.S. Exchange Act will not be applicable to HEXO; therefore, its shareholders may not know on as timely a basis when the Companys officers, directors and principal shareholders purchase or sell Common Shares, as the reporting periods under the corresponding Canadian insider reporting requirements are longer.
The Company also qualifies as an emerging growth company as defined in the United States Jumpstart Our Business Startups Act of 2012. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies that are not emerging growth companies. These reduced reporting requirements include an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting. HEXO may take advantage of some of these exemptions until it is no longer an emerging growth company. HEXO could remain an emerging growth company for up to five years, although circumstances could cause the Company to lose that status earlier, including if the market value of the Common Shares held by non-affiliates exceeds $700.0 million as of the end of our most recently completed second fiscal quarter, if we have total annual gross revenue of $1.07 billion or more during any fiscal year, or if we issue more than $1.0 billion in non-convertible debt during any three-year period.
If HEXO chooses to take advantage of the exemptions available to emerging growth companies, information we provide to you may be different than you might get from other public companies in which you hold securities. Further, investors could find the Common Shares less attractive if we choose to rely on these exemptions. If some investors find the Common Shares less attractive as a result of any choices to reduce future disclosure, the trading market and price of the Common Shares may be adversely affected.
PFIC Status
Based upon the nature of the Companys current business activities, the Company does not believe it was a passive foreign investment company (PFIC) for U.S. income tax purposes for its 2018 fiscal year, and does not expect to be a PFIC in its current taxation year. However, the tests for determining PFIC status are based upon the composition of the income and assets of the Company and its subsidiaries and affiliates from time to time, and it is difficult to make accurate predictions of future income and assets. Accordingly, there can be no assurance that the Company will not become a PFIC in the future. A non-U.S. corporation generally will be considered a PFIC for any taxable year if either: (i) at least 75% of its gross income is passive income; or (ii) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income (which generally includes cash). If the Company were to be treated as a PFIC for any taxation year, such characterization could result in adverse U.S. income tax consequences to certain investors in the Company in the United States.
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The following persons or companies are named as having prepared or certified a report, valuation, statement or opinion in this Prospectus, either directly or in a document incorporated herein by reference, and whose profession or business gives authority to the report, valuation, statement or opinion made by the expert.
The Companys audited consolidated financial statements for the years ended July 31, 2018 and 2017 have been audited by MNP LLP, Chartered Professional Accountants, as set forth in their report, which report expresses an unqualified opinion on such financial statements. The audited consolidated financial statements have been incorporated by reference into this Prospectus in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. MNP LLP is independent of HEXO within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
Unless otherwise specified in a Prospectus Supplement relating to any Securities offered, certain legal matters in connection with the offering of Securities may be passed upon on behalf of HEXO by DLA Piper (Canada) LLP as to legal matters relating to Canadian law and, if governed by United States law, by DLA Piper (US) LLP as to matters relating to United States law. In addition, certain legal matters in connection with any offering of Securities may be passed upon for any underwriters, dealers or agents by counsel to be designated at the time of the offering by such underwriters, dealers or agents, as the case may be.
The registrar and transfer agent for the Common Shares is TSX Trust Company at its office in Toronto, Ontario.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents will be filed with the SEC as part of the registration statement to which this Prospectus forms a part: (i) the documents listed under Documents Incorporated by Reference ; (ii) the consent of the Companys auditors, MNP LLP; and (iii) powers of attorney from the Companys directors and officers included on the signature pages of the registration statement.
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PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO
OFFEREES OR PURCHASERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Business Corporations Act (Ontario) (the OBCA ), the Registrant may indemnify a present or former director or officer of the Registrant or another individual who acts or acted at the Registrants request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Registrant or other entity. The Registrant may not indemnify an individual unless the individual acted honestly and in good faith with a view to the best interests of the Registrant, or, as the case may be, to the best interests of the other entity for which the individual acted as a director or officer or in a similar capacity at the Registrants request and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that their conduct was lawful. The indemnification may be made in connection with an action by or on behalf of the Registrant or other entity to obtain a judgment in its favor, to which the individual is made a party because of the individuals association with the Registrant or other entity as described above only with court approval. The aforementioned individuals are entitled to indemnification from the Registrant in respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defense of any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of the individuals association with the Registrant or other entity as described above if the individual was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the individual described above ought to have done provided the individual fulfills the conditions set out above. The Registrant may advance moneys to an individual described above for the costs, charges and expenses of a proceeding described above; however, the individual shall repay the moneys if the individual does not fulfill the conditions set out above.
The by-laws of the Registrant require it to indemnify all present or former directors and officers of the Registrant and other individuals who act or have acted at the Registrants request as a director or officer or in a similar capacity of another entity, to the fullest extent possible and in every circumstance permitted by the OBCA. The by-laws further provide that from time to time the directors of the Registrant may revoke, limit or vary the continued application of an individuals indemnification, provided that no such action shall affect any right of the individual or any liability of the Registrant which has arisen prior to the date of such action.
The Registrant maintains insurance policies relating to certain liabilities that its directors and officers may incur in such capacities.
Insofar as indemnification for liabilities arising under the U.S. Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the U.S. Securities Act, and is therefore unenforceable.
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1. Undertaking.
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to this Form F-10 or to transactions in said securities.
Item 2. Consent to Service of Process.
(a) |
Concurrently with the filing of this Registration Statement, the Registrant is filing with the Commission a written irrevocable consent and power of attorney on Form F-X. |
(b) |
Any change to the name or address of the Registrants agent for service shall be communicated promptly to the Commission by amendment to Form F-X referencing the file number of this Registration Statement. |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Gatineau, Québec, on this 20 th day of December, 2018.
HEXO CORP. | ||
By: | /s/ Sébastien St-Louis | |
Name: Sébastien St-Louis Title: President and Chief Executive Officer |
Each person whose signature appears below constitutes and appoints Sébastien St-Louis and Ed Chaplin, and each of them, either of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement and registration statements filed pursuant to Rule 429 under the Securities Act, and to file the same, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated below on December 20, 2018.
Signature |
Title |
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/s/ Sébastien St-Louis Sébastien St-Louis |
President, Chief Executive Officer and Director (principal executive officer) | |||
/s/ Ed Chaplin Ed Chaplin |
Chief Financial Officer (principal financial officer) |
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/s/ Nathalie Bourque Nathalie Bourque |
Director | |||
/s/ Vincent Chiara Vincent Chiara |
Director | |||
/s/ Jason Ewart Jason Ewart |
Director | |||
/s/ Adam Miron Adam Miron |
Director | |||
/s/ Michael Munzar Michael Munzar |
Director and Chairman |
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized Representative has duly caused this Registration Statement to be signed on its behalf by the undersigned, solely in his capacity as the duly authorized representative of the Registrant in the United States, on this 20 th day of December, 2018.
CT CORPORATION SYSTEM |
By: | /s/ Scott White | |
Name: | Scott White | |
Title: | Assistant Secretary |
Exhibit 4.1
HEXO CORP.
ANNUAL INFORMATION FORM
For the fiscal year ended July 31, 2018
OCTOBER 25, 2018
TABLE OF CONTENTS
ANNUAL INFORMATION FORM |
3 | |||
FORWARD-LOOKING STATEMENTS |
3 | |||
CORPORATE STRUCTURE |
4 | |||
GENERAL DEVELOPMENT OF THE BUSINESS |
6 | |||
DESCRIPTION OF THE BUSINESS |
9 | |||
RISK FACTORS |
15 | |||
DIVIDENDS |
25 | |||
CAPITAL STRUCTURE |
25 | |||
MARKET FOR SECURITIES |
26 | |||
PRIOR SALES |
27 | |||
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER |
28 | |||
DIRECTORS AND OFFICERS |
28 | |||
PROMOTERS |
33 | |||
LEGAL PROCEEDINGS AND REGULATORY ACTIONS |
33 | |||
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS |
33 | |||
TRANFER AGENT AND REGISTAR |
33 | |||
MATERIAL CONTRACTS |
34 | |||
AUDIT COMMITTEE INFORMATION |
34 | |||
INTERESTS OF EXPERTS |
35 | |||
ADDITIONAL INFORMATION |
35 | |||
SCHEDULE A - AUDIT COMMITTEE CHARTER |
ANNUAL INFORMATION FORM
In this annual information form ( Annual Information Form or AIF ), unless otherwise noted or the context indicates otherwise, the Company, HEXO, we, us and our refer to HEXO Corp. and its wholly-owned subsidiaries, and the terms cannabis, client, licensed producer and marijuana have the meanings given to the terms cannabis, client, licensed producer and marihuana respectively in the Access to Cannabis for Medical Purposes Regulations (Canada) (the ACMPR ) made under the Controlled Drugs and Substances Act (Canada) (the CDSA ).
All currency amounts in this AIF are stated in Canadian dollars, unless otherwise noted.
Unless otherwise noted, all information in this AIF is given as of July 31, 2018.
FORWARD-LOOKING STATEMENTS
This Annual Information Form contains certain forward-looking information and forward-looking statements (collectively, forward-looking statements ) which are based upon the Companys current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as expect, likely, may, will, should, intend, or anticipate, potential, proposed, estimate and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions may or will happen, or by discussions of strategy. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. The forward-looking statements included in this Annual Information Form are made only as of the date of this Annual Information Form. Forward-looking statements in this Annual Information Form include, but are not limited to, statements with respect to:
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the competitive and business strategies of the Company; |
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the intention to grow the business, operations and potential activities of the Company; |
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the ongoing expansion of the Companys facilities, its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity; |
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the expected production capacity of the Company; |
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the expected sales mix of offered products; |
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the competitive conditions of the industry; |
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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; |
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the applicable laws, regulations and any amendments thereof; |
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the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof; |
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the anticipated future gross margins of the Companys operations; and |
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the performance of the Companys business and operations. |
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The purpose of forward-looking statements is to provide the reader with a description of managements expectations, and such forward-looking statements may not be appropriate for any other purpose. In particular, but without limiting the foregoing, disclosure in this Annual Information Form under Description of the Business as well as statements regarding the Companys objectives, plans and goals, including future operating results, economic performance and patient acquisition efforts may make reference to or involve forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.
Certain of the forward-looking statements and other information contained herein concerning the cannabis industry and its medical and adult-use markets and the general expectations of HEXO concerning the industry and the Companys business and operations are based on estimates prepared by HEXO using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of this industry which HEXO believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While HEXO is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry and newly forming adult-use market involves risks and uncertainties that are subject to change based on various factors.
A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. You should not place undue reliance on forward-looking statements contained in this Annual Information Form. Such forward-looking statements are made as of the date of this Annual Information Form. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The Companys forward-looking statements are expressly qualified in their entirety by this cautionary statement.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company is in the business of producing, marketing and selling cannabis through its wholly-owned subsidiary, HEXO Operations Inc. ( HOI ) (formerly 10074241 Canada Inc.), from its facilities in Gatineau, Québec. HOI is a licensed producer under the ACMPR.
The Company was incorporated under the Business Corporations Act (Ontario) (the OBCA ) on October 29, 2013 as BFK Capital Corp. ( BFK ). BFK completed its initial public offering as a Capital Pool Company under Policy 2.4 of the TSX Venture Exchange (the TSXV ) on November 12, 2014 and its common shares (the Common Shares ) commenced trading on the TSXV under the symbol BFK.P on November 17, 2014.
On March 15, 2017, pursuant to a Qualifying Transaction in accordance with Policy 2.4 of the TSXV (the Qualifying Transaction ), BFK acquired all of the issued and outstanding common shares of The Hydropothecary Corporation ( Predecessor THCX ). In connection with the completion of the Qualifying Transaction, the Company filed articles of amendment under the OBCA on March 15, 2017 to consolidate, prior to the acquisition of the common shares of Predecessor THCX, its Common Shares on a 1 post-consolidation share for every one-and-a-half (1.5) preconsolidation shares basis (the Consolidation ), and to change its name to The Hydropothecary Corporation. As a result of the Qualifying Transaction, the Company met the TSXV listing requirements for a Tier 1 issuer and the Common Shares commenced trading on the TSXV under the symbol THCX on March 21, 2017.
On June 21, 2018, the Company received approval from the Toronto Stock Exchange (the TSX ) to graduate from the TSXV and list the Common Shares on the TSX. The Common Shares commenced trading on the TSX under the symbol HEXO on June 22, 2018. Certain common share purchase warrants of the Company also commenced trading on the TSX under the symbol HEXO.WT
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On August 29, 2018, the Company filed articles of amendment under the OBCA to change its name to HEXO Corp.
The Companys head office is located at 204-490 Boulevard Saint-Joseph, Gatineau, Québec, J8Y 3W9. The Companys telephone number is 1-844-406-1852. The Companys business website is www.hexo.com and its corporate and investor relations website is ir.hexo.com . The Companys registered office is located at Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2.
Intercorporate Relationships
HEXO has three wholly-owned subsidiaries, being HOI, Banta Health Group Inc. and Coral Health Group Inc.
HOI was formed on March 15, 2017 through the amalgamation of Predecessor THCX and 1010070 Canada Inc., then a wholly-owned subsidiary of the Company, under the Qualifying Transaction. In addition, 167151 Canada Inc. ( 167 Canada ), another previous subsidiary of the Company, was amalgamated with HOI on August 3, 2018. Banta and Coral were incorporated by Predecessor THCX under the CBCA and the OBCA respectively on August 2, 2016 and November 25, 2016 respectively.
In addition to these subsidiaries, the Company, indirectly through HOI, owns all of the preferred shares of 8980268 Canada Inc. ( 898 Canada ) and has an irrevocable right to acquire the one issued and outstanding common share of 898 Canada, which is jointly owned by Michael Munzar and Vincent Chiara, directors of the Company. See Description of the Business - The Companys Facilities .
On October 4, 2018, the Company finalized a joint venture with Molson Coors Canada. The joint venture has been established through a stand-alone company named Truss Limited Partnership, in which HOI holds a 42.5% interest, and the remaining 57.5% interest is held by Molson Coors Canada. The joint venture company possesses a separate board of directors and management team from HEXO.
The following chart illustrates, as of the date of this AIF, the Companys corporate structure including details of the jurisdiction of formation of each subsidiary.
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GENERAL DEVELOPMENT OF THE BUSINESS
Three-Year History
Introduction
Predecessor THCX was formed in August 2013 with the strategic purpose of seeking a licence under the regulatory regime for medical cannabis introduced by Health Canada in 2013, the Marihuana for Medical Purposes Regulations (the MMPR ), and developing a premium brand and offering a suite of products and services for this new market. In November 2014, Predecessor THCX acquired 167 Canada, which had received a licence under the MMPR in March 2014 to produce, possess and destroy medical cannabis.
Through 167 Canada as its wholly-owned subsidiary, Predecessor THCX commenced commercial production and sales of legal medical cannabis in Canada. Predecessor THCX had its first harvest on October 8, 2014.
Between March 2014 and November 2016, Predecessor THCX completed various private placement financings for gross proceeds of approximately $35 million to funds its operations and investigated options for going public and raising additional capital to grow its business.
Reverse Takeover and Qualifying Transaction
On November 16, 2016, Predecessor THCX entered into an agreement with BFK to proceed with the Qualifying Transaction.
Predecessor THCX and BFK subsequently completed the Qualifying Transaction on March 15, 2017 to form the Company. Under the Qualifying Transaction, BFK acquired all the issued and outstanding common shares in the capital of Predecessor THCX by way of a three-cornered amalgamation, pursuant to which a wholly-owned subsidiary of BFK amalgamated with Predecessor THCX and each Predecessor THCX shareholder received six (6) post-Consolidation Common Shares in the capital of BFK for each THCX common share held. In addition, as part of the Qualifying Transaction, BFK completed the Consolidation and changed its name from BFK Capital Corp. to The Hydropothecary Corporation, and the directors and management of Predecessor THCX became the directors and management of the Company.
In connection with the Qualifying Transaction, Predecessor THCX completed both a brokered and a non-brokered private placement of common shares for gross proceeds of $17.5 million.
Under the Qualifying Transaction, the Company issued a total of 68,428,824 Common Shares to the holders of shares of Predecessor THCX. Following closing of the Qualifying Transaction, the Company had a total of 70,266,594 Common Shares outstanding. In addition, 22,532,979 Common Shares of the Company were reserved for issuance upon the conversion or exercise of secured convertible debentures, unsecured convertible debentures, warrants and options issued to the holders of Predecessor THCX secured convertible debentures, unsecured convertible debentures, warrants and options.
With the completion of the Qualifying Transaction, the Company met the TSXV listing requirements for a Tier 1 issuer and the Common Shares commenced trading on the TSXV under the symbol THCX on March 21, 2017.
Licences
The Company is licensed to produce and sell cannabis and cannabis products as a licensed producer under the provisions of the ACMPR. Predecessor THCX was issued its initial licence under the MMPR to cultivate medical cannabis through 167 Canada in March 2014 and its licence was amended in May 2015 to permit it to sell medical
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cannabis. The MMPR were replaced by the ACMPR in August 2016. HEXOs current licence under the ACMPR was most recently renewed on June 21, 2017 and will be up for renewal on October 15, 2019. The Companys licence is issued by Health Canada to HEXO (formerly Hydropothecaire/Hydropothecary), the operating name of the business run by HEXO Operations Inc.
The Companys licence designates it as a licensed producer and permits the production, sale, possession, shipping, transportation, delivery and destruction of fresh cannabis, dried cannabis, cannabis plants, cannabis seeds, cannabis oil and cannabis resin, all as set out therein, delivered pursuant to the ACMPR and CDSA. The licence covers Buildings 1, 2, 3, 4, 5, 6, 7 and 8 at the Companys facilities as described below and authorizes unlimited production of cannabis.
HEXOs licence has a current term ending on October 15, 2019. At the end of each term of the licence, HEXO must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. HEXO is not currently aware of any reason why it would not be able to receive a renewal of its licence in October 2019.
Private Placement and Conversion of Unsecured 8% Convertible Debentures
On July 18, 2017, the Company closed a bought deal private placement of unsecured convertible debenture units for aggregate gross proceeds of $25.1 million (the July 2017 Private Placement ). Under the placement, the Company issued a total of $25.1 million of 8.0% senior unsecured convertible debentures (the July 2017 Debentures) and 7,856,300 common share purchase warrants (the July 2017 Warrants) .
Effective December 27, 2017, the Company forced the conversion of all of the outstanding principal amount of the July 2017 Debentures and unpaid accrued interest thereon into Common Shares. The Company became entitled to force the conversion of the July 2017 Debentures on November 19, 2017 on the basis that the volume weighted average price ( VWAP ) of the Common Shares on the TSXV for 15 consecutive trading days was equal to or exceeded $2.25.
Pursuant to the conversion of the July 2017 Debentures, holders of the July 2017 Debentures received 625 Common Shares for each $1,000 principal amount of July 2017 Debentures held, as well as an additional 22 Common Shares for each $1,000 principal amount of July 2017 Debentures held on account of accrued and unpaid interest, for a total of 647 Common Shares for each $1,000 principal amount of July 2017 Debentures held.
Effective January 2, 2018, the Company accelerated the expiry date of the July 2017 Warrants from July 18, 2019 to February 1, 2018. The Company became entitled to accelerate the expiry date of the warrants on December 27, 2017 on the basis that the closing trading price of the Common Shares on the TSXV exceeded $3.00 for 15 consecutive trading days.
Public Offering and Conversion of 7.0% Unsecured Debenture Units
On November 24, 2017, the Company closed a bought deal public offering of 7.0% unsecured convertible debenture units for aggregate gross proceeds of $69.0 million (the November 2017 Offering) . Under the offering, the Company issued a total of $69.0 million of 7.0% unsecured convertible debentures (the November 2017 Debentures) and 15,663,000 common share purchase warrants (the November 2017 Warrants) .
Effective January 15, 2018, the Company forced the conversion of all of the outstanding principal amount of the November 2017 Debentures and unpaid accrued interest thereon into Common Shares. The Company became entitled to force the conversion of the November 2017 Debentures on December 13, 2017 on the basis that the VWAP of the Common Shares on the TSXV for 10 consecutive trading days was equal to or exceeded $3.15.
Pursuant to the conversion of the November 2017 Debentures, holders of the November 2017 Debentures received 454.54 Common Shares for each $1,000 principal amount of 7.0% Debentures held, as well as an additional 1.33 Common Shares for each $1,000 principal amount of November 2017 Debentures held on account of accrued and unpaid interest, for a total of 455.87 Common Shares for each $1,000 principal amount of November 2017 Debentures held.
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Effective May 24, 2018, the Company accelerated the expiry date of the November 2017 Warrants from November 24, 2019 to June 25, 2018. The Company became entitled to accelerate the expiry date of the warrants on May 23, 2018 on the basis that the closing trading price of the Common Shares on the TSXV exceeded $4.50 for 10 consecutive trading days.
Public Offering of Units
On January 30, 2018, the Company completed a bought deal public offering of 37,375,000 units of the Company at a price of $4.00 per unit for aggregate gross proceeds to the Company of $149.5 million. Each unit consisted of one Common Share and one-half of one common share purchase warrant, with each whole warrant being exercisable to purchase one Common Share for a period of two years at an exercise price of $5.60 per share, subject to adjustment in certain events.
SAQ Agreement
On April 11, 2018, the Company announced that it has entered into a commercial agreement with the SAQ to be the preferred supplier of cannabis products for the Québec market for the first five years post-legalization, with an option to extend the term for an additional year. Under the agreement, the Company will supply 20,000 kg of products in the first year of the agreement and is expected to supply 35,000 kg in the second year and 45,000 kg in the third. The volumes for the final two years of the agreement will be established at a later date based on the sales generated in the first three years. The supply arrangement covers the full range of the Companys products and brands, from flowers to cannabis oil.
TSX Listing
On June 21, 2018, the Company received approval from the TSX to graduate from the TSXV and list the Common Shares on the TSX. The Common Shares commenced trading on the TSX under the symbol HEXO on June 22, 2018. Certain common share purchase warrants of the Company also commenced trading on the TSX under the symbol HEXO.WT.
Molson Coors Canada Joint Venture Truss
On August 1, 2018, HEXO and Molson Coors Canada, the Canadian business unit of Molson Coors Brewing Company (NYSE: TAP; TSX: TPX), entered into an agreement to form a joint venture to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following adult-use legalization. The joint venture transaction was subsequently completed on October 5, 2018.
Under the joint venture, HEXO and Molson Coors Canada have formed a standalone company named Truss Limited Partnership with its own board of directors and an independent management team led by former Molson Coors executive, Brett Vye, in the role of Chief Executive Officer. The Company holds a 42.5% interest in the company, while Molson Coors Canada holds the remaining 57.5% interest. The five-member board of directors for the company is comprised of Frederic Landtmeters, President and CEO of Molson Coors Canada, Paul Holden, VP of Legal and Industry Affairs of Molson Coors Canada, Scott Cooper, VP, Global Innovation of Molson Coors (and Chairman of the Truss board), Sebastien St-Louis, Chief Executive Officer and co-founder of HEXO, and Ed Chaplin, Chief Financial Officer of HEXO.
In connection with the closing of the transaction, HEXO issued 11,500,000 common share purchase warrants to an affiliate of Molson Coors Canada, each of which is exercisable to acquire one Common Share for a period of three years at an exercise price of $6.00 per share.
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Subsequent Developments
Expansion into Greece
On September 26, 2018, HEXO announced plans to establish a Eurozone processing, production and distribution centre in Greece. The partnership with Greek company Qannabos ( QNBS ) will catalyze a vertically integrated cannabis enterprise to capitalize on the current medical markets. HEXOs plan to establish operations in Greece marks the Companys first foray into the European cannabis market. The move will provide the Company with a presence in Europe with the expectation of supplying a full suite of brands in France, the United Kingdom, and other European markets once regulations permit. The agreement between HEXO and QNBS plans for the development of 350,000 sq. ft. of licensed infrastructure that will be used for manufacturing, processing and distribution of medical cannabis products, powered by HEXO, destined for the European market.
Belleville Facility
On September 10, 2018, HEXO announced the acquisition of an interest in a 2,004,000 sq. ft. facility in Belleville, Ontario. This is the first facility of the Company to be established outside of Québec, further delivering on its national expansion strategy and providing capacity for the manufacturing of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles. The centralized location, conveniently located along primary shipping routes in Ontario, presents the opportunity to process and distribute products and to fulfil commitments across Canada. The space also supports the Companys hub and spoke model. Its scalability, flexibility and location are ideal to deliver on anticipated future joint ventures with Fortune 500 companies for cosmetics, edibles, vapes, and more, positioning it to become a centre of excellence for all of HEXOs joint ventures. HEXOs expansion will also lead to the creation of jobs and a rejuvenated employment sector for the area.
The building, previously used as a Sears distribution centre, is owned by Belleville Complex Inc. ( Belleville Complex ), which is owned by Olegna Holdings Inc. In addition to initially leasing approximately 500,000 sq. ft. of space in the building under a long-term lease, HEXO plans to acquire a 25% interest in Belleville Complex from Olegna Holdings Inc. In addition to its initial lease of space, it is expected that HEXO will have rights of first offer and first refusal to lease the remaining space in the building. As part of the transaction, HEXO has loaned $20,000,000 to Belleville Complex to acquire the building. The loan is due within 120 days from September 7, 2018, and, as of October 7, 2018, bears interest at an annual rate of 4%, payable monthly. The loan is secured by a first mortgage over the building. The transaction is scheduled to close on or about October 26, 2018.
DESCRIPTION OF THE BUSINESS
Company Overview
The Company was founded in 2013 for the purpose of producing medical cannabis under Health Canadas Marihuana for Medical Purposes Regulations (MMPR) and were the first licensed producer in Quebec and are the only publicly traded cannabis company headquartered in the province.
The MMPR was replaced by the Access to Cannabis for Medical Purposes Regulations (ACMPR) in August 2016. Under the Companys current ACMPR license, it is authorized to produce and sell cannabis to medical patients and adult recreational users in dried and oil formats. The license has a term ending on October 15, 2019, and the Company is not currently aware of any circumstances that would impede renewal.
Ultimately, the Company is a vertically integrated consumer packaged goods company in the medical and emerging legal adult-use cannabis market. Its primary business is to cultivate, process, package and distribute cannabis through our facilities in Gatineau, Quebec, in order to serve the medical and adult-use cannabis markets across Canada and internationally where regulations allow. The Company has expanded operations to include a corporate office location in Gatineau, Quebec, additional advanced processing and manufacturing space in Belleville, Ontario, and a distribution centre located in Montreal, Quebec.
To date, we have sold over 1 million grams of medical cannabis to thousands of patients across Canada who count on us for safe, high-quality products. We have developed an extensive and award-winning product range, as well as valuable experience and knowledge, while serving these patients. This positions us well to serve the legal adult-use market. We currently possess the single largest and longest national forward supply amount among all licensed producers, based upon the announced provincial supply agreements. In Quebec alone, we will supply 20,000 kg in the first year of legalized adult-use cannabis and up to approximately 200,000 kg over the first five years of legalized adult-use cannabis.
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Molson Coors Canada Joint Venture
The Company has established a joint venture with Molson Coors Canada in order to pursue opportunities in the non-alcoholic, cannabis infused beverages Canadian market. The Company will hold a 42.5% interest in the joint venture with the remaining balance allocated to Molson Coors Canada. The newly formed company will combine the proven beverage experience of Canadas leading brewer with the quality cannabis and innovative products HEXO has become known for in the market. The joint venture is on track to be ready to supply Canada with its cannabis beverages upon the edibles and other smokeless cannabis products legalization date of October 17, 2019.
HEXO continues to seek opportunities in developing similar joint ventures in other cannabis infused product sectors in order to meet the edible markets preferred products demand expected to be begin October 17, 2019.
International Expansion into Greece
The Company announced the partnership with the Greek company Qannabos (QNBS). Together a joint venture will be created supported by the development of 350,000 sq. ft. of licensed infrastructure, which will be used for the manufacturing, processing and distribution of medical cannabis. This expansion is the Companys first international embarkment and will allow HEXO to serve the medical markets of the United Kingdom, France and other European jurisdictions, where regulations permit, with our full suite of products.
The Companys Licences
The Company is licensed to produce and sell cannabis as a licensed producer under the provisions of the ACMPR. The Companys licence designates it as a licensed producer and permits the production, sale, possession, shipping, transportation, delivery and destruction of fresh cannabis, dried cannabis, cannabis plants, cannabis seeds, cannabis oil and cannabis resin, all as set out therein, delivered pursuant to the ACMPR and CDSA. The licence covers Buildings 1, 2, 3, 5, 6, and 8 at the Companys facilities as described below and authorizes unlimited production of cannabis.
At the end of each term of the licence, HEXO must submit an application for renewal to Health Canada containing information prescribed by the ACMPR. HEXO is not currently aware of any reason why it would not be able to receive a renewal of its licence in October 2019.
The Companys Facilities
HEXOs facilities are located at 120 Chemin de la Rive, Gatineau, Québec (the Gatineau Facility ). Predecessor THCX acquired the 65-acre Gatineau Facility when it purchased 167 Canada in November 2014. The Gatineau Facility currently consists of an approximately 7,000 square foot 4-season greenhouse ( Building 2 ), a storage, processing and administration building ( Building 1 ), a 35,000 square foot glass roof greenhouse ( Building 5 ), two stand-alone laboratories each approximately 240 square feet in size ( Buildings 3 and 4 ), a 250,000 square foot glass roof greenhouse and processing bay ( Building 6 ) a modular building housing final packaging ( Building 7 ), a second modular building for customer service and registration ( Building 8 ) and a warehouse ( Warehouse ). As of the date of this Prospectus, Buildings 1, 2, 3, 5, 6 and 8 are covered by the Companys licence under the ACMPR. HEXO is in the process of expanding to add an additional 1,000,000 square feet of growing, production and infrastructure space (the Building 9 ) which is on track to be completed by December 2018.
As of July 31, 2018, there exists 310,000 sq. ft. of licensed facilities and an expected 1,310,000 sq. ft. after completion of the expansion. The Companys current production capacity is now capable of yielding 25,000 kg of quality dried cannabis and dried cannabis equivalent products and is expected to rise to 108,000 kg annually with the additional of B9 expected in December 2018. The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the estimated square footage of cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities and estimates of future production capabilities.
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The Company recently leased a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture for the purposes of manufacturing value-added cannabis products and increasing capacity for distribution and storage. The centralized location and the Companys first facility outside of Quebec is ideally situated along primary shipping routes to distribute our products and fulfill commitments across Canada. This facility provides a regulatory key hole to our partners and future partners so that they may enter the cannabis industry with HEXO Corp. and have immediate access to licensed infrastructure. This acquisition further delivers on our expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles.
On September 19, 2018, the Company also bolstered its distribution capacity with the announcement of the newly established distribution and storage centre formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility in Montreal, Quebec, was strategically acquired for logistical purposes. Through it, we will supply cannabis for all direct-to-customer sales placed in Quebec through the SQDCs online store. Additionally, through the distribution center we will house, supply and distribute direct-to-consumers the cannabis products of all licensed producers who have contracts with the SQDC.
The Gatineau Facility is owned by 898 Canada and is leased from 898 Canada by HOI for a term of 20 years having an expiration date of October 27, 2034, with two additional optional renewal periods of 5 years each, during which renewal terms the rent will be indexed to increases in the cost of living in Canada. Monthly base rent is $10.00. HEXO is responsible for additional rent, including costs related to utility usage, property maintenance, and certain taxes in accordance with the Gatineau Facility lease. As of the date hereof, the lease for the Gatineau Facility is in good standing.
HOI owns all of the outstanding preferred shares of 898 Canada but the one issued and outstanding common share of 898 Canada is owned by Michael Munzar and Vincent Chiara, directors of the Company and residents of Québec. The Gatineau Facility is considered farmland and in Québec, non-residents must obtain authorization from the Commission de protection du territoire agricole du Québec to acquire more than 4 hectares (or about 10 acres) of farm land. In addition to the lease for the Gatineau Facility, HOI has an irrevocable and unconditional agreement with Dr. Munzar and Mr. Chiara for the purchase of the issued and outstanding common share of 898 Canada upon demand and following receipt of approval from the Commission de protection du territoire agricole du Québec for HOI to own the facility. HEXO has applied for this approval.
The Company has leased commercial office space at 490 Boulevard Saint-Joseph, Gatineau, QC which houses the finance, HR, administrative, government relations, IT and executive teams of the Company.
The Companys Product Offerings
HEXO offers dried cannabis and cannabis-derived products under three product types: dried cannabis, cannabis oils and decarb.
Dried Cannabis Premium and mid-range products offered under the Time of Day and H2 lines. Both lines offer a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 15 dried marijuana products priced between $3 and $15 a gram. Each product is carefully selected to treat symptoms universally reported by patients and meet the needs of adult-use customers.
Oil-Based Products Elixir, a cannabis oil sublingual mist product line, includes both a high THC and high CBD content, and is Canadas only peppermint-based cannabis oil product. Fleur de Lune, is one of Canadas first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis. HEXO offers three oil-based products priced between $69 and $89 per bottle, as well as an intimate-use oil product priced $59 per 60 ml spray bottle.
Decarb Decarb is an activated fine-milled cannabis powder product offered in a range of high- to low- CBD and THC content. Decarb is offered in six products, priced between $3 and $15 a gram.
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Decarb was voted Top New Product at the 2017 Canadian Cannabis Awards; Elixir received third place in the same category, as well as second place in Top High THC Oil. We also received the top honours in the packaging category.
Brand
HEXO Adult-Use
During this past quarter, the Company announced HEXO as the adult-use brand name that will serve the legalized Canadian adult-use market. The goal of HEXO is to continue to offer a premium house of brands, signaling innovation, quality and consistency of experience and become a top two Canadian market share producer and 2% international market share producer. As a brand, HEXO shares the same focus on award-winning product innovation and high-quality cannabis that the market has come to expect from its medical sister brand, Hydropothecary.
Hydropothecary Medical
Hydropothecary sells premium as well as mid-market medical cannabis, offering over 24 products in dried, decarb and oil formats. Hydropothecary has been serving the medical market with its award-winning products for over three years, and will continue to serve our medical patients with the upmost levels of quality and customer service.
Adult-Use Market
On June 12, 2018 the Canadian government passed the legalization of cannabis through Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the Cannabis Act ) on rendering adult-use of cannabis lawful throughout Canada beginning October 17, 2019. Only cannabis cultivated by producers licensed by the federal government under the ACMPR will be lawful for consumption.
According to Statistics Canada, nearly 5 million Canadians purchased approximately 760,000 kg of cannabis worth $5.7 billion in 2017, mostly from illegal sources. The federal agency estimates that the average price was $7.50 per gram. Various market studies have estimated the size of the legal Canadian cannabis market at over $10 billion per year. The Company is uniquely positioned to serve that market through holding the largest forward supply contract of all licensed producers.
As of August 13, 2018, all provinces and territories have announced their cannabis market retail approach, ranging from privately owned stores to government-owned retail, as well as a combined approach in several jurisdictions. The Company has positioned itself through strategic supply agreements with the Quebec, Ontario and British Columbia provincial governments, as well as through an investment in the private cannabis retail sector, in order to offer its award-winning and innovative products across all channels throughout Canada.
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CANADIAN MARKET OVERVIEW
Quebec
In Quebec, which has a population of 8.45 million, or approximately 23% of the Canadian population, the Société québécoise du cannabis (SQDC) operates the distribution and sale of adult-use cannabis. The SQDC has established 15 retail locations throughout the province, for in-store cannabis sales. It expects to increase this number to 50 locations within the first year of legalization. It will also sell cannabis online.
In the first year of legalization, the Company holds a 35% market share in Quebec. The Companys agreement with the SQDC spans a potential five-year period, with us supplying 200,000 kg or more of cannabis, representing $1 billion in potential revenues.
In addition, the Company has reached a distribution agreement with the SQDC, in which it will house and distribute all of the SQDCs online sales to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC.
Ontario
In Ontario, which has a population of 14.4 million, or approximately 40% of the Canadian population, the government has announced that it will offer consumers a variety of cannabis products through Ontario Cannabis Store (OCS) online web sales in 2018. The province will also allow privately owned retail locations that serve the adult-use market. Initially, products will include dried cannabis, oil and capsule products, pre-rolled, and clones and seeds.
The Company has entered into a supply agreement with the OCS, in which we will supply the province with THC and CBD Elixir and Fleur de Lune products, two of our most innovative oil-based and smokeless offerings. In the future, once the 1 million sq. ft. greenhouse expansion is complete in December 2018, the Company will offer its full suite of products. This approach will allow the Company to initially serve the Ontario market for smokeless cannabis products through the OCS.
British Columbia
British Columbia, which has a population of 4.6 million, or approximately 13% of the Canadian population, will serve the adult-use cannabis market through a dual private-government approach. The British Columbia Liquor Distribution Branch (BCLDB) will manage the distribution of cannabis and cannabis-based products. The Company holds a supply agreement with the BCLDB, in which it will supply its THC and CBD oil-based Elixir and Fleur de Lune products.
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The Company has also aligned itself with Fire & Flower (F&F), a private cannabis retailer, through a strategic investment of a $10 million convertible loan. F&F is expected to hold store locations throughout British Columbia, allowing HEXO products to be distributed via the private retail route in tandem with the BCLDB.
Other Canadian Private Markets
The Company expects to enter the remaining private-sector Canadian cannabis markets via strategic investments in private retailers such as the investment in F&F. Currently, F&F holds two licenses for retail locations within Saskatchewan and is currently undergoing the licensing process in Alberta, with 37 locations pending. F&F has also begun the process of acquiring licenses and locations in Manitoba.
Medical Sales and Client Acquisition
Under the ACMPR, HEXO sells medical marijuana under the Hydropothecary name solely to clients who have obtained a valid medical document from a doctor or authorized health care professional. All medical clients of HEXO are required to order their medical marijuana through the Hydropothecary online store or over the phone, through one of the Companys trained representatives. Once an order is placed, it is shipped securely and discreetly to the client in accordance with the ACMPR, which regulates the packaging, labelling and shipping requirements for dried marijuana.
Licensed producers such as HEXO are restricted in the manner of advertising their products directly to the general public. Licensed producers are permitted to provide to the public representations of their brand name, proper or common name of the strain, price, cannabinoid content and contact information. Working in cooperation with Health Canadas ACMPR compliance department, Hydropothecarys patient-client acquisition strategy is focused on building national brand awareness for HEXO/Hydropothecary, its products and the Hydropothecary value proposition among its target patient-markets.
For client acquisition, Hydropothecary works closely with specialty cannabinoid clinics to build product education and company awareness through patients, clinic staff and health care practitioners.
Employees
As at July 31, 2018, HEXO has approximately 220 employees and expects to reach 400 employees by calendar years end. HEXOs team includes skilled professionals with experience directly translatable to the business. This includes 40 employees in harvest and cultivation, 81 employees in operations, manufacturing and processing, 53 employees in sales and marketing, 7 employees in quality and research and development, and 39 employees in corporate services and executive.
Proprietary Protection
HEXO protects its intellectual property through by seeking and obtaining registered protection (inclusive of patents) where possible. HEXO has over a dozen registered trademarks, has filed to protect over a dozen more in accordance with its Intellectual Property Strategy and has further filed multiple patent applications, in its continuing effort to protect and create value.
Corporate Social Responsibility
At HEXO, the goal is to be one of the worlds leading cannabis brands powering an array of medical and consumer products. In order to achieve our goal, HEXO needs to think about more than just our products and prices. HEXO must also examine the way our operations impact the natural and social environment. As part of this commitment, HEXO recruited the former British Columbia Health and Environment Minister Dr. Terry Lake to the position of VP of Corporate Social Responsibility ( CSR ).
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HEXOs CSR Charter focuses on four priorities to meet these goals: People, Public, Products, and Planet. Through this lens we are creating CSR partnerships at the local, provincial, national and international level.
HEXO is very proud to be investors in our local economy of Masson-Angers. As well as supporters of local organisations like La Fondation Santé Papineau, the Association for People Living with Chronic Pain and Ottawa Riverkeeper. HEXO has also contributed to the Gastrointestinal Society of Canada and Canadians for Fair Access to Medical Marijuana and are new members of the Global Cannabis Partnership which brings together many diverse stakeholders in the cannabis industry to create a global standard for social and environmental sustainability.
As HEXO launches the Canadian adult-use cannabis industry it is crucial that HEXO demonstrates to the world that social and environmental responsibility while providing world-class products to consumers and patients alike.
RISK FACTORS
There are a number of risk factors that could cause future results to differ materially from those described herein. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Companys business. If any of the following risks actually occur, the Companys business may be harmed and its financial condition and results of operations may suffer significantly.
Financial Risk Factors
The Company has implemented risk management governance processes that are led by the Board of Directors, with the active participation of management, and updates its assessment of its business risk on an annual basis. Notwithstanding, it is possible that the Company may not be able to foresee all of the risks that it may have to face. The market in which the Company currently competes is complex, competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. Readers of this AIF should not rely upon forward-looking statements as a prediction of future results.
Interest Risk
The Companys exposure to interest rate risk only relates to any investments of surplus cash. The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at July 31, 2018, the Company had short term investments of $205,446,830.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Companys trade receivables and convertible note receivable. As at July 31, 2018, the Company was exposed to credit related losses in the event of non-performance by the counterparties.
The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the sales are transacted with clients that are covered under various insurance programs, the Company has limited credit risk.
Cash and cash equivalents are held by one of the largest cooperative financial groups in Canada. The short-term investments are held in various guaranteed investment certificates, term deposits, and fixed income securities. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The trade receivable balance is held with one of the largest medical insurance companies in Canada. Credit risk from the convertible note receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
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The carrying amount of cash and cash equivalents, short-term investments, trade receivables and convertible note receivable represents the maximum exposure to credit risk and as at July 31, 2018; this amounted to $255,432,114.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at July 31, 2018, the Company had $244,788,518 of cash and short term investments.
The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $8,994,789 due in the next 12 months.
The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.
Reliance on Management and Key Persons
The Company is reliant on senior managements ability to execute on strategy. This exposes the Company to managements ability to perform, and as well the risk of management leaving the Company. To mitigate this risk, HEXO has implemented incentive plans for all members of the senior management team. In addition, all senior members currently hold significant equity in the Company, another deterrent from having them leave.
The success of the Company will be dependent upon the ability, expertise, judgment, discretion and good faith of certain of its management team and board of directors. While employment agreements and incentive programs are designed for the retention of such key persons, these agreements and incentive programs cannot assure the continued services of such persons. Any loss of key persons could have a material adverse effect on the Companys business, operating results and/or financial condition.
Scale of Operations
The Company now possesses supplier contracts across four provinces with 20,000 kg of cannabis to be supplied to Quebec in year one alone. As demand for HEXOs products increase there exists the risk of HEXO being unable to fulfil the demand due to production capacity limits on the existing facilities. Although the Company is currently on track to meet the intended goal of 108,000 kg of capacity by December 2018, delays in meeting this capacity increase could result in unfulfilled purchase orders and HEXO may lose a significant amount of sales. Any inability to secure the required supply of cannabis to meet the demands of supplier agreements either by means of internal generation or through acquisition could have a materially adverse impact on operating results of the Company.
Competition
HEXO faces intense competition from licensed producers and other companies, some of which can be expected to have more financial resources, industry, manufacturing and marketing experience than the Company. Additionally, there is potential that the industry will undergo consolidation, creating larger companies that may have increased geographic scope. As a result of this competition, the Company may be unable to maintain its operations or develop them as currently proposed, on terms it considers acceptable or at all. Increased competition by larger, better-financed competitors with geographic advantages could materially and adversely affect the business, financial condition and results of operations of HEXO.
The number of licences granted and the number of licensed producers ultimately authorized by Health Canada could have an impact on the operations of the Company. To date over 115 licenses have been authorized within Canada. HEXO expects to face additional competition from new market entrants that are granted licences under the ACMPR or existing licence holders which are not yet active in the industry. If a significant number of new licences are granted by Health Canada in the near term future, HEXO may experience increased competition for market share within the medical market and private retail provincial and territorial markets.
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If the national demand of medical and adult-use cannabis in Canada increases, along with an increased number of licensed producers, HEXO expects that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, HEXO will require a continued high level of investment in joint enterprises, research and development, marketing, sales and client support. HEXO may not have sufficient resources to maintain and support these efforts on a competitive basis which could materially and adversely affect the business, financial condition and results of operations of HEXO.
Any or all of these events could materially and adversely affect the business, financial condition and results of operations of HEXO.
General Business Risk and Liability
Given the nature of Companys business, it may from time to time be subject to claims or complaints from investors or others in the normal course of business. The legal risks facing the Company, its directors, officers, employees or agents in this respect include potential liability for violations of securities laws, breach of fiduciary duty and misuse of investors funds. Some violations of securities laws and breach of fiduciary duty could result in civil liability, fines, sanctions, or the suspension or revocation of the Companys right to carry on its existing business. The Company may incur significant costs in connection with such potential liabilities.
Regulation of the Cannabis Industry
The Company is heavily regulated in all jurisdictions where it carries on business. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the Company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Companys products and services.
Failure to adhere to these regulations may result in possible sanctions including the revocation or imposition of conditions on licences to operate the Companys business; the suspension or expulsion from a particular market or jurisdiction or of its key personnel; and, the imposition of fines and censures. To the extent that existing or future regulations affect the sale or offering of the Companys product or services in any way, the Companys revenues may be adversely affected.
Regulatory Risks
The business and activities of the Company are heavily regulated in all jurisdictions where it carries on business. The Companys operations are subject to various laws, regulations and guidelines by governmental authorities, particularly Health Canada, relating to the manufacture, marketing, management, transportation, storage, sale and disposal of medical cannabis, and also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the Company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Companys products and services.
Achievement of the Companys business objectives are 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 its products. The Company cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of the Company.
Failure to comply with the laws and regulations applicable to its operations may lead to possible sanctions including the revocation or imposition of additional conditions on licences to operate the Companys business; the suspension or expulsion from a particular market or jurisdiction or of its key personnel; and, the imposition of fines and censures.
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To the extent that there are changes to the existing or the enactment of future laws and regulations that affect the sale or offering of the Companys product or services in any way, the Companys revenues may be adversely affected.
Change in Laws, Regulations and Guidelines
The Companys operations are subject to a variety of laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis but also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. While to the knowledge of the Companys management, it is currently in compliance with all such laws, changes to such laws, regulations and guidelines due to matters beyond the control of the Company may cause adverse effects to the Companys operations.
Reliance on Licence Renewal
HEXOs business operations are dependent on its licence under the ACMPR. The licence must be renewed annually. HEXOs current licence expires on October 15, 2019. Prior to the expiry of the licence, THCX must submit to Health Canada an application for renewal of the licence containing information prescribed by the ACMPR. Failure to comply with the requirements of the licence or any failure to renew the licence would have a material adverse impact on the business, financial condition and operating results of HEXO.
HEXO believes it is complying in all material respects with the terms of the licence and it is not aware of any reason why it would not be able to renew the licence upon its expiry. However, there can be no guarantee that Health Canada will renew the licence, or that such renewal will occur in a timely fashion or on terms similar to HEXOs existing licence or otherwise acceptable to HEXO and its business. Should Health Canada not renew HEXOs licence, delay the renewal of the licence or renew the licence on different terms, the business, financial conditions and results of the operation of HEXO would be materially adversely affected.
HEXO is in the process of expanding its facilities. In order for HEXO to include the new building under its licence, it must make an application to Health Canada to amend the licence to include the new buildings. Should Health Canada not grant the licence amendment, delay the amendment of the licence or amend the licence on different terms, the business, financial conditions and results of the operation of HEXO would be materially adversely affected.
Sufficiency of Insurance
The Company maintains various types of insurance which may include errors and omissions insurance; directors and officers insurance; property coverage; and, general commercial insurance. There is no assurance that claims will not exceed the limits of available coverage; that any insurer will remain solvent or willing to continue providing insurance coverage with sufficient limits or at a reasonable cost; or, that any insurer will not dispute coverage of certain claims due to ambiguities in the policies. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on the Company in terms of damages awarded and the impact on the reputation of the Company.
Reliance on a Single Centralized Production Facility
HEXOs activities and resources are currently primarily focused on its Gatineau Facility, and HEXO will continue to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau facility including but not limited to changes to municipal laws regarding zoning, facility design errors, environmental pollution, non-performance by third party contractors, increases in materials or labour costs, labour disputes or disruptions, inability to attract sufficient numbers of qualified workers, productivity inefficiencies, equipment or process failures, production errors, disruption in the supply of energy and utilities and major incidents and/or catastrophic events such as fires, explosions, earthquakes or storms, would have a material and adverse effect on HEXOs business, financial condition and prospects.
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Implementation of new ERP Systems
In year, the Company initiated the implementation of new ERP systems. The implementation is expected to be completed in fiscal year ended July 31, 2019. Upon full commencement of the implementation, the scoping, requirements definition, business process definition, design, and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting.
Limited Operating History
HEXO commenced operations in August 2013, and as such is an early stage business and subject to the risks any early stage business faces. HEXO has incurred operating losses since commencing operations. The success of the Company is dependent on, among other things, eventual profitability of operations, ability to raise funds when necessary in a timely manner, and senior managements ability to execute on strategy. The Company may incur losses in the future and may not achieve profitability.
Realization of Growth Targets
The Companys growth strategy contemplates outfitting the Gatineau facility with additional production resources. There is a risk that these additional resources will not be achieved on time, on budget, or at all, as they can be adversely affected by a variety of factors, including some that are discussed elsewhere in these risk factors and the following:
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delays in obtaining, or conditions imposed by, regulatory approvals; |
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failure to obtain anticipated licence capacity increases; |
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plant design errors, non-performance by third party contractors, increases in materials or labour costs; or, construction performance falling below expected levels of output or efficiency |
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environmental pollution; |
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contractor or operator errors; or, breakdowns, aging or failure of equipment or processes; |
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labour disputes, disruptions or declines in productivity; or, inability to attract sufficient numbers of qualified workers; |
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disruption or delay in acquiring incremental supply of energy and utilities as needed; and major incidents and/or extraordinary catastrophic events such as fires, explosions, earthquakes or storms. |
As a result, there is a risk that the Company may not have product, or sufficient product, available for shipment, to meet the expectations of its potential customers or in its business plan.
Risks Inherent in an Agricultural Business
A key aspect of HEXOs business is growing cannabis, and as such the Company is exposed to the risks inherent in any agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for the Companys customers. To mitigate the risk, HEXO has trained personnel to carefully monitor the growing conditions. Although HEXO grows its products indoors under climate controlled conditions and carefully monitors the growing conditions with trained personnel, there can be no assurance the natural elements will not have a material adverse effect on the production of its products.
Vulnerability to Rising Energy Costs
The Companys cannabis growing operations consume considerable energy, making the Company vulnerable to rising energy costs. Although, the cultivating facilities are located in Quebec, which has one of the lowest hydro rates in the country. Rising or volatile energy costs may adversely impact the business of the Company and its ability to operate profitably.
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Unfavourable Publicity or Consumer Perception
The Company believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the medical cannabis produced. Consumer perception of the Companys 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. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Companys products and the business, results of operations, financial condition and the Companys cash flows. The Companys dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for the Companys products, and the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of medical cannabis in general, or the Companys products specifically, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers failure to consume such products appropriately or as directed.
Development of Adult Recreational Market
The Cannabis Act came into effect on October 17, 2018 to create a regulated adult-use recreational market for cannabis in Canada, and the governments of every Canadian province and territory have, to varying degrees, announced proposed regulatory regimes for the distribution and sale of cannabis for adult-use purposes within those jurisdictions.
While HEXO has adopted a strategy and has been preparing for the legalization of the adult-use recreational market for cannabis in Canada, the impact of such regulatory changes and the creation of this market on the Companys business is uncertain. Among other considerations, restrictions on advertising, marketing and the use of logos and brand names under the Cannabis Act could have a material adverse impact on the Companys business, financial condition and results of operation. In addition, there is no guarantee that the regulatory regimes in the provinces and territories of Canada will be enacted according to all the terms announced by such provinces and territories, or at all, or that any such regulatory regimes will create the growth opportunities that the Company currently anticipates.
TSX Restrictions on U.S. Business Activities
On October 16, 2017, the TSX provided clarity regarding the application of certain of its listing requirements to TSX-listed issuers with business activities in the cannabis sector. In TSX Staff Notice 2017-0009, the TSX notes that issuers with ongoing business activities that violate U.S. federal law regarding cannabis are not in compliance with these requirements. The TSX reminded issuers that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the requirements, the TSX has the discretion to initiate a delisting review. Failure to comply with the requirements could have an adverse effect on our business.
International Expansion Risks
HEXO has announced plans to expand into Europe with the establishment of a Eurozone processing, production and distribution centre in Greece through a partnership with QNBS. HEXOs expansion into jurisdictions outside of Canada is subject to additional business risks, including whether any market for our products will develop or be maintained. HEXO may face new or unexpected risks or significantly increase its exposure to one or more existing risk factors, including economic instability, changes in laws and regulations, and the effects of competition. These factors may limit HEXOs ability to successfully expand our operations into such jurisdictions and may have a material adverse effect on the Companys business, financial condition and results of operations
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In addition, if HEXO expands into jurisdictions which are emerging markets, it may encounter political and other risks in emerging markets. Such operations would expose HEXO to the socioeconomic conditions as well as the laws governing the cannabis industry in such countries. Inherent risks with conducting foreign operations include, but are not limited to: high rates of inflation; extreme fluctuations in currency exchange rates; military repression war or civil war; social and labor unrest; organized crime; hostage taking; terrorism; violent crime; expropriation and nationalization; renegotiation or nullification of existing licenses, approvals, permits and contracts; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political norms, currency controls and governmental regulations that favor or require us to award contracts in, employ citizens of, or purchase supplies from, the jurisdiction. Governments in certain foreign jurisdictions intervene in their economies, sometimes frequently, and occasionally make significant changes in policies and regulations. Changes, if any, in cannabis industry or investment policies or shifts in political attitude in the countries in which HEXO may expand may adversely affect its operations or profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of product and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of property, foreign investment, maintenance of licenses, approvals and permits, environmental matters, land use, land claims of local people, water use and workplace safety. Failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licenses, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.
HEXO continues to monitor developments and policies in the emerging markets in which it may expand; however, such developments cannot be accurately predicted and could have an adverse effect on our operations or profitability. Any of the foregoing risks and uncertainties could have a material adverse effect on HEXOs business, financial condition and results of operations.
Ownership or Control Restrictions in Foreign Jurisdictions
Non-resident individuals and non-domiciled foreign legal entities may be subject to restrictions on the acquisition or lease of properties in certain emerging markets. Limitations also apply to legal entities domiciled in such countries which are controlled by foreign investors, such as the entities through which HEXO may operate in certain countries. Accordingly, HEXOs current and future operations may be impaired as a result of such restrictions on the acquisition or use of property, and our ownership or access rights in respect of any property we own or lease in such jurisdictions may be subject to legal challenges, all of which could result in a material adverse effect on the Companys business, results of operations, financial condition and cash flows.
Increased Operational, Regulatory and Other Risks from International Expansion
HEXOs expansion into jurisdictions outside of Canada could increase its operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Companys operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future international expansion could require HEXO to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. HEXO may not be able to successfully identify suitable acquisition and expansion opportunities or integrate such operations successfully with its existing operations.
Acquisition and Development Risks
HEXO expects to selectively seek strategic acquisitions. HEXOs ability to consummate and to integrate effectively any future acquisitions on terms that are favourable to it may be limited by the number of attractive acquisition targets, internal demands on HEXOs resources and, to the extent necessary, HEXOs ability to obtain financing on satisfactory terms, if at all. Acquisitions may expose HEXO to additional risks including difficulties in integrating administrative, financial reporting, operational and information systems and managing newly acquired operations and improving their operating efficiency, difficulties in maintaining uniform standards, controls, procedures and policies through all of the HEXOs operations, entry into markets in which HEXO has little or no direct experience; difficulties in retaining key employees of the acquired operations; and disruptions to HEXOs ongoing business. In addition,
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future acquisitions could result in the incurrence of additional debt, costs, and contingent liabilities to HEXO. HEXO may also incur costs for and divert management attention to potential acquisitions that are never consummated. For acquisitions that are consummated, expected synergies may not materialize. HEXOs failure to effectively address any of these issues could have a material adverse effect on HEXOs business, financial condition, results of operations and cash flows in the future
Product Liability
As a manufacturer and distributor of products designed to be ingested or inhaled by humans, HEXO faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of HEXOs products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties. Previously unknown adverse reactions resulting from human consumption of HEXOs products alone or in combination with other medications or substances could occur. HEXO may be subject to various product liability claims, including, among others, that HEXOs products caused injury, illness or loss, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against HEXO could result in increased costs, could adversely affect HEXOs reputation with its clients and consumers generally, and could have a material adverse effect on the results of operations and financial condition of HEXO. There can be no assurances that HEXO will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of HEXOs potential products.
Product Recalls
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 labeling disclosure. If any of HEXOs products are recalled due to an alleged product defect or for any other reason, HEXO could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. HEXO may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although HEXO has detailed procedures in place for testing finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of HEXOs significant brands were subject to recall, the image of that brand and HEXO could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for HEXOs products and could have a material adverse effect on the results of operations and financial condition of HEXO. Additionally, product recalls may lead to increased scrutiny of HEXOs operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
Reliance on Key Inputs
The Companys business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition and operating results of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition and operating results of the Company.
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Difficulties with Forecasts
The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical cannabis industry in Canada. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the Company.
Management of Growth
The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. If the Company is unable to deal with this growth; that may have a material adverse effect on the Companys business, financial condition, results of operations and prospects.
Litigation
The Company may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Companys ability to continue operating and the market price for the Companys common shares and could use significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant company resources.
Dividends
The Company has no earnings or dividend record and may not pay any dividends on its common shares in the foreseeable future. Dividends paid by the Company could be subject to tax and, potentially, withholdings.
Limited Market for Securities
The Companys common shares are listed on the TSX, however, there can be no assurance that an active and liquid market for the common shares will be maintained and an investor may find it difficult to resell any securities of the Company.
Volatile Market Price of Common Shares
The market price for HEXOs common shares may be volatile and subject to wide fluctuations in response to numerous factors, including governmental and regulatory regimes, community support for the medical cannabis industry, variations in the operating results of the Company, changes in the business prospects for the Company, as well as many other factors that are beyond the Companys control, including the following:
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actual or anticipated fluctuations in the Companys results of operations; |
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changes in estimates of future results of operations by the Company or securities research analysts; |
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changes in the economic performance or market valuations of other companies that investors deem comparable to the Company; |
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addition or departure of the Companys executive officers and other key personnel; |
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release or other transfer restrictions on outstanding Company common shares; |
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sales or perceived sales of additional securities by the Company; |
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significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; and |
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news reports relating to trends, concerns or competitive developments, regulatory changes and other related issues in the Companys industry or target markets. |
The results of these activities will inevitably affect the Companys decisions related to future operations and will likely trigger major changes in the trading price of the Companys common shares. In general, financial markets have, from time to time, experienced extreme price and volume fluctuations, that have been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Companys common shares may decline even if the Companys 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. If such increased levels of volatility and market turmoil continue, the Companys operations could be adversely impacted, and the trading price of the Companys common shares may be adversely affected.
Risk Factors Related to Dilution
The Company may issue additional common shares in the future, which may dilute a shareholders holdings in the Company. The Companys articles permit the issuance of an unlimited number of common shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have the discretion to determine the price and the terms of issue of further issuances. Moreover, additional common shares will be issued by the Company on the exercise of options under the Companys stock option plan and upon the exercise of outstanding warrants.
Environmental and Employee Health and Safety Regulations
The Companys operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. The Company will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions on our manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Companys operations or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Constraints on Marketing Products
The development of the Companys business and operating results may be hindered by applicable restriction on sales and marketing activities imposed by Health Canada. The regulatory environment in Canada limits the Companys ability to compete for market share in a manner similar to other industries. If HEXO is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through the selling price for its products, the Companys sales and operating results could be adversely affected.
Fraudulent or Illegal Activities by Employees, Contractors or Consultants
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses
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or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against HEXO, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Companys operations, any of which could have a material adverse effect on the Companys business, financial condition and results of operations.
Significant Obligations as a Public Company
The Company is subject to evolving corporate governance and disclosure regulations that may from time to time increase HEXOs risk of non-compliance, which could adversely impact the price of the Common Shares.
The Company is subject to changed rules and regulations as implemented by a number of governmental and self-regulated bodies, including, but not limited to, the Canadian Securities Administration, the TSX and the International Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity creating many new requirements.
On June 21, 2018, the Company commenced trading on the TSX and is therefore subject to National Instrument 52-109 Certifications for Disclosure in Issuers Annual and Interim Filings , to file certifications related to establishing and maintaining adequate Disclosure Controls and Procedures (DCP) and Internal Control Over Financial Reporting (ICFR). If we do not satisfy the DCP and ICFR requirements on an ongoing and timely basis, investors could lose confidence in the reliability of our financial statements, and this could harm our business and have a negative effect on the trading price or market value of securities of the Corporation. If we do not implement new or improved controls, or experience difficulties in implementing them, it could harm our operating results, or we may not be able to meet our reporting obligations. There is no assurance that we will be able to remediate material weaknesses, if any are identified in future periods, or maintain all of the necessary controls to ensure continued compliance. There is also no assurance that we will be able to retain personnel who have the necessary finance and accounting skills because of the increased demand for qualified personnel among publicly traded companies. Although we intend to devote substantial time to ongoing compliance with this, including incurring the necessary costs associated with therewith, we cannot be certain that we will be successful in complying with the aforementioned public governance requirements.
The Company operates in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may not be realized for a number of reasons. An investment in HEXO securities is speculative and involves a high degree of risk and uncertainty.
DIVIDENDS
As of the date of this Annual Information Form, the Company has not paid any dividends and has no current intention to declare dividends on its Common Shares in the foreseeable future. Any decision to pay dividends on its Common Shares in the future will be at the discretion of the Companys board of directors and will depend on, among other things, the Companys results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the board of directors may deem relevant.
CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Common Shares and an unlimited number of special shares issuable in series. As of the date of this Annual Information Form, there are 193,629,174 Common Shares issued and outstanding.
The holders of the Common Shares are entitled to one vote per share at all meetings of the shareholders of the Company either in person or by proxy. The holders of Common Shares are also entitled to dividends, if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the event of a liquidation, dissolution or winding up of the Company. The Common Shares rank equally as to all benefits which might accrue to
25
the holders thereof, including the right to receive dividends, voting powers, and participation in assets and in all other respects, on liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other disposition of the assets of the Company among its shareholders for the purpose of winding up its affairs after the Company has paid out its liabilities. The Common Shares are not subject to call or assessment rights or any preemptive or conversion rights. There are no provisions for redemption, purchase for cancellation, surrender or purchase of funds.
The Company has adopted an omnibus long-term incentive plan (the Omnibus Plan ) under which it is authorized to grant stock options, restricted shares, restricted share units, deferred share units, share appreciation rights and retention awards (collectively, Awards ) to officers, directors, employees and consultants. The maximum number of Common Shares reserved for issuance pursuant to Awards that may be granted under the Omnibus Plan is 10% of the issued and outstanding Common Shares as at the date of the grant. The Omnibus Plan is a rolling plan or evergreen plan under the rules of the TSX. As of the date of this Annual Information Form, there are Awards outstanding under the Omnibus Plan for stock options exercisable to purchase up to 1,187,500 Common Shares. No other Awards have been made under the Omnibus Plan as of the date of this Annual Information Form.
In addition, the Company has adopted a stock option plan (the Option Plan ) under which it was authorized to grant stock options to officers, directors, employees, and consultants. The Omnibus Plan has replaced the Option Plan and no additional stock options will be issued under the Option Plan. At the time the Omnibus Plan was adopted on June 27, 2018, there were stock options to acquire 9,323,396 Common Shares issued under the Option Plan, which are in addition to any Awards which may be made under the Omnibus Plan. As of the date of this Annual Information Form, there are options which remain outstanding under the Option Plan exercisable to purchase up to 13,751,337 Common Shares.
In addition, as the date of this Annual Information Form, the Company also has common share purchase warrants outstanding exercisable to purchase up to 23,431,058 Common Shares at conversion prices ranging from $0.16-$6.00.
MARKET FOR SECURITIES
Common Shares
The Common Shares are currently listed on the TSX under the trading symbol HEXO. Prior to the listing of the Common Shares on the TSX on June 22, 2018, the Common Shares were listed on the TSXV under the trading symbol THCX. The following tables sets forth the reported intraday high and low prices and monthly trading volumes of the Common Shares for the 12-month period prior to the date of this Annual Information Form.
TSX Price Range | ||||||||||||
Month |
High | Low | TSX Total Volume | |||||||||
October 1 25, 2018 |
$ | 8.95 | $ | 5.50 | 1,045,840,000 | |||||||
September 2018 |
$ | 8.99 | $ | 5.42 | 1,127,680,000 | |||||||
August 2018 |
$ | 5.65 | $ | 4.12 | 397,820,000 | |||||||
July 2018 |
$ | 5.11 | $ | 4.10 | 134,270,000 | |||||||
June 21 30, 2018 |
$ | 5.39 | $ | 4.91 | 42,500,000 |
26
TSXV Price Range | ||||||||||||
Month |
High | Low | TSXV Total Volume | |||||||||
June 1 20, 2018 |
$ | 5.18 | $ | 4.80 | 4,737,874 | |||||||
May 2018 |
$ | 5.35 | $ | 4.21 | 5,991,619 | |||||||
April 2018 |
$ | 4.31 | $ | 3.49 | 17,845,768 | |||||||
March 2018 |
$ | 4.30 | $ | 3.64 | 15,366,507 | |||||||
February 2018 |
$ | 4.23 | $ | 3.38 | 200,770,000 | |||||||
January 2018 |
$ | 3.81 | $ | 5.00 | 396,160,000 | |||||||
December 2017 |
$ | 4.11 | $ | 2.52 | 220,480,000 | |||||||
November 2017 |
$ | 2.81 | $ | 2.30 | 58,280,000 |
Notes:
(1) |
Source: TMXData. |
PRIOR SALES
The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued by the Company during the 12-month period prior to the date of this Annual Information Form:
Date |
Type of Security Issued |
Note |
Issuance/Exercise
Price per Security |
Issued | ||||||||||
November 6, 2017 |
Stock Options |
1 | $ | 2.48 | 128,000 | |||||||||
November 24, 2017 |
Unsecured Convertible Debentures |
2 | $ | 1,000 | 69,000 | |||||||||
November 24, 2017 |
Common Share Purchase Warrants |
2 | $ | 3.00 | 15,663,000 | |||||||||
November 24, 2017 |
Common Share Purchase Warrants |
2 | $ | 3.00 | 1,568,181 | |||||||||
December 4, 2017 |
Stock Options |
3 | $ | 2.69 | 1,770,000 | |||||||||
January 29, 2018 |
Stock Options |
4 | $ | 4.24 | 261,000 | |||||||||
January 30, 2018 |
Bought Deal Public Offering |
5 | $ | 4.00 | 37,375,000 | |||||||||
January 30, 2018 |
Common Share Purchase Warrants |
5 | $ | 5.60 | 18,687,500 | |||||||||
January 30, 2018 |
Common Share Purchase Warrants |
5 | $ | 4.00 | 1,495,000 | |||||||||
March 12, 2018 |
Stock Options |
6 | $ | 3.89 | 325,000 | |||||||||
April 16, 2018 |
Stock Options |
7 | $ | 4.27 | 906,500 | |||||||||
June 8, 2018 |
Stock Options |
8 | $ | 5.14 | 441,000 | |||||||||
July 11, 2018 |
Stock Options |
9 | $ | 4.89 | 5,691,500 |
Notes:
(1) |
The Company granted stock options under the Option Plan to certain directors and executives exercisable for a total of 125,000 Common Shares and to certain non-executive employees exercisable for a total of 3,000 Common Shares. |
(2) |
The Company issued $69,000,000 principal amount of the November 2017 Debentures under the November 2017 Offering. The debenture holders also received a total of 15,663,000 warrants, and the Company also issued a total of 1,568,181 broker warrants. The November 2017 Debentures were subsequently converted into Common Shares and the warrants have expired. See General Development of the Business Three Year History - Public Offering and Conversion of 7.0% Unsecured Debenture Units . |
(3) |
The Company granted stock options under the Option Plan to certain directors and executives exercisable for a total of 1,750,000 Common Shares and to certain non-executive employees exercisable for a total of 20,000 Common Shares. |
(4) |
The Company granted stock options under the Option Plan to certain non-executive employees exercisable for a total of 261,000 Common Shares. |
(5) |
The Company issued 37,375,000 units under a public offering at a price of $4.00 per unit for gross proceeds of $149,500,000. Each unit consisted one Common Share and one-half of one share purchase warrant of the Company. Each warrant is exercisable for one Common Share at a price of $5.60 per share for a period of two years. In addition, the Company issued an aggregate of 1,495,000 compensation warrants to the underwriters. See General Development of the Business Three Year History - Public Offering of Units . |
27
(6) |
The Company granted stock options under the Option Plan to certain directors and executives exercisable for a total of 325,000 Common Shares. |
(7) |
The Company granted stock options under the Option Plan to certain directors and executives exercisable for a total of 845,000 Common Shares and to certain non-executive employees exercisable for a total of 61,500 Common Shares. |
(8) |
The Company granted stock options under the Option Plan to certain non-executive employees exercisable for a total of 441,000 Common Shares. |
(9) |
The Company granted stock options under the Omnibus Plan to certain directors and executives for a total of 4,325,000 Common Shares and to certain non-executive employees for a total of 1,366,500 Common Shares. |
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
To the Companys knowledge, there exist no securities in escrow or that are subject to a contractual restriction on transfer as of the date of this Annual Information Form.
DIRECTORS AND OFFICERS
Name, Occupation and Security Holding
The table below sets out the names, provinces and country of residence of the directors and executive officers of HEXO, their positions and offices with HEXO, the dates since which they have served as a director or executive officer of HEXO, their present principal occupations, and the number and percentage of Common Shares which they beneficially own or over which they have control or direction, directly or indirectly.
Number and % | ||||||||
of Common | ||||||||
Shares | ||||||||
Beneficially
Owned or Controlled or |
||||||||
Directed, | ||||||||
Name and Residence |
Position and Offices Held
|
Director or Officer Since (1) |
Principal Occupation (2) |
Directly or
Indirectly (3) |
||||
Sébastien St-Louis Ontario, Canada | Chief Executive Officer and Director | August 13, 2013 (11) | Co-founder and Chief Executive Officer of HEXO |
3,774,030
(6)
(1.92%) |
||||
Ed Chaplin Ontario, Canada | Chief Financial Officer | October 1, 2014 (11) | Chief Financial Officer of HEXO |
33,000
(0.02%) |
||||
Dr. Michael Munzar Québec, Canada | Director and Chair | November 17, 2014 (11) | Medical doctor |
1,850,866
(7)
(0.94%) |
||||
Adam Miron Ontario, Canada | Chief Brand Officer and Director | August 13, 2013 (11) | Co-founder and Chief Brand Officer of HEXO |
3,355,916
(8)
(1.71%) |
||||
Jason Ewart (4),(5) Ontario, Canada | Director | November 17, 2014 (11) | Director and Executive Vice- President, Capital Markets of Uptempo Inc. |
10,000
(0.01%) |
||||
Vincent Chiara (4),(5) Québec, Canada | Director | November 4, 2016 (11) | President of Groupe Mach Inc. |
7,708,432
(9)
(3.93%) |
||||
Nathalie Bourque (4),(5) Québec, Canada | Director | October 4, 2017 | Public relations, government relations and financial communications consultant |
72,727
(0.04%) |
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James McMillan Ontario, Canada | Vice-President, Business Development | July 6, 2015 (11) | Vice-President, Business Development of HEXO |
24,000
(10)
(0.21%) |
||||
Roch Vaillancourt Quebec, Canada | General Counsel | March 12, 2018 | General Counsel of HEXO |
20
(0.00%) |
||||
Jocelyn Racine Ontario, Canada | Vice-President, Finance | March 9, 2018 | Vice-President, Finance of HEXO |
Nil
(Nil%) |
||||
Terence Lake British Columbia, Canada | Vice-President, Corporate Social Responsibility | September 4, 2017 | Vice-President, Business Development of HEXO |
4,000
(0.00%) |
||||
Pierre Killeen, Ontario, Canada | Vice-President, Government Relations | September 4, 2017 | Vice-President, Government Relations of HEXO |
Nil
(Nil%) |
||||
Sonia Isabel Quebec, Canada | Vice-President, Sales | March 9, 2018 | Vice-President, Sales of HEXO |
Nil
(Nil%) |
||||
Arno Groll Ontario, Canada | Vice-President, Operations | April 16, 2018 | Vice-President, Operations of HEXO |
Nil
(Nil%) |
||||
Dominique Jones Ontario, Canada | Vice-President, Human Resources | September 17, 2018 | Vice-President, Human Resources of HEXO |
Nil
(Nil%) |
||||
Nick Davies Ontario, Canada | Vice-President, Marketing | September 17, 2018 | Vice-President, Marketing of HEXO |
Nil
(Nil%) |
Notes:
(1) |
The term of the current directors shall expire at the conclusion of the following annual meeting of the shareholders of the Company. |
(2) |
For details on the principal occupations of the directors and officers during the past five years, see Biographical Information . |
(3) |
Percentage of securities is calculated from the total number of issued and outstanding shares as of October 11, 2018, being 196,098,593 shares. |
(4) |
Member of the Audit Committee. |
(5) |
Member of the Human Resources and Governance Committee. |
(6) |
Includes 3,546,198 Common Shares owned of record by 8375739 Canada Inc., which is owned and controlled by Mr. St-Louis. |
(7) |
Includes 1,710,866 Common Shares owned of record by 159927 Canada Inc., which is owned and controlled by Dr. Munzar. |
(8) |
These shares are owned of record by No. 2 Mission Row Inc., which is owned and controlled by Mr. Miron. |
(9) |
Includes 6,171,432 Common Shares owned of record by Casale HC Limited Partnership and 1,469,000 shares owned of record by SMA Trust, which are owned and/or controlled by Mr. Chiara. |
(10) |
These shares are owned of record by UberGreen Inc., which is owned and controlled by Mr. McMillan. |
(11) |
Reflects the date of appointment to Predecessor THCX otherwise, since March 15, 2017, the date the Qualifying Transaction was completed and the directors and officers of BFK were replaced by the directors and officers of Predecessor THCX . |
Biographical Information
Dr. Michael Munzar Director & Chair of the Board
Dr. Munzar is a clinician and is currently serving as Medical Director of Statcare medical clinic in Pointe Claire, Québec. In addition, Dr. Munzar is on the board of directors of Osta Biotechnologies Inc., and has held the position of Vice President of Medical and Regulatory Affairs at Osta since 2005. He served as Medical Director of Nymox Pharmaceutical Corporation (NASDAQ:NYMX) from 1996 to 2004 and as the President of Serex Inc., a wholly owned Subsidiary of Nymox, from 2000 to 2004. Dr. Munzar has experience in the regulatory development of drugs and medical devices. He obtained his MDCM from McGill University in 1979.
29
Jason Ewart Director
Mr. Ewart currently serves as a Director and Executive Vice President, Capital Markets of Uptempo Inc. Mr. Ewart is the co-founder and former CEO of the Canadian merchant bank, Fountain Asset Corp from 2003 to 2017. Mr. Ewart was a market analyst with A&E Capital Funding Inc. and Bradstone Equity Partners Inc. between 1998 and 2002 and Vice President of Quest Investment Corporation between 2002 and 2003. He is a board member of Marathon Mortgage Corp, Attorneys Title Guarantee Fund Inc., and the Northumberland Community Futures Development Corp. Mr. Ewart is a member of the Institute of Corporate Directors (ICD) in Canada. Mr. Ewart holds an economics degree from McGill University.
Vincent Chiara Director
Mr. Chiara is the President and sole owner of Groupe Mach Inc. ( Mach ). He began his career in 1984 as a lawyer specializing in real estate transactions and corporate litigation. In 1999 he ceased practicing law and focused on real estate acquisitions and property development through Mach, a private holding company. Mach and its affiliates hold significant investments representing approximately 19 million square feet of real estate (office, retail, residential, industrial and hotel) located primarily in Montreal and Québec City, including the Stock Exchange Tower, the CIBC Tower, the Sun Life Building, the CBC Tower and the University Complex. Mach continues to acquire and redevelop properties across North America while maintaining its institutional reputation within the market.
Nathalie Bourque Director
Ms. Bourque is a member of the board of Alimentation Couche-Tard and Héroux-Devtek. She held the position of Vice-President, Public Affairs and Global Communications at CAE Inc. from 2005 until her retirement in February 2015. Prior to joining CAE, Ms. Bourque was a partner at NATIONAL Public Relations where she was responsible for numerous clients in the financial, biopharmaceutical, retail and entertainment areas. Previously, she worked for various communications companies and has also worked for accounting firms in marketing. She was a member of the Board of Financial Services of the Caisse de dépôt et placement du Québec and Horizon Science and Technology. She also served as President of the MBA Association and Le Cercle Finance et Placement du Québec. She was also a Governor of McGlll University and was on the board of Maison MarieVincent. Ms. Bourque has a BA from Laval University and an MBA from McGill University.
Sébastien St-Louis President and Chief Executive Officer and Director
Mr. St-Louis has been the President and Chief Executive Officer of THC since August 2013. Mr. St-Louis is also the President and founder of Shield Real Estate Investments Inc., founded in 2012. Prior to that, he served as a Senior Account Manager at the Business Development Bank of Canada from 2008 to 2011 and as Chief Financial Officer of Wholesale Autoparts Warehouses from 2011 to 2012. Mr. St-Louis holds an MBA, DESS, finance from the Université du Québec à Montréal and a Bachelor of Arts from the University of Ottawa.
Ed Chaplin Chief Financial Officer
Prior to Joining THC as Chief Financial Officer in 2014, Mr. Chaplin served as V.P. Finance and Administration for Solacom Technologies Inc. from 2011 to 2014, Interim Corporate Controller at Arise Technologies Inc. in 2011, V.P Finance and Administration at BTI Systems Inc. from 2008 to 2010 and Corporate Controller at Corel Corporation from 1999 to 2008. He obtained his Chartered Professional Accountant, Chartered Accountant designation while working for Ernst and Young from 1996 to 1999. Mr. Chaplin holds a Bachelor of Commerce from Carleton University.
Adam Miron Chief Brand Officer and Director
Mr. Miron has been the Chief Brand Officer of HEXO since August 2013. Mr. Miron is the co-founder of iPolitics.ca and was its Chief Information Officer from 2010 to 2013. He was also the National Director of the Federal Liberal Commission from 2007 to 2009 and was responsible for the Liberal Party of Canadas online election campaigns. He has experience with online marketing and sales, and brand development. Mr. Miron has also run political campaigns in Canada and abroad.
30
James McMillan Vice-President, Business Development
Mr. McMillan has been the Vice-President, Business Development of HEXO since June 2015. Prior to that, he served as Vice-President, Business Development of LivQoS Inc. from 2009 to 2015 and as Vice-President, Sales and Marketing of UberGreen Inc. from 2005 to 2009. Mr. McMillan has over 19 years experience as a senior sales leader with a strong background in new market identification and development including expansion into international markets. He holds a Bachelor of Commerce from Concordia University.
Roch Vaillancourt General Counsel
Mr. Vaillancourt has been HEXOs General Counsel since March 2018. Roch brings almost 25 years of business and legal experience to his role as General Counsel and Corporate Secretary. Roch has been involved in several successful business ventures, both as an executive and legal advisor which earned him inclusion as one of Canadas top 100 General Counsels (Legal 500 GC Powerlist -2016). As General Counsel, Roch plays an integral role in crafting all aspects of the companys business and legal strategy, including contract negotiations, ensuring regulatory compliance, managing legal and regulatory issues, and supporting management and the Board of Directors in all legal issues.
Terence Lake Vice-President, Corporate Social Responsibility
Dr. Lake has been the Vice-President of Corporate Social Responsibility since September 2017. Dr. Lake brings sixteen years of political experience and a dedication to best practice in public health policy to his role as Vice-President of Corporate and Social Responsibility. During his tenure as a member of the British Columbia legislature (2009-2017), he served as Minister of the Environment and Minister of Health, where he was responsible for a $18 billion health budget. He also managed the implementation of the provinces public health response to the fentanyl opioid crisis, earning him the Canadian Public Health Associations National Public Health Hero Award in May 2017, and the Provincial Public Health Officers Award of Excellence in Public Health. He is a past mayor of Kamloops, BC, a veterinarian and former animal health instructor at Thompson Rivers University.
Sonia Isabel Vice-President, Sales
Ms. Isabel has been the Vice-President of Sales since March 2018. Sonia brings more than 20 years of sales and marketing experience managing large teams to success. Her experience includes more than a decade in senior roles with the Société des alcools du Québéc (SAQ), including Director of Business Relations, Director of Sales Administration, and Director of Operational Planning. Sonia leads our sales development and customer acquisition and retention strategies, focusing on Quebec and other markets across Canada and abroad.
Jocelyn Racine Vice-President, Finance
Mr. Racine joined HEXO as Vice-President of Finance in March 2018. Jocelyn is a Chartered Professional Accountant and brings three decades of financial management in the construction and telecommunications industry to the role. Jocelyn is responsible for financial reporting, internal control, risk management, and day-to-day treasury and financial operations. He also provides executive management with financial insight to support decision-making and contributes to the companys success.
Arno Groll Vice-President, Operations
Mr. Groll has been the Vice-President of Operations since April 2018. Arno was recently promoted to VP of Operations from his previously held Director of Operations position at Hydropothecary. His engineering background along with management and organizational expertise has helped him to succeed in overseeing our day-to-day operations in support of our growth. This includes oversight of and responsibility for operations, supply chain, and our expansion projects.
31
Nick Davies Vice-President, Marketing
Mr. Davies is an accomplished marketing executive with over two decades of experience building trusted global brands and market-leading products. Nick has been involved with several successful businesses including, Puma, Coleman, Virgin, and Corel. Nick has earned a reputation as an energetic marketing leader known for building high quality consumer experiences. As Executive Vice President at Corel, he held global P&L responsibility for the graphics and productivity division, and led the companys expansion into new international markets. Nick is a graduate of the European Business School and holds an MBA from INSEAD.
Dominque Jones Vice-President, Human Resources
Ms. Jones offers more than 20 years experience in leading organizations through periods of exceptional growth, with a career spanning six industries and three continents. Most recently, Dominique served as Chief Operating Officer for an education software company and before that as Chief People Officer of Halogen Software, where she led the companys people through an IPO to sale. Of particular note, Dominique led significant culture change initiatives and designed and implemented award-winning leadership and high - potential development programs. She brings to the team a passion for coaching and team-building.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Other than as set out below, to the knowledge of the Company, no director or executive officer of the Company, or shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company:
1. is, as of the date of this Annual Information Form, or has been within the last ten (10) years of the date of this Annual Information Form, a director, chief executive officer or chief financial officer or any company that while acting in such capacity, the company:
(a) was subject to a cease trade order, a similar order or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than thirty (30) consecutive days; or,
(b) was subject to a cease trade order, a similar order or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than thirty (30) consecutive days, that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or,
(c) within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
2. has, within the ten (10) years before the date of this Annual Information Form, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a received, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.
32
To the knowledge of the Company, no director or executive officer of the Company, or shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, has been subject to:
1. any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or,
2. any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
Conflicts of Interest
The Company may from time to time become involved in transactions which conflict with the interests of the directors and the officers of the Company. The interest of these persons could conflict with those of the Company. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the directors of the Company, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of the Company are required to act honestly, in good faith and in the best interest of the Corporation.
PROMOTERS
There are no individuals who would be considered promoters of the Company.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
There are no material legal proceedings or regulatory actions that HEXO is or was a party to, or that any of its property is or was the subject of, during the year ended July 31, 2018, and no such proceedings are known by THCX to be contemplated.
The Company is not aware of any penalties or sanctions imposed against the Company by a court relating to securities legislation or by a securities regulatory authority, any other penalties or sanctions imposed by a court or regulatory body against the Company that would likely be considered important to a reasonable investor making an investment decision, or any settlement agreements the Company has entered into before a court relating to securities legislation or with a securities regulatory authority.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
No director or executive officer of HEXO, no shareholder who beneficially owns, or controls or directs, directly or indirectly, more than 10% of the outstanding Common Shares, nor any associate or affiliate of such persons, has or has had any material interest, direct or indirect, in any transaction within the three most recently completed financial years of the Company that has materially affected or is reasonably expected to materially affect HEXO or any of its subsidiaries.
TRANFER AGENT AND REGISTAR
The transfer agent and registrar of the Company is TSX Trust Company at its offices in Toronto, Ontario.
33
MATERIAL CONTRACTS
Except for the contracts noted below and contracts entered into in the ordinary course of business, there are no contracts entered into by the Company during the twelve month period ending July 31, 2018 which are material or entered into before the twelve month period ending July 31, 2018 but are still in effect which are material:
1. warrant indenture dated January 30, 2018 between the Company and TSX Trust Company as warrant agent in respect of the common share purchase warrants issued by the Company on January 30, 2018.
AUDIT COMMITTEE INFORMATION
As of the date hereof, the Audit Committee consists of Jason Ewart (chairman), Vincent Chiara and Nathalie Bourque, all of whom are independent, and all of whom are financially literate within the meaning of National Instrument 52-110 Audit Committees . Each of the Audit Committee members has an understanding of the accounting principles used to prepare the Companys financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting.
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of the Companys financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring the Companys compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of the Companys internal auditors. The Audit Committee has specific responsibilities relating to the Companys financial reports; the external auditor; the internal audit function; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on the Company; and the Companys whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members. Information concerning the relevant education and experience of the Audit Committee members can be found in Directors and Officers above. The full text of the Audit Committees charter is disclosed in Schedule A.
Pre-Approval Policies and Procedures
The Committee will pre-approve all non-audit services to be provided to the Company or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but preapproval by such member or members so delegated shall be presented to the full Committee at its first scheduled meeting following such pre-approval.
External Auditor Service Fees
The following table sets forth, by category, the fees for all services rendered by the Companys current external auditor, MNP LLP, for the financial year ended July 31, 2018 (including estimates). MNP LLP was retained by the Company to act as external auditor beginning on May 25, 2017.
July 31, 2018 | ||||
Audit Fees |
$ | 135,000 | ||
Review Related Fees |
$ | 85,000 | ||
Tax Fees |
$ | 22,475 | (2) | |
All Other Fees |
$ | 16,590 | (1) |
Notes:
(1) |
Includes translation related fees and business amalgamating activity. |
(2) |
Includes fees for services related to assistance with tax returns. |
34
The following table sets forth, by category, the fees for all services rendered by the Companys former external auditor, Deloitte LLP, for the financial years ended July 31, 2017 and July 31, 2018 (including estimates). Deloitte LLP ceased to act as external auditor on March 15, 2017.
July 31, 2017 | July 31, 2018 | |||||||
Audit Fees |
$ | Nil | $ | Nil | ||||
Audit Related Fees |
$ | 38,150 | (1) | $ | Nil | |||
Tax Fees |
$ | Nil | $ | Nil | ||||
All Other Fees |
$ | 60,000 | (2) | $ | Nil |
Notes:
(1) |
Includes fees for services related to review of interim financial statements. |
(2) |
Includes fees for services related to support for the BFK filing statement prepared in connection with the Qualifying Transaction and accounting consultation. |
The following table sets forth, by category, the fees for all services rendered by the McGovern Hurley LLP, formerly the auditors to BFK, the Companys predecessor, and the Company, for the financial years ended July 31, 2016 and July 31, 2017 (including estimates). McGovern Hurley LLP ceased to act as external auditors to BFK on May 25, 2017.
July 31, 2017 | July 31, 2018 | |||||||
Audit Fees |
$ | 6,297 | $ | Nil | ||||
Audit Related Fees |
$ | Nil | $ | Nil | ||||
Tax Fees |
$ | Nil | $ | Nil | ||||
All Other Fees |
$ | 7,650 | (1) | $ | Nil |
Note:
(1) |
Includes fees for services related to support for the BFK filing statement prepared in connection with the Qualifying Transaction. |
INTERESTS OF EXPERTS
MNP LLP is the independent auditor of the Company and is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found under its profile on SEDAR at www.sedar.com .
Additional information relating to HEXO, including with respect to directors and officers remuneration and indebtedness, principal holders of its securities, and securities authorized for issuance under equity compensation plans, will be contained in the Companys information circular for its most recent annual meeting of security holders that involves the election of directors.
35
Additional financial information for HEXO is provided in the audited annual consolidated financial statements and managements discussion and analysis of HEXO for the year ended July 31, 2018, which are available for viewing under the Companys profile on SEDAR at www.sedar.com .
36
SCHEDULE A
Audit Committee Charter
(See Attached)
37
Approved: June 28, 2017
AUDIT COMMITTEE CHARTER
1. |
Purpose |
The Audit Committee (the Committee ) is a standing committee of the Board of Directors (the Board ) of HEXO Corp. (the Corporation ) appointed as required by s. 158 of the Business Corporations Act (Ontario) and the Canadian Securities Administrators National Instrument 52-110 Audit Committees ( NI 52-110 ). Its purpose is to assist the Board in fulfilling its oversight responsibilities for (i) the integrity of the Corporations financial statements, (ii) the Corporations compliance with legal and regulatory requirements, and (iii) the qualifications and independence of the auditor of the Corporation (the external auditor ).
2. |
Authority |
The Committee has authority to conduct or authorize investigations into any matter within its scope of responsibility. It is empowered to:
a. Recommend to the Board the public accounting firm to be nominated for appointment by the Corporations shareholders as the external auditor, including the external auditors compensation, and oversee the work of the external auditor. The external auditor will report directly to the Committee.
b. Resolve any disagreements between management and the external auditor regarding financial reporting.
c. Pre-approve permitted non-audit services performed by the Corporations external auditor.
d. Retain independent counsel, accountants, or others to advise the Committee or assist in its duties and to set and pay their applicable compensation.
e. Meet with the Corporations officers, external auditor or outside counsel, as necessary and communicate directly with the Corporations shareholders.
f. Delegate authority, to the extent permitted by applicable law, to one or more designated members of the Committee, including the authority to pre-approve all permitted non-audit services, provided that such decisions are reported to the full Committee at its next scheduled meeting.
3. |
Composition |
a. The Committee will consist of directors, as determined by resolution of the Board from time to time.
38
b. The Corporate Governance Committee will recommend to the Board applicable directors for appointment to the Committee and the Chair of the Committee.
c. If and whenever a vacancy exists on the Committee, the remaining members may exercise all of its powers so long as there continue to be at least three members on the Committee. If at any time a vacancy exists on the Committee that the Board is required to fill, the Board may appoint a new member to fill such vacancy by ordinary resolution of the Board.
d. Each Committee member must be financially literate as defined in NI 52-110. The Board or the Committee may, from time to time, establish policies limiting the number of audit committees which Committee members may be appointed to.
4. |
Meetings |
a. The Committee must meet at least four times per year, and at least annually, privately, with each of management and the external auditor.
b. The greater of two members or 50% of the members of the Committee shall constitute a quorum. All resolutions of the Committee shall be made by a majority of its members present at a meeting duly called and held. All Committee members are expected to attend each meeting, in person or by telephone or video conference. Any decision or determination of the Committee reduced to writing and signed by all of the members of the Committee shall be fully as effective as if it had been made at a meeting duly called and held.
c. The Committee may invite such officers, directors and employees of the Corporation as it deems necessary or advisable from time to time to attend meetings of the Committee and assist in the discussion and consideration of the duties of the Committee.
d. The time at which and place where the meetings of the Committee shall be held and the calling of meetings and the procedure in all things at such meetings shall be determined by the Committee. Following a Committee meeting, the Committee Chair shall report on the Committees activities to the Board at the next Board meeting. The Committee must keep and approve minutes of its meetings in which shall be recorded all action taken by it, which minutes must be made available to the Board as soon as practicable after each meeting of the Committee.
5. |
Chair |
The Chair of the Committee has the powers and responsibilities set forth in Schedule A hereto.
6. |
Responsibilities |
The Committee must:
a. Review significant accounting and reporting issues and understand their impact on the financial statements, including but not limited to:
39
(i) complex or unusual transactions and highly judgmental areas;
(ii) major issues regarding accounting principles and financial statement presentation, including any significant changes in the Corporations selection or application of accounting principles;
(iii) any significant variances with comparative reporting periods; and
(iv) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Corporation.
b. Review analyses prepared by management and/or the external auditor relating to significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of the selection or application of the Corporations accounting principles.
c. Review compliance with covenants under any loan agreements.
d. Review disclosure requirements for commitments and contingencies.
e. Review with management and the external auditor the results of the audit, including any difficulties encountered. This review will include any restrictions on the scope of the external auditors activities or on access to requested information, any significant disagreements with management, and adjustments raised by external auditors, whether or not included in the financial reports.
f. Review and discuss the annual audited financial statements and quarterly financial statements with management and the external auditor, including the Corporations disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A), including the discussion of critical accounting estimates included therein.
g. Review and recommend to the Board for approval, prior to public disclosure, the annual and quarterly financial statements, MD&A and annual and interim profit or loss press releases.
h. Review disclosures made by the Chief Executive Officer and the Chief Financial Officer during the certification process about significant deficiencies or material weakness in the design or operation of internal controls or any fraud that involves management or other employees who have a significant role in the Corporations internal controls and, if applicable, understand the basis upon which the certifying officers concluded that any particular deficiency or combination of deficiencies did or did not constitute a material weakness.
i. Review and recommend to the Board for approval, prior to public disclosure, financial information and earnings guidance provided externally, including to analysts and rating agencies if applicable. This review may be general (i.e., the types of information to be disclosed and the type of presentations to be made).
j. Satisfy itself that adequate procedures are in place, and periodically assess the adequacy of those procedures, for the review of any public disclosure of financial information extracted or derived from the financial statements, other than the statements themselves, the MD&A or the press releases referred to above.
40
k. Annually review and assess the Corporations policies in effect from time to time, including its, Disclosure and Confidentiality Policy and Whistleblower Policy and make recommendations to the Board.
7. |
Internal Control |
The Committee shall also:
a. Consider the effectiveness of the Corporations system for internal control over financial reporting, including information technology security and control.
b. Review the scope of the external auditors review of internal control over financial reporting, and obtain reports on significant findings and recommendations, together with managements responses.
c. Review the external auditors management letters and managements responses to such letters.
d. As requested by the Board, discuss with management and the external auditor the Corporations identifiable risks arising from any financial, operational or other deficiencies, the adequacy and effectiveness of the Corporations accounting and financial controls relating thereto, and the steps management has taken to monitor and control identified risks.
e. Annually review the Corporations disclosure controls and procedures, including any significant deficiencies in, or material non-compliance with same, and the steps management has taken to monitor and control such deficiencies or instances of noncompliance.
8. |
External Audit |
The Committee shall also:
a. Review the external auditors proposed audit scope and approach.
b. Review the performance of the external auditor. Annually review the report of the external auditor on matters required to be communicated to the Committee under Section 5135 (auditors responsibility to consider fraud) and Section 5751 (communications with those having oversight responsibility for the financial reporting process-independence) of the Canadian Institute of Chartered Accountants handbook.
c. Report any conclusions with respect to the external auditor to the Board.
d. Establish and periodically assess the Corporations hiring policies for partners, employees and former partners and employees of the current or prior external auditor.
41
e. At least once per year, meet privately with the external auditor to discuss any matters that the Committee or the external auditor believes should be discussed privately.
f. Review and pre-approve, in accordance with NI 52-110, any non-audit services, provided by the Corporations external auditor, taking into consideration whether the delivery of non-audit services will interfere with the independence of the auditors. The pre-approval of non-audit services may be further delegated to one or more independent members of the Committee, provided that said pre-approval is presented to the Committee at its first scheduled meeting following such approval. The pre-approval requirement is satisfied with respect to the provision of de minimis non-audit services if:
(i) the aggregate amount of all such non-audit services provided to the Corporation which were not pre-approved constitutes not more than 5% of the total amount of fees paid by the Corporation and its subsidiaries to the external auditor during the fiscal year in which the non-audit services are provided;
(ii) the services were not recognized by the Corporation or its subsidiaries, at the time of the engagement, to be non-audit services; and
(iii) the services are promptly brought to the attention of the Committee and approved, prior to the completion of the audit, by the Committee or by one or more members of the Committee to whom authority to grant such approvals has been delegated by the Committee.
The Committee may from time to time establish specific pre-approval policies and procedures in accordance with NI 52-110.
9. |
Compliance |
The Committee shall also:
a. Annually review the effectiveness of the Corporations system of monitoring compliance with laws and regulations and the results of managements investigation and follow-up (including disciplinary action) of any instances of noncompliance.
b. Establish and periodically assess the adequacy of procedures for: (i) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls, or auditing matters; and (ii) the confidential, anonymous submission by employees regarding questionable accounting or auditing matters.
c. Review findings of any examinations by regulatory agencies, and any external auditors observations made regarding those findings.
42
d. Review the process for communicating the Code of Business Ethics to Corporation personnel, and for monitoring compliance therewith. 10. Reporting Responsibilities The Committee shall also:
a. Report to the Board about Committee activities and issues that arise with respect to the quality or integrity of the Corporations financial statements, the Corporations compliance with legal or regulatory requirements, the performance and independence of the Corporations external auditor and internal controls over financial reporting.
b. Review any other reports the Corporation issues that relate to Committee responsibilities.
c. Liaise with the external auditor and the Board to ensure that any material issues that have arisen related to compliance and governance have been addressed and that appropriate actions have been identified and undertaken to mitigate the issues identified.
d. The Committee shall at least annually evaluate its own performance and the contents of this Charter, including Schedule A attached hereto, and recommend to the Board such changes to the Charter as the Committee deems appropriate.
11. |
Other responsibilities |
The Committee shall also:
a. Discuss with management the Corporations major policies with respect to risk assessment and risk management.
b. Perform other activities related to this Charter as requested by the Board.
c. Institute and oversee special investigations as required with respect to the discharge of the Committees duties hereunder.
d. Ensure appropriate disclosure of this Charter as may be required by applicable law.
43
Schedule A
HEXO Corp.
Audit Committee Chair Person Description
In addition to the duties and responsibilities set out in the bylaws and any other applicable charter, mandate or position description, the chair (the Chair ) of the Audit Committee (the Committee ) of HEXO Corp. has the duties and responsibilities described below.
1. Provide overall leadership to enhance the effectiveness of the Committee, including:
(a) overseeing the structure, composition, membership and activities delegated to the Committee;
(b) chairing every meeting of the Committee and encouraging free and open discussion at the meeting of the Committee;
(c) scheduling and setting the agenda for Committee meetings with input from other Committee members, the Chair of the Board of Directors and management as appropriate;
(d) facilitating the timely, accurate and proper flow of information to and from the Committee;
(e) arranging for management, internal personnel, external advisors and others to attend and present at Committee meetings as appropriate;
(f) arranging sufficient time during Committee meetings to fully discuss agenda items;
(g) encouraging Committee members to ask questions and express viewpoints during meetings, and
(h) taking all other reasonable steps to ensure that the responsibilities and powers of the Committee, as outlined in its Charter, are well understood by the Committee members and executed as effectively as possible.
2. Foster ethical and responsible decision making by the Committee and its individual members.
3. Encourage the Committee members to meet separately from the scheduled Committee meetings to ensure that all members have an opportunity to be fully informed of information that will be addressed by the Committee during the meeting.
4. Following each meeting of the Committee, report to the Board of Directors on the activities, findings and any recommendations of the Committee.
5. Carry out such other duties as may reasonably be requested by the Board of Directors.
44
Exhibit 4.2
Independent Auditors Report
To the Shareholders of HEXO Corp.:
We have audited the accompanying consolidated financial statements of HEXO Corp., which comprise the consolidated statements of financial position as at July 31, 2018 and July 31, 2017, and the consolidated statements of loss and comprehensive loss, changes in shareholders equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of HEXO Corp. as at July 31, 2018 and July 31, 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Ottawa, Ontario | Chartered Professional Accountants | |
October 25, 2018 | Licensed Public Accountants |
800 1600 CARLING AVE, OTTAWA ON, K1Z 1G3 |
||
T: 613.691.4200 F: 613.726.9009 MNP.ca |
39 |
|
Consolidated Statements of
Financial Position
(in Canadian dollars)
As at |
Note | July 31, 2018 | July 31, 2017 | |||||||
Assets |
||||||||||
Current assets |
||||||||||
Cash and cash equivalents |
$ | 39,341,688 | $ | 38,452,823 | ||||||
Short-term investments |
5 | 205,446,830 | 2,871,550 | |||||||
Trade receivables |
643,596 | 351,207 | ||||||||
Commodity taxes recoverable |
4,237,465 | 495,783 | ||||||||
Convertible note receivable |
13 | 10,000,000 | | |||||||
Prepaid expenses |
4,203,693 | 200,677 | ||||||||
Inventory |
6 | 10,414,624 | 3,689,239 | |||||||
Biological assets |
7 | 2,331,959 | 1,504,186 | |||||||
276,619,855 | 47,565,465 | |||||||||
Property, plant and equipment |
8 | 54,333,051 | 5,849,695 | |||||||
Intangible assets and other longer-term assets |
9 | 4,044,527 | 2,763,764 | |||||||
$ | 334,997,433 | $ | 56,178,924 | |||||||
Liabilities |
||||||||||
Current liabilities |
||||||||||
Accounts payable and accrued liabilities |
$ | 8,994,789 | $ | 1,672,406 | ||||||
Interest payable |
10 | | 72,511 | |||||||
Warrant liability |
10, 11 | 3,129,769 | 1,355,587 | |||||||
12,124,558 | 3,100,504 | |||||||||
Unsecured convertible debentures |
10 | | 20,638,930 | |||||||
$ | 12,124,558 | $ | 23,739,434 | |||||||
Shareholders equity |
||||||||||
Share capital |
11 | $ | 347,232,724 | $ | 45,159,336 | |||||
Share-based payment reserve |
11 | 6,139,179 | 1,561,587 | |||||||
Contributed surplus |
| 1,774,880 | ||||||||
Warrants |
11 | 12,635,339 | 3,728,255 | |||||||
Deficit |
(43,134,367 | ) | (19,784,568 | ) | ||||||
$ | 322,872,875 | $ | 32,439,490 | |||||||
$ | 334,997,433 | $ | 56,178,924 |
Approved by the Board | ||||
/s/ Jason Ewart, Director | /s/ Michael Munzar, Director |
The accompanying notes are an integral part of these consolidated financial statements.
40 |
|
Consolidated Statements of
Loss and Comprehensive Loss
(in Canadian dollars)
For the years ended |
Note | July 31, 2018 | July 31, 2017 | |||||||
Revenue |
$ | 4,933,952 | $ | 4,096,841 | ||||||
Cost of goods sold |
6 | 2,093,043 | 1,462,522 | |||||||
Gross margin before fair value adjustments and amortization |
2,840,909 | 2,634,319 | ||||||||
Fair value adjustment on sale of inventory |
6 | 2,288,975 | 576,872 | |||||||
Fair value adjustment on biological assets |
7 | (7,339,566 | ) | (5,003,822) | ||||||
Adjustment to net realizable value of inventory |
6 | 1,491,070 | | |||||||
Loss on write-down of inventory |
6 | | 613,074 | |||||||
Gross margin before amortization |
$ | 6,400,430 | $ | 6,448,195 | ||||||
Operating expenses |
||||||||||
General and administrative |
9,374,438 | 3,608,595 | ||||||||
Marketing and promotion |
8,335,083 | 3,072,802 | ||||||||
Stock-based compensation |
11 | 4,996,513 | 658,620 | |||||||
Amortization of property, plant and equipment |
8 | 895,714 | 359,967 | |||||||
Amortization of intangible assets |
9 | 765,238 | 231,685 | |||||||
16 | $ | 24,366,986 | $ | 7,931,669 | ||||||
Loss from operations |
(17,966,556 | ) | (1,483,474) | |||||||
Revaluation of financial instruments gain/(loss) |
10 | (5,091,460 | ) | (9,169,275) | ||||||
RTO listing expense |
4 | | (951,024) | |||||||
Loss on investment |
19, 20 | (649,714 | ) | | ||||||
Loss on disposal of assets |
| (56,356) | ||||||||
Foreign exchange gain/(loss) |
(228,012 | ) | (326,981) | |||||||
Interest expense |
10 | (1,529,408 | ) | (522,618) | ||||||
Interest income |
2,115,351 | 92,158 | ||||||||
Net loss and comprehensive loss attributable to shareholders |
$ | (23,349,799 | ) | $ | (12,417,570) | |||||
Net loss per share, basic and diluted |
$ | (0.17 | ) | $ | (0.21) | |||||
Weighted average number of outstanding shares |
||||||||||
Basic and diluted |
12 | 134,171,509 | 58,556,121 |
The accompanying notes are an integral part of these consolidated financial statements.
41 |
|
Consolidated Statements of
Changes in Shareholders Equity
(in Canadian dollars)
For the years ended July 31, 2018 and 2017 |
Note |
Number
common shares |
Share capital |
Share-based
payment reserve |
Warrants |
Contributed
surplus |
Deficit |
Shareholders equity |
||||||||||||||||||||||||
Balance, August 1, 2017 |
76,192,990 | $ | 45,159,336 | $ | 1,561,587 | $ | 3,728,255 | $ | 1,774,880 | $ | (19,784,568) | $ | 32,439,490 | |||||||||||||||||||
Issuance of 7% unsecured convertible debentures |
10 | | | | 3,529,770 | 7,283,084 | | 10,812,854 | ||||||||||||||||||||||||
Issuance of units |
11 | 37,375,000 | 139,029,262 | | 10,470,738 | | | 149,500,000 | ||||||||||||||||||||||||
Issuance costs |
11 | | (7,342,461 | ) | | (768,186 | ) | (505,767 | ) | | (8,616,414 | ) | ||||||||||||||||||||
Issuance of broker/finder warrants |
11 | | | | 2,351,615 | | | 2,351,615 | ||||||||||||||||||||||||
Conversion of 8% unsecured convertible debentures |
10 | 15,853,887 | 23,462,232 | | | (1,742,779 | ) | | 21,719,453 | |||||||||||||||||||||||
Conversion of 7% unsecured convertible debentures |
10 | 31,384,081 | 61,555,345 | | | (6,809,418 | ) | | 54,745,927 | |||||||||||||||||||||||
Exercise of stock options |
11 | 907,273 | 1,008,775 | (418,921 | ) | | | | 589,854 | |||||||||||||||||||||||
Exercise of warrants |
10, 11 | 27,897,087 | 75,254,494 | | (5,029,415 | ) | | | 70,225,079 | |||||||||||||||||||||||
Exercise of broker/finder warrants |
11 | 4,018,798 | 9,105,741 | | (1,647,438 | ) | | | 7,458,303 | |||||||||||||||||||||||
Stock-based compensation |
11 | | | 4,996,513 | | | | 4,996,513 | ||||||||||||||||||||||||
Net loss |
| | | | | (23,349,799 | ) | (23,349,799 | ) | |||||||||||||||||||||||
Balance at July 31, 2018 |
193,629,116 | $ | 347,232,724 | $ | 6,139,179 | $ | 12,635,339 | $ | $ | (43,134,367 | ) | $ | 322,872,875 | |||||||||||||||||||
Balance, August 1, 2016 |
39,305,832 | $ | 12,756,262 | $ | 937,065 | $ | 1,370,579 | $ | 89,601 | $ | (7,366,998 | ) | $ | 7,786,509 | ||||||||||||||||||
Issuance of units |
11 | 338,274 | 192,253 | | 61,453 | | | 253,706 | ||||||||||||||||||||||||
Private placement |
11 | 8,571,432 | 5,000,002 | | | | | 5,000,002 | ||||||||||||||||||||||||
Concurrent financing |
11 | 20,010,000 | 15,007,501 | | | | | 15,007,501 | ||||||||||||||||||||||||
Shares issued for reverse acquisition |
1,837,770 | 1,378,332 | 70,253 | | | | 1,448,585 | |||||||||||||||||||||||||
Share issuance costs |
11 | | (2,246,704 | ) | | | | | (2,246,704 | ) | ||||||||||||||||||||||
Issuance of broker/finder warrants |
11 | | | | 1,236,428 | | | 1,236,428 | ||||||||||||||||||||||||
Exercise of stock options |
11 | 162,504 | 136,603 | (104,351 | ) | | | | 32,252 | |||||||||||||||||||||||
Exercise of warrants |
10, 11 | 828,694 | 1,033,772 | | (93,858 | ) | | | 939,914 | |||||||||||||||||||||||
Issuance of 8% unsecured convertible debentures |
10 | | | | 1,084,433 | 1,742,779 | | 2,827,212 | ||||||||||||||||||||||||
Conversion of secured convertible debentures |
10 | 4,678,494 | 11,570,911 | | | | | 11,570,911 | ||||||||||||||||||||||||
Conversion of unsecured convertible debentures |
10 | 459,990 | 330,404 | | 69,220 | (57,500 | ) | | 342,124 | |||||||||||||||||||||||
Stock-based compensation |
11 | | | 658,620 | | | | 658,620 | ||||||||||||||||||||||||
Net loss |
| | | | | (12,417,570 | ) | (12,417,570 | ) | |||||||||||||||||||||||
Balance at July 31, 2017 |
76,192,990 | $ | 45,159,336 | $ | 1,561,587 | $ | 3,728,255 |
$ 1,774,880 |
$ | (19,784,568 | ) | $ | 32,439,490 |
Outstanding number of shares has been retrospectively adjusted to reflect a share exchange in connection with the Qualifying Transaction (Note 1) six common shares of the Company for every one share of The Hydropothecary Corporation, which was effected in March 2017.
The accompanying notes are an integral part of these consolidated financial statements.
42 |
|
Consolidated Statements of
Cash Flows
(in Canadian dollars)
For the years ended |
Note | July 31, 2018 | July 31, 2017 | |||||||||
Operating activities |
||||||||||||
Net loss and comprehensive loss |
$ | (23,349,799 | ) | $ | (12,417,570) | |||||||
Items not affecting cash |
||||||||||||
Amortization of property, plant and equipment |
8 | 895,714 | 359,967 | |||||||||
Amortization of intangible assets |
9 | 765,238 | 231,685 | |||||||||
Loss on disposal of property, plant and equipment |
| 56,356 | ||||||||||
Unrealized revaluation gain on biological assets |
7 | (7,339,566 | ) | (5,663,161) | ||||||||
Foreign exchange |
| (119,429) | ||||||||||
Fair value adjustment on inventory sold |
2,288,975 | | ||||||||||
Stock-based compensation |
11 | 4,996,513 | 658,620 | |||||||||
Non-cash interest expense |
312,043 | 198,533 | ||||||||||
Accretion of convertible debt |
10 | 1,368,014 | 201,447 | |||||||||
RTO listing expense |
| 796,475 | ||||||||||
Revaluation of foreign currency denominated warrants |
5,091,460 | 9,169,275 | ||||||||||
Changes in non-cash operating working capital items |
||||||||||||
Trade receivables |
(292,389 | ) | 692,158 | |||||||||
Commodity taxes recoverable |
(3,741,682 | ) | (512,221) | |||||||||
Prepaid expenses |
(4,003,016 | ) | (160,044) | |||||||||
Inventory |
(2,502,567 | ) | 1,121,828 | |||||||||
Accounts payable and accrued liabilities |
3,399,059 | 75,034 | ||||||||||
Interest payable |
10 | (72,511 | ) | | ||||||||
Cash and cash equivalents used in operating activities |
(22,184,514 | ) | (5,311,047) | |||||||||
Financing activities |
||||||||||||
Issuance of units |
11 | 149,500,000 | 503,717 | |||||||||
Issuance of common shares Private Placement |
11 | | 5,000,002 | |||||||||
Issuance of common shares Concurrent Financing |
11 | | 15,007,501 | |||||||||
Issuance of common shares RTO |
10 | | 647,214 | |||||||||
Issuance of secured convertible debentures |
10 | 69,000,000 | 4,403,893 | |||||||||
Issuance costs |
11 | (10,305,552 | ) | (3,239,937) | ||||||||
Exercise of stock options |
589,854 | 32,252 | ||||||||||
Exercise of warrants |
74,366,104 | 716,926 | ||||||||||
Issuance of unsecured convertible debentures |
9 | | 25,100,000 | |||||||||
Cash provided by financing activities |
283,150,406 | 48,171,568 | ||||||||||
Investing activities |
||||||||||||
Acquisition of short-term investment |
5 | (202,575,280 | ) | (2,871,550) | ||||||||
Convertible note receivable |
13 | (10,000,000 | ) | | ||||||||
Acquisition of property, plant and equipment |
8 | (45,721,503 | ) | (3,105,919) | ||||||||
Purchase of intangible assets |
9 | (1,780,244 | ) | (361,683) | ||||||||
Cash used in investing activities |
(260,077,027 | ) | (6,339,152) | |||||||||
Decrease in cash and cash equivalents |
888,865 | 36,521,369 | ||||||||||
Cash and cash equivalents, beginning of year |
38,452,823 | 1,931,454 | ||||||||||
Cash and cash equivalents, end of year |
$ | 39,341,688 | $ | 38,452,823 |
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to the Consolidated
Financial Statements
For the fiscal years ended July 31, 2018 and 2017
(in Canadian dollars)
1. Description of Business
HEXO Corp. (formerly The Hydropothecary Corporation), formerly BFK Capital Corp. (the Company), has one wholly owned subsidiary, HEXO Operations Inc. (formerly 10074241 Canada Inc.) (HOI). HOI has three wholly owned subsidiaries: 167151 Canada Inc., Banta Health Group and Coral Health Group (together HEXO). HEXO is a producer of cannabis and its site is licensed by Health Canada for production and sale. Its head office is located at 240 490 Boulevard Sainte-Joseph, Gatineau, Quebec, Canada. The Company is a publicly traded corporation, incorporated in Ontario. The Companys common shares are listed on the Toronto Stock Exchange (TSX), under the trading symbol HEXO.
The Company was incorporated under the name BFK Capital Corp. by articles of incorporation pursuant to the provisions of the Business Corporations Act (Ontario) on October 29, 2013, and after completing its initial public offering of shares on the TSX-V on November 17, 2014, it was classified as a Capital Pool Corporation as defined in policy 2.4 of the TSX-V. The principal business of the Company at that time was to identify and evaluate businesses or assets with a view to completing a qualifying transaction (a Qualifying Transaction) under relevant policies of the TSX-V. The Company had one wholly-owned subsidiary, HOI, which was incorporated with the sole purpose of facilitating a future Qualifying Transaction.
On March 15, 2017, the Company completed its Qualifying Transaction which was effective pursuant to an agreement between the Company and the legacy entity, The Hydropothecary Corporation (Hydropothecary). As part of the Qualifying Transaction, the Company changed its name to The Hydropothecary Corporation and consolidated its 2,756,655 shares on a 1.5 to 1 basis to 1,837,770. Following this change, Hydropothecary amalgamated with 10100170 Canada Inc., which resulted in the creation of a new entity, 10074241 Canada Inc. (HOI). In connection with that amalgamation, HEXO acquired all of the issued and outstanding shares of the Company and the former shareholders of Hydropothecary received a total of 68,428,824 post-consolidation common shares. Immediately following closing, the Company had a total 70,266,594 common shares outstanding.
Upon closing of the transaction, the shareholders of Hydropothecary owned 97.4% of the common shares of the Company, and as a result, the transaction is considered a reverse acquisition of the Company by Hydropothecary. For accounting purposes, Hydropothecary is considered the acquirer and the Company is considered the acquiree. Accordingly, the annual consolidated financial statements are in the name of HEXO Corp. (formerly BFK Capital Corp.); however, they are a continuation of the financial statements of Hydropothecary. Additional information on the transaction is disclosed in Note 4.
Shareholder approval of the Companys name change to HEXO Corp. formerly The Hydropothecary Corporation occurred August 28, 2018. See subsequent event details as presented in Note 24.
2. Basis of Presentation
Statement of Compliance
The annual consolidated financial statements have been prepared in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).
These annual consolidated financial statements were approved and authorized for issue by the Board of Directors on October 25, 2018.
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Basis of Measurement and Consolidation
The annual consolidated financial statements have been prepared on a historical cost basis except for cash and cash equivalents, short-term investments, biological assets, convertible note receivable, the warrant liability, and unsecured debenture conversion liability, which are measured at fair value on a recurring basis and include the accounts of the Company and entities controlled by the Company and its subsidiaries. They include its wholly owned subsidiary, HOI (formerly 10074241 Canada Inc.). They also include 167151 Canada Inc., Banta Health Group and Coral Health Group, three wholly owned subsidiaries of HEXO Operations Inc. They also include the accounts of 8980268 Canada Inc., a company for which HOI holds a right to acquire the outstanding shares at any time for a nominal amount. All subsidiaries are located in Canada.
Historical cost is the fair value of the consideration given in exchange for goods and services based upon the fair value at the time of the transaction of the consideration provided.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these annual consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, S hare-Based Payment, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2, Inventories .
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
The preparation of these annual consolidated financial statements requires the use of certain critical accounting estimates, which requires management to exercise judgment in applying the Companys accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to these annual consolidated financial statements, have been set out in Note 3.
Functional and Presentation Currency
These annual consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its subsidiaries.
3. Significant Accounting Policies
(a) Foreign Currency Translation
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the consolidated statement of financial position date are translated to Canadian dollars at the foreign exchange rate applicable at that date. Realized and unrealized exchange gains and losses are recognized through profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
(b) Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertibles into known amounts of cash with original maturities of three months or less.
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(c) Short-Term Investments
Short-term investments are comprised of liquid investments with maturities between three and 12 months. Short-term investments are recognized initially at fair value and subsequently adjusted to fair value through profit or loss.
(d) Biological Assets
The Company measures biological assets consisting of cannabis plants using the income approach at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. Biological assets are considered Level 3 fair value estimates. The Company capitalizes all the direct and indirect costs as incurred related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest including labour-related costs, grow consumables, materials, utilities, facilities costs, quality and testing costs. The identified capitalized direct and indirect costs of biological assets are subsequently recorded within the line item cost of goods sold on the statement of loss and comprehensive loss in the period that the related product is sold. Unrealized gains or losses arising from changes in fair value less cost to sell during the year are included in the results of operations and presented on a separate line of statement of comprehensive loss of the related year.
(e) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the initial deemed cost of the inventory. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Subsequent costs include materials and labour involved in manicuring, drying, testing, irradiation, packaging and quality assurance. The identified capitalized direct and indirect costs related to inventory are subsequently recorded within cost of goods sold on the statement of loss and comprehensive loss at the time the product is sold, with the exclusion of realized fair value amounts included in inventory sold, which are recorded as a separate line within gross margin before amortization on the statement of loss and comprehensive loss. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Packaging and supplies are initially valued at cost and subsequently at the lower of cost and net realizable value.
(f) Property, Plant and Equipment
Property, plant and equipment is measured at cost less accumulated amortization and impairment losses. Amortization is provided using the following terms and method:
Land | Not amortized | 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 | ||||
Construction in progress | Not amortized | No term |
An assets residual value, useful life and amortization method are reviewed at each financial year and adjusted if appropriate. When parts of an item of equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount of the equipment and are recognized in profit or loss.
Construction in progress is transferred to property, plant and equipment when the assets are available for use and amortization of the assets commences at that point.
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(g) Finite Life Intangible Assets
Finite life intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. Amortization is provided on a straight-line basis over the following terms:
Domain names | 10 years | |||
Health Canada licenses | 20 years | |||
Software | 3 to 5 years |
The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
(h) Investments at Cost
Investments in equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured are recorded at cost.
(i) Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and intangible assets, are reviewed for impairment at the end of each financial reporting period or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit, or CGU). The recoverable amount of an asset or a CGU is the higher of its fair value, less costs of disposal, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss by the amount by which the carrying amount of the asset exceeds the recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment loss been recognized previously.
(j) Leased Assets
Leases are classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed.
(k) Revenue Recognition
The Company only ships product when there is a reasonable expectation of payment from the customer. Accordingly, the Company recognizes revenue at the fair value when it has transferred the significant risks and rewards of ownership to its customers, the collection of payment is reasonably assured, and the amount receivable is fixed or determinable.
(l) Cost of Goods Sold
Cost of goods sold includes cost of inventory expensed, packaging costs, shipping costs and related labour.
(m) Research and Development
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures are recognized in profit and loss as incurred. To date, no development costs have been capitalized.
(n) Income Taxes
The Company uses the liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for accounting purposes, and the irrespective tax bases. Deferred income tax assets and liabilities are measured using tax rates that have been enacted or substantively enacted applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in statutory tax rates is recognized in profit or loss in the year of change. Deferred income tax assets are recorded when their recoverability is considered probable and are reviewed at the end of each reporting period.
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(o) Share-Based Compensation
The Company has an employee stock option plan. The Company measures equity settled share-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Companys estimate of equity instruments that will eventually vest. Forfeitures are adjusted for on an actual basis. The impact of the revision of the original estimate is recognized in profit or loss such that the cumulative expense reflects the revised estimate. The number of vested options ultimately exercised by holders does not impact the expense recorded in any period. For stock options granted to non-employees, the compensation expense is measured at the fair value of goods and services received except where the fair value cannot be estimated, in which case it is measured at the fair value of the equity instruments granted. The fair value of share-based compensation to non-employees is periodically remeasured until counterparty performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. Consideration paid by employees or non-employees on the exercise of stock options is recorded as share capital and the related share-based compensation is transferred from share-based payment reserve to share capital.
(p) Loss per Share
Loss per common share represents loss for the period attributable to common shareholders divided by the weighted average number of common shares outstanding during the year. Diluted loss per common share is calculated by dividing the applicable loss for the year by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the year.
(q) Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognized in profit or loss in the period which they are incurred.
(r) Financial Instruments
Financial assets are classified into one of four categories: fair value through profit and loss (FVTPL), held-to-maturity (HTM), available for sale (AFS), and loans and receivable.
(i) FVTPL FINANCIAL ASSETS
Financial assets are classified as FVTPL when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in the consolidated statements of loss. Transaction costs are expensed as incurred. The fair values of financial assets in this category are determined by reference to active market transactions or by using a valuation technique where no active market exists.
(ii) HTM INVESTMENTS
HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturity other than loans and receivables. Investments are classified as HTM if the Company has the intention and ability to hold them until maturity. HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction costs, and subsequently at amortized cost using the effective interest method.
(iii) AFS FINANCIAL ASSETS
AFS financial assets are those non-derivative financial assets that are designated as available for sale or are not classified in any of the other categories. Gains and losses arising from changes in fair value are recognized in other comprehensive income. When the asset is disposed of or is determined to be impaired, the cumulative gain or loss recognized in other comprehensive income is reclassified from the equity reserve to profit or loss.
(iv) LOANS AND RECEIVABLES
Loans and receivables are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. They are initially recognized at the transaction value and subsequently carried at amortized cost using the effective interest method less any impairment losses. Discounting is omitted where the effect of discounting is immaterial.
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(v) FINANCIAL LIABILITIES AND OTHER FINANCIAL LIABILITIES
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with changes being recognized through the consolidated statements of loss. The fair values of financial liabilities at FVTPL are determined by reference to active market transactions or by using a valuation technique where no active market exists. Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method.
(vi) CLASSIFICATION OF FINANCIAL INSTRUMENTS
The Company classifies its financial assets and liabilities depending on the purpose for which the financial instruments were acquired, their characteristics, and management intent as outlined below:
Instrument | Classification | Level | Fair value method | |||
Cash and cash equivalents |
FVTPL |
Level 1 |
Carrying amount (approximates fair value due to short-term nature) |
|||
Short-term investments |
FVTPL | Level 1 | Carrying amount (approximates fair value due to short-term nature) | |||
Trade receivables |
Loans and receivables | n/a | Carrying amount (approximates fair value due to short-term nature) | |||
Convertible note receivable |
FVTPL | Level 2 | Discounted cash flow model | |||
Accounts payable and accrued liabilities |
Other financial liabilities | n/a | Carrying amount (approximates fair value due to short-term nature) | |||
Convertible debentures |
Other financial liabilities | Level 2 | Black-Scholes-Merton model | |||
Warrant liability |
FVTPL | Level 1 | Black-Scholes-Merton model |
There have been no transfers between fair value levels during the current year and prior year. There were no unrealized or realized gains or losses related to changes in fair value levels.
(vii) EMBEDDED DERIVATIVES
Derivatives are initially measured at fair value in conjunction with the host contract; no bifurcation is performed, and any directly attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, the entire instrument, including the embedded derivative, is measured at fair value and changes therein are recognized in profit or loss. The Company has a convertible loan receivable whereby the balance can be converted into equity. See Note 13 for transaction and valuation details.
(viii) COMPOUND INSTRUMENTS
The component parts of compound instruments (convertible debentures) issued by the Company are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Companys 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 instruments maturity date.
The conversion option classified as equity is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognized and included in equity, and is not subsequently remeasured. In addition, the conversion option classified as equity will remain in equity. No gain or loss is recognized in profit or loss upon conversion or expiration of the conversion option.
Transaction costs that relate to the issue of the convertible debentures are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are recognized directly in equity. Transaction costs relating to the liability component are included in the carrying amount of the liability component and are amortized over the term of the convertible debentures using the effective interest method.
For compound instruments with non-equity derivatives, the fair value of the embedded derivative is determined first based on the contractual terms, and the initial carrying amount of the host instrument is the residual amount after separating the embedded derivative.
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(ix) EFFECTIVE INTEREST METHOD
The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
(x) TRANSACTION COSTS
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
(xi) IMPAIRMENT OF FINANCIAL ASSETS
Financial assets, other than those classified at fair value through profit and loss, are assessed for indicators of impairment at the end of the reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
(s) Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
VALUATION OF BIOLOGICAL ASSETS AND INVENTORY
In calculating the value of the biological assets and inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis, harvesting costs, selling costs, sales price and expected yields for the cannabis plant. In calculating final inventory values, management is required to determine an estimate of spoiled or expired inventory and compares the inventory cost versus net realizable value.
ESTIMATED USEFUL LIVES AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS
Amortization of property, plant and equipment and intangible assets are dependent upon estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
SHARE-BASED COMPENSATION
In calculating the share-based compensation expense, key estimates such as the value of the common share, the rate of forfeiture of options granted, the expected life of the option, the volatility of the Companys stock price and the risk-free interest rate are used.
WARRANTS
In calculating the value of the warrants, key estimates such as the value of the common share, the expected life of the warrant, the volatility of the Companys stock price and the risk-free interest rate are used.
All broker/compensation warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be reliably measured.
PROVISIONS
Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a previous event, if it is probable that the Company will be required to settle the obligation and a reliable estimate can be made of the obligation. The amount recognized is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligations. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate of the expected future cash flows.
ALLOCATION OF PURCHASE PRICE
In determining the allocation of the purchase price, estimates are used based on market research and appraisal values.
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CONVERTIBLE NOTE RECEIVABLE
The fair value of the convertible note receivable is determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and in performing the fair value calculations in order to determine the values attributed to the instrument at the time of their issuance and the subsequent measurement at fair value on a recurring basis. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of the convertible note receivable that are not quoted in an active market.
(t) Changes to Accounting Standards and Interpretations
NEW AND REVISED IFRS IN ISSUE BUT NOT YET EFFECTIVE
IFRS 9, Financial Instruments
IFRS 9 was issued by the International Accounting Standards Board (IASB) in November 2009 and October 2010 and will replace IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Two measurement categories continue to exist to account for financial liabilities in IFRS 9, fair value through profit or loss (FVTPL) and amortized cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortized cost unless the fair value option is applied. The treatment of embedded derivatives under the new standard is consistent with IAS 39 and is applied to financial liabilities and non-derivative hosts not within the scope of the standard. The Company will adopt IFRS 9 effective August 1, 2018. The Company has completed its assessment of the impact of this new standard. Investments currently measured at cost will be measured at FVTPL, and the Company expects no significant changes as a result of this or elsewhere in the application of the new standard.
IFRS 7, Financial Instruments: Disclosure
IFRS 7, Financial Instruments: Disclosure , was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018. The Company intends to adopt the amendments to IFRS 7 on August 1, 2018 and does not expect the implementation will result in a significant effect to the financial statements.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying performance obligations, principal versus agent considerations, and licensing. The Company will adopt IFRS 15 effective August 1, 2018. The Company has completed its assessment of the impact of this new standard and has noted beyond the required additional disclosures, there exist no material changes to the financial statements or required retroactive adjustments to the retained earnings.
IFRS 16, Leases
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted.
The Company is assessing the impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial statements.
4. Reverse Acquisition
On March 15, 2017, BFK Capital Corp. completed its Qualifying Transaction, which was effected pursuant to an agreement between BFK Capital Corp. and Hydropothecary. Pursuant to the agreement, BFK Capital Corp. acquired all of the issued and outstanding shares of Hydropothecary. The former shareholders of Hydropothecary received an aggregate of 68,428,824 post-consolidation common shares of BFK Capital Corp. for all the outstanding Hydropothecary common shares.
The transaction was a reverse acquisition of BFK Capital Corp. and has been accounted for under IFRS 2, Share-Based Payment . Accordingly, the transaction has been accounted for at the fair value of the equity instruments granted by the shareholders of Hydropothecary to the shareholders and option holders of BFK Capital Corp. The difference between the fair value of the consideration (including the outstanding options) and the fair value of BFK Capital Corp.s net assets has been recognized as a listing expense in the consolidated statements of comprehensive loss for the fiscal year ended July 31, 2017. The options were valued using the Black-Scholes-Merton option pricing model with the following variables: share price of $0.75; expected life of two years; $Nil dividends; 100% volatility; and risk-free interest rate of 1.34%. Additional legal and consulting fees of $154,549 were incurred to complete the transaction.
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The results of operations of BFK Capital Corp. are included in the condensed interim consolidated financial statements of HEXO from the date of the reverse acquisition, March 15, 2017.
The following represents managements estimate of the fair value of the net assets acquired and total consideration transferred at March 15, 2017 as a result of the reverse acquisition.
Fair value of BFK shares prior to transaction (1,837,770 at $ 0.75 per share) |
$ | 1,378,332 | ||
Options |
70,253 | |||
Total consideration transferred |
1,448,585 | |||
Net assets acquired |
(652,110 | ) | ||
Excess attributed to cost of listing |
796,475 | |||
Professional, consulting and other fees |
154,549 | |||
RTO listing expense |
$ | 951,024 | ||
Net assets acquired include: |
||||
Cash |
$ | 647,214 | ||
Prepaid expense |
4,896 | |||
Total net assets acquired |
$ | 652,110 |
5. Short-Term Investments
Short-term investments consist of in various guaranteed investment certificates, term deposits, and fixed income securities that mature on dates between January 27, 2019 and June 21, 2019 with annual interest rates ranging from 0.45% to 2.30%.
Short-term investments are comprised of liquid investments with maturities of less than 12 months. Short-term investments are recognized initially at fair value and subsequently adjusted to fair value through profit or loss. The Company intends to hold the high interest savings funds for a period greater than three months. Short-term investments contain restricted funds of $3,117,000 due to a held letter of credit (see Note 19).
Interest rate | Maturity date | July 31, 2018 | July 31, 2017 | |||||||||
Guaranteed investment certificates |
0.45%0.5% | January 27, 2019 to June 21, 2019 | $ | 712,284 | $ | 2,871,550 | ||||||
Term deposits |
1.2%1.75% | To desired term | 49,483,945 | | ||||||||
High interest savings accounts |
1.4%4.25% | April 26, 2019 to desired term | 155,250,602 | | ||||||||
$ |
205,446,830 |
|
$ | 2,871,550 |
52 |
|
6. Inventory
July 31, 2018 |
July 31, 2017 | |||||||||||||||
Capitalized cost |
Biological
|
Total | Total | |||||||||||||
Dried cannabis |
$ | 2,115,464 | $ | 4,440,195 | $ | 6,555,659 | $ | 3,517,609 | ||||||||
Oils |
2,280,780 | 881,432 | 3,162,212 | 106,893 | ||||||||||||
Packaging and supplies |
696,753 | | 696,753 | 64,737 | ||||||||||||
$ |
5,092,997 |
|
$ | 5,321,627 | $ | 10,414,624 | $ | 3,689,239 |
The inventory expensed to cost of goods sold in the year ended July 31, 2018 was $964,956 (July 31, 2017 $952,968).
Included in inventory expensed to cost of goods sold is the fair value adjustment on the sale of inventory of $2,288,975 for the year ended July 31, 2018 (July 31, 2017 $576,872).
During the year ended July 31, 2018, the Company recorded an adjustment to the net realizable value of inventories of $1,491,070 (July 31, 2017 $Nil). This was due to the decrease in the estimated market selling price input of the inventory valuation which was caused by the onset of the adult-use market and is reflective of competitive market prices.
During the year ended July 31, 2017, the Company recorded a write-down of inventories in the amount of $613,074, of which $494,810 related to the Companys voluntary recall and $118,264 as a result of a flood at the Companys facility.
7. Biological Assets
The Companys biological assets consist of cannabis plants, from seeds all the way through to mature plants. The changes in the carrying value of biological assets are as follows:
July 31, 2018 | July 31, 2017 | |||||||
Carrying amount, beginning of period |
$ | 1,504,186 | $ | 120,667 | ||||
Production costs capitalized |
993,469 | 659,339 | ||||||
Net increase in fair value due to biological transformation less cost to sell |
7,339,566 | 5,003,822 | ||||||
Transferred to inventory upon harvest |
(7,505,262 | ) | (4,279,642 | ) | ||||
Carrying amount, end of period |
$ | 2,331,959 | $ | 1,504,186 |
As at July 31, 2018, the fair value of biological assets included $6,200 in seeds and $2,325,759 in cannabis plants ($6,200 in seeds and $1,497,986 in cannabis plants as at July 31, 2017). The significant estimates used in determining the fair value of cannabis plants are as follows:
|
yield by plant; |
|
stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested; |
|
percentage of costs incurred for each stage of plant growth; and |
|
fair value selling price per gram less cost to complete and cost to sell. |
All biological assets are classified as current assets on the balance sheet and are considered Level 3 fair value estimates (Note 2). As at July 31, 2018, it is expected that the Companys biological assets will yield approximately 4,373,775 grams of cannabis (July 31, 2017 700,169 grams of cannabis). The Companys estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the plants life relative to the stages within the harvest cycle.
53 |
|
Managements identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below:
Unobservable inputs |
Input values | Sensitivity analysis | ||
Average selling price |
||||
Obtained through actual retail prices on a per strain basis |
$4.66 per dried gram | An increase or decrease of 5% applied to the average selling price would result in a change of approximately $329,000 to the valuation. | ||
Yield per plant |
||||
Obtained through historical harvest cycle results on a per strain basis
|
50235 grams per plant | An increase or decrease of 5% applied to the average yield per plant would not result in a material change in valuation. | ||
Stage of growth |
||||
Obtained through the estimates of stage of completion within the harvest cycle |
Average of 32% completion | An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $320,000 in valuation. |
8. Property, Plant and Equipment
Cost |
|
Balance at
July 31, 2017 |
|
Additions | Adjustments |
|
Balance at
July 31, 2018 |
|
||||||||
Land |
$ | 358,405 | $ | 680,315 | $ | | $ | 1,038,720 | ||||||||
Buildings |
3,744,759 | 3,930,217 | 24,860,752 | 32,535,728 | ||||||||||||
Leasehold improvements |
| 205,456 | | 205,456 | ||||||||||||
Furniture and equipment |
900,395 | 1,232,613 | (472,320 | ) | 1,660,688 | |||||||||||
Cultivation and production equipment |
379,992 | 3,165,199 | 486,438 | 4,031,629 | ||||||||||||
Vehicles |
113,926 | 32,900 | 4,425 | 151,251 | ||||||||||||
Computers |
233,685 | 425,117 | | 658,802 | ||||||||||||
Construction in progress |
605,015 | 39,707,253 | (24,879,295 | ) | 15,432,973 | |||||||||||
$ |
6,336,177 |
|
$ | 49,379,070 | $ | | $ | 55,715,247 | ||||||||
Accumulated amortization |
|
Balance at
July 31, 2017 |
|
Amortization | Adjustments |
|
Balance at
July 31, 2018 |
|
||||||||
Land |
$ | | $ | | $ | | $ | | ||||||||
Buildings |
194,187 | 338,993 | | 533,180 | ||||||||||||
Leasehold improvements |
| 8,313 | | 8,313 | ||||||||||||
Furniture and equipment |
165,086 | 195,086 | 167,384 | 527,556 | ||||||||||||
Cultivation and production equipment |
23,068 | 213,075 | (167,384 | ) | 68,759 | |||||||||||
Vehicles |
25,589 | 30,203 | | 55,792 | ||||||||||||
Computers |
78,552 | 110,044 | | 188,596 | ||||||||||||
$ |
486,482 |
|
$ | 895,714 | $ | | $ | 1,382,196 | ||||||||
Net carrying value |
$
|
5,849,695
|
|
$ | 54,333,051 |
As at July 31, 2018, there was $3,920,069 (July 31, 2017 $262,502) of property, plant and equipment in accounts payable and accrued liabilities.
Buildings consist of $993,611 (July 31, 2017 $72,000) of capitalized borrowing costs. Adjustments reflect the activation of an assets useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification. Adjustments, as well, consist of re-classifications.
54 |
|
Cost |
|
Balance at
July 31, 2016
|
|
|
Additions
|
|
|
Disposals
|
|
|
Adjustments
|
|
|
Balance at
July 31, 2017
|
|
|||||
Land |
$ | 105,000 | $ | 253,405 | $ | | $ | | $ | 358,405 | ||||||||||
Buildings |
917,087 | 1,212,399 | (25,000 | ) | 1,640,273 | 3,744,759 | ||||||||||||||
Furniture and equipment |
320,586 | 649,189 | (69,380 | ) | | 900,395 | ||||||||||||||
Cultivation and production equipment |
| 373,249 | | 6,743 | 379,992 | |||||||||||||||
Vehicles |
37,537 | 76,389 | | | 113,926 | |||||||||||||||
Computers |
91,298 | 160,147 | (17,760 | ) | | 233,685 | ||||||||||||||
Construction in progress |
1,647,017 | 605,014 | | (1,647,016 | ) | 605,015 | ||||||||||||||
$ |
3,118,525 |
|
$ | 3,329,792 | $ | (112,140 | ) | $ | | $ | 6,336,177 | |||||||||
Accumulated amortization |
|
Balance at
July 31, 2016
|
|
|
Amortization
|
|
|
Disposals/
adjustments
|
|
|
Adjustments
|
|
|
Balance at
July 31, 2017
|
|
|||||
Land |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Buildings |
54,095 | 146,414 | (3,420 | ) | (2,902 | ) | 194,187 | |||||||||||||
Furniture and equipment |
67,224 | 133,334 | (38,292 | ) | 2,820 | 165,086 | ||||||||||||||
Cultivation and production equipment |
| 23,068 | | | 23,068 | |||||||||||||||
Vehicles |
15,535 | 10,054 | | | 25,589 | |||||||||||||||
Computers |
45,445 | 47,097 | (14,072 | ) | 82 | 78,552 | ||||||||||||||
$ |
182,299 |
|
$ | 359,967 | $ | (55,784 | ) | $ | | $ | 486,482 | |||||||||
Net carrying value |
$ | 2,936,226 | $ | 5,849,695 |
9. Intangible Assets and Other Longer-Term Assets
Cost |
|
Balance at
July 31, 2017
|
|
|
Additions
|
|
|
Disposals/
adjustments
|
|
|
Balance at
July 31, 2018
|
|
||||
ACMPR license |
$ | 2,544,696 | $ | | $ | | $ | 2,544,696 | ||||||||
Software |
651,247 | 1,148,892 | | 1,800,139 | ||||||||||||
Domain names |
| 585,283 | | 585,283 | ||||||||||||
Investments held at cost |
| 100,000 | | 100,000 | ||||||||||||
Capitalized transaction costs |
| 211,826 | | 211,826 | ||||||||||||
$ |
3,195,943 |
|
$ | 2,046,001 | $ | | $ | 5,241,944 | ||||||||
Accumulated amortization |
|
Balance at
July 31, 2017
|
|
|
Amortization
|
|
|
Disposals/
adjustments
|
|
|
Balance at
July 31, 2018
|
|
||||
ACMPR license |
$ | 276,909 | $ | 126,181 | $ | | $ | 403,090 | ||||||||
Software |
155,270 | 629,302 | | 784,572 | ||||||||||||
Domain name |
| 9,755 | | 9,755 | ||||||||||||
$ |
432,179 |
|
$ | 765,238 | $ | | $ | 1,197,417 | ||||||||
Net carrying value |
$ | 2,763,764 | $ | 4,044,527 |
Software includes $647,311 and $257,666 relating to an enterprise resource planning software and online sales platform, respectively, that are not yet available for use. Accordingly, no amortization has been taken during the fiscal year ended July 31, 2018. The Company expects that both assets will be fully available for use in the first quarter of fiscal 2019.
As at July 31, 2018, there was $265,757 (July 31, 2017 $Nil) of intangible assets in accounts payable and accrued liabilities.
55 |
|
Capitalized transaction costs are those incurred with respect to the definitive agreement to form a joint venture subsequent to the year ended July 31, 2018 (Note 24).
Cost |
|
Balance at
July 31, 2016
|
|
|
Additions
|
|
|
Disposals/
adjustments
|
|
|
Balance at
July 31, 2017
|
|
||||
ACMPR license |
$ | 2,544,696 | $ | | $ | | $ | 2,544,696 | ||||||||
Software |
289,564 | 361,683 | | 651,247 | ||||||||||||
Domain names |
6,596 | | (6,596 | ) | | |||||||||||
$ |
2,840,856 |
|
$ | 361,683 | $ | (6,596 | ) | $ | 3,195,943 | |||||||
Accumulated amortization |
|
Balance at
July 31, 2016
|
|
|
Amortization
|
|
|
Disposals/
adjustments
|
|
|
Balance at
July 31, 2017
|
|
||||
ACMPR license |
$ | 149,008 | 127,901 | $ | | $ | 276,909 | |||||||||
Software |
51,486 | 103,784 | | 155,270 | ||||||||||||
Domain name |
6,596 | | 6,596 | | ||||||||||||
$ |
207,090 |
|
$ | 231,685 | $ | 6,596 | $ | 432,179 | ||||||||
Net carrying value |
$ | 2,633,766 | $ | 2,763,764 |
During the fiscal year ended July 31, 2018, the Company conducted a review of its intangible assets, which resulted in changes in the expected usage of its software. Certain assets, which management previously intended to use for five years from the date of purchase, were replaced during the fiscal year as well as September 2018. As a result, the expected useful lives of these assets decreased. The effect of these changes on actual and expected depreciation expense, in current and future years, respectively, is as follows.
2018
|
2019 | 2020 | 2021 | 2022 | Later | |||||||||||||||||||
(Decrease) increase in amortization expense |
$ | 309,253 | $ (87,478 | ) | $ (119,136 | ) | $ (99,874 | ) | $ (2,765 | ) | $ | |
56 |
|
10. Convertible Debentures
2016 unsecured
|
2017 secured
|
2017 unsecured
|
2017 unsecured
|
Total
|
||||||||||||||||
Balance at July 31, 2016 |
$ | 306,205 | $ | | $ | | $ | | $ | 306,205 | ||||||||||
Gross proceeds |
| 4,403,893 | 25,100,000 | | 29,503,893 | |||||||||||||||
Issuance costs |
| (718,661 | ) | (1,703,602 | ) | | (12,422,263) | |||||||||||||
Warrants, net of issuance costs |
| (461,065 | ) | (1,084,433 | ) | | (1,545,478) | |||||||||||||
Conversion feature, net of issuance costs |
| (557,009 | ) | (1,742,779 | ) | | (2,299,788) | |||||||||||||
Accretion |
35,919 | 215,875 | 69,744 | | 321,538 | |||||||||||||||
Foreign exchange |
| (119,429 | ) | | | (119,429) | ||||||||||||||
Conversion of debenture |
(132,124 | ) | (2,763,624 | ) | | | (3,105,748) | |||||||||||||
Balance at July 31, 2017 |
$ | | | $ | 20,638,930 | $ | | $ | 20,638,930 | |||||||||||
Gross proceeds |
| | | 69,000,000 | 69,000,000 | |||||||||||||||
Issuance costs |
| | | (4,791,642 | ) | (4,791,642) | ||||||||||||||
Warrants, net of issuance costs |
| | | (3,284,648 | ) | (3,284,648) | ||||||||||||||
Conversion feature, net of issuance costs |
| | | (6,777,317 | ) | (6,777,317) | ||||||||||||||
Accretion |
| | 814,304 | 553,710 | 1,368,014 | |||||||||||||||
Conversion of debenture |
| | (21,453,234 | ) | (54,700,103 | ) | (76,153,337) | |||||||||||||
Balance at July 31, 2018 |
$ | | $ | | $ | | $ | | $ | |
2016 Unsecured Convertible Debentures
In March 2017, debenture holders converted their debentures to equity. The debentures had a book value of $342,124 ($345,000 face value) and contributed surplus (equity component) of $57,500. The conversion resulted in the issuance of 459,990 units at a price of $0.75 per unit. The 459,990 warrants issued were valued at $69,220 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.60; expected life of two years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.59%. Accordingly, share capital was increased at the date of conversion by the carrying value of the debentures of $342,124, which included $35,919 of accreted interest.
2017 Secured Convertible Debentures
In November 2016, the Company issued $4,403,893 (US$3,275,000) principal amount of secured debentures through a brokered private placement. The debentures bear interest at 8% per annum and mature on December 31, 2019. Interest for the first year of the term of the debentures will be accrued and paid in arrears, following which, interest will be accrued and paid quarterly in arrears. The debentures are convertible into common shares of the Company at US$0.70 at the option of the holder. The debentures will automatically convert to common shares after the Company becomes a reporting issuer on a Canadian or United States exchange and maintains a volume weighted average trading price equal to or exceeding the conversion price of the debentures for 15 days. The obligations of the Company under the debentures are secured by a first priority security interest against all of the assets of the Company. The debenture holders received 2,339,208 warrants, one for every two common shares that would be issued assuming full conversion of the debentures. The warrants have a three-year term, expiring November 13, 2019, and have an exercise price of US$0.76.
The Company identified embedded derivatives related to the above described debentures. These embedded derivatives included variable conversion feature liability and the warrant liability. The accounting treatment of the derivative financial instruments requires that the Company record the fair value of the derivatives as at the inception date of the debentures and to fair value as at each subsequent reporting date.
The Company allocated the proceeds first to the warrant liability and the conversion feature liability based on their fair value, and the residual proceeds represented the fair value of the debentures. The fair values of the embedded derivatives were determined using the Black-Scholes-Merton option pricing model.
57 |
|
The warrant liability was valued with a fair value of $550,955 (US$409,723) using the following assumptions:
● |
stock price of $0.75 (US$0.56); |
● |
exchange rate of 1.3447; |
● |
expected life of three years; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.25%. |
The conversion feature liability was initially valued with a fair value of $665,632 (US$495,004) using the following assumptions:
● |
stock price of $0.75 (US$0.56); |
● |
expected life of 15 months; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.25%. |
The residual proceeds of $3,187,306 (US$2,370,273) represent the fair value of the debenture.
In connection with the closing of the debentures, the Company paid a placement agent fee of $560,152 (US$416,563) from the gross proceeds of the financing and incurred an additional $62,996 of financing costs. The Company also issued broker warrants exercisable to acquire 62,381 common shares at an exercise price of US$0.70 per share.
The broker warrants were attributed a fair value of $95,513 (US$71,029) based on the Black-Scholes-Merton option pricing model with the following assumptions:
● |
stock price of $0.75 (US$0.56); |
● |
expected life of three years; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.25%. |
The total financing costs amounted to $718,661 and were allocated on a pro-rata basis as follows: debenture $520,128, conversion liability $108,623, and warrant liability $89,910. The issue costs allocated to the conversion feature liability and the warrant liability, totalling $198,533, were included in financing charges on the statement of comprehensive loss.
Pursuant to the debenture agreement, on April 11, 2017 (the date of conversion) the debentures automatically converted to 4,678,494 common shares at a conversion price of US$0.70 after the Company became a reporting issuer on the TSX-V and by maintaining a volume weighted average trading price equal to or exceeding the conversion price of the debentures for 15 days.
Up to and including the date of conversion, the accreted interest on the debentures was $145,628 (US$109,232), and $70,247 for the deferred financing fees, for the fiscal year ended July 31, 2017; both are recorded as interest expense on the statement of comprehensive loss. Additionally, as the debentures are a monetary liability, they were re-translated on the date of conversion, resulting in a value of $3,213,505 (US$2,261,041), and a foreign exchange gain of $119,429 was recorded in foreign exchange on the statement of comprehensive loss. Accordingly, the debentures at the date of conversion were valued at $2,763,624, which consisted of the debenture value of $3,213,505 less unamortized financing fees of $449,881.
58 |
|
The conversion liability was revalued on the date of conversion using the Black-Scholes-Merton option pricing model. The conversion liability was revalued to $8,807,287 (US$6,606,126):
● |
stock price of $2.79 converted to US$2.09; |
● |
expected life of 12.6 months; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.25%; |
● |
USD/CAD exchange rate of 1.3332. |
Accordingly, the loss on the revaluation of the conversion liability was $8,141,655, which is recorded in the revaluation of financial instruments account on the statement of comprehensive loss. Therefore, on April 11, 2017, the conversion of the debentures and the corresponding conversion liability resulted in an increase to share capital of $11,570,911 for the 4,678,494 common shares issued.
During the fiscal year ended July 31, 2017, 285,708 of the warrants were exercised, for total proceeds of $292,302 (US$217,138, based on an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option pricing model. Overall, the value of the warrants exercised was $222,988 (US$165,182) using the following variables: stock price of US$1.26$1.32; expected life of 12 months; $Nil dividends; 60% volatility; risk-free interest rate of 1.25%; and USD/CAD exchange rate of 1.34901.3503. The exercise of these warrants resulted in an increase to share capital of $515,290.
During the fiscal year ended July 31, 2018, 1,124,958 warrants were exercised, for total proceeds of $1,076,576 (US$844,828, based on an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option pricing model. Overall, the liability value of the warrants exercised was $3,317,278 (US$2,633,514) using the following variables:
● |
stock price of various; |
● |
expected life of 12 months; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 0.75%; |
● |
USD/CAD exchange rate of various. |
The exercise of these warrants resulted in an increase to share capital of $4,393,854.
The remaining warrant liability was revalued on July 31, 2018 using the Black-Scholes-Merton option pricing model. The warrant liability was revalued to $3,129,769 (US$2,404,370) with a stock price of US$3.34; expected life of 12 months; $Nil dividends; 60% volatility; risk-free interest rate of 0.75%; and USD/CAD exchange rate of 1.3017. The (loss)/gain on the revaluation of the warrant liability for the three and 12 months ended July 31, 2018 was $173,890 and $5,091,460, which is recorded in the revaluation of financial instruments account on the statement of comprehensive loss.
The following table summarizes warrant liability activity during the fiscal years ended July 31, 2018 and July 31, 2017.
July 31, 2018
|
July 31, 2017
|
|||||||
Opening balance |
$ | 1,355,587 | $ | | ||||
Granted |
| | ||||||
Expired |
| | ||||||
Exercised |
(3,317,278 | ) | (7,813,688 | ) | ||||
Revaluation due to foreign exchange |
5,091,460 | 9,169,275 | ||||||
Closing balance |
$ | 3,129,769 | $ | 1,355,587 |
59 |
|
2017 Unsecured Convertible Debentures 8%
On July 18, 2017, the Company issued $25,100,000 principal amount of unsecured debentures through a brokered private placement. The debentures bear interest at 8% per annum and mature on June 30, 2019. Interest will be accrued and paid semi-annually in arrears. The debentures are convertible into common shares of the Company at $1.60 at the option of the holder. Beginning after November 19, 2017, the Company may force the conversion of the debentures on 30 days prior written notice should the daily weighted average trading price of the common shares of the Company be greater than $2.25 for any 15 consecutive trading days. The debenture holders received 7,856,300 warrants: 313 for every $1,000 unit. The warrants have a two-year term, expiring July 18, 2019, and have an exercise price of $2.00. Beginning after November 19, 2017, the Company has the right to accelerate the expiry of the warrants should the closing trading price of the common shares of the Company be greater than $3.00 for any 15 consecutive trading days.
On initial recognition, the residual method was used to allocate the fair value of the warrants and conversion option. The fair value of the liability component was calculated as $22,066,925 using a discount rate of 16%. The residual proceeds of $3,033,075 were allocated between the warrants and conversion option on a pro-rata basis relative to their fair values. The fair values of the warrants and conversion option were determined using the Black-Scholes-Merton option pricing model.
The warrants were valued with a fair value of $1,929,098 using the following assumptions:
● |
stock price of $1.26; |
● |
expected life of two years; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.27%. |
The conversion option was valued with a fair value of $3,100,227 using the following assumptions:
● |
stock price of $1.26; |
● |
expected life of one year; |
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.27%. |
Based on the fair value of the warrants and conversion option, the residual proceeds of $3,033,075 were allocated as $1,163,396 to the warrants and $1,869,679 to the conversion option.
In connection with the closing of the debentures, the Company paid a placement fee of $1,292,010 from the gross proceeds of the financing and incurred an additional $218,990 of financing costs. The Company also issued broker warrants exercisable to acquire 784,375 common shares at an exercise price of $2.00 per share.
The broker warrants were attributed a fair value of $192,602 based on the Black-Scholes-Merton option pricing model with the following assumptions:
● stock price of $1.26;
● expected life of two years;
● |
$Nil dividends; |
● |
60% volatility; |
● |
risk-free interest rate of 1.27%. |
The total financing costs amounted to $1,703,602 and were allocated on pro-rata basis as follows: debt $1,497,739, conversion option $126,900, and the warrants $78,963.
60 |
|
Pursuant to the agreement, on November 22, 2017 the Company announced that it had elected to exercise its right to convert all of the outstanding principal amount of the debentures and unpaid accrued interest thereon into common shares. The Company became entitled to force the conversion of the 8.0% Debentures on November 19, 2017 on the basis that the volume weighted average price (VWAP) of the common shares on the TSXV for 15 consecutive trading days was equal to or exceeded $2.25. For the 15 consecutive trading days preceding November 19, 2017, the VWAP of the common shares was $2.56. The Company provided the holders of the 8.0% Debentures with the required 30 days advance written notice of the conversion, and the effective date for the conversion was December 27, 2017.
Pursuant to the conversion of the 8.0% Debentures, holders of the 8.0% Debentures received 625 common shares for each $1,000 principal amount of 8.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 8.0% Debentures for the period from issuance on July 18, 2017 to, but excluding, the conversion date was $36.00, and 8.0% Debenture holders received an additional 22.5 common shares for each $1,000 principal amount of 8.0% Debentures held on account of accrued and unpaid interest, for a total of 647.5 common shares for each $1,000 principal amount of 8.0% Debentures held at the conversion date. Accordingly, at the date of conversion, the carrying value of the debentures of $21,453,234, interest payable paid through shares of $266,219 and the conversion feature of $1,742,779 resulted in the cumulative increase to share capital of $23,462,232.
Interest expensed to the statement of loss and comprehensive loss was $417,718 and interest capitalized to property, plant and equipment was $921,611 for the year ended July 31, 2018 (2017 $70,255 and $72,000, respectively). Accretion for the fiscal year ended July 31, 2018 was $814,304 (2017 $69,744). During the year, the Company paid $266,219 of interest owing through shares, and $331,317 of interest owing in cash (2017 $Nil). The accrued interest payable as at July 31, 2018 was $Nil (2017 $72,511).
2018 UNSECURED CONVERTIBLE DEBENTURES 7%
On November 24, 2017, the Company issued $69,000,000 principal amount of unsecured debentures through a brokered private placement. The debentures bear interest at 7% per annum and mature on November 24, 2020. Interest will be accrued and paid semi-annually in arrears. The debentures were convertible into common shares of the Company at $2.20 at the option of the holder. The Company may force the conversion of the debentures on 30 days prior written notice should the daily weighted average trading price of the common shares of the Company be greater than $3.15 for any 10 consecutive trading days. The debenture holders received 15,663,000 warrants, 227 for every $1,000 unit. The warrants have a two-year term, expiring November 24, 2019, and have an exercise price of $3.00. The Company has the right to accelerate the expiry of the warrants should the closing trading price of the common shares of the Company be greater than $4.50 for any 10 consecutive trading days.
On initial recognition, the residual method was used to allocate the fair value of the warrants and conversion option. The fair value of the liability component was calculated as $58,187,146 using a discount rate of 14%. The residual proceeds of $10,812,854 were allocated between the warrants and conversion option on a pro-rata basis relative to their fair values. The fair values of the warrants and conversion option were determined using the Black-Scholes-Merton option pricing model.
The warrants were valued with a fair value of $8,647,797 using the following assumptions:
● |
stock price of $2.62; |
● |
expected life of one year; |
● |
$Nil dividends; |
● |
65% volatility; |
● |
risk-free interest rate of 1.25%. |
The conversion option was valued with a fair value of $17,843,269 using the following assumptions:
● |
stock price of $2.62; |
● |
expected life of three months; |
● |
$Nil dividends; |
● |
65% volatility; |
● |
risk-free interest rate of 1.25%. |
Based on the fair value of the warrants and conversion option, the residual proceeds of $10,812,854 were allocated as $3,529,770 to the warrants and $7,283,084 to the conversion option, less allocation of issuance costs.
61 |
|
In connection with the closing of the debentures, the Company paid a placement fee of $3,450,000 from the gross proceeds of the financing and incurred an additional $475,824 of issuance costs. The Company also issued broker warrants exercisable to acquire 1,568,181 common shares at an exercise price of $3.00 per share.
The broker warrants were attributed a fair value of $865,818 based on the Black-Scholes-Merton option pricing model with the following assumptions:
● |
stock price of $2.62; |
● |
expected life of one year; |
● |
$Nil dividends; |
● |
65% volatility; |
● |
risk-free interest rate of 1.25%. |
The total issuance costs amounted to $4,791,642 and were allocated on pro-rata basis as follows: debt $4,040,753, conversion option $505,767, and the warrants $245,122.
On December 15, 2017, the Company announced that it had elected to exercise its right to convert all of the outstanding principal amount of the Companys 7.0% Debentures and unpaid accrued interest thereon into common shares. The Company became entitled to force the conversion of the 7.0% Debentures on December 13, 2017 on the basis that the VWAP of the common shares on the TSXV for 10 consecutive trading days was equal to or exceeded $3.15. For the 10 consecutive trading days preceding December 13, 2017, the VWAP of the common shares was $3.32. The Company provided the holders of the 7.0% Debentures with the required 30 days advance written notice of the conversion, and the effective date for the conversion was January 15, 2018.
Pursuant to the conversion of the 7.0% Debentures, holders of the 7.0% Debentures received 454.54 common shares for each $1,000 principal amount of 7.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 7.0% Debentures for the period from December 31, 2017 (the interest payment scheduled for December 31, 2017 was paid in cash) up to, but excluding, the conversion date, was $2.92, and 7.0% Debenture holders received an additional 1.33 common shares for each $1,000 principal amount of 7.0% Debentures held on account of accrued and unpaid interest, for a total of 455.87 common shares for each $1,000 principal amount of 7.0% Debentures held. Accordingly, at the date of conversion, the carrying value of the debentures of $54,700,103, interest payable paid through shares of $45,824 and the conversion feature of $6,809,418 resulted in the cumulative increase to share capital of $61,555,345.
Interest expensed to the statement of loss and comprehensive loss was $1,111,690 (2017 $Nil). Accretion for the fiscal year ended July 31, 2018 was $553,710 (2017 $Nil). During the year, the Company paid $45,824 of interest owing through shares, and $512,156 of interest owing in cash (2017 $Nil). The accrued interest payable as at July 31, 2018 was $Nil (2017 $Nil).
The unsecured convertible debentures balance net of interest payable was $Nil and $20,638,930 for the fiscal years ended July 31, 2018 and July 31, 2017, respectively.
11. Share Capital
(a) Authorized
An unlimited number of common shares
(b) Issued and Outstanding
During the first quarter of fiscal 2017, the Company issued 338,274 units in a private placement at $0.75 per unit, generating gross proceeds of $253,706. A unit provides the holder with one common share and one common share purchase warrant. The warrant entitles the holder the option to buy a share at the price of $0.83 for three years from date of issuance. The value of the warrants was estimated using the Black-Scholes-Merton option pricing model with the following variables: stock price of $0.57; expected life of three years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.60%. The value of the warrants was estimated to be $61,453. As a result, the residual value of the common shares was calculated to be $192,253.
62 |
|
Share issue costs relating to the equity financing in the first quarter of fiscal 2017 amounted to $6,308. $617 of the costs were related to 2,664 warrants issued that have an $0.83 exercise price and expire in five years. These warrants were issued to a broker in relation to the sale of 338,274 units. The warrants were valued using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.52; expected life of five years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.60%. $97 of the costs were related to 798 warrants issued that have a $0.75 exercise price and expire in one year. These warrants were issued to a financing consultant in relation to a finders fee for the sale of 13,332 units. The warrants were valued using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.63; expected life of one year; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.69%. In both cases, the warrants issued provide the holders with the option to purchase one common share.
During the second quarter of fiscal 2017, the Company issued 4,285,716 common shares at $0.58 per common share for total proceeds of $2,500,001 from a group of private investors (Investors). As part of the private placement, the Investors have the right to nominate up to two directors supported by an agreement between certain shareholders. The Investors have a call option to purchase another 4,285,716 common shares at a price of $0.58 per share prior to May 31, 2017. The Company also has a put option to purchase another 4,285,716 common shares at the subscription price of $0.58 prior to June 30, 2017, so long as the Company attains revenues of $3,500,000 between January 1, 2017 and May 31, 2017.
In connection with the closing of this placement, the Company incurred share issuance costs of $147,014 and issued 342,852 broker warrants with an exercise price of $0.75 and a five-year term. The warrants were valued using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of five years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 0.75%. The value of the broker warrants was estimated to be $152,890. The broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the second quarter of fiscal year 2017, the Company completed a concurrent financing through an agent, pursuant to which it issued 17,517,042 common shares at a price of $0.75 per share for gross proceeds of $13,137,782 (Concurrent Financing). In connection with the closing of the Concurrent Financing, the Company paid the agent a cash commission of $803,487, equal to 7% of the gross proceeds from the Concurrent Financing, subject to a reduced commission of 3.5% for certain subscribers on a Presidents List of the Company. The Company also issued to the agent warrants exercisable to acquire 1,071,318 common shares, being that number of common shares as was equal to 7% of the number of common shares sold under the Concurrent Financing, subject to a reduced percentage of 3.5% for certain subscribers on the Presidents List, at an exercise price of $0.75 per share and a two-year term. The warrants were valued at $323,653 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. Additional transaction costs of $82,329 were included in share issuance costs. The Company also issued 44,940 broker warrants with an exercise price of $0.75 and a two-year term. The warrants were valued at $13,576 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%.
These warrants were recorded as a share issuance cost in the statement of changes in shareholders equity. The agent warrants and broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the second quarter of fiscal 2017, the Company also issued the following warrants:
● |
203,202 warrants in exchange for services rendered by two service providers: |
● |
The Company issued 120,000 warrants with an exercise price of US$ 0.70 and expiring in May 2018. The warrants were valued at $24,411 (US$ 18,760) using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of 18 months; $Nil dividends; 73.2% volatility; risk-free interest rate of 1.25%; and USD/CAD exchange rate of 1.3447. 30,000 warrants were exercised on April 28, 2017. These warrants were recorded as a share issuance cost in the statements of changes in shareholders equity. |
● |
The Company issued another 83,202 warrants with an exercise price of $0.75 and expiring in three years. The warrants were valued at $30,184 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.75; expected life of three years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. These warrants were recorded as a share issuance cost in the statements of changes in shareholders equity. |
During the third quarter of fiscal 2017, the Company issued 2,492,958 shares for $0.75 per share for gross proceeds of $1,869,719. These shares were issued pursuant to an agents option under the Concurrent Financing completed in December 2016, in which 17,400,000 shares were offered, which allowed the agent to sell an additional number of shares equal to 15% of the number of offered shares.
63 |
|
The Company paid share issuance costs of $146,792 and issued 174,504 warrants to the broker. The warrants have an exercise price of $0.75 and expire in two years. The warrants were valued at $167,222 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $1.55; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. These warrants were recorded as a share issuance cost in the statements of shareholders equity. The broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the third quarter of fiscal 2017, the Company issued 4,285,716 common shares at a price of $0.58 per share, for total proceeds of $2,500,001, pursuant to a call option issued to a group of private investors on November 4, 2016.
As described in Note 10, Convertible Debentures, the Company issued unsecured debentures in the third and fourth quarters of fiscal 2016. On March 16, 2017, $345,000 of the debentures held by six individuals were converted into 459,990 common shares at a price of $0.75 per unit. In relation to the conversion of this debt, 459,990 warrants were issued. The warrants were valued at $69,220 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $0.60; expected life of two years; $Nil dividends; 64.5% volatility; and risk-free interest rate of 0.59%.
As described in Note 10, Convertible Debentures, the Company issued secured debentures in the second quarter of fiscal 2017. On April 11, 2017, the debentures automatically converted to 4,678,494 common shares at a conversion price of US$ 0.70 after the Company became a reporting issuer on the TSX-V and maintained a volume weighted average trading price equal to or exceeding the conversion price of the debentures for 15 days.
As described in Note 10, Convertible Debentures, during the fourth quarter of 2017, 7,856,300 warrants were issued in relation to the issuance of convertible debt. The allocation of the proceeds to these warrants was $1,163,396. In relation to this financing, the Company issued 784,375 broker agent warrants that have an exercise price of $2.00 and expire in two years. The warrants were valued at $192,602 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $1.52; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.27%. The value of the broker warrants, and other financing costs, were allocated on a pro-rata basis based on the allocated fair value of each component of this financing, as detailed in Note 10, Convertible Debentures. The broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
In relation to the third quarter of fiscal 2017 issuance of 4,285,716 common shares, during the fourth quarter of fiscal 2017 the Company issued 342,852 broker warrants with an exercise price of $0.75 and a five-year term from the date of listing. The warrants were valued at $238,753 using the Black-Scholes-Merton option pricing model and the following variables: stock price of $1.25; expected life of two years; $Nil dividends; 73.2% volatility; and risk-free interest rate of 1.25%. The broker warrants were measured at the fair value of the equity instruments granted, as the fair value of the related services cannot be measured reliably.
During the first quarter of fiscal 2018, 481,896 warrants with exercise prices of $0.75 and US$0.70 were exercised for proceeds of $405,778, resulting in the issuance of 481,896 common shares.
During the second quarter of fiscal 2018, the Company issued 15,687,500 common shares from the conversion of the 8% unsecured convertible debentures and 166,387 common shares in lieu of accrued interest, as described in Note 10, Convertible Debentures.
On January 2, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date of the common share purchase warrants issued under the 8% convertible debentures. The Company became entitled to accelerate the expiry date of the warrants on December 27, 2017 on the basis that the closing trading price of the common shares on the TSXV exceeded $3.00 for 15 consecutive trading days. The expiry date for the warrants was accelerated from July 18, 2019 to February 1, 2018. During the second quarter of fiscal 2018, the Company issued 7,799,960 common shares related to the exercise of warrants associated with the 8% convertible debentures.
During the second quarter of fiscal 2018, the Company issued 31,363,252 common shares from the conversion of the 7% unsecured convertible debentures and 20,829 common shares in lieu of accrued interest, as described in Note 10, Convertible Debentures. The Company issued 2,922,393 common shares related to the exercise of warrants from the 7% unsecured convertible debentures.
During the second quarter of fiscal 2018, in addition to common shares issued related to the exercise of warrants associated with the convertible debentures, 5,025,627 warrants with exercise prices of $0.75 and US$0.70 were exercised, resulting in the issuance of 5,021,940 common shares. Total proceeds from the exercise of warrants were $30,936,897.
64 |
|
On January 30, 2018, the Company closed a bought deal public offering of 37,375,000 units at a price of $4.00 per unit for gross proceeds of $149,500,000. Each unit consisted of one common share and one-half of one share purchase warrant of the Company. Each warrant is exercisable into one common share at a price of $5.60 per share for a period of two years. The fair value of the warrants at the date of grant was estimated at $0.56 per warrant based on the following weighted average assumptions:
● |
stock price of $3.93; |
● |
expected life of one year; |
● |
$Nil dividends; |
● |
65% volatility; |
● |
risk-free interest rate of 1.25%. |
Total cash share issue costs amounted to $6,379,728, which consisted of underwriters commissions of $5,980,000, underwriters expenses of $10,000, underwriters legal fees of $96,522 and incurred $311,206 of additional cash issuance costs. In addition, the Company issued an aggregate of 1,495,000 compensation warrants to the underwriters at a fair value of $1,485,797. The compensation warrants have an exercise price of $4.00 and expire January 30, 2020. The fair value of the compensation warrants at the date of grant was estimated at $0.99 per warrant based on the following weighted average assumptions:
● |
stock price of $3.93; |
● |
expected life of one year; |
● |
$Nil dividends; |
● |
65% volatility; |
● |
risk-free interest rate of 1.25%. |
The Company allocated $7,342,461 of the issuance costs to the common shares and $523,064 to the warrants.
During the third quarter of fiscal 2018, 2,474,813 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $4,422,747, resulting in the issuance of 2,474,813 common shares.
On May 24, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date governing the common share purchase warrants issued November 24, 2017. Pursuant to the terms of the warrant indenture, the Company elected its right to accelerate the expiry date of the remaining 5,261,043 warrants from November 24, 2019 to June 25, 2018. As at the date of expiry, all warrants were exercised. The accelerated expiry date also applied to the remaining 1,568,181 compensation warrants originally issued to certain investment banks on November 24, 2017. As at the date of expiry, 1,505,453 compensation warrants were exercised and 62,728 warrants expired.
During the fourth quarter of fiscal 2018, 13,214,883 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $38,600,682, resulting in the issuance of 13,214,883 common shares.
As at July 31, 2018, there were 193,629,116 common shares outstanding and 26,425,504 warrants outstanding.
65 |
|
The following is a summary of warrants on July 31, 2018.
Number
|
Book value
|
|||||||
Warrants issued with $0.75 units
|
||||||||
Exercise price of $0.83 expiring April 28, 2019
|
|
13,332
|
|
$
|
2,389
|
|
||
Exercise price of $0.83 expiring May 19, 2019
|
|
19,332
|
|
|
3,457
|
|
||
Exercise price of $0.83 expiring June 2, 2019
|
|
333,330
|
|
|
59,598
|
|
||
Exercise price of $0.83 expiring June 6, 2019
|
|
144,000
|
|
|
25,747
|
|
||
Exercise price of $0.83 expiring June 8, 2019
|
|
1,333,332
|
|
|
261,998
|
|
||
Exercise price of $0.83 expiring June 23, 2019
|
|
66,672
|
|
|
11,921
|
|
||
Exercise price of $0.83 expiring June 28, 2019
|
|
266,670
|
|
|
47,680
|
|
||
Exercise price of $0.83 expiring July 21, 2019
|
|
100,008
|
|
|
17,881
|
|
||
Exercise price of $0.83 expiring July 25, 2019
|
|
66,672
|
|
|
11,921
|
|
||
Exercise price of $0.83 expiring July 28, 2019
|
|
420,000
|
|
|
75,095
|
|
||
Exercise price of $0.83 expiring August 12, 2019
|
|
33,336
|
|
|
6,056
|
|
||
Exercise price of $0.83 expiring August 18, 2019
|
|
266,676
|
|
|
47,681
|
|
||
Exercise price of $0.83 expiring August 31, 2019
|
|
39,600
|
|
|
7,194
|
|
||
Exercise price of $0.83 expiring September 26, 2019
|
|
72,000
|
|
|
13,080
|
|
||
Exercise price of $0.83 expiring October 17, 2019
|
|
60,000
|
|
|
10,900
|
|
||
2015 secured convertible debenture warrants
|
||||||||
Exercise price of $0.75 expiring July 15, 2019
|
|
1,318,332
|
|
|
253,155
|
|
||
2016 unsecured convertible debenture warrants
|
||||||||
Exercise price of $0.83 expiring July 18, 2019
|
|
100,002
|
|
|
15,047
|
|
||
2018 Equity financing
|
||||||||
Exercise price of $5.60 expiring January 30, 2020
|
|
18,570,500
|
|
|
9,981,561
|
|
||
Broker/consultant warrants
|
||||||||
Exercise price of $0.75 expiring March 15, 2019
|
|
302,861
|
|
|
158,308
|
|
||
Exercise price of $0.75 expiring November 9, 2019
|
|
41,598
|
|
|
15,091
|
|
||
Exercise price of US$0.70 expiring November 14, 2019
|
|
45,143
|
|
|
11,147
|
|
||
Exercise price of $0.75 expiring November 3, 2021
|
|
244,284
|
|
|
108,935
|
|
||
Exercise price of $0.75 expiring March 14, 2022
|
|
144,282
|
|
|
100,474
|
|
||
Exercise price of $4.00 expiring January 30, 2020 |
1,495,000 | 1,389,023 | ||||||
25,496,962 | $ | 12,635,339 | ||||||
2016 secured convertible debenture warrants
|
||||||||
Exercise price of US$0.76 expiring November 14, 2019 |
928,542 | 3,129,769 | ||||||
|
26,425,504 |
|
$ |
15,765,108 |
|
66 |
|
The following table summarizes warrant activity during the fiscal years ended July 31, 2018 and July 31, 2017.
July 31, 2018
|
July 31, 2017
|
|||||||||||||||
Number of
|
Weighted
|
Number of
|
Weighted
|
|||||||||||||
Outstanding, beginning of period
|
|
20,994,123
|
|
|
1.31
|
|
|
7,504,062
|
|
|
0.86
|
|
||||
Expired during period
|
|
(62,728
|
)
|
|
3.00
|
|
|
|
|
|
|
|
||||
Issued during period
|
|
37,413,681
|
|
|
4.34
|
|
|
14,335,563
|
|
|
1.95
|
|
||||
Exercised during period |
(31,919,572 | ) | 2.33 | (845,502 | ) | 1.16 | ||||||||||
Outstanding, end of period |
26,425,504 | 4.35 | 20,994,123 | 1.31 |
Stock Option Plan
The Company has a share option plan (the Plan) that is administered by the Board of Directors, who establish exercise prices and expiry dates, which are up to 10 years from issuance as determined by the Board at the time of issuance. Unless otherwise determined by the Board, options issued under the Plan vest over a three-year period except for options granted to consultants or persons employed in investor relations activities (as defined in the policies of the TSX), which vest in stages over 12 months with no more than one-quarter of the options vesting in any three-month period. The maximum number of common shares reserved for issuance for options that may be granted under the Plan is 19,362,911 common shares as at July 31, 2018.
The following table summarizes the stock option grants during the fiscal year ended July 31, 2018.
Vesting terms A One-third of the options will vest on the one-year anniversary of the date of grant, and the balance will vest quarterly over two years thereafter.
Vesting terms B Half of the options will vest immediately, and the balance will vest annually over three years thereafter.
Vesting terms C Based upon organizational milestones.
67 |
|
The following table summarizes stock option activity during the fiscal years ended July 31, 2018 and July 31, 2017.
July 31, 2018
|
July 31, 2017
|
|||||||||||||||
Options issued
|
Weighted
|
Options issued
|
Weighted
|
|||||||||||||
Opening balance |
5,748,169 | $ | 0.68 | 3,481,896 | $ | 0.49 | ||||||||||
Granted |
10,174,000 | 4.16 | 2,428,777 | 0.92 | ||||||||||||
Expired |
| | | | ||||||||||||
Forfeited |
(626,830 | ) | 3.44 | | | |||||||||||
Exercised |
(907,273 | ) | 0.65 | (162,504 | ) | 0.19 | ||||||||||
|
||||||||||||||||
Closing balance |
14,388,066 | $ | 1.05 | 5,748,169 | $ | 0.68 |
The weighted average share price at the time of exercise during the period was $4.31 (July 31, 2017 $0.76).
The following table summarizes information concerning stock options outstanding as at July 31, 2018.
Exercise price
|
Number outstanding
|
Weighted average remaining
|
Number exercisable
|
Weighted average remaining
|
||||||
$ 0.16 | 570,000 | 0.01 | 570,000 | 0.11 | ||||||
0.58 | 1,241,900 | 0.05 | 1,241,900 | 1.81 | ||||||
0.75 | 2,248,996 | 0.12 | 1,466,496 | 2.64 | ||||||
1.27 | 606,670 | 0.05 | 202,670 | 0.42 | ||||||
1.37 | 651,000 | 0.06 | | | ||||||
2.48 | 128,000 | 0.02 | | | ||||||
2.69 | 1,695,000 | 0.32 | 885,000 | 1.89 | ||||||
3.89 | 325,000 | 0.09 | | | ||||||
4.24 | 258,000 | 0.08 | | | ||||||
4.27 | 885,000 | 0.26 | | | ||||||
4.89 | 5,667,500 | 1.93 | | | ||||||
$ 5.14 | 111,000 | 0.04 | | | ||||||
14,388,066 | 4,366,066 |
Stock-based Compensation
For the fiscal year ended July 31, 2018, the Company recorded $4,996,513 respectively (July 31, 2017 $658,620) in stock-based compensation expense related to employee options, which are measured at fair value at the date of grant and are expensed over the vesting period. In determining the amount of stock-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of options granted by applying the following assumptions:
July 31, 2018
|
July 31, 2017
|
|||||||
Exercise price |
$1.37$5.14 | $0.16$1.55 | ||||||
Risk-free interest rate |
2.06%2.37% | 1.27%1.73% | ||||||
Expected life of options (years) |
7 | 37 | ||||||
Expected annualized volatility |
65% | 65%73% |
Volatility was estimated using the average historical volatility of the comparable companies in the industry that have trading history and volatility history.
68 |
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12. Net Loss per Share
The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:
July 31, 2018
|
July 31, 2017
|
|||||||
2017 unsecured convertible debentures |
| 15,687,500 | ||||||
Options |
14,388,066 | 5,748,169 | ||||||
Warrants issued with $0.75 units |
3,234,960 | 4,911,186 | ||||||
2015 secured convertible debenture warrants |
1,318,332 | 2,210,358 | ||||||
2015 secured convertible debenture amendment warrants |
| 237,612 | ||||||
2015 unsecured convertible debenture amendment warrants |
| 38,100 | ||||||
2016 unsecured convertible debenture warrants |
100,002 | 426,660 | ||||||
2016 secured convertible debenture warrants |
928,542 | 2,053,500 | ||||||
2017 8% unsecured convertible debenture warrants |
| 7,856,300 | ||||||
2017 7% unsecured convertible debenture warrants |
| | ||||||
2018 equity warrants |
18,570,500 | | ||||||
Convertible debenture broker/finder warrants |
2,273,168 | 3,260,407 | ||||||
|
40,813,570 | 42,429,792 |
13. Convertible Note Receivable
On July 26, 2018, the Company lent $10,000,000 to an unrelated entity, Fire and Flower (FF), in the form of an unsecured and subordinated convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures July 31, 2019 and includes the right to convert the debenture into common shares of FF at the lesser of $1.15 or 90% of the deemed price per common share upon maturity or a triggering event as defined within the agreement.
The option to settle the loan in common shares represents a call option to the Company and is included in the fair value of the loan. There existed an insignificant difference in fair value between the initial recognition date of July 26, 2018 and the reporting date of July 31, 2018, and accordingly the transaction price approximated the fair value of the note.
As at July 31, 2018, the Companys note receivable from FF did not earn any interest.
14. Segmented Information
The Company operates in one operating segment.
All property, plant and equipment and intangible assets are located in Canada.
15. Financial Instruments
Interest Risk
The Companys exposure to interest rate risk only relates to any investments of surplus cash. The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at July 31, 2018, the Company had short-term investments of $205,446,830.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Companys trade receivables and convertible note receivable. As at July 31, 2018, the Company was exposed to credit-related losses in the event of non-performance by the counterparties.
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The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the sales are transacted with clients that are covered under various insurance programs, the Company has limited credit risk.
Cash and cash equivalents are held by one of the largest co-operative financial groups in Canada. The short-term investments are held in various guaranteed investment certificates, term deposits, and fixed income securities. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The trade receivable balance is held with one of the largest medical insurance companies in Canada. Credit risk from the convertible note receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, short-term investments, trade receivables and convertible note receivable represents the maximum exposure to credit risk, and as at July 31, 2018, this amounted to $255,432,114.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at July 31, 2018, the Company had $244,788,518 of cash and cash equivalents and short-term investments.
The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $8,994,789 due in the next 12 months.
The carrying values of cash, trade receivables, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.
16. Operating Expenses by Nature
July 31, 2018
|
July 31, 2017
|
|||||||
Salaries and benefits |
$ | 6,992,321 | $ | 3,092,745 | ||||
Stock-based compensation |
4,996,513 | 658,620 | ||||||
Consulting |
3,659,069 | 285,081 | ||||||
Marketing and promotion |
2,447,069 | 1,234,807 | ||||||
Professional fees |
1,761,437 | 547,300 | ||||||
General and administrative |
1,441,830 | 786,021 | ||||||
Facilities |
919,799 | 499,642 | ||||||
Amortization of property, plant and equipment |
895,714 | 359,468 | ||||||
Amortization of intangible assets |
765,238 | 231,685 | ||||||
Travel |
487,996 | 236,300 | ||||||
Total |
$ | 24,366,986 | $ | 7,931,669 |
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17. Related Party Disclosure
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Companys operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 8.77% of the outstanding shares of the Company as at July 31, 2018 (July 31, 2017 25.11%).
Compensation provided to key management during the period was as follows:
July 31, 2018
|
July 31, 2017
|
|||||||
Salary and/or consulting fees |
$ | 2,244,006 | $ | 1,269,825 | ||||
Stock-based compensation |
3,835,733 | 512,056 | ||||||
$ | 6,079,739 | $ | 1,781,881 |
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.
Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
On July 11, 2018, the Company granted certain directors and executives of the Company a total of 4,325,000 stock options with an exercise price of $4.89.
On April 16, 2018, the Company granted certain directors and executives of the Company a total of 845,000 stock options with an exercise price of $4.27.
On March 12, 2018, the Company granted certain directors and executives of the Company a total of 325,000 stock options with an exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives of the Company a total of 1,750,000 stock options with an exercise price of $2.69, of which half of the options will vest immediately, and the balance will vest annually over three years thereafter. On November 6, 2017, the Company granted certain directors of the Company a total of 125,000 stock options with an exercise price of $2.48.
On September 8, 2017, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $1.37.
On July 24, 2017, the Company granted certain directors and executives of the Company a total of 125,000 stock options with an exercise price of $1.27. On November 15, 2016, the Company granted certain directors and executives of the Company a total of 1,227,000 stock options with an exercise price of $0.75.
The Company leased a building to a related party for $700 per month as part of a usufruct agreement. The related party used this property as a personal residence. On December 2, 2016, the related party and the Company reached an agreement to terminate the usufruct. In exchange for abandoning the usufruct, the Company paid the related party $46,000. Gaining access to this building provides the Company with additional office space and thereby reduces the need to rent or build additional offices.
18. Capital Management
The Companys objective is to maintain sufficient capital so as to maintain investor, creditor and customer confidence and to sustain future development of the business and provide the ability to continue as a going concern. Management defines capital as the Companys shareholders equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements.
As at July 31, 2018, total managed capital was comprised of shareholders equity of $322,872,875 (July 31, 2017 $32,439,490). There were no changes in the Companys approach to capital management during the period.
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19. Commitments and Contingencies
The Company has certain contractual financial obligations related to service agreements, purchase agreements and construction contracts.
Some of these contracts have optional renewal terms that the Company may exercise at its option. The annual minimum payments payable under these obligations over the next five years are as follows:
Fiscal year |
2019
|
2020
|
2021
|
2022
|
2023
|
Total
|
||||||||||||||||||
Amount |
$ | 61,765,917 | $ | 890,659 | $ | 853,851 | $ | 800,569 | $ | Nil | $ | 64,310,996 |
Letter of Credit
On June 28, 2018, the Company executed a letter of credit with a Canadian credit union as required under an agreement with a public utility provider entitling the Company up to a maximum limit of $3,117,000, subject to certain operational requirements. The letter of credit has a one-year expiry from the date of issue. The credit facility is secured by a guaranteed investment certificate (GIC). As at July 31, 2018, the letter of credit has not been drawn upon and is in compliance with the specified requirements.
Surety Bond
On June 28, 2018, the Company entered into an indemnity agreement to obtain a commercial surety bond with a North American insurance provider entitling the Company up to a maximum of $2,000,000. The bond bears a premium at 0.1% annually. The Company obtained the surety bond as required under the Canada Revenue Agencys excise tax laws for the transporting of commercial goods throughout Canada.
Litigation and Contingent Recovery
The Company is currently taking legal action to recover an investment loss incurred during the three months ended July 31, 2018. There is no reasonable estimate for the amount of financial recovery, and no financial asset has been recognized as at the year ended July 31, 2018.
20. Loss on Investment
During the fiscal year ended July 31, 2018, the Company realized a loss on investment activities in the amount of $649,714. The Company is currently taking legal action to recover the loss.
21. Fair Value of Financial Instruments
The carrying values of the financial instruments as at July 31, 2018 are summarized in the following table:
Loans and
|
Financial assets
as FVTPL
|
Other financial
|
Financial
|
Total
|
||||||||||||||||
Assets |
$ | $ | $ | $ | $ | |||||||||||||||
Cash and cash equivalents |
| 39,341,688 | | | 39,341,688 | |||||||||||||||
Short-term investments |
| 205,446,830 | | | 205,446,830 | |||||||||||||||
Trade receivables |
643,596 | | | | 643,596 | |||||||||||||||
Convertible note receivable |
| 10,000,000 | | | 10,000,000 | |||||||||||||||
Liabilities |
$ | $ | $ | $ | $ | |||||||||||||||
Accounts payable and accrued liabilities |
| | 8,994,789 | | 8,994,789 | |||||||||||||||
Convertible debentures |
| | | | | |||||||||||||||
Warrant liability |
| | | 3,129,769 | 3,129,769 |
The carrying values of trade receivables and accounts payable and accrued liabilities approximate their fair values due to their relatively short periods to maturity.
72 |
|
22. Income Taxes
Income tax expense recognized in comprehensive loss consists of the following components:
July 31, 2018
|
July 31, 2017
|
|||||||
Current tax for the year |
$ | $ | ||||||
Adjustments of previous years |
| | ||||||
Total |
$ | $ | ||||||
Componets of deferred income tax expense (recovery) |
||||||||
July 31, 2018 | July 31, 2017 | |||||||
Origination and reversal of temporary differences |
$ ( 6,779,861 | ) | $130,384 | |||||
Difference between statutory tax rate and deferred tax rate |
(6,771 | ) | (471,075 | ) | ||||
Change in temporary differences for which no deferred tax assets are recorded |
6,786,632 | 340,691 | ||||||
Deferred income tax (recovery) |
$ | $ |
The Companys 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, 2018 | July 31, 2017 | |||||||
Expected tax rate |
26.9% | 26.9% | ||||||
Earnings before income taxes |
$ (23,349,799 | ) | $ (10,263,937 | ) | ||||
Expected tax benefit resulting from loss |
(6,281,096 | ) | (3,327,909 | ) | ||||
Adjustments for the following items: |
||||||||
Tax rate differences |
(6,771 | ) | | |||||
Changes in foreign tax rates |
| | ||||||
Foreign exchange |
| | ||||||
Permanent differences |
3,094,793 | 2,922,013 | ||||||
Change in temporary differences for which no tax assets are recorded |
2,400,826 | 340,691 | ||||||
True up and other |
792,248 | 65,205 | ||||||
$ | $ |
73 |
|
The following is a reconciliation of the deferred tax assets and liabilities recognized by the Company.
Opening
August 1, 2017 |
Recognized
in income |
Recognized in Equity/OCI |
Ending
July 31, 2018 |
|||||||||||||
Deductible temporary differences |
$ | 812,864 | $ | | $ | (812,864 | ) | $ | | |||||||
Taxable temporary differences |
| (117,094 | ) | | (117,094 | ) | ||||||||||
Biological assets |
| (457,986 | ) | | (457,986 | ) | ||||||||||
Inventory |
| (1,431,518 | ) | | (1,431,518 | ) | ||||||||||
Loss carryforward |
| 2,006,598 | | 2,006,598 | ||||||||||||
Share issue costs |
| | | | ||||||||||||
Intangible assets |
| | | | ||||||||||||
Revaluation of financial instruments Equity |
(812,864 | ) | | 812,864 | | |||||||||||
$ | | $ | | $ | | $ | | |||||||||
Opening
August 1, 2016 |
Recognized
in income |
Recognized in Equity/OCI |
Ending
July 31, 2017 |
|||||||||||||
Deferred tax assets |
$ | | $ | | $ | 812,864 | $ | 812,864 | ||||||||
Loss carryforward |
| | | | ||||||||||||
Share issue costs Equity |
| | | | ||||||||||||
Deferred tax liabilities |
| | | | ||||||||||||
Revaluation of financial instruments Equity |
| | (812,864 | ) | (812,864 | ) | ||||||||||
|
$ | | $ | | $ | | $ | |
Deferred income taxes reflect the impact of loss carryforwards and of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. At July 31, 2018, deductible temporary differences and unused tax losses for which no deferred tax assets have been recognized are attributable to the following:
July 31, 2018 | July 31, 2017 | |||||||
Losses carried forward |
$ | 20,671,803 | $ | 8,198,562 | ||||
Research and development expenditures |
265,821 | 74,000 | ||||||
Share issue costs |
13,351,528 | | ||||||
Accounting amortization in deficit (excess) of tax |
| 1,201,803 | ||||||
$ | 34,289,152 | $ | 9,474,365 |
The Company has approximate non-capital losses available to reduce future years federal and provincial taxable income, which expires as follows:
2034 | $ | 763,471 | ||
2035 | 2,143,509 | |||
2036 | 2,944,011 | |||
2037 | 3,182,286 | |||
2038 | 19,098,000 | |||
$ | 28,131,277 |
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23. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the current presentation, none of which were material.
24. Subsequent Events
Molson Coors Canada Joint Venture Truss
On August 1, 2018, the Company announced it had entered into a definitive agreement to form Truss, a joint venture with Molson Coors Canada (the Partner), the Canadian business unit of Molson Coors Brewing Company, to pursue opportunities in the non-alcoholic, cannabis-infused beverages market. Truss will be structured as a stand-alone start-up company with its own board of directors and an independent management team. The Partner will have a 57.5% controlling interest with the Company controlling the remaining balance. On October 4, 2018, the transaction was finalized. In connection with the transaction, HEXO has issued the Partner 11,500,000 common share warrants at an exercise price of $6.00 for a period of three years.
Amalgamation of Subsidiary
On August 1, 2018, the operating subsidiary amalgamated with its previously wholly owned subsidiary, 167151 Canada Inc., pursuant to a vertical amalgamation. The resulting entity retained the name HEXO Operations Inc.
Supply Agreement with Ontario Cannabis Store
On August 20, 2018, the Company announced that it had entered into a supply agreement with the Ontario Cannabis Store (OCS). Under the agreement, the Company will supply the province with product which will be offered in several formulations.
Shareholder Approval of Corporate Name Change
On August 28, 2018, following a special meeting of the shareholders, the proposed change of the Companys name to HEXO Corp. and implementation of the new omnibus plan was approved through a majority vote.
Acquisition of 2 Million Sq. Ft. Facility in Belleville, Ontario
On September 10, 2018, the Company announced the acquisition of a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture established with a related party, Olegna Holdings Inc. (entity under the control of a HEXO board member, Olegna). The Company acquired a 25% interest in the joint venture with the remaining balance belonging to Olegna. The joint venture purchased the facility in part by a $20,000,000 loan issued by HEXO repayable within 120 days, bearing an annual 4% interest rate, payable monthly. As part of the agreement, the Company will be the anchor tenant for a period of 20 years.
Warehouse and Distribution Centre
On September 19, 2018, the Company announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (Metro). Under the agreement, HEXO and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to house and supply the cannabis products of all licensed producers who hold supply contracts with the Société québécoise du cannabis (SQDC). The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within the province of Quebec for orders placed through the SQDC.
EXPANSION INTO GREECE
On September 26, 2018, we announced the partnership with the Greek company Qannabos (QNBS). Together we will create a joint venture supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing, processing and distribution of medical cannabis.
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Exhibit 4.3
Management Discussion & Analysis
For the three and 12 months ended July 31, 2018
(In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)
This management discussion and analysis (MD&A) of the financial condition and results of operations of HEXO Corp. (formerly The Hydropothecary Corporation) and our wholly owned subsidiaries (collectively, we or us or our or Company or HEXO Corp.) is for the three and 12 months ended July 31, 2018 (Fiscal 2018). It is supplemental to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes for the fiscal year ended July 31, 2018. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at thehydropothecary.com or hexo.com or through the SEDAR website at sedar.com.
Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as may, expect, intend, estimate, anticipate, believe, should, plans, continue, objective, or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance. Such statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations about future events. Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from current expectations, see Risk Factors. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.
This MD&A is dated October 25, 2018.
12 |
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Company Overview
The Company was founded in 2013 for the purpose of producing medical cannabis under Health Canadas Marihuana for Medical Purposes Regulations (MMPR). We became the 17th licensed producer in Canada in March 2014 and made our first sale of medical cannabis in May 2015. We were the first licensed producer in Quebec and are the only publicly traded cannabis company headquartered in the province.
The MMPR was replaced by the Access to Cannabis for Medical Purposes Regulations (ACMPR) in August 2016. Under our current ACMPR license, we are authorized to produce and sell cannabis to medical patients and adult recreational users in dried and oil formats. Our license has a term ending on October 15, 2019, and we are not currently aware of any circumstances that would impede renewal.
Ultimately, we are a vertically integrated consumer packaged goods company in the medical and emerging legal adult-use cannabis market. Our primary business is to cultivate, process, package and distribute cannabis through our facilities in Gatineau, Quebec, in order to serve the medical and adult-use cannabis markets across Canada and internationally where regulations allow. We have expanded operations to include a corporate office location in Gatineau, Quebec, additional advanced processing and manufacturing space in Belleville, Ontario, and a distribution centre located in Montreal, Quebec.
To date, we have sold over 1 million grams of medical cannabis to thousands of patients across Canada who count on us for safe, high-quality products. We have developed an extensive and award-winning product range, as well as valuable experience and knowledge, while serving these patients. This positions us well to serve the legal adult-use market. We currently possess the single largest and longest national forward supply amount among all licensed producers, based upon the announced provincial supply agreements. In Quebec alone, we will supply 20,000 kg in the first year of legalized adult-use cannabis and up to approximately 200,000 kg over the first five years of legalized adult-use cannabis.
As at October 19, 2018, we hold 310,000 sq. ft. of licensed production space, with a 25,000 kg annual production capacity; an additional 1,000,000 sq. ft. under construction; 2,060,000 sq. ft. of commercial real estate for distribution and product research and development needs; another 58,000 sq. ft. of leased distribution space in Montreal, Quebec, and leased commercial office spaces in downtown Gatineau, Quebec.
We employ approximately 220 people, including 81 people in operations, manufacturing and processing; 53 in sales and marketing; 40 in cultivation and harvesting; 39 in corporate services and executive; and seven in quality assurance and research and development.
We are among the cannabis industrys top innovators, with products such as Elixir, Canadas first and only line of cannabis peppermint oil sublingual sprays, and the award-winning decarb, an activated cannabis powder designed for oral consumption. Further, we are delivering on product innovation through our joint venture with Molson Canada, which positions us at the forefront of the cannabis-infused beverage market.
Investors have responded positively to both our strategy and execution, as evidenced by the $316.5 million we have raised in public markets since July 2017 and by our corresponding zero debt held, making us one of the best-capitalized companies in the industry.
We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis or cannabis products in the United States or any other jurisdiction where the sale of cannabis is unlawful under applicable laws.
Canadian Cannabis Market
According to Statistics Canada, nearly five million Canadians purchased approximately 760,000 kg of cannabis worth $5.7 billion in 2017, mostly from illegal sources. The federal agency estimates that the average price was $7.50 per gram. Various market studies have estimated the size of the legal Canadian cannabis market at over $10 billion per year. We are uniquely positioned to serve that market through holding the largest forward supply contract of all licensed producers.
As of August 13, 2018, all provinces and territories have announced their cannabis market retail approach, ranging from privately owned stores to government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through strategic supply agreements with the Quebec, Ontario and British Columbia provincial governments, as well as through an investment in the private cannabis retail sector, in order to offer our award-winning and innovative products across all channels throughout Canada.
13 |
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Anticipated retail distribution channels by province and territory:
We have established supply channels within five provinces Quebec, Ontario, Saskatchewan, Alberta and British Columbia through supply agreements with both governmental boards and private retailers. We hold the single largest forward supply contract among licensed producers, based upon announced agreements for year one of legalization, with 20,000 kg to be supplied to Quebec in the first year.
14 |
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QUEBEC
In Quebec, which has a population of 8.45 million, or approximately 23% of the Canadian population, the Société québécoise du cannabis (SQDC) operates the distribution and sale of adult-use cannabis. The SQDC has established 15 retail locations throughout the province, for in-store cannabis sales. It expects to increase this number to 50 locations within the first year of legalization. It will also sell cannabis online.
In the first year of legalization, we hold a 35% market share in Quebec. Our agreement with the SQDC spans a potential five-year period, with us supplying 200,000 kg or more of cannabis, representing $1 billion in potential revenues.
In addition, we have reached a distribution agreement with the SQDC, in which we will house and distribute all of the SQDCs online sales to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC.
ONTARIO
In Ontario, which has a population of 14.4 million, or approximately 40% of the Canadian population, the government has announced that it will offer consumers a variety of cannabis products through the Ontario Cannabis Store (OCS) online web sales in 2018. The province will also allow privately owned retail locations that serve the adult-use market. Initially, products will include dried cannabis, oil and capsule products, pre-rolled, and clones and seeds.
We have entered into a supply agreement with the OCS, in which we will supply the province with THC and CBD Elixir and Fleur de Lune products, two of our most innovative oil-based and smokeless offerings. In the future, once our 1 million sq. ft. greenhouse expansion is complete in December 2018, we will offer our full suite of products. This approach will allow us to initially serve the Ontario market for smokeless cannabis products through the OCS.
BRITISH COLUMBIA
British Columbia, which has a population of 4.6 million, or approximately 13% of the Canadian population, will serve the adult-use cannabis market through a dual privategovernment approach. The British Columbia Liquor Distribution Branch (BCLDB) will manage the distribution of cannabis and cannabis-based products. We hold a supply agreement with the BCLDB, in which we will supply our THC and CBD oil-based Elixir and Fleur de Lune products.
We have also aligned ourselves with Fire & Flower (F&F), a private cannabis retailer, through a strategic investment of a $10 million convertible loan. F&F is expected to hold store locations throughout British Columbia, allowing HEXO products to be distributed via the private retail route in tandem with the BCLDB.
OTHER CANADIAN PRIVATE MARKETS
We expect to enter the remaining private-sector Canadian cannabis markets via strategic investments in private retailers, such as our investment in F&F. Currently, F&F holds two licenses for retail locations within Saskatchewan and is undergoing the licensing process in Alberta, with 37 locations pending. F&F has also begun the process of acquiring licenses and locations in Manitoba.
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CANADIAN LEGISLATIVE LANDSCAPE
Regulation of the sale of adult-use cannabis in retail and online environments is the responsibility of the provinces and territories. Only licensed producers will be authorized to sell cannabis within the adult-use market. As at July 31, 2018, there are 114 licensed producers under the ACMPR.
Strategic Priorities
Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis markets. In everything we do cultivation, production, product development, innovation, distribution we exercise rigour in order to offer medical cannabis patients and adult recreational users uncompromising quality and safety, while earning and maintaining the trust of all of our stakeholders. We believe that we can leverage our demonstrated success in Canada to global cannabis markets.
Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and todays limited but growing cultivation capacity, among other factors, we believe the initial years following legalization will be the most critical in determining the future shape of the cannabis industry in Canada, and we believe early distribution and financial performance will be critical to securing a market leader position.
For this and other reasons, we have deliberately set out to build a commanding position in our initial jurisdiction, Quebec, while making strategic inroads in select other markets across the country through provincial supply agreements and private retail partnerships. Now entering the adult-use market as one of the top producers and suppliers, we are looking beyond the Canadian border to take HEXO Corp. international, where regulations permit. We are making continuous efforts to assess global opportunities in current and future medical and adult-use markets, including Europe, where we are currently expanding into Greece.
We have positioned ourselves to meet the smokeless cannabis alternative market demand through our joint venture with Molson Canada, and we continue to explore other opportunities for similar ventures in this market. Even as we continue to prove our business model and operational excellence in Quebec and across the country, the Company has already established itself as a desirable business partner for cannabis control authorities, private retail, and Fortune 500 joint-arrangement partners across Canada and globally.
Our uncompromising commitment to quality and safety is supported by our compliance with Health Canadas stringent quality control requirements, our pharmaceutical-grade production system, full seed-to-sale traceability, third party independent testing and an online system to post our product testing results.
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Our overall strategy is built on four pillars: be a top two market share licensed producer in Canada, demonstrate brand leadership, innovate products and support that work through operational scalability. As we enter the adult-use market, we are focused on the execution of these four strategic priorities.
Top Two in Canada
After establishing a dominant presence within our home market of Quebec, we look to expand nationally on a larger scale. Our objective is to execute on our supply agreements with the OCS and the BCLDB, as well as on our long-term supply agreement with the SQDC, and to successfully manage our recently announced distribution centre responsible for all SQDC online salebased cannabis distribution. We also possess a strategic relationship with the private cannabis retailer F&F. This private retail presence will allow us to expand our expected distribution presence across six provinces and secure a top two public forward sales contract ranking.
Forward Sales Contract Rank
Based on quantities announced in provincial supply agreements
Operational Scalability Invest in people, processes and systems to deliver on market demands, adapt to new opportunities and provide users with high- quality products at sustainable operating costs. Top Two in Canada Our top priorities are to execute and deliver on the SQDC contract, to serve and expand large-scale distribution across Canada and globally, and to become a top two licensed producer by market share in Canada. Product Innovation Continue to innovate and lead the market in identifying, developing and launching new cannabis-based products. Brand Leadership Further develop our house of brands using data-driven, in-depth knowledge of our customers and their preferences, ensuring we meet the full range of desired products within the market.
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SQDC SUPPLY AGREEMENT
The strategic value of our SQDC relationship cannot be understated. We hold the single largest forward contract in the history of the emerging cannabis industry with the SQDC and are the preferred supplier for cannabis products for the Quebec market for the first five years following legalization. We will supply the SQDC with 20,000 kg of products in the first year, and we expect to supply 35,000 kg and 45,000 kg in years two and three, respectively. Thereafter, based on an expected market growth rate of 10%, we intend to supply 49,500 kg and 54,450 kg in years four and five, respectively. The Company estimates the total volume to be supplied over the five-year term of the agreement to be in excess of 200,000 kg. Based on the current agreements signed between the SQDC and five other licensed producers, we have obtained the highest year one volume, representing approximately 35% market share within Quebec, and we are aiming to remain the largest supplier in subsequent years.
Volume and Market Share % in the Province of Quebec
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Brand
Since our inception as a medical cannabis producer in 2013, we have built a trusted brand. Our robust product development team has introduced products that offer consumers a full range of experiences and price points, including a variety of ways to consume cannabis. This team works hand-in-hand with our marketing team in leveraging these products to build brand awareness in a highly regulated environment.
HEXO ADULT-USE
During this past quarter, the Company announced HEXO as the adult-use brand name that will serve the legalized Canadian adult-use market. The goal of HEXO is to continue to offer a premium house of brands, signalling innovation, quality and consistency of experience, and become a top two Canadian market share brand and obtain a 2% international market share. As a brand, HEXO shares the same focus on award-winning product innovation and high-quality cannabis that the market has come to expect from its medical sister brand, Hydropothecary.
HYDROPOTHECARY MEDICAL
Hydropothecary sells premium as well as mid-market medical cannabis, offering over 24 products in dried, decarb and oil formats. Hydropothecary has been serving the medical market with its award-winning products for over three years, and will continue to serve our medical patients with the utmost levels of quality and customer service.
HEXO PRODUCT OFFERINGS
Initially, HEXO will offer dried cannabis and cannabis-derived products under three product types: dried cannabis, cannabis oils and decarb.
Dried Cannabis Premium and mid-range products offered under the Time of Day and H2 lines. Both lines offer a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 15 dried marijuana products priced between $3 and $15 a gram. Each product is carefully selected to treat symptoms universally reported by patients and meet the needs of adult consumers.
Oil-Based Products Elixir, a cannabis oil sublingual mist product line, includes both a high THC and high CBD content, and is Canadas only peppermint-based cannabis oil product. Fleur de Lune is one of Canadas first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis. HEXO offers three oil-based products priced between $69 and $89 per bottle, as well as an intimate-use oil product priced at $59 per 60 ml spray bottle.
Decarb Decarb is an activated fine-milled cannabis powder product offered in a range of high to low CBD and THC content. Decarb is offered in six products, priced between $3 and $15 a gram.
Decarb was voted Top New Product at the 2017 Canadian Cannabis Awards; Elixir received third place in the same category, as well as second place in Top High THC Oil. We also received top honours in the packaging category.
Product Innovation
Our strategic priorities reflect our belief that companies that achieve large-scale distribution and high brand awareness will drive long-term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being recognized for delivering the best user experiences across the full spectrum of products, price points and delivery methods.
We continue to position ourselves to meet the expected edibles market demand and consumer-preferred products for October 2019. This includes, but is not limited to, vapes; cosmetics; edibles such as confectionary and baked and dairy goods; and non-alcoholic beverages, through our joint venture with Molson Canada.
Our focus on research, innovation and product development also reflects our strategic priorities. We are actively exploring ways to increase our expertise related to cannabis applications and forms of delivery, and to expand our product range and brand portfolio. Activities include current and potential partnerships, joint ventures and strategic acquisitions of intellectual property and related transactions.
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The cannabis industry has already recognized us as an innovative leader, as demonstrated by our award-winning and nominated products Elixir and decarb. During the quarter, we launched Fleur de Lune, one of Canadas first intimate-use cannabis oils.
Beyond the funds required for our currently planned investments in cultivation capacity, we expect to allocate the majority of our capital to branding, product innovation, international expansion and production, while remaining alert for strategic transactions that create shareholder value. Supporting this focus is the acquisition of the Belleville, Ontario, facility, which among other purposes will serve to house research and development activities for the Company and its future products. This approach will directly support our continued leadership position in the Canadian cannabis market as both a distributor and a product innovator.
Scalability
We have been cultivating cannabis for four years under the ACMPR regulatory regime, growing and producing high-quality cannabis with consistent yields. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies.
We chose to locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production. The key is an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people.
On the border of Canadas two largest consumer markets, Quebec and Ontario, our main campus positions us in close proximity to two of the countrys major urban areas, Greater Montreal and the National Capital Region. Furthermore, we have acquired facilities in Belleville, Ontario, ideally situated between the National Capital Region and Toronto, and in Montreal, which conveniently serves central Quebec.
Our current licensed facilities total approximately 310,000 sq. ft. They include our original 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2017, a 250,000 sq. ft. greenhouse completed in July 2018, a warehouse, two stand-alone laboratories and two modular buildings for final packaging and customer service, all located on our 143-acre land parcel. The annual production capacity of these facilities is estimated at approximately 25,000 kg of dried cannabis.
As of July 23, 2018, all 10 zones of the 250,000 sq. ft. greenhouse were fully licensed by Health Canada and plants were transferred in. The corresponding first harvests were executed in mid-September. This expansion increased our annual production capacity by approximately 21,400 kg of dried cannabis to 25,000 kg.
In December 2017, we acquired an adjacent 78-acre land parcel upon which we are building a 1 million sq. ft. greenhouse. This newest expansion is well underway, with the foundation and frame in place and the roof significantly completed. It is expected to be completed in December 2018. Once completed and licensed by Health Canada, our total annual production capacity will rise to approximately 108,000 kg of dried cannabis.
Subsequent to year-end, we announced a partnership to expand into Europe. A 350,000 sq. ft. licensed facility will be established in Greece through our joint venture with Qannabos. This venture will result in additional production capacity and Eurozone foothold to serve legal cannabis markets in the United Kingdom, France and other jurisdictions where regulations permit.
We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant business knowledge derived from a variety of industries and markets.
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Distribution
In terms of processing and distribution capacity, we have significantly increased our capabilities in the three months ended July 31, 2018, as annual production increased to approximately 25,000 kg with the activation and full licensing of our new 250,000 sq. ft. greenhouse. Our extensive 1 million sq. ft. greenhouse project which features a state-of-the-art processing, packaging and distribution centre and is on target to be completed by calendar year-end will further increase production capacity to approximately 108,000 kg.
The Company recently acquired a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture with a related party for the purposes of manufacturing value-added cannabis products and increasing capacity for distribution and storage. The centralized location and the Companys first facility outside of Quebec is ideally situated along primary shipping routes to distribute our products and fulfill commitments across Canada. This facility will provide a regulatory keyhole to our partners and future partners so that they may enter the cannabis industry with HEXO Corp. and will have access to licensed infrastructure once the facility is licensed by Health Canada. This acquisition further delivers on our national expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles.
Subsequent to year-end, the Company also bolstered its distribution capacity with the announcement of the newly established distribution and storage centre formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility in Montreal, Quebec, was strategically acquired for logistical purposes. Through it, we will supply cannabis for all direct-to-customer sales placed in Quebec through the SQDCs online store. Additionally, through the distribution centre we will house, supply and distribute direct-to-customers the cannabis products of all licensed producers who have contracts with the SQDC.
The Company has positioned itself for the private retail distribution through an issued $10 million convertible note debenture as a strategic investment in the private cannabis retailer F&F. F&F has applied for 37 retail store licenses in the province of Alberta, targeted eight applications in British Columbia, identified 16 potential operations in Manitoba and been awarded two retail stores in the province of Saskatchewan.
Distribution Strategy
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Corporate Highlights
Molson Canada Joint Venture Truss
On August 1, 2018, we announced that we have entered into a definitive agreement to form a joint venture (the JV) with Molson Canada (Molson), to pursue opportunities in the non-alcoholic, cannabis-infused beverages market. The JV was to be structured as a stand-alone start-up with its own board of directors and an independent management team. Molson would have a 57.5% controlling interest, with the Company owning the remaining balance. We and Molson closed the transaction to form the JV, called Truss, on these terms on October 4, 2018. In connection with the closing of the transaction, we issued 11,500,000 common share purchase warrants to an affiliate of Molson, each of which is exercisable to purchase one common share of the Company at a price of $6.00 per share for three years. Molson brings to the JV years of related beverage industry experience, product innovation and distribution expertise. This, paired with the Companys history of innovating and delivering quality cannabis products to the market, positions the Company to be at the forefront of the Canadian cannabis beverage market.
Supply Agreement with the Ontario Cannabis Store
On August 20, 2018, we announced that we have entered into a supply agreement with the Ontario Cannabis Store (OCS). Under the agreement, we will supply Ontario with our award-winning Elixir product line, which will be offered in several formulations such as THC, CBD or 1:1, in either a peppermint oil or a medium-chain triglyceride (MCT) carrier oil. We will also supply the OCS with the newly launched Fleur de Lune intimate-use cannabis oil. Both products are smokeless and easy to use, and will be sold in childproof packaging.
Expansion into Greece
On September 26, 2018, we announced the partnership with the Greek company Qannabos (QNBS). Together, we will create a partnership supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing, processing and distribution of medical cannabis. This expansion is our first international expansion and will allow us to serve the medical markets of the United Kingdom, France and other European jurisdictions, where regulations permit, with our full suite of products.
HEXO Brand
On May 24, 2018, we announced the launch of our new sister brand, HEXO, for the recreational adult-use cannabis market. HEXO will bring the same award-winning product innovation and high-quality cannabis that the Hydropothecary brand has established over the past three years. The Company will continue to deliver premium cannabis under the Hydropothecary brand to serve the medical market going forward.
Corporate Name Change
On August 28, 2018, the Company held a special meeting during which shareholders passed to change officially the legal name of The Hydropothecary Corporation to HEXO Corp.
Graduation to the Toronto Stock Exchange
On June 22, 2018, we graduated from the TSX Venture Exchange (TSXV) to the Toronto Stock Exchange (TSX) and our common shares and common share purchase warrants were listed and started trading on the TSX under the symbols HEXO and HEXO.WT, respectively. Graduating to the TSX presents the opportunity for increased access to capital, greater market visibility, increased oversight, enhanced reputation in meeting the required standards of a senior exchange and increased liquidity on world markets.
Supply Agreement with BC Liquor Distribution Board
On July 11, 2018, we announced that we have entered into a memorandum of understanding with British Columbias Liquor Distribution Branch (BCLDB). The Company will supply the province through the BCLDB with its award-winning Elixir products.
250,000 Sq. Ft. B6 Greenhouse and B5 Expansion Are Fully Licensed and Operational
As of October 10, 2018, all 10 growing zones and warehouse of the new state-of-the-art 250,000 sq. ft. greenhouse and the B5 expansion area have received final licensing from Health Canada, increasing annual production to approximately 25,000 kg of dried cannabis. The advanced manufacturing facilities include areas for dewaxing, distillation, milling and extraction that will provide the Company the capability to transform, manufacture and package cannabis in a wide range of products. The expansion also includes secondary trimming zones, additional storage areas and cleaning rooms. The additional facilities and associated production capacity have positioned the Company to meet the SQDC first-year demand of 20,000 kg.
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Fire & Flower
On July 26, 2018, we announced the $10 million strategic investment in the western-based Canadian retail operation Fire & Flower (F&F). The investment was made through the purchase of a $10 million convertible debenture of F&F which entitles HEXO Corp. to convert the principal amount of the debenture into common shares of F&F at the maturity date of July 31, 2019, or in the event of a triggering event as defined by the debenture agreement. F&F has applied for 37 retail store licenses in Alberta and has been awarded two retail stores in the province of Saskatchewan. We intend to secure additional distribution for our oil-based products in these provinces. This is another step towards achieving our strategic goal of entering the national cannabis market on a large distribution scale.
Acquisition of 2 Million Sq. Ft. Facility in Belleville, Ontario
On September 10, 2018, we announced the acquisition of a 2 million sq. ft. facility in Belleville, Ontario, through a joint venture established with a related party, Olegna Holdings Inc. (Olegna). The Company acquired a 25% interest in the joint venture, with the remaining balance belonging to Olegna. The joint venture purchased the facility in part by a $20 million loan issued by HEXO Corp. repayable within 120 days, bearing an annual 4% interest rate, payable monthly. As part of the agreement, HEXO Corp. will be the anchor tenant for a period of 20 years. The facility will be utilized as a centre of research and development and manufacturing. This is the first HEXO Corp. facility established outside of Quebec, further delivering on the Companys national expansion strategy and providing capacity for the manufacturing of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles to be supplied across Canada. Furthermore, this facility provides a regulatory keyhole for current and future partners to immediately access the cannabis space and licensed infrastructure.
Warehouse and Distribution Centre
On September 19, 2018, we announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (Metro). Under the agreement, HEXO Corp. and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to house and supply the cannabis products of all licensed producers who hold supply contracts with the Société québécoise du cannabis (SQDC). The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within the province of Quebec for orders placed through the SQDC.
Additionally, HEXO Corp. has attained accreditation from the Autorité des marchés financiers to contract with government organizations such as the SQDC. This is a required authorization for companies conducting over $1 million in business with the government of Quebec for both services and the supply of products.
Executive Appointments
During the quarter, we bolstered our executive team with the addition of two experienced professionals to our leadership team.
Nick Davies, Vice-President of Marketing Nick is an accomplished marketing executive with over two decades of experience building trusted global brands and market-leading products. Nick has been involved with several successful businesses, including Puma, Coleman, Virgin and Corel. Nick has earned a reputation as an energetic marketing leader known for building high-quality consumer experiences. As Executive Vice-President at Corel, he held global P&L responsibility for the graphics and productivity division, and led the companys expansion into new international markets. Nick is a graduate of the European Business School and holds an MBA from INSEAD.
Dominique Jones, Vice-President of Human Resources Dominique offers more than 20 years experience in leading organizations through periods of exceptional growth, with a career spanning six industries and three continents. Most recently, Dominique served as Chief Operating Officer for an education software company and before that as Chief People Officer of Halogen Software, where she led the companys people through an IPO to sale. Of particular note, Dominique led significant culture change initiatives and designed and implemented award-winning leadership and high-potential development programs. She brings to the team a passion for coaching and team-building.
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Non-IFRS Measures
We have included certain non-IFRS performance measures in this MD&A, including weighted average cash cost of dried inventory sold per gram and adjusted gross margin, as defined in this section. We employ these measures internally to measure our operating and financial performance.
We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.
As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
WEIGHTED AVERAGE CASH COST OF DRIED INVENTORY SOLD PER GRAM
Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality assurance and testing of inventory sold in the period.
We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our competitors.
ADJUSTED GROSS MARGIN
We use adjusted gross margin to provide a better representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (fair value cost adjustment) recognized as cost of goods sold.
We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our competitors.
Operational and Financial Highlights
KEY FINANCIAL PERFORMANCE INDICATORS
Q4 18 | Q3 18 | Q2 18 | Q1 18 | Q4 17 | ||||||||||||||||
Revenue |
$ | 1,410 | $ | 1,240 | $ | 1,182 | $ | 1,102 |
$
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862
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Dried grams and gram equivalents sold |
152,288 | 134,253 | 131,501 | 120,844 | 95,735 | |||||||||||||||
Revenue/gram equivalent |
$ | 9.26 | $ | 9.24 | $ | 8.99 | $ | 9.12 | $ | 9.00 | ||||||||||
Weighted average cash cost of dried inventory sold per gram |
$ | 0.90 | $ | 0.88 | $ | 0.97 | $ | 1.07 | $ | 1.05 |
INCREASED REVENUES
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Revenue per gram equivalent increased to $9.26 per gram equivalent from $9.24 in the prior quarter, and $9.00 in the fourth quarter of fiscal 2017. Gram equivalents are utilized to provide a representation of dried grams utilized within our oil products. The gram equivalency factor was an average of 6.73 dried grams per unit sold in the quarter. |
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Revenue increased 64% to $1,410 compared to $862 in the fourth quarter of fiscal 2017. Higher revenue was driven mainly by increased oil sales volume which command a higher revenue per gram equivalent than dried products as well as by an increase to dried product sales. Compared to the prior quarter, the sequential revenue growth was 14% due to increased sales volume in both dried and oil products. This was partially offset by a decrease in dried product revenue per gram of $0.12. Sales in Ontario increased by 15% in the quarter. |
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Sales volume increased 59% to 152,288 gram equivalents, compared to 95,735 in the same prior year period. This is due to a higher market acceptance and an increased consumer desire for smokeless products as oil sales increased to account for 21% of total sales in the quarter. Dried grams sold increased 33% compared to the same prior year period. On a sequential basis, sales volume increased 13% compared to the third quarter of fiscal 2018, primarily driven by a 30% increase in oil sales. |
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Furthermore, sales were increased through new relationships with an additional eight clinics during the quarter, further expanding and diversifying our patient base and medical market presence, which we continue to serve under the Hydropothecary brand. We had relationships with 147 clinic locations as at the end of the quarter. |
CASH COST PER GRAM
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Weighted average cash cost of dried inventory sold per gram as at July 31, 2018 increased 2% to $0.90, compared to $0.88 in the prior quarter. These results reflect the start of the expected interim period of higher production costs to be realized as operations trend towards full capacity with the utilization of the newly online facilities and equipment. Efficiencies of scale are expected once full capacity and utilization is obtained. |
ORGANIZATIONS HEADCOUNT
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As a result of the growing scale of operations, our headcount rose by 61% to 220 employees as at July 31, 2018 from the previous quarters headcount of 137 on April 30, 2018. |
FACILITY EXPANSION
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As of July 23, 2018, all 10 greenhouse zones of the new 250,000 sq. ft. B6 facility have been completed and fully licensed, as well as the expansion project to the existing B5 facility. The new facility and expansion increase the current production capacity to 25,000 kg per year. Along with the B9 expansion which is currently under construction, total expected production capacity will increase to 108,000 kg annually. The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the estimated square footage of cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities and estimates of future production capabilities. |
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Subsequent to the three months ended July 31, 2018, the Company expanded into Ontario through the acquisition of a 2,000,000 sq. ft. facility in Belleville, Ontario, through a joint venture with a related party. The facility was acquired for the purpose of providing capacity for further research and development over enhanced cannabis products as well as for its strategic logistical position to serve the province of Ontario and Canada. |
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Also, subsequent to the quarter ended July 31, 2018, the Company leased a 58,000 sq. ft. facility in Montreal, Quebec, for the purposes of housing and distributing the cannabis products of all licensed producers supplying the SQDC with product for the adult-use market. |
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Due to significant growth over the past fiscal year, in June 2018 we secured an additional office space in our current office building in Gatineau, Quebec. The space will primarily house the executive team, as well as the finance, marketing, government relations, legal, compliance and communications departments, with the possibility of further expansion as the Company and headcount continue to grow. |
PRODUCT LINE EXPANSION
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On July 16, 2018, we launched Fleur de Lune, one of Canadas first intimate-use cannabis oil products. With 710 mg/ml of THC per 60 ml bottle, Fleur de Lune offers HEXO users a new and innovative method of use. |
FINANCIAL POSITION
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As at July 31, 2018, we held cash and short-term investments of $244,789 and continued to hold no debt on our balance sheet. |
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Summary of Results
Summary of results for the three- and 12-month periods ended July 31, 2018 and July 31, 2017:
Revenue for the fourth quarter ended July 31, 2018 increased 64% to $1,410 compared to $862 in the same period in fiscal 2017. Higher revenue was driven mainly by increased Elixir and H2 (mid-range line) sales volume, as Elixir was introduced in late Q4 17 and H2 sales volume increased by 70%. Compared to the prior quarter, the sequential revenue increase was 14%, reflecting a higher total of volume sold, primarily driven by a 31% increase in oil sales.
Sales volume increased 59% to 152,288 gram equivalents, compared to 95,735 in the same prior year period, due to an increase in our oil-based products as the product mix purchased by customers shifted towards smoke-free alternatives. Total dried grams sold increased 33%. Revenue per gram equivalent increased to $9.26 as compared to $9.00 in the same prior year period, mainly as a result of higher sales of our Elixir product line, which contributes a higher revenue per gram equivalent than dried product.
On a sequential basis, sales volume increased 14% compared to the third quarter of fiscal 2018, essentially for the same reasons as noted above.
For the 12 months ended July 31, 2018, revenue increased 20% to $4,934 compared to $4,097 in the same period in fiscal 2017. Sales volume increased 33% to 538,886 gram equivalents, compared to 404,158 in the same prior year period.
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Cost of Sales
Cost of goods sold includes the direct costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging and shipping costs.
Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.
Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.
Cost of sales for the quarter ended July 31, 2018 was $700, compared to $111 for the same quarter ended July 31, 2017. Included in the cost of sales for the quarter ended July 31, 2017 is the $139 write-down of inventories due to the Companys voluntary recall in May 2017 and water-damaged inventory, which when excluded yields additional cost of sales of $613 for the 12 months ended July 31, 2017. The increase in cost of sales is the result of increased sales volumes and an increase to transformation, packaging and shipping costs.
Fair value adjustment on the sale of inventory for the fourth quarter ended July 31, 2018 was $455 compared to $78 for the same quarter ended July 31, 2017. This is due to the increase in production scale and total sales. The adjustment to net realizable value of inventory increased from the same quarter ended July 31, 2017 to $906 due to the decrease in the estimated market selling price input of inventory valuation. This is due to the onset of the adult-use market and reflects competitive market prices. The increase in the 12 months ended July 31, 2018 adjustment of $1,491 is also due to the above.
Fair value adjustment on biological assets for the fourth quarter ended July 31, 2018 was ($1,171) compared to ($3,003) for the same quarter ended July 31, 2017. This is due to a significant decrease in the average dried gram market selling price input due to the onset of the adult-use market. This decrease is offset by the increase in the total number of plants as the first harvests of the B6 greenhouse began in July 2018. The increase in scale and total plants on hand is the result of preparing for the adult-use market, which began October 17, 2018.
Operating Expenses
For the three months ended
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For the 12 months ended
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|||||||||||||||
July 31, 2018
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July 31, 2017
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July 31, 2018
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July 31, 2017
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General and administration |
$ | 4,300 | $ | 1,206 | $ | 9,374 | $ | 3,609 | ||||||||
Marketing and promotion |
3,807 | 749 | 8,335 | 3,072 | ||||||||||||
Stock-based compensation |
1,933 | 193 | 4,997 | 659 | ||||||||||||
Amortization of property, plant and equipment |
421 | 135 | 896 | 360 | ||||||||||||
Amortization of intangible assets |
252 | 64 | 765 | 232 | ||||||||||||
Total |
$ | 10,713 | $ | 2,347 | $ | 24,367 | $ | 7,932 |
Operating expenses include marketing and promotion, general and administrative, research and development, stock-based compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses, and research and development costs. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4,300 in the fourth quarter, compared to $1,206 for the same period in fiscal 2017. This increase reflects the general growing scale of our operations, including an increase in general, finance and administrative staffing and additional rental space. Consulting and professional fees increased by $1,904 and $728, respectively, as a result of the increased financial reporting and control-based regulatory requirements accompanying public status on the TSX-V and subsequently the TSX, as well as increased compliance costs as a publicly listed company.
For the 12 months ended July 31, 2018, general and administrative expenses increased to $9,374 compared to $3,609 for the same period in fiscal 2017. The increase is consistent with the explanation as stated above.
MARKETING AND PROMOTION
Marketing and promotion expenses increased to $3,807 in the fourth quarter, compared to $749 for the same period in fiscal 2017. This primarily reflects additional marketing and promotional events undertaken in the quarter as we build brand recognition and establish HEXO in the recreational cannabis market. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well as advertisement costs. This is consistent with our focus to prepare for the legalization of the adult recreational market.
For the 12 months ended July 31, 2018, marketing and promotion expenses increased to $8,335, compared to $3,072 for the same period in fiscal 2017. The increase is consistent with the explanation as stated above.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Amortization of property, plant and equipment increased to $421 in the fourth quarter, compared with $135 for the same period in fiscal 2017. The increase is the direct result of the Companys newly built greenhouses and cultivation equipment becoming operational. Additionally, increases to cultivation and production equipment were incurred in order to support the larger production demands.
For the 12 months ended July 31, 2018, property, plant and equipment depreciation expenses increased to $896, compared to $360 for the same period in fiscal 2017. The increase is consistent with the explanation as stated above.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $252 in the fourth quarter, compared with $64 for the same period in fiscal 2017. The increase is the result of a change in the expected useful life of certain software as we prepared for the implementation of a new ERP system, which will replace certain software programs we currently use and the establishment of an online sales platform.
For the 12 months ended July 31, 2018, intangible asset depreciation expenses increased to $765, compared to $232 for the same period in fiscal 2017. The increase is consistent with the explanation as stated above.
Loss from Operations
Income/(loss) from operations for the fourth quarter was ($10,194), compared to $716 for the same period in fiscal 2017. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepare for the legalization of the adult recreational market.
For the 12 months ended July 31, 2018, loss from operations was ($17,967), compared to ($1,483) in the same prior year period for the same reasons as the change for the three-month period.
Other Income/Expenses
Other income/(expense) was ($315) and ($5,383) for the three and 12 months ended July 31, 2018 ($219 and ($10,934) for the three and 12 months ended July 31, 2017, respectively). Revaluation of financial instruments of ($5,091) in the latest quarter reflects the revaluation of an embedded derivative related to $3,275 of USD convertible debentures issued and converted in the prior year. Additionally, we incurred interest income for the three months ended July 31, 2018 and July 31, 2017 of $854 and $61, respectively. Interest expenses of $Nil and $75 were realized for the three months ended July 31, 2018 and July 31, 2017, respectively. This increase reflects the interest generated from the acquired short-term investments during the quarter ended July 31, 2018.
28 |
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Non-IFRS Measures
Weighted average cash cost of dried inventory sold per gram
Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality assurance and testing of inventory sold in the period.
As there are no standardized methods of calculating this non-IFRS measure, our methods may differ from those used by others, and accordingly, the use of this measure may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
Weighted average cash cost of dried inventory sold is calculated as follows:
Q4 18
|
Q3 18
|
Q2 18
|
Q1 18
|
Q4 17
|
||||||||||||||||
Cost of goods sold |
$ | 700 | $ | 479 | $ | 451 | $ | 463 | $ | 663 | ||||||||||
Less: |
||||||||||||||||||||
Order fulfillment costs 1 |
$ | (453 | ) | $ | (335 | ) | $ | (286 | ) | $ | (307 | ) | $ | (273 | ) | |||||
Cannabis oil conversion costs |
$ | (133 | ) | $ | (43 | ) | $ | (41 | ) | $ | (32 | ) | $ | (37 | ) | |||||
Recall of inventory write-down |
$ | | $ | | $ | | $ | | $ | (139 | ) | |||||||||
$ | 114 | $ | 101 | $ | 124 | $ | 124 | $ | 214 | |||||||||||
Number of dried grams sold |
127,252 | 114,968 | 127,769 | 115,768 | 95,735 | |||||||||||||||
Weighted average cash cost of dried inventory sold (g) |
$ | 0.90 | $ | 0.88 | $ | 0.97 | $ | 1.07 | $ | 2.23 |
1 |
Order fulfillment costs are excluded from the calculation of weighted average cash cost of dried inventory sold as this non-IFRS metric is utilized to demonstrate the burdened cash cost of producing, cultivating and bringing a gram of dried inventory to the state of a finished good to be sold during the period. |
Weighted average cash cost of dried inventory sold per gram declined 60% year over year to $0.90 for the fourth quarter ended July 31, 2018, compared to $2.23 for the same prior year quarter. Cost per gram sold has been trending downward cumulatively as a result of improvements in the cultivation processes and economies of scale resulting from the full utilization of a higher production capacity.
The weighted average cash cost of dried inventory sold increased slightly to $0.90 from $0.88 as compared to the three months ended April 30, 2018. This trend is expected to continue in the short term, as the Company moves towards full efficiencies of scale and utilization of the new facilities as well as beginning increased levels of production to meet the demand of the adult recreational market.
During the prior year quarter ended July 31, 2017, the Company recorded a write-down of inventories related to the Companys voluntary recall and water-damaged goods.
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Biological Assets Fair Value Measurements
As at July 31, 2018, the changes in the carrying value of biological assets are as follows:
July 31, 2018
|
July 31, 2017
|
|||||||
Carrying amount, beginning of period |
$ | 1,504 | $ | 121 | ||||
Production costs capitalized |
993 | 659 | ||||||
Net increase in fair value due to biological transformation less cost to sell |
7,340 | 5,004 | ||||||
Transferred to inventory upon harvest |
(7,505 | ) | (4,280 | ) | ||||
Carrying amount, end of period |
$ | 2,332 | $ | 1,504 |
Our biological assets consist of cannabis plants, from seeds all the way through to mature plants. As at July 31, 2018, the carrying amount of biological assets consisted of $6 in seeds and $2,326 in cannabis plants ($6 in seeds and $1,498 in cannabis plants as at July 31, 2017). The increase in the carrying amount of biological assets is attributable to an increase in plants on hand and offset by the market selling price decrease as a result of the adult-use market. The significant estimates used in determining the fair value of cannabis on plants are as follows:
● |
yield by plant; |
● |
stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets which have not yet been harvested; |
● |
percentage of costs incurred for each stage of plant growth; and |
● |
fair value selling price per gram less cost to complete and cost to sell. |
We view our biological assets as Level 3 fair value estimates and estimate the probability of certain harvest rates at various stages of growth. As at July 31, 2018, it is expected that our biological assets will yield approximately 4,373,775 grams (July 31, 2017 700,169 grams). Our estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the plants life relative to the stages within the harvest cycle.
Managements identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below:
Unobservable inputs
|
Input values
|
Sensitivity analysis
|
||
Average selling price Obtained through actual retail prices on a per strain basis |
$4.66 per dried gram |
An increase or decrease of 5% applied to the average selling price would result in a change of approximately $329,000 to the valuation.
|
||
Yield per plant Obtained through historical harvest cycle results on a per strain basis |
50235 grams per plant |
An increase or decrease of 5% applied to the average yield per plant would not result in a material change in valuation.
|
||
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle |
Average of 32% completion |
An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $320,000 in valuation.
|
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Quarterly Results
The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended July 31, 2018. The information has been derived from our unaudited consolidated financial statements, which in managements opinion have been prepared on a basis consistent with the consolidated financial statements for the year ended July 31, 2018. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.
Q4 18
|
Q3 18
|
Q2 18
|
Q1 18
|
|||||||||||||
Revenue |
$ | 1,410 | $ | 1,240 | $ | 1,182 | $ | 1,102 | ||||||||
Net income (loss) |
(10,194 | ) | (1,971 | ) | (8,952 | ) | (1,918 | ) | ||||||||
Income (loss) per share basic |
(0.05 | ) | (0.01 | ) | (0.10 | ) | (0.03 | ) | ||||||||
Income (loss) per share fully diluted |
(0.05 | ) | (0.01 | ) | (0.10 | ) | (0.03 | ) | ||||||||
Q4 17
|
Q3 17
|
Q2 17
|
Q1 17
|
|||||||||||||
Revenue |
$ | 862 | $ | 1,182 | $ | 914 | $ | 1,139 | ||||||||
Net income (loss) |
935 | (11,808 | ) | (1,114 | ) | (430 | ) | |||||||||
Income (loss) per share basic |
0.02 | (0.17 | ) | (0.02 | ) | (0.01 | ) | |||||||||
Income (loss) per share fully diluted |
0.01 | (0.17 | ) | (0.02 | ) | (0.01 | ) |
Financial Position
The following table provides a summary of our interim condensed financial position as at July 31, 2018 and July 31, 2017:
July 31, 2018
|
July 31, 2017
|
|||||||
Total assets |
$ | 334,997 | $ | 56,179 | ||||
Total liabilities |
12,124 | 23,739 | ||||||
Share capital |
347,233 | 45,159 | ||||||
Share-based payment reserve |
6,139 | 1,562 | ||||||
Contributed surplus |
| 1,775 | ||||||
Warrants |
12,635 | 3,728 | ||||||
Deficit |
(43,134 | ) | (19,785 | ) |
Total Assets
Total assets increased to $334,997 as at July 31, 2018 from $56,179 as at July 31, 2017, primarily due to financings, capital asset additions related to facility expansion and an increase in inventory as we move closer to the opening of the adult-use market. Since July 31, 2017, we have raised gross proceeds of approximately $218,500 through two financings and $74,366 raised gross proceeds through exercised warrants. At July 31, 2018, we had a cash balance of $39,342 and short-term investments of $205,447.
Total Liabilities
Total liabilities decreased to $12,124 as at July 31, 2018 from $23,739 as at July 31, 2017, primarily due to the conversion of the unsecured convertible debentures from our July 2017 financing, partially offset by an increase to accounts payable as operations continue to grow. Total liabilities include a warrant liability of $3,130 as at July 31, 2018, from $1,356 as at July 31, 2017, recorded at fair value, related to a private placement completed in the prior year. The increase in the value of the fair value of the warrant liability is the result of changes in the share price and foreign exchange rate in the period, partially offset by the reduction in the number of warrants outstanding.
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Share Capital
Share capital increased to $347,233 as at July 31, 2018 from $45,159 as at July 31, 2017, primarily due to the closing of the January 2018 financing, the conversion of the unsecured convertible debentures from our July 2017 and November 2017 financings, as well as warrant exercises. During the three months period ended, the Company finalized the acceleration of the November 2017 outstanding warrants expiry date. The resulting exercised warrants increased share capital by $40,873.
Liquidity and Capital Resources
Liquidity
Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund operating and organic growth requirements, and to meet contractual obligations. Our ability to reach profitability is dependent on successful implementation of our business strategy. While management is confident in the future success of the business, there can be no assurance that our products will gain adequate market penetration or acceptance or generate sufficient revenue to reach profitability.
As at July 31, 2018, we had $39,342 of cash and cash equivalents on hand, $205,447 of short-term investments, $644 of trade receivables, and $8,995 of accounts payable and accrued liabilities. As at July 31, 2017, we had $38,453 of cash and cash equivalents on hand, $2,872 of short-term investments, $351 of trade receivables, $1,672 of accounts payable and accrued liabilities, and $20,639 in 8% unsecured convertible debentures.
Liquidity
|
12 months ended
|
12 months ended
|
||
Operating activities |
$ (22,185) | $ (5,311) | ||
Financing activities |
283,150 | 48,172 | ||
Investing activities |
(260,077) | (6,339) |
Operating Activities
Net cash used in operating activities for the 12 months ended July 31, 2018 was $22,185 as a result of the net loss for the 12 months ended of $23,350, and a decrease in non-cash working capital of $7,213, partially offset by non-cash expense of $8,738. In the same prior year period, cash used in operating activities was $5,311, reflecting the net loss of $12,418, net non-cash income of $5,890, and a decrease in working capital of $1,217. The change in cash flow reflects $7,340 of an unrealized change in the fair value of biological assets and increased inventory stock and prepaid expenses of $2,503 and $4,003, respectively.
Financing Activities
Net cash received from financing activities for the 12 months ended July 31, 2018 was $283,150, reflecting the issuance of $149,500 in units from the January 2018 equity financing, $69,000 from the November 2017 convertible debenture financing, and $74,366 related to the exercise of warrants.
Investing Activities
For the 12 months ended July 31, 2018, we used $260,077 for investing activities, primarily due to the acquisition of $202,575 short-term investments. The balance was used in the construction of our new 250,000 sq. ft. greenhouse and the continuing construction of our 1,000,000 sq. ft. greenhouse of approximately $45,721. During the period, we continued additions to our software, licenses and online platforms of $1,780. Also during the period, a $10,000 convertible note receivable was issued to Fire & Flower.
Capital Resources
As at July 31, 2018, total current assets less accounts payable totalled $267,625. The exercise of all the issued and outstanding warrants, as at July 31, 2018, would result in an increase in cash of approximately $115,251, and the exercise of all stock options would increase cash by approximately $43,459.
Upon the completion of the Molson joint venture transaction, the Company issued 11,500,000 common share warrants with an exercise price of $6.00 per warrant. This would increase cash by approximately $69,000.
Management believes that current working capital provides sufficient funds to fund current expansion projects and meet contractual obligations for the next 12 months. We periodically evaluate the opportunity to raise additional funds through the public or private placement of equity capital to strengthen our financial position and to provide sufficient cash reserves for growth and development of the business.
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Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines the number of issued and outstanding common shares, warrants and options as at July 31, 2017, July 31, 2018 and October 25, 2018.
October 25, 2018 | July 31, 2018 | July 31, 2017 | ||||||||||
Common shares |
197,092,917 | 193,629,116 | 76,192,990 | |||||||||
Warrants |
34,931,058 | 26,425,504 | 20,994,123 | |||||||||
Options |
14,938,837 | 14,388,066 | 5,748,169 | |||||||||
Total |
246,962,812 | 234,442,686 | 102,935,282 |
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements.
We have certain contractual financial obligations related to service agreements and construction contracts for the construction in progress shown in Note 8 of the consolidated financial statements and the accompanying notes for the three and 12 months ended July 31, 2018.
These contracts have optional renewal terms that we may exercise at our option. The annual minimum payments payable under these contracts over the next five years are as follows:
Fiscal year | 2019 | 2020 | 2021 | 2022 | Total | |||||||||||||||
Amount |
$ | 61,766 | $ | 891 | $ | 854 | $ | 801 | $ | 64,311 |
Financial Risk Management
We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The main objectives of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which we are exposed are described below.
Interest Risk
Our exposure to interest rate risk only relates to any investments of surplus cash. We may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at July 31, 2018, we had short term investments of $205,447.
Credit Risk
Credit risk is the risk of financial loss to us if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from our trade receivables and convertible note receivable. As at July 31, 2018, we are exposed to credit-related losses in the event of non-performance by the counterparties.
We provide credit to our customers in the normal course of business and have established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the sales are transacted with clients covered under various insurance programs, we have limited credit risk.
Credit risk from the convertible note receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, short-term investments, trade receivables and convertible note receivable represents the maximum exposure to credit risk and as at July 31, 2018, this amounted to $255,432. The cash and short-term investments are held with well-established financial institutions in Canada. Since our inception, no losses have been incurred in relation to cash held by our financial institution. The trade receivables balance is held with one of the largest medical insurance companies in Canada.
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Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due. We manage our liquidity risk by reviewing on an ongoing basis our capital requirements. As at July 31, 2018, we had $244,789 of cash and short-term investments.
We are obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $8,995 due in the next 12 months.
The carrying values of cash, trade receivables, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.
Critical Accounting Assumptions
Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in applying these accounting policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological assets and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets. Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note 3 of the Companys annual audited consolidated financial statements for the fiscal year ended July 31, 2018, which is available under HEXOs profile on SEDAR.
Upcoming Changes in Accounting Policies
The following are new and revised IFRS standards in issue, but not yet effective.
IFRS 9, Financial Instruments
IFRS 9 was issued by the International Accounting Standards Board (IASB) in November 2009 and October 2010 and will replace IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Two measurement categories continue to exist to account for financial liabilities in IFRS 9, fair value through profit or loss (FVTPL) and amortized cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortized cost unless the fair value option is applied. The treatment of embedded derivatives under the new standard is consistent with IAS 39 and is applied to financial liabilities and non-derivative hosts not within the scope of the standard. The Company adopted IFRS 9 effective August 1, 2018. The Company has completed its assessment of the impact of this new standard and expects no changes.
IFRS 7, Financial Instruments: Disclosure
IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018. The Company adopted the amendments to IFRS 7 on August 1, 2018 and does not expect the implementation will result in a significant effect to the financial statements.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying performance obligations, principal versus agent considerations, and licensing. The Company adopted IFRS 15 effective August 1, 2018. The Company has completed its assessment of the impact of this new standard and has noted beyond the required additional disclosures, there exist no material changes to the financial statements or required retroactive adjustments to the retained earnings.
IFRS 16, Leases
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is assessing the impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial statements.
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Related Party Transactions
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling our operations, directly or indirectly. Our key management personnel are the members of the executive management team and Board of Directors, who collectively control approximately 8.77% of the outstanding common shares as at July 31, 2018 (July 31, 2017 25.11%).
Compensation provided to key management for the three and 12 months ended July 31, 2018 and July 31, 2017 was as follows:
For the three months ended | For the 12 months ended | |||||||||||||||
|
|
|||||||||||||||
July 31, 2018 | July 31, 2017 | July 31, 2018 | July 31, 2017 | |||||||||||||
Salary and/or consulting fees |
$ | 739 | $ | 438 | $ | 2,244 | $ | 1,270 | ||||||||
Stock-based compensation |
1,272 | 231 | 3,836 | 512 | ||||||||||||
Total |
$ | 2,011 | $ | 669 | $ | 6,080 | $ | 1,782 |
Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
On July 11, 2018, the Company granted certain of its directors and officers a total of 4,325,000 stock options with an exercise price of $4.89.
On April 16, 2018, the Company granted certain executives of the Company a total of 845,000 stock options with an exercise price of $4.27.
On March 12, 2018, the Company granted certain executives of the Company a total of 325,000 stock options with an exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives a total of 1,750,000 stock options with an exercise price of $2.69, half of which vested immediately and the balance over a three-year period.
On September 8, 2017, the Company granted certain of our executives a total of 650,000 stock options with an exercise price of $1.37.
The Company leased a building to a related party for $0.7 per month as part of a usufruct agreement. The related party used this property as a personal residence. On December 2, 2016, we reached an agreement with the related party to terminate the usufruct. In exchange, we paid the related party $46. Gaining access to this building provides us with additional office space and thereby reduces the need to rent or build additional offices in the short term.
Subsequent to the quarter ended July 31, 2018, the Company announced the acquisition of a new facility. The building is owned by Belleville Complex Inc., a joint venture in which HEXO will hold a 25% interest and Olegna will hold a 75% interest. Olegna is controlled by a HEXO director and a nonarms length related party. In addition to its initial lease of 500,000 sq. ft. of the space under a long-term lease, HEXO will have rights of first offer and first refusal to lease the remaining space in the building. As part of the transaction, HEXO has loaned $20,000 to Belleville Complex to acquire the building. The loan will be repaid within 120 days from September 7, 2018, and as of October 7, 2018, bore interest at an annual rate of 4%, which interest shall be payable monthly. The loan is secured by a first mortgage over the building. HEXO has also agreed to be the anchor tenant of the facility for a period of 20 years.
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.
Internal Controls over Financial Reporting
In accordance with National Instrument 52-109, Certification of Disclosure in Issuers Annual and Interim Filings, management is responsible for establishing and maintaining adequate disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR). On June 22, 2018, the Company commenced trading on the TSX, graduating from the TSX Venture Exchange. The Companys CEO and CFO will be required to file certifications relating to DCP and ICFR for the Company in connection with its interim and annual filings, commencing with the three months ended October 31, 2018, the second reporting period ended after the Company became a non-venture issuer on the TSX.
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Risk Factors
Our overall performance and results of operations are subject to various risks and uncertainties which could cause actual performance, results and achievements to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including, without limitation, the following factors, which are discussed in our Annual Information Form dated October 26, 2018 available under our profile on www.sedar.com, which risk factors are incorporated by reference into this document, and should be reviewed in detail by all readers:
● |
We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may not be realized for a number of reasons. An investment in our securities is speculative and involves a high degree of risk and uncertainty. |
● |
Reliance on managements and key persons ability to execute on strategy. This exposes us to managements ability to perform, as well as the risk of management leaving the Company. |
● |
We face intense competition from licensed producers and other companies, some of which may have greater financial resources and more industry, manufacturing and marketing experience than we do. |
● |
The number of licences granted, and the number of licensed producers ultimately authorized by Health Canada could have an impact on our operations. We expect to face additional competition from new market entrants that are granted licences under the ACMPR or existing licence holders which are not yet active in the industry. |
● |
We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base. |
● |
We maintain various types of insurance such as, but not limited to, errors and omissions insurance; directors and officers insurance; property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo insurance. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on us in terms of damages awarded and the impact on our reputation. |
● |
Given the nature of our business, we may from time to time be subject to claims or complaints from investors or others in the normal course of business which could adversely affect the publics perception of the Company. |
● |
We may become party to litigation from time to time in the ordinary course of business which could adversely affect our business. |
● |
Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition of conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition of fines and censures. |
● |
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that may be required by governmental authorities. |
● |
While to the knowledge of our management, it is currently in compliance with all laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis and also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment, changes to such laws, regulations and guidelines due to matters beyond our control may cause adverse effects to our operations. |
● |
Our business operations are dependent on our licence under the ACMPR. The licence must be renewed by Health Canada. Our current licence expires on October 15, 2019. Failure to comply with the requirements of the licence or any failure to renew the licence would have a material adverse impact on our business, financial condition and operating results. |
● |
Our activities and resources are currently primarily focused on our production facilities on the Gatineau campus, and we will continue to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau campus would have a material and adverse effect on our business, financial condition and prospects. |
● |
We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve profitability. |
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● |
Our growth strategy contemplates outfitting the Companys multiple facilities with additional production resources. There is a risk that these additional resources will not be completed on time, on budget, or at all. |
● |
A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers. |
● |
Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact our business and our ability to operate profitably. |
● |
We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. |
● |
As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties. |
● |
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. |
● |
Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to our growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition and operating results. |
● |
We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical marijuana industry in Canada. |
● |
We have no earnings or dividend record and may not pay any dividends on our common shares in the foreseeable future. |
● |
Our common shares are listed on the TSX; however, there can be no assurance that an active and liquid market for the common shares will be maintained, and an investor may find it difficult to resell such shares. |
● |
The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, including governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our business prospects, as well as many other factors that are beyond. |
● |
We may issue additional common shares in the future, which may dilute a shareholders holdings in the Company. |
● |
Our operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. We will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in restrictions on our manufacturing operations. |
● |
The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada. |
● |
In the fiscal year 2018, the Company initiated the implementation of new ERP systems. The implementation is expected to be completed in the fiscal year ended July 31, 2019. Upon full commencement of the implementation, the scoping, requirements definition, business process definition, design and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting. |
37 |
|
● |
We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. |
● |
Our TSXs listing conditions required us to deliver an undertaking confirming that, while listed on the TSX, we will only conduct the business of production, acquisition, sale and distribution of cannabis in Canada as permitted under the Health Canada license. |
● |
The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations that may increase the risk of non-compliance, which could adversely impact the Company, its market perception and valuation. |
● |
The Company is subject to changed rules and regulations as implemented by a number of governmental and self-regulated bodies, including, but not limited to, the Canadian Securities Administration, the TSX and the International Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity, creating many new requirements. |
38 |
|
Exhibit 4.4
Condensed interim consolidated
financial statements of HEXO Corp.
(formerly The Hydropothecary Corporation)
For the three months ended October 31, 2018 and 2017
Condensed Interim Consolidated Statements of Financial Position
(Unaudited, in Canadian dollars)
As at |
Note | October 31, 2018 | July 31, 2018 | |||||||||
Assets |
||||||||||||
Current assets |
||||||||||||
Cash and cash equivalents |
$ | 23,278,012 | $ | 39,341,688 | ||||||||
Restricted cash |
4 | 5,000,000 | | |||||||||
Short-term investments |
5 | 148,608,728 | 205,446,830 | |||||||||
Trade receivables |
15 | 6,975,573 | 643,596 | |||||||||
Commodity taxes recoverable |
4,387,193 | 4,237,465 | ||||||||||
Convertible debenture receivable |
13 | 13,648,593 | 10,000,000 | |||||||||
Promissory note receivable |
17 | 20,333,702 | | |||||||||
Prepaid expenses |
3,238,193 | 4,203,693 | ||||||||||
Inventory |
6 | 16,240,283 | 10,414,624 | |||||||||
Biological assets |
7 | 2,640,808 | 2,331,959 | |||||||||
|
|
|
|
|||||||||
$ | 244,351,085 | $ | 276,619,855 | |||||||||
|
|
|
|
|||||||||
Property, plant and equipment |
8 | 85,266,400 | 54,333,051 | |||||||||
Intangible assets and other longer term assets |
9 | 4,428,471 | 4,044,527 | |||||||||
Investment in joint ventures |
17 | 49,259,827 | | |||||||||
|
|
|
|
|||||||||
$ | 383,305,783 | $ | 334,997,433 | |||||||||
|
|
|
|
|||||||||
Liabilities |
||||||||||||
Current liabilities |
||||||||||||
Accounts payable and accrued liabilities |
$ | 14,632,644 | $ | 8,994,789 | ||||||||
Warrant liability |
10, 11 | 2,805,221 | 3,129,769 | |||||||||
|
|
|
|
|||||||||
$ | 17,437,865 | $ | 12,124,558 | |||||||||
|
|
|
|
|||||||||
Shareholders equity |
||||||||||||
Share capital |
11 | 357,402,419 | 347,232,724 | |||||||||
Share-based payment reserve |
11 | 10,675,375 | 6,139,179 | |||||||||
Warrants |
11 | 53,727,767 | 12,635,339 | |||||||||
Deficit |
(55,937,643 | ) | (43,134,367 | ) | ||||||||
|
|
|
|
|||||||||
$ | 365,867,918 | $ | 322,872,875 | |||||||||
|
|
|
|
|||||||||
$ | 383,305,783 | $ | 334,997,433 | |||||||||
|
|
|
|
Commitments and contingencies (Note 20)
Subsequent events (Note 24)
Approved by the Board
/s/ Jason Ewart, Director
/s/ Michael Munzar, Director
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
1
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
(Unaudited, in Canadian dollars)
For the three months ended |
Note | October 31, 2018 | October 31, 2017 | |||||||||
Gross revenue from sale of goods |
$ | 6,630,001 | $ | 1,101,502 | ||||||||
Excise taxes |
(1,014,478 | ) | | |||||||||
|
|
|
|
|||||||||
Net revenue from sale of goods |
5,615,523 | 1,101,502 | ||||||||||
Ancillary revenue |
22 | 47,370 | | |||||||||
|
|
|
|
|||||||||
Net revenue |
5,662,893 | 1,101,502 | ||||||||||
Cost of goods sold |
6, 11 | 2,830,764 | 463,000 | |||||||||
|
|
|
|
|||||||||
Gross margin before fair value adjustments |
2,832,129 | 638,502 | ||||||||||
Fair value adjustment on sale of inventory |
6 | 717,489 | 814,499 | |||||||||
Fair value adjustment on biological assets |
7 | (5,122,845 | ) | (2,639,257 | ) | |||||||
|
|
|
|
|||||||||
Gross margin |
$ | 7,237,485 | $ | 2,463,260 | ||||||||
|
|
|
|
|||||||||
Operating Expenses |
||||||||||||
General and administrative |
4,911,627 | 1,167,929 | ||||||||||
Marketing and promotion |
11,710,941 | 1,114,584 | ||||||||||
Stock-based compensation |
11, 16 | 4,689,303 | 313,539 | |||||||||
Amortization of property, plant and equipment |
8 | 573,398 | 124,112 | |||||||||
Amortization of intangible assets |
9 | 149,536 | 62,810 | |||||||||
Research and development |
| 61,400 | ||||||||||
|
|
|
|
|||||||||
16 | $ | 22,034,805 | $ | 2,844,374 | ||||||||
|
|
|
|
|||||||||
Loss from operations |
(14,797,320 | ) | (381,114 | ) | ||||||||
Revaluation of financial instruments loss |
10 | (2,336,730 | ) | (1,282,436 | ) | |||||||
Share of loss from investment in joint venture |
17 | (161,104 | ) | | ||||||||
Unrealized gain on convertible debenture receivable |
13 | 3,433,798 | | |||||||||
Foreign exchange gain/(loss) |
(14 | ) | 84,992 | |||||||||
Interest expense |
10 | (7,934 | ) | (432,908 | ) | |||||||
Interest income |
5, 13, 17 | 1,066,028 | 93,264 | |||||||||
|
|
|
|
|||||||||
Net loss and comprehensive loss attributable to shareholders |
$ | (12,803,276 | ) | $ | (1,918,202 | ) | ||||||
|
|
|
|
|||||||||
Net loss per share, basic and diluted |
$ | (0.07 | ) | $ | (0.03 | ) | ||||||
|
|
|
|
|||||||||
Weighted average number of outstanding shares |
||||||||||||
Basic and diluted |
12 | 194,033,380 | 76,480,085 | |||||||||
|
|
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
2
Condensed Interim Consolidated Statements of Changes in Shareholders Equity
(Unaudited, in Canadian dollars)
For the three months ended October 31, 2018 and 2017 |
Note |
Number
common shares |
Share capital |
Share-based
payment reserve |
Warrants |
Contributed
surplus |
Deficit |
Shareholders
equity |
||||||||||||||||||||||||
Balance, August 1, 2018 |
193,629,116 | $ | 347,232,724 | $ | 6,139,179 | $ | 12,635,339 | $ | | $ | (43,134,367 | ) | $ | 322,872,875 | ||||||||||||||||||
Issuance of warrants |
11 | | | | 42,386,162 | | | 42,386,162 | ||||||||||||||||||||||||
Exercise of stock options |
11 | 621,729 | 626,167 | (263,716 | ) | | | 362,451 | ||||||||||||||||||||||||
Exercise of warrants |
10, 11 | 1,937,885 | 4,806,904 | | (991,722 | ) | | | 3,815,182 | |||||||||||||||||||||||
Exercise of Broker/Finder warrants |
11 | 1,199,861 | 4,736,624 | | (302,012 | ) | | | 4,434,612 | |||||||||||||||||||||||
Stock-based compensation |
11 | | | 4,799,912 | | | | 4,799,912 | ||||||||||||||||||||||||
Net loss |
| | | | | (12,803,276 | ) | (12,803,276 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at October 31, 2018 |
197,388,591 | $ | 357,402,419 | $ | 10,675,375 | $ | 53,727,767 | $ | | $ | (55,937,643 | ) | $ | 365,867,918 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance, August 1, 2017 |
76,192,990 | 45,159,336 | 1,561,587 | 3,728,255 | 1,774,880 | (19,784,568 | ) | 32,439,490 | ||||||||||||||||||||||||
Exercise of warrants |
10, 11 | 481,896 | 625,788 | | (32,594 | ) | | | 593,194 | |||||||||||||||||||||||
Stock-based compensation |
11 | | | 313,539 | | | | 313,539 | ||||||||||||||||||||||||
Net loss |
| | | | | (1,918,202 | ) | (1,918,202 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at October 31, 2017 |
76,674,886 | $ | 45,785,124 | $ | 1,875,126 | $ | 3,695,661 | $ | 1,774,880 | $ | (21,702,770 | ) | $ | 31,428,021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
3
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited, in Canadian dollars)
For the three months ended |
Note | October 31, 2018 | October 31, 2017 | |||||||
Operating activities |
||||||||||
Net loss and comprehensive loss |
$ | (12,803,276 | ) | $ | (1,918,202 | ) | ||||
Items not affecting cash |
||||||||||
Amortization of property, plant and equipment |
8 | 929,596 | 124,112 | |||||||
Amortization of intangible assets |
9 | 149,536 | 62,810 | |||||||
Unrealized revaluation gain on convertible debenture |
13 | (3,433,798 | ) | | ||||||
Unrealized revaluation gain on biological assets |
7 | (5,122,845 | ) | (2,827,285 | ) | |||||
Accrued interest income |
13 | (214,795 | ) | | ||||||
Share of loss on investment |
17 | 161,104 | | |||||||
Fair value adjustment on inventory sold |
6 | 717,489 | | |||||||
Stock-based compensation |
11,16 | 4,799,912 | 313,539 | |||||||
Accretion of convertible debt |
10 | | 493,981 | |||||||
Revaluation of foreign currency denominated warrants |
10 | 2,336,730 | 1,282,436 | |||||||
Liability value of foreign currency denominated warrants exercised |
10 | (2,661,304 | ) | | ||||||
Changes in non-cash operating working capital items |
||||||||||
Trade receivables |
(6,331,977 | ) | 55,470 | |||||||
Commodity taxes recoverable |
(149,728 | ) | (192,082 | ) | ||||||
Prepaid expenses |
965,500 | (62,502 | ) | |||||||
Inventory |
6 | (1,729,152 | ) | 563,422 | ||||||
Accounts payable and accrued liabilities |
(713,736 | ) | 428,341 | |||||||
Warrant liability |
(324,548 | ) | | |||||||
Interest payable |
10 | | 502,000 | |||||||
|
|
|
|
|||||||
Cash and cash equivalents used in operating activities |
(23,425,292 | ) | (1,173,960 | ) | ||||||
|
|
|
|
|||||||
Financing activities |
||||||||||
Exercise of stock options |
11 | 362,451 | | |||||||
Exercise of warrants |
11 | 8,249,798 | 405,778 | |||||||
|
|
|
|
|||||||
Cash provided by financing activities |
8,612,249 | 405,778 | ||||||||
|
|
|
|
|||||||
Investing activities |
||||||||||
Disposal of short-term investments |
5 | 56,838,102 | (30,639,563 | ) | ||||||
Issuance of promissory note receivable |
17 | (20,333,702 | ) | | ||||||
Restricted cash |
4 | (5,000,000 | ) | | ||||||
Acquisition of property, plant and equipment |
8 | (25,341,028 | ) | (5,242,818 | ) | |||||
Purchase of intangible assets |
9 | (379,236 | ) | (58,454 | ) | |||||
Investment in joint ventures |
17 | (7,034,769 | ) | | ||||||
|
|
|
|
|||||||
Cash used in investing activities |
(1,250,633 | ) | (35,940,835 | ) | ||||||
|
|
|
|
|||||||
Decrease in cash and cash equivalents |
(16,063,676 | ) | (36,709,017 | ) | ||||||
Cash and cash equivalents, beginning of year |
39,341,688 | 38,452,823 | ||||||||
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
$ | 23,278,012 | $ | 1,743,806 | ||||||
|
|
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
4
Notes to the Condensed Interim Consolidated Financial Statements
For the three months ended October 31, 2018 and 2017
(Unaudited, in Canadian dollars)
1. Description of Business
HEXO Corp. (formerly The Hydropothecary Corporation), formerly BFK Capital Corp. (the Company), has one wholly-owned subsidiary, HEXO Operations Inc. (formerly 10074241 Canada Inc. and 167151 Canada Inc.) (HOI). HOI has two wholly-owned subsidiaries: Banta Health Group and Coral Health Group (together HEXO). HEXO is a producer of cannabis and its site is licensed by Health Canada for production and sale. Its head office is located at 240-490 Boulevard Sainte-Joseph, Gatineau, Quebec, Canada. The Company is a publicly traded corporation, incorporated in Ontario. The Companys common shares are listed on the Toronto Stock Exchange (TSX), under the trading symbol HEXO.
The Company was incorporated under the name BFK Capital Corp. by articles of incorporation pursuant to the provisions of the Business Corporations Act (Ontario) on October 29, 2013, and after completing its initial public offering of shares on the TSX-V on November 17, 2014, it was classified as a Capital Pool Corporation as defined in policy 2.4 of the TSX-V. The principal business of the Company at that time was to identify and evaluate businesses or assets with a view to completing a qualifying transaction (a Qualifying Transaction) under relevant policies of the TSX-V. The Company had one wholly-owned subsidiary, HOI, which was incorporated with the sole purpose of facilitating a future Qualifying Transaction.
On March 15, 2017, the Company completed its Qualifying Transaction which was effective pursuant to an agreement between the Company and the legacy entity, The Hydropothecary Corporation (Hydropothecary). As part of the Qualifying Transaction, the Company changed its name to The Hydropothecary Corporation and consolidated its 2,756,655 shares on a 1.5 to 1 basis to 1,837,770. Following this change, Hydropothecary amalgamated with 10100170 Canada Inc., which resulted in the creation of a new entity, 10074241 Canada Inc. (HOI). In connection with that amalgamation, HEXO acquired all of the issued and outstanding shares of the Company and the former shareholders of Hydropothecary received a total of 68,428,824 post-consolidation common shares. Immediately following closing, the Company had a total 70,266,594 common shares outstanding.
Upon closing of the transaction, the shareholders of Hydropothecary owned 97.4% of the common shares of the Company and as a result, the transaction was considered a reverse acquisition of the Company by Hydropothecary. For accounting purposes Hydropothecary was considered the acquirer and the Company was considered the acquiree. Accordingly, the annual consolidated financial statements are in the name of HEXO Corp. (formerly BFK Capital Corp.); however, they are a continuation of the financial statements of Hydropothecary.
Shareholder approval of the Companys name change to HEXO Corp. formerly The Hydropothecary Corporation occurred August 28, 2018.
2. Basis of Presentation
Statement of Compliance
These condensed interim consolidated financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Reporting (IAS 34). These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the fiscal year ended July 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (IFRS).
These condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors on December 12, 2018.
Basis of Measurement and Consolidation
The condensed interim consolidated financial statements have been prepared on an historical cost basis except for cash and cash equivalents, restricted cash, short term investments, biological assets, convertible debenture receivable, and the warrant liability, which are measured at fair value on a recurring basis and include the accounts of the Company and entities controlled by the Company and its subsidiaries. They include its wholly-owned subsidiary, HOI (formerly 10074241 Canada Inc and 167151 Canada Inc.). They also include Banta Health Group and Coral Health Group, two wholly-owned subsidiaries of HEXO Operations Inc. They also include the accounts of 8980268 Canada Inc., a company for which HOI holds a right to acquire the outstanding shares at any time for a nominal amount. All subsidiaries are located in Canada.
Historical cost is the fair value of the consideration given in exchange for goods and services based upon the fair value at the time of the transaction of the consideration provided.
5
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these condensed interim consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, Share-based payment and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2, Inventories .
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
Level 2 - inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 - inputs are unobservable inputs for the asset or liability.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of these condensed interim consolidated financial statements requires the use of certain critical accounting estimates, which requires management to exercise judgement in applying the Companys accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these condensed interim consolidated financial statements have been set out in Note 3 of the audited consolidated financial statements for the year ended July 31, 2018, with the exception of the new areas of significant judgements, estimates and assumptions presented below.
(a) INVESTMENT IN ASSOCIATES AND JOINT VENTURES
When determining the appropriate basis of accounting for the Companys interests in affiliates, the Company makes judgments about the degree of influence that it exerts directly or through an arrangement over the investees relevant activities.
Judgment was used to determine whether the joint venture arrangements described in Note 17 should be accounted for as a joint operation or a joint venture. Given the Company has rights to the net assets of the separate legal entities, the Company has concluded they will be accounted for as joint ventures. The Company will recognize the initial investment at cost and the carrying amount is increased or decreased to recognize the Companys share of the profit or loss of the venture after the date of acquisition.
(b) FUNCTIONAL AND PRESENTATION CURRENCY
These annual consolidated financial statements are presented in Canadian dollars, the functional currency of the Company and its subsidiaries.
3. Changes to Policies and Accounting Standards and Interpretations
Change in Accounting Policies
Effective August 1, 2018, the Company changed its accounting policy with respect to the capitalization of indirect costs related to biological assets and inventory within the biological transformation and harvesting process. The Company now capitalizes production related depreciation and amortization, overhead and stock-based compensation to the costs of goods sold as inventory is sold. The Companys voluntary change in accounting policy was applied retrospectively and resulted in an insignificant impact to the comparative period.
The Companys amended policies are as follows:
(a) BIOLOGICAL ASSETS
The Company measures biological assets consisting of cannabis plants using the income approach at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. The Company capitalizes all the direct and indirect costs as incurred related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest including labour related costs, grow consumables, materials, utilities, facilities costs, depreciation, overhead, stock-based compensation of applicable employees, 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. Seeds are measured at fair value. Unrealized gains or losses arising from changes in fair value less cost to sell during the period are included in the results of operations and presented on a separate line of statement of comprehensive loss of the related period.
6
(b) INVENTORY
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest, which becomes the initial deemed cost of the inventory. Any subsequent post-harvest costs are capitalized to inventory to the extent that cost is less than net realizable value. Subsequent costs include materials, overhead, amortization, stock-based compensation of applicable employees and labour 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 margin before depreciation. 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.
New IFRS Effective August 1, 2018
IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying performance obligations, principal versus agent considerations, and licensing.
The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative period or transitional adjustments required as a result of the adoption. The Companys accounting policy for revenue recognition under IFRS 15 is as follows:
1. |
Identifying the contract with a customer; |
2. |
Identifying the performance obligation(s) in the contract; |
3. |
Determining the transaction price; |
4. |
Allocating the transaction price to the performance obligation(s) in the contract; and |
5. |
Recognizing revenue when or as the Company satisfies the performance obligation(s). |
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 timing of which is consistent with the Companys previous revenue recognition policy under IAS 18.
IFRS 9, FINANCIAL INSTRUMENTS
The Company adopted IFRS 9 retroactively and determined that there is no change to the comparative period or transitional adjustments required as a result of the adoption.
IFRS 9 was issued by the International Accounting Standards Board (IASB) in November 2009 and October 2010 and will replace IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or at fair value. The classification and measurement of financial assets is based on the Companys business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). Financial assets under IFRS 9 are initially measured at fair value and are subsequently measured at either amortized cost; fair value through other comprehensive income (FVTOCI) or; fair value through profit or loss (FVTPL).
Amortized Cost
Financial assets classified and measured at amortized cost are those assets that are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows that are SPPI. Financial assets classified at amortized cost are measured using the effective interest method.
FVTOCI
Financial assets classified and measured at FVTOCI are those assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise to cash flows that are SPPI.
This classification includes certain equity instruments where IFRS 9 allows an entity to make an irrevocable election to classify the equity instruments, on an instrument-by-instrument basis, that would otherwise be measured at FVTPL to present subsequent changes in FVTOCI.
FVTPL
Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at amortized cost or at FVTOCI. This category includes debt instruments whose cash flow characteristics are not 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.
7
The following table summarizes the Companys financial instruments under IAS 39 and IFRS 9:
IAS 39 Classification |
IFRS 9 Classification |
|||
Financial assets |
||||
Cash and cash equivalents |
FVTPL | FVTPL | ||
Restricted cash |
FVTPL | FVTPL | ||
Short-term investments |
FVTPL | FVTPL | ||
Trade receivables |
Loans and receivables | Amortized cost | ||
Convertible debenture receivable |
FVTPL | FVTPL | ||
Promissory note receivable |
Loans and receivables | Amortized cost | ||
Financial liabilities |
||||
Accounts payable and accrued liabilities |
Other financial liabilities | Amortized cost | ||
Warrant liability |
FVTPL | FVTPL |
The adoption of IFRS 9 did not have a material impact to the Companys classification and measurement of financial assets and liabilities.
IFRS 9 uses an expected credit loss impairment model as opposed to an incurred credit loss model under IAS 39. The impairment model is applicable to financial assets measured at amortized cost where any expected future credit losses are provided for, irrespective of whether a loss event has occurred as at the reporting date. For trade receivables, the Company has measured the expected credit losses based on lifetime expected credit losses taking into consideration historical credit loss experience and financial factors specific to the debtors and other factors. The carrying amount of trade receivables is reduced for any expected credit losses through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the statements of loss and comprehensive loss. At the point when the Company is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial assets at amortized cost.
Classification and Measurement of Financial Liabilities
Accounting for financial liabilities remains largely the same under IFRS 9 and subsequently the Companys liabilities were not significantly impacted by the adoption.
Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Company designates a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortized cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments).
New and Revised IFRS in Issue but Not Yet Effective
IFRS 16, LEASES
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is assessing the impact of the new or revised IFRS standard in issue but not yet effective on its condensed interim consolidated financial statements.
4. Restricted Cash
As at October 31, 2018, the Company had $5,000,000 of restricted funds placed in escrow to facilitate a purchase agreement with a vendor. The purchase agreement shall be amortized on a pro-rata basis based upon delivery milestones over the five months period ended March 31, 2019.
8
5. Short-Term Investments
Short-term investments consist of in various guaranteed investment certificates, term deposits, and fixed income securities that mature on dates between January 27, 2019 and June 21, 2019 with annual interest rates ranging from 0.45% to 1.85%.
Short term investments are comprised of liquid investments with maturities of less than 12 months. Short term investments are recognized initially at fair value and subsequently adjusted to fair value through profit or loss. The Company intends to hold the high interest savings funds for a period greater than 3 months. Short term investments contain restricted funds of $3,117,000 due to a held letter of credit (see note 20).
October 31, 2018 | July 31, 2018 | |||||||||||
Interest rate | Maturity date | Total | Total | |||||||||
Guaranteed investment certificates |
0.45%0.50% | January 27, 2019 to June 21, 2019 | $ | 1,314 | $ | 712,284 | ||||||
Term deposits |
1.2%1.75% | To desired term | 3,163,886 | 49,483,945 | ||||||||
High interest savings accounts |
1.4%1.85% | April 26, 2019 to desired term | 145,443,528 | 155,250,602 | ||||||||
|
|
|
|
|||||||||
$ | 148,608,728 | $ | 205,446,830 | |||||||||
|
|
|
|
6. Inventory
October 31, 2018 | ||||||||||||
Capitalized
cost |
Biological asset
fair value adjustment |
Total | ||||||||||
Dried cannabis |
$ | 5,195,138 | $ | 7,493,389 | $ | 12,688,527 | ||||||
Oils |
1,871,507 | 703,282 | 2,574,789 | |||||||||
Packaging and supplies |
976,967 | | 976,967 | |||||||||
|
|
|
|
|
|
|||||||
$ | 8,043,612 | $ | 8,196,671 | $ | 16,240,283 | |||||||
|
|
|
|
|
|
The inventory expensed to cost of goods sold in the three months ended October 31, 2018, was $2,830,764 (October 31, 2017 $1,040,099).
July 31, 2018 | ||||||||||||
Capitalized
cost |
Biological asset
fair value adjustment |
Total | ||||||||||
Dried cannabis |
$ | 2,115,464 | $ | 4,440,195 | $ | 6,555,659 | ||||||
Oils |
2,280,780 | 881,432 | 3,162,212 | |||||||||
Packaging and supplies |
696,753 | | 696,753 | |||||||||
|
|
|
|
|
|
|||||||
$ | 5,092,997 | $ | 5,321,627 | $ | 10,414,624 | |||||||
|
|
|
|
|
|
7. Biological Assets
The Companys biological assets consist of cannabis plants from seeds all the way through to mature plants. The changes in the carrying value of biological assets are as follows:
October 31, 2018 | July 31, 2018 | |||||||
Carrying amount, beginning of period |
$ | 2,331,959 | $ | 1,504,186 | ||||
Production costs capitalized |
1,536,852 | 993,469 | ||||||
Net increase in fair value due to biological transformation less cost to sell |
5,122,845 | 7,339,566 | ||||||
Transferred to inventory upon harvest |
(6,350,848 | ) | (7,505,262 | ) | ||||
|
|
|
|
|||||
Carrying amount, end of period |
$ | 2,640,808 | $ | 2,331,959 | ||||
|
|
|
|
9
As at October 31, 2018, the fair value of biological assets included $6,200 in seeds and $2,634,608 in cannabis plants ($6,200 in seeds and $2,325,759 in cannabis plants as at July 31, 2018). The significant estimates used in determining the fair value of cannabis plants are as follows:
|
yield by plant; |
|
stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested; |
|
percentage of costs incurred for each stage of plant growth. |
|
fair value selling price per gram less cost to complete and cost to sell. |
|
destruction/wastage of plants during the harvesting and processing process. |
All biological assets are classified as current assets in the statement of financial position and are considered Level 3 fair value estimates (Note 2). As at October 31, 2018, it is expected that the Companys biological assets will yield approximately 4,846,294 grams of cannabis (July 31, 2018 4,373,775 grams of cannabis). The Companys estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the plants life relative to the stages within the harvest cycle.
Managements identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below.
The following table summarizes the unobservable inputs for the period ended October 31, 2018:
Unobservable inputs |
Input values |
Sensitivity analysis |
||
Average selling price Obtained through actual retail prices on a per strain basis. |
$5.00 per dried gram. | An increase or decrease of 5% applied to the average selling price would result in a change of approximately $131,700 to the valuation. | ||
Yield per plant Obtained through historical harvest cycle results on a per strain basis. |
54235 grams per plant. | An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $373,100 in valuation. | ||
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle. |
Average of 38% completion. | An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $325,100 in valuation. | ||
Wastage Obtained through the estimates of wastage within the cultivation and production cycle. |
0%30% dependent upon the stage within the harvest cycle. | An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $134,400 in valuation. |
The following table summarizes the unobservable inputs for the period ended July 31, 2018:
Unobservable inputs |
Input values |
Sensitivity analysis |
||
Average selling price Obtained through actual retail prices on a per strain basis. |
$4.66 per dried gram. | An increase or decrease of 5% applied to the average selling price would result in a change of approximately $329,000 to the valuation. | ||
Yield per plant Obtained through historical harvest cycle results on a per strain basis. |
50235 grams per plant. | An increase of decrease of 5% applied to the average yield per plant would not result in a material change in valuation. | ||
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle. |
Average of 32% completion. | An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $320,000 in valuation. | ||
Wastage Obtained through the estimates of wastage within the cultivation and production cycle. |
0%30% dependent upon the stage within the harvest cycle. | An increase of decrease of 5% applied to the average yield per plant would not result in a material change in valuation. |
10
8. Property, Plant and Equipment
Cost |
Balance at
July 31, 2018 |
Additions | Adjustments |
Balance at
October 31, 2018 |
||||||||||||
Land |
$ | 1,038,720 | $ | |
$
|
|
|
$ | 1,038,720 | |||||||
Buildings |
32,535,728 | 3,352,494 | | 35,888,222 | ||||||||||||
Leasehold Improvements |
205,456 | 221,251 | | 426,707 | ||||||||||||
Furniture and equipment |
1,660,688 | 581,049 | | 2,241,737 | ||||||||||||
Cultivation and production equipment |
4,031,629 | 1,596,017 | | 5,627,646 | ||||||||||||
Vehicles |
151,251 | 31,082 | | 182,333 | ||||||||||||
Computers |
658,802 | 146,361 | | 805,163 | ||||||||||||
Construction in progress |
15,432,973 | 25,945,046 | | 41,378,019 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 55,715,247 | $ | 31,873,300 | $ | | $ | 87,588,547 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization |
Balance at
July 31, 2018 |
Amortization | Adjustments |
Balance at
October 31, 2018 |
||||||||||||
Land |
$ | | $ | | $ | | $ | | ||||||||
Buildings |
533,180 | 462,165 | | 995,345 | ||||||||||||
Leasehold Improvements |
8,313 | 32,905 | | 41,218 | ||||||||||||
Furniture and equipment |
527,556 | 101,214 | | 628,770 | ||||||||||||
Cultivation and production equipment |
68,759 | 272,126 | | 340,885 | ||||||||||||
Vehicles |
55,792 | 8,340 | | 64,132 | ||||||||||||
Computers |
188,596 | 63,201 | | 251,797 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,382,196 | $ | 939,951 | $ | | $ | 2,322,147 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying value |
$ | 54,333,051 | $ | 85,266,400 | ||||||||||||
|
|
|
|
As at October 31, 2018, there was $6,165,719 (July 31, 2018 $3,920,069) of property, plant and equipment in accounts payable and accrued liabilities. During the three months ended October 31, 2018, the Company capitalized $366,553 of amortization to inventory. During the three months ended October 31, 2018, the Company capitalized borrowing costs to buildings in the amount of $Nil (July 31, 2018 $993,611).
Adjustments reflect the activation of an assets useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification. Adjustments as well, consist of re-classifications.
11
Cost |
Balance at
July 31, 2017 |
Additions | Adjustments |
Balance at
July 31, 2018 |
||||||||||||
Land |
$ | 358,405 | $ | 680,315 | $ | | $ | 1,038,720 | ||||||||
Buildings |
3,744,759 | 3,930,217 | 24,860,752 | 32,535,728 | ||||||||||||
Leasehold Improvements |
| 205,456 | | 205,456 | ||||||||||||
Furniture and equipment |
900,395 | 1,232,613 | (472,320 | ) | 1,660,688 | |||||||||||
Cultivation and production equipment |
379,992 | 3,165,199 | 486,438 | 4,031,629 | ||||||||||||
Vehicles |
113,926 | 32,900 | 4,425 | 151,251 | ||||||||||||
Computers |
233,685 | 425,117 | | 658,802 | ||||||||||||
Construction in progress |
605,015 | 39,707,253 | (24,879,295 | ) | 15,432,973 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 6,336,177 | $ | 49,379,070 | $ | | $ | 55,715,247 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization |
Balance at
July 31, 2017 |
Amortization | Adjustments |
Balance at
July 31, 2018 |
||||||||||||
Land |
$ | | $ | | $ | | $ | | ||||||||
Buildings |
194,187 | 338,993 | | 533,180 | ||||||||||||
Leasehold Improvements |
| 8,313 | | 8,313 | ||||||||||||
Furniture and equipment |
165,086 | 195,086 | 167,384 | 527,556 | ||||||||||||
Cultivation and production equipment |
23,068 | 213,075 | (167,384 | ) | 68,759 | |||||||||||
Vehicles |
25,589 | 30,203 | | 55,792 | ||||||||||||
Computers |
78,552 | 110,044 | | 188,596 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 486,482 | $ | 895,714 | $ | | $ | 1,382,196 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying value |
$ | 5,849,695 | $ | 54,333,051 | ||||||||||||
|
|
|
|
9. Intangible Assets and Other Longer Term Assets
Cost |
Balance at
July 31, 2018 |
Additions | Adjustments |
Balance at
October 31, 2018 |
||||||||||||
ACMPR License |
$ | 2,544,696 | $ | | $ | | $ | 2,544,696 | ||||||||
Software |
1,800,139 | 567,414 | | 2,367,553 | ||||||||||||
Domain names |
585,283 | | | 585,283 | ||||||||||||
Patents |
| 177,892 | | 177,892 | ||||||||||||
Investments held at cost |
100,000 | | | 100,000 | ||||||||||||
Capitalized transaction costs |
211,826 | | (211,826 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 5,241,944 | $ | 745,306 | $ | (211,826 | ) | $ | 5,775,424 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization |
Balance at
July 31, 2018 |
Amortization | Adjustments |
Balance at
October 31, 2018 |
||||||||||||
ACMPR License |
$ | 403,090 | $ | 31,629 | $ | | $ | 434,719 | ||||||||
Software |
784,572 | 105,714 | | 890,286 | ||||||||||||
Domain name |
9,755 | 12,193 | | 21,948 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,197,417 | $ | 149,536 | $ | | $ | 1,346,953 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying value |
$ | 4,044,527 | $ | 4,428,471 | ||||||||||||
|
|
|
|
Software includes $690,350 and $392,456 relating to an enterprise resource planning software and an online sales platform, respectively (October 31, 2017$180,186 and $Nil, respectively). Both assets are not yet available for use. Accordingly, no amortization has been taken during the three months ended October 31, 2018. As at October 31, 2018, there was $154,244 (July 31, 2018 $265,757) of intangible assets in accounts payable and accrued liabilities. The adjustment represents capitalized transaction costs being allocated to the joint venture Truss (Note 17).
12
Cost |
Balance at
July 31, 2017 |
Additions |
Disposals/
adjustments |
Balance at
July 31, 2018 |
||||||||||||
ACMPR License |
$ | 2,544,696 | $ | | $ | | $ | 2,544,696 | ||||||||
Software |
651,247 | 1,148,892 | | 1,800,139 | ||||||||||||
Domain names |
| 585,283 | | 585,283 | ||||||||||||
Investments held at cost |
| 100,000 | | 100,000 | ||||||||||||
Capitalized transaction costs |
| 211,826 | | 211,826 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 3,195,943 | $ | 2,046,001 |
$
|
|
|
$ | 5,241,944 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization |
Balance at
July 31, 2017 |
Amortization |
Disposals/
adjustments |
Balance at
July 31, 2018 |
||||||||||||
ACMPR License |
$ | 276,909 | $ | 126,181 | $ | | $ | 403,090 | ||||||||
Software |
155,270 | 629,302 | | 784,572 | ||||||||||||
Domain name |
| 9,755 | | 9,755 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 432,179 | $ | 765,238 | $ | | $ | 1,197,417 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying value |
$ | 2,763,764 | $ | 4,044,527 | ||||||||||||
|
|
|
|
During the fiscal year ended July 31, 2018, the Company conducted a review of its intangible assets, which resulted in changes in the expected usage of its software. Certain assets, which management previously intended to use for 5 years from the date of purchase were replaced during the fiscal year as well as September 2018. As a result, the expected useful lives of these assets decreased. The effect of these changes on actual and expected depreciation expense, in current and future years respectively is as follows.
2019 | 2020 | 2021 | 2022 | Later | ||||||||||||||||
(Decrease) increase in amortization expense |
$ | (87,478 | ) | $ | (119,136 | ) | $ | (99,874 | ) | $ | (2,765 | ) | $ | Nil |
10. Convertible Debentures
2017 unsecured
convertible debentures 8% |
2018 unsecured
convertible debentures 7% |
Total | ||||||||||
Balance at July 31, 2017 |
20,638,930 | | 20,638,930 | |||||||||
Gross proceeds |
| 69,000,000 | 69,000,000 | |||||||||
Issuance costs |
| (4,791,642 | ) | (4,791,642 | ) | |||||||
Warrants, net of issuance costs |
| (3,284,648 | ) | (3,284,648 | ) | |||||||
Conversion feature, net of issuance costs |
| (6,777,317 | ) | (6,777,317 | ) | |||||||
Accretion |
814,304 | 553,710 | 1,368,014 | |||||||||
Conversion of debenture |
(21,453,234 | ) | (54,700,103 | ) | (76,153,337 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at July 31, 2018 |
| | | |||||||||
|
|
|
|
|
|
13
2017 Secured Convertible Debentures
During the three months ended October 31, 2018, 399,958, warrants were exercised for total proceeds of $392,331 (US$303,554, based on an exercise price of US$0.76). On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option pricing model. Overall, the liability value of the warrants exercised was $2,661,278 (US$2,048,536); using the following variables:
|
stock price of various; |
|
expected life of 12 months; |
|
$Nil dividends; |
|
60% volatility based upon comparative market indicators and historical data; |
|
risk free interest rate of 0.75%; |
|
USD/CAD exchange rate of various. |
The exercise of these warrants resulted in an increase to share capital of $3,064,051.
The remaining warrant liability was revalued on October 31, 2018 using the Black-Scholes-Merton option pricing model. The warrant liability was revalued to $2,805,221 (US$2,134,546); with a stock price of US$4.49; expected life of 12 months; $Nil dividends; 60% volatility based upon comparative market indicators and historical data; risk free interest rate of 0.75%; and USD/CAD exchange rate of 1.3142. The (loss)/gain on the revaluation of the warrant liability for the three months ended October 31, 2018 was $2,336,730 (October 31, 2017 $1,282,436), which is recorded in the revaluation of financial instruments account on the statement of loss and comprehensive loss.
The following table summarizes warrant liability activity during the three months ended October 31, 2018 and fiscal year ended July 31, 2018.
October 31, 2018 | July 31, 2018 | |||||||
Opening balance |
$ | 3,129,769 | $ | 1,355,587 | ||||
Granted |
| | ||||||
Expired |
| | ||||||
Exercised |
(2,661,278 | ) | (3,317,278 | ) | ||||
Revaluation due to foreign exchange |
2,336,730 | 5,091,460 | ||||||
|
|
|
|
|||||
Closing balance |
$ | 2,805,221 | $ | 3,129,769 | ||||
|
|
|
|
2017 Unsecured Convertible Debentures 8%
Pursuant to the conversion of the 8.0% Debentures, holders of the 8.0% Debentures received 625 Common Shares for each $1,000 principal amount of 8.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 8.0% Debentures for the period from issuance on July 18, 2017 to but excluding the conversion date was $36.00 and 8.0% Debenture holders received an additional 22.5 Common Shares for each $1,000 principal amount of 8.0% Debentures held on account of accrued and unpaid interest, for a total of 647.5 Common Shares for each $1,000 principal amount of 8.0% Debentures held at the conversion date. Accordingly, at the date of conversion the carrying value of the debentures of $21,453,234, interest payable paid through shares of $266,219 and the conversion feature of $1,742,779 resulted in the cumulative increase to share capital of $23,462,232.
Interest expensed to the statement of loss and comprehensive loss was $Nil and interest capitalized to property, plant, and equipment was $Nil for the three months ended October 31, 2018 (October 31, 2017 $502,000 and $563,349 respectively). Accretion for the three months ended October 31, 2018 was $Nil (October 31, 2017 $493,982 ).
2018 Unsecured Convertible Debentures 7%
On November 24, 2017, the Company issued $69,000,000 principal amount of unsecured debentures through a brokered private placement. The debentures bear interest at 7% per annum and mature on November 24, 2020. Interest will be accrued and paid semi-annually in arrears. The debentures were convertible into common shares of the Company at $2.20 at the option of the holder. The Company may force the conversion of the debentures on 30 days prior written notice should the daily weighted average trading price of the common shares of the Company be greater than $3.15 for any 10 consecutive trading days. The debenture holders received 15,663,000 warrants, 227 for every $1,000 unit. The warrants have a two-year term, expiring November 24, 2019, and have an exercise price of $3.00. The Company has the right to accelerate the expiry of the warrants should the closing trading price of the common shares of the Company be greater than $4.50 for any 10 consecutive trading days.
On initial recognition, the residual method was used to allocate the fair value of the warrants and conversion option. The fair value of the liability component was calculated as $58,187,146 using a discount rate of 14%. The residual proceeds of $10,812,854 were allocated between the warrants and conversion option on a pro-rata basis relative to their fair values. The fair values of the warrants and conversion option were determined using the Black-Scholes-Merton option pricing model.
14
The warrants were valued with a fair value $8,647,797 using the following assumptions:
|
stock price of $2.62; |
|
expected life of one year; |
|
$Nil dividends; 65% volatility; |
|
risk free interest rate of 1.25%. |
The conversion option was valued with a fair value of $17,843,269 using the following assumptions:
|
stock price of $2.62; |
|
expected life of three months; |
|
$Nil dividends; 65% volatility; |
|
risk free interest rate of 1.25%. |
Based on the fair value of the warrants and conversion option, the residual proceeds of $10,812,854 were allocated as $3,529,770 to the warrants and $7,283,084 to the conversion option, less allocation of issuance costs.
In connection with the closing of the debentures, the Company paid a placement fee of $3,450,000 from the gross proceeds of the financing and incurred an additional $475,824 of issuance costs. The Company also issued broker warrants exercisable to acquire 1,568,181 common shares at an exercise price of $3.00 per share.
The broker warrants were attributed a fair value of $865,818 based on the Black-Scholes-Merton option pricing model with the following assumptions:
|
stock price of $2.62; |
|
expected life of 1 year; |
|
$Nil dividends; |
|
65% volatility; |
|
risk free interest rate of 1.25%. |
The total issuance costs amounted to $4,791,642 and were allocated on pro-rata basis as follows: Debt $4,040,753, Conversion option $505,767, and the Warrants $245,122.
On December 15, 2017 the Company announced that it had elected to exercise its right to convert all of the outstanding principal amount of the Companys 7.0% Debentures and unpaid accrued interest thereon into Common Shares. The Company became entitled to force the conversion of the 7.0% Debentures on December 13, 2017 on the basis that the VWAP of the Common Shares on the TSXV for 10 consecutive trading days was equal to or exceeded $3.15. For the 10 consecutive trading days preceding December 13, 2017, the VWAP of the Common Shares was $3.32. The Company provided the holders of the 7.0% Debentures with the required 30 days advance written notice of the conversion, and the effective date for the conversion was January 15, 2018.
Pursuant to the conversion of the 7.0% Debentures, holders of the 7.0% Debentures received 454.54 Common Shares for each $1,000 principal amount of 7.0% Debentures held. In addition, the accrued and unpaid interest on each $1,000 principal amount of the 7.0% Debentures for the period from December 31, 2017 (the interest payment scheduled for December 31, 2017 was paid in cash) up to, but excluding the conversion date, was $2.92 and 7.0% Debenture holders received an additional 1.33 Common Shares for each $1,000 principal amount of 7.0% Debentures held on account of accrued and unpaid interest, for a total of 455.87 Common Shares for each $1,000 principal amount of 7.0% Debentures held. Accordingly, at the date of conversion the carrying value of the debentures of $54,700,103, interest payable paid through shares of $45,824 and the conversion feature of $6,809,418 resulted in the cumulative increase to share capital of $61,555,345.
Accretion for the three months ended October 31, 2018 was $Nil (October 31, 2017 $Nil). During the three months ended October 31, 2018, the Company paid $Nil (October 31, 2017 $Nil) of interest owing through shares, and $Nil (October 31, 2017 $Nil) of interest owing in cash.
The unsecured convertible debentures balance net of interest payable was $Nil for the three months ended October 31, 2018 and $21,132,911 for the three months ended October 31, 2017.
15
11. Share Capital
(a) Authorized
An unlimited number of common shares
(b) Issued and Outstanding
During the first quarter of fiscal 2018, 481,896 warrants with exercise prices of $0.75 and US$0.70 were exercised for proceeds of $405,778, resulting in the issuance of 481,896 common shares.
During the second quarter of fiscal 2018, the Company issued 15,687,500 common shares from the conversion of the 8% unsecured convertible debentures and 166,387 common shares in lieu of accrued interest, as described Note 10 Convertible debentures.
On January 2, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date of the common share purchase warrants issued under the 8% convertible debentures. The Company became entitled to accelerate the expiry date of the warrants on December 27, 2017 on the basis that the closing trading price of the Common Shares on the TSXV exceeded $3.00 for 15 consecutive trading days. The expiry date for the warrants was accelerated from July 18, 2019 to February 1, 2018. During the second quarter of fiscal 2018, the Company issued 7,799,960 common shares related to the exercise of warrants associated with the 8% convertible debentures.
During the second quarter of fiscal 2018, the Company issued 31,363,252 common shares from the conversion of the 7% unsecured convertible debentures and 20,829 common shares in lieu of accrued interest, as described Note 10 Convertible debentures. The Company issued 2,922,393 common shares related to the exercise of warrants from the 7% unsecured convertible debentures.
During the second quarter of fiscal 2018, in addition to common shares issued related to the exercise of warrants associated with the convertible debentures, 5,025,627 warrants with exercise prices of $0.75 and US$0.70 were exercised, resulting in the issuance of 5,021,940 common shares. Total proceeds from the exercise of warrants were $30,936,897.
On January 30, 2018 the Company closed a bought deal public offering of 37,375,000 units at a price of $4.00 per unit for gross proceeds of $149,500,000. Each unit consisted one common share and one-half of one share purchase warrant of the Company. Each warrant is exercisable into one common share at a price of $5.60 per share for a period of two years. The fair value of the warrants at the date of grant was estimated at $0.56 per warrants based on the following weighted average assumptions:
|
stock price of $3.93; |
|
expected life of 1 year; |
|
$Nil dividends; |
|
65% volatility based upon comparative market indicators and historical data; |
|
risk free interest rate of 1.25%. |
Total cash share issue costs amounted to $6,379,728 which consisted of underwriters commissions of $5,980,000, underwriters expenses of $10,000, underwriters legal fees of $96,522 and incurred $311,206 of additional cash issuance costs. In addition, the Company issued an aggregate of 1,495,000 compensation warrants to the underwriters at a fair value of $1,485,797. The compensation warrants have an exercise price of $4.00 and expire January 30, 2020. The fair value of the compensation warrants at the date of grant was estimated at $0.99 per warrant based on the following weighted average assumptions:
|
stock price of $3.93; |
|
expected life of 1 year; |
|
$Nil dividends; |
|
65% volatility based upon comparative market indicators and historical data; |
|
risk free interest rate of 1.25%. |
The Company allocated $7,342,461 of the issuance costs to the common shares and $523,064 to the warrants.
During the third quarter of fiscal 2018, 2,474,813 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $4,422,747, resulting in the issuance of 2,474,813 common shares.
On May 24, 2018, the Company announced that it had elected to exercise its right to accelerate the expiry date governing the common share purchase warrants issued November 24, 2017. Pursuant to the terms of the warrant indenture the Company elected its right to accelerate the expiry date of the remaining 5,261,043 warrants from November 24, 2019 to June 25, 2018. As at the date of expiry all warrants were exercised. The accelerated expiry date also applied to the remaining 1,568,181 compensation warrants originally issued to certain investment banks on November 24, 2017. As at the date of expiry 1,505,453 compensation warrants were exercised and 62,728 warrants expired.
16
During the fourth quarter of fiscal 2018, 13,214,883 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $38,600,682, resulting in the issuance of 13,214,883 common shares.
On October 4, 2018 the Company closed its transaction with joint venture partner Molson Coors in which the Company granted 11,500,000 warrants at a price of $6.00 per warrant. Each warrant is exercisable into one common share at a price of $6.00 per share for a period of three years. The fair value of the warrants at the date of grant was estimated at $3.69 per warrants based on the following weighted average assumptions:
|
stock price of $8.45; |
|
expected life of 1.5 years; |
|
$Nil dividends; |
|
65% volatility based upon comparative market indicators and historical data; |
|
risk free interest rate of 0.75%. |
During the first quarter of fiscal 2019, 3,137,746 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $5,588,503, resulting in the issuance of 3,137,746 common shares.
As at October 31, 2018, there were 197,388,591 common shares outstanding and 34,787,758 warrants outstanding.
The following is a summary of warrants on October 31, 2018.
Number
outstanding |
Book value | |||||||
Warrants issued with $0.75 Units |
||||||||
Exercise price of $0.83 expiring April 28, 2019 |
13,332 | $ | 2,383 | |||||
Exercise price of $0.83 expiring May 19, 2019 |
19,332 | 3,456 | ||||||
Exercise price of $0.83 expiring June 2, 2019 |
333,330 | 59,598 | ||||||
Exercise price of $0.83 expiring June 8, 2019 |
1,333,332 | 261,999 | ||||||
Exercise price of $0.83 expiring June 23, 2019 |
66,672 | 11,921 | ||||||
Exercise price of $0.83 expiring June 28, 2019 |
266,670 | 47,680 | ||||||
Exercise price of $0.83 expiring July 21, 2019 |
66,672 | 11,921 | ||||||
Exercise price of $0.83 expiring August 18, 2019 |
66,672 | 11,921 | ||||||
Exercise price of $0.83 expiring August 31, 2019 |
39,600 | 7,194 | ||||||
2015 secured convertible debenture warrants |
||||||||
Exercise price of $0.75 expiring July 15, 2019 |
866,040 | 166,303 | ||||||
2016 unsecured convertible debenture warrants |
||||||||
Exercise price of $0.83 expiring July 18, 2019 |
75,000 | 11,285 | ||||||
2018 Equity financing |
||||||||
Exercise price of $5.60 expiring January 30, 2020 |
18,541,000 | 9,965,705 | ||||||
Broker / Consultant warrants |
||||||||
Exercise price of $0.75 expiring November 9, 2019 |
41,598 | 15,091 | ||||||
Exercise price of USD$0.70 expiring November 14, 2019 |
526 | 130 | ||||||
Exercise price of $0.75 expiring November 3, 2021 |
244,284 | 108,935 | ||||||
Exercise price of $0.75 expiring March 14, 2022 |
144,282 | 100,474 | ||||||
Exercise price of $4.00 expiring January 30, 2020 |
598,000 | 555,609 | ||||||
Joint Venture MOLSON warrants |
||||||||
Exercise price of $6.00 expiring October 4, 2021 |
11,500,000 | 42,386,162 | ||||||
|
|
|
|
|||||
34,216,342 | 53,727,767 | |||||||
2016 secured convertible debenture warrants |
||||||||
Exercise price of USD$0.76 expiring November 14, 2019 |
571,416 | 2,805,221 | ||||||
|
|
|
|
|||||
34,787,758 | $ | 56,532,988 | ||||||
|
|
|
|
17
The following table summarizes warrant activity during the three months ended October 31, 2018 and fiscal year ended July 31, 2018.
October 31, 2018 | July 31, 2018 | |||||||||||||||
Number of
warrants |
Weighted average
exercise price |
Number of
warrants |
Weighted average
exercise price |
|||||||||||||
Outstanding, beginning of period |
26,425,504 | $ | 4.35 | 20,994,123 | $ | 1.31 | ||||||||||
Expired during the period |
| | (62,728 | ) | 3.00 | |||||||||||
Issued during the period |
11,500,000 | 6.00 | 37,413,681 | 4.34 | ||||||||||||
Exercised during the period |
(3,137,746 | ) | 1.73 | (31,919,572 | ) | 2.33 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding, end of the period |
34,787,758 | $ | 5.14 | 26,425,504 | $ | 4.35 | ||||||||||
|
|
|
|
|
|
|
|
Stock Option Plan
The Company has a share option plan (the Plan) that is administered by the Board of Directors who establish exercise prices and expiry dates, which are up to 10 years from issuance as determined by the Board at the time of issuance. Unless otherwise determined by the Board, options issued under the Plan vest over a three-year period except for options granted to consultants or persons employed in investor relations activities (as defined in the policies of the TSX) which vest in stages over 12 months with no more than 1 ⁄ 4 of the options vesting in any three-month period. The maximum number of common shares reserved for issuance for options that may be granted under the Plan is 19,738,859 common shares as at October 31, 2018.
The following table summarizes the stock option grants during the three months ended October 31, 2018.
Options granted | ||||||||||||||||||||
Grant date |
Exercise price |
Executive and
directors |
Non-executive
employees |
Vesting terms | Vesting period | |||||||||||||||
September 8, 2017 |
$ | 1.37 | 650,000 | 1,000 | Terms A | 10 years | ||||||||||||||
November 6, 2017 |
$ | 2.48 | 125,000 | 3,000 | Terms A | 10 years | ||||||||||||||
December 4, 2017 |
$ | 2.69 | 1,750,000 | 20,000 | Terms B | 10 years | ||||||||||||||
January 29, 2018 |
$ | 4.24 | | 261,000 | Terms A, C | 10 years | ||||||||||||||
March 12, 2018 |
$ | 3.89 | 325,000 | | Terms A | 10 years | ||||||||||||||
April 16, 2018 |
$ | 4.27 | 845,000 | 61,500 | Terms A | 10 years | ||||||||||||||
June 8, 2018 |
$ | 5.14 | | 441,000 | Terms A | 10 years | ||||||||||||||
July 11, 2018 |
$ | 4.89 | 4,325,000 | 1,366,500 | Terms A | 10 years | ||||||||||||||
September 17, 2018 |
$ | 7.93 | 650,000 | 523,500 | Terms A | 10 years |
Vesting terms A One-third of the options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
Vesting terms B Half of the options will vest immediately, and the balance will vest annually over three years thereafter.
Vesting terms C Based upon organizational milestones.
The following table summarizes stock option activity during the three months ended October 31, 2018 and the fiscal year July 31, 2018.
October 31, 2018 | July 31, 2018 | |||||||||||||||
Options
issued |
Weighted average
exercise price |
Options
issued |
Weighted average
exercise price |
|||||||||||||
Opening balance |
14,388,066 | $ | 1.05 | 5,748,169 | $ | 0.68 | ||||||||||
Granted |
1,173,500 | 7.93 | 10,174,000 | 4.16 | ||||||||||||
Expired |
| | | | ||||||||||||
Forfeited |
(169,996 | ) | 1.99 | (626,830 | ) | 3.44 | ||||||||||
Exercised |
(621,729 | ) | 0.58 | (907,273 | ) | 0.65 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Closing balance |
14,769,841 | $ | 3.53 | 14,388,066 | $ | 1.05 | ||||||||||
|
|
|
|
|
|
|
|
The weighted average share price at the time of exercise during the period was $5.32 (July 31, 2018 $4.31).
18
The following table summarizes information concerning stock options outstanding as at October 31, 2018.
Exercise price |
Number outstanding |
Weighted average
remaining contractual life (years) |
Number exercisable |
Weighted average
remaining contractual life (years) |
||||||||||||||
$ | 0.16 | 285,000 | 0.11 | 285,000 | 0.40 | |||||||||||||
0.58 | 1,206,900 | 0.49 | 1,206,900 | 1.84 | ||||||||||||||
0.75 | 1,931,500 | 0.98 | 1,136,000 | 2.14 | ||||||||||||||
1.27 | 600,991 | 0.33 | 350,578 | 0.71 | ||||||||||||||
1.37 | 542,450 | 0.33 | 108,450 | 0.24 | ||||||||||||||
2.48 | 128,000 | 0.08 | | | ||||||||||||||
2.69 | 1,695,000 | 1.04 | 885,000 | 2.03 | ||||||||||||||
3.89 | 325,000 | 0.21 | | | ||||||||||||||
4.24 | 258,000 | 0.16 | | | ||||||||||||||
4.27 | 884,000 | 0.57 | | | ||||||||||||||
4.89 | 5,644,500 | 3.71 | | | ||||||||||||||
5.14 | 110,000 | 0.07 | | | ||||||||||||||
$ | 7.93 | 1,158,500 | 0.78 | | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
14,769,841 | 3,971,928 | |||||||||||||||||
|
|
|
|
Stock-based Compensation
For the three months ended October 31, 2018, the Company recorded $4,799,912 (October 31, 2017 $313,539) in stock-based compensation expense related to employee options, which are measured at fair value at the date of grant and are expensed over the vesting period. In determining the amount of stock-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of options granted by applying the following assumptions:
October 31, 2018 | October 31, 2017 | |||||||
Exercise price |
$ | 0.75$7.93 | $ | 0.16$1.37 | ||||
Risk-free interest rate |
2.06%2.42 | % | 2.13 | % | ||||
Expected life of options (years) |
7 | 7 | ||||||
Expected annualized volatility |
65%70 | % | 65 | % |
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 three-month period ended October 31, 2018, the Company allocated $110,609 (October 31, 2017 $Nil) of stock-based compensation expenses to cost of sales based upon those expenses applicable to direct and indirect labour in the selling and production process.
19
12. Net Loss per Share
The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:
October 31, 2018 | October 31, 2017 | |||||||
2017 Unsecured convertible debentures |
| 15,687,500 | ||||||
Options |
14,754,841 | 6,399,169 | ||||||
Warrants issued with $0.75 units |
2,205,612 | 4,911,186 | ||||||
2015 Secured convertible debentures warrants |
866,040 | 2,210,358 | ||||||
2015 Unsecured convertible debenture amendment warrants |
| 38,100 | ||||||
2016 Unsecured convertible debenture warrants |
75,000 | 426,660 | ||||||
2016 Secured convertible debenture warrants |
571,416 | 1,839,216 | ||||||
2017 8% Unsecured convertible debenture warrants |
| 7,856,300 | ||||||
2018 Equity warrants |
18,541,000 | | ||||||
Joint venture issued warrants |
11,500,000 | | ||||||
Convertible debenture broker/finder warrants |
1,028,690 | 3,230,407 | ||||||
|
|
|
|
|||||
49,542,599 | 42,598,896 | |||||||
|
|
|
|
13. Convertible Debenture Receivable
On July 26, 2018, the Company lent $10,000,000 to an unrelated entity, Fire and Flower (FF) in the form of an unsecured and subordinated convertible debenture. The convertible debenture bears interest at 8%, paid semi-annually, matures July 31, 2019 and includes the right to convert the debenture into common shares of FF at the lesser of $1.15 or 90% of the deemed price per common share upon maturity or a triggering event as defined within the agreement. The Company issued the debenture as a part of a strategic investment into the private retail cannabis market.
The option to settle the loan in common shares represents a call option to the Company and is included in the fair value of the loan. During the quarter the Companys convertible debenture receivable increased by $3,433,798 (October 31, 2017 $Nil) representing the change in fair value on the note.
As at October 31, 2018, the Companys debenture receivable from FF accrued interest of $214,795 (October 31, 2017 $Nil) and the convertible debenture receivable totalled $13,648,593 (July 31, 2018 $10,000,000).
The fair value of the note at the reporting date was estimated using the Black-Scholes Merton model and based on the following assumptions:
|
exercise price of $1.15; |
|
expected life of 2 months; |
|
$Nil dividends; |
|
70% volatility; |
|
risk free interest rate of 0.75%. |
14. Segmented Information
The Company operates in one operating segment.
All property, plant and equipment and intangible assets are located in Canada.
20
15. Financial Instruments
Interest Risk
The Companys exposure to interest rate risk only relates to any investments of surplus cash. The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at October 31, 2018, the Company had short term investments of $148,608,728.
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 Companys trade receivables, promissory note receivable and convertible debenture receivable. As at October 31, 2018, 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, the Company has limited credit risk.
Cash and cash equivalents are held by one of the largest cooperative financial groups in Canada. The short-term investments are held in various guaranteed investment certificates, term deposits, and fixed income securities. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The majority of the trade receivables balance are held with the crown corporations of Quebec, Ontario and British Columbia as well as one of the largest medical insurance companies in Canada. Credit risk from the convertible debenture receivable and promissory note receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables, convertible note receivable and promissory note receivable represents the maximum exposure to credit risk and as at October 31, 2018; this amounted to $217,844,608.
The following table summarizes the Companys aging of receivables as at October 31, 2018 and July 31, 2018:
October 31,
2018 |
July 31,
2018 |
|||||||
$ | $ | |||||||
030 days |
6,196,932 | 262,448 | ||||||
3160 days |
180,175 | 187,446 | ||||||
6190 days |
200,252 | 90,656 | ||||||
Over 90 days |
398,215 | 103,046 | ||||||
|
|
|
|
|||||
Total |
6,975,573 | 643,596 | ||||||
|
|
|
|
Economic Dependence Risk
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. The Company recorded sales from three crown corporations representing 78% (October 31, 2017 Nil%) of total sales in the three months ended October 31, 2018.
The Company holds trade receivables from three crown corporations representing 84% of total trade receivables as of October 31, 2018 (October 31, 2017 Nil%).
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2018, the Company had $171,886,740 of cash and cash equivalents and short-term investments.
The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $14,632,644 due in the next 12 months.
The carrying values of cash, trade receivable, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.
21
16. Operating Expenses by Nature
October 31, 2018 | October 31, 2017 | |||||||
Marketing and promotion |
$ | 9,588,928 | $ | 286,226 | ||||
Stock based compensation |
4,689,303 | 313,539 | ||||||
Salaries and benefits |
3,245,524 | 1,158,663 | ||||||
Consulting |
1,437,951 | 181,611 | ||||||
Facilities |
922,755 | 155,196 | ||||||
Professional fees |
825,069 | 136,604 | ||||||
Amortization of property, plant and equipment |
573,398 | 124,112 | ||||||
Travel |
328,962 | 107,529 | ||||||
General and administrative |
273,379 | 318,084 | ||||||
Amortization of intangible assets |
149,536 | 62,810 | ||||||
|
|
|
|
|||||
Total |
$ | 22,034,805 | $ | 2,844,374 | ||||
|
|
|
|
The following table summarizes the nature of stock based compensation in the period:
October 31, 2018 | ||||
General and administrative related stock based compensation |
$ | 4,458,651 | ||
Marketing and promotion related stock based compensation |
230,652 | |||
|
|
|||
Total operating expense related stock based compensation |
4,689,303 | |||
Stock based compensation allocated to cost of sales |
110,609 | |||
|
|
|||
Total stock based compensation |
$ | 4,799,912 | ||
|
|
17. Investment in Joint Ventures
Molson Coors Canada Joint Venture Truss
October 31, 2018 | July 31, 2018 | |||||||
Opening Balance |
$ | | $ | | ||||
Cash consideration of investment |
6,375,425 | | ||||||
Fair value of warrant consideration |
42,386,162 | |||||||
Capitalized transaction costs |
659,344 | | ||||||
Share of net loss |
(161,104 | ) | | |||||
|
|
|
|
|||||
Ending Balance |
$ | 49,259,827 | $ | | ||||
|
|
|
|
On October 4, 2018, the formation of the joint venture Truss between the Company and Molson Coors Canada (the Partner) was finalized. Truss is a standalone start-up company with its own board of directors and an independent management team and is incorporated in Canada. Truss is private company and its principle activities consist of pursuing opportunities to develop non-alcoholic, cannabis-infused beverages and is currently operating in Gatineau, Quebec.
The Partner holds 57,500 common shares representing 57.5% controlling interest in Truss with the Company holding 42,500 common shares and controlling the remaining 42.5%. In connection with the transaction HEXO has granted the Partner 11,500,000 common share warrants at an exercise price of $6.00 for a period of 3 years.
Included in the initial investment cost is the capitalized fair value $42,386,162 of warrant consideration (see Note 11 for fair value inputs and assumptions).
Transaction costs of $659,344 in respect to the definitive agreement to form the joint venture were capitalized.
The joint venture is accounted for using the equity method. During the three months quarter ended October 31, 2018, the Companys share in the net loss of Truss was $161,104 (July 31, 2018 $Nil).
22
Belleville Complex Inc Joint Venture
During the period ended October 31, 2018, the Company acquired a 25% interest in the joint venture Belleville Complex Inc. (BCI) with a related party holding the remaining 75% in BCI. The joint venture purchased an initially configured 2 million sq. ft. facility through a $20,279,188 loan issued by the Company on September 7, 2018, repayable within 120 days, bearing an annual 4% interest rate, which interest is payable monthly. The loan is secured by the first mortgage over the building. As a part of the agreement, the Company will be the anchor tenant for a period of 20 years. Consideration for the 25% interest on the joint venture is deemed $Nil. The Company accrued interest of $54,514 on the note for a total receivable of $20,333,702.
18. Related Party Disclosure
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Companys operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 8.57% of the outstanding shares of the Company as at October 31, 2018 (October 31, 2017 22.40%).
Compensation provided to key management during the period was as follows:
October 31, 2018 | October 31, 2017 | |||||||
Salary and/or consulting fees |
$ | 668,733 | $ | 383,891 | ||||
Bonus compensation |
214,438 | | ||||||
Stock-based compensation |
3,288,985 | 261,209 | ||||||
|
|
|
|
|||||
$ | 4,172,156 | $ | 645,100 | |||||
|
|
|
|
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.
Unless otherwise stated the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
On September 17, 2018, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $7.93.
On July 11, 2018, the Company granted certain directors and executives of the Company a total of 4,325,000 stock options with an exercise price of $4.89.
On April 16, 2018, the Company granted certain directors and executives of the Company a total of 845,000 stock options with an exercise price of $4.27.
On March 12, 2018, the Company granted certain directors and executives of the Company a total of 325,000 stock options with an exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives of the Company a total of 1,750,000 stock options with an exercise price of $2.69, of which half of the options will vest immediately, and the balance will vest annually over three years thereafter.
On November 6, 2017, the Company granted certain directors of the Company a total of 125,000 stock options with an exercise price of $2.48.
On September 8, 2017, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $1.37.
The Company loaned $20,272,188 on September 7, 2018, to the related party BCI to be used in the purchase of a facility in Belleville, Ontario and matures in January 2019. The loan bears annual interest of 4% which is repayable monthly.
19. Capital Management
The Companys objective is to maintain sufficient capital so as to maintain investor, creditor and customer confidence and to sustain future development of the business and provide the ability to continue as a going concern. Management defines capital as the Companys shareholders equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements.
As at October 31, 2018 total managed capital was comprised of shareholders equity of $365,867,918 (July 31, 2018 $322,872,875). There were no changes in the Companys approach to capital management during the period.
23
20. Commitments and Contingencies
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 years is as follows:
2019 |
$ | 64,136,910 | ||
2020 |
4,077,506 | |||
2021 |
4,038,172 | |||
2022 |
3,978,223 | |||
2023 |
3,177,654 | |||
Thereafter |
50,051,833 | |||
|
|
|||
$ | 129,460,298 | |||
|
|
Inclusive of the commitments balance is $64,926,107 related to the Belleville Complex Inc 20-year anchor tenant agreement ending September 7, 2038. See note 17.
Letter of Credit
On June 28, 2018, the Company executed a letter of credit with a Canadian credit union as required under an agreement with a public utility provider entitling the Company up to a maximum limit of $3,117,000 subject to certain operational requirements. The letter of credit has a one year expiry from the date of issue. The credit facility is secured by a guaranteed investment certificate (GIC). As at October 31, 2018, the letter of credit has not been drawn upon (July 31, 2018 $Nil) and is in compliance with the specified requirements.
Surety Bond
On June 28, 2018, the Company entered into an indemnity agreement to obtain a commercial surety bond with a North American insurance provider entitling the Company up to a maximum of $2,000,000. The bond bears a premium at 0.1% annually. The Company obtained the surety bond as required under the Canada Revenue Agencys excise tax laws for the transporting of commercial goods throughout Canada.
21. Fair Value of Financial Instruments
The carrying values of the financial instruments as at October 31, 2018 are summarized in the following table:
Amortized
costs |
Financial assets
designated as FVTPL |
Financial liabilities
designated as FVTPL |
Total | |||||||||||||
Assets |
$ | $ | $ | $ | ||||||||||||
Cash and cash equivalents |
| 23,278,012 | | 23,278,012 | ||||||||||||
Restricted cash |
| 5,000,000 | | 5,000,000 | ||||||||||||
Short-term investments |
| 148,608,728 | | 148,608,728 | ||||||||||||
Trade receivables |
6,975,573 | | | 6,975,573 | ||||||||||||
Convertible debenture receivable |
| 13,648,593 | | 13,648,593 | ||||||||||||
Promissory note receivable |
20,333,702 | | | 20,333,702 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
$ | $ | $ | $ | ||||||||||||
Accounts payable and accrued liabilities |
14,632,644 | | | 14,632,644 | ||||||||||||
Warrant liability |
| | 2,805,221 | 2,805,221 |
The carrying values of trade receivables and accounts payable and accrued liabilities approximate their fair values due to their relatively short periods to maturity.
24
22. Ancillary Revenue
Ancillary revenues are those sales outside of the primary business of the Company as outlined in Note 1. During the three months period ended the Company realized net revenues of $47,370 (October 31, 2017 $Nil) related to management fees.
23. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the current presentation, none of which were material.
24. Subsequent Events
Filing of Final Base Shelf Prospectus
On November 21, 2018, the Company announcing the filing of the final short form base shelf prospectus with securities regulatory authorities in each of the provinces and territories of Canada. The shelf prospectus is valid for a 25-month period, during which HEXO may make offerings of up to $800 million of common shares, warrants, subscription receipts and units or a combination of thereof of the Company from time to time, separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering. The specific terms of any future offering will be established in a prospectus supplement to the shelf prospectus, which supplement will be filed with the applicable Canadian securities regulatory authorities. Unless otherwise specified in the prospectus supplement relating to a particular offering of securities, the net proceeds from any sale of any securities may be used by HEXO for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay indebtedness from time to time, capital projects and potential future acquisitions, including in relation to international expansion.
25
Exhibit 4.5
Management Discussion & Analysis
For the three months ended October 31, 2018
(In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)
This management discussion and analysis (MD&A) of the financial condition and results of operations of HEXO Corp. (formerly The Hydropothecary Corporation) and our wholly owned subsidiaries (collectively, we or us or our or Company or HEXO Corp.) is for the three months ended October 31, 2018 (Q1 of Fiscal 2019). It is supplemental to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes for the fiscal year ended July 31, 2018. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at thehydropothecary.com or hexo.com or through the SEDAR website at sedar.com.
Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as may, expect, intend, estimate, anticipate, believe, should, plans, continue, objective, or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance. Such statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations about future events. Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from current expectations, see Risk Factors. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.
This MD&A is dated December 12, 2018.
1
Company Overview
HEXO Corp. is helping shape an entirely new legal cannabis market in Canada and abroad.
Just five years ago, two entrepreneurs set out to corner the cannabis market in Canada. Laying roots in the province of Quebec, the company was influential in stimulating market acceptance and support, raising $326.6 million in public markets since July 2017. We have landmark supply agreements in place with five provincial governments, including a five-year contract with Quebecs Société québécoise du cannabis that is worth $1 billion or more in potential revenue over its life, and which represents 35% of the provinces adult-use sales in the first year of legalization alone. In total, we have provincial or private retail distribution agreements in most major markets in Canada.
Today, HEXO Corp. is a consumer-packaged goods cannabis ingredient company that has turned its attention globally. Through our hub and spoke strategy, we are partnering with Fortune 500 companies, bringing our brand value, cannabinoid isolation and delivery technology, licensed infrastructure and regulatory expertise to established companies, leveraging their distribution networks and capacity.
Our foothold in Greece will allow us to establish a Eurozone processing, production, and distribution centre and will unlock our access to customers across Europe and we will leverage this approach in other international markets, including Latin America and the U.S.
Ultimately, our focus is on the customers we serve. We are among the cannabis industrys top innovators, with award-winning products such as Elixir, Canadas first and only line of cannabis peppermint oil sublingual sprays, and decarb, an activated cannabis powder designed for oral consumption. We are also pioneering a line of womens sexual health products with Fleur de Lune. Our ability to develop consistent advanced cannabis formulations for use in world-renowned brands beverages, food, cosmetics, and more has already garnered the attention of Molson Coors Canada and resulted in the creation of Truss, an exclusive joint venture to develop non-alcoholic, cannabis-infused beverages.
The global cannabis market is estimated to reach $250B. HEXO believes that in a few years, a handful of companies will control 80% of this market share. We believe HEXO is poised to be one of those companies.
To date, we have sold over 2 million grams of adult-use and medical cannabis to thousands of Canadians who count on us for safe, high-quality products. We have developed an extensive and award-winning product range, and gained valuable experience and knowledge, while serving our customers. We currently possess the single largest and longest national forward supply amount among all licensed producers, based upon announced provincial supply agreements. In Quebec alone, we will supply 20,000 kg in the first year of legalized adult-use cannabis and up to approximately 200,000 kg over the first five years of legalized adult-use cannabis. We believe all of this positions us well to become one of the top two companies in Canada serving the legal adult-use market.
We currently operate with 310,000 sq. ft. of licensed production space with an estimated annual production capacity of 25,000 kg; have an additional 1,000,000 sq. ft. of production space on-time and on-budget to be completed by the end of December 2018 ; 579,000 sq. ft. of industrial real estate for manufacturing, distribution and product research and development needs in Belleville, Ontario; another 58,000 sq. ft. of leased distribution space in Montreal, Quebec, and leased commercial office space in downtown Gatineau, Quebec.
As at October 31, 2018, we employed approximately 283 people, including 155 people in cultivation, harvesting, manufacturing, processing and quality and assurance; 65 in sales and marketing; and 63 in corporate services and executive management.
Investors have responded positively to both our strategy and execution. We have zero debt, and are one of the best-capitalized companies in the industry.
We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis or cannabis products in any jurisdiction where the sale of cannabis is unlawful under applicable laws.
Canadian Cannabis Market
According to Statistics Canada, nearly five million Canadians purchased approximately 760,000 kg of cannabis worth $5.7 billion in 2017, mostly from illegal sources. The federal agency estimates that the average price was $7.50 per gram. Various market studies have estimated the size of the legal Canadian cannabis market at over $10 billion per year. We are uniquely positioned to serve that market through holding the largest forward supply contract of all licensed producers.
As of August 13, 2018, all provinces and territories have announced their cannabis market retail approach, ranging from privately owned stores to government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through strategic supply agreements with the Quebec, Ontario and British Columbia provincial governments, as well as through an investment in the private cannabis retail sector, in order to offer our award-winning and innovative products across all channels throughout Canada.
2
Anticipated retail distribution channels by province and territory:
We have established supply channels within five provinces Quebec, Ontario, Saskatchewan, Alberta and British Columbia through supply agreements with both governmental boards and private retailers. We hold the single largest forward supply contract among licensed producers, based upon announced agreements for year one of legalization, with 20,000 kg to be supplied to Quebec in the first year.
3
QUEBEC
In Quebec, which has a population of 8.45 million, or approximately 23% of the Canadian population, the Société québécoise du cannabis (SQDC) operates the distribution and sale of adult-use cannabis. The SQDC has established 12 retail locations throughout the province, for in-store cannabis sales. It expects to increase this number to 50 locations within the first year of legalization. It will also sell cannabis online.
In the first year of legalization, we hold a 35% market share in Quebec. Our agreement with the SQDC spans a potential five-year period, with us supplying an estimated 200,000 kg or more of cannabis, representing $1 billion in potential revenues.
In addition, we hold a distribution agreement with the SQDC, in which we house and distribute all of the SQDCs online sales to end-users. This includes the product of all licensed producers with established supply agreements held with the SQDC. Operations of the distribution centre began in October 2018.
ONTARIO
In Ontario, which has a population of 14.4 million, or approximately 40% of the Canadian population, the government currently offers consumers a variety of cannabis products through the Ontario Cannabis Store (OCS) online web sales. The province will also allow privately owned retail locations that serve the adult-use market. Initially, products will include dried cannabis, oil and capsule products, pre-rolled, and clones and seeds.
We have entered into a supply agreement with the OCS, in which we supply the province with THC and CBD Elixir and Fleur de Lune products, two of our most innovative oil-based and smokeless offerings. In the future, once our 1 million sq. ft. greenhouse expansion is operational in late December 2018, we will offer our full suite of products. This approach will allow us to initially serve the Ontario market for smokeless cannabis products through the OCS.
BRITISH COLUMBIA
British Columbia, which has a population of 4.6 million, or approximately 13% of the Canadian population, will serve the adult-use cannabis market through a dual privategovernment approach. The British Columbia Liquor Distribution Branch (BCLDB) will manage the distribution of cannabis and cannabis-based products. We hold a supply agreement with the BCLDB, in which we supply our THC and CBD oil-based Elixir and Fleur de Lune products.
We have also aligned ourselves with Fire & Flower (F&F), a private cannabis retailer, through a strategic investment of a $10 million convertible loan. F&F is expected to hold store locations throughout British Columbia, allowing HEXO products to be distributed via the private retail route in tandem with the BCLDB.
OTHER CANADIAN PRIVATE MARKETS
We expect to enter the remaining private-sector Canadian cannabis markets via strategic investments in private retailers, such as our investment in F&F. Currently, F&F holds two licensed retail locations within Saskatchewan and ten licensed retail locations within Alberta. Currently, F&F is undergoing licensing processing in Alberta, for several additional licenses. F&F has also begun the process of acquiring licenses and locations in Manitoba.
4
CANADIAN LEGISLATIVE LANDSCAPE
Regulation of the sale of adult-use cannabis in retail and online environments is the responsibility of the provinces and territories. Only licensed producers will be authorized to sell cannabis within the adult-use market. As at October 31, 2018, there are 132 licensed producers under Cannabis Regulations.
Strategic Priorities
Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis markets. In everything we do cultivation, production, product development, innovation, distribution we exercise rigour in order to offer medical cannabis patients and adult recreational users uncompromising quality and safety, while earning and maintaining the trust of all of our stakeholders. We believe that we can leverage our demonstrated success in Canada to global cannabis markets.
Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and todays limited but growing cultivation capacity, among other factors, we believe the initial years following legalization will be the most critical in determining the future shape of the cannabis industry in Canada, and we believe early distribution and financial performance will be critical to securing a market leader position.
For this and other reasons, we have deliberately set out to build a commanding position in our initial jurisdiction, Quebec, while making strategic inroads in select other markets across the country through provincial supply agreements and private retail partnerships. Now having entered the adult-use market as one of the top producers and suppliers, we are looking beyond the Canadian border to take HEXO Corp. international, where regulations permit. We are making continuous efforts to assess global opportunities in current and future medical and adult-use markets, including Europe, where we are expanding into Greece.
We have positioned ourselves to meet the smokeless cannabis alternative market demand through our joint venture with Molson Canada, and we continue to explore other opportunities for similar ventures in this market. Even as we continue to prove our business model and operational excellence in Quebec and across the country, the Company has already established itself as a desirable business partner for cannabis control authorities, private retail, and Fortune 500 joint-arrangement partners across Canada and globally.
Our uncompromising commitment to quality and safety is supported by our compliance with Health Canadas stringent quality control requirements, our pharmaceutical-grade production system, full seed-to-sale traceability, third party independent testing and an online system to post our product testing results.
5
Our overall strategy is built on four pillars: be a top two market share licensed producer in Canada, demonstrate brand leadership, innovate products and support that work through operational scalability. As we enter the adult-use market, we are focused on the execution of these four strategic priorities.
Top Two in Canada
After establishing a dominant presence within our home market of Quebec, we look to expand nationally on a larger scale. Our objective is to execute on our supply agreements with the OCS and the BCLDB, as well as on our long-term supply agreement with the SQDC, and to successfully manage our distribution centre responsible for all SQDC online salebased cannabis distribution. We also possess a strategic relationship with the private cannabis retailer F&F. This private retail presence will allow us to expand our expected distribution presence across six provinces and secure a top two public forward sales contract ranking.
SQDC SUPPLY AGREEMENT
The strategic value of our SQDC relationship cannot be understated. We hold the single largest forward contract in the history of the emerging cannabis industry with the SQDC and are the preferred supplier for cannabis products for the Quebec market for the first five years following legalization. We will supply the SQDC with 20,000 kg of products in the first year, and we expect to supply 35,000 kg and 45,000 kg in years two and three, respectively. Thereafter, based on an expected market growth rate of 10%, we intend to supply 49,500 kg and 54,450 kg in years four and five, respectively. The Company estimates the total volume to be supplied over the five-year term of the agreement to be in excess of 200,000 kg. Based on the current agreements signed between the SQDC and five other licensed producers, we have obtained the highest year one volume, representing approximately 35% market share within Quebec, and we are aiming to remain the largest supplier in subsequent years.
Volume and Market Share % in the Province of Quebec
6
Brand
Since our inception as a medical cannabis producer in 2013, we have built a trusted brand. Our robust product development team has introduced products that offer consumers a full range of experiences and price points, including a variety of ways to consume cannabis. This team works hand-in-hand with our marketing team in leveraging these products to build brand awareness in a highly regulated environment.
HEXO ADULT-USE
During this past quarter, the Company announced HEXO as the adult-use brand name that will serve the legalized Canadian adult-use market. The goal of HEXO is to continue to offer a premium house of brands, signaling innovation, quality and consistency of experience, and become a top two Canadian market share brand and obtain a 2% international market share. As a brand, HEXO shares the same focus on award-winning product innovation and high-quality cannabis that the market has come to expect from its medical sister brand, Hydropothecary.
PRODUCT OFFERINGS
Initially, HEXO will offer dried cannabis and cannabis-derived products under two product types: dried flower, milled and pre roll; and oils Elixir and Fleur de Lune.
Flower, Milled and Pre Roll The HEXO adult-use brand offers a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 9 flower products and 2 milled cannabis products in 3.5g and 15g formats. HEXO also carries 4 pre roll products.
Elixir and Fleur de Lune Elixir, a cannabis oil sublingual spray product line, includes both a high THC, high CBD and 1:1 content, and is Canadas only peppermint-based cannabis oil product. All three products are also available in an MCT carrier oil. Fleur de Lune is one of Canadas first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis. HEXO offers six oil-based spray products as well as an intimate-use oil product.
HYDROPOTHECARY MEDICAL
Hydropothecary sells premium as well as mid-market medical cannabis, offering over 24 products in dried, decarb and oil formats. Hydropothecary has been serving the medical market with its award-winning products for over three years, and will continue to serve our medical patients with the utmost levels of quality and customer service.
PRODUCT OFFERINGS
Hydropothecary continues to offer dried cannabis and cannabis-derived products under three product types: dried flower and milled; oils Elixir and Fleur de Lune; and decarb.
Flower and Milled Premium and mid-range products offered under the Time of Day and H2 lines. Both lines offer a relatively wide spectrum of CBD and THC levels, through sativa, hybrid and indica plant strains. HEXO offers 15 flower and milled cannabis products. Each product is carefully selected to treat symptoms universally reported by patients and meet the needs of adult consumers.
Elixir and Fleur de Lune; Oil-Based Products Elixir, a cannabis oil sublingual spray product line, includes both a high THC and high CBD content, and is Canadas only peppermint-based cannabis oil product.
Fleur de Lune is one of Canadas first cannabis-based THC intimate oils. Both products provide alternative, smokeless methods to consume cannabis.
HEXO offers three oil-based spray products as well as an intimate-use oil product.
Decarb Decarb is an activated fine-milled cannabis powder product offered in a range of high to low CBD and THC content. Decarb is offered in six products and is orally consumed for consumers desiring smokeless cannabis.
7
HEXOs Elixir recently won the Cannabis Product of the Year and Innovation of the Year awards at the 2018 Canadian Cannabis Awards. HEXO was also nominated for Brand of the year. Our decarb product was voted Top New Product at the 2017 Canadian Cannabis Awards.
Product Innovation
Our strategic priorities reflect our belief that companies that achieve large-scale distribution and high brand awareness will drive long-term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being recognized for delivering the best user experiences across the full spectrum of products, price points and delivery methods.
We continue to position ourselves to meet the expected edibles market demand and consumer-preferred products for October 2019. This includes, but is not limited to, vapes; cosmetics; edibles such as confectionary and baked and dairy goods; and non-alcoholic beverages, through our joint venture with Molson Canada.
Our focus on research, innovation and product development also reflects our strategic priorities. We are actively exploring ways to increase our expertise related to cannabis applications and forms of delivery, and to expand our product range and brand portfolio. Activities include current and potential partnerships, joint ventures and strategic acquisitions of intellectual property and related transactions.
The cannabis industry has already recognized us as an innovative leader, as demonstrated by our award-winning products Elixir and decarb. We also offer Fleur de Lune, one of Canadas first intimate-use cannabis oils.
Beyond the funds required for our currently planned investments in cultivation capacity, we expect to allocate the majority of our capital to branding, product innovation, international expansion and production, while remaining alert for strategic transactions that create shareholder value. Supporting this focus is the acquisition of the Belleville, Ontario, facility, which among other purposes will serve to house research and development activities for the Company and its future products. This approach will directly support our continued leadership position in the Canadian cannabis market as both a distributor and a product innovator.
Scalability
We have been cultivating cannabis for five years under the CR regulatory regime, growing and producing high-quality cannabis with consistent yields. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies.
We chose to locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production. The key is an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people.
On the border of Canadas two largest consumer markets, Quebec and Ontario, our main campus positions us in close proximity to two of the countrys major urban areas, Greater Montreal and the National Capital Region. Furthermore, we have acquired facilities in Belleville, Ontario, ideally situated between the National Capital Region and Toronto, and in Montreal, which conveniently serves central Quebec.
Our current licensed facilities total approximately 310,000 sq. ft. They include our original 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2017, a 250,000 sq. ft. greenhouse completed in July 2018, a warehouse, two stand-alone laboratories and two modular buildings for final packaging and customer service, all located on our 143-acre land parcel. The annual production capacity of these facilities is estimated at approximately 25,000 kg of dried cannabis.
In December 2017, we added to our existing 65-acre land parcel by acquiring an adjacent 78-acre land parcel upon which we are building a 1 million sq. ft. greenhouse. This newest expansion is significantly completed. It is on schedule to be operational in late December 2018 and the transfer of plants into the facility in the first weeks of January 2019. Once completed and licensed by Health Canada, our total annual production capacity will rise to approximately 108,000 kg of dried cannabis.
The current annual production estimate of 25,000 kg and future annual production estimate of 108,000 kg are based upon the estimated square footage of cultivation space and the ratio of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities and estimates of future production capabilities.
On September 26, 2018, we announced a partnership to expand into Europe. A 350,000 sq. ft. licensed facility will be established in Greece through our joint venture with Qannabos. This venture will result in additional production capacity and Eurozone foothold to serve legal cannabis markets in the United Kingdom, France and other jurisdictions where regulations permit.
We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant business knowledge derived from a variety of industries and markets.
8
Distribution
In terms of processing and distribution capacity, we have significantly increased our capabilities over the past 12 months, as annual production increased to approximately 25,000 kg with the activation and full licensing of our new 250,000 sq. ft. greenhouse. Our extensive 1 million sq. ft. greenhouse project is on target to be operational by calendar year-end will further increase production capacity to approximately 108,000 kg.
The Company recently acquired an initially configured 2 million sq. ft. facility in Belleville, Ontario, through the joint venture Belleville Complex Inc. established with a related party for the purposes of manufacturing value-added cannabis products and increasing capacity for distribution and storage. Retrofitting of the facility is well underway and expected to be operational in the spring of 2019. The centralized location and the Companys first facility outside of Quebec is ideally situated along primary shipping routes to distribute our products and fulfill commitments across Canada. This facility will provide a regulatory keyhole to our partners and future partners so that they may enter the cannabis industry with HEXO Corp. and will have access to licensed infrastructure once the facility is licensed by Health Canada. This facility further delivers on our national expansion strategy and ensures necessary capacity for the manufacture of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles.
The Company bolstered its distribution capacity with the establishment of a distribution and storage centre formed with Metro Supply Chain Inc. This 58,000 sq. ft. facility in Montreal, Quebec, was strategically acquired for logistical purposes. Through it, we supply cannabis for all direct-to-customer sales placed in Quebec through the SQDCs online store. Additionally, through the distribution centre we house, supply and distribute direct-to-customers the cannabis products of all licensed producers who have contracts with the SQDC.
The Company has positioned itself for the private retail distribution through an issued $10 million convertible debenture as a strategic investment in the private cannabis retailer F&F. F&F has applied for 37 retail store licenses in the province of Alberta, targeted eight applications in British Columbia, identified 16 potential operations in Manitoba and been awarded 2 retail stores in the province of Saskatchewan and 10 in Alberta.
Distribution Strategy
9
Corporate Social Responsibility
At HEXO, it is important to us that we demonstrate to the world that we can be socially and environmentally responsible while providing world-class products and services. HEXOs Corporate Social Responsibility (CSR) Charter focuses on four main priorities: People, Public, Products, and Planet. Through this holistic lens we are creating CSR partnerships with local, national and international organizations. Some of these organizations include:
Local partnerships
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The Papineau Health Foundation |
|
The Association for People Living with Chronic Pain |
|
The Moisson-Outaouais Food Bank |
|
Ottawa Riverkeeper |
National partnerships
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The Gastrointestinal Society of Canada |
|
The Campaign for Cannabis Amnesty |
International partnerships
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The Global Cannabis Partnership: a collaboration of leaders in the cannabis industry creating an international standard for the safe and responsible production, distribution and consumption of legal adult-use cannabis. |
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SmartCert: an internationally recognized certification company to help us calculate and monitor our carbon footprint. |
Corporate Highlights
Molson Canada Joint Venture Truss
On August 1, 2018, we announced that we have entered into a definitive agreement to form a joint venture (the JV) with Molson Canada (Molson), to pursue opportunities in the non-alcoholic, cannabis-infused beverages market. The JV was to be structured as a stand-alone start-up with its own board of directors and an independent management team. Molson would have a 57.5% controlling interest, with the Company owning the remaining balance. We and Molson closed the transaction to form the JV, called Truss, on these terms on October 4, 2018. In connection with the closing of the transaction, we issued 11,500,000 common share purchase warrants to an affiliate of Molson, each of which is exercisable to purchase one common share of the Company at a price of $6.00 per share for three years. Molson brings to the JV years of related beverage industry experience, product innovation and distribution expertise. This paired with the Companys history of innovating and delivering quality cannabis products to the market and proprietary cannabinoid solutions to its partners, positions the Company to be at the forefront of the Canadian cannabis beverage market.
Supply Agreement with the Ontario Cannabis Store
On August 20, 2018, we announced that we have entered into a supply agreement with the Ontario Cannabis Store (OCS). Under the agreement, we will supply Ontario with our award-winning Elixir product line, which will be offered in several formulations such as THC, CBD or 1:1, in either a peppermint oil or a medium-chain triglyceride (MCT) carrier oil. We will also supply the OCS with the newly launched Fleur de Lune intimate-use cannabis oil. Both products are smokeless and easy to use and will be sold in childproof packaging.
Corporate Name Change
On August 28, 2018, the Company held a special meeting during which shareholders passed to change officially the legal name of The Hydropothecary Corporation to HEXO Corp.
Acquisition of Facility in Belleville, Ontario
On September 10, 2018, we announced the acquisition of an initially configured 2 million sq. ft. facility in Belleville, Ontario, through a joint venture established with a related party, Olegna Holdings Inc. (Olegna). The Company acquired a 25% interest in the joint venture, with the remaining balance belonging to Olegna. The joint venture purchased the facility in part by a $20 million loan issued by HEXO Corp. repayable within 120 days, bearing an annual 4% interest rate, payable monthly. As part of the agreement, HEXO Corp. will be the anchor tenant for a period of 20 years. HEXO currently rents 579,000 sq. ft. of the facility with the remaining space available for current and future partners. The facility will be utilized as a centre of research and development and manufacturing. This is the first HEXO Corp. facility established outside of Quebec, further delivering on the Companys national expansion strategy and providing capacity for the manufacturing of advanced cannabis products, including cosmetics, vapes, non-alcoholic beverages and other edibles to be supplied across Canada. Furthermore, this facility provides a regulatory keyhole for current and future partners to immediately access the cannabis space and licensed infrastructure.
10
Warehouse and Distribution Centre
On September 19, 2018, we announced the storage and distribution arrangement with Metro Supply Chain Group Inc. (Metro). Under the agreement, HEXO Corp. and Metro will manage and run the 58,000 sq. ft. storage and distribution facility in Montreal, Quebec, to house and supply the cannabis products of all licensed producers who hold supply contracts with the Société québécoise du cannabis (SQDC). The distribution centre will serve as the sole distribution point for all direct-to-customer shipments within the province of Quebec for orders placed through the SQDC.
Additionally, HEXO Corp. has attained accreditation from the Autorité des marchés financiers to contract with government organizations such as the SQDC. This is a required authorization for companies conducting over $1 million in business with the government of Quebec for both services and the supply of products.
Expansion into Greece
On September 26, 2018, we announced the partnership with the Greek company Qannabos. Together, we will create a partnership supported by the development of 350,000 sq. ft. of licensed infrastructure, which we will use for the manufacturing, processing and distribution of medical cannabis. This expansion is our first international expansion and will allow us to serve the medical markets of the United Kingdom, France and other European jurisdictions, where regulations permit, with our full suite of products.
250,000 Sq. Ft. B6 Greenhouse and B5 Expansion Are Fully Licensed and Operational
As of October 10, 2018, all 10 growing zones and warehouse of the new state-of-the-art 250,000 sq. ft. greenhouse and the B5 expansion area have received final licensing from Health Canada, increasing annual production to approximately 25,000 kg of dried cannabis. The advanced manufacturing facilities include areas for dewaxing, distillation, milling and extraction that will provide the Company the capability to transform, manufacture and package cannabis in a wide range of products. The expansion also includes secondary trimming zones, additional storage areas and cleaning rooms. The additional facilities and associated production capacity have positioned the Company to meet the SQDC first-year demand of 20,000 kg.
Filling of Final Base Shelf Prospectus
On November 21, 2018, the Company announcing the filing of the final short form base shelf prospectus with securities regulatory authorities in each of the provinces and territories of Canada. The shelf prospectus is valid for a 25-month period, during which HEXO may make offerings of up to $800 million of common shares, warrants, subscription receipts and units or a combination of thereof of the Company from time to time, separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering. The specific terms of any future offering will be established in a prospectus supplement to the shelf prospectus, which supplement will be filed with the applicable Canadian securities regulatory authorities. Unless otherwise specified in the prospectus supplement relating to a particular offering of securities, the net proceeds from any sale of any securities may be used by HEXO for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay indebtedness from time to time, capital projects and potential future acquisitions, including in relation to international expansion.
Executive Appointments
We recently bolstered our executive team with the addition of two experienced professionals.
Devan Pennell, Vice-President Program Office Devan brings over 10 years of financial management, project management, and cross-functional team building experience to the role of Vice President, Program Office. A graduate of Saint Francis Xavier University and Chartered Professional Accountant by training, Devan has managed cross-functional and cross-border teams on a variety of high profile consulting projects, including the independent foreclosure reviews in the United States. Most recently, Devan was the Director of Finance at the Ottawa Sports and Entertainment Group, where he helped bring the $500M redevelopment to life. Devan joined HEXO in the fall of 2016 as Director, Business Planning to help support the financing and go-public transaction for the company. Since then, Devan was also tasked with overseeing the construction of over 1,000,000 sq. ft. of facility expansions.
As Vice President, Program Office, Devan is responsible for leveraging our tools and people to drive shared consciousness and coordination across the organization, thus facilitating the timely and effective delivery of projects and initiatives that support achievement of our strategic objectives. In this role, Devan is responsible for the Operational Scalability, Product Management, and Information Services functions within HEXO.
Jim Busey, Interim Chief Revenue Officer Jim brings more than 30 years of experience in management with a specific focus on operational execution aligned with strategic direction to his interim role as Chief Revenue Officer. Jim has extensive background in management of business transformation initiatives, in organizations undergoing significant growth and change. He brought his experience to organizations such as Jetform (acquired by Adobe), SHL Systemhouse (acquired by MCI), Petro Canada, Atlantic Lottery, Bell, AMEC, Halogen, and Hydro Ottawa.
As interim Chief Revenue Officer, Jim oversees the sales and business development functions for HEXO Corp.
11
Non-IFRS Measures
We have included certain non-IFRS performance measures in this MD&A, including adjusted gross margin, as defined in this section. We employ these measures internally to measure our operating and financial performance.
We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.
As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
ADJUSTED GROSS MARGIN
We use adjusted gross margin to provide a better representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (fair value cost adjustment) recognized as cost of goods sold.
We believe this measure provides useful information as it measures production efficiency and may be a benchmark against our competitors.
12
Operational and Financial Highlights
KEY FINANCIAL PERFORMANCE INDICATORS
Summary of results for the three-month period ended October 31, 2018 and October 31, 2017:
For the three months ended | ||||||||
Income statement snapshot |
October 31, 2018 | October 31, 2017 | ||||||
Gross revenue |
$ | 6,677 | $ | 1,102 | ||||
Excise taxes |
$ | (1,014 | ) | $ | | |||
Net revenue |
$ | 5,663 | $ | 1,102 | ||||
Gross margin before fair value adjustments |
$ | 2,832 | $ | 639 | ||||
Gross margin |
$ | 7,237 | $ | 2,463 | ||||
Operating expenses |
$ | 22,035 | $ | 2,844 | ||||
(Loss)/income from operations |
$ | (14,797 | ) | $ | (381 | ) | ||
Other income/(expenses) |
$ | 1,994 | $ | (1,537 | ) | |||
Net income (loss) |
$ | (12,803 | ) | $ | (1,918 | ) | ||
Weighted average shares outstanding |
194,033,380 | 76,480,085 | ||||||
Net income (loss) per share |
$ | (0.07 | ) | $ | (0.03 | ) |
REVENUE IN Q1 EXCEED TOTAL FY18 REVENUES
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Total revenue in the quarter increased in excess of 500% to $6,677 as compared to the same quarter of fiscal 2018. |
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Revenue in the three months ended October 31, 2018, exceeded total revenues fiscal 2018 by $1,743 or 35%. |
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Total grams and gram equivalents sold in the period increased to 1,109,727 from 120,844 when compared to the same quarter in fiscal 2018, and more than doubled the total quantity of 538,886 sold in fiscal 2018. |
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New in the quarter were ancillary revenues which contributed net $47 to total revenue. |
INTRODUCTION OF ADULT-USE REVENUES
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The Company realized its first adult-use revenues in the fiscal quarter ended October 31, 2018. |
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Adult-use sales totaled $5,194 with legalization occurring October 17, 2018 and alone outperformed the total medical revenues of fiscal 2018 of $4,934. |
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Oils sales represented 15% of the adult-use revenues. |
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Gross revenue per gram for adult-use sales was $5.45 during the three months ended October 31, 2018. |
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Gram and gram equivalents sold in the adult-use market amounted to 952,223 grams. |
PRODUCTION ON TRACK FOR EXPECTED ANNUAL YIELD OF 108,000 KG
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During the quarter ended October 31, 2018, the Company produced over 3,550 kg of dried cannabis. |
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Certain production areas of our existing licensed facilities have been dedicated to the commissioning of our new 1,000,000 sq. ft. facility (B9). This includes designated areas housing the mother plants to be relocated to B9, as well as a cuttings area to supply B9 with its first plants in January 2019. |
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The Company is ramping up towards its full production capacity, with efficiency gains and increased capacity achieved through our recently licensed 250,000 sq. ft. facility and the additional 1,000,000 sq. ft. facility, which will become operational at the end of the calendar year. The Company expects to achieve its run goal rate of 108,000 kg of annual dried flower production. |
INCREASED MEDICAL REVENUES
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Medical revenue increased 30% to $1,436 compared to $1,102 in the first quarter of fiscal 2018 and despite the demand of the adult-use market the Company ensured the needs of the medical clients were fully met. Higher revenue was driven mainly by increased oil sales volume which command a higher revenue per gram equivalent than dried products as well as by an increase to dried product sales. Compared to the prior quarter, the sequential revenue growth was 2% due to increased sales volume in both dried and oil products. This was partially offset by a decrease in dried product revenue per gram of $0.22 due to the current periods sales mix. |
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Sales in Ontario and Quebec increased by 8% and 16% respectively in the quarter. |
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Revenue per gram equivalent decreased to $9.12 from $9.26 in the prior quarter but remained consistent with the first quarter of fiscal 2018 at $9.12. Gram equivalents are utilized to provide a representation of dried grams utilized within our oil products. The gram equivalency factor was an average of 6.51 dried grams per unit sold in the quarter. |
13
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Sales volume increased 30% to 157,504 gram equivalents, compared to 120,844 in the same prior year period. This is due to a higher market acceptance and an increased consumer desire for smokeless products as oil sales increased to account for 22% of total sales in the quarter. On a sequential basis, sales volume remained consistent with slight increase of 3% and 4% in dried and oil sales respectively. |
ORGANIZATIONS HEADCOUNT
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As a result of the growing scale of operations, our headcount rose by 29% to 283 employees as at October 31, 2018 from the previous quarters headcount of 220 on July 31, 2018. |
FACILITY EXPANSION
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On September 7, 2018, the Company expanded into Ontario through the acquisition of an approximate 2,000,000 sq. ft. facility in Belleville, Ontario, through a joint venture with a related party. The Company has leased 579,000 sq. ft. for the purpose of providing state-of the-art processing, packaging and distribution capability. The facility with further allow for continuing research and development over enhanced cannabis products as well as for its strategic logistical position to serve the province of Ontario and Canada. The remaining portion of the facility will remain available for future licensed space for additional fortune 500 partners and business opportunities. |
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Also, during the period, the Company leased a 58,000 sq. ft. facility in Montreal, Quebec, for the purposes of housing and distributing the cannabis products of all licensed producers supplying the SQDC with product for the adult-use market. |
FINANCIAL POSITION
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As at October 31, 2018, we held cash, cash equivalents and short-term investments of $171,887 and continued to hold no debt on our balance sheet. |
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Subsequent to the quarter end, the Company filed its final shelf prospectus for up to $800,000 of additional common shares, warrants, subscription receipts and units or a combination of thereof. |
Summary of Results
Revenue
Q1 19 | Q4 18 | Q3 18 | Q2 18 | Q1 18 | ||||||||||||||||
Adult-use cannabis revenue 1 |
$ | 5,194 | $ | | $ | | $ | | $ | | ||||||||||
Dried grams and gram equivalents sold |
952,223 | | | | | |||||||||||||||
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Adult-use revenue/gram equivalent |
$ | 5.45 | $ | | $ | | $ | | $ | | ||||||||||
Medical cannabis revenue |
$ | 1,436 | $ | 1,410 | $ | 1,240 | $ | 1,182 | $ | 1,102 | ||||||||||
Dried grams and gram equivalents sold |
157,504 | 152,288 | 134,253 | 131,501 | 120,844 | |||||||||||||||
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Medical revenue/gram equivalent |
$ | 9.12 | $ | 9.26 | $ | 9.24 | $ | 8.99 | $ | 9.12 | ||||||||||
Ancillary revenue 2 |
$ | 47 | $ | | $ | | $ | | $ | | ||||||||||
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Total sales |
$ | 6,677 | $ | 1,410 | $ | 1,240 | $ | 1,182 | $ | 1,102 | ||||||||||
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1 |
Cannabis revenue represents adult-use market sales under the normal course of business and is exclusive of excise taxes. |
2 |
Revenue outside of the primary operations of the Company. |
Total revenue in the first quarter of fiscal 2019 increased to $6,677 from $1,102 in the compared period of fiscal 2018. The main contributor is the introduction of adult-use sales in the final two weeks of the quarter which accounted for 78% of total revenue. New in the period is $47 of ancillary non-direct cannabis sales revenue related to a management agreement.
14
ADULT-USE SALES
The Company realized its first adult-use revenues during the first quarter of fiscal 2019. Adult-use sales totaled $5,194 in this period which is a 371% increase over the $1,102 of medical sales in the first quarter of 2018, and a 5% increase over the $4,934 of total medical sales in all of fiscal 2018. This is a direct result of the Companys introductory brand awareness campaign.
Sales volume in the first quarter of 2019 was 952,223 gram equivalents sold. Dried flower represented 81% of gram equivalents sold during the period.
Adult-use revenue per gram equivalent was $5.45. This is reflective of 81% of these sales pertaining to dried flower which command a competitive market sales price. The remaining balance primarily represents oil sales which command a higher revenue per gram equivalent.
During the period, 90% of all adult-use sales were realized in Quebec through the SQDC with the remaining 10% derived in Ontario and British Columbia via the OCS and BCLDB respectively.
MEDICAL SALES
Revenue for the first quarter ended October 31, 2018 increased 30% to $1,436 compared to $1,102 in the same period in fiscal 2018. Higher revenue was driven by increased sales volume as well higher Elixir oil sales which command a higher revenue per gram when compared to dried gram sales. Compared to the prior quarter, the sequential revenue increase was 2% reflecting a lower revenue per gram on the dried flower sales which decreased $0.22/gram due to the current periods sales mix of products.
Sales volume increased 30% to 157,504 gram equivalents, compared to 120,844 in the same prior year period, due to an increase in our oil-based products as the product mix purchased by customers shifted towards smoke-free alternatives. Total dried grams sold increased 10% when compared to the same prior year period. Revenue per gram equivalent remained at $9.12 as compared the same prior year period. On a sequential basis, sales volume collectively increased 3% across both dried and oil sales.
Geographical sales in Ontario and Quebec increased 8% and 16% respectively.
Cost of Sales and Excise Taxes
Cost of goods sold includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging, shipping costs, depreciation and applicable 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.
For the three months ended | ||||||||
October 31, 2018 | October 31, 2017 | |||||||
Excise taxes |
$ | 1,014 | $ | | ||||
Cost of sales |
2,831 | 463 | ||||||
Fair value adjustment on sale of inventory |
717 | 814 | ||||||
Fair value adjustment on biological assets |
(5,123 | ) | (2,639 | ) | ||||
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Total fair value adjustment |
$ | (4,406 | ) | $ | (1,825 | ) | ||
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Cost of sales for the quarter ended October 31, 2018 were $2,831, compared to $463 for the same quarter ended in fiscal 2018. The increase in cost of sales is the result of increased sales volumes and increases to transformation costs as the oil and other value added product production mix has increased from the first quarter of fiscal 2018.
Fair value adjustment on the sale of inventory for the first quarter ended October 31, 2018 was $717 compared to $814 for the same quarter ended October 31, 2017. This variance is due to increased sales volume of inventory sold when compared to the same quarter in fiscal year 2018 and the reversal of the previously recognized net realizable impairment on dried inventory.
Fair value adjustment on biological assets for the quarter ended October 31, 2018 was ($5,123) compared to ($2,639) for the same quarter ended in fiscal 2018. This variance is due to the increase in the total number of plants as the first harvests and first full quarter of the B6 greenhouse being active. This results in significantly increased expected gram yields in the quarter and increased production costs of operating a newly in-use facility. The increase in scale and total plants on hand is the result of preparing for the adult-use market, which began October 17, 2018.
New in the period were excise taxes associated with the first adult-use and medical recognized revenues post legalization between October 17, 2018 and October 31, 2018. These taxes totaled $1,014 and reduced the total gross margin by approximately 13%. Excise taxes 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.
15
Operating Expenses
. | For the three months ended | |||||||
October 31, 2018 | October 31, 2017 | |||||||
General and administration |
$ | 4,912 | $ | 1,168 | ||||
Marketing and promotion |
11,711 | 1,115 | ||||||
Stock-based compensation |
4,689 | 314 | ||||||
Amortization of property, plant and equipment |
573 | 124 | ||||||
Amortization of intangible assets |
150 | 63 | ||||||
Research and development |
| 61 | ||||||
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Total |
$ | 22,035 | $ | 2,844 | ||||
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Operating expenses include marketing and promotion, general and administrative, research and development, stock-based compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses, and research and development costs. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4,912 in the first quarter, compared to $1,168 for the same period in fiscal 2018. This increase reflects the general growing scale of our operations, including an increase in general, finance and administrative staffing and additional rental space. Total general and administrative payroll increased $2,063 due to the growth in operations. Total professional fees increased by $710, as a result of the increased financial reporting and control-based regulatory requirements accompanying public status on the TSX, additional legal fees pertaining to agreements such as the joint ventures established in the period, recruiting fees and increased compliance costs as a publicly listed company.
MARKETING AND PROMOTION
Marketing and promotion expenses significantly increased to $11,711 in the first quarter, compared to $1,115 for the same period in fiscal 2018. This reflects the launch of adult-use marketing and promotional events undertaken in the quarter as we build brand recognition and establish HEXO in the cannabis market. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well as advertisement costs.
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Amortization of property, plant and equipment increased to $573 in the quarter, compared with $124 for the same period in fiscal 2018. The increase is the direct result of the Companys newly built greenhouses and acquired cultivation equipment. Additionally, increases to cultivation and production equipment were incurred in order to support the larger production demands and scalability of the Company.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $150 in the first quarter, compared with $63 for the same period in fiscal 2018. The increase is the result of the implementation of the first phase of a new ERP system, which will replace certain software programs we currently use and capitalized licenses and web-based assets.
Loss from Operations
Income/(loss) from operations for the first quarter was ($14,797), compared to ($381) for the same period in fiscal 2018. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepared for the legalization of the adult-use market and the realization of stock-based compensation expenses in line with the increased headcount and market share price value of the Company.
Other Income/Expenses
Other income/(expense) was $1,994 for the three months ended October 31, 2018 compared to ($1,537) in the same period of fiscal 2018. Revaluation of financial instruments of ($2,337) in the latest quarter reflects the revaluation of an embedded derivative related to USD denominated warrants issued in the prior year. Additionally, we had an unrealized fair value gain on convertible note receivable of $3,434. Interest income of $1,066 was realized for the three months ended October 31, 2018 reflective of the interest generated from the increased short-term investments held as at October 31, 2018.
16
Biological Assets Fair Value Measurements
As at October 31, 2018, the changes in the carrying value of biological assets are as follows:
October 31, 2018 | July 31, 2018 | |||||||
Carrying amount, beginning of period |
$ | 2,332 | $ | 1,504 | ||||
Production costs capitalized |
1,537 | 993 | ||||||
Net increase in fair value due to biological transformation less cost to sell |
5,123 | 7,340 | ||||||
Transferred to inventory upon harvest |
(6,351 | ) | (7,505 | ) | ||||
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Carrying amount, end of period |
$ | 2,641 | $ | 2,332 | ||||
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Our biological assets consist of cannabis plants, from seeds all the way through to mature plants. As at October 31, 2018, the carrying amount of biological assets consisted of $6 in seeds and $2,635 in cannabis plants ($6 in seeds and $2,326 in cannabis plants as at July 31, 2018). The increase in the carrying amount of biological assets is attributable to an increase in production costs and offset by the market selling price decrease as a result of the adult-use market. The significant estimates used in determining the fair value of cannabis on plants are as follows:
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yield by plant; |
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stage of growth estimated as the percentage of costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfillment costs) to arrive at an in-process fair value for estimated biological assets which have not yet been harvested; |
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percentage of costs incurred for each stage of plant growth; |
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fair value selling price per gram less cost to complete and cost to sell; and |
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destruction/wastage of plants during the harvesting and processing process. |
We view our biological assets as Level 3 fair value estimates and estimate the probability of certain harvest rates at various stages of growth. As at October 31, 2018, it is expected that our biological assets will yield approximately 4,846,294 grams (July 31, 2018 4,373,775 grams). Our estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets.
The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period end. Stage of growth is determined by reference to the plants life relative to the stages within the harvest cycle.
Managements identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the table below:
Unobservable inputs |
Input values |
Sensitivity analysis |
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Average selling price
Obtained through
actual retail prices
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$5.00 per dried gram | An increase or decrease of 5% applied to the average selling price would result in a change of approximately $131,700 to the valuation. | ||
Yield per plant Obtained through historical harvest cycle results on a per strain basis |
54235 grams per plant | An increase or decrease of 5% applied to the average yield per plant would result in a change up to approximately $373,100 in valuation. | ||
Stage of growth Obtained through the estimates of stage of completion within the harvest cycle |
Average of 38% completion | An increase or decrease of 5% applied to the average stage of growth per plant would result in a change of approximately $325,100 in valuation. | ||
Wastage Obtained through the estimates of stage of wastage within the cultivation and production cycle |
0%30% dependent upon the stage within the harvest cycle | An increase or decrease of 5% applied to the wastage expectation would result in a change of approximately $134,400 in valuation. |
17
Quarterly Results
The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended October 31, 2018. The information has been derived from our unaudited consolidated financial statements, which in managements opinion have been prepared on a basis consistent with the condensed interim consolidated financial statements for the three months ended October 31, 2018. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.
Q1 19
October 31, 2018 |
Q4 18
July 31, 2018 |
Q3 18
April 30, 2018 |
Q2 18
January 31, 2018 |
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Net revenue |
$ | 5,663 | $ | 1,410 | $ | 1,240 | $ | 1,182 | ||||||||
Net income (loss) |
(12,803 | ) | (10,194 | ) | (1,971 | ) | (8,952 | ) | ||||||||
Income (loss) per share basic |
(0.07 | ) | (0.05 | ) | (0.01 | ) | (0.10 | ) | ||||||||
Income (loss) per share fully diluted |
(0.07 | ) | (0.05 | ) | (0.01 | ) | (0.10 | ) | ||||||||
Q1 18
October 31, 2017 |
Q4 17
July 31, 2017 |
Q3 17
April 30, 2017 |
Q2 17
January 31, 2017 |
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Net revenue |
$ | 1,102 | $ | 862 | $ | 1,182 | $ | 914 | ||||||||
Net income (loss) |
(1,918 | ) | 935 | (11,808 | ) | (1,114 | ) | |||||||||
Income (loss) per share basic |
(0.03 | ) | 0.02 | (0.17 | ) | (0.02 | ) | |||||||||
Income (loss) per share fully diluted |
(0.03 | ) | 0.01 | (0.17 | ) | (0.02 | ) |
Financial Position
The following table provides a summary of our interim condensed financial position as at October 31, 2018 and July 31, 2018:
October 31, 2018 | July 31, 2018 | |||||||
Total assets |
$ | 383,306 | $ | 334,997 | ||||
Total liabilities |
17,438 | 12,124 | ||||||
Share capital |
357,402 | 347,233 | ||||||
Share-based payment reserve |
10,675 | 6,139 | ||||||
Warrants |
53,728 | 12,635 | ||||||
Deficit |
(55,937 | ) | (43,134 | ) |
Total Assets
Total assets increased to $383,306 as at October 31, 2018 from $334,997 as at July 31, 2018, primarily due to the capitalization of $42,386 in fair value consideration related to the Truss joint venture. Property plant and equipment increased by $30,933 due to continuing additions in the construction of the 1,000,000 sq. ft facility B9. At October 31, 2018, the Company had an unrestricted cash balance of $23,278 and short-term investments of $148,609. New the period the Company holds a $20,334 promissory note receivable and a $3,434 unrealized gain on fair value related to the convertible debenture receivable.
Total Liabilities
Total liabilities increased to $17,438 as at October 31, 2018 from $12,124 as at July 31, 2018, due to an increase in trade accounts payable and accruals of $5,638 due to continued growth in operations and scalability. Total liabilities include a warrant liability of $2,805 as at October 31, 2018, from $3,130 as at July 31, 2018, recorded at fair value, representing exercised USD denominated warrants and offset by the increased revaluation of the liability due to an increased market value.
Share Capital
Share capital increased to $357,402 as at October 31, 2018 from $347,233 as at July 31, 2018, due to the exercising of warrants and stock options during the period. The excising of warrants and stock options increased during the period due to the large increase in the market share price during the ramp up to adult-use legalization in October 2018.
18
Share-Based Payment Reserve
The share-based payment reserve increased to $10,675 as at October 31, 2018 from $6,139 as at July 31, 2018, primarily due to the 1,173,500 options issued on September 17, 2018 which held fair market value of $8.43 per share at the time of granting.
Warrants
The warrant reserve increased significantly to $53,728 as at October 31, 2018 from $12,635 as at July 31, 2018, primarily due to the $42,386 addition of the fair valued Molson warrants reserve established for the 11,500,000 warrants granted as consideration in the Truss joint venture acquisition in early October 2018. The warrants possess a strike price of $6.00 and a term of 3 years.
Liquidity and Capital Resources
Liquidity
Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund operating and organic growth requirements, and to meet contractual obligations. Our ability to reach profitability is dependent on successful implementation of our business strategy. While management is confident in the future success of the business, there can be no assurance that our products will gain adequate market penetration or acceptance or generate sufficient revenue to reach profitability.
As at October 31, 2018, we had $23,278 of cash and cash equivalents on hand, $148,609 of short-term investments, $6,976 of trade receivables, $20,334 promissory note receivable maturing in January 2019 and $14,633 of accounts payable and accrued liabilities. As at July 31, 2018, we had $39,342 of cash and cash equivalents on hand, $205,447 of short-term investments, $644 of trade receivables and $8,995 of accounts payable and accrued liabilities.
For the three months ended | ||||||||
Liquidity |
October 31, 2018 | October 31, 2017 | ||||||
Operating activities |
$ | (23,425 | ) | $ | (1,174 | ) | ||
Financing activities |
8,612 | 406 | ||||||
Investing activities |
$ | (1,251 | ) | $ | (35,941 | ) |
Operating Activities
Net cash used in operating activities for the 3 months ended October 31, 2018 was $23,425 as a result of the net loss for the period ended of $12,803, and a decrease in non-cash working capital of $8,284, partially offset by non-cash expense of $2,338. In the same prior year period, cash used in operating activities was $1,174, reflecting the net loss of $1,918, net non-cash income of $550, and an increase in working capital of $1,295. The change in cash flow reflects $5,123 of an unrealized change in the fair value of biological assets and increased inventory stock and trade receivables of $1,729 and $6,332, respectively.
Financing Activities
Net cash received from financing activities for the 3 months ended October 31, 2018 was $8,612, reflecting the exercised warrants and stock options during the period.
Investing Activities
For the 3 months ended October 31, 2018, we used $1,251 for investing activities, primarily due to the cash consideration and capitalized transaction costs of the $7,035 Truss joint venture and the issuance of a $20,334 promissory note receivable, which is fully repayable in March 2019. During the period, we continued additions of $25,341 to our property, plant and equipment as scalability increases and the new 1,000,000 sq. ft. greenhouse approaches significant completion. The aforementioned reduction in cash was offset by the reduction in short-term investments of $56,838.
Capital Resources
As at October 31, 2018, total current assets less current liabilities totaled $226,913. The exercise of all the issued and outstanding warrants, as at October 31, 2018, would result in an increase in cash of approximately $178,652, and the exercise of all stock options would increase cash by approximately $52,407.
On November 21, 2018, the Company filed the final short form prospectus with the regulatory authorities in each of the provinces and territories of Canada. The prospectus is valid for a 25-month period, during which offerings up to $800,000 of common shares, warrants, subscription receipts and units or a combination of thereof may be executed.
Management believes that current working capital along with the recently filled prospectus, sufficiently provides funds to fund current expansion projects and meet contractual obligations for the next 12 months. We periodically evaluate the opportunity to raise additional funds through the public or private placement of equity capital to strengthen our financial position and to provide sufficient cash reserves for growth and development of the business.
19
Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines the number of issued and outstanding common shares, warrants and options as at July 31, 2018, October 31, 2018 and December 12, 2018.
December 12, 2018 | October 31, 2018 | July 31, 2018 | ||||||||||
Common shares |
198,172,020 | 197,388,591 | 193,629,116 | |||||||||
Warrants |
34,651,000 | 34,787,758 | 26,425,504 | |||||||||
Options |
14,520,224 | 14,769,841 | 14,388,066 | |||||||||
|
|
|
|
|
|
|||||||
Total |
247,343,244 | 246,946,190 | 234,442,686 | |||||||||
|
|
|
|
|
|
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements.
We have certain contractual financial obligations related to service agreements and construction contracts for the construction in progress shown in Note 8 of the interim consolidated financial statements and the accompanying notes for the three months ended October 31, 2018. Commitments are inclusive of $64,926,107 related to the 20-year anchor rental commitment regarding the Belleville facility.
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:
$ | ||||
2019 |
64,136,910 | |||
2020 |
4,077,506 | |||
2021 |
4,038,172 | |||
2022 |
3,978,223 | |||
2023 |
3,177,654 | |||
Thereafter |
50,051,833 | |||
|
|
|||
129,460,298 | ||||
|
|
Financial Risk Management
We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The main objectives of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which we are exposed are described below.
Interest Risk
Our exposure to interest rate risk only relates to any investments of surplus cash. We may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at October 31, 2018, we had short term investments of $148,609.
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 Companys trade receivables, promissory note receivable and convertible debenture receivable. As at October 31, 2018, 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, the Company has limited credit risk.
Cash and cash equivalents are held by one of the largest cooperative financial groups in Canada. The short-term investments are held in various guaranteed investment certificates, term deposits, and fixed income securities. Since the inception of the Company, no losses have been incurred in relation to cash held by the financial institution. The majority of the trade receivables balance are held with the crown corporations of Quebec, Ontario and British Columbia as well as one of the largest medical insurance companies in Canada. Credit risk from the convertible debenture receivable and promissory note receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables, convertible note receivable and promissory note receivable represents the maximum exposure to credit risk and as at October 31, 2018; this amounted to $217,845.
20
The following table summarizes the Companys aging of receivables as at October 31, 2018 and July 31, 2018:
October 31,
2018 $ |
July 31,
2018 $ |
|||||||
030 days |
6,196,932 | 262,448 | ||||||
3160 days |
180,175 | 187,446 | ||||||
6190 days |
200,252 | 90,656 | ||||||
Over 90 days |
398,214 | 103,046 | ||||||
|
|
|
|
|||||
Total |
6,975,573 | 643,596 | ||||||
|
|
|
|
Economic Dependence Risk
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. The Company recorded sales from three crown corporations representing 78% (October 31, 2017 Nil%) of total sales in the three months ended October 31, 2018.
The Company holds trade receivables from three crown corporations representing 84% of total trade receivables as of October 31, 2018 (October 31, 2017 Nil%).
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at October 31, 2018, the Company had $171,887 of cash and cash equivalents and short-term investments.
The Company is obligated to pay accounts payable and accrued liabilities with a carrying amount and contractual cash flows amounting to $14,633 due in the next 12 months.
The carrying values of cash, trade receivable, accounts payable and accrued liabilities approximate their fair values due to their short term to maturity.
Critical Accounting Assumptions
Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in applying these accounting policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological assets and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets. Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note 3 of the Companys annual audited consolidated financial statements for the fiscal year ended July 31, 2018, which is available under HEXOs profile on SEDAR.
Adopted and Upcoming Changes in Accounting Standards
IFRS 15, Revenues from Contracts with Customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. On April 12, 2016, the IASB published final clarifications to IFRS 15 with respect to identifying performance obligations, principal versus agent considerations, and licensing.
The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative period or transitional adjustments required as a result of the adoption. The Companys accounting policy for revenue recognition under IFRS 15 is as follows:
1. |
Identifying the contract with a customer; |
2. |
Identifying the performance obligation(s) in the contract; |
3. |
Determining the transaction price; |
4. |
Allocating the transaction price to the performance obligation(s) in the contract; and |
5. |
Recognizing revenue when or as the Company satisfies the performance obligation(s). |
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.
21
IFRS 9, Financial Instruments
The Company adopted IFRS 9 retroactively and determined that there is no change to the comparative period or transitional adjustments required as a result of the adoption.
IFRS 9 was issued by the International Accounting Standards Board (IASB) in November 2009 and October 2010 and will replace IAS 39. IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or at fair value. The classification and measurement of financial assets is based on the Companys business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). Financial assets under IFRS 9 are initially measured at fair value and are subsequently measured at either amortized cost; fair value through other comprehensive income (FVTOCI) or; fair value through profit or loss (FVTPL).
AMORTIZED COST
Financial assets classified and measured at amortized cost are those assets that are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows that are SPPI. Financial assets classified at amortized cost are measured using the effective interest method.
FVTOCI
Financial assets classified and measured at FVTOCI are those assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise to cash flows that are SPPI.
This classification includes certain equity instruments where IFRS 9 allows an entity to make an irrevocable election to classify the equity instruments, on an instrument-by-instrument basis, that would otherwise be measured at FVTPL to present subsequent changes in FVTOCI.
FVTPL
Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at amortized cost or at Fair Value through Other Comprehensive Income (FVTOCI). This category includes debt instruments whose cash flow characteristics are not 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.
The following table summarizes the Companys financial instruments under IAS 39 and IFRS 9:
IAS 39 Classification |
IFRS 9 Classification |
|||
Financial assets | ||||
Cash and cash equivalents | FVTPL | FVTPL | ||
Restricted cash | FVTPL | FVTPL | ||
Short-term investments | FVTPL | FVTPL | ||
Trade receivables | Loans and receivables | Amortized cost | ||
Convertible debenture receivable | FVTPL | FVTPL | ||
Promissory note receivable | Loans and receivables | Amortized cost | ||
Financial liabilities | ||||
Accounts payable and accrued liabilities | Other financial liabilities | Amortized cost | ||
Warrant liability | FVTPL | FVTPL |
The adoption of IFRS 9 did not have a material impact to the Companys classification and measurement of financial assets and liabilities.
IFRS 9 uses an expected credit loss impairment model as opposed to an incurred credit loss model under IAS 39. The impairment model is applicable to financial assets measured at amortized cost where any expected future credit losses are provided for, irrespective of whether a loss event has occurred as at the reporting date. For trade receivables, the Company has measured the expected credit losses based on lifetime expected credit losses taking into consideration historical credit loss experience and financial factors specific to the debtors and other factors. The carrying amount of trade receivables is reduced for any expected credit losses through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the statement of comprehensive income. At the point when the Company is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial assets at amortized cost.
22
CLASSIFICATION AND MEASUREMENT OF FINANCIAL LIABILITIES
Accounting for financial liabilities remains largely the same under IFRS 9 and subsequently the Companys liabilities were not significantly impacted by the adoption.
Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Company designates a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortized cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments).
IFRS 16, Leases
IFRS 16 was issued by the IASB in January 2016, and specifies the requirements to recognize, measure, present and disclose leases. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company is assessing the impact of the new or revised IFRS standard in issue but not yet effective on its consolidated financial statements.
Related Party Transactions
Key Management Personnel Compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling our operations, directly or indirectly. Our key management personnel are the members of the executive management team and Board of Directors, who collectively control approximately 8.57% of the outstanding common shares as at October 31, 2018 (July 31, 2018 22.40%).
Compensation provided to key management for the three months ended October 31, 2018 and 2017 was as follows:
. | For the three months ended | |||||||
October 31, 2018 | October 31, 2017 | |||||||
Salary and/or consulting fees |
$ | 669 | $ | 384 | ||||
Bonus compensation |
214 | | ||||||
Stock-based compensation |
3,289 | 261 | ||||||
|
|
|
|
|||||
Total |
$ | 4,172 | $ | 645 | ||||
|
|
|
|
Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.
On September 17, 2018, the Company granted certain its executives a total of 650,000 stock options with an exercise price of $7.93.
On July 11, 2018, the Company granted certain of its directors and officers a total of 4,325,000 stock options with an exercise price of $4.89.
On April 16, 2018, the Company granted certain executives of the Company a total of 845,000 stock options with an exercise price of $4.27.
On March 12, 2018, the Company granted certain executives of the Company a total of 325,000 stock options with an exercise price of $3.89.
On December 4, 2017, the Company granted certain directors and executives a total of 1,750,000 stock options with an exercise price of $2.69, half of which vested immediately and the balance over a three-year period.
On September 8, 2017, the Company granted certain of our executives a total of 650,000 stock options with an exercise price of $1.37.
On September 10, 2018, the Company announced the leasing of a new facility. The building is owned by Belleville Complex Inc., a joint venture in which HEXO holds a 25% interest and Olegna will hold a 75% interest. Olegna is controlled by a HEXO director and a nonarms length related party. In addition to its initial lease of 500,000 sq. ft. of the space under a long-term lease, HEXO will have rights of first offer and first refusal to lease the remaining space in the building. As part of the transaction, HEXO has loaned $20,272 to Belleville Complex to acquire the building. The loan will be repaid within 120 days from September 7, 2018, and bears interest at an annual rate of 4%, in which interest shall be payable monthly. The loan is secured by a first mortgage over the building. HEXO has also agreed to be the anchor tenant of the facility for a period of 20 years.
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.
23
Internal Controls over Financial Reporting
In accordance with National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings (NI 52-109) , the establishment and maintenance of Disclosure Controls and Procedures (DCP) and Internal Control Over Financial Reporting (ICFR) is the responsibility of management. The DCP and ICFR have been designed by management based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to provide reasonable assurance that the Companys financial reporting is reliable and that its financial statements have been prepared in accordance with IFRS.
Regardless of how well the DCP and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are meeting the Companys objectives in providing reliable financial reporting information in accordance with IFRS. 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.
The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. An evaluation of the design of Disclosure Controls was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the material changes to the control environment and the material weakness in our internal control over financial reporting as at October 31, 2018, are set forth below.
Material Changes to the Control Environment
During the period the Company continued to embark on a transformation project, enabled by a new end to end Enterprise Resource Planning (ERP) system. When completed, the project will provide an integrated system for inventory tracking and valuation from seed to sale. The project was launched in November 2017 to standardize and automate business processes and controls across the organization. Currently, the system is operational in Finance, Sales and Procurement processes. It will continue to be rolled out for inventory tracking and processing throughout the fiscal year. The project is a major initiative that is utilizing third party consultants, and a solution designed specifically for the cannabis industry. The new ERP is intended to facilitate improved reporting and oversight and enhance internal controls over financial reporting.
Identified Material Weaknesses and Remediation Plan
COMPLEX SPREADSHEET CONTROLS
Management concluded that the Company did not implement and maintain effective controls surrounding complex spreadsheets. Spreadsheets are inherently prone to error due to the manual nature and increased risk of human error. The Companys controls related to complex spreadsheets did not address all identified material risks associated with manual data entry, documentation of assumptions, completeness of data entry, and the accuracy of formulas.
The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of complex spreadsheet internal controls over financial reporting. The Company intends to move towards an ERP which possesses specific functionality to remove the manual nature and usage of complex spreadsheets in future periods.
IMPLEMENTATION OF AN ERP
The Company did not have effective information technology (IT) general controls over all operating systems, databases, and IT applications supporting financial reports. Accordingly, process-level automated controls and manual controls that were dependent upon the information derived from IT systems were also determined to be ineffective.
The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of IT related internal controls over financial reporting. The Company intends to fully implement the ERP during fiscal 2019 and will only take reliance upon such controls once the appropriate level of testing is reached.
24
Risk Factors
Our overall performance and results of operations are subject to various risks and uncertainties which could cause actual performance, results and achievements to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including, without limitation, the following factors, which are discussed in our Annual Information Form dated October 26, 2018 available under our profile on www.sedar.com, which risk factors are incorporated by reference into this document, and should be reviewed in detail by all readers:
|
We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may not be realized for a number of reasons. An investment in our securities is speculative and involves a high degree of risk and uncertainty. |
|
Reliance on managements and key persons ability to execute on strategy. This exposes us to managements ability to perform, as well as the risk of management leaving the Company. |
|
We face intense competition from licensed producers and other companies, some of which may have greater financial resources and more industry, manufacturing and marketing experience than we do. |
|
The number of licenses granted, and the number of licensed producers ultimately authorized by Health Canada could have an impact on our operations. We expect to face additional competition from new market entrants that are granted licences under the ACMPR or existing license holders which are not yet active in the industry. |
|
We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base. |
|
We maintain various types of insurance such as, but not limited to, errors and omissions insurance; directors and officers insurance; property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo insurance. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on us in terms of damages awarded and the impact on our reputation. |
|
Given the nature of our business, we may from time to time be subject to claims or complaints from investors or others in the normal course of business which could adversely affect the publics perception of the Company. |
|
We may become party to litigation from time to time in the ordinary course of business which could adversely affect our business. |
|
Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition of conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition of fines and censures. |
|
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that may be required by governmental authorities. |
|
While to the knowledge of our management, it is currently in compliance with all laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis and also including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment, changes to such laws, regulations and guidelines due to matters beyond our control may cause adverse effects to our operations. |
|
Our business operations are dependent on our license under the Cannabis Regulations . The license must be renewed by Health Canada. Our current license expires on October 15, 2019. Failure to comply with the requirements of the license or any failure to renew the license would have a material adverse impact on our business, financial condition and operating results. |
|
Our activities and resources are currently primarily focused on our production facilities on the Gatineau campus, and we will continue to be focused on this facility for the foreseeable future. Adverse changes or developments affecting the Gatineau campus would have a material and adverse effect on our business, financial condition and prospects. |
|
We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve profitability. |
|
Our growth strategy contemplates outfitting the Companys multiple facilities with additional production resources. There is a risk that these additional resources will not be completed on time, on budget, or at all. |
|
A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers. |
|
Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact our business and our ability to operate profitably. |
25
|
We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. |
|
As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties. |
|
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. |
|
Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to our growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition and operating results. |
|
We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical marijuana industry in Canada. |
|
We have no earnings or dividend record and may not pay any dividends on our common shares in the foreseeable future. |
|
Our common shares are listed on the TSX; however, there can be no assurance that an active and liquid market for the common shares will be maintained, and an investor may find it difficult to resell such shares. |
|
The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, including governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our business prospects, as well as many other factors that are beyond our control. |
|
We may issue additional common shares in the future, which may dilute a shareholders holdings in the Company. |
|
Our operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. We will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in restrictions on our manufacturing operations. |
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The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada. |
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In the fiscal year 2018, the Company initiated the implementation of new ERP systems. The implementation is expected to be completed in the fiscal year ended July 31, 2019. Upon full commencement of the implementation, the scoping, requirements definition, business process definition, design and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting. |
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We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. |
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Our TSXs listing conditions required us to deliver an undertaking confirming that, while listed on the TSX, we will only conduct the business of production, acquisition, sale and distribution of cannabis in Canada as permitted under the Health Canada license. |
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The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations that may increase the risk of non-compliance, which could adversely impact the Company, its market perception and valuation. |
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The Company is subject to changed rules and regulations as implemented by a number of governmental and self-regulated bodies, including, but not limited to, the Canadian Securities Administration, the TSX and the International Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity, creating many new requirements. |
26
Exhibit 4.6
HEXO CORP.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that an annual meeting (the Meeting ) of the holders (the Shareholders ) of common shares (the Common Shares ) of HEXO Corp. (formerly The Hydropothecary Corporation) (the Corporation ) will be held at the Thompson Hotel, 550 Wellington Street W., Toronto, Ontario on Wednesday, January 16, 2019 at 6:00 p.m. (EST) for the following purposes:
1. |
to receive the audited financial statements of the Corporation for the year ended July 31, 2018, together with the auditors report thereon; |
2. |
to elect the directors of the Corporation for the ensuing year; |
3. |
to appoint MNP LLP as the auditors of the Corporation for the ensuing year and authorize the directors to fix the remuneration of the auditors; and |
4. |
to transact such other business as may properly be brought before the Meeting or any adjournment(s) or postponement(s) thereof. |
Information relating to the matters to be brought before the Meeting is set forth in the management information circular (the Circular ) which accompanies this Notice.
The Board of Directors of the Corporation has fixed Tuesday, December 4, 2018 as the record date for the Meeting. Shareholders of record at the close of business on this date are entitled to notice of the Meeting and to vote thereat or at any adjournment(s) or postponement(s) thereof on the basis of one vote for each Common Share held.
Registered Shareholders may attend the Meeting in person or may be represented by proxy. If you are a registered Shareholder and are unable to attend the Meeting in person, please exercise your right to vote by completing, signing, dating and returning the accompanying form of proxy to TSX Trust Company, the transfer agent of the Corporation. To be valid, completed proxy forms must be signed, dated and deposited with TSX Trust Company using one of the following methods:
By Mail or Hand Delivery: |
TSX Trust Company Suite 301, 100 Adelaide Street West Toronto, Ontario M5H 4H1 |
|
Facsimile: | 416-595-9593 | |
By Internet: |
www.voteproxyonline.com You will need to provide your 12 digit control number (located on the form of proxy accompanying this Circular) |
Proxies must be deposited with TSX Trust Company not later than 6:00 p.m. (EST) on Monday, January 14, 2019 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned meeting. The Chairman of the Meeting shall have the discretion to waive or extend the proxy deadlines without notice.
If you are unable to attend the Meeting, we encourage you to complete and return the enclosed form of proxy as soon as possible so that as large a representation as possible may be had at the Meeting.
If a Shareholder receives more than one form of proxy because such holder owns Common Shares registered in different names or addresses, each form of proxy should be completed and returned.
If you are a registered Shareholder and receive these materials through your broker or through another intermediary, please complete and return the form of proxy in accordance with the instructions provided to you by your broker or by the other intermediary.
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NOTICE-AND-ACCESS
Notice is also hereby given that the Corporation has decided to use the notice-and-access method of delivery of meeting materials for the Meeting for beneficial owners of Common Shares (the Non-Registered Holders ) and for registered Shareholders. The notice-and-access method of delivery of meeting materials allows the Corporation to deliver the meeting materials over the Internet in accordance with the notice-and-access rules adopted by the Canadian Securities Administrators under National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer . Under the notice-and-access system, registered Shareholders will receive a form of proxy and Non-Registered Holders will receive a voting instruction form enabling them to vote at the Meeting. However, instead of a paper copy of this Notice, the Circular, the form of proxy, the annual financial statements and related managements discussion and analysis, where applicable, and other meeting materials (collectively the Meeting Materials ), Shareholders will receive a notification with information on how they may access such materials electronically. The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the cost of printing and mailing the Meeting Materials to Shareholders. Shareholders are reminded to view the Meeting Materials prior to voting. The Corporation will not be adopting stratification procedures in relation to the use of notice-and-access provisions.
Websites Where Meeting Materials Are Posted:
Meeting Materials can be viewed online under the Corporations profile on SEDAR at www.sedar.com or at http://docs.tsxtrust.com/2092 , the website for the Meeting Materials maintained by the Corporations transfer agent and registrar. The Meeting Materials will remain posted on TSX Trust Companys website at least until the date that is one year after the date the Meeting Materials were posted.
How to Obtain Paper Copies of the Meeting Materials
Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on TSX Trust Companys website. In order to receive a paper copy of the Meeting Materials, or if you have questions concerning notice-and-access, please call or email the Corporations transfer agent and registrar, TSX Trust Company, toll free at 1-866-600-5869 or TMXEInvestorServices@tmx.com . Requests should be received by January 7, 2019 in order to receive the Meeting Materials in advance of the Meeting.
The Circular provides additional detailed information relating to the matters to be dealt with at the Meeting and is supplemental to, and expressly made a part of, this Notice. Additional information about the Corporation and its consolidated financial statements are also available under the Corporations profile on SEDAR at www.sedar.com .
DATED at Gatineau, Québec this 4 th day of December, 2018.
BY ORDER OF THE BOARD OF DIRECTORS |
(Signed) Sébastien St-Louis |
Sébastien St-Louis President and Chief Executive Officer and Director |
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HEXO CORP.
TSX: HEXO
INFORMATION CIRCULAR
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 16, 2019
PURPOSES OF SOLICITATION
THIS MANAGEMENT INFORMATION CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF HEXO CORP. (the Corporation ) of proxies to be used at the annual meeting (the Meeting ) of the holders (the Shareholders ) of common shares (the Common Shares ) of the Corporation to be held at the Thompson Hotel, 550 Wellington Street W., Toronto, Ontario on Wednesday, January 16, 2019 at 6:00 p.m. (EST), and at any adjournment or postponement thereof, for the purposes set out in the enclosed notice of meeting (the Notice of Meeting ). Although it is expected that the solicitation of proxies will be primarily by mail, proxies may also be solicited personally or by telephone, facsimile or other proxy solicitation services. In accordance with National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer ( NI 54-101 ), arrangements have been made with brokerage houses and clearing agencies, custodians, nominees, fiduciaries or other intermediaries to send the Notice of Meeting, this management information circular (the Circular ), the form of proxy for the meeting, the annual financial statements of the Corporation for the financial year ended July 31, 2018 and related managements discussion and analysis, where applicable, and other meeting materials (collectively the Meeting Materials ) to the beneficial owners of the Common Shares held of record by such parties. The Corporation may reimburse such parties for reasonable fees and disbursements incurred by them in doing so. The costs of the solicitation of proxies will be borne by the Corporation. The Corporation may also retain, and pay a fee to, one or more professional proxy solicitation firms to solicit proxies from the Shareholders in favour of the matters set forth in the Notice of Meeting.
NOTICE-AND-ACCESS
The Corporation has decided to use the notice-and-access ( Notice-and-Access ) rules provided under NI 54-101 for the delivery of the Meeting Materials to holders of Common Shares who appear on the records maintained by the Corporations registrar and transfer agent as registered holders of Common Shares ( Registered Shareholders ) and beneficial owners of Common Shares (the Non-Registered Holders ) for the Meeting. The Notice-and-Access method of delivery of Meeting Materials allows the Corporation to deliver the Meeting Materials over the internet in accordance with the Notice-and-Access rules adopted by the Canadian Securities Administrators under NI 54-101.
Registered Shareholders will receive a form of proxy and Non-Registered Holders will receive a voting instruction form, in each case enabling them to vote at the Meeting. However, instead of a paper copy of the Meeting Materials, Shareholders will receive only a notice with information on the date, location and purpose of the Meeting, as well as information on how they may access such materials electronically. The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the cost of printing and mailing the Meeting Materials to Shareholders. Shareholders are reminded to view the Meeting Materials prior to voting. Materials can be viewed online under the Corporations profile on SEDAR at www.sedar.com or on the website of TSX Trust Company (the Transfer Agent ), the Corporations transfer agent and registrar, at http://docs.tsxtrust.com/2092 . The Meeting Materials will remain posted on the Transfer Agents website at least until the date that is one year after the date the Meeting Materials were posted. The Corporation will not be adopting stratification procedures in relation to the use of Notice-and-Access rules.
Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on the Transfer Agents website. In order to receive a paper copy of the Meeting Materials or if you have questions concerning Notice-and-Access, please call or email the Corporations transfer agent and registrar, TSX Trust Company, toll free at 1-866-600-5869 or TMXEInvestorServices@tmx.com . Requests should be received by January 7, 2019 in order to receive the Meeting Materials in advance of the Meeting.
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APPOINTMENT AND REVOCATION OF PROXIES
A Registered Shareholder may vote in person at the Meeting or may appoint another person to represent such Registered Shareholder as proxy and to vote the Common Shares of such Registered Shareholder at the Meeting. In order to appoint another person as proxy, a Registered Shareholder must complete, execute and deliver the form of proxy accompanying this Circular, or another proper form of proxy, in the manner specified in the Notice of Meeting.
The purpose of a form of proxy is to designate persons who will vote on the Shareholders behalf in accordance with the instructions given by the Shareholder in the form of proxy. The persons named in the enclosed form of proxy are officers or directors of the Corporation . A REGISTERED SHAREHOLDER DESIRING TO APPOINT SOME OTHER PERSON, WHO NEED NOT BE A SHAREHOLDER OF THE CORPORATION, TO REPRESENT HIM, HER OR IT AT THE MEETING MAY DO SO BY FILLING IN THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED IN THE FORM OF PROXY OR BY COMPLETING ANOTHER PROPER FORM OF PROXY. A Registered Shareholder wishing to be represented by proxy at the Meeting or any adjournment thereof must, in all cases, deposit the completed form of proxy with the Transfer Agent not later than 6:00 p.m. (EST) on Monday, January 14, 2019 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned Meeting at which the form of proxy is to be used. A form of proxy should be executed by the Registered Shareholder or his or her attorney duly authorized in writing or, if the Registered Shareholder is a corporation, by an officer or attorney thereof duly authorized.
Proxies may be deposited with the Transfer Agent using one of the following methods:
By Mail or Hand Delivery: |
TSX Trust Company Suite 301 100 Adelaide Street West Toronto, Ontario M5H 4H1 |
|
Facsimile: | 416-595-9593 | |
By Internet: |
www.voteproxyonline.com You will need to provide your 12 digit control number (located on the form of proxy accompanying this Circular) |
A Registered Shareholder attending the Meeting has the right to vote in person and, if he, she or it does so, his, her or its form of proxy is nullified with respect to the matters such person votes upon at the Meeting and any subsequent matters thereafter to be voted upon at the Meeting or any adjournment thereof.
A Registered Shareholder who has given a form of proxy may revoke the form of proxy at any time prior to using it: (a) by depositing an instrument in writing, including another completed form of proxy, executed by such Registered Shareholder or by his, her or its attorney authorized in writing or by electronic signature or, if the Registered Shareholder is a corporation, by an authorized officer or attorney thereof at, or by transmitting by facsimile or electronic means, a revocation signed, subject to the Business Corporations Act (Ontario), by electronic signature, to (i) the head office of the Corporation, located at 204-490 Boulevard Saint-Joseph, Gatineau, Québec, J8Y 3W9 at any time prior to 5:00 p.m. (EST) on the last business day preceding the day of the Meeting or any adjournment thereof or (ii) with the Chairman of the Meeting on the day of the Meeting or any adjournment thereof; or (b) in any other manner permitted by law.
ADVICE TO NON-REGISTERED SHAREHOLDERS
The information set forth in this section is of significant importance to many Shareholders, as a substantial number of Shareholders do not hold Common Shares in their own name. Only Registered Shareholders or the persons they appoint as their proxies are permitted to attend and vote at the Meeting and only forms of proxy deposited by Registered Shareholders will be recognized and acted upon at the Meeting. Common Shares beneficially owned by a Non-Registered Holder are registered either: (i) in the name of an intermediary (an Intermediary ) with whom the Non-Registered Holder deals in respect of the Common Shares (Intermediaries
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include, among others, banks, trust companies, securities dealers or brokers and trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans); or (ii) in the name of a clearing agency (such as CDS Clearing and Depository Services Inc.) (each a Clearing Agency ) of which the Intermediary is a participant. Accordingly, such Intermediaries and Clearing Agencies would be the Registered Shareholders and would appear as such on the list maintained by the Transfer Agent. Non-Registered Holders do not appear on the list of the Registered Shareholders maintained by the Transfer Agent.
Distribution of Meeting Materials to Non-Registered Holders
In accordance with the requirements of NI 54-101, the Corporation has distributed copies of the Meeting Materials to the Clearing Agencies and Intermediaries for onward distribution to Non-Registered Holders as well as directly to NOBOs (as defined below).
Non-Registered Holders fall into two categoriesthose who object to their identity being known to the issuers of the securities which they own ( OBOs ) and those who do not object to their identity being made known to the issuers of the securities which they own ( NOBOs ). Subject to the provisions of NI 54-101, issuers may request and obtain a list of their NOBOs from Intermediaries directly or via their transfer agent and may obtain and use the NOBO list for the distribution of proxy-related materials to such NOBOs. If you are a NOBO and the Corporation or its agent has sent the Meeting Materials directly to you, your name, address and information about your holdings of Common Shares have been obtained in accordance with applicable securities regulatory requirements from the Intermediary holding the Common Shares on your behalf.
The Corporations OBOs can expect to be contacted by their Intermediary. The Corporation does not intend to pay for Intermediaries to deliver the Meeting Materials to OBOs and it is the responsibility of such Intermediaries to ensure delivery of the Meeting Materials to their OBOs.
Voting by Non-Registered Holders
The Common Shares held by Non-Registered Holders can only be voted or withheld from voting at the direction of the Non-Registered Holder. Without specific instructions, Intermediaries or Clearing Agencies are prohibited from voting Common Shares on behalf of Non-Registered Holders. Therefore, each Non-Registered Holder should ensure that voting instructions are communicated to the appropriate person well in advance of the Meeting.
The various Intermediaries have their own mailing procedures and provide their own return instructions to Non-Registered Holders, which should be carefully followed by Non-Registered Holders in order to ensure that their Common Shares are voted at the Meeting.
Non-Registered Holders will receive either a voting instruction form or, less frequently, a form of proxy. The purpose of these forms is to permit Non-Registered Holders to direct the voting of the Common Shares they beneficially own. Non-Registered Holders should follow the procedures set out below, depending on which type of form they receive.
A. |
Voting Instruction Form . In most cases, a Non-Registered Holder will receive, as part of the Meeting Materials, a voting instruction form (a VIF ). If the Non-Registered Holder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Holders behalf), the VIF must be completed, signed and returned in accordance with the directions on the form. |
OR
B . |
Form of Proxy. Less frequently, a Non-Registered Holder will receive, as part of the Meeting Materials, a form of proxy that has already been signed by the Intermediary (typically by a facsimile, stamped signature) which is restricted as to the number of Common Shares beneficially owned by the Non-Registered Holder but which is otherwise not completed. If the Non-Registered Holder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Holders behalf), the Non-Registered Holder must complete and sign the form of proxy and in accordance with the directions on the form. |
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Voting by Non-Registered Holders at the Meeting
Although a Non-Registered Holder may not be recognized directly at the Meeting for the purposes of voting Common Shares registered in the name of an Intermediary or a Clearing Agency, a Non-Registered Holder may attend the Meeting as proxyholder for the Registered Shareholder who holds Common Shares beneficially owned by such Non-Registered Holder and vote such Common Shares as a proxyholder. A Non-Registered Holder who wishes to attend the Meeting and to vote their Common Shares as proxyholder for the Registered Shareholder who holds Common Shares beneficially owned by such Non-Registered Holder, should (a) if they received a VIF, follow the directions indicated on the VIF; or (b) if they received a form of proxy strike out the names of the persons named in the form of proxy and insert the Non-Registered Holders or its nominees name in the blank space provided. Non-Registered Holders should carefully follow the instructions of their Intermediaries, including those instructions regarding when and where the VIF or the form of proxy is to be delivered.
All references to Shareholders in the Meeting Materials are to Registered Shareholders as set forth on the list of registered Shareholders as maintained by the Transfer Agent, unless specifically stated otherwise.
VOTING OF PROXIES
All Common Shares represented at the Meeting by properly executed proxies will be voted on any matter that may be called for and, where a choice with respect to any matter to be acted upon has been specified in the accompanying form of proxy, the Common Shares represented by the proxy will be voted in accordance with such instructions. In the absence of any such instruction, the persons whose names appear on the printed form of proxy will vote in favour of all the matters set out thereon.
The enclosed form of proxy confers discretionary authority upon the persons named therein. If any other business or amendments or variations to matters identified in the Notice of Meeting properly comes before the Meeting, then discretionary authority is conferred upon the person appointed in the proxy to vote in the manner they see fit, in accordance with their best judgment.
At the time of the printing of this Circular, the management of the Corporation knew of no such amendment, variation or other matter to come before the Meeting other than the matters referred to in the Notice of Meeting.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
To the knowledge of the directors and executive officers of the Corporation, no director or executive officer of the Corporation, any proposed nominee for election as director of the Corporation, or any associate or affiliate of any of the foregoing persons, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting, other than the election of directors.
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
The board of directors of the Corporation has fixed Tuesday, December 4, 2018 as the record date for the Meeting. Shareholders at the close of business on this date are entitled to receive notice of the Meeting and to vote thereat or at any adjournments or postponements thereof on the basis of one vote for each Common Share held.
The authorized capital of the Corporation consists of an unlimited number of Common Shares and an unlimited number of special shares issuable in series. As of the date hereof, 198,172,020 Common Shares were issued and outstanding as fully paid and non-assessable.
As of the date hereof, to the knowledge of the directors and executive officers of the Corporation, no person or company beneficially owns, or controls or directs, directly or indirectly, Common Shares carrying 10% or more of the voting rights attached to all of the Common Shares.
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BUSINESS TO BE TRANSACTED AT THE MEETING
1. |
Financial Statements |
The audited financial statements of the Corporation for the period ended July 31, 2018, together with the report of the auditors thereon, will be presented at the Meeting.
2. |
Election of Directors |
The affairs of the Corporation are managed by the board of directors of the Corporation (the Board ). The members of the Board are elected annually, on an individual basis, at each annual meeting of Shareholders.
At the Meeting, the number of directors proposed for election will be six (6), as listed below, all of whom are currently directors of the Corporation. Management has been informed that each of the proposed nominees listed below is willing to serve as a director if elected. The table below sets forth certain information regarding the nominees proposed as directors for election by the Shareholders at the Meeting, their respective positions with the Corporation, principal occupations or employment during the last five (5) years, the dates on which they became directors of the Corporation and the approximate number of Common Shares beneficially owned by them, directly or indirectly, or over which control or direction is exercised by them as of the date hereof.
The enclosed form of proxy allows the Shareholders to direct proxyholders to vote individually for each of the nominees as a director of the Corporation. Unless instructions are given to withhold from voting with regard to the election of directors, the persons whose names appear on the enclosed form of proxy will vote in favour of the election of each of the six (6) nominees whose names are listed below.
Management of the Corporation does not foresee that any of the following nominees listed below will be unable or, for any reason, unwilling to perform his or her duties as a director. In the event that the foregoing occurs for any reason, prior to the election, the persons indicated on the enclosed form of proxy reserve the right to vote for another candidate of their choice unless otherwise instructed by the Shareholder in the form of proxy to abstain from voting on the election of directors.
Each director elected at the Meeting will hold office until the next annual meeting or until his or her successor is duly elected or appointed.
In order for the resolution to be passed, approval by the majority of the votes cast by all of the holders of Common Shares, present in person and by proxy at the Meeting, is required.
Name, Municipality of Residence and Title |
Principal Occupation for the Past Five (5) Years |
Director of the Corporation Since |
Number of Shares
Beneficially Owned, Directly or Indirectly, Controlled or Directed |
|||||
Sébastien St-Louis Ottawa, Ontario President and Chief Executive Officer and director |
President, Co-Founder and Chief Executive Officer of the Corporation since August 13, 2013. | August 13, 2013 | 3,774,030 | (3) | ||||
Adam Miron Ottawa, Ontario Chief Brand Officer and director |
Chief Brand Officer of the Corporation since August 13, 2013. | August 13, 2013 | 3,355,916 | (4) | ||||
Dr. Michael Munzar (2) Westmount, Québec Director |
Medical Director of Statcare medical clinic since 2004. Vice President and board member of Medical and Regulatory Affairs at Osta since 2005. | November 17, 2014 | 1,850,866 | (5) |
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Name, Municipality of Residence and Title |
Principal Occupation for the Past Five (5) Years |
Director of the Corporation Since |
Number of Shares
Beneficially Owned, Directly or Indirectly, Controlled or Directed |
|||||
Jason Ewart (1) Cobourg, Ontario Director |
Chief Executive Officer and Chief Operating Officer of Fountain Capital Corporation from 2003 until October 2017. Director and Executive Vice-President of Uptempo Inc. since April 18, 2018. | November 17, 2014 | Nil | |||||
Vincent Chiara (1)(2) Montréal, Québec Director |
President and sole owner of Groupe Mach Inc. since 1999. | November 4, 2016 | 7,727,632 | (6) | ||||
Nathalie Bourque (1)(2) Montréal, Québec Director |
Vice-President, Public Affairs and Global Communications at CAE from 2005 until February 2015. | October 4, 2017 | 72,727 |
Notes:
(1) |
Member of the Audit Committee. |
(2) |
Member of the Human Resource and Corporate Governance Committee. |
(3) |
Includes 3,546,198 Common Shares owned of record by 8375739 Canada Inc., which is owned and controlled by Mr. St-Louis. |
(4) |
Such Common Shares are held by a corporation owned and controlled by Mr. Miron. |
(5) |
Includes 1,710,866 Common Shares held by a corporation owned and controlled by Dr. Munzar. |
(6) |
7,662,932 of such Common Shares are held by corporations owned and controlled by Mr. Chiara. |
There are no contracts, arrangements or understandings between any nominee and any other person (other than the directors and officers of the Corporation acting solely in such capacity) pursuant to which the nominee has been or is to be elected as a director.
As of the date hereof, the proposed directors of the Corporation as a group (six persons) beneficially owned, or exercised control or direction over, 16,781,171 Common Shares, or approximately 8.47% of the outstanding Common Shares.
The following are brief biographies of each of the proposed director nominees:
Sébastien St-Louis, President, Chief Executive Officer and Director. Sébastien St-Louis is an entrepreneur with strong leadership abilities, financial acumen and operational expertise. Sébastien has wide-ranging business experience in manufacturing, distribution, trade finance and commercial lending. He has advised Canadian business owners and CEOs across multiple industry sectors, while structuring and closing $200 million in financing to support their export and growth initiatives. Sébastien co-founded HEXO Corp. with one goal in mind: to create a world-class company based on the highest standards of product quality and safety. Since 2013, he has secured more than $260 million in financing for the company. His leadership has been instrumental in navigating the company through regulatory, financing and start-up challenges en route to becoming the only significant licensed cannabis producer in Québec and, upon completion of two fully funded expansion projects currently underway, one of the largest in Canada. Sébastien holds an MBA in Finance from the Université du Québec à Montréal and completed his Bachelor of Arts (Economics) from the University of Ottawa in 18 months.
Adam Miron, Chief Brand Officer and Director. Mr. Miron has been the Chief Brand Officer of HEXO since August 2013. Mr. Miron is the co-founder of iPolitics.ca and was its Chief Information Officer from 2010 to 2013. He was also the National Director of the Federal Liberal Commission from 2007 to 2009 and was responsible for the Liberal Party of Canadas online election campaigns. He has experience with online marketing and sales, and brand development. Mr. Miron has also run political campaigns in Canada and abroad.
Dr. Michael Munzar, Director. Dr. Munzar is a clinician and is currently serving as Medical Director of Statcare medical clinic in Pointe-Claire, Québec. In addition, Dr. Munzar is on the board of directors of Osta Biotechnologies Inc. and has held the position of Vice-President of Medical and Regulatory Affairs at Osta since 2005. He served as Medical Director of Nymox Pharmaceutical Corporation (NASDAQ:NYMX) from 1996 to 2004 and as the President of Serex Inc., a wholly owned subsidiary of Nymox, from 2000 to 2004. Dr. Munzar has experience in the regulatory development of drugs and medical devices. He obtained his MDCM from McGill University in 1979.
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Jason Ewart, Director. Mr. Ewart is a corporate director who was the co-founder and the former Chief Executive Officer and Chief Operating Officer of Fountain Capital Corporation from 2003 until October 2017. Mr. Ewart was a market analyst with A&E Capital Funding Inc. and Bradstone Equity Partners Inc. between 1998 and 2002 and Vice-President of Quest Investment Corporation between 2002 and 2003. He is now Executive Vice-President of Toronto based Uptempo Inc., a U.S. fintech company that offers an open banking platform that improves the financial journey for consumers with an active guidance financial dashboard. He has experience with bridge financing, financial analysis, quantitative modelling, equities trading and mergers and acquisitions. Mr. Ewart is a member of the Institute of Corporate Directors (ICD) in Canada and a Director for the non-profit Northumberland Community Futures Development Corporation, which provides financing and strategic guidance to entrepreneurs. Mr. Ewart holds an economics degree from McGill University.
Vincent Chiara, Director. Mr. Chiara is the President and sole owner of Groupe Mach Inc. ( Mach ). He began his career in 1984 as a lawyer specializing in real estate transactions and corporate litigation. In 1999, he ceased practicing law and focused on real estate acquisitions and property development through Mach, a private holding company. Mach and its affiliates hold significant investments representing approximately 26 million sq. ft. of real estate (office, retail, residential, industrial and hotel) located primarily in Montreal and Québec City, including the Stock Exchange Tower, the CIBC Tower, the Sun Life Building, the CBC Tower and the University Complex. Mach continues to acquire and redevelop properties across North America while maintaining its institutional reputation within the market.
Nathalie Bourque, Director. Ms. Bourque is a member of the boards of directors of Alimentation Couche-Tard Inc. and Héroux-Devtek Inc. She held the position of Vice-President, Public Affairs and Global Communications at CAE Inc. (CAE) from 2005 until her retirement in February 2015. Prior to joining CAE, Ms. Bourque was a partner at NATIONAL Public Relations where she was responsible for numerous clients in the financial, biopharmaceutical, retail and entertainment areas. Previously, she worked for various communications companies and has also worked for accounting firms in marketing. She was a member of the Board of Financial Services of the Caisse de dépôt et placement du Québec and Horizon Science and Technology. She also served as President of the MBA Association and Le Cercle Finance et Placement du Québec. She was also a Governor of McGill University and was on the board of Maison Marie Vincent. Ms. Bourque has a BA from Laval University and an MBA from McGill University.
Majority Voting for Election of Directors
The Board has adopted a majority voting policy. Pursuant to this policy, if a nominee for election as director receives for votes fewer than a majority of the votes (50% + 1 vote) cast with respect to his or her election by Shareholders, he or she must immediately tender his or her resignation to the Board following the meeting of Shareholders at which the election is held. Upon receiving such resignation, the Human Resource and Corporate Governance Committee will consider it and make a recommendation to the Board on whether or not to accept the resignation. The Board shall accept the resignation absent exceptional circumstances and announce its decision in a press release promptly within 90 days following the meeting of Shareholders. If the Board determines not to accept a resignation, the press release must fully state the reasons for that decision. The resignation will be effective when accepted by the Board. The director who tendered his or her resignation is not permitted to be a part of any deliberations of the Human Resource and Corporate Governance Committee or of the Board pertaining to the resignation offer. The policy only applies in circumstances involving an uncontested election of directors.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of the Corporation, no director or executive officer of the Corporation is, as of the date of this Circular, or has been within the last ten (10) years of the date of this Circular, a director, chief executive officer or chief financial officer or any company that while acting in such capacity: (a) was subject to a cease trade order, a similar order or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than thirty (30) consecutive days; or (b) was subject to a cease trade order, a similar order or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than thirty (30) consecutive days, that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that
7
occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or (c) within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
To the knowledge of the Corporation, no director or executive officer of the Corporation has, within the ten (10) years before the date of this Circular, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a received, receiver manager or trustee appointed to hold the assets of the director or executive officer.
To the knowledge of the Corporation, no director or executive officer of the Corporation, has been subject to: (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
3. |
Appointment of Auditors |
MNP LLP ( MNP ) have been the auditors of the Corporation since January 17, 2018. At the Meeting, Shareholders will be requested to reappoint MNP as auditors of the Corporation to hold office until the next annual meeting of Shareholders or until a successor is appointed, and to authorize the directors to fix the auditors remuneration. In order for the resolution to be passed, approval by the majority of the Common Shares voted in respect thereof at the Meeting is required.
Absent contrary instructions, proxies given pursuant to this solicitation by the management of the Corporation will be voted FOR the appointment of MNP as the auditors of the Corporation to hold office until the next annual meeting of Shareholders or until a successor is appointed and the authorization of the directors to fix the remuneration of the auditors.
STATEMENT OF EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The purpose of this Compensation Discussion and Analysis is to describe and explain all significant elements of compensation awarded to, earned by, paid to, or payable to the Corporations Named Executive Officers for the Corporations fiscal year ended July 31, 2018, including: the Corporations philosophy, objectives and processes regarding their compensation; the elements of their compensation; and how the Corporation determines their compensation.
The Corporations Named Executive Officers consist of the Chief Executive Officer, the Chief Financial Officer and each of the three most highly compensated executive officers of the Corporation other than the Chief Executive Officer and Chief Financial Officer, whose total compensation was, individually, more than $150,000 (each a Named Executive Officer and collectively, the Named Executive Officers ). For the fiscal year ended July 31, 2018, the Corporations Named Executive Officers are comprised of: (i) Sébastien St-Louis, the Corporations President and Chief Executive Officer; (ii) Ed Chaplin, the Corporations Chief Financial Officer; (iii) Adam Miron, the Corporations Chief Brand Officer; (iv) James McMillan, the Corporations Vice President, Business Development; and (v) Dr. Terry Lake, the Corporations Vice President, Corporate Social Responsibility. No management functions of the Corporation are performed by a person or company other than the directors and executive officers of the Corporation.
Compensation Philosophy and Objectives
The Corporations executive compensation program is designed to provide short and long-term rewards to the Corporations executives that are consistent with individual and corporate performance and their contribution to
8
the Corporations short and long-term objectives. The objectives of the Corporation with respect to compensation of executive officers are to provide compensation levels necessary to attract and retain high quality executives, and to motivate key executives to contribute to the interests of the Corporation. These objectives are to be met by the principal components of the Corporations executive compensation program, which has been focused on a combination of base compensation, bonus remuneration and long-term incentives in the form of stock options or other security-based compensation.
The executive compensation program adopted by the Corporation and applied to its executive officers is designed to attract and retain qualified and experienced executives who will contribute to the growth and success of the Corporation. The executive compensation program attempts to ensure that the compensation of the senior executive officers provides a competitive base compensation package and a strong link between corporate performance and compensation. Senior executive officers are motivated through the program to enhance long-term shareholder value and rewarded for their yearly individual contribution in the context of overall annual corporate performance.
Compensation Governance
For fiscal year 2018, all executive compensation was determined and administered by the Board based on recommendations from management of the Corporation. Going forward, the Human Resource and Corporate Governance Committee (the HR & CG Committee ) will make recommendations to the Board with respect to executive compensation. For additional information on the HR & CG Committee, see Corporate Governance and Audit Committee Disclosure Board CommitteesHuman Resource and Corporate Governance Committee .
To assist in reviewing and determining executive compensation, in March 2018 the Board retained Wilkinson Consulting Group Inc. ( Wilkinson ), an independent compensation consultant, to recommend market competitive compensation for the Chief Executive Officer, Chief Financial Officer, Chief Brand Officer, Chief Operating Officer and Vice President, Business Development, as well as the directors of the Corporation. Wilkinsons review focused on comparing the Corporations compensation practices with those of a comparator group for the Corporation consisting of 12 companies in the controlled substance sector or in similar geographic areas, and providing recommendations resulting from this review in relation to certain executive and director compensation matters. The following table sets out the aggregate fees billed by Wilkinson for its services related to determining compensation for the Corporations directors and executive officers for the two most recently completed financial years of the Corporation:
Year Ended
July 31, 2018 |
Year Ended
July 31, 2017 |
|||||||
Executive Compensation-Related Fees |
$ | 21,617 | Nil | |||||
All Other Fees |
Nil | Nil |
Compensation Components
The executive compensation program during the fiscal year ended July 31, 2018 consisted of three principal components: base salaries, annual incentive compensation and benefits, and long-term compensation in the form of stock options.
Base Salaries
Base salary is reflective of responsibilities and annual increases should, at a minimum, reflect inflationary pressures and changes in duties. At the date of hire, base salary is determined using a number of factors including industry comparators and relevant experience and is set out in the employment agreement. Annual increases are determined based upon reference to data on compensation levels of executives in comparable companies as well as the annual performance evaluation and underlying economic circumstances.
9
Annual Incentive Compensation and Benefits
Cash bonuses are awarded to recognize the achievement of annual corporate objectives and to recognize contributions that enhance the intrinsic value of the Corporation. Benefits commensurate with those available to all employees of the Corporation are available to executive officers.
The annual incentive plan is a cash performance plan under which a payment is made to executives, quarterly, annually or upon the achievement of specific objectives, based on the achievement of established corporate and individual goals and objectives.
The Chief Executive Officers employment agreement with the Corporation provides for a bonus program once the Corporation achieves profitability and which will pay out to the Chief Executive Officer a bonus equal to 5% of the Corporations earnings before tax for each fiscal year, as such earnings are reflected in the financial statements of such year. The bonus is payable is a lump sum within 30 days of receipt of the financial statements for such year. There has been no payout to date under this bonus provision.
Long-Term Compensation
The long-term component of compensation for executive officers, including the Named Executive Officers, is based on stock options or other security-based compensation. This component of compensation is intended to reinforce managements commitment to long term improvements in the Corporations performance.
The Board believes that incentive compensation in the form of stock option grants and other security-based compensation awards which vest over time, is and has been beneficial and necessary to attract and retain both senior executives and managerial talent at other levels. Furthermore, the Board believes stock option grants and other security-based compensation awards are an effective long-term incentive vehicle because they are directly tied to share price over a longer period, generally 10 years, and motivate executives to deliver sustained long term performance and increase shareholder value, and have a time horizon that aligns with long-term corporate goals.
As part of the Corporations evolving compensation practices, the Board adopted a new omnibus long-term incentive plan for the Corporation (the Omnibus Plan ) on June 27, 2018. Prior to the adoption of the Omnibus Plan, the sole security-based compensation plan which the Corporation had available for security-based compensation purposes was its existing stock option plan (the Previous Option Plan ), pursuant to which the Board was able to grant stock options as compensation. With the growth of the Corporations business since the adoption of the Previous Option Plan, the Board determined it was in the best interests of the Corporation to adopt a new security-based compensation plan which would provide the Board with the ability and flexibility to make broader and different forms of equity rewards as part of its need to retain a competitive compensation structure for its directors, officers, executives, employees, consultants and service providers.
Consequently, the Board adopted the Omnibus Plan as a means to grant or award not only stock options ( Options ), but also restricted shares ( Restricted Shares ), restricted share units ( RSUs ), deferred share units ( DSUs ), share appreciation rights ( SARs ) and retention awards ( Retention Awards , and together with the Options, the Restricted Shares, the RSUs, the DSUs and the SARs, Awards ) to directors, officers, senior executives and other employees of the Corporation or a subsidiary, consultants and service providers providing ongoing services to the Corporation and its affiliates ( Eligible Participants , and when such Eligible Participants are granted Awards, Participants ) in order to attract, retain and motivate such persons as individuals whose skills, performance and loyalty to the objectives and interests of the Corporation are necessary to the Corporations success, to incentivize them to continue their services for the Corporation, and to align their interests with those of the Corporation. For additional details on the Omnibus Plan, see Security-Based Compensation Plans .
Benchmarking
As previously noted, the Corporations approach with respect to compensation for executive officers has been assessed against a comparator group suggested by Wilkinson consisting of 12 companies in the controlled substance sector or in a similar geographic area (the Comparator Group ). The Comparator Group consisted of the following:
10
Company |
Selection Criteria |
Market
Capitalization (1) |
||||
Aphria Inc. |
Controlled substance sector | $ | 2.31 billion | |||
Aurora Cannabis Inc. |
Controlled substance sector | $ | 5.25 billion | |||
Canopy Growth Corporation |
Controlled substance sector | $ | 5.63 billion | |||
Cipher Pharmaceuticals Inc. |
Controlled substance sector | $ | 107 million | |||
Corby Spirit and Wine Limited |
Controlled substance sector | $ | 591 million | |||
Cronos Group Inc. |
Controlled substance sector | $ | 1.45 billion | |||
Emerald Health Therapeutics Inc. |
Controlled substance sector | $ | 652 million | |||
MedReleaf Corp. |
Controlled substance sector | $ | 1.69 billion | |||
Mitel Networks Corporation |
Similar geographic area | $ | 1.00 billion | |||
Neptune Technologies & Bioressources Inc. |
Similar geographic area | $ | 220 million | |||
Organigram Holdings Inc. |
Controlled substance sector | $ | 519 million | |||
The Supreme Cannabis Company Inc. |
Controlled substance sector | $ | 525 million |
Note:
(1) |
Approximate market capitalization as of the time of Wilkinsons report in March 2018. The median market capitalization of the Comparator Group was $830 million while the Corporations market capitalization at the time was approximately $694 million. |
Risk Analysis
As part of its review of the Corporations compensation policies and practices, the HR & CG Committee considers the implications of risks associated with the Corporations compensation policies and practices. The HR & CG Committee keeps itself apprised of the current compensation policies of companies in the same space and also draws upon the committee members backgrounds with other issuers to help identify and mitigate compensation policies and practices that could encourage a Named Executive Officer or individual at a principal business unit or division to take inappropriate or excessive risks. As of the date hereof, the HR & CG Committee is not aware of any material risks arising from the Corporations current compensation policies or practices that would be reasonably likely to have a material adverse effect on the Corporation.
Restrictions on Hedging
The Corporation has not adopted a policy restricting its Named Executive Officers and directors from purchasing financial instruments, including, for greater certainty, prepaid variable forward contracts, equity swaps, collars or units of exchange funds, that are designed to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by a Named Executive Officer or director.
Performance Graph
The following graph compares the total cumulative shareholder return for $100.00 invested in the Corporations Common Shares during the period from March 21, 2017, the date when the Corporations Common Shares started trading on the TSX Venture Exchange following the completion of the going public business combination transaction (the Qualifying Transaction ) by The Hydropothecary Corporation ( Predecessor THCX ), the predecessor to the Corporation, with BFK Capital Corp., to July 31, 2018, the end of the Corporations most recently completed financial year, with the cumulative total return of the S&P/TSX Composite Index for the same period.
11
The trend shown by the above graph is a significant positive total cumulative return for a Shareholder since Predecessor THCX went public in March 2017. During the same period, total compensation received by the Named Executive Officers increased in line with this trend as Predecessor THCX went public, raised substantial capital and significantly expanded its business. Based on the growth and results of the Corporation over this period and the return to Shareholders, no material misalignment exists between the compensation of the Named Executive Officers and the return to Shareholders.
Summary Compensation Table
The following table sets out the compensation for the Corporations Named Executive Officers for the years ended July 31, 2018, July 31, 2017 and July 31, 2016:
Name and Principal Position |
Fiscal
Year |
Salary
($) (9) |
Share-
Based Awards ($) |
Option-
Based Awards ($) (7) |
Non-Equity
Incentive
Plan Compensation ($) |
Pension
Value ($) |
All Other
Compensation ($) (8) |
Total
Compensation ($) |
||||||||||||||||||||||||||||
Annual
Incentive Plans |
Long-
Term Incentive Plans |
|||||||||||||||||||||||||||||||||||
Sebastien St-Louis (1)(2) Chief Executive Officer |
|
2018
2017 2016 |
|
$
$ $ |
327,308
177,209 125,000 |
|
|
Nil
Nil Nil |
|
$
$
|
1,180,254
191,875 Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
$
$
|
30,691
6,522 Nil |
|
$
$ $ |
1,521,332
375,606 125,000 |
|
|||||||||
Ed Chaplin (1)(3) Chief Financial Officer |
|
2018
2017 2016 |
|
$
$ $ |
259,952
153,211 125,000 |
|
|
Nil
Nil Nil |
|
$
$ |
322,493
Nil 181,722 |
|
$
$
|
18,750
118,750 Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
$
$ $ |
601,195
271,961 306,722 |
|
|||||||||
Adam Miron (1)(4) Chief Brand Officer |
|
2018
2017 2016 |
|
$
$ $ |
254,846
135,363 125,000 |
|
|
Nil
Nil Nil |
|
$
|
229,331
Nil Nil |
|
$
$
|
22,500
22,500 Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
$
$
|
32,230
6,522 Nil |
|
$
$ $ |
556,177
164,385 125,000 |
|
|||||||||
James McMillan (1)(5) Vice-President, Business Development |
|
2018
2017 2016 |
|
$
$ $ |
175,576
135,000 135,000 |
|
|
Nil
Nil Nil |
|
$
$
|
81,512
96,751 Nil |
|
$
$ $ |
150,000
48,941 24,017 |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
$
$ $ |
407,088
280,692 159,017 |
|
|||||||||
Terry Lake (6) Vice-President, Corporate Social Responsibility |
|
2018
2017 2016 |
|
$
|
233,285
Nil Nil |
|
|
Nil
Nil Nil |
|
$
|
203,838
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
|
Nil
Nil Nil |
|
$
|
437,123
Nil Nil |
|
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Notes:
(1) |
The compensation in this table is presented for the three most recently completed financial years of the Corporation. However, some or all of the compensation in previous years was paid or awarded by Predecessor THCX before it completed the Qualifying Transaction with BFK Capital Corp. in March 2017. The compensation in this table is presented on a consolidated basis. |
(2) |
Mr. St-Louis was appointed President and Chief Executive Officer of the Corporation on March 15, 2017 upon completion of the Qualifying Transaction. Prior to completion of the Qualifying Transaction, Mr. St-Louis was the Chief Executive Officer of Predecessor THCX. |
(3) |
Mr. Chaplin was appointed Chief Financial Officer of the Corporation on March 15, 2017 upon completion of the Qualifying Transaction. Prior to completion of the Qualifying Transaction, Mr. Chaplin was the Chief Financial Officer of Predecessor THCX. |
(4) |
Mr. Miron was appointed Chief Brand Officer of the Corporation on March 15, 2017 upon completion of the Qualifying Transaction. Prior to completion of the Qualifying Transaction, Mr. Miron was the Chief Brand Officer of Predecessor THCX. |
(5) |
Mr. McMillan was appointed Vice-President, Business Development of the Corporation on March 15, 2017 upon completion of the Qualifying Transaction. Prior to completion of the Qualifying Transaction, Mr. McMillan was the Vice-President, Business Development of Predecessor THCX. |
(6) |
Dr. Terry Lake was appointed Vice-President, Corporate Social Responsibility of the Corporation on September 4, 2017. |
(7) |
Based on the grant date fair value calculated using the Black Scholes Merton model. The Corporation chose the Black Scholes Merton model because it is a commonly used and accepted method of calculating grant date fair value. Details of these calculations are included in Note 10 of the Corporations audited financial statements for the year ended July 31, 2018. |
(8) |
Relates to cash compensation received for director fees. Messrs. St-Louis and Miron will no longer receive director fees after July 31, 2018. |
(9) |
Inclusive of benefits and bonus amounts. |
Incentive Plan Awards
Outstanding Share-Based Awards and Option-Based Awards
The following table sets out information concerning all outstanding share-based awards and option-based awards granted by the Corporation to the Corporations Named Executive Officers as at July 31, 2018.
Option-Based Awards | Share-Based Awards | |||||||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
Value of
Unexercised In-The-Money Options (1)(2) ($) |
Number of
Shares or Units of Shares Not Vested (#) |
Market or
Payout Value of Share-Based Awards Not Vested ($) |
Market or
Payout Value of Vested Share-Based Awards Not Paid Out or Distributed ($) |
|||||||||||||||||||
Sebastien St-Louis Chief Executive Officer |
|
75,000
187,500 1,000,000 1,600,000 |
|
$
$ $ $ |
0.16
0.75 2.69 4.89 |
|
May 29, 2024
Nov 24, 2026 Dec 4, 2027 Jul 11, 2028 |
$
$ $
|
314,250
675,000 1,660,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Ed Chaplin Chief Financial Officer |
|
150,000
450,000 150,000 350,000 |
|
$
$ $ $ |
0.58
0.75 2.69 4.89 |
|
Nov 16, 2024
Apr 19, 2026 Dec 4, 2027 Jul 11, 2028 |
$
$ $
|
565,500
1,620,000 249,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Adam Miron , Chief Brand Officer |
|
150,000
75,000 350,000 |
|
$
$ $ |
0.16
2.69 4.89 |
|
May 29, 2019
Dec 4, 2027 Jul 11, 2028 |
$
$
|
628,500
124,500 Nil |
|
Nil | Nil | Nil |
13
Option-Based Awards | Share-Based Awards | |||||||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
Value of
Unexercised In-The-Money Options (1)(2) ($) |
Number of
Shares or Units of Shares Not Vested (#) |
Market or
Payout Value of Share-Based Awards Not Vested ($) |
Market or
Payout Value of Vested Share-Based Awards Not Paid Out or Distributed ($) |
|||||||||||||||||||
James McMillan Vice-President, Business Development |
|
150,000
150,000 25,000 175,000 |
|
$
$ $ $ |
0.58
0.75 1.27 4.89 |
|
Jul 5, 2025
Nov 14, 2026 Jul 24, 2027 Jul 11, 2028 |
$
$ $
|
565,500
540,000 77,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Terry Lake Vice-President, Corporate Social Responsibility |
|
325,000
175,000 |
|
$
$ |
1.37
4.89 |
|
Sept 8, 2027
Jul 11, 2028 |
$
|
968,500
Nil |
|
Nil | Nil | Nil |
Note:
(1) |
Value of unexercised in-the-money options is calculated by determining the excess of the market value of the Corporations Common Shares on July 31, 2018 on the TSX, being $4.35, over the exercise price of the options. |
Incentive Plan Awards Value Vested or Earned During the Year
The following table sets out information concerning all share-based awards and option-based awards granted by the Corporation to the Named Executive Officers which were earned or have vested during the most recently completed financial year.
Name |
Option-Based Awards
Value Vested During the Year (1) ($) |
Share-Based Awards
Value Vested During the Year ($) |
Non-Equity Incentive
Plan Compensation Value Earned During the Year ($) |
|||||||||
Sebastien St-Louis President and Chief Executive Officer |
$ | 1,180,254 | Nil | Nil | ||||||||
Ed Chaplin Chief Financial Officer |
$ | 322,493 | Nil | $ | 18,750 | |||||||
Adam Miron Chief Brand Officer |
$ | 628,500 | Nil | $ | 22,500 | |||||||
James McMillan Vice-President, Business Development |
$ | 81,512 | Nil | $ | 150,000 | |||||||
Terry Lake Vice-President, Corporate Social Responsibility |
$ | 203,838 | Nil | Nil |
Note:
(1) |
Based on the grant date fair value calculated using the Black Scholes Merton model. The Corporation chose the Black Scholes Merton model because it is a commonly used and accepted method of calculating grant date fair value. Details of these calculations are included in Note 10 of the Corporations audited financial statements for the year ended July 31, 2018. |
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Pension Plan Benefits
The Corporation has an RSP and a DPSP, both of which are available to the Named Executive Officers on a voluntary basis. The Corporation does not otherwise have any pension plans that provide for payments or benefits at, following, or in connection with retirement to the Named Executive Officers.
Termination and Change of Control Benefits
Other than as disclosed below, none of the Named Executive Officers were entitled to any payments following or in connection with any termination, resignation, retirement, change in control or change in the responsibilities of the Named Executive Officers.
Termination Payments
Sébastien St-Louis entered into an employment contract with the Corporation on May 16, 2014, and this employment agreement was amended on November 9, 2016 and again on December 11, 2017 and March 5, 2018 (the St-Louis Agreement ). The St-Louis Agreement has an indefinite term. Either party may terminate the St-Louis Agreement with certain periods of advance notice. The St-Louis Agreement provides for an eighteen (18) month non-competition clause. In the event that the Corporation terminates Mr. St-Louis without cause, he is entitled to a lump sum severance payment equal to eighteen (18) months salary, minus any statutory deductions and amounts owing by Mr. St-Louis to the Corporation. In addition, upon termination without cause, Mr. St-Louis is entitled to an additional amount equal to the bonus of 5% of the Corporations earnings before tax which would be payable to him over the eighteen (18) month period subsequent to the date of termination calculated on a proportionate basis.
Ed Chaplin entered into an employment contract with the Corporation on October 1, 2014, as amended (the Chaplin Agreement ). The Chaplin Agreement has an indefinite term. Either party may terminate the Chaplin Agreement with certain periods of advance notice. The Chaplin Agreement provides for a twelve (12) month non-competition clause. In the event that the Corporation terminates Mr. Chaplin without cause, he is entitled to a lump sum severance payment equal to twelve (12) months salary, minus any statutory deductions and amounts owing by Mr. Chaplin to the Corporation.
Adam Miron entered into an employment contract with the Corporation on May 16, 2014, as amended (the Miron Agreement ). The Miron Agreement has an indefinite term. Either party may terminate the Miron Agreement with certain periods of advance notice. The Miron Agreement provides for a twelve (12) month non-competition clause. In the event that the Corporation terminates Mr. Miron without cause, he is entitled to a lump sum severance payment equal to twelve (12) months salary, minus any statutory deductions and amounts owing by Mr. Miron to the Corporation.
James McMillan entered into an employment contract with the Corporation on July 6, 2015, as amended (the McMillan Agreement ). The McMillan Agreement has an indefinite term. Either party may terminate the McMillan Agreement with certain periods of advance notice. The McMillan Agreement provides for a six (6) month non-competition clause.
Dr. Terry Lake entered into an employment contract with the Corporation on September 5, 2017 (the Lake Agreement ). The Lake Agreement has an indefinite term. Either party may terminate the Lake Agreement within certain periods of advance notice. The Lake Agreement provides for a six (6) month non-competition clause.
The following table sets out estimated payments that would be made to the Named Executive Officers in the event of the termination of their employment by the Corporation without cause as at July 31, 2018:
Named Executive Officer |
Severance Payments |
Total
Estimated Payment (1) |
||||
Sébastien St-Louis |
18 months | $ | 450,000 | |||
Ed Chaplin |
12 months | $ | 225,000 |
15
Named Executive Officer |
Severance Payments |
Total
Estimated Payment (1) |
||||
Adam Miron |
12 months | $ | 220,000 | |||
James McMillan |
One month / year of service | $ | 50,000 | |||
Dr. Terry Lake |
One month / year of service | $ | 16,250 |
Note:
(1) |
Severance payments based on salary and bonus. Amounts do not include benefits or value of unvested in-the-money options which may become vested as a result of termination without cause. See Incentive Plan Awards - Outstanding Share-Based Awards and Option-Based Awards for details on the total value of the in-the-money options held by the Named Executive Officers as at July 31, 2018. |
Change of Control Payments
On December 11, 2017 and on March 5, 2018, based on a recommendation from the HR & CG Committee and approved by the Board, an amendment to Mr. St-Louis employment contract was issued. This amendment provides for certain payments which would be payable to Mr. St. Louis in the event of a change of control in the Corporation. Under these amendments, the Corporation will be required to make payments to the Mr. St-Louis in the event that there is a change of control and either: (a) the executives employment is terminated by the Corporation on or within twenty-four (24) months of the change of control; or (b) there is a material change in the executives duties and responsibilities on or within twenty-four (24) months of the change of control such that the executive is required to assume duties that are not consistent with, or to relinquish responsibilities that are consistent with, those customarily and usually performed by an individual in the executives position and the duties and responsibilities previously performed by the executive, and the executive resigns from his employment as a result. The payment payable to Mr. St-Louis in the event of a change of control will be, in addition to unpaid salary, bonus and vacation pay, a lump sum equal to $3,000,000 plus the total of twenty-four (24) months salary plus the bonus earned by Mr. St-Louis over the twenty-four (24) month period preceding his termination or resignation. In addition, upon a change of control, the vesting of all unvested stock options held by Mr. St-Louis will accelerate and such options will become vested and exercisable immediately upon the executives termination or resignation for a period of ninety (90) days.
Based on recommendations from the HR & CG Committee which have been approved by the Board, the Corporation has amended its employment contracts with Ed Chaplin and Adam Miron on December 11, 2017 and with James MacMillan on June 27, 2018. As senior executives of the Corporation, the amendment provides for certain payments which would be payable to them in the event of a change of control in the Corporation. Under these amendments, the Corporation will be required to make payments to the executives in the event that there is a change of control and either: (a) the executives employment is terminated by the Corporation on or within twenty-four (24) months of the change of control; or (b) there is a material change in the executives duties and responsibilities on or within twenty-four (24) months of the change of control such that the executive is required to assume duties that are not consistent with, or to relinquish responsibilities that are consistent with, those customarily and usually performed by an individual in the executives position and the duties and responsibilities previously performed by the executive, and the executive resigns from his employment as a result. The payments payable to each of the executives in the event of a change of control will be a lump sum equal to the total of twenty-four (24) months salary plus the bonus earned by the executive over the twenty-four (24) month period preceding the executives termination or resignation. In addition, upon a change of control, the vesting of all unvested stock options held by each of the executives will accelerate and such options will become vested and exercisable immediately upon the executives termination or resignation for a period of ninety (90) days.
Change of control is defined under these agreements to mean the occurrence of any one or more of the following transactions, whether accomplished in a single transaction or series of transactions: (i) any sale, exchange, conveyance or other disposition of securities of the Corporation (other than through the issuance of equity securities by the Corporation as part of a financing transaction), in a transaction or series of related transactions after giving effect to which more than fifty percent (50%) of the voting power or equity value of the Corporation is held by holders of shares of the Corporation who were not shareholders (or affiliates thereof) immediately prior to the first of such transactions; (ii) a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the Corporations assets (other than a sale, lease, transfer, exclusive license or other disposition to a wholly-owned subsidiary of the Corporation); (iii) a merger or consolidation involving the Corporation; or (iv) any similar transaction or series of transactions.
16
The following table sets out estimated payments that would be made to the Named Executive Officers in the event of the termination of their employment by the Corporation following a change of control as at July 31, 2018:
Named Executive Officer |
Severance Payments |
Total
Estimated Payment (1) |
||||
Sébastien St-Louis |
18 months | $ | 3,600,000 | |||
Ed Chaplin |
12 months | $ | 587,500 | |||
Adam Miron |
12 months | $ | 485,000 | |||
James McMillan |
One month / year of service | $ | 598,941 | |||
Dr. Terry Lake |
N/A | N/A |
Note:
(1) |
Change of control payments based on salary, bonus and any prescribed additional payment under the employment agreements of the Named Executive Officers. Amounts do not include benefits or value of unvested in-the-money options which may become vested as a result of change of control. See Incentive Plan Awards - Outstanding Share-Based Awards and Option-Based Awards for details on the total value of the in-the-money options held by the Named Executive Officers as at July 31, 2018. |
Director Compensation
The HR & CG Committee assists the Board with respect to the establishment of the Corporations compensation program for its directors. The main objectives of the directors compensation program are to: compensate the directors in a manner that is commensurate with the risks and responsibilities assumed in Board and committee membership, and competitive with other comparable issuers; and align the interests of the directors with those of the Shareholders. Unlike compensation for the Named Executive Officers, the directors compensation program is not designed to pay for performance; rather, directors receive retainers for their services in order to help ensure unbiased decision-making.
As previously noted, Wilkinsons review and recommendations on market competitive compensation in March 2018 included compensation for the directors of the Corporation. Prior to this time, director compensation consisted of payment of an annual retainer fee in the amount of $18,000, and an additional $4,000 annual retainer fee for Board committee Chairs, as well as discretionary stock option grants. Based on the growth of the Corporations business and Wilkinsons recommendations, director compensation was revised in March 2018 to consist of an annual retainer fee in the amount of $36,000, and additional $29,000 annual retainer fee for the Chair, an additional $9,000 annual retainer fee for Board committee Chairs, and discretionary security-based compensation grants with a value of approximately $35,000 expected to be awarded in the form of DSUs. Directors also receive reimbursement for reasonable expenses incurred in connection with attending Board and committee meetings.
Director Compensation Table
The following table sets forth information concerning the compensation earned by the non-executive directors during the 12 months ended July 31, 2018.
Name |
Fees
Earned ($) |
Share-
Based Awards ($) |
Option-
Based Awards ($) (1) |
Non-Equity
Incentive Plan Compensation ($) |
Pension
Value ($) |
All Other
Compensation ($) |
Total ($) | |||||||||||||||||||||
Dr. Michael Munzar |
$ | 46,562 | Nil | $ | 266,572 | Nil | Nil | Nil | $ | 313,134 | ||||||||||||||||||
Jason Ewart |
$ | 43,854 | Nil | $ | 178,186 | Nil | Nil | Nil | $ | 222,040 | ||||||||||||||||||
Vincent Chiara |
$ | 36,461 | Nil | $ | 208,950 | Nil | Nil | Nil | $ | 245,411 | ||||||||||||||||||
Nathalie Bourque |
$ | 37,420 | Nil | $ | 227,922 | Nil | Nil | Nil | $ | 265,342 |
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Note:
(1) |
Based on the grant date fair value calculated using the Black Scholes Merton model. The Corporation chose the Black Scholes Merton model because it is a commonly used and accepted method of calculating grant date fair value. Details of these calculations are included in Note 10 of the Corporations audited financial statements for the year ended July 31, 2018. |
Director Compensation Outstanding Option-Based Awards
The following table sets out information concerning all outstanding share-based awards and option-based awards granted by the Corporation to the Corporations non-executive directors as at July 31, 2018.
Option-Based Awards | Share-Based Awards | |||||||||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
Value of
Unexercised In-The-Money Options (1)(2) ($) |
Number of
Shares or Units of Shares Not Vested (#) |
Market or
Payout Value of Share-Based Awards Not Vested ($) |
Market or
Payout Value of Vested Share- Based Awards Not Paid Out or Distributed ($) (1) |
|||||||||||||||||||||
Dr. Michael Munzar |
|
60,000
150,000 300,000 150,000 200,000 |
|
$
$ $ $ $ |
0.58
0.75 0.75 2.69 4.89 |
|
|
Nov 17, 2024
Apr 20, 2026 Nov 15, 2026 Dec 4, 2027 Jul 11, 2028 |
|
$
$ $ $
|
226,200
540,000 1,080,000 249,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Jason Ewart |
|
60,000
150,000 150,000 100,000 200,000 |
|
$
$ $ $ $ |
0.58
0.75 0.75 2.69 4.89 |
|
|
Nov 17, 2024
Apr 20, 2026 Nov 15, 2026 Dec 4, 2027 Jul 11, 2028 |
|
$
$ $ $
|
226,200
540,000 540,000 166,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Vincent Chiara |
|
75,000
25,000 100,000 200,000 |
|
$
$ $ $ |
1.27
2.48 2.69 4.89 |
|
|
Jul 24, 2027
Nov 6, 2027 Dec 4, 2027 Jul 11, 2028 |
|
$
$ $
|
231,000
46,750 166,000 Nil |
|
Nil | Nil | Nil | |||||||||||||
Nathalie Bourque |
|
100,000
100,000 200,000 |
|
$
$ $ |
2.48
2.69 4.89 |
|
|
Nov 6, 2027
Dec 4, 2027 Jul 11, 2028 |
|
$
$
|
187,000
166,000 Nil |
|
Nil | Nil | Nil |
Note:
(1) |
Value of unexercised in-the-money options is calculated by determining the excess of the market value of the Corporations Common Shares on July 31, 2018 on the TSX, being $4.35, over the exercise price of the options. |
Director Compensation Incentive Plan Awards Value Vested or Earned During the Year
The following table sets out information concerning all share-based awards and option-based awards granted by the Corporation to the Corporations non-executive directors which were earned or have vested during the most recently completed financial year.
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Name |
Option-Based Awards
Value Vested During the Year (2) ($) |
Share-Based Awards
Value Vested During the Year ($) |
Non-Equity Incentive
Plan Compensation Value Earned During the Year ($) |
|||||||||
Dr. Michael Munzar |
$ | 266,572 | Nil | Nil | ||||||||
Jason Ewart |
$ | 178,186 | Nil | Nil | ||||||||
Vincent Chiara |
$ | 208,951 | Nil | Nil | ||||||||
Nathalie Bourque |
$ | 227,922 | Nil | Nil |
Note:
(1) |
Based on the grant date fair value calculated using the Black Scholes model. The Corporation chose the Black Scholes model because it is a commonly used and accepted method of calculating grant date fair value. Details of these calculations are included in Note 10 of the Corporations financial statements for the year ended July 31, 2017. |
CORPORATE GOVERNANCE AND AUDIT COMMITTEE DISCLOSURE
The Board is committed to the highest standards of integrity, fiduciary duty and corporate governance. National Instrument 58-101 Disclosure of Corporate Governance Practices ( NI 58-101 ) and National Policy 58-201 Corporate Governance Guidelines ( NP 58-201 , and together with NI 58-101, the CSA Guidelines ) set out a series of guidelines for effective corporate governance. Under the CSA Guidelines, the Corporation must disclose on an annual basis the corporate governance practices it has adopted. In this section, the Corporation summarizes such practices, in addition to certain other governance matters.
Board of Directors
Composition and Independence
The Board is currently comprised of six members. All but two of the six directors are considered to be independent under the CSA Guidelines and in accordance with National Instrument 52-110 Audit Committees ( NI 52-110 ). The directors of the Corporation who are independent are Dr. Michael Munzar, Jason Ewart, Vincent Chiara and Nathalie Bourque. Neither Sébastien St-Louis, the President and CEO of the Corporation, nor Adam Miron, the Chief Brand Officer of the Corporation are independent as they are executive officers of the Corporation. As four out of the six directors of the Corporation are independent, a majority of directors are independent.
The Chair of the Board, Dr. Michael Munzar, is an independent director. The Board has developed a written position description for the Chair. The role of the Chair is to provide leadership to the Board with respect to its functions, and in this role the Chairs responsibilities include: establishing procedures to govern the Boards work; ensuring the Board has adequate resources; ensuring that delegated committee functions are carried out and reported to the Board; acting as a liaison between the Board and management through the CEO; and meeting periodically with the CEO and the Corporate Secretary to review governance issues including the level of communication between management and the Board.
The independent directors meet for in camera sessions without non-independent directors and members of management at the end of each regular Board meeting (unless they waive such requirement). In addition, they generally have at least one meeting (by phone) per month at which non-independent directors and members of management are not present.
Other Directorships
Currently, the following directors serve on the boards of other public companies, as listed below:
Name of Director |
Other Reporting Issuers |
|
Nathalie Bourque |
Alimentation Couche-Tard Inc. (TSX:ATD) Héroux-Devtek Inc. (TSX:HRX) |
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Name of Director |
Other Reporting Issuers |
|
Vincent Chiara | PRO Real Estate Investment Trust (TSXV:PRV) | |
Jason Ewart |
Advantgewon Oil Corp. (CSE:AOC) Bradstone Capital Corp. (CSE:HPBI) |
Meeting Attendance
The following table summarizes for each of the directors the number of Board and Board committee meetings they attended for the fiscal year ended July 31, 2018.
Director |
Board
Meetings |
Audit
Committee Meetings |
HR & CG
Committee Meetings |
|||||||||
Nathalie Bourque |
3/4 | 3/4 | 3/3 | |||||||||
Vincent Chiara |
4/4 | 3/4 | 2/3 | |||||||||
Jason Ewart |
4/4 | 4/4 | 3/3 | |||||||||
Adam Miron |
4/4 | N/A | N/A | |||||||||
Dr. Michael Munzar |
4/4 | 4/4 | 3/3 | |||||||||
Sébastien St-Louis |
4/4 | 4/4 | 3/3 |
Note:
(1) |
Ms. Bourque was appointed as a director of the Corporation on November 6, 2017. |
Board Mandate
The mandate of the Board is to manage or supervise the management of the business and affairs of the Corporation and to act with a view to the best interests of the Corporation and its shareholders. The Board has adopted a written mandate which provides that the core responsibilities of the Board include stewardship and oversight in the following areas:
(a) Strategic Plan
The Board meets annually, at the end of the year, and may also have special meetings as required, to review the Corporations overall business strategies and its annual business plan, as well as major strategic initiatives, to allow for the Board to evaluate whether the Corporations proposed actions generally accord with the objectives of the Corporation.
(b) Identification of Principal Risks
The Board, directly and through the Audit Committee as well as the other committees of the Board, reviews the principal risks of the Corporations business and the appropriateness of the systems management puts in place to manage these risks. A current report on risk management is presented to and reviewed by the Audit Committee each quarter.
(c) Communication Policy
The Disclosure and Confidentiality Policy established by the Board summarizes practices regarding disclosure of material information to investors, analysts and the media. The Board, in consultation with the HR & CG Committee, monitors and advises on compliance with this Policy.
The Board is also responsible for approving the content of the Corporations major communications to shareholders and the investing public, including the interim and annual reports, the management proxy circular, the annual information form, and any prospectuses that may be issued and significant press releases.
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(d) Internal Control and Management Information Systems
The Board, acting through the Audit Committee, monitors the implementation of appropriate internal control systems. The Audit Committee reports, at least quarterly, to the Board and periodically includes in its reports updates on the status of the Corporations internal control systems.
(e) Shareholder Feedback
The Board monitors management in its ongoing development of appropriate investor relations programs and procedures to receive and respond to shareholder feedback.
Board Committees
At present, the Board has two standing committees, the Audit Committee and the HR & CG Committee. Both committees are comprised entirely of independent directors.
Audit Committee
At present, the Audit Committee consists of Jason Ewart (Chairman), Nathalie Bourque and Vincent Chiara, all of whom are independent within the meaning of NI 52-110. Each member of the Audit Committee is also financially literate within the meaning of NI 52-110, as they have an understanding of the accounting principles used to prepare the Corporations financial statements, experience preparing, auditing, analyzing or evaluating comparable financial statements and experience as to the general application of relevant accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting. Information concerning the relevant education and experience of the Audit Committee members can be found in Business to be Transacted at the Meeting Election of Directors in this Circular.
The Audit Committee has the primary function of fulfilling its responsibilities in relation to reviewing the integrity of the Corporations financial statements, financial disclosures and internal controls over financial reporting; monitoring the system of internal control; monitoring the Corporations compliance with legal and regulatory requirements, selecting the external auditor for shareholder approval; reviewing the qualifications, independence and performance of the external auditor; and reviewing the qualifications, independence and performance of the Corporations internal auditors. The Audit Committee has specific responsibilities relating to the Corporations financial reports; the external auditor; the internal audit function; internal controls; regulatory reports and returns; legal or compliance matters that have a material impact on the Corporation; and the Corporations whistleblowing procedures. In fulfilling its responsibilities, the Audit Committee meets regularly with the internal and external auditor and key management members.
See the section entitled Audit Committee Information in the Corporations Annual Information Form filed under the Corporations profile on SEDAR at www.sedar.com on October 26, 2018 for the fiscal year ended July 31, 2018 for additional information regarding the Audit Committee, including the full text of the Audit Committees charter.
Human Resource and Corporate Governance Committee
At present, the HR & CG Committee consists of Nathalie Bourque (Chair), and Vincent Chiara and Michael Munzar, all of whom are independent within the meaning of NI 52-110. The Board believes that the members of the HR & GC Committee possess the combined knowledge, experience and backgrounds necessary to fulfill the Committees mandate. Information concerning the relevant education and experience of the HR & CG Committee members can be found in Business to be Transacted at the Meeting Election of Directors in this Circular.
The core responsibilities of the HR & CG Committee include stewardship and oversight in the following areas: (a) corporate governance; (b) nomination of directors and Board composition; (c) assessment of director independence; (d) orientation and continuing education; (e) business conduct and ethics; (f) Chief Executive Officer and director assessment; and (g) compensation for executive officers and directors.
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Regarding compensation, the HR & CG Committees responsibilities include: (a) reviewing and making recommendations to the Board with respect to the overall compensation strategy and policies for directors, officers and employees of the Corporation, including executive officer and management compensation criteria, corporate and personal goals and objectives; (b) reviewing and making recommendations to the Board with respect to the corporate goals and objectives relevant to the compensation of the Chief Executive Officer, evaluating the performance of the Chief Executive Officer in light of those goals and objectives, and recommending to the Board the compensation level of the Chief Executive Officer based on this evaluation; (c) reviewing and making recommendations to the Board with respect to the compensation of the Chairman of the Board; (d) reviewing and making recommendations to the Board with respect to the annual compensation of all other executive officers and directors of the Corporation. The Board conducts a review, through the HR & CG committee, at least once every two years, of the components and amount of Board compensation in relation to other similarly situated companies. Board compensation should be consistent with market practices but should not be set at a level that would call into question the Boards objectivity; (e) administering the Corporations Stock Option Plan, and any other Restricted Share Unit Plan or Deferred Share Unit Plan that may be in effect from time to time, in accordance with the terms of such plans; (f) making recommendations to the Board with respect to the Corporations incentive compensation and equity-based plans that are subject to Board approval; and (g) reviewing and approving the annual public disclosure in the information circular relating to executive compensation of the Corporation.
Position Descriptions
The Board has developed a written position description for the Chair of the Board and for the chair of each of the Audit Committee and the HR & CG Committee. The Board has adopted general terms describing the responsibilities of the chair of each board committee, namely those of presiding committee meetings, and overseeing the way in which the relevant board committee carries out its mandate. The chair of a board committee is required, following a meeting of such committee, to report to the Board at the next regularly scheduled meeting of the Board. The chair of each Board committee is responsible for the management, the development and the effective performance of the committee. The chair of each Board committee provides leadership and direction to the committee for all aspects of the committees work and takes all reasonable measures to ensure such committee fulfils its responsibilities.
The Board has not developed a written position description for the Chief Executive Officer. However, the Chief Executive Officer leads the management of the Corporations business and affairs and the implementation of the resolutions and policies of the Board. In this capacity, his key responsibilities are determined with reference to those typically carried out by an individual in this position and by ongoing discussion with the Board and include: leading the development of the Corporations overall strategy; operational direction including facilities development, product development, geographic expansion and strategic relationships; human resources management; Board interaction; risk management; and effective communication with shareholders, clients, employees, regulators and other stakeholders.
Orientation and Continuing Education
Due to the size of the Corporations Board, no formal program currently exists for the orientation of new directors and existing directors provide orientation and education to new members on an informal and ad hoc basis. No formal continuing education program currently exists for the directors of the Corporation; however, the Corporation encourages directors to attend, enroll or participate in courses and/or seminars dealing with financial literacy, corporate governance and related matters. Each director of the Corporation has the responsibility for ensuring that he or she maintains the skill and knowledge necessary to meet his or her obligations as a director.
Ethical Business Conduct
The directors of the Corporation have adopted a formal written code of business conduct and ethics (the Code ) in addition to compliance with applicable governmental laws, rules and regulations. The Code is designed to deter wrongdoing and to promote:
|
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
22
|
avoidance of conflicts of interest with the interests of the Corporation, including disclosure to an appropriate person of any material transaction or relationship that reasonably could be expected to give rise to such a conflict; |
|
confidentiality of corporate information; |
|
protection and proper use of corporate assets and opportunities; |
|
compliance with applicable governmental laws, rules and regulations; |
|
the prompt internal reporting of any violations of the Code to an appropriate person or person identified in the Code; and |
|
accountability for adherence to the Code. |
The Code sets the minimum standards expected to be met or exceed in all business and dealings of the Corporation, and provides guidelines to help address new situations. The directors of the Corporation expect the Corporations employees, officers and directors to act with honesty and integrity and to avoid any relationship or activity that might create, or appear to create, a conflict between their personal interest and the interests of the Corporation.
The Code has been filed under the Corporations profile on SEDAR at www.sedar.com .
The Corporation has adopted a Whistleblower Policy that provides a channel for individuals to express concerns, questions, or observations of misconduct, unethical behavior, and/or noncompliance directly and anonymously to the Corporations General Counsel or Audit Committee Chair or to an anonymous ethics hotline.
Nomination of Directors
The HR & CG Committee is responsible for identifying and recommending potential appointees to the Board. New nominees must have a track record in general business management, special expertise in an area of strategic interest to the Corporation, the ability to devote the time required, shown support for the Corporations mission and strategic objectives, and a willingness to serve. The HR & CG Committee is composed of at least three directors appointed by the Board, each of whom the Board has determined to be independent as contemplated by the laws, regulations and listing requirements to which the Corporation is subject. The Chief Executive Officer of the Corporation takes part in the work of the HR & CG Committee as a non-voting member and removes himself where the HR & CG Committee decides on his remuneration and on corporate governance matters.
Compensation
The HR & CG Committee is charged with reviewing on an annual basis the compensation and benefits paid to the directors in light of market conditions and practice and in light of risks and responsibilities.
Assessments
The HR & CG Committee is responsible for monitoring the effectiveness of the Board and the performance of the directors. The process is facilitated by questionnaires sent by the Chair of the HR & CG Committee to enable individual directors to provide feedback on the effectiveness of the Board and its Committees. Following receipt of the questionnaires, the Chair of the HR & CG Committee may contact the directors separately in order to discuss their answer to the questionnaires. The HR & CG Committee assesses the operation of the Board and the committees, the adequacy of information given to directors, communication between the Board and management and the strategic direction and processes of the Board and committees. The HR & CG Committee recommends changes to enhance the performance of the Board based on the survey feedback.
Director Terms Limits and Other Mechanisms of Board Renewal
The Company does not have a retirement policy and does not discriminate based on age. The Company considers it to be an integral role of the Board and the HR & CG Committee to assess director engagement and fitness to be a director of the Company.
Similarly, the Board of Directors has not adopted a term limit for Directors, or established a formal process for the renewal of Board membership. The Board is of the view that the imposition of arbitrary director term limits may
23
diminish the benefits derived from continuity amongst members and their familiarity with the Corporation and the industry in which it operates, and could unnecessarily expose the Corporation to losing experienced and valuable talent. The Boards renewal process is built around the concept of performance management. To that end, the Board relies on assessment procedures, and the role of the HR & CG Committee, to ensure the quality and expertise of its Board.
Policies Regarding the Representation of Women
The Corporation does not have a formal policy with respect to the representation of women on the Board. The Board is mindful of the benefit of diversity on the Board and regards involvement of women and their experience and input as constructive to the Boards decision-making process. Establishing and implementing a policy regarding female representation on the Board will be an element that the Corporation will take into consideration going forward. As at July 31, 2018, 17% of the Board members were women (one female director out of six directors). The Board is committed to increasing that level as board turnover occurs from time to time taking into account the skills, background, experience and knowledge desired at a particular time by the Board and its committees.
In general, the Board aspires to continuously improving the diversity of the Board and the Corporations management team. While the Board has not adopted any formal diversity policies and makes executive officer appointment decisions based on merit, the Board believes that diversity (including, but not limited to, gender) is important to ensure that the profiles of directors and members of the Corporations executive management provide the necessary range of perspectives, experience and expertise required to achieve effective stewardship and management. The Corporation believes that diversity is an important attribute of a well-functioning Board and an efficient team of executive officers. The Corporation recognizes that gender diversity is a significant aspect of diversity and believes women play an important leadership role in executing on the Corporations strategy, and this belief forms an important part of the focus of management in the appointment and recruitment of officers and the Board in the search and selection of nominee directors.
Consideration of the Representation of Women in the Director Identification and Selection Process
The HR & CG Committee will, within the purview of its mandate, have the responsibility to take gender into consideration as part of its overall recruitment and selection process in respect of the Board. Accordingly, when searching for new directors, the HR & CG Committee will consider the level of women representation on the Board and, where appropriate, will recruit qualified women candidates as part of the Corporations overall recruitment and selection process to fill Board positions, as the need arises, through vacancies, growth or otherwise.
Consideration Given to the Representation of Women in Executive Officer Appointments
The Corporation will consider and be sensitive to the representation of women when making executive officer appointments. However, considering the relatively small number of positions in question, the Corporation refrains from setting targets for the representation of women among its executive officers. It is important that each individual appointed as an executive officer be considered on the individuals merits and on the needs of the Corporation at the relevant time. Targets based on specific criteria could limit the Corporations ability to appoint the individual who is the best qualified for the position. As of July 31, 2018, there was one woman occupying an executive officer position with the Corporation. Subsequent to year end, another woman was appointed to an executive officer position such that there are currently two women occupying executive officer positions out of twelve positions, or approximately 16.7%. The Corporation will, however, be committed to increasing the gender diversity of its executive officers going forward.
Targets Regarding the Representation of Women on the Board and in Executive Officer Positions
The Corporation has not adopted a measurable objective for achieving gender diversity on the Board or in executive officer positions. The Corporation will consider establishing measurable objectives and targets as it further develops.
24
SECURITY-BASED COMPENSATION PLANS
Security-Based Compensation Plans
The Corporation has two security-based compensation plans, being the Omnibus Plan and the Previous Option Plan. No additional stock options have been or will be issued under the Previous Option Plan since the adoption of the Omnibus Plan.
The following table provides a summary of certain material provisions of the Omnibus Plan:
Administration |
The Omnibus Plan is administered and interpreted by the Board. The Board may decide by resolution to appoint a committee of at least three members to administer and interpret the Omnibus Plan. |
|
Eligibility |
The persons eligible to receive Awards are the Eligible Participants. |
|
Reserve Maximum |
Subject to adjustment, the total number of Common Shares reserved and available for grant and issuance pursuant to Awards shall not exceed a number of Common Shares equal to ten percent (10%) of the total issued and outstanding Common Shares of the Corporation at the time of granting of Awards (on a non-diluted basis) or such other number as may be approved by the Shareholders of the Corporation from time to time.
The Omnibus Plan is a rolling plan or evergreen plan. This means any increase in the issued and outstanding Common Shares (whether as a result of exercise of Awards or otherwise) will result in an increase in the number of Common Shares that may be issued on Awards outstanding at any time and any increase in the number of Awards granted will, upon exercise, make new grants available under the Omnibus Plan. |
|
Securities Awarded and Available |
As of July 31, 2018, the Corporation had 193,629,116 Common Shares issued and outstanding and, as a result, 19,362,911 Common Shares available to be reserved for issuance under the Omnibus Plan. As of the same date, the Corporation had 5,691,500 Common Shares issuable pursuant to Options granted under the Omnibus Plan. Accordingly, 13,671,411 Common Shares remained available for issuance under the Omnibus Plan as of July 31, 2018. |
|
Participation Limits |
The aggregate number of Common Shares (i) issued to insiders under the Omnibus Plan or any other proposed or established security-based compensation arrangement within any one-year period and (ii) issuable to insiders at any time under the Omnibus Plan or any other proposed or established security-based compensation arrangement, shall in each case not exceed ten percent (10%) of the issued and outstanding Common Shares (on a non-diluted basis). |
|
Market Value as of Grant |
Restricted Shares
Restrictions and conditions on the disposition of Restricted Shares that are granted are determined by the Board at the time of grant.
Options
The option price for Common Shares that are the subject of any Option shall be determined by the Board at the time the Option is granted, but may not be less than Market Value at the time of grant. The terms of the Omnibus Plan allow for the exercise of an Option on a cashless basis. The number of Common Shares received on the cashless exercise of an Option is determined by taking (i) the difference between (A) the Market Value and (B) the exercise price of such Option, (ii) multiplying that difference by the number of Common Shares to which such Option relates, and then (iii) |
25
dividing that product by the Market Value.
DSUs
Each Eligible Participant may elect, once each calendar year, to be paid a percentage of his or her annual retainer in the form of DSUs. The number of DSUs an Eligible Participant is entitled to receive is calculated by taking (i) the percentage elected by the Eligible Participant, (ii) multiplying that percentage by the Eligible Participants annual retainer, and then (iii) dividing that product by the Market Value.
RSUs
The purchase price of an RSU is determined by the Board and may be zero.
SARs
The exercise price of a SAR shall be fixed by the Board, but may not be less than the Market Value at the time of grant. Upon exercise, the holder is entitled to receive the number of Common Shares equal to the excess of the Market Value on the effective date of such exercise over the exercise price of the SAR.
Retention Awards
A retention award entitles an Eligible Participant to receive the number of Common Shares that is equal to the retention payment divided by the Market Value on the vesting date of the retention award, disregarding fractions and less any amounts withheld for taxes.
Market Value means at any date when the Market Value of Common Shares of the Corporation is to be determined, the volume weighted average trading price of the Common Shares on the five trading days prior to the date of grant, calculated by dividing the total value by the total volume of Common Shares traded for the five trading days prior to the date of grant on the principal stock exchange on which the Common Shares are listed, or if the Common Shares are not listed on any stock exchange, the value as is determined solely by the Board, acting reasonably and in good faith. |
||
Market Appreciation/Dividend Payment |
The Omnibus Plan contemplates the award of SARs.
In addition, a holder of DSUs is entitled to receive additional DSUs (or fractions thereof) when dividends are declared and paid on Common Shares. The additional DSUs are based on (i) the actual amount of dividends that would have been paid if the Participant had held Common Shares under the Omnibus Plan on the applicable record date divided by (ii) the Market Value on the date on which the dividends on Common Shares are payable. |
|
Vesting |
Restricted Shares
The Omnibus Plan does not contemplate any required vesting of the Restricted Shares. Restrictions and conditions on the disposition of Restricted Shares are determined by the Board at the time of grant.
Options
The Board shall, from time to time by resolution, determine the vesting provisions of the Options. |
26
DSUs
The Board may, at the time of grant, make DSUs subject to restrictions and conditions (i.e. continuing employment or achievement of pre-established performance goals). DSUs are exercisable immediately following the date a Participant resigns or is terminated.
RSUs
The relevant conditions and vesting provisions of a RSU are determined by the Board (including the performance period and criteria, if any). In making its determination regarding the vesting requirements applicable to any RSUs, the Board shall ensure that such requirements are not considered a salary deferral arrangement for purposes of applicable legislation. The Board also sets a date upon which it is determined whether the vesting conditions with respect to RSUs have been met (the RSU Vesting Determination Date ). This then establishes the number of RSUs that become vested. The RSU Vesting Determination Date cannot fall outside the period (the Restricted Period ) that ends on December 31 of the year that is three (3) years after the calendar year in which the grant of RSUs was made. Any RSU that remains unvested on the RSU Vesting Determination or at the end of the Restricted Period, whichever is earlier, is cancelled.
SARs
The relevant conditions and vesting provisions of a SAR are determined by the Board (including the performance period and criteria, if any).
Retention Awards
The relevant conditions and vesting provisions of a Retention Award are determined by the Board (including the performance period and criteria, if any). |
||
Term |
Restricted Shares
Determined by the Board.
Options
The Board shall determine the period in which an Option is exercisable. An Option cannot expire later than ten (10) years from the date it is granted.
DSUs
A Participant may redeem his or her DSUs up to the 120th day after the date of his or her termination.
RSUs
The Board shall determine the Restricted Period, provided such Restricted Period cannot expire later than December 31 of the year that is three (3) years after the calendar year in which the grant of RSUs was made.
SARs
The Board shall determine the period during which a SAR is exercisable, provided such period cannot expire more than ten (10) years from the date the SAR was granted. |
27
Retention Awards The relevant conditions and vesting provisions of a Retention Award are determined by the Board (including the performance period and criteria, if any). |
||
Cessation |
Options, SARs and Retention Awards
Termination for Cause.
Any Option, SAR or Retention Award, or any unexercised or unvested portion thereof, shall terminate when a Participant ceases to be an Eligible Participant for cause.
Death.
Any vested Option, SAR or Retention Award or the unexercised portion thereof ( Vested Award ), may be exercised by the estate of a Participant if such Participant dies while he or she is an Eligible Participant. However, a Vested Award must be exercised (i) within one (1) year of the Participants death or (ii) prior to the expiration of the original term of such Vested Award, whichever is earlier.
Disability.
Any Option, SAR or Retention Award, or any unexercised portion thereof, may be exercised by the Participant or his/her representative as the rights to exercise accrue. However, the Award must be exercised (i) within three (3) years of the disability, (ii) until the Participant becomes eligible for long-term disability benefits, or (iii) prior to the expiration of the original term of the Award, whichever is earlier.
Other.
If a Participant ceases to be an Eligible Participant for any reason other than for cause, death, or disability, the right to exercise an Option, SAR or Retention Award shall be limited to and expire on the earlier of (i) one (1) year after the date the Participant ceases to be an Eligible Participant or (ii) the expiry date of the Award set forth in the agreement pursuant to which the Award was granted.
RSUs
Termination for Cause.
Any unvested RSUs credit to a Participants account shall be forfeited and cancelled immediately upon such Participant ceasing to be an Eligible Participant for cause or by resignation.
Cessation of Employment.
When a Participant retires, becomes eligible to receive long-term disability benefits, or has his or her employment terminated for reasons other than cause or by reason of injury or disability, such Participants participation in the Omnibus Plan shall be terminated immediately. Unvested RSUs shall remain in effect until the applicable RSU Vesting Determination Date.
Retirement.
If a Participant retires and becomes involved in another business or activity in the cannabis industry prior to the applicable RSU Determination Date, then (i) if the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such Participant shall be forfeited and cancelled, or (ii) if |
28
the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Death.
If a Participant dies, his or her participation in the Omnibus Plan terminates immediately. All unvested RSUs remain in effect until the RSU Vesting Determination Date. If the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such deceased Participant shall be forfeited and cancelled. If the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such deceased Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Leave of Absence.
If a Participant voluntarily takes a leave of absence, his or her participation in the Omnibus Plan terminates immediately. All unvested RSUs remain in effect until the RSU Vesting Determination Date. If the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such Participant shall be forfeited and cancelled. If the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Restricted Shares
Upon a Participant ceasing to be an Eligible Participant for any reason, any Restricted Shares that have not vested at such time shall automatically be deemed to have been reacquired by the Corporation. |
||
Assignability |
Awards granted under the Omnibus Plan are transferrable or assignable only to a permitted assign. A permitted assign means the spouse of a Participant or a trustee, holding entity, or RRSP/RRIF of the Participant or his or her spouse. |
|
Amendments |
The Board may amend the Omnibus Plan or any Award with consent of the Participants provided that the amendment shall:
not adversely alter or impair any Award previously granted;
be subject to any regulatory approvals;
be subject to Shareholder approval, where required, provided that Shareholder approval is not required for following amendments and the Board may make any changes which may include but are not limited to: (i) amendments of a housekeeping nature; (ii) a change to the vesting provisions of any Award; (iii) the introduction or amendment of a cashless exercise feature payable in securities, whether or not such feature provides for a full deduction of the number of underlying securities from the Omnibus Plan reserve; and (iv) the addition of or amendment to any form of financial assistance.
The Board needs Shareholder approval to make the following amendments: |
29
any change to the maximum number of Common Shares issuable under the Omnibus Plan, except any increase due to an adjustment or due to the evergreen nature of the plan;
any amendment that reduces the exercise price of an Award;
any amendment that extends the expiry date of an Award;
any amendment that changes the Eligible Participants, including a change that would have the potential to broaden the participation by insiders;
any amendment that would permit an Award to be transferable or assignable other than as currently permitted;
any amendment that increases the maximum number of shares issuable or issued to insiders; and
any amendment to the amendment provisions of the Omnibus Plan.
Common Shares held directly or indirectly by insiders that may benefit from certain amendments shall be excluded from voting when obtaining Shareholder approval. |
||
Financial Assistance |
The Omnibus Plan does not contain any form of financial assistance. |
|
Change of Control |
In the event of a Change in Control, a reorganization of the Corporation, an amalgamation of the Corporation, an arrangement involving the Corporation, a take-over bid (as that term is defined in the Securities Act (Québec)) for all of the Common Shares or the sale or disposition of all or substantially all of the property and assets of the Corporation, the Board may make such provision for the protection of the rights of the Participants as the Board in its discretion considers appropriate in the circumstances.
Change in Control means an event whereby (i) any person becomes the beneficial owner, directly or indirectly, of 50% or more of either the issued and outstanding Common Shares or the combined voting power of the Corporations then outstanding voting securities entitled to vote generally; (ii) any person acquires, directly or indirectly, securities of the Corporation to which is attached the right to elect the majority of the directors of the Corporation; or (iii) the Corporation undergoes a liquidation or dissolution or sells all or substantially all of its assets. |
|
Adjustments |
The Omnibus Plan may be adjusted if certain changes are made to the Corporations capitalization (e.g. subdivision, consolidation or reclassification of or a distribution of assets on (other than an ordinary course dividend) the Common Shares) in order to preclude a dilution or enlargement of the benefits due to Participants under the Omnibus Plan. |
Additional information regarding the Omnibus Plan and a copy of the full Omnibus Plan are available in the management information circular of the Corporation dated July 16, 2018 in respect of the Corporations special meeting of Shareholders held on August 28, 2018 at which the Omnibus Plan was approved, which has been filed under the Corporations profile on SEDAR at www.sedar.com .
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the number of Common Shares to be issued upon exercise of outstanding securities or rights under equity compensation plans of the Corporation, the weighted-average exercise price of such outstanding securities or rights and the number of Common Shares remaining available for future issuance under such equity compensation plans as at July 31, 2018.
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Plan Category |
Number of securities to be
issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise
price of outstanding options, warrants and rights |
Number of securities remaining
available for future issuance under equity compensation plans (excluding securities reflected in the second column of this table |
|||||||||
Equity compensation plans approved by security holders (1) |
14,388,066 | (2) | $ | 3.02 | 13,670,791 | (3) | ||||||
Equity compensation plans not approved by securityholders |
Nil | Nil | Nil | |||||||||
Total |
14,388,066 | $ | 3.02 | 13,670,791 |
Notes:
(1) |
Equity compensation plans approved by securityholders consist of the Omnibus Plan and the Previous Option Plan. |
(2) |
Based on 5,691,500 Options issued under the Omnibus Plan and 8,696,566 stock options issued under the Previous Option Plan outstanding as of July 31, 2018. |
(3) |
Based on Common Shares issuable under the Omnibus Plan equal to 10% of the number of issued and outstanding Common Shares as at July 31, 2018, being 193,629,116, less 5,691,500 Common Shares issuable upon the exercise of Options issued under the Omnibus Plan as of July 31, 2018. |
Burn Rate of Security-Based Compensation Plan Awards
In accordance with the requirements of section 613 of the TSX Company Manual, the following table sets out the burn rate of awards granted under the Omnibus Plan as of the end of the fiscal year ended July 31, 2018 and for the two preceding financial years. The burn rate is calculated by dividing the number of awards granted under the security-based compensation plans during the relevant fiscal year by the weighted average number of securities outstanding for the applicable fiscal year. The Omnibus Plan was adopted by the Corporation on June 27, 2018.
Fiscal Year
Ended July 31, 2018 |
Fiscal
Year Ended July 31, 2017 |
Fiscal
Year Ended July 31, 2016 |
||||||||||
Number of awards granted under the Omnibus Plan |
5,691,500 | Nil | Nil | |||||||||
Weighted average of outstanding securities for that fiscal year |
134,171,509 | N/A | N/A | |||||||||
Annual Burn Rate |
4 | % | N/A | N/A |
The following table sets out the burn rate of awards granted under the Previous Option Plan as of the end of the fiscal year ended July 31, 2018 and for the two preceding financial years.
Fiscal Year
Ended July 31, 2018 |
Fiscal Year
Ended July 31, 2017 |
Fiscal Year
Ended July 31, 2016 |
||||||||||
Number of awards granted under the Previous Option Plan |
4,482,500 | 2,428,777 | 840,000 | |||||||||
Weighted average of outstanding securities for that fiscal year |
134,171,509 | 58,556,121 | 31,538,886 | |||||||||
Annual Burn Rate |
3 | % | 4 | % | 3 | % |
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INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
No director, proposed director, executive officer, nor any of their respective associates or affiliates, is or has been indebted to the Corporation or its subsidiaries since the beginning of the Corporations most recently completed financial year.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Corporation maintains insurance for the benefit of the directors and officers of the Corporation against liabilities in their capacities as directors or officers of the Corporation. For the fiscal year ended July 31, 2018, the insurance provided for a coverage limit of $25,000,000 without any deductible for claims, and the premiums for the insurance were $243,600, which were paid in full by the Corporation.
TRANSFER AGENT AND REGISTRAR
The Corporations transfer agent and registrar for the Common Shares is TSX Trust Company at its office at 100 Adelaide Street West, Toronto, Ontario, M5H 4H1.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Except as disclosed in this Circular, neither the Corporation nor any director or officer of the Corporation, nor any proposed nominee for election as a director of the Corporation, nor any other insider of the Corporation, nor any associate or affiliate of any one of them has or has had, at any time since the beginning of the year ended July 31, 2018, any material interest, direct or indirect, in any transaction or proposed transaction that has materially affected or would materially affect the Corporation.
OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
Management of the Corporation knows of no matters to come before the Meeting other than as set forth in this Circular. HOWEVER, IF OTHER MATTERS WHICH ARE NOT KNOWN TO THE MANAGEMENT SHOULD PROPERLY COME BEFORE THE MEETING, THE ENCLOSED FORM OF PROXY WILL BE USED TO VOTE ON SUCH MATTERS IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS VOTING THE PROXY.
ADDITIONAL INFORMATION
Additional information relating to the Corporation is available under the Corporations profile on SEDAR at www.sedar.com . Financial information is provided in the Corporations audited comparative financial statements and managements discussion and analysis for the year ended July 31, 2018. Copies of the Corporations financial statements and managements discussion and analysis may be obtained under the Corporations profile on SEDAR at www.sedar.com or upon written request to the Corporate Secretary at 204-490 Boulevard Saint-Joseph, Gatineau, Québec, J8Y 3W9.
APPROVAL OF BOARD
The contents of this Circular and delivery of it to each director of the Corporation, to the auditors of the Corporation and to the Shareholders of the Corporation entitled to notice of the Meeting, have been approved by the directors of the Corporation.
DATED at Gatineau, Québec this 4 th day of December, 2018.
BY ORDER OF THE BOARD OF DIRECTORS |
(Signed) Sébastien St-Louis |
Sebastien St-Louis President and Chief Executive Officer and Director |
32
Exhibit 4.7
NOTICE OF SPECIAL MEETING OF THE HOLDERS OF COMMON SHARES OF
THE HYDROPOTHECARY CORPORATION
NOTICE IS HEREBY GIVEN that a special meeting (the Meeting ) of the holders (the Shareholders ) of common shares (the Common Shares ) of The Hydropothecary Corporation (the Corporation ) will be held at the offices of DLA Piper (Canada) LLP, Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2 on Tuesday, August 28, 2018 at 2:00 p.m. (EST) for the following purposes:
(a) |
to consider and, if deemed appropriate, pass, with or without variation, a special resolution approving an amendment to the articles of the Corporation to change the name of the Corporation to HEXO Corp., as more fully described in the accompanying management information circular dated July 16, 2018 (the Circular ); |
(b) |
to consider and, if deemed appropriate, pass, with or without variation, an ordinary resolution approving the Corporations omnibus long-term incentive plan and the unallocated awards thereunder, and ratifying 5,691,500 stock options which have been granted to certain directors, officers and non-executive employees of the Corporation under the Omnibus Plan, as more fully described in the Circular; and |
(c) |
to transact such other business as may properly be brought before the Meeting or any adjournment(s) or postponement(s) thereof. |
Shareholders should refer to the Circular for more detailed information with respect to the matters to be considered at the Meeting.
Registered Shareholders may attend the Meeting in person or may be represented by proxy. If you are a registered Shareholder and are unable to attend the Meeting in person, please exercise your right to vote by dating, signing and returning the accompanying form of proxy to TSX Trust Company, the transfer agent of the Corporation. To be valid, completed proxy forms must be dated, completed, signed and deposited with TSX Trust Company using one of the following methods:
By Mail or Hand Delivery: |
TSX Trust Company Suite 301, 100 Adelaide Street West Toronto, Ontario M5H 4H1 |
|
Facsimile: | 416-595-9593 | |
By Internet: |
www.voteproxyonline.com You will need to provide your 12 digit control number (located on the form of proxy accompanying this Circular) |
A Shareholder wishing to be represented by proxy at the Meeting or any adjournment thereof must deposit his, her or its duly executed form of proxy with the Corporations transfer agent and registrar, TSX Trust Company, at Suite 301, 100 Adelaide Street West, Toronto, Ontario M5H 4H1 not later than 4:00 p.m. (EST) on Friday, August 24, 2018 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned meeting.
Shareholders who are unable to attend the Meeting in person, are requested to date, complete, sign and return the enclosed form of proxy so that as large a representation as possible may be had at the Meeting.
The Board of Directors of the Corporation has by resolution fixed Monday, July 9, 2018 as the record date for the Meeting. Shareholders of record at the close of business on July 9, 2018 are entitled to notice of the Meeting and to vote thereat or at any adjournment(s) or postponement(s) thereof on the basis of one vote for each Common Share held.
1
If you are unable to attend the Meeting, we encourage you to complete the enclosed form of proxy as soon as possible. If a Shareholder receives more than one form of proxy because such holder owns Common Shares registered in different names or addresses, each form of proxy should be completed and returned. The Chairman of the Meeting shall have the discretion to waive or extend the proxy deadlines without notice.
If you are a registered Shareholder and receive these materials through your broker or through another intermediary, please complete and return the form of proxy in accordance with the instructions provided to you by your broker or by the other intermediary.
NOTICE-AND-ACCESS
Notice is also hereby given that the Corporation has decided to use the notice-and-access method of delivery of meeting materials for the Meeting for beneficial owners of Common Shares (the Non-Registered Holders ) and for registered Shareholders. The notice-and-access method of delivery of meeting materials allows the Corporation to deliver the meeting materials over the internet in accordance with the notice-and-access rules adopted by the Canadian Securities Administrators under National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer . Under the notice-and-access system, registered Shareholders will receive a form of proxy and Non-Registered Holders will receive a voting instruction form enabling them to vote at the Meeting. However, instead of a paper copy of the notice of the Meeting, the Circular and the form of proxy and other meeting materials (collectively the Meeting Materials ), Shareholders will receive a notification with information on how they may access such materials electronically. The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the cost of printing and mailing the Meeting Materials to Shareholders. Shareholders are reminded to view the Meeting Materials prior to voting. The Corporation will not be adopting stratification procedures in relation to the use of notice-and-access provisions.
Websites Where Meeting Materials Are Posted:
Meeting Materials can be viewed online under the the Corporations profile on SEDAR at www.sedar.com or at https://docs.tsxtrust.com/2070 , on the website of the Corporations transfer agent and registrar at. The Meeting Materials will remain posted on TSX Trust Companys website at least until the date that is one year after the date the Meeting Materials were posted.
How to Obtain Paper Copies of the Meeting Materials
Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on TSX Trust Companys website. In order to receive a paper copy of the Meeting Materials or if you have questions concerning notice-and-access, please call the Corporations transfer agent and registrar, TSX Trust Company, toll free at 1-866-600-5869. Requests should be received by 4:00 p.m. (EST) on August 16, 2018 in order to receive the Meeting Materials in advance of the Meeting.
The Circular provides additional detailed information relating to the matters to be dealt with at the Meeting and is supplemental to, and expressly made a part of, this notice of special meeting. Additional information about the Corporation including its consolidated financial statements is also available on the Corporations profile at www.sedar.com .
DATED at Gatineau, Quebec this 16 th day of July, 2018.
BY ORDER OF THE BOARD OF DIRECTORS |
(Signed) Sebastien St-Louis |
Sebastien St-Louis |
Chief Executive Officer and Director |
2
THE HYDROPOTHECARY CORPORATION
INFORMATION CIRCULAR
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 28, 2018
PURPOSES OF SOLICITATION
THIS MANAGEMENT INFORMATION CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF THE HYDROPOTHECARY CORPORATION (the Corporation ) of proxies to be used at the special meeting of shareholders of the Corporation to be held on Tuesday, August 28, 2018 at the offices of DLA Piper (Canada) LLP, Suite 6000, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1E2 at 2:00 p.m. (EST), and at any adjournment or postponement thereof (the Meeting ) for the purposes set out in the enclosed notice of meeting (the Notice of Meeting ). Although it is expected that the solicitation of proxies will be primarily by mail, proxies may also be solicited personally or by telephone, facsimile or other proxy solicitation services. In accordance with National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer ( NI 54-101 ), arrangements have been made with brokerage houses and clearing agencies, custodians, nominees, fiduciaries or other intermediaries to send the Notice of Meeting, this management information circular (the Circular ), the form of proxy for the meeting and other meeting materials, if applicable (collectively the Meeting Materials ) to the beneficial owners of the common shares of the Corporation (the Common Shares ) held of record by such parties. The Corporation may reimburse such parties for reasonable fees and disbursements incurred by them in doing so. The costs of the solicitation of proxies will be borne by the Corporation. The Corporation may also retain, and pay a fee to, one or more professional proxy solicitation firms to solicit proxies from the shareholders of the Corporation in favour of the matters set forth in the Notice of Meeting.
NOTICE-AND-ACCESS
The Corporation has decided to use the notice-and-access ( Notice-and-Access ) rules provided under NI 54-101 for the delivery of the Meeting Materials to holders of Common Shares who appear on the records maintained by the Corporations registrar and transfer agent as registered holders of Common Shares ( Registered Shareholders ) and beneficial owners of Common Shares (the Non-Registered Holders ) for the Meeting. The Notice-and-Access method of delivery of Meeting Materials allows the Corporation to deliver the Meeting Materials over the internet in accordance with the Notice-and-Access rules adopted by the Canadian Securities Administrators under NI 54-101.
Registered Shareholders will receive a form of proxy and Non-Registered Holders will receive a voting instruction form, in each case enabling them to vote at the Meeting. However, instead of a paper copy of the Meeting Materials, shareholders will receive only a notice with information on the date, location and purpose of the Meeting, as well as information on how they may access such materials electronically. The use of this alternative means of delivery is more environmentally friendly as it will help reduce paper use and will also reduce the cost of printing and mailing the Meeting Materials to shareholders. Shareholders are reminded to view the Meeting Materials prior to voting. Materials can be viewed online under the Corporations profile at www.sedar.com or on the website of TSX Trust Company (the Transfer Agent ), the Corporations transfer agent and registrar, at https://docs.tsxtrust.com/2070 . The Meeting Materials will remain posted on the Transfer Agents website at least until the date that is one year after the date the Meeting Materials were posted. The Corporation will not be adopting stratification procedures in relation to the use of Notice-and-Access rules.
Shareholders may request paper copies of the Meeting Materials be sent to them by postal delivery at no cost to them. Requests may be made up to one year from the date the Meeting Materials are posted on the Transfer Agents website. In order to receive a paper copy of the Meeting Materials or if you have questions concerning Notice-and-Access, please call the Transfer Agent toll free at 1-866-600-5869. Requests should be received by 4:00 p.m. (EST) on August 16, 2018 in order to receive the Meeting Materials in advance of the Meeting.
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APPOINTMENT AND REVOCATION OF PROXIES
A Registered Shareholder may vote in person at the Meeting or may appoint another person to represent such Registered Shareholder as proxy and to vote the Common Shares of such Registered Shareholder at the Meeting. In order to appoint another person as proxy, a Registered Shareholder must complete, execute and deliver the form of proxy accompanying this Circular, or another proper form of proxy, in the manner specified in the Notice of Meeting.
The purpose of a form of proxy is to designate persons who will vote on the shareholders behalf in accordance with the instructions given by the shareholder in the form of proxy. The persons named in the enclosed form of proxy are officers or directors of the Corporation . A REGISTERED SHAREHOLDER DESIRING TO APPOINT SOME OTHER PERSON, WHO NEED NOT BE A SHAREHOLDER OF THE CORPORATION, TO REPRESENT HIM, HER OR IT AT THE MEETING MAY DO SO BY FILLING IN THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED IN THE FORM OF PROXY OR BY COMPLETING ANOTHER PROPER FORM OF PROXY. A Registered Shareholder wishing to be represented by proxy at the Meeting or any adjournment thereof must, in all cases, deposit the completed form of proxy with the Corporations transfer agent and registrar, the Transfer Agent not later than 4:00 p.m. (EST) on Friday, August 24, 2018 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned Meeting at which the form of proxy is to be used. A form of proxy should be executed by the Registered Shareholder or his or her attorney duly authorized in writing or, if the Registered Shareholder is a corporation, by an officer or attorney thereof duly authorized.
Proxies may be deposited with the Transfer Agent using one of the following methods:
By Mail or Hand Delivery: |
TSX Trust Company Suite 301 100 Adelaide Street West Toronto, Ontario M5H 4H1 |
|
Facsimile: | 416-595-9593 | |
By Internet: |
www.voteproxyonline.com You will need to provide your 12 digit control number (located on the form of proxy accompanying this Circular) |
A Registered Shareholder attending the Meeting has the right to vote in person and, if he, she or it does so, his, her or its form of proxy is nullified with respect to the matters such person votes upon at the Meeting and any subsequent matters thereafter to be voted upon at the Meeting or any adjournment thereof.
A Registered Shareholder who has given a form of proxy may revoke the form of proxy at any time prior to using it: (a) by depositing an instrument in writing, including another completed form of proxy, executed by such Registered Shareholder or by his, her or its attorney authorized in writing or by electronic signature or, if the Registered Shareholder is a corporation, by an authorized officer or attorney thereof at, or by transmitting by telephone or electronic means, a revocation signed, subject to the Business Corporations Act (Ontario), by electronic signature, to (i) the head office of the Corporation, located at 490 St-Joseph, Suite 204, Gatineau, Québec, J8Y 3Y7 at any time prior to 5:00 p.m. (EST) on the last business day preceding the day of the Meeting or any adjournment thereof or (ii) with the Chairman of the Meeting on the day of the Meeting or any adjournment thereof; or (b) in any other manner permitted by law.
ADVICE TO NON-REGISTERED SHAREHOLDERS
The information set forth in this section is of significant importance to many shareholders of the Corporation, as a substantial number of shareholders of the Corporation do not hold Common Shares in their own name. Only Registered Shareholders or the persons they appoint as their proxies are permitted to attend and vote at
2
the Meeting and only forms of proxy deposited by Registered Shareholders will be recognized and acted upon at the Meeting. Common Shares beneficially owned by a Non-Registered Holder are registered either: (i) in the name of an intermediary (an Intermediary ) with whom the Non-Registered Holder deals in respect of the Common Shares (Intermediaries include, among others, banks, trust companies, securities dealers or brokers and trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans); or (ii) in the name of a clearing agency (such as CDS Clearing and Depository Services Inc.) (each a Clearing Agency ) of which the Intermediary is a participant. Accordingly, such Intermediaries and Clearing Agencies would be the Registered Shareholders and would appear as such on the list maintained by the Transfer Agent. Non-Registered Holders do not appear on the list of the Registered Shareholders maintained by the Transfer Agent.
Distribution of Meeting Materials to Non-Registered Holders
In accordance with the requirements of NI 54-101, the Corporation has distributed copies of the Meeting Materials to the Clearing Agencies and Intermediaries for onward distribution to Non-Registered Holders as well as directly to NOBOs (as defined below).
Non-Registered Holders fall into two categories - those who object to their identity being known to the issuers of the securities which they own ( OBOs ) and those who do not object to their identity being made known to the issuers of the securities which they own ( NOBOs ). Subject to the provisions of NI 54-101, issuers may request and obtain a list of their NOBOs from Intermediaries directly or via their transfer agent and may obtain and use the NOBO list for the distribution of proxy-related materials to such NOBOs. If you are a NOBO and the Corporation or its agent has sent the Meeting Materials directly to you, your name, address and information about your holdings of Common Shares have been obtained in accordance with applicable securities regulatory requirements from the Intermediary holding the Common Shares on your behalf.
The Corporations OBOs can expect to be contacted by their Intermediary. The Corporation does not intend to pay for Intermediaries to deliver the Meeting Materials to OBOs and it is the responsibility of such Intermediaries to ensure delivery of the Meeting Materials to their OBOs.
Voting by Non-Registered Holders
The Common Shares held by Non-Registered Holders can only be voted or withheld from voting at the direction of the Non-Registered Holder. Without specific instructions, Intermediaries or Clearing Agencies are prohibited from voting Common Shares on behalf of Non-Registered Holders. Therefore, each Non-Registered Holder should ensure that voting instructions are communicated to the appropriate person well in advance of the Meeting.
The various Intermediaries have their own mailing procedures and provide their own return instructions to Non-Registered Holders, which should be carefully followed by Non-Registered Holders in order to ensure that their Common Shares are voted at the Meeting.
Non-Registered Holders will receive either a voting instruction form or, less frequently, a form of proxy. The purpose of these forms is to permit Non-Registered Holders to direct the voting of the Common Shares they beneficially own. Non-Registered Holders should follow the procedures set out below, depending on which type of form they receive.
A. |
Voting Instruction Form . In most cases, a Non-Registered Holder will receive, as part of the Meeting Materials, a voting instruction form (a VIF ). If the Non-Registered Holder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Holders behalf), the VIF must be completed, signed and returned in accordance with the directions on the form. |
OR
B . |
Form of Proxy. Less frequently, a Non-Registered Holder will receive, as part of the Meeting Materials, a form of proxy that has already been signed by the Intermediary (typically by a facsimile, stamped signature) which is restricted as to the number of Common Shares beneficially owned by the Non- |
3
Registered Holder but which is otherwise not completed. If the Non-Registered Holder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Holders behalf), the Non- Registered Holder must complete and sign the form of proxy and in accordance with the directions on the form. |
Voting by Non-Registered Holders at the Meeting
Although a Non-Registered Holder may not be recognized directly at the Meeting for the purposes of voting Common Shares registered in the name of an Intermediary or a Clearing Agency, a Non-Registered Holder may attend the Meeting as proxyholder for the Registered Shareholder who holds Common Shares beneficially owned by such Non-Registered Holder and vote such Common Shares as a proxyholder. A Non-Registered Holder who wishes to attend the Meeting and to vote their Common Shares as proxyholder for the Registered Shareholder who holds Common Shares beneficially owned by such Non-Registered Holder, should (a) if they received a VIF, follow the directions indicated on the VIF; or (b) if they received a form of proxy strike out the names of the persons named in the form of proxy and insert the Non-Registered Holders or its nominees name in the blank space provided. Non-Registered Holders should carefully follow the instructions of their Intermediaries, including those instructions regarding when and where the VIF or the form of proxy is to be delivered.
All references to shareholders in the Meeting Materials are to Registered Shareholders as set forth on the list of registered shareholders of the Corporation as maintained by the Transfer Agent, unless specifically stated otherwise.
VOTING OF PROXIES
All Common Shares represented at the Meeting by properly executed proxies will be voted on any matter that may be called for and, where a choice with respect to any matter to be acted upon has been specified in the accompanying form of proxy, the Common Shares represented by the proxy will be voted in accordance with such instructions. In the absence of any such instruction, the persons whose names appear on the printed form of proxy will vote in favour of all the matters set out thereon.
The enclosed form of proxy confers discretionary authority upon the persons named therein. If any other business or amendments or variations to matters identified in the Notice of Meeting properly comes before the Meeting, then discretionary authority is conferred upon the person appointed in the proxy to vote in the manner they see fit, in accordance with their best judgment.
At the time of the printing of this Circular, the management of the Corporation knew of no such amendment, variation or other matter to come before the Meeting other than the matters referred to in the Notice of Meeting.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON
To the knowledge of the directors and executive officers of the Corporation, no director or executive officer of the Corporation, any proposed nominee for election as director of the Corporation, or any associate or affiliate of any of the foregoing persons, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting, other than the election of directors.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The board of directors of the Corporation (the Board ) has fixed Monday, July 9, 2018 as the record date. Shareholders at the close of business on July 9, 2018 are entitled to receive notice of the Meeting and to vote thereat or at any adjournments or postponements thereof on the basis of one vote for each Common Share held.
The authorized capital of the Corporation consists of an unlimited number of Common Shares. As of the date of this Circular, 193,629,116 Common Shares were issued and outstanding.
As of the date hereof, to the knowledge of the directors and executive officers of the Corporation, there are no persons or companies known to the Corporation who beneficially own, directly or indirectly, or control or direct Common shares carrying 10% or more of the voting rights attached to all of the Common Shares.
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BUSINESS TO BE TRANSACTED AT THE MEETING
1. Name Change
As previously announced by the Corporation, the Corporation proposes to change its name to HEXO Corp., or such other similar name as may be determined by the Board in its sole discretion and the Director appointed under the Business Corporations Act (Ontario) (the OCBA ) may permit. The proposed change of the Corporations name to HEXO Corp. follows the Corporations launch of HEXO as its new brand for the adult-use cannabis market, while continuing to use the Hydropothecary brand for the medical cannabis market.
Pursuant to the OBCA, a change of name requires approval of the Shareholders by way of a special resolution, being a resolution passed by not less than two-thirds of the votes cast by Shareholders at the Meeting. Accordingly, at the Meeting, Shareholders will be asked to consider and, if deemed appropriate, to pass, with or without variation, the following special resolution to approve the change of the name of the Corporation (the Name Change Resolution ):
BE IT HEREBY RESOLVED AS A SPECIAL RESOLUTION OF THE CORPORATION THAT:
1. |
the change of the name of the Corporation to HEXO Corp. or such other similar name as the board of directors of the Corporation may determine, in its sole discretion, and the Director appointed under the Business Corporations Act (Ontario) may permit, is hereby approved, and the articles of the Corporation be amended to effect such change of name; |
2. |
any one director or officer of the Corporation is authorized and directed, on behalf of the Corporation, to execute, deliver and file any and all declarations, agreements, documents and other instruments and do all such other acts and things that such director or officer may determine to be necessary or desirable to give effect to this resolution (including, without limitation, the delivery of articles of amendment in the prescribed form to the Director appointed under the Business Corporations Act (Ontario)), the execution, delivery and filing of any such declarations, agreements, documents or other instruments and the doing of such act or thing being conclusive evidence of such determination; and |
3. |
notwithstanding approval of the shareholders of the Corporation as herein provided, the board of directors of the Corporation is hereby authorized to revoke this special resolution without further approval, ratification or confirmation of the shareholders of the Corporation at any time before it is acted upon. |
If the Name Change Resolution is approved at the Meeting, it is the intention of the Board to effect the name change shortly after the Meeting (subject to receipt of all necessary regulatory approvals, including the approval of the TSX and the Director appointed under the OBCA) through the filing of articles of amendment with the Director appointed under the OBCA. The change of name will become effective on the date shown in the certificate of amendment issued pursuant to the OBCA. Notwithstanding approval of the proposed name change by Shareholders, the Board, in its sole discretion, may revoke the special resolution and abandon the name change without further approval or action by, or prior notice to, Shareholders.
The Board believes that it is in the best interests of the Corporation to approve the Name Change Resolution and, accordingly, recommends that Shareholders vote FOR the Name Change Resolution. Proxies received in favour of management designees will be voted FOR the Name Change Resolution, unless a Shareholder has specified in the proxy that his, her or its Common Shares are to be voted against the Name Change Resolution. As a special resolution, at least two-thirds of the votes cast by Shareholders at the Meeting are required to approve the Name Change Resolution.
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2. Omnibus Long-Term Incentive Plan
On June 27, 2018, the Board adopted a new omnibus long-term incentive plan for the Corporation (the Omnibus Plan ). Prior to the adoption of the Omnibus Plan by the Board, the sole security-based compensation plan which the Corporation had available in order to attract, retain and motivate directors, officers, senior executives and other employees of the Corporation and consultants and service providers providing ongoing services to the Corporation, was its existing stock option plan (the Existing Option Plan ), pursuant to which the Board was able to grant stock options to such individuals. With the growth of the Corporations business subsequent to adoption of the Existing Option Plan, the Board determined it was in the best interests of the Corporation to adopt a new security-based compensation plan which would provide the Board with the ability and flexibility to make broader and different forms of equity rewards as part of its need to retain a competitive compensation structure for its directors, officers, executives, employees, consultants and service providers.
Consequently, the Board adopted the Omnibus Plan as a means to grant options ( Options ), restricted shares ( Restricted Shares ), restricted share units ( RSUs ), deferred share units ( DSUs ), share appreciation rights ( SARs ) and retention awards ( Retention Awards , and together with the Options, the Restricted Shares, the RSUs, the DSUs and the SARs, the Awards ) to directors, officers, senior executives and other employees of the Corporation or a subsidiary, consultants and service providers providing ongoing services to the Corporation and its affiliates ( Eligible Participants , and when such Eligible Participants are granted Awards (as defined below), the Participants ) in order to attract, retain and motivate such persons as individuals whose skills, performance and loyalty to the objectives and interests of the Corporation are necessary to the Corporations success, to incentivize them to continue their services for the Corporation, and to align their interests with those of the Corporation.
A complete copy of the Omnibus Plan is set out in Appendix A of this Circular, and a summary of the material provisions of the Omnibus Plan is set out below.
The adoption of the Omnibus Plan by the Board was subject to approval of the Omnibus Plan by the Shareholders in accordance with the rules of the TSX. Under TSX rules, security-based compensation arrangements, like the Omnibus Plan, which have unallocated awards and no fixed aggregate maximum number of securities issuable, but permit the issuance of up to an aggregate of 10% of the outstanding Common Shares from time to time, must be approved by shareholders upon adoption and every three years thereafter. Accordingly, at the Meeting, Shareholders will be asked to approve the Omnibus Plan and the unallocated Awards issuable pursuant to the Omnibus Plan, as set out below. If approval of the Omnibus Plan is obtained at the Meeting, the Corporation will not be required to seek further approval of the grant of unallocated Awards under the Omnibus Plan until the Corporations 2021 annual Shareholders meeting (provided that such meeting is held on or prior to August 28, 2021).
Since the Omnibus Plan was adopted by the Board, 5,691,500 Options have been granted to certain directors, officers and non-executive employees of the Corporation under the Omnibus Plan (the Granted Options ), 4,325,000 of which were granted to directors and officers and 1,366,500 of which were granted to non-executive employees. The Granted Options have an exercise price of $4.89 per share and a term of 10 years, subject to vesting. One-third of the Granted Options vest on July 12, 2019 being the one year anniversary of the date of grant and the balance vest quarterly over the following two years. The Granted Options cannot be exercised until such time that the Shareholders have approved and ratified the Omnibus Plan and the grant of the Granted Options. Should Shareholders fail to approve the Omnibus Plan, the Granted Options will be cancelled forthwith (but could then be replaced by stock options under the Existing Option Plan as an alternative to the Omnibus Plan).
Summary of the Omnibus Plan
The following is a summary of the material provisions of the Omnibus Plan:
Administration | The Omnibus Plan is administered and interpreted by the Board. The Board may decide by resolution to appoint a committee of at least three members to administer and interpret the Omnibus Plan. The Board and the committee may also delegate to one or more officers of the Corporation, or to a committee of such officers, the authority, subject to such terms and limitations as the Board or the committee may determine, to |
6
grant, cancel, modify, waive rights with respect to, alter, discontinue, suspend or terminate Awards. | ||
Eligibility | The persons eligible to receive Awards are the Eligible Participants. | |
Reserve Maximum |
Subject to adjustment, the total number of Common Shares reserved and available for grant and issuance pursuant to Awards shall not exceed a number of Common Shares equal to ten percent (10%) of the total issued and outstanding Common Shares of the Corporation at the time of granting of Awards (on a non-diluted basis) or such other number as may be approved by the Shareholders of the Corporation from time to time.
The Omnibus Plan is a rolling plan or evergreen plan. This means any increase in the issued and outstanding Common Shares (whether as a result of exercise of Awards or otherwise) will result in an increase in the number of Common Shares that may be issued on Awards outstanding at any time and any increase in the number of Awards granted will, upon exercise, make new grants available under the Omnibus Plan. |
|
Current Reserve |
As of the date of this Circular, the Corporation had 193,629,116 Common Shares issued and outstanding. Consequently, 19,362,911 Common Shares are available to be reserved for issuance under the Omnibus Plan. This represents 10% of the issued and outstanding Common Shares.
Since the Omnibus Plan was adopted by the Board, the 5,691,500 Granted Options have been granted to certain directors, officers and non-executive employees of the Corporation, subject to ratification by the Shareholders. Accordingly, 13,671,411 Common Shares remain available for issuance under the Omnibus Plan following the issuance of the Granted Options.
The Corporation does not currently have any other security-based compensation plan other than the Existing Option Plan, under which stock options to acquire 9,323,396 Common Shares have been issued as of the date of this Circular. No additional stock options will be issued under the Existing Option Plan. The stock options issued under the Existing Option Plan are in addition to any Awards which may be made under the Omnibus Plan. Accordingly, the Corporation has a combined total of 28,686,307 Common Shares available for issuance under the Omnibus Plan and the Existing Option Plan. This represents 14.8% of the issued and outstanding Common Shares. |
|
Participation Limits | The aggregate number of Common Shares (i) issued to insiders under the Omnibus Plan or any other proposed or established security-based compensation arrangement within any one-year period and (ii) issuable to insiders at any time under the Omnibus Plan or any other proposed or established security-based compensation arrangement, shall in each case not exceed ten percent (10%) of the issued and outstanding Common Shares (on a non-diluted basis). | |
Market Value as of Grant |
Restricted Shares
Restrictions and conditions on the disposition of Restricted Shares that are granted are determined by the Board at the time of grant.
Options
The option price for Common Shares that are the subject of any Option shall be determined by the Board at the time the Option is granted, but may not be less than Market Value at the time of grant. The terms of the Omnibus Plan allow for the exercise of an Option on a cashless basis. The number of Common Shares received on the cashless exercise of an Option is determined by taking (i) the difference between (A) |
7
the Market Value and (B) the exercise price of such Option, (ii) multiplying that difference by the number of Common Shares to which such Option relates, and then (iii) dividing that product by the Market Value.
DSUs
Each Eligible Participant may elect, once each calendar year, to be paid a percentage of his or her annual retainer in the form of DSUs. The number of DSUs an Eligible Participant is entitled to receive is calculated by taking (i) the percentage elected by the Eligible Participant, (ii) multiplying that percentage by the Eligible Participants annual retainer, and then (iii) dividing that product by the Market Value.
RSUs
The purchase price of an RSU is determined by the Board and may be zero.
SARs
The exercise price of a SAR shall be fixed by the Board, but may not be less than the Market Value at the time of grant. Upon exercise, the holder is entitled to receive the number of Common Shares equal to the excess of the Market Value on the effective date of such exercise over the exercise price of the SAR.
Retention Awards
A retention award entitles an Eligible Participant to receive the number of Common Shares that is equal to the retention payment divided by the Market Value on the vesting date of the retention award, disregarding fractions and less any amounts withheld for taxes.
Market Value means at any date when the Market Value of Common Shares of the Corporation is to be determined, the volume weighted average trading price of the Common Shares on the five trading days prior to the date of grant, calculated by dividing the total value by the total volume of Common Shares traded for the five trading days prior to the date of grant on the principal stock exchange on which the Common Shares are listed, or if the Common Shares are not listed on any stock exchange, the value as is determined solely by the Board, acting reasonably and in good faith. |
||
Market Appreciation/Dividend Payment |
The Omnibus Plan contemplates the award of SARs.
In addition, a holder of DSUs is entitled to receive additional DSUs (or fractions thereof) when dividends are declared and paid on Common Shares. The additional DSUs are based on (i) the actual amount of dividends that would have been paid if the Participant had held Common Shares under the Omnibus Plan on the applicable record date divided by (ii) the Market Value on the date on which the dividends on Common Shares are payable. |
|
Vesting |
Restricted Shares
The Omnibus Plan does not contemplate any required vesting of the Restricted Shares. Restrictions and conditions on the disposition of Restricted Shares are determined by the Board at the time of grant. |
8
Options
The Board shall, from time to time by resolution, determine the vesting provisions of the Options.
DSUs
The Board may, at the time of grant, make DSUs subject to restrictions and conditions (i.e. continuing employment or achievement of pre-established performance goals). DSUs are exercisable immediately following the date a Participant resigns or is terminated.
RSUs
The relevant conditions and vesting provisions of a RSU are determined by the Board (including the performance period and criteria, if any). In making its determination regarding the vesting requirements applicable to any RSUs, the Board shall ensure that such requirements are not considered a salary deferral arrangement for purposes of applicable legislation. The Board also sets a date upon which it is determined whether the vesting conditions with respect to RSUs have been met (the RSU Vesting Determination Date ). This then establishes the number of RSUs that become vested. The RSU Vesting Determination Date cannot fall outside the period (the Restricted Period ) that ends on December 31 of the year that is three (3) years after the calendar year in which the grant of RSUs was made. Any RSU that remains unvested on the RSU Vesting Determination or at the end of the Restricted Period, whichever is earlier, is cancelled.
SARs
The relevant conditions and vesting provisions of a SAR are determined by the Board (including the performance period and criteria, if any).
Retention Awards
The relevant conditions and vesting provisions of a Retention Award are determined by the Board (including the performance period and criteria, if any). |
||
Term |
Restricted Shares
Determined by the Board.
Options
The Board shall determine the period in which an Option is exercisable. An Option cannot expire later than ten (10) years from the date it is granted.
DSUs
A Participant may redeem his or her DSUs up to the 120th day after the date of his or her termination.
RSUs
The Board shall determine the Restricted Period, provided such Restricted Period cannot expire later than December 31 of the year that is three (3) years after the calendar year in which the grant of RSUs was made. |
9
SARs
The Board shall determine the period during which a SAR is exercisable, provided such period cannot expire more than ten (10) years from the date the SAR was granted. Retention Awards The relevant conditions and vesting provisions of a Retention Award are determined by the Board (including the performance period and criteria, if any). |
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Cessation |
Options, SARs and Retention Awards
Termination for Cause.
Any Option, SAR or Retention Award, or any unexercised or unvested portion thereof, shall terminate when a Participant ceases to be an Eligible Participant for cause.
Death.
Any vested Option, SAR or Retention Award or the unexercised portion thereof ( Vested Award ), may be exercised by the estate of a Participant if such Participant dies while he or she is an Eligible Participant. However, a Vested Award must be exercised (i) within one (1) year of the Participants death or (ii) prior to the expiration of the original term of such Vested Award, whichever is earlier.
Disability.
Any Option, SAR or Retention Award, or any unexercised portion thereof, may be exercised by the Participant or his/her representative as the rights to exercise accrue. However, the Award must be exercised (i) within three (3) years of the disability, (ii) until the Participant becomes eligible for long-term disability benefits, or (iii) prior to the expiration of the original term of the Award, whichever is earlier.
Other.
If a Participant ceases to be an Eligible Participant for any reason other than for cause, death, or disability, the right to exercise an Option, SAR or Retention Award shall be limited to and expire on the earlier of (i) one (1) year after the date the Participant ceases to be an Eligible Participant or (ii) the expiry date of the Award set forth in the agreement pursuant to which the Award was granted.
RSUs
Termination for Cause.
Any unvested RSUs credit to a Participants account shall be forfeited and cancelled immediately upon such Participant ceasing to be an Eligible Participant for cause or by resignation.
Cessation of Employment.
When a Participant retires, becomes eligible to receive long-term disability benefits, or has his or her employment terminated for reasons other than cause or by reason of injury or disability, such Participants participation in the Omnibus Plan shall be terminated immediately. Unvested RSUs shall remain in effect until the applicable RSU Vesting Determination Date. |
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Retirement.
If a Participant retires and becomes involved in another business or activity in the cannabis industry prior to the applicable RSU Determination Date, then (i) if the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such Participant shall be forfeited and cancelled, or (ii) if the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Death.
If a Participant dies, his or her participation in the Omnibus Plan terminates immediately. All unvested RSUs remain in effect until the RSU Vesting Determination Date. If the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such deceased Participant shall be forfeited and cancelled. If the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such deceased Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Leave of Absence.
If a Participant voluntarily takes a leave of absence, his or her participation in the Omnibus Plan terminates immediately. All unvested RSUs remain in effect until the RSU Vesting Determination Date. If the Board determines the vesting conditions have not been met on the RSU Vesting Determination Date, the unvested RSUs of such Participant shall be forfeited and cancelled. If the Board determines the vesting conditions have been met on the RSU Vesting Determination Date, such Participant is entitled to receive the number of Common Shares he or she is entitled to in respect of such RSUs adjusted for the length of service provided by the Participant to the Corporation.
Restricted Shares
Upon a Participant ceasing to be an Eligible Participant for any reason, any Restricted Shares that have not vested at such time shall automatically be deemed to have been reacquired by the Corporation. |
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Assignability | Awards granted under the Omnibus Plan are transferrable or assignable only to a permitted assign. A permitted assign means the spouse of a Participant or a trustee, holding entity, or RRSP/RRIF of the Participant or his or her spouse. | |
Amendments |
The Board may amend the Omnibus Plan or any Award with consent of the Participants provided that the amendment shall:
not adversely alter or impair any Award previously granted;
be subject to any regulatory approvals;
be subject to Shareholder approval, where required, provided that Shareholder approval is not required for following amendments and the Board may make any changes which may include but are not limited to: (i) amendments of a housekeeping nature; (ii) a change to the vesting provisions of any Award; (iii) the introduction or amendment of a cashless exercise feature payable in securities, |
11
whether or not such feature provides for a full deduction of the number of underlying securities from the Omnibus Plan reserve; and (iv) the addition of or amendment to any form of financial assistance.
The Board needs Shareholder approval to make the following amendments:
any change to the maximum number of Common Shares issuable under the Omnibus Plan, except any increase due to an adjustment or due to the evergreen nature of the plan;
any amendment that reduces the exercise price of an Award;
any amendment that extends the expiry date of an Award;
any amendment that changes the Eligible Participants, including a change that would have the potential to broaden the participation by insiders;
any amendment that would permit an Award to be transferable or assignable other than as currently permitted;
any amendment that increases the maximum number of shares issuable or issued to insiders; and
any amendment to the amendment provisions of the Omnibus Plan.
Common Shares held directly or indirectly by insiders that may benefit from certain amendments shall be excluded from voting when obtaining Shareholder approval. |
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Financial Assistance | The Omnibus Plan does not contain any form of financial assistance. | |
Ratification | The Board has not made any grant of Awards that is subject to ratification. | |
Black-out Period | If the expiration date of an Option or SAR falls within a black-out period or within the ten (10) business days following the end of the black-out period, then the expiration of the Option or SAR is extended to the tenth (10 th ) business day following the end of the black-out period. | |
Change of Control |
In the event of a Change in Control, a reorganization of the Corporation, an amalgamation of the Corporation, an arrangement involving the Corporation, a take-over bid (as that term is defined in the Securities Act (Québec)) for all of the Common Shares or the sale or disposition of all or substantially all of the property and assets of the Corporation, the Board may make such provision for the protection of the rights of the Participants as the Board in its discretion considers appropriate in the circumstances.
Change in Control means an event whereby (i) any person becomes the beneficial owner, directly or indirectly, of 50% or more of either the issued and outstanding Common Shares or the combined voting power of the Corporations then outstanding voting securities entitled to vote generally; (ii) any person acquires, directly or indirectly, securities of the Corporation to which is attached the right to elect the majority of the directors of the Corporation; or (iii) the Corporation undergoes a liquidation or dissolution or sells all or substantially all of its assets. |
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Adjustments | The Omnibus Plan may be adjusted if certain changes are made to the Corporations capitalization (e.g. subdivision, consolidation or reclassification of or a distribution of assets on (other than an ordinary course dividend) the Common Shares) in order to preclude a dilution or enlargement of the benefits due to Participants under the Omnibus Plan. |
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Shareholder Approval of the Omnibus Plan
At the Meeting, Shareholders will be asked to consider and, if deemed appropriate, to pass, with or without variation, the following resolution to approve the Omnibus Plan and the unallocated Awards issuable thereunder (the Omnibus Plan Resolution ):
WHEREAS the Board of Directors of the Corporation approved on June 27, 2018 the adoption of an omnibus long-term incentive plan (the Omnibus Plan ) of the Corporation, as set out in the management information circular of the Corporation dated July 16, 2018 (the Circular );
AND WHEREAS since the Omnibus Plan was adopted by the Board, on July 12, 2018, the Board of Directors of the Corporation granted 5,691,500 stock options to certain directors, officers and non-executive employees of the Corporation under the Omnibus Plan (the Granted Options ) which are subject to shareholder ratification, 4,325,000 of which were granted to directors and officers and 1,366,500 of which were granted to non-executive employees and all of which have an exercise price of $4.89 per share and a term of 10 years, subject to vesting, as set out in the Circular;
NOW THEREFORE BE IT HEREBY RESOLVED THAT:
1. |
the Omnibus Plan as set out in the Circular be and is hereby approved; |
2. |
the Granted Options as set out in the Circular be and are hereby ratified; |
3. |
the Corporation be and is hereby authorized to grant Awards (as defined under the Omnibus Plan) to acquire up to 10% of the issued and outstanding common shares in the capital of the Corporation from time to time in accordance with the terms of the Omnibus Plan; and |
4. |
any one director or officer of the Corporation be and is hereby authorized, for and on behalf of the Corporation, to execute and deliver all documents and do all things as such person may determine to be necessary or advisable to give effect to this resolution, the execution of any such document or the doing of any such other act or thing being conclusive evidence of such determination. |
The Board believes that it is in the best interests of the Corporation to approve the Omnibus Plan Resolution and, accordingly, recommends that Shareholders vote FOR the Omnibus Plan Resolution. Proxies received in favour of management designees will be voted FOR the Omnibus Plan Resolution, unless a Shareholder has specified in the proxy that his, her or its Common Shares are to be voted against the Omnibus Plan Resolution. As an ordinary resolution, a majority of the votes cast by Shareholders at the Meeting are required to approve the Omnibus Plan Resolution.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
No director, proposed director, executive officer, nor any of their respective associates or affiliates, is or has been indebted to the Corporation or its subsidiaries since the beginning of the Corporations most recently completed financial year.
TRANSFER AGENT AND REGISTRAR
The Corporations transfer agent and registrar for the Common Shares is TSX Trust Company at its office at 100 Adelaide Street West Toronto, Ontario, M5H 4H1.
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INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Except as disclosed in this Circular, neither the Corporation nor any director or officer of the Corporation, nor any proposed nominee for election as a director of the Corporation, nor any other insider of the Corporation, nor any associate or affiliate of any one of them has or has had, at any time since the beginning of the year ended July 31, 2018, any material interest, direct or indirect, in any transaction or proposed transaction that has materially affected or would materially affect the Corporation.
OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
Management of the Corporation knows of no matters to come before the Meeting other than as set forth in this Circular. HOWEVER, IF OTHER MATTERS WHICH ARE NOT KNOWN TO THE MANAGEMENT SHOULD PROPERLY COME BEFORE THE MEETING, THE ENCLOSED FORM OF PROXY WILL BE USED TO VOTE ON SUCH MATTERS IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS VOTING THE PROXY.
ADDITIONAL INFORMATION
Additional information relating to the Corporation is available under the Corporations profile on SEDAR at www.sedar.com. Financial information is provided in the Corporations audited comparative financial statements and managements discussion and analysis for the year ended July 31, 2018. Copies of the Corporations financial statements and managements discussion and analysis may be obtained under the Corporations profile on SEDAR at www.sedar.com or upon written request to the Corporate Secretary at 490 St-Joseph, Suite 204, Gatineau, Québec, J8Y 3Y7.
APPROVAL OF BOARD
The contents of this Circular and delivery of it to each director of the Corporation, to the auditors of the Corporation and to the Shareholders of the Corporation entitled to notice of the Meeting, have been approved by the directors of the Corporation.
DATED at Gatineau, Québec this 16 th day of July, 2018.
BY ORDER OF THE BOARD OF DIRECTORS |
(Signed) Sebastien St-Louis |
Sebastien St-Louis |
Chief Executive Officer and Director |
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APPENDIX A
OMNIBUS LONG-TERM INCENTIVE PLAN
(See Attached)
THE HYDROPOTHECARY CORPORATION
OMNIBUS LONG-TERM INCENTIVE PLAN
June 27, 2018
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS | 1 | |||||
Section 1.1 |
Definitions. |
1 | ||||
ARTICLE 2 PURPOSE AND ADMINISTRATION OF THE PLAN; GRANTING OF AWARDS | 4 | |||||
Section 2.1 |
Purpose of the Plan. |
4 | ||||
Section 2.2 |
Implementation and Administration of the Plan. |
5 | ||||
Section 2.3 |
Eligible Participants. |
5 | ||||
Section 2.4 |
Shares Subject to the Plan. |
6 | ||||
Section 2.5 |
Granting of Awards. |
6 | ||||
ARTICLE 3 RESTRICTED SHARES | 6 | |||||
Section 3.1 |
Nature of Restricted Shares. |
6 | ||||
Section 3.2 |
Restricted Share Awards. |
7 | ||||
Section 3.3 |
Payment to Participant. |
7 | ||||
Section 3.4 |
Restricted Share Agreements. |
8 | ||||
ARTICLE 4 OPTIONS | 8 | |||||
Section 4.1 |
Nature of Options. |
8 | ||||
Section 4.2 |
Option Awards. |
8 | ||||
Section 4.3 |
Option Price. |
8 | ||||
Section 4.4 |
Option Term. |
8 | ||||
Section 4.5 |
Exercise of Options. |
8 | ||||
Section 4.6 |
Method of Exercise and Payment of Purchase Price. |
9 | ||||
Section 4.7 |
Option Agreements. |
9 | ||||
ARTICLE 5 DEFERRED SHARE UNITS | 10 | |||||
Section 5.1 |
Nature of DSUs. |
10 | ||||
Section 5.2 |
Election to Participate. |
10 | ||||
Section 5.3 |
DSU Awards. |
10 | ||||
Section 5.4 |
Redemption of DSUs. |
10 | ||||
Section 5.5 |
Award of Dividend Equivalents. |
11 | ||||
Section 5.6 |
Unfunded Plan. |
11 | ||||
Section 5.7 |
DSU Agreements. |
11 | ||||
ARTICLE 6 RESTRICTED SHARE UNITS | 11 | |||||
Section 6.1 |
Nature of RSUs. |
11 | ||||
Section 6.2 |
RSU Awards. |
12 | ||||
Section 6.3 |
Restriction Period. |
12 | ||||
Section 6.4 |
Performance Criteria and Performance Period. |
12 | ||||
Section 6.5 |
RSU Vesting Determination Date. |
12 | ||||
Section 6.6 |
Settlement of RSUs. |
13 | ||||
Section 6.7 |
Determination of Amounts. |
13 | ||||
Section 6.8 |
RSU Agreements. |
14 |
ARTICLE 7 SHARE APPRECIATION RIGHTS | 14 | |||||
Section 7.1 |
Nature of SARs. |
14 | ||||
Section 7.2 |
SAR Awards. |
14 | ||||
Section 7.3 |
SAR Price. |
14 | ||||
Section 7.4 |
SAR Term. |
14 | ||||
Section 7.5 |
Exercise of SARs. |
15 | ||||
Section 7.6 |
Method of Exercise and Payment of Purchase Price. |
15 | ||||
Section 7.7 |
SAR Agreements. |
15 | ||||
ARTICLE 8 RETENTION AWARDS | 16 | |||||
Section 8.1 |
Nature of Retention Awards. |
16 | ||||
Section 8.2 |
Retention Awards. |
16 | ||||
Section 8.3 |
Payment to Participant. |
16 | ||||
Section 8.4 |
Retention Award Agreements. |
16 | ||||
ARTICLE 9 GENERAL CONDITIONS | 17 | |||||
Section 9.1 |
General Conditions applicable to Awards. |
17 | ||||
Section 9.2 |
General Conditions applicable to Options, SARs and Retention Awards. |
17 | ||||
Section 9.3 |
General Conditions applicable to RSUs. |
18 | ||||
Section 9.4 |
General Conditions applicable to Restricted Shares. |
20 | ||||
ARTICLE 10 ADJUSTMENTS AND AMENDMENTS | 21 | |||||
Section 10.1 |
Adjustment to Shares Subject to Outstanding Awards. |
21 | ||||
Section 10.2 |
Amendment or Discontinuance of the Plan. |
22 | ||||
ARTICLE 11 MISCELLANEOUS | 23 | |||||
Section 11.1 |
Use of an Administrative Agent and Trustee. |
23 | ||||
Section 11.2 |
Tax Withholding. |
23 | ||||
Section 11.3 |
Reorganization of the Corporation. |
24 | ||||
Section 11.4 |
Personal Information |
24 | ||||
Section 11.5 |
Governing Laws. |
24 | ||||
Section 11.6 |
Severability. |
24 | ||||
Section 11.7 |
Effective Date of the Plan. |
25 |
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THE HYDROPOTHECARY CORPORATION
OMNIBUS LONG-TERM INCENTIVE PLAN
The Hydropothecary Corporation (the Corporation ) hereby establishes this Omnibus Long-Term Incentive Plan for Eligible Participants and for the purposes set out herein.
ARTICLE 1 DEFINITIONS
Section 1.1 Definitions.
Where used herein or in any amendments hereto or in any communication required or permitted to be given hereunder, the following terms shall have the following meanings, respectively, unless the context otherwise requires:
Account means an account maintained for each Participant on the books of the Corporation which will be credited with Awards, including any Dividend Equivalents, in accordance with the terms of this Plan;
Affiliate has the meaning given to this term in the Securities Act (Québec), as such legislation may be amended, supplemented or replaced from time to time;
Associate , where used to indicate a relationship with a Participant, means (i) any partner of that Participant and (ii) the spouse of that Participant and that Participants children, as well as that Participants relatives and that Participants spouses relatives, if they share that Participants residence;
Awards means an Option, a SAR, a Restricted Share, a RSU, a DSU or a Retention Award granted to a Participant pursuant to the terms of the Plan;
Black-Out Period means a period of time when pursuant to any policies of the Corporation, any securities of the Corporation may not be traded by certain persons designated by the Corporation;
Board has the meaning ascribed thereto in Section 2.2(1) hereof;
Broker means a broker independent from the Corporation or any of its Subsidiaries who has been designated by the Corporation as the broker that will purchase Shares pursuant to the Plan and who is a member of the principal Canadian stock exchange or other public exchange on which the Shares are listed, or, if the Shares are not then listed, as selected by the Board acting in good faith;
Business Day means a day other than a Saturday, Sunday or statutory holiday, when banks are generally open for business in Gatineau, Québec, Canada, for the transaction of banking business;
Cash Equivalent means the amount of money equal to the Market Value multiplied by the number of vested RSUs in the Participants Account, net of any applicable taxes in accordance with Section 11.2, on the RSU Settlement Date;
Change in Control means an event whereby (i) any Person becomes the beneficial owner, directly or indirectly, of 50% or more of either the issued and outstanding Shares or the combined voting power of the Corporations then outstanding voting securities entitled to vote generally; (ii) any Person acquires, directly or indirectly, securities of the Corporation to which is attached the right to elect the majority of the directors of the Corporation; or (iii) the Corporation undergoes a liquidation or dissolution or sells all or substantially all of its assets;
Code of Conduct means any code of conduct adopted by the Corporation, as modified from time to time;
Committee has the meaning ascribed thereto in Section 2.2(1) hereof;
Corporation means The Hydropothecary Corporation, a corporation existing under the Business Corporations Act (Ontario), and its successors from time to time;
Dividend Equivalent means a bookkeeping entry equivalent in value to a dividend paid on a Share credited to a Participants Account in accordance with Section 5.5 hereof;
DSU means a deferred share unit, which is a bookkeeping entry equivalent in value to a Share credited by the Corporation to a Participants Account in accordance with Article 5 hereof, subject to the provisions of this Plan;
DSU Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of DSUs and the terms and conditions thereof;
Eligibility Date has the meaning ascribed thereto in Section 9.2(3) hereof;
Eligible Participants has the meaning ascribed thereto in Section 2.3(1) hereof;
Employment Agreement means, with respect to any Participant, any written employment agreement between the Corporation or an affiliate and such Participant;
Exercise Notice means a notice in writing signed by a Participant and stating the Participants intention to exercise a particular Award, if applicable;
Grant Agreement means an agreement evidencing the grant to a Participant of an Award, including a Restricted Share Agreement, an Option Agreement, a SAR Agreement, a DSU Agreement, a RSU Agreement, a Retention Award Agreement or an Employment Agreement;
Insider has the meaning given to the term in Part I of the TSX Company Manual, as same may be amended, supplemented or replaced from time to time;
Market Value means at any date when the Market Value of Shares of the Corporation is to be determined, the volume weighted average trading price of the Shares on the five Trading Days prior to the date of grant, calculated by dividing the total value by the total volume of Shares traded for the five Trading Days prior to the date of grant on the principal stock exchange on which the Shares are listed, or if the Shares of the Corporation are not listed on any stock exchange, the value as is determined solely by the Board, acting reasonably and in good faith;
Notice of Redemption means the written notice by a Participant, or the administrator or liquidator of the estate of the Participant, to the Corporation of the Participants wish to redeem his or her DSUs for cash or Shares;
Option means an option granted by the Corporation to a Participant entitling such Participant to acquire a designated number of Shares from treasury at the Option Price, subject to the provisions of this Plan;
Option Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of Options and the terms and conditions thereof;
Option Price has the meaning ascribed thereto in Section 4.2 hereof;
Option Term has the meaning ascribed thereto in Section 4.4(1) hereof;
Participants means Eligible Participants that are granted Awards under the Plan;
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Participants Account means an account maintained for each Participants participation in DSUs and/or RSUs under the Plan;
Performance Criteria means criteria established by the Board which, without limitation, may include criteria based on the Participants personal performance and/or the financial performance of the Corporation and/or of its Affiliates, and that may be used to determine the vesting of the Awards, when applicable;
Performance Period means the period determined by the Board pursuant to Section 6.3 hereof;
Person means an individual, corporation, company, cooperative, partnership, trust, unincorporated association, entity with juridical personality or governmental authority or body, and pronouns which refer to a Person shall have a similarly extended meaning;
Plan means this Omnibus Long-Term Incentive Plan, as amended and restated from time to time;
Restricted Share means a Share granted to a Participant with such restrictions and conditions upon the Participants disposition of such Shares as may be determined by the Board at the time of the grant and granted in accordance with Article 3 hereof, subject to the provisions of this Plan;
Restricted Share Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of Restricted Shares and the terms and conditions thereof;
Restriction Period means the period determined by the Board pursuant to Section 6.4(1) hereof;
Retention Award means any payment to a Participant that is not payable periodically for services provided by the Participant, as determined by the Board from time to time, as provided in Article 8 hereof.
Retention Award Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of Retention Awards and the terms and conditions thereof;
Retention Payment means the retention payment specified in the Retention Agreement or Employment Agreement;
RSU means a right awarded by the Corporation to a Participant to receive a payment in the form of Shares as provided in Article 3 hereof, subject to the provisions of this Plan;
RSU Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of RSUs and the terms and conditions thereof;
RSU Settlement Date has the meaning determined in Section 6.6(1)(a);
RSU Settlement Notice means a notice by a Participant to the Corporation electing the desired form of settlement of vested RSUs.
RSU Vesting Determination Date has the meaning described thereto in Section 6.5 hereof;
SAR means a right granted to a Participant as provided in Article 7 hereof to receive, upon exercise by the Participant, the excess of (i) the Market Value of one Share on the date of exercise over (ii) the grant price of the right on the date of grant, or if granted in connection with an outstanding Option on the date of grant of the related Option, as specified by the Board in its sole discretion, which, except in the case of Substitute Awards, shall not be less than the Market Value of one Share on such date of grant of the right or the related Option, as the case may be, subject to the provisions of this Plan;
- 3 -
SAR Agreement means a written letter agreement between the Corporation and a Participant evidencing the grant of SARs and the terms and conditions thereof;
SAR Price has the meaning ascribed thereto in Section 7.2 hereof;
SAR Term has the meaning ascribed thereto in Section 7.4(1) hereof;
Share Compensation Arrangement means a stock option, stock option plan, employee stock purchase plan, long-term incentive plan or any other compensation or incentive mechanism involving the issuance or potential issuance of Shares to one or more full-time employees, directors, officers, insiders, service providers or consultants of the Corporation or a Subsidiary including a share purchase from treasury by a full-time employee, director, officer, insider, service provider or consultant which is financially assisted by the Corporation or a Subsidiary by way of a loan, guarantee or otherwise;
Shares means the common shares in the share capital of the Corporation;
Subsidiary means a corporation, company or partnership that is controlled, directly or indirectly, by the Corporation;
Successor Corporation has the meaning ascribed thereto in Section 10.1(3) hereof;
Tax Act means the Income Tax Act (Canada) and its regulations thereunder, as amended from time to time.
Termination Date means (i) in the event of a Participants resignation, the date on which such Participant ceases to be an employee of the Corporation or a Subsidiary and (ii) in the event of the termination of the Participants employment by the Corporation or a Subsidiary, the effective date of the termination as specified in the notice of termination provided to the Participant by the Corporation or the Subsidiary, as the case may be;
Trading Day means any day on which the TSX is opened for trading;
TSX means the Toronto Stock Exchange; and
Vested Awards has the meaning described thereto in Section 9.2(2) hereof.
ARTICLE 2 PURPOSE AND ADMINISTRATION OF THE PLAN; GRANTING OF AWARDS
Section 2.1 Purpose of the Plan.
(1) |
The purpose of the Plan is to permit the Corporation to grant Awards to Eligible Participants, subject to certain conditions as hereinafter set forth, for the following purposes: |
(a) |
to increase the interest in the Corporations welfare of those Eligible Participants, who share responsibility for the management, growth and protection of the business of the Corporation or a Subsidiary; |
(b) |
to provide an incentive to such Eligible Participants to continue their services for the Corporation or a Subsidiary and to encourage such Eligible Participants whose skills, performance and loyalty to the objectives and interests of the Corporation or a Subsidiary are necessary or essential to its success, image, reputation or activities; |
(c) |
to reward the Participants for their performance of services while working for the Corporation or a Subsidiary; and |
- 4 -
(d) |
to provide a means through which the Corporation or a Subsidiary may attract and retain able Persons to enter its employment. |
Section 2.2 Implementation and Administration of the Plan.
(1) |
The Plan shall be administered and interpreted by the Board of Directors of the Corporation (the Board ) or, if the Board by resolution so decides, by a committee appointed by the Board (the Committee ) and consisting of not less than three (3) members of the Board. If a Committee is appointed for this purpose, all references to the term Board will be deemed to be references to the Committee. |
(2) |
The Board or, for greater certainty, the Committee, may, from time to time, as it may deem expedient, adopt, amend and rescind rules, regulations and policies for carrying out the provisions and purposes of the Plan, subject to any applicable rules of the TSX. Subject to the provisions of the Plan, the Board or, for greater certainty, the Committee, is authorized, in its sole discretion, to make such determinations under, and such interpretations of, and take such steps and actions in connection with, the proper administration of the Plan as it may deem necessary or advisable. The interpretation, construction and application of the Plan and any provisions hereof made by the Board or, for greater certainty, the Committee, shall be final and binding on all Eligible Participants. |
(3) |
No member of the Board or, for greater certainty, the Committee, shall be liable for any action or determination taken or made in good faith in the administration, interpretation, construction or application of the Plan or any Award granted hereunder. |
(4) |
Any determination approved by a majority of the Board or, for greater certainty, the Committee, shall be deemed to be a determination of that matter by the Board or, for greater certainty, the Committee. |
(5) |
Subject to the terms of this Plan and applicable law, the Board or, for greater certainty, the Committee, may delegate to one or more officers of the Corporation, or to a committee of such officers, the authority, subject to such terms and limitations as the Board or the Committee may determine, to grant, cancel, modify, waive rights with respect to, alter, discontinue, suspend or terminate Awards. |
Section 2.3 Eligible Participants.
(1) |
The Persons who shall be eligible to receive Awards ( Eligible Participants ) shall be the directors, officers, senior executives and other employees of the Corporation or a Subsidiary, consultants and service providers providing ongoing services to the Corporation and its Affiliates. In determining Awards to be granted under the Plan, the Board shall give due consideration to the value of each Eligible Participants present and potential future contribution to the Corporations success. For greater certainty, a Person whose employment with the Corporation or a Subsidiary has ceased for any reason, or who has given notice or been given notice of such cessation, whether such cessation was initiated by such employee, the Corporation or such Subsidiary, as the case may be, shall cease to be eligible to receive Awards hereunder as of the date on which such Person provides notice to the Corporation or the Subsidiary, as the case may be, in writing or verbally, of such cessation, or on the Termination Date for any cessation of a Participants employment initiated by the Corporation. |
(2) |
Participation in the Plan shall be entirely voluntary and any decision not to participate shall not affect an Eligible Participants relationship or employment with the Corporation. |
- 5 -
(3) |
Notwithstanding any express or implied term of this Plan to the contrary, the granting of an Award pursuant to the Plan shall in no way be construed as a guarantee of employment by the Corporation to the Participant. |
Section 2.4 Shares Subject to the Plan.
(1) |
Subject to adjustment pursuant to provisions of Article 10 hereof, the total number of shares reserved and available for grant and issuance pursuant to Awards shall not exceed a number of Shares equal to ten percent (10%) of the total issued and outstanding Shares of the Corporation at the time of granting of Awards (on a non-diluted basis) or such other number as may be approved by the shareholders of the Corporation from time to time. Any increase in the issued and outstanding Shares (whether as a result of exercise of Awards or otherwise) will result in an increase in the number of Shares that may be issued on Awards outstanding at any time and any increase in the number of Awards granted will, upon exercise, make new grants available under the Plan. |
(2) |
Shares in respect of which an Award is granted under the Plan, but not exercised prior to the termination of such Award or not vested or delivered prior to the termination of such Award due to the expiration, termination or lapse of such Award, shall be available for Awards to be granted thereafter pursuant to the provisions of the Plan. All Shares issued pursuant to the exercise or the vesting of the Awards granted under the Plan shall be so issued as fully paid and non-assessable Shares. |
(3) |
The aggregate number of Shares (i) issued to Insiders under the Plan or any other proposed or established Share Compensation Arrangement within any one-year period and (ii) issuable to Insiders at any time under the Plan or any other proposed or established Share Compensation Arrangement, shall in each case not exceed ten percent (10%) of the issued and outstanding Shares (on a non-diluted basis). |
Section 2.5 Granting of Awards.
(1) |
Any Award granted under the Plan shall be subject to the requirement that if at any time counsel to the Corporation shall determine that the listing, registration or qualification of the Shares subject to such Award, if applicable, upon any securities exchange or under any law or regulation of any jurisdiction, or the consent or approval of any securities exchange or any governmental or regulatory body, is necessary as a condition of, or in connection with, the grant or exercise of such Award or the issuance or purchase of Shares thereunder, if applicable, such Award may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board. Nothing herein shall be deemed to require the Corporation to apply for or to obtain such listing, registration, qualification, consent or approval. |
(2) |
Any Award granted under the Plan shall be subject to the requirement that the Corporation has the right to place any restriction or legend on any securities issued pursuant to this Plan including, but in no way limited to placing a legend to the effect that the securities have not been registered under the United States Securities Act of 1933 and may not be offered or sold in the United States unless registration or an exemption from registration is available. |
ARTICLE 3 RESTRICTED SHARES
Section 3.1 Nature of Restricted Shares.
A Restricted Share is a Share with such restrictions and conditions placed upon the Shares disposition by the Participant as the Board may determine at the time of grant. Conditions may be based on
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continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives.
Section 3.2 Restricted Share Awards.
Subject to the provisions herein set forth and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive Restricted Shares under the Plan, (ii) fix the number of Restricted Shares, if any, to be granted to each Eligible Participant and the date or dates on which such Restricted Shares shall be granted, and (iii) determine the restrictions and conditions applicable to such Restricted Shares, the whole subject to the terms and conditions prescribed in this Plan.
Section 3.3 Payment to Participant.
(1) |
The Corporation shall, as soon as possible after the grant of Restricted Shares, cause the transfer agent and registrar of the Shares to either: |
(a) |
deliver to the Participant a certificate in the name of the Participant representing in the aggregate such number of Shares as the Participant shall then be entitled to receive; or |
(b) |
in the case of Restricted Shares issued in uncertificated form, cause the issuance of the aggregate number of Restricted Shares as the Participant shall then be entitled to receive to be evidenced by a book position on the register of the shareholders of the Corporation maintained by the transfer agent and registrar of the Shares. |
(2) |
Each certificate representing Restricted Shares shall bear the following legend, as amended to reflect the restrictions and/or conditions placed upon the Shares disposition as the Board may determine at the time of grant: |
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS IN ACCORDANCE WITH THE CORPORATIONS OMNIBUS LONG-TERM INCENTIVE PLAN DATED ●, AND A RESTRICTED SHARE AGREEMENT DATED ●. THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNTIL ●.
(3) |
Unless the Board shall otherwise determine, |
(a) |
uncertificated Restricted Shares shall be accompanied by a notation on the records of the Corporation or the transfer agent and registrar to the effect that they are subject to forfeiture until such Restricted Shares are vested as provided in Section 3.3(4) below; and |
(b) |
certificated Restricted Shares shall remain in the possession of the Corporation until such Restricted Shares have vested as provided in Section 3.3(4) below, |
and the Participant shall be required, as a condition of the grant of such Restricted Shares, to deliver to the Corporation such instruments of transfer as the Board may prescribe.
(4) |
The Board at the time of grant shall specify the date or dates and/or the restrictions and conditions on which the non-transferability of the Restricted Shares and the Corporations right of repurchase or forfeiture shall lapse. Subsequent to such date, or dates and/or the attainment of the restrictions and conditions, the Restricted Shares for which all restrictions have lapsed shall no longer be Restricted Shares and shall be deemed vested. |
- 7 -
Section 3.4 Restricted Share Agreements.
The terms of the Restricted Shares shall be evidenced by a Restricted Share Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 3 and Article 9 hereof be included therein. The Restricted Share Agreement shall contain such terms that may be considered necessary in order that the Restricted Shares will comply with any provisions respecting restricted securities in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 4 OPTIONS
Section 4.1 Nature of Options.
An Option is an option granted by the Corporation to a Participant entitling such Participant to acquire a designated number of Shares from treasury at the Option Price, subject to the provisions of this Plan.
Section 4.2 Option Awards.
Subject to the provisions set forth in this Plan and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive Options under the Plan, (ii) fix the number of Options, if any, to be granted to each Eligible Participant and the date or dates on which such Options shall be granted, (iii) determine the price per Share to be payable upon the exercise of each such Option (the Option Price ) and the relevant vesting provisions (including Performance Criteria, if applicable) and Option Term, the whole subject to the terms and conditions prescribed in this Plan, in any Option Agreement and any applicable rules of the TSX.
Section 4.3 Option Price.
The Option Price for Shares that are the subject of any Option shall be fixed by the Board when such Option is granted, but shall not be less than the Market Value of such Shares at the time of the grant.
Section 4.4 Option Term.
(1) |
The Board shall determine, at the time of granting the particular Option, the period during which the Option is exercisable, commencing on the date such Option is granted to the Participant and ending as specified in this Plan, or in the Option Agreement, but in no event shall an Option expire on a date which is later than ten (10) years from the date the Option is granted ( Option Term ). Unless otherwise determined by the Board, all unexercised Options shall be cancelled at the expiry of such Options. |
(2) |
Should the expiration date for an Option fall within a Black-Out Period or within ten (10) Business Days following the expiration of a Black-Out Period, such expiration date shall be automatically extended without any further act or formality to that date which is the tenth Business Day after the end of the Black-Out Period, such tenth Business Day to be considered the expiration date for such Option for all purposes under the Plan. Notwithstanding Section 10.2 hereof, the ten (10) Business Day-period referred to in this Section 4.4 may not be extended by the Board. |
Section 4.5 Exercise of Options.
(1) |
Subject to the provisions of this Plan, a Participant shall be entitled to exercise an Option granted to such Participant at any time prior to the expiry of the Option Term, subject to vesting limitations which may be imposed by the Board at the time such Option is granted. |
- 8 -
(2) |
Prior to its expiration or earlier termination in accordance with the Plan, each Option shall be exercisable as to all or such part or parts of the optioned Shares and at such time or times and/or pursuant to the achievement of such Performance Criteria and/or other vesting conditions as the Board at the time of granting the particular Option, may determine in its sole discretion. For greater certainty, no Option shall be exercised by a Participant during a Black-Out Period. |
Section 4.6 Method of Exercise and Payment of Purchase Price.
(1) |
Subject to the provisions of the Plan, an Option granted under the Plan shall be exercisable (from time to time as provided in Section 4.5 hereof) by the Participant (or by the liquidator, executor or administrator, as the case may be, of the estate of the Participant) by delivering a fully completed Exercise Notice to the Corporation at its registered office to the attention of the Corporate Secretary of the Corporation (or the individual that the Corporate Secretary of the Corporation may from time to time designate) or give notice in such other manner as the Corporation may from time to time designate, which notice shall specify the number of Shares in respect of which the Option is being exercised and shall be accompanied by full payment, by cash, cheque or bank draft of the purchase price for the number of Shares specified therein. Unless otherwise determined by the Board the Corporation shall not offer financial assistance in regards to the exercise of an Option. |
(2) |
Upon the exercise of an Option, the Corporation shall, as soon as practicable after such exercise but no later than ten (10) Business Days following such exercise, forthwith cause the transfer agent and registrar of the Shares to either: |
(a) |
deliver to the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) a certificate in the name of the Participant representing in the aggregate such number of Shares as the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall have then paid for and as are specified in such Exercise Notice; or |
(b) |
in the case of Shares issued in uncertificated form, cause the issuance of the aggregate number of Shares as the Participant (or the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall have then paid for and as are specified in such Exercise Notice to be evidenced by a book position on the register of the shareholders of the Corporation to be maintained by the transfer agent and registrar of the Shares. |
(3) |
With the consent of the Board, a Participant may, rather than exercise the Option which the Participant is entitled to exercise under this Plan as provided above, elect to surrender such Option, in whole or in part and, in lieu of receiving the Shares to which the exercised Option relates, receive, as consideration for the surrender of such Option, the number of Shares, disregarding fractions, which, when multiplied by the Market Value of the Shares to which the exercised Option relates, have a value equal to the product of the number of Shares to which the exercised Option relates multiplied by the difference between the Market Value of such Shares and the Option Price of such Option, less any amount withheld on account of taxes in accordance with Section 11.2. The Corporation makes no representation to any Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) that it will waive or renounce its right to claim a deduction in respect of such payment. |
Section 4.7 Option Agreements.
Options shall be evidenced by an Option Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 4 and Article 9 hereof be included therein. The Option Agreement shall contain such terms that may be considered necessary in order that the Option will comply with any provisions respecting options in the income tax or other laws in force in any country or jurisdiction of which the
- 9 -
Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 5 DEFERRED SHARE UNITS
Section 5.1 Nature of DSUs.
A DSU is an Award of phantom share units to an Eligible Participant, subject to restrictions and conditions as the Board may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives.
Section 5.2 Election to Participate.
Each Eligible Participant may elect, once each calendar year, to be paid a percentage of his or her annual retainer in the form of DSUs, with the balance being paid in cash. In the case of an existing Eligible Participant, the election must be completed, signed and delivered to the Corporation by the end of the fiscal year preceding the fiscal year to which such election is to apply. In the case of a new Eligible Participant, the election must be completed, signed and delivered to the Corporation as soon as possible, and, in any event, no later than thirty (30) days, after the Eligible Participants appointment, with such election to be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporations receipt of the election until the final day of the fiscal year of appointment. For the first year of the Plan, Eligible Participants must make such election as soon as possible, and, in any event, no later than thirty (30) days, after adoption of the Plan and the election shall be effective on the first day of the fiscal quarter of the Corporation next following the date of the Corporations receipt of the election until the final day of such fiscal year. If no election is made in respect of a particular fiscal year, the new or existing Eligible Participant will receive the annual retainer in cash.
Section 5.3 DSU Awards.
The number of DSUs that an Eligible Participant is entitled to receive in a fiscal year is based upon the percentage that the Eligible Participant has elected to receive in DSUs multiplied by the Participants annual retainer divided by the Market Value. At the discretion of the Board, fractional DSUs will not be issued and any fractional entitlements will be rounded down to the nearest whole number.
Section 5.4 Redemption of DSUs.
(1) |
Each Participant shall be entitled to redeem his or her DSUs during the period commencing on the business day immediately following the Termination Date and ending on the 90th day following the Termination Date by providing a written Notice of Redemption to the Corporation. In the event of death of a Participant, the Notice of Redemption shall be filed by the administrator or liquidator of the estate of the Participant. The Notice of Redemption must specify an election to receive: |
(a) |
a cash payment equal to the number of DSUs credited to the Participants Account as of the Termination Date multiplied by the Market Value on the Termination Date, net of any applicable withholding taxes; or |
(b) |
Shares purchased on the Participants behalf on the open market by a Broker; or |
(c) |
a percentage of the DSUs paid out in cash and the remaining percentage of the DSUs paid out as Shares on the Participants behalf on the open market by a Broker. |
In the event a Notice of Redemption is not provided by a Participant, such Participant will be deemed to have elected to receive a cash payment as provided for in Section 5.4(1)(a).
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(2) |
Where Shares are purchased on the open market on the Participants behalf, the Corporation will remit all or a portion of the final payment to the Broker, and the Broker will be required to (within ten (10) business days) use the amount to purchase Shares in the open market on the principal Canadian stock exchange or any other public exchange on which the Shares are traded. The number of Shares will be computed by taking the number of DSUs that the Participant elected to receive in Shares, net of the number of DSUs that would equal to any applicable withholding taxes. Any Shares acquired by the Broker from all or a portion of the final payment and any cash remaining therefrom shall be delivered directly to the Participant forthwith as soon as practicable upon completion of such purchases. The Corporation will pay all brokerage fees arising in connection with the purchase of Shares by the Broker in accordance with the Plan. |
(3) |
The Corporation will make all of the payments described in this Article 5 (referred to hereinafter as the Final Payment ) to the Participant or the Broker, within 120 days of the Termination Date. Upon making such payment to the Participant or the Broker, the DSUs upon which such payment was based shall be cancelled and no further payments shall be made from the Plan in relation to such DSUs. |
Section 5.5 Award of Dividend Equivalents.
Dividend Equivalents will be awarded in respect of DSUs in a Participants Account on the same basis as dividends declared and paid on Shares as if the Participant was a shareholder of record of Shares on the relevant record date. These Dividend Equivalents will be credited to the Participants Account as additional DSUs (or fractions thereof), with the number of additional DSUs based on (a) the actual amount of dividends that would have been paid if the Participant had held Shares under the Plan on the applicable record date divided by (b) the Market Value per Share on the date on which the dividends on Shares are payable. For greater certainty, no DSUs representing Dividend Equivalents will be credited to a Participants Account in relation to DSUs that have been previously cancelled or paid out of the Plan and all additional DSUs credited as a result of a Dividend Equivalent will be credited at the same time as any applicable Final Payment.
Section 5.6 Unfunded Plan.
Unless otherwise determined by the Board, this Plan shall be unfunded. To the extent any Participant or his or her estate holds any rights by virtue of a grant of DSUs under this Plan, such rights (unless otherwise determined by the Board) shall be no greater than the rights of an unsecured creditor of the Corporation. Notwithstanding the foregoing, any determinations made shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the Income Tax Regulations, adopted under the Tax Act or any successor provision thereto.
Section 5.7 DSU Agreements.
DSUs shall be evidenced by a DSU Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 5 and Article 9 hereof be included therein. The DSU Agreement shall contain such terms that may be considered necessary in order that the DSU will comply with any provisions respecting deferred share units in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 6 RESTRICTED SHARE UNITS
Section 6.1 Nature of RSUs.
A RSU is an Award entitling the recipient to acquire Shares, at such purchase price (which may be zero) as determined by the Board, subject to such restrictions and conditions as the Board may determine at
- 11 -
the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives.
Section 6.2 RSU Awards.
(1) |
Subject to the provisions herein set forth and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive RSUs under the Plan, (ii) fix the number of RSUs, if any, to be granted to each Eligible Participant and the date or dates on which such RSUs shall be granted, and (iii) determine the relevant conditions and vesting provisions (including the applicable Performance Period and Performance Criteria, if any) and Restriction Period of such RSUs, the whole subject to the terms and conditions prescribed in this Plan and in any RSU Agreement. |
(2) |
The RSUs are structured so as to be considered to be a plan described in section 7 of the Tax Act or any successor provision thereto. |
(3) |
Subject to the vesting and other conditions and provisions herein set forth and in the RSU Agreement, each RSU awarded to a Participant shall entitle the Participant, at his or her election, to receive one Share issued from treasury or the Cash Equivalent at any time beginning on the first Business Day following their RSU Vesting Determination Date but no later than the RSU Settlement Date. |
Section 6.3 Restriction Period.
The applicable restriction period in respect of a particular RSU award shall be determined by the Board but in all cases shall end no later than December 31 of the calendar year which is three (3) years after the calendar year in which the Award is granted ( Restriction Period ). For example, the Restriction Period for a grant made in June 2018 shall end no later than December 31, 2021. Subject to the Boards determination, any vested RSUs with respect to a Restriction Period will be paid to Participants in accordance with Article 5, no later than the end of the Restriction Period. Unless otherwise determined by the Board, all unvested RSUs shall be cancelled on the RSU Vesting Determination Date (as such term is defined in Section 6.5) and, in any event, no later than the last day of the Restriction Period.
Section 6.4 Performance Criteria and Performance Period.
(1) |
For each award of RSUs, the Board shall establish the period in which any Performance Criteria and other vesting conditions must be met in order for a Participant to be entitled to receive Shares in exchange for all or a portion of the RSUs held by such Participant (the Performance Period ), provided that such Performance Period may not expire after the end of the Restriction Period, being no longer than three (3) years after the financial year in which the Award was granted. For example, a Performance Period determined by the Board to be for a period of three (3) financial years will start on the first day of the financial year in which the award is granted and will end on the last day of the second financial year after the year in which the grant was made. In such a case, for a grant made on August 5, 2018, the Performance Period will start on August 1, 2018 and will end on July 31, 2020. |
(2) |
For each award of RSUs, the Board shall establish any Performance Criteria and other vesting conditions which must be met during the Performance Period in order for a Participant to be entitled to receive Shares in exchange for his or her RSUs. |
Section 6.5 RSU Vesting Determination Date.
The vesting determination date means the date on which the Board determines if the Performance Criteria and/or other vesting conditions with respect to a RSU have been met (the RSU Vesting
- 12 -
Determination Date ), and as a result, establishes the number of RSUs that become vested, if any. For greater certainty, the RSU Vesting Determination Date must fall after the end of the Performance Period, if any, but no later than the last day of the Restriction Period.
Section 6.6 Settlement of RSUs.
(1) |
Except as otherwise provided in the RSU Agreement, in the event that the vesting conditions, the Performance Criteria and Performance Period, if applicable, of an RSU are satisfied: |
(a) |
all of the vested RSUs covered by a particular grant may, subject to Section 6.6(4), be settled at any time beginning on the first Business Day following their RSU Vesting Determination Date but no later than the date that is ten (10) years from their RSU Vesting Determination Date (the RSU Settlement Date ); |
(b) |
a Participant is entitled to deliver to the Corporation, on or before the RSU Settlement Date, an RSU Settlement Notice in respect of any or all vested RSUs held by such Participant; and |
(c) |
in the RSU Settlement Notice, the Participant will elect, in such Participants sole discretion, including with respect to any fractional RSUs, to settle vested RSUs for their Cash Equivalent, Shares issued from treasury, or a combination thereof. |
(2) |
Subject to Section 6.6(4), settlement of RSUs shall take place promptly following the RSU Settlement Date and take the form set out in the RSU Settlement Notice through: |
(a) |
in the case of settlement of RSUs for their Cash Equivalent, delivery of a cheque to the Participant representing the Cash Equivalent; |
(b) |
in the case of settlement of RSUs for Shares, delivery of a share certificate to the Participant or the entry of the Participants name on the share register for the Shares (or in the case of Shares issued in uncertificated form, cause the issuance of the aggregate number of Shares as the Participant shall then be entitled to receive to be evidenced by a book position on the register of the shareholders of the Corporation maintained by the transfer agent and registrar of the Shares); or |
(c) |
in the case of settlement of the RSUs for a combination of Shares and the Cash Equivalent, a combination of (a) and (b) above. |
(3) |
If an RSU Settlement Notice is not received by the Corporation on or before the RSU Settlement Date, settlement shall take the form of Shares issued from treasury as set out in Section 6.7(2). |
(4) |
Notwithstanding any other provision of this Plan, in the event that an RSU Settlement Date falls during a Black-Out Period or other trading restriction imposed by the Corporation and the Participant has not delivered an RSU Settlement Notice, then such RSU Settlement Date shall be automatically extended to the tenth (10th) Business Day following the date that such Black-Out Period or other trading restriction is lifted, terminated or removed. |
Section 6.7 Determination of Amounts.
(1) |
Cash Equivalent of RSUs . For purposes of determining the Cash Equivalent of RSUs to be made pursuant to Section 6.6, such calculation will be made on the RSU Settlement Date and shall equal the Market Value on the RSU Settlement Date multiplied by the number of vested RSUs in the Participants Account which the Participant desires to settle in cash pursuant to the RSU Settlement Notice. |
- 13 -
(2) |
Payment in Shares; Issuance of Shares from Treasury . For the purposes of determining the number of Shares from treasury to be issued and delivered to a Participant upon settlement of RSUs pursuant to Section 6.6, such calculation will be made on the RSU Settlement Date and be the whole number of Shares equal to the whole number of vested RSUs then recorded in the Participants Account which the Participant desires to settle pursuant to the RSU Settlement Notice. Shares issued from treasury will be issued in consideration for the past services of the Participant to the Corporation and the entitlement of the Participant under this Plan shall be satisfied in full by such issuance of Shares. |
Section 6.8 RSU Agreements.
RSUs shall be evidenced by a RSU Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 6 and Article 9 hereof be included therein. The RSU Agreement shall contain such terms that may be considered necessary in order that the RSU will comply with any provisions respecting restricted share units in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 7 SHARE APPRECIATION RIGHTS
Section 7.1 Nature of SARs.
A SAR is an Award entitling the recipient to receive Shares having a value equal to the excess of (i) the Market Value of one Share on the date of exercise over (ii) the grant price of the right on the date of grant, or if granted in connection with an outstanding Option on the date of grant of the related Option, as specified by the Board in its sole discretion, which, except in the case of Substitute Awards, shall not be less than the Market Value of one Share on such date of grant of the right or the related Option, as the case may be, multiplied by the number of Shares with respect to which the SAR shall have been exercised.
Section 7.2 SAR Awards.
Subject to the provisions herein set forth and any shareholder or regulatory approval which may be required, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive SAR Awards under the Plan, (ii) fix the number of SAR Awards to be granted to each Eligible Participant and the date or dates on which such SAR Awards shall be granted, and (iii) determine the price per Share to be payable upon the vesting of each such SAR (the SAR Price ) and the relevant conditions and vesting provisions (including the applicable Performance Period and Performance Criteria, if any) and the SAR Term, the whole subject to the terms and conditions prescribed in this Plan and in any SAR Agreement.
Section 7.3 SAR Price.
The SAR Price for the Shares that are the subject of any SAR shall be fixed by the Board when such SAR is granted, but shall not be less than the Market Value of such Shares at the time of the grant.
Section 7.4 SAR Term.
(1) |
The Board shall determine, at the time of granting the particular SAR, the period during which the SAR is exercisable, which shall not be more than ten (10) years from the date the SAR is granted ( SAR Term ) and the vesting schedule of such SAR, which will be detailed in the respective SAR Agreement. Unless otherwise determined by the Board, all unexercised SARs shall be cancelled at the expiry of such SAR. |
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(2) |
Should the expiration date for a SAR fall within a Black-Out Period or within ten (10) Business Days following the expiration of a Black-Out Period, such expiration date shall be automatically extended without any further act or formality to that date which is the tenth (10th) Business Day after the end of the Black-Out Period, such tenth (10th) Business Day to be considered the expiration date for such SAR for all purposes under the Plan. Notwithstanding Section 10.2 hereof, the ten (10) Business Day-period referred to in this Section 7.4 may not be extended by the Board. |
Section 7.5 Exercise of SARs.
Prior to its expiration or earlier termination in accordance with the Plan, each SAR shall be exercisable as to all or such part or parts of the granted Shares and at such time or times and/or pursuant to the achievement of such Performance Criteria and/or other vesting conditions as the Board at the time of granting the particular SAR, may determine in its sole discretion. For greater certainty, no SAR shall be exercised by a Participant during a Black-Out Period.
Section 7.6 Method of Exercise and Payment of Purchase Price.
(1) |
Subject to the provisions of the Plan, a SAR granted under the Plan shall be exercisable (from time to time as provided in Section 7.5 hereof) by the Participant (or by the liquidator, executor or administrator, as the case may be, of the estate of the Participant) by delivering a fully completed Exercise Notice to the Corporation at its registered office to the attention of the Corporate Secretary of the Corporation (or to the individual that the Corporate Secretary of the Corporation may from time to time designate) or give notice in such other manner as the Corporation may from time to time designate, no less than three (3) business days in advance of the effective date of the proposed exercise, which notice shall specify the number of Shares with respect to which the SAR is being exercised and the effective date of the proposed exercise. |
(2) |
The exercise of a SAR with respect to any number of Shares shall entitle the Participant to Shares equal to the excess of the Market Value of a Share on the effective date of such exercise over the per share SAR Price. |
(3) |
Upon the exercise, the Corporation shall, as soon as practicable after such exercise but no later than ten (10) Business Days following such exercise, forthwith cause the transfer agent and registrar of the Shares to either: |
(a) |
deliver to the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) a certificate in the name of the Participant representing in the aggregate such number of Shares as the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall be entitled to receive (unless the Participant intends to simultaneously dispose of any such Shares); or |
(b) |
in the case of Shares issued in uncertificated form, cause the issuance of the aggregate number of Shares as the Participant (or the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall be entitled to receive to be evidenced by a book position on the register of the shareholders of the Corporation to be maintained by the transfer agent and registrar of the Shares. |
Section 7.7 SAR Agreements.
SARs shall be evidenced by a SAR Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan as the Board may from time to time determine, provided that the substance of Article 7 and Article 9 hereof be included therein. The SAR Agreement shall contain such terms that may be considered necessary in order that the SAR will comply with any provisions respecting stock
- 15 -
appreciation rights in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the corporation.
ARTICLE 8 RETENTION AWARDS
Section 8.1 Nature of Retention Awards.
Retention Awards are any payment to an Eligible Participant that is not payable periodically for services provided by the Eligible Participant, as determined by the Board from time to time.
Section 8.2 Retention Awards.
(1) |
Subject to the provisions herein set forth, the Board shall, from time to time by resolution, in its sole discretion, (i) designate the Eligible Participants who may receive Retention Awards under the Plan, (ii) fix the number of Retention Awards, if any, to be granted to each Eligible Participant and the date or dates on which such Retention Awards shall be granted, and (iii) determine the relevant conditions and vesting provisions (including the applicable Performance Period and Performance Criteria, if any) of such Retention Awards, the whole subject to the terms and conditions prescribed in this Plan and in any Retention Award Agreement or Employment Agreement. |
(2) |
Subject to the vesting and other conditions and provisions herein set forth and in the Retention Award Agreement or Employment Agreement, each Retention Award awarded to a Participant shall entitle the Participant to receive, on the vesting date of the Retention Award, such number of Shares, disregarding fractions, which, when multiplied by the Market Value of the Shares on the vesting date of the Retention Award, to which the Retention Awards relate, have a value equal to the Retention Payment, less any amount withheld on account of income taxes, which withheld income taxes will be remitted by the Corporation. |
Section 8.3 Payment to Participant.
In the event that the vesting conditions of a Retention Award are satisfied, the Corporation shall, as soon as possible after the date of vesting of the Retention Awards cause the transfer agent and registrar of the Shares to either:
(a) |
deliver to the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) a certificate in the name of the Participant representing in the aggregate such number of Shares as the Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall be entitled to receive (unless the Participant intends to simultaneously dispose of any such Shares); or |
(b) |
in the case of Shares issued in uncertificated form, cause the issuance of the aggregate number of Shares as the Participant (or the liquidator, executor or administrator, as the case may be, of the estate of the Participant) shall be entitled to receive to be evidenced by a book position on the register of the shareholders of the Corporation to be maintained by the transfer agent and registrar of the Shares. |
Section 8.4 Retention Award Agreements.
Retention Awards shall be evidenced by a Retention Award Agreement or included in an Employment Agreement, in such form not inconsistent with the Plan, as the Board may from time to time determine, provided that the substance of Article 8 and Article 9 hereof be included therein. The Retention Award Agreement shall contain such terms that may be considered necessary in order that the Retention Award
- 16 -
will comply with any provisions respecting such awards in the income tax or other laws in force in any country or jurisdiction of which the Participant may from time to time be a resident or citizen or the rules of any regulatory body having jurisdiction over the Corporation.
ARTICLE 9 GENERAL CONDITIONS
Section 9.1 General Conditions applicable to Awards.
Each Award, as applicable, shall be subject to the following conditions:
(1) |
Employment - The granting of an Award to a Participant shall not impose upon the Corporation or a Subsidiary any obligation to retain the Participant in its employ in any capacity. For greater certainty, the granting of Awards to a Participant shall not impose any obligation on the Corporation to grant any awards in the future nor shall it entitle the Participant to receive future grants. |
(2) |
Rights as a Shareholder - Neither the Participant nor such Participants personal representatives or legatees shall have any rights whatsoever as shareholder in respect of any Shares covered by such Participants Awards until the date of issuance of a share certificate to such Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant). Without in any way limiting the generality of the foregoing, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such share certificate is issued. |
(3) |
Conformity to Plan In the event that an Award is granted or a Grant Agreement is executed which does not conform in all particulars with the provisions of the Plan, or purports to grant Awards on terms different from those set out in the Plan, the Award or the grant of such Award shall not be in any way void or invalidated, but the Award so granted will be adjusted to become, in all respects, in conformity with the Plan. |
(4) |
Transferrable Awards Awards granted under this Plan shall be transferrable or assignable only to a permitted assign and shall be exercisable only by the Participant or his or her permitted assign. For the purposes hereof, permitted assign means for such Participant: |
(a) |
a trustee, custodian or administrator acting on behalf, or for the benefit, of the Participant; |
(b) |
a holding entity of the Participant; |
(c) |
a registered retirement savings plan ( RRSP ) or registered retirement income fund ( RRIF ) of the Participant, as such terms are defined in the Tax Act; |
(d) |
a spouse of the Participant (the Spouse ); |
(e) |
a trustee, custodian or administrator acting on behalf, or for the benefit, of the Spouse; |
(f) |
a holding entity of the Spouse; or |
(g) |
an RRSP or RRIF of the Spouse. |
Section 9.2 General Conditions applicable to Options, SARs and Retention Awards.
Each Option, SAR or Retention Award, as applicable, shall be subject to the following conditions:
(1) |
Termination for Cause. Upon a Participant ceasing to be an Eligible Participant for cause, any Option, SAR or Retention Award or the unexercised or unvested portion thereof, as applicable, |
- 17 -
when granted to such Participant shall terminate on the effective date of the termination as specified in the notice of termination. For the purposes of the Plan, the determination by the Corporation that the Participant was discharged for cause shall be binding on the Participant. Cause shall include, among other things, gross misconduct, theft, fraud, breach of confidentiality or breach of the Corporations Code of Conduct and any reason determined by the Corporation to be cause for termination. |
(2) |
Death. If a Participant dies while in his or her capacity as an Eligible Participant, any vested Option, SAR or Retention Award or the unexercised portion thereof, granted to such Participant may be exercised by the liquidator, executor or administrator, as the case may be, of the estate of the Participant for that number of Shares only which such Participant was entitled to acquire under the respective Options, SARs or Retention Awards (the Vested Awards ) hereof on the date of such Participants death. Such Vested Award shall only be exercisable within one (1) year after the Participants death or prior to the expiration of the original term of the Options, SARs or Retention Awards, as applicable, whichever occurs earlier. All Options, SARs or Retention Awards or the unexercised or unvested portion thereof, as applicable, other than such Vested Awards on the date of such Participants death, will be cancelled on the date of such Participants death. |
(3) |
Disability. Upon a Participant ceasing to be an Eligible Participant by reason of injury or disability or upon a Participant becoming eligible to receive long-term disability benefits, any Option, SAR or Retention Award or the unexercised portion thereof, granted to such Participant may be exercised by such Participant or his/her representative as the rights to exercise accrue. Such Option, SAR or Retention Award shall only be exercisable (i) within three (3) years after such cessation or (ii) the effective date on which the Participant becomes eligible to receive long-term disability benefits (provided that, for greater certainty, such effective date shall be confirmed in writing to the Corporation by the insurance company providing such long-term disability benefits) (the Eligibility Date )) or (iii) prior to the expiration of the original term of the Option, SAR or Retention Award, whichever occurs earlier. All Options, SARs or Retention Awards or the unexercised or unvested portion thereof, as applicable, on the date that is three (3) years after such cessation, will be cancelled on such date. |
(4) |
Termination or Cessation. In the case of a Participant ceasing to be an Eligible Participant for any reason (other than for cause, death or disability) the right to exercise an Option, SAR or Retention Award shall be limited to and shall expire on the earlier of one year after the Termination Date, or the expiry date of the Award set forth in the Grant Agreement, to the extent such Award was exercisable by the Participant on the Termination Date. |
Section 9.3 General Conditions applicable to RSUs.
Each RSU shall be subject to the following conditions:
(1) |
Termination for Cause. Upon a Participant ceasing to be an Eligible Participant for cause or the Participants resignation from employment with the Corporation or a Subsidiary, the Participants participation in the Plan shall be terminated immediately, all RSUs credited to such Participants Account that have not vested shall be forfeited and cancelled, and the Participants rights to Shares that relate to such Participants unvested RSUs shall be forfeited and cancelled on the Termination Date. |
(2) |
Cessation of Employment. Except as otherwise determined by the Board from time to time, at its sole discretion, upon a Participants (i) retirement, (ii) employment with the Corporation or a Subsidiary being terminated by the Corporation or a Subsidiary for reasons other than for cause, (iii) employment with the Corporation or a Subsidiary being terminated by reason of injury or disability or (iv) becoming eligible to receive long-term disability benefits, the Participants participation in the Plan shall be terminated immediately (provided that, for the Participant becoming eligible to receive long-term disability benefits, such termination shall occur on the |
- 18 -
Eligibility Date), provided that all unvested RSUs in the Participants Account as of such date relating to a Restriction Period in progress shall remain in effect until the applicable RSU Vesting Determination Date. |
(3) |
Retirement. In the case of a Participants retirement, this Section (3) shall not apply to a Participant in the event such Participant, directly or indirectly, in any capacity whatsoever, alone, through or in connection with any person, carries on or becomes employed by, engaged in or otherwise commercially involved in, any activity or business in the cannabis industry prior to the applicable RSU Vesting Determination Date. In such event, Section 9.3(2) shall apply to such Participant. |
(a) |
If, on the RSU Vesting Determination Date, the Board determines that the vesting conditions were not met for such RSUs, then all unvested RSUs credited to such Participants Account shall be forfeited and cancelled and the Participants rights to Shares that relate to such unvested RSUs shall be forfeited and cancelled. |
(b) |
If, on the RSU Vesting Determination Date, the Board determines that the vesting conditions were met for such RSUs, the Participant shall be entitled to receive that number of Shares equal to the number of RSUs outstanding in the Participants Account in respect of such Restriction Period multiplied by a fraction, the numerator of which shall be the number of completed months of service of the Participant with the Corporation or a Subsidiary during the applicable Performance Period, if any, as of the date of the Participants retirement, termination or Eligibility Date and the denominator of which shall be equal to the total number of months included in the applicable Performance Period, if any (which calculation shall be made on the applicable RSU Vesting Determination Date) and the Corporation shall distribute such number of Shares to the Participant as soon as practicable thereafter, but no later than the end of the Restriction Period, the Corporation shall debit the corresponding number of RSUs from such Participants Account, and the Participants rights to all other Shares that relate to such Participants RSUs shall be forfeited and cancelled. |
(4) |
Death. Except as otherwise determined by the Board from time to time, at their sole discretion, upon the death of a Participant, the Participants participation in the Plan shall be terminated immediately, provided that all unvested RSUs in the Participants Account as of such date relating to a Restriction Period in progress shall remain in effect until the applicable RSU Vesting Determination Date or any earlier date as may be determined by the Board. |
(a) |
If, on the applicable RSU Vesting Determination Date or any earlier date as may be determined by the Board, the Board determines that the vesting conditions were not met for such RSUs, then all unvested RSUs credited to such Participants Account shall be forfeited and cancelled and the Participants rights to Shares (or cash or a combination of Shares and cash as permitted under this Plan) that relate to such unvested RSUs shall be forfeited and cancelled. |
(b) |
If, on the applicable RSU Vesting Determination Date or any earlier date as may be determined by the Board, the Board determines that the vesting conditions were met, the liquidator, executor or administrator, as the case may be, of the estate of the Participant shall be entitled to receive that number of Shares equal to the number of RSUs outstanding in the Participants Account in respect of such Restriction Period multiplied by a fraction, the numerator of which shall be the number of completed months of service of the Participant with the Corporation or a Subsidiary during the applicable Performance Period, if any, as of the date of death of the Participant and the denominator of which shall be equal to the total number of months included in the applicable Performance Period, if any (which calculation shall be made on the applicable RSU Vesting Determination Date or any earlier date as may be determined by the Board) and the Corporation shall distribute such number of Shares to the liquidator, executor or |
- 19 -
administrator, as the case may be, of the estate of the Participant as soon as practicable thereafter but no later than the end of the Restriction Period, the Corporation shall debit the corresponding number of RSUs from such deceased Participants Account, and the Participants right to all other Shares that relate to such deceased Participants RSUs shall be forfeited and cancelled. |
(5) |
Leave of Absence. Except as otherwise determined by the Board from time to time, at their sole discretion, upon a Participant electing a voluntary leave of absence, the Participants participation in the Plan shall be terminated immediately, provided that all unvested RSUs in the Participants Account as of such date relating to a Restriction Period in progress shall remain in effect until the applicable RSU Vesting Determination Date. |
(a) |
If, on the applicable RSU Vesting Determination Date, the Board determines that the vesting conditions were not met for such RSUs, then all unvested RSUs credited to such Participants Account shall be forfeited and cancelled and the Participants rights to Shares (or cash or a combination of Shares and cash as permitted under this Plan) that relate to such unvested RSUs shall be forfeited and cancelled. |
(b) |
If, on the applicable RSU Vesting Determination Date, the Board determines that the vesting conditions were met, the Participant shall be entitled to receive that number of Shares equal to the number of RSUs outstanding in the Participants Account in respect of such Restriction Period multiplied by a fraction, the numerator of which shall be the number of completed months of service of the Participant with the Corporation or a Subsidiary during the relevant Performance Period, if any, as of the date the Participant elects for a voluntary leave of absence and the denominator of which shall be equal to the total number of months included in the relevant Performance Period, if any (which calculation shall be made on the applicable RSU Vesting Determination Date) and the Corporation shall distribute such number of Shares (or cash or a combination of Shares and cash as permitted under this Plan) to the Participant as soon as practicable thereafter but no later than the end of the applicable Restriction Period, the Corporation shall debit the corresponding number of RSUs from such Participants Account, and the Participants right to all other Shares that relate to such Participants RSUs shall be forfeited and cancelled. |
(c) |
Subject to applicable laws, the Board may decide, at their sole discretion that Section 9.3(5) should not apply to voluntary leaves granted to a Participant by the Corporation for a period of twelve (12) months or less. In such event, all unvested RSUs in such Participants Account as of such date relating to a Restriction Period in progress shall remain in effect until the applicable RSU Vesting Determination Date. |
(6) |
General. For greater certainty, where (i) a Participants employment with the Corporation or a Subsidiary is terminated pursuant to Section 9.3(1), Section 9.3(2) or Section 9.3(4) hereof or (ii) a Participant elects for a voluntary leave of absence pursuant to Section 9.3(5) hereof following the satisfaction of all vesting conditions in respect of particular RSUs but before receipt of the corresponding distribution or payment in respect of such RSUs, the Participant shall remain entitled to such distribution or payment. |
Section 9.4 General Conditions applicable to Restricted Shares.
(1) |
Upon a Participant ceasing to be an Eligible Participant for any reason, any Restricted Shares that have not vested at such time shall automatically and without any requirement of notice to such Participant, or other action by or on behalf of the Corporation, be deemed to have been reacquired by the Corporation from such Participant, and thereafter shall cease to represent any ownership in the Corporation by the Participant or rights of the Participant as a shareholder of the Corporation. Following such deemed reacquisition, the Participant shall surrender any certificates |
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representing Restricted Shares in such Participants possession to the Corporation upon request without consideration. |
ARTICLE 10 ADJUSTMENTS AND AMENDMENTS
Section 10.1 Adjustment to Shares Subject to Outstanding Awards.
(1) |
In the event of any subdivision of the Shares into a greater number of Shares at any time after the grant of an Award to a Participant and prior to the expiration of the term of such Award, the Corporation shall deliver to such Participant, at the time of any subsequent exercise or vesting of such Award in accordance with the terms hereof, in lieu of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award, but for the same aggregate consideration payable therefor, such number of Shares as such Participant would have held as a result of such subdivision if on the record date thereof the Participant had been the registered holder of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award. |
(2) |
In the event of any consolidation of Shares into a lesser number of Shares at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Corporation shall deliver to such Participant at the time of any subsequent exercise or vesting of such Award in accordance with the terms hereof in lieu of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award, but for the same aggregate consideration payable therefor, such number of Shares as such Participant would have held as a result of such consideration if on the record date thereof the Participant had been the registered holder of the number of Shares to which such Participant was theretofore entitled upon such exercise or vesting of such Award. |
(3) |
If at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Shares shall be reclassified, reorganized or otherwise changed, otherwise than as specified in Section 10.1(1) or Section 10.1(2) hereof or, subject to the provisions of Section 10.2(3) hereof, the Corporation shall consolidate, merge or amalgamate with or into another corporation (the corporation resulting or continuing from such consolidation, merger or amalgamation being herein called the Successor Corporation ), the Participant shall be entitled to receive upon the subsequent exercise or vesting of Award, in accordance with the terms hereof and shall accept in lieu of the number of Shares then subscribed for but for the same aggregate consideration payable therefor, the aggregate number of shares of the appropriate class or other securities of the Corporation or the Successor Corporation (as the case may be) or other consideration from the Corporation or the Successor Corporation (as the case may be) that such Participant would have been entitled to receive as a result of such reclassification, reorganization or other change of shares or, subject to the provisions of Section 10.2(3) hereof, as a result of such consolidation, merger or amalgamation, if on the record date of such reclassification, reorganization or other change of shares or the effective date of such consolidation, merger or amalgamation, as the case may be, such Participant had been the registered holder of the number of Shares to which such Participant was immediately theretofore entitled upon such exercise or vesting of such Award. |
(4) |
If, at any time after the grant of an Award to any Participant and prior to the expiration of the term of such Award, the Corporation shall make a distribution to all holders of Shares or other securities in the capital of the Corporation, or cash, evidences of indebtedness or other assets of the Corporation (excluding an ordinary course dividend in cash or shares, but including for greater certainty shares or equity interests in a Subsidiary or business unit of the Corporation or one of its Subsidiaries or cash proceeds of the disposition of such a Subsidiary or business unit), or should the Corporation effect any transaction or change having a similar effect, then the price or the number of Shares to which the Participant is entitled upon exercise or vesting of Award shall be adjusted to take into account such distribution, transaction or change. The Board shall determine the appropriate adjustments to be made in such circumstances in order to maintain the |
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Participants economic rights in respect of their Awards in connection with such distribution, transaction or change. |
Section 10.2 Amendment or Discontinuance of the Plan.
(1) |
The Board may amend the Plan or any Award at any time without the consent of the Participants provided that such amendment shall: |
(a) |
not adversely alter or impair any Award previously granted except as permitted by the provisions of Article 10 hereof; |
(b) |
be subject to any regulatory approvals including, where required, the approval of the TSX; and |
(c) |
be subject to shareholder approval, where required by law or the requirements of the TSX, provided that shareholder approval shall not be required for the following amendments and the Board may make any changes which may include but are not limited to: |
(i) |
amendments of a housekeeping nature; |
(ii) |
a change to the vesting provisions of any Award; |
(iii) |
the introduction or amendment of a cashless exercise feature payable in securities, whether or not such feature provides for a full deduction of the number of underlying securities from the Plan reserve; and |
(iv) |
the addition of a form of financial assistance and any amendment to a financial assistance provision which is adopted. |
(2) |
Notwithstanding Section 10.2(1)(c), the Board shall be required to obtain shareholder approval to make the following amendments: |
(a) |
any change to the maximum number of Shares issuable from treasury under the Plan, except such increase by operation of Section 2.4 and in the event of an adjustment pursuant to Article 10; |
(b) |
any amendment which reduces the exercise price of any Award, as applicable, after such Awards have been granted or any cancellation of an Award and the substitution of that Award by a new Award with a reduced price, except in the case of an adjustment pursuant to Article 10; |
(c) |
any amendment which extends the expiry date of any Award, or the Restriction Period of any RSU beyond the original expiry date, except in case of an extension due to a Black-Out Period; |
(d) |
any amendment which would permit a change to the Eligible Participants, including a change which would have the potential of broadening or increasing participation by Insiders; |
(e) |
any amendment which would permit any Award granted under the Plan to be transferable or assignable by any Participant other than as allowed by Section 9.1(4); |
(f) |
any amendment which increases the maximum number of Shares that may be (i) issuable to Insiders and Associates of such Insiders at any time; or (ii) issued to Insiders |
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and Associates of such Insiders under the Plan and any other proposed or established Share Compensation Arrangement in a one-year period, except in case of an adjustment pursuant to Article 10; or |
(g) |
any amendment to the amendment provisions of the Plan, |
provided that Shares held directly or indirectly by Insiders benefiting from the amendments in Sections (b) and (c) shall be excluded when obtaining such shareholder approval.
(3) |
Notwithstanding anything contained to the contrary in the Plan, in a Grant Agreement contemplated herein, but subject to any specific provisions contained in any Employment Agreements, in the event of a Change in Control, a reorganization of the Corporation, an amalgamation of the Corporation, an arrangement involving the Corporation, a take-over bid (as that term is defined in the Securities Act (Québec)) for all of the Shares or the sale or disposition of all or substantially all of the property and assets of the Corporation, the Board may make such provision for the protection of the rights of the Participants as the Board in its discretion considers appropriate in the circumstances, including, without limitation, changing the Performance Criteria and/or other vesting conditions for the Awards and/or the date on which any Award expires or the Restriction Period, the Performance Period, the Performance Criteria and/or other vesting conditions for the Awards. |
(4) |
The Board may, by resolution, advance the date on which any Award may be exercised or payable or, subject to applicable regulatory provisions, including the rules of the TSX, and shareholder approval, extend the expiration date of any Award, in the manner to be set forth in such resolution provided that the period during which an Option or a SAR is exercisable or RSU is outstanding does not exceed ten (10) years from the date such Option or SAR is granted in the case of Options and SARs and three (3) years after the calendar year in which the award is granted in the case of RSUs. The Board shall not, in the event of any such advancement or extension, be under any obligation to advance or extend the date on or by which any Option or SAR may be exercised or RSU may be outstanding by any other Participant. |
(5) |
The Committee may, by resolution, but subject to applicable regulatory approvals, decide that any of the provisions hereof concerning the effect of termination of the Participants employment shall not apply for any reason acceptable to the Committee. |
(6) |
The Board may, subject to regulatory approval, discontinue the Plan at any time without the consent of the Participants provided that such discontinuance shall not materially and adversely affect any Awards previously granted to a Participant under the Plan. |
ARTICLE 11 MISCELLANEOUS
Section 11.1 Use of an Administrative Agent and Trustee.
The Board may in its sole discretion appoint from time to time one or more entities to act as administrative agent to administer the Awards granted under the Plan and to act as trustee to hold and administer the assets that may be held in respect of Awards granted under the Plan, the whole in accordance with the terms and conditions determined by the Board in its sole discretion. The Corporation and the administrative agent will maintain records showing the number of Awards granted to each Participant under the Plan.
Section 11.2 Tax Withholding.
(1) |
Notwithstanding any other provision of this Plan, all distributions, delivery of Shares or payments to a Participant (or to the liquidator, executor or administrator, as the case may be, of the estate of the Participant) under the Plan shall be made net of applicable source deductions. If the event |
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giving rise to the withholding obligation involves an issuance or delivery of Shares, then, the withholding obligation may be satisfied by (a) having the Participant elect to have the appropriate number of such Shares sold by the Corporation, the Corporations transfer agent and registrar or any trustee appointed by the Corporation pursuant to Section 11.1 hereof, on behalf of and as agent for the Participant as soon as permissible and practicable, with the proceeds of such sale being delivered to the Corporation, which will in turn remit such amounts to the appropriate governmental authorities, or (b) any other mechanism as may be required or appropriate to conform with local tax and other rules. |
(2) |
Notwithstanding the first paragraph of this Section 11.2, the applicable tax withholdings may be waived where the Participant directs in writing that a payment be made directly to the Participants registered retirement savings plan in circumstances to which regulation 100(3) of the regulations of the Tax Act apply. |
Section 11.3 Reorganization of the Corporation.
The existence of any Awards shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporations capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to affect the dissolution or liquidation of the Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.
Section 11.4 Personal Information
Each Participant shall provide the Corporation and the Board with all information they require in order to administer the Plan. The Corporation and the Board may from time to time transfer or provide access to such information to a third party service provider for purposes of the administration of the Plan provided that such service providers will be provided with such information for the sole purpose of providing such services to the Corporation. By participating in the Plan, each Participant acknowledges that information may be so provided and agrees to its provision on the terms set forth herein. Except as specifically contemplated in this Section 11.4, the Corporation and the Board shall not disclose the personal information of a Participant except: (i) in response to regulatory filings or other requirements for the information by a governmental authority with jurisdiction over the Corporation; (ii) for the purpose of complying with a subpoena, warrant or other order by a court, person or body having jurisdiction to compel production of the information; or (iii) as otherwise required by law. In addition, personal information of Participants may be disclosed or transferred to another party during the course of, or completion of, a change in ownership of, or the grant of a security interest in, all or a part of the Corporation or its Affiliates including through an asset or share sale, or some other form of business combination, merger or joint venture, provided that such party is bound by appropriate agreements or obligations.
Section 11.5 Governing Laws.
The Plan and all matters to which reference is made herein shall be governed by and interpreted in accordance with the laws of the Province of Québec and the laws of Canada applicable therein.
Section 11.6 Severability.
The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from the Plan.
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Section 11.7 Effective Date of the Plan.
The Plan was approved by the Board on June 27, 2018 and shall take effect on June 27, 2018, subject to the acceptance of the Plan by the shareholders of the Corporation, the TSX and any other applicable regulatory authorities.
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Exhibit 5.1
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the inclusion in the Registration Statement on Form F-10 of HEXO Corp. (the Company), of our report dated October 25, 2018 relating to the July 31, 2018 and July 31, 2017 consolidated financial statements of the Company.
We also consent to the reference to us under the heading Interests of Experts in such Registration Statement.
MNP LLP
Chartered Professional Accountants,
Licensed Public Accountants
Ottawa, Ontario
December 20, 2018