UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July 2021
Commission File Number: 001-38781
HEXO Corp.
(Translation of registrants name into English)
3000 Solandt Road
Ottawa, Ontario, Canada K2K 2X2
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
EXPLANATORY NOTE
Exhibit 99.1 included with this Report on Form 6-K is hereby incorporated by reference into (i) the Registration Statement on Form F-10 of HEXO Corp. and HEXO Operations Inc. (File No. 333-256131), and (ii) the Registration Statement on Form F-10 of HEXO Corp. (File No. 333-255264).
Exhibit |
Description |
|
99.1 | Amended and restated material change report dated July 14, 2021 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HEXO Corp. | ||||
Date: July 14, 2021 | /s/ Trent MacDonald | |||
Chief Financial Officer |
Exhibit 99.1
FORM 51-102F3
AMENDED AND RESTATED MATERIAL CHANGE REPORT
1. |
Name and Address of Company |
HEXO Corp. (the Company or HEXO)
3000 Solandt Road
Ottawa, Ontario K2K 2X2
2. |
Date of Material Change |
May 28, 2021 (as updated on July 14, 2021 only for new financial information having been made available)
3. |
News Release |
A first news release dated May 28, 2021 was disseminated through the facilities of GlobeNewswire and was filed on the System for Electronic Document Analysis and Retrieval (SEDAR). A copy of the news release is available under the Companys profile on SEDAR at www.sedar.com.
A subsequent news release dated July 14, 2021 was disseminated through the facilities of GlobeNewswire and was filed on the System for Electronic Document Analysis and Retrieval (SEDAR). A copy of the news release is available under the Companys profile on SEDAR at www.sedar.com and is attached as Schedule A hereto.
4. |
Summary of Material Change |
On May 28, 2021, the Company entered into a definitive share purchase agreement (the Share Purchase Agreement) to acquire all of the outstanding shares of the entities that carry on the business of Redecan, for a purchase price of $925 million payable in cash and common shares of HEXO, subject to certain customary adjustments (the Transaction).
On July 14, 2021, the Company announced and made publicly available certain previously unavailable historical audited annual and interim unaudited financial statements of 2579951 Canada Inc. (being the entity, together with its subsidiaries, carrying on the business of Redecan) (collectively, Redecan) as well as certain pro forma financial statements in connection with the Transaction.
This material change report is being filed to supplement the information provided in the Companys material change report dated June 4, 2021 with this financial information that was not available on June 4, 2021. By its filing, this material change report is incorporated into and forms part of each of the Companys (Equity) Amended and Restated Short Form Base Shelf Prospectus dated May 25, 2021 (as well as, for greater certainty, the Companys Prospectus Supplement dated May 11, 2021 filed pursuant to the aforementioned Amended and Restated Short Form Base Shelf Prospectus) and the Companys (Debt) Short Form Base Shelf Prospectus dated May 21, 2021.
5. |
Full Description of Material Change |
The Company entered into the Share Purchase Agreement to acquire all of the outstanding shares of the entities that carry on the business of Redecan, Canadas largest privately-owned licensed producer, for a purchase price of $925 million payable in cash and common shares of HEXO, subject to certain customary adjustments.
Under the terms of the Share Purchase Agreement, the $925 million purchase price will be paid to the Redecan shareholders as follows:
|
$400 million of consideration due on closing paid in cash; and |
|
$525 million of consideration due on closing paid through the issuance of HEXO common shares (the Consideration Shares) at an implied price per share of $7.53. |
The $7.53 price per Consideration Share represents the five trading day-period volume-weighted average price (VWAP) of HEXO common shares on the Toronto Stock Exchange (TSX) as of the close of Canadian markets on May 27, 2021. It is anticipated that the Redecan shareholders will collectively hold approximately 31% of HEXOs issued and outstanding common shares immediately following the closing of the Transaction on a pro forma non-diluted basis. Under TSX rules, the Transaction requires a simple majority approval of HEXOs shareholders. HEXO expects to convene a meeting of shareholders to be held in August 2021 for the purpose of submitting the Transaction to shareholders for approval.
HEXO announced on May 27, 2021, the closing of an offering of US$360,000,000 aggregate principal amount of senior secured convertible notes due May 1, 2023 (the Notes) directly to an institutional purchaser and certain of its affiliates or related funds. HEXO will use substantially all of the net proceeds from the sale of the Notes to satisfy the anticipated cash portion of the purchase price in the Transaction.
In addition to restrictions under applicable securities laws, resale by the Redecan shareholders of the Consideration Shares will be restricted by a 24-month hold period during which, subject to certain exceptions, each Redecan shareholder will be entitled to sell a maximum of 1/24th of the initial amount of such Redecan shareholders Consideration Shares issued under the Transaction. Furthermore, the Redecan shareholders have agreed to be bound by customary standstill provisions for an 18-month period, during which such shareholders have agreed to support HEXOs management and board of directors.
The Share Purchase Agreement provides for expense reimbursement provisions in favour of the Redecan shareholders if the Transaction is terminated by either party in certain specified circumstances.
Redecan shareholders will receive the right to nominate up to two members to HEXOs board of directors (within certain parameters) and will be entitled to other customary governance rights, including limited demand and piggyback registration rights, pursuant to an investor rights agreement (the Investor Rights Agreement). Following closing of the Transaction, HEXOs board of directors will be increased to 10 members, with Peter James Montour and William Montour, two of Redecans founding shareholders, joining the HEXO board as directors. The Redecan shareholders will also be bound by customary non-competition and non-solicitation covenants in favour of HEXO and Redecan following the closing of the Transaction.
- 2 -
The Transaction is expected to close in calendar Q3 2021, subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals, including the approvals of the TSX and the New York Stock Exchange, and the shareholder approval described above required under TSX rules.
The Transaction was unanimously approved by HEXOs board of directors.
Further information regarding the Transaction will be included in the information circular that HEXO will prepare, file, and mail in due course to its shareholders in connection with the meeting of shareholders to be held to consider the issuance of the Consideration Shares under the Transaction as required by TSX rules. The Share Purchase Agreement and Investor Rights Agreement will be filed under the SEDAR profile of HEXO on the SEDAR website at www.sedar.com.
On July 14, 2021, the Company announced and made publicly available certain previously unavailable historical audited annual and interim unaudited financial statements of Redecan as well as certain pro forma financial statements in connection with the Transaction. These financial statements were not available at the time the original Material Change Report dated June 4, 2021 was filed and only became available before the issuance of the Companys press release on July 14, 2021.
The following financial statements set out in the schedules hereto form an integral part of this Amended and Restated Material Change Report:
Schedule B: | Audited Consolidated Financial Statements of 2579951 Canada Inc. for the financial year ended December 31, 2020 (prepared in accordance with Canadian accounting standards for private enterprises (ASPE) | |||
Schedule C: | Unaudited Interim Consolidated Financial Statements of 2579951 Canada Inc. for the three months ended March 31, 2021 (prepared in accordance with ASPE) | |||
Schedule D: | Unaudited pro forma condensed consolidated financial statements of HEXO that give effect to the acquisition of Redecan as at April 30, 2021 and for the nine months ended April 30, 2021 and for the year ended July 31, 2020 |
6. |
Reliance on Section 7.1(2) of National Instrument 51-102 |
Not Applicable.
7. |
Omitted Information |
Not Applicable.
- 3 -
8. |
Executive Officer |
The name and business number of the executive officer of the Company who is knowledgeable about the material change and this report is:
Sébastien St-Louis, President and Chief Executive Officer
1-866-438-8429
invest@HEXO.com
9. |
Date of Report |
July 14, 2021
- 4 -
SCHEDULE A
(See attached)
HEXO provides update on Redecan acquisition
July 14, 2021 06:31 ET | Source: HEXO Corp.
OTTAWA, July 14, 2021 (GLOBE NEWSWIRE) HEXO Corp (HEXO or the Company) (TSX: HEXO; NYSE: HEXO) is pleased to announce, that in connection with its previously announced acquisition of the entities operating the business of Redecan, it has now obtained and will be shortly filing the recently completed audited consolidated financial statements of Redecan for the financial year ended December 31, 2020 (FY20) and the unaudited interim financial statements for the first quarter ended March 31, 2021 (1Q21) prepared in accordance with Accounting standards for private enterprises (ASPE). The Company previously announced a definitive share purchase agreement to acquire Redecan, Canadas largest privately-owned licensed producer.
Redecan has the top consumer loyalty in Canada, impressive market share and leading products in key categories. Today, we are excited to finally share additional financial information with HEXO shareholders, said HEXO CEO and co-founder Sebastien St-Louis. Redecans historical financial statements demonstrate exactly what we already knew: Redecan is one of the fastest growth LPs in Canada with positive income from operations, impressive margins, lean operational efficiency and strong revenue. Once closed, the acquisition will further strengthen our position as a leader in the Canadian cannabis industry, bolster the Company as we look towards becoming a top three global cannabis products company and put us firmly on the path towards positive EPS.
Key Financial Highlights (as per ASPE unless otherwise stated):
|
Revenue, net of excise duties of $73.6M for F20 and $24.7 million in Q1 F21, representing an increase of 146% over Q1 F20 |
|
Unadjusted EBITDA of $28.9M for F20 and $12.4M for Q1 F21, per the following reconciliation: |
Q1 F21 | F20 | |||||||
Net Earnings |
6,913,624 | 11,624,161 | ||||||
Add back: |
||||||||
Amortization |
4,216,528 | 12,174,795 | ||||||
Impairment loss on property, plant and equipment |
37,235 | 588,593 | ||||||
Provision for income taxes |
1,230,000 | 4,499,595 | ||||||
Unadjusted EBITDA |
12,397,387 | 28,887,144 |
|
Income from operations of $8.3M and net earnings of $6.9M in Q1 F21. |
|
Income from operations of $16.7M and net earnings of $11.6 million in F20. |
|
Gross margins (gross margin divided by revenue, net of excise duties) of 51% in F20 and 58% in Q1 F21. |
|
Selling, general and administrative costs, (defined as General and administrative, plus marketing and promotion, plus research and development) as a % of sales of 27% in F20 and 23% in Q1 F21. |
|
Depreciable capital base, consisting of property, plant and equipment, was $84.1M at December 31, 2020, the lowest of any of the top 6 licensed producers in Canada. |
Proforma Highlights for the Nine Months ended April 30, 2021 for HEXO Corp and the Nine Months ended March 31, 2021 for Redecan, adjusted to International Financial Reporting Standards (IFRS)*:
|
Net revenue of $155.6M. |
|
Gross margin before fair value adjustments of $69.1M, or 44.4%. |
|
Income from operations of $38.6M. |
The Redecan acquisition is expected to close in calendar Q3 2021, subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals and the shareholder approval described above required under TSX rules.
Redecans historical financial statements for the financial year ended December 31, 2020 and for the first quarter ended March 31, 2021 as well as certain pro forma financial statements giving effect to the acquisition of Redecan by HEXO have been filed or furnished, as applicable, as schedules to an amended and restated material change report dated July 14, 2021 available under the Companys profile on SEDAR at www.sedar.com and EDGAR at www.sec.gov respectively.
About HEXO
HEXO is an award-winning licensed producer of innovative products for the global cannabis market. HEXO serves the Canadian recreational market with a brand portfolio including HEXO, UP Cannabis, Original Stash, Bake Sale, Namaste, and REUP brands, and the medical market in Canada, Israel and Malta. The Company also serves the Colorado market through its Powered by HEXO® strategy and Truss CBD USA, a joint-venture with Molson Coors. In the event that the previously announced transactions to acquire 48North and Redecan close, HEXO expects to be the number one cannabis products company in Canada by recreational market share.
For more information, please visit www.hexocorp.com.
* |
The Companys unaudited pro forma condensed consolidated statement of financial position as of April 30, 2021 and the unaudited pro forma condensed consolidated statements of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 have been prepared by management of HEXO for the purpose of presenting the impact of the Acquisition, as described therein. Although the Acquisition had not closed as of the date of the pro forma financial statements, the unaudited pro forma condensed consolidated statement of financial position includes the effect of the Acquisition as if it had occurred on April 30, 2021. The unaudited pro forma condensed consolidated statement of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 give effect to the Acquisition as if it had occurred on August 1, 2019. |
The unaudited pro forma condensed consolidated financial statements, including the notes thereto, should be read in conjunction with HEXOs historical financial statements, and respective Managements Discussion and Analysis of financial condition and results of operations as filed with or furnished to, as applicable, the Canadian and U.S. securities regulatory authorities and Redecans historical financial statements. The unaudited pro forma condensed consolidated financial statements are based on
assumptions and adjustments that are described in the notes to such pro forma financial statements The unaudited pro forma condensed consolidated financial statements do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the Acquisition. The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized if HEXO and the acquired company (being the Redecan Group) had been a consolidated company during the specified periods. The application of the acquisition method of accounting depends on certain valuations and other studies that have yet to be completed. Accordingly, the pro forma adjustments are preliminary, subject to further revisions as additional information becomes available and additional analyses are performed and have been made solely for the purposes of providing unaudited pro forma condensed consolidated financial statements. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed consolidated financial statements and the consolidated companys future earnings and financial position. Further, differences between the preliminary and final amounts will likely occur as a result of changes in the fair value of HEXOs common shares to determine the actual purchase consideration for the Acquisition, as well as the actual amount of cash used in Redecans operations, and other changes in assets and liabilities.
Non-IFRS/Non-ASPE Measures
In this press release, reference is made to unadjusted EBITDA, which is not a measure of financial performance under International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). This metric and measure is not a recognized measure under IFRS or ASPE, does not have meanings prescribed under IFRS or ASPE and is as a result unlikely to be comparable to similar measures presented by other companies. This measure is provided as information complementary to those IFRS and ASPE measures by providing a further understanding of HEXO and Redecans operating results from the perspective of management. As such, this measure should not be considered in isolation or in lieu of a review of HEXO and Redecans financial information reported under IFRS or ASPE respectively.
Forward Looking Statements
This press release contains forward-looking information and forward-looking statements within the meaning of applicable securities laws (forward-looking statements). Forward-looking statements are based on certain expectations and assumptions and are subject to known and unknown risks and uncertainties and other factors that could cause actual events, results, performance and achievements to differ materially from those anticipated in these forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.
Investor Relations:
invest@HEXO.com
www.hexocorp.com
Media Relations:
(819) 317-0526
media@hexo.com
SCHEDULE B
(See attached)
2579951 Ontario Inc.
Consolidated Financial Statements
December 31, 2020
2579951 Ontario Inc.
Contents
For the year ended December 31, 2020
Page | ||||
Consolidated Financial Statements |
||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 |
To the Shareholders of 2579951 Ontario Inc.:
Opinions
We have audited the consolidated financial statements of 2579951 Ontario Inc. and its subsidiaries (the Company), which comprise the consolidated balance sheet as at December 31, 2020, and the consolidated statements of earnings (loss), retained earnings (deficit) and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
Unmodified Opinion on the Consolidated Financial Position
In our opinion, the accompanying consolidated balance sheet presents fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020, in accordance with Canadian accounting standards for private enterprises.
Qualified Opinion on the Consolidated Results of Operations and Cash Flows
In our opinion, except for the possible effects of the matter described in the Basis for Opinions, Including Basis for Qualified Opinion on the Results of Consolidated Operations and Cash Flows section or our report, the accompanying consolidated statement of earnings (loss), retained earnings (deficit) and cash flows present fairly, in all material respects, the consolidated results of operations and cash flows of the Company for the year ended December 31, 2020 in accordance with Canadian accounting standards for private enterprises.
Basis for Opinions, Including Basis for Qualified Opinion on the Results of Consolidated Operations and Cash Flows
We were appointed as auditors of the Company after December 31, 2020 and, therefore, did not observe the counting of physical inventories at January 1, 2020 and were unable to satisfy ourselves concerning those inventory quantities by alternative means. Since opening inventories enter into the determination of the results of operations and cash flows, we were unable to determine whether any adjustments might have been required in the consolidated statement of earnings (loss) and the cash flows from operating activities reported in the cash flow statement. Our audit opinion on the consolidated results of operations and cash flows for the year ended December 31, 2020 is modified because of the possible effects of this scope limitation.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our unmodified opinion on the consolidated financial position and our qualified opinion on the consolidated results of operations and cash flows.
Other Matter - Comparative Information
The comparative information for the year ended December 31, 2019 is unaudited and accordingly we do not express an audit opinion on the comparative figures.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Canadian accounting standards for private enterprises, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Companys ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Companys financial reporting process.
Auditors Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
|
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. |
|
Obtain an understanding of internal control relevant to the audit 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 Companys internal control. |
|
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. |
|
Conclude on the appropriateness of managements use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Companys ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Company to cease to continue as a going concern. |
|
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. |
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
|
||
Burlington, Ontario | Chartered Professional Accountants | |
July 13, 2021 | Licensed Public Accountants | |
2579951 Ontario Inc.
As at December 31, 2020
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current |
||||||||
Cash |
7,806,974 | 3,110,116 | ||||||
Trade receivables |
14,666,289 | 5,335,688 | ||||||
Government remittances receivable |
2,200,906 | 7,948,282 | ||||||
Inventory (Note 3) |
26,792,382 | 16,454,944 | ||||||
Prepaid expenses and deposits |
3,213,503 | 1,296,368 | ||||||
Receivable from shareholders (Note 4) |
117,906 | | ||||||
54,797,960 | 34,145,398 | |||||||
Property, plant and equipment (Note 5) |
84,136,530 | 65,322,854 | ||||||
Deposits (Note 5) |
4,923,006 | | ||||||
143,857,496 | 99,468,252 | |||||||
Liabilities |
||||||||
Current |
||||||||
Trade and other payables |
9,407,837 | 9,815,603 | ||||||
Government remittances payable |
3,030,819 | 876,569 | ||||||
Income taxes payable |
4,374,595 | 104,199 | ||||||
Advances from related parties (Note 6) |
116,215,958 | 89,467,755 | ||||||
133,029,209 | 100,264,126 | |||||||
Shareholders Equity (Deficit) |
||||||||
Share capital (Note 7) |
48 | 48 | ||||||
Retained earnings (deficit) |
10,828,239 | (795,922 | ) | |||||
10,828,287 | (795,874 | ) | ||||||
143,857,496 | 99,468,252 | |||||||
Approved on behalf of the Board |
|
|||||||
Director |
The accompanying notes are an integral part of these consolidated financial statements
1
2579951 Ontario Inc.
Consolidated Statement of Earnings (Loss)
For the year ended December 31, 2020
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Revenue |
||||||||
Revenue before returns and allowances |
107,295,969 | 17,337,454 | ||||||
Returns and allowances |
(5,209,031 | ) | (152,289 | ) | ||||
Revenue before excise duties (Note 8) |
102,086,938 | 17,185,165 | ||||||
Excise duties |
(28,437,696 | ) | (3,964,572 | ) | ||||
Revenue, net of excise duties |
73,649,242 | 13,220,593 | ||||||
Cost of sales (Note 3) |
35,811,886 | 6,028,301 | ||||||
Gross margin |
37,837,356 | 7,192,292 | ||||||
Selling, general and administrative expenses |
||||||||
Advertising and promotion |
997,041 | 318,939 | ||||||
Amortization |
1,303,945 | 1,021,593 | ||||||
Business taxes and licences |
2,148,637 | 486,074 | ||||||
Consulting fees |
1,316,135 | | ||||||
Donations |
| 2,339 | ||||||
Freight and logistics |
1,850,686 | 284,236 | ||||||
Insurance |
811,492 | 514,115 | ||||||
Interest and bank charges |
147,755 | 88,711 | ||||||
Meals and entertainment |
119,068 | 99,819 | ||||||
Office and general |
1,903,554 | 488,603 | ||||||
Professional fees |
260,936 | 173,557 | ||||||
Property taxes |
101,340 | 64,185 | ||||||
Rental |
151,873 | 191,450 | ||||||
Repairs and maintenance |
1,122,879 | 270,627 | ||||||
Salaries, wages and benefits |
6,188,585 | 2,420,380 | ||||||
Supplies |
2,737,949 | 726,733 | ||||||
21,161,875 | 7,151,361 | |||||||
Income from operations |
16,675,481 | 40,931 | ||||||
Other income (loss) |
||||||||
Foreign exchange gain |
36,868 | 44,127 | ||||||
Impairment loss on property, plant and equipment (Note 5) |
(588,593 | ) | | |||||
(551,725 | ) | 44,127 | ||||||
Earnings before income tax |
16,123,756 | 85,058 | ||||||
Provision for income taxes (Note 9) |
4,499,595 | 123,299 | ||||||
Net earnings (loss) |
11,624,161 | (38,241 | ) |
The accompanying notes are an integral part of these consolidated financial statements
2
2579951 Ontario Inc.
Consolidated Statement of Retained Earnings (Deficit)
For the year ended December 31, 2020
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Deficit, beginning of year |
(795,922 | ) | (757,681 | ) | ||||
Net earnings (loss) |
11,624,161 | (38,241 | ) | |||||
Retained earnings (deficit), end of year |
10,828,239 | (795,922 | ) |
The accompanying notes are an integral part of these consolidated financial statements
3
2579951 Ontario Inc.
Consolidated Statement of Cash Flows
For the year ended December 31, 2020
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Cash provided by (used for) the following activities |
||||||||
Operating activities |
||||||||
Net earnings (loss) |
11,624,161 | (38,241 | ) | |||||
Amortization |
12,174,795 | 4,932,847 | ||||||
Impairment loss on property, plant and equipment |
588,593 | | ||||||
24,387,549 | 4,894,606 | |||||||
Changes in working capital accounts |
||||||||
Trade receivables |
(9,330,601 | ) | (1,772,667 | ) | ||||
Government remittances receivable |
5,747,376 | (3,900,635 | ) | |||||
Inventory |
(10,337,438 | ) | (11,624,220 | ) | ||||
Prepaid expenses and deposits |
(1,917,135 | ) | (478,835 | ) | ||||
Income taxes payable |
4,270,396 | (582,372 | ) | |||||
Trade and other payables |
(407,765 | ) | 5,392,385 | |||||
Government remittances payable |
2,154,250 | 221,408 | ||||||
14,566,632 | (7,850,330 | ) | ||||||
Financing activity |
||||||||
Advances from related parties |
26,748,203 | 40,452,298 | ||||||
Investing activities |
||||||||
Purchases of property, plant and equipment |
(31,577,065 | ) | (33,668,113 | ) | ||||
Advances to shareholders |
(117,906 | ) | | |||||
Deposits |
(4,923,006 | ) | | |||||
Increase (decrease) in cash |
4,696,858 | (1,066,145 | ) | |||||
Cash, beginning of year |
3,110,116 | 4,176,261 | ||||||
Cash, end of year |
7,806,974 | 3,110,116 |
The accompanying notes are an integral part of these consolidated financial statements
4
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
1. |
Incorporation and operations |
2579951 Ontario Inc. was incorporated under the Ontario Business Corporations Act on May 30, 2017. 2579951 Ontario Inc., through its wholly owned subsidiaries 9037136 Canada Inc. (o/a Redecan Pharm) and 2526356 Ontario Inc. (collectively referred to as the Company), operate as a licensed cultivator, processor and seller of medical and recreational cannabis in Canada under the Cannabis Act.
2. |
Significant accounting policies |
The consolidated financial statements have been prepared in accordance with Canadian accounting standards for private enterprises ASPE set out in Part II of the CPA Canada Handbook - Accounting, as issued by the Accounting Standards Board in Canada and include the following significant accounting policies:
Basis of consolidation
The Company consolidates all subsidiaries. As such, assets, liabilities, revenues and expenses of all subsidiaries have been consolidated and all inter company transactions and balances have been eliminated.
Inventory
Inventory includes biological assets (growing cannabis plants), agriculture inventories (harvested cannabis) and related supplies and packaging materials. All inventory is valued at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs.
Property, plant and equipment
Property, plant and equipment are initially recorded at cost. Amortization is provided using the declining balance method at rates intended to amortize the cost of assets over their estimated useful lives.
Method | Rate | |||||||
Land and land improvements |
Not amortized | |||||||
Buildings |
declining balance | 10 | % | |||||
Automotive |
declining balance | 30 | % | |||||
Computer equipment |
declining balance | 67 | % | |||||
Computer software |
declining balance | 100 | % | |||||
Equipment |
declining balance | 30 | % | |||||
Fences |
declining balance | 10 | % | |||||
Furniture and fixtures |
declining balance | 20 | % | |||||
Office equipment |
declining balance | 20 | % | |||||
Machinery and equipment |
declining balance | 30 | % |
Property, plant and equipment acquired during the year but not placed into use during this time are not amortized in the year of acquisition.
Revenue recognition
Revenue from the sale of cannabis to customers is recognized when the Company transfers the control of the goods to the customer, which occurs upon delivery and acceptance by the customer. The Company recognizes revenue for the amount of consideration the Company expects to receive, taking into account the impact from any rights of return on sales, price concessions or similar obligations.
Income taxes
The Company accounts for income taxes using the taxes payable method. Under this method, a provision is only made for taxes payable or recoverable in the current year. Income taxes payable/recoverable are measured using the income tax rates and laws established by taxation authorities and in effect at the balance sheet date.
5
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
2. |
Significant accounting policies (Continued from previous page) |
Leases
A lease that transfers substantially all of the benefits and risks of ownership is classified as a capital lease. At the inception of a capital lease, an asset and a payment obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the propertys fair market value. Assets under capital leases are amortized using the declining balance method, over their estimated useful lives. All other leases are accounted for as operating leases and rental payments are expensed as incurred.
An arrangement contains a lease where the arrangement conveys a right to use the underlying tangible asset, and whereby its fulfillment is dependent on the use of the specific tangible asset. After the inception of the arrangement, a reassessment of whether the arrangement contains a lease is made only in the event that:
- |
there is a change in contractual terms; |
- |
a renewal option is exercised or an extension is agreed upon by the parties to the arrangement; |
- |
there is a change in the determination of whether the fulfillment of the arrangement is dependent on the use of the specific tangible asset; or |
- |
there is a substantial physical change to the specified tangible asset. |
Foreign currency translation
These consolidated financial statements have been presented in Canadian dollars, the principal currency of the Companys operations.
Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at the balance sheet date. Gains and losses on translation or settlement are included in the determination of net earnings (loss) for the current year.
Long-lived assets and discontinued operations
Long-lived assets consist of property, plant and equipment. Long-lived assets held for use are measured and amortized as described in the applicable accounting policies.
The Company performs impairment testing on long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted future cash flows from its use and disposal. If the carrying amount is not recoverable, impairment is then measured as the amount by which the assets carrying amount exceeds its fair value. Fair value is measured using discounted future cash flows. Any impairment is included in net earnings (loss) for the year.
Use of estimates
The preparation of consolidated financial statements in conformity with Canadian accounting standards for private enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the year.
Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. Provisions are made for slow moving and obsolete inventory, and for potential returns, allowance and price concessions on product sold. Amortization is based on the estimated useful lives of property, plant and equipment.
By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements from changes in such estimates in future years could be material. These estimates and assumptions are reviewed periodically and, as adjustments become necessary they are reported in earnings in the years in which they become known.
6
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
2. |
Significant accounting policies (Continued from previous page) |
Financial instruments
The Company recognizes its financial instruments when the Company becomes party to the contractual provisions of the financial instrument. All financial instruments are initially recorded at their fair value, including financial assets and liabilities originated and issued in a related party transaction with management. Financial assets and liabilities originated and issued in all other related party transactions are initially measured at their carrying or exchange amount in accordance with Section 3840 Related Party Transactions.
At initial recognition, the Company may irrevocably elect to subsequently measure any financial instrument at fair value. The Company has not made such an election during the year.
Transaction costs and financing fees directly attributable to the origination, acquisition, issuance or assumption of financial instruments subsequently measured at fair value are immediately recognized in net earnings (loss). Conversely, transaction costs and financing fees are added to the carrying amount for those financial instruments subsequently measured at cost or amortized cost.
3. |
Inventory |
2020 | 2019 | |||||||
Packaging materials |
4,571,980 | 4,586,233 | ||||||
Cannabis plants |
1,833,898 | 1,830,474 | ||||||
Bulk cannabis flower |
12,489,460 | 5,385,895 | ||||||
Bulk cannabis extracts |
3,218,154 | 3,383,898 | ||||||
Finished goods |
4,678,890 | 1,268,444 | ||||||
26,792,382 | 16,454,944 |
The cost of inventories recognized as an expense and included in cost of sales amounted to $35,811,886 (2019 $6,028,301), including $661,624 (2019 - $nil) relating to packaging materials which were written off as obsolete during the year. Included in cost of sales is amortization of production equipment of $10,042,552 (2019 - $3,911,254).
4. |
Receivable from shareholder |
The balance due from the shareholder is unsecured, non-interest bearing and due on demand.
7
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
5. |
Property, plant and equipment |
2020 | 2019 | |||||||||||||||
Accumulated | Net book | Net book | ||||||||||||||
Cost | amortization | value | value | |||||||||||||
Land and land improvements |
5,337,750 | | 5,337,750 | 2,984,120 | ||||||||||||
Buildings |
59,647,615 | 7,541,462 | 52,106,153 | 46,173,589 | ||||||||||||
Automotive |
215,204 | 87,368 | 127,836 | 109,017 | ||||||||||||
Computer equipment |
1,766,038 | 1,340,614 | 425,424 | 560,231 | ||||||||||||
Computer software |
4,069,098 | 3,590,025 | 479,073 | 1,424,915 | ||||||||||||
Equipment |
33,040,257 | 7,850,969 | 25,189,288 | 13,599,584 | ||||||||||||
Fences |
21,187 | 10,875 | 10,312 | 11,410 | ||||||||||||
Furniture and fixtures |
316,282 | 68,881 | 247,401 | 261,242 | ||||||||||||
Office equipment |
151,511 | 37,095 | 114,416 | 70,300 | ||||||||||||
Machinery and equipment |
253,235 | 154,358 | 98,877 | 128,446 | ||||||||||||
104,818,177 | 20,681,647 | 84,136,530 | 65,322,854 |
Deposits included in the consolidated balance sheet represent deposits placed for certain property, plant and equipment to be used in the Companys production operations, which has not been delivered as of December 31, 2020. Additional commitments relating to these items is disclosed in Note 10.
During the year the Company recorded an impairment loss on property, plant and equipment relating to certain construction costs which had been capitalized, but for which management determined the construction was not expected to be completed.
6. |
Advances from related parties |
2020 | 2019 | |||||||
2516576 Ontario Inc. (controlling shareholder) |
115,847,648 | 89,132,156 | ||||||
Minority shareholders |
1,060 | 75,779 | ||||||
Member of immediate family of minority shareholders |
367,250 | 259,820 | ||||||
116,215,958 | 89,467,755 |
Amounts owing to the above related parties are unsecured, non-interest bearing and due on demand.
7. |
Share capital |
Authorized
Unlimited number of common shares | 2020 | 2019 | ||||||
Issued |
||||||||
100 Common shares |
48 | 48 |
8
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
8. |
Revenue |
The Company earns revenues from sales to medical patients (medical) and through provincial distributors for the recreational market (recreational). The gross revenue recognized by major category is as follows:
2020 | 2019 | |||||||
Revenue |
||||||||
Medical |
5,499,766 | 2,204,971 | ||||||
Recreational |
101,796,203 | 15,132,483 | ||||||
Returns and allowances |
(5,209,031 | ) | (152,289 | ) | ||||
Revenue before excise taxes |
102,086,938 | 17,185,165 |
9. |
Income taxes |
The reconciliation of the Companys effective income tax expense is as follows:
2020 | 2019 | |||||||
Expected tax expense |
4,272,795 | (10,134 | ) | |||||
Increase (decrease) in income tax expense resulting from: |
||||||||
Impact of difference between amortization for accounting purposes and CCA taken in the period |
(1,077,586 | ) | (1,050,024 | ) | ||||
Intercompany charges capitalized for tax purposes |
4,163,664 | (1,734,670 | ) | |||||
Ontario minimum tax |
214,109 | | ||||||
Non-deductible expenses |
19,485 | 13,089 | ||||||
Impact of tax loss carried forward against period taxable income |
(3,092,872 | ) | 2,905,038 | |||||
Actual tax expense |
4,499,595 | 123,299 |
10. |
Commitments |
The Company has entered into various operating lease agreements with estimated minimum annual payments as follows:
2021 |
214,243 | |||
2022 |
210,000 | |||
2023 |
210,000 | |||
2024 |
210,000 | |||
2025 |
210,000 | |||
Thereafter, to 2029 |
390,000 | |||
1,444,243 |
During the year, the Company signed various agreement to purchase items of manufacturing equipment. As at December 31, 2020, outstanding commitments for manufacturing equipment were $16,349,578.
11. |
Financial instruments |
The Company, as part of its operations, carries a number of financial instruments. It is managements opinion that the Company is not exposed to significant interest, currency, credit, liquidity or other price risks arising from these financial instruments except as otherwise disclosed.
9
2579951 Ontario Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2020
(Figures as at December 31, 2019 and for the year then ended are unaudited)
Credit concentration
As at December 31, 2020, 3 customers (2019 3) accounted for 95% (2019 89%) of consolidated revenues before excise duties and 3 customers (2019 3) accounted for 97% (2019 99%) of the consolidated accounts receivable. The Company believes that there is no unusual exposure associated with the collection of these receivables as the customers are government agencies that distribute cannabis in their respective provinces.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Companys objective is to have sufficient liquidity to meet its liabilities from due. The Company monitors cash balances and cash flows generated from operations to meet its requirements. The Company is exposed to liquidity risk relating to its trade and other payables and advances from related parties which are due on demand.
12. |
Subsequent events |
On May 28, 2021, HEXO Corp. announced that it has entered into a definitive share purchase agreement to acquire all the outstanding shares of the Company for a purchase price of $925 million payable in cash and through the issuance of common shares of HEXO Corp. (the Transaction). The Transaction is subject to certain customary adjustments, closing conditions, applicable regulatory approvals, and HEXO Corp. shareholder approval. The close date of the Transaction is not determinable as of the date of these financial statements. As part of the Transaction and related customary adjustments, the parties have agreed that the balance owing to the controlling shareholder 2516576 Ontario Inc., as disclosed in Note 6, will be settled in full on close of the Transaction. Accordingly, the balance owing to 2516576 Ontario Inc. has been classified as a current liability in advances from related parties in the consolidated balance sheet.
On May 14, 2021, 2579951 Ontario Inc. was amalgamated with its parent company, 2516576 Ontario Inc., to form 5048963 Ontario Inc. (the Company).
13. |
ASPE to International Financial Reporting Standards Reconciliation |
As discussed in Note 12, the Company entered into a definitive share purchase agreement on May 28, 2021 to sell all of the outstanding shares of the Company to HEXO Corp. The Company has presented an ASPE to International Financial Reporting Standards (IFRS) reconciliation for the statement of earnings (loss), balance sheet and a description of the impact of each adjustment for each period presented. The tables below quantify the significant differences on the Companys net earnings and financial position between ASPE and IFRS as at and for the years ended December 31, 2020 and 2019 with descriptions thereto of such differences.
Notes | 2020 | 2019 | ||||||||||
Net income (loss) after tax under ASPE |
11,624,161 | (38,241 | ) | |||||||||
IFRS Adjustments |
||||||||||||
Variable consideration adjustment to gross revenue |
(i) | (249,883 | ) | (112,725 | ) | |||||||
Realized fair value amounts on inventory sold |
(ii) | (81,213,167 | ) | (6,013,788 | ) | |||||||
Unrealized gain on biological asset transformation |
(ii) | 122,236,824 | 18,933,426 | |||||||||
Reversal of cost of sales |
(iii) | 100,000 | 75,000 | |||||||||
Depreciation on right-of-use assets |
(iii) | (249,293 | ) | (198,245 | ) | |||||||
Interest expense on lease liability |
(iii) | (147,696 | ) | (146,046 | ) | |||||||
Reversal of rent expense |
(iii) | 149,388 | 189,554 | |||||||||
Deferred income tax expense |
(iv) | (10,619,186 | ) | (3,956,264 | ) | |||||||
Net and comprehensive income under IFRS |
41,631,148 | 8,732,671 |
10
13. |
ASPE to International Financial Reporting Standards Reconciliation (Continued from previous page) |
Notes |
As reported
under ASPE |
Adjustments |
As reported
under IFRS |
|||||||||||||
As at December 31, 2020 |
||||||||||||||||
Inventory |
(ii) | 26,792,382 | 49,309,456 | 76,101,838 | ||||||||||||
Biological assets |
(ii) | | 9,098,703 | 9,098,703 | ||||||||||||
Right-of-use asset, net |
(iii) | | 1,737,168 | 1,737,168 | ||||||||||||
Trade and other payables |
(iii) | 9,407,837 | (120,000 | ) | 9,287,837 | |||||||||||
Current lease liability |
(iii) | | 238,650 | 238,650 | ||||||||||||
Non-current lease liability |
(iii) | | 2,001,156 | 2,001,156 | ||||||||||||
Provisions |
(i), (iii) | | 405,071 | 405,071 | ||||||||||||
Deferred tax liability |
(iv) | | 14,575,450 | 14,575,450 | ||||||||||||
Retained earnings |
(i), (ii), (iii), (iv) | 10,828,239 | 43,045,000 | 53,873,239 | ||||||||||||
As at December 31, 2019 |
||||||||||||||||
Inventory |
(ii) | 16,454,944 | 11,714,981 | 28,169,925 | ||||||||||||
Biological assets |
(ii) | | 5,669,521 | 5,669,521 | ||||||||||||
Right-of-use asset, net |
(iii) | | 1,986,461 | 1,986,461 | ||||||||||||
Trade and other payables |
(iii) | 9,815,603 | (60,000 | ) | 9,755,603 | |||||||||||
Current lease liability |
(iii) | | 249,387 | 249,387 | ||||||||||||
Non-current lease liability |
(iii) | | 2,032,112 | 2,032,112 | ||||||||||||
Provision |
(i), (iii) | | 155,188 | 155,188 | ||||||||||||
Deferred tax liability |
(iv) | | 3,956,264 | 3,956,264 | ||||||||||||
Retained earnings |
(i), (ii), (iii), (iv) | (795,922 | ) | 13,038,012 | 12,242,090 |
(i) Under IFRS, an adjustment is required to record the constraint on variable consideration resulting from the markdown / price reductions arrangements with customers.
(ii) Under IFRS, an adjustment is required to record biological assets at fair value less cost to sell. Further, biological assets are transferred to inventory at fair value less cost to sell. An adjustment is made to recognize inventory at cost which is the fair value less cost of sell at the point where it transferred from biological assets. The following represent the key assumptions used in the determination of the fair value of the biological assets:
Weighted average selling price (per gram) - $3.18 (2019 - $3.31)
Yield per plant (dried bud and trim) - 1,144 grams (2019 - 968 grams)
Stage of growth - 43% (2019 - 53%)
Attrition rate - 1% (2019 - 1%)
(iii) Under IFRS, an adjustment is required to record right-of-use assets and lease liabilities for items leased. After initial recognition, IFRS requires the discounted lease liability to be accreted to the full liability amount and associated interest expense is recognized. In preparing the estimate for the value of the lease liability, management has determined a range of incremental borrowing rates attributable to underlying leases to be 2.28% - 6.84%. Depreciation expense is recognized on the right-of use assets over the lease term or the non-cancellable lease term ranging from 2 - 21 years. Additionally, an adjustment for lease restitution costs is also required to be recognized under IFRS as a provision.
(iv) Under ASPE, the Company uses the taxes payable method of accounting for income taxes. Under IFRS, the Company is required to recognize both current and deferred taxes. Deferred tax has been recognized on any temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.
SCHEDULE C
(See attached)
2579951 Ontario Inc.
Interim Consolidated Financial Statements
March 31, 2021
(Unaudited)
- 1 -
2579951 Ontario Inc.
Contents
For the 3 month periods ended March 31, 2021 and 2020
(Unaudited)
Page | ||||
Interim Consolidated Financial Statements |
||||
Interim Consolidated Balance Sheets |
1 | |||
Interim Consolidated Statements of Earnings (Loss) |
2 | |||
Interim Consolidated Statements of Retained Earnings (Deficit) |
3 | |||
Interim Consolidated Statements of Cash Flows |
4 | |||
Notes to the Interim Consolidated Financial Statements |
5 |
2579951 Ontario Inc.
Interim Consolidated Balance Sheets
As at
(Unaudited)
March 31
2021 |
December 31
2020 |
|||||||
(audited) | ||||||||
Assets |
||||||||
Current |
||||||||
Cash |
2,811,611 | 7,806,974 | ||||||
Trade receivables |
14,708,430 | 14,666,289 | ||||||
Government remittances receivable |
1,533,359 | 2,200,906 | ||||||
Inventory (Note 3) |
31,306,782 | 26,792,382 | ||||||
Prepaid expenses and deposits |
5,655,733 | 3,213,503 | ||||||
Receivable from shareholders (Note 4) |
117,937 | 117,906 | ||||||
56,133,852 | 54,797,960 | |||||||
Property, plant and equipment (Note 5) |
85,481,713 | 84,136,530 | ||||||
Deposits (Note 5) |
4,795,656 | 4,923,006 | ||||||
146,411,221 | 143,857,496 | |||||||
Liabilities |
||||||||
Current |
||||||||
Trade and other payables |
6,172,256 | 9,407,837 | ||||||
Government remittances payable |
2,657,052 | 3,030,819 | ||||||
Income taxes payable |
3,604,994 | 4,374,595 | ||||||
Advances from related parties (Note 6) |
116,235,008 | 116,215,958 | ||||||
128,669,310 | 133,029,209 | |||||||
Share capital (Note 7) |
48 | 48 | ||||||
Retained earnings |
17,741,863 | 10,828,239 | ||||||
17,741,911 | 10,828,287 | |||||||
146,411,221 | 143,857,496 | |||||||
Approved on behalf of the Board |
|
|||||||
Director |
The accompanying notes are an integral part of these financial statements
1
2579951 Ontario Inc.
Interim Consolidated Statements of Earnings (Loss)
For the periods ended March 31, 2021 and March 31, 2020
(Unaudited)
3 Months
Ended |
3 Months
Ended |
|||||||
March 31 | March 31 | |||||||
2021 | 2020 | |||||||
Revenue |
||||||||
Revenue before returns and allowances |
35,038,368 | 13,051,200 | ||||||
Returns and allowances |
(1,121,304 | ) | (56,925 | ) | ||||
Revenue before excise duties (Note 8) |
33,917,064 | 12,994,275 | ||||||
Excise duties |
(9,265,410 | ) | (2,980,950 | ) | ||||
Revenue, net of excise duties |
24,651,654 | 10,013,325 | ||||||
Cost of sales (Note 3) |
10,279,719 | 8,228,063 | ||||||
Gross margin |
14,371,935 | 1,785,262 | ||||||
Selling, general and administrative expenses |
||||||||
Advertising and promotion |
727,064 | 12,320 | ||||||
Amortization |
378,648 | 325,322 | ||||||
Business taxes and licences |
673,270 | 278,256 | ||||||
Consulting fees |
142,408 | 487,309 | ||||||
Freight and logistics |
680,598 | 201,113 | ||||||
Insurance |
275,996 | 151,755 | ||||||
Interest and bank charges |
42,951 | 32,276 | ||||||
Meals and entertainment |
25,422 | 31,096 | ||||||
Office and general |
513,326 | 272,213 | ||||||
Professional fees |
15,903 | 32,555 | ||||||
Property taxes |
53,567 | 24,477 | ||||||
Repairs and maintenance |
258,847 | 143,786 | ||||||
Rental |
37,397 | 38,289 | ||||||
Salaries, wages and benefits |
1,403,717 | 883,467 | ||||||
Supplies |
831,534 | 579,187 | ||||||
6,060,648 | 3,493,421 | |||||||
Income (loss) from operations |
8,311,287 | (1,708,159 | ) | |||||
Other income (loss) |
||||||||
Foreign exchange gain (loss) |
(130,428 | ) | 302,253 | |||||
Impairment loss on property, plant and equipment |
(37,235 | ) | | |||||
(167,663 | ) | 302,253 | ||||||
Earnings (loss) before income tax |
8,143,624 | (1,405,906 | ) | |||||
Provision for income taxes (Note 9) |
1,230,000 | 609,666 | ||||||
Net earnings (loss) |
6,913,624 | (2,015,572 | ) |
The accompanying notes are an integral part of these financial statements
2
2579951 Ontario Inc.
Interim Consolidated Statements of Retained Earnings (Deficit)
For the periods ended March 31, 2021 and March 31, 2020
(Unaudited)
3 Months
Ended |
3 Months
Ended |
|||||||
March 31 | March 31 | |||||||
2021 | 2020 | |||||||
Retained earnings (deficit), beginning of period |
10,828,239 | (795,921 | ) | |||||
Net earnings (loss) |
6,913,624 | (2,015,572 | ) | |||||
Retained earnings (deficit), end of period |
17,741,863 | (2,811,493 | ) |
The accompanying notes are an integral part of these financial statements
3
2579951 Ontario Inc.
Interim Consolidated Statements of Cash Flows
For the periods ended March 31, 2021 and March 31, 2020
(Unaudited)
3 Months
Ended |
3 Months
Ended |
|||||||
March 31 | March 31 | |||||||
2021 | 2020 | |||||||
Cash provided by (used for) the following activities |
||||||||
Operating activities |
||||||||
Net earnings (loss) |
6,913,624 | (2,015,572 | ) | |||||
Amortization |
4,261,528 | 2,034,043 | ||||||
Impairment loss on property, plant and equipment |
37,235 | | ||||||
11,212,387 | 18,471 | |||||||
Changes in working capital accounts |
||||||||
Trade receivables |
(42,141 | ) | (5,519,189 | ) | ||||
Government remittances receivable |
667,547 | (189,266 | ) | |||||
Inventory |
(4,514,399 | ) | (740,794 | ) | ||||
Prepaid expenses and deposits |
(2,442,230 | ) | (258,646 | ) | ||||
Trade and other payables |
(3,235,580 | ) | (2,175,960 | ) | ||||
Government remittances payable |
(373,767 | ) | 41,413 | |||||
Income taxes payable |
(769,601 | ) | 109,666 | |||||
502,216 | (8,714,305 | ) | ||||||
Financing activity |
||||||||
Advances from related parties |
19,050 | 11,481,461 | ||||||
Investing activities |
||||||||
Purchases of property, plant and equipment |
(5,643,948 | ) | (5,545,093 | ) | ||||
Advances to shareholders |
(31 | ) | | |||||
Deposits |
127,350 | | ||||||
(5,516,629 | ) | (5,545,093 | ) | |||||
Decrease in cash |
(4,995,363 | ) | (2,777,937 | ) | ||||
Cash, beginning of period |
7,806,974 | 3,110,116 | ||||||
Cash, end of period |
2,811,611 | 332,179 |
The accompanying notes are an integral part of these financial statements
4
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the periods ended March 31, 2021 and 2020
(Unaudited)
1. |
Incorporation and operations |
2579951 Ontario Inc. was incorporated under the Ontario Business Corporations Act on May 30, 2017. 2579951 Ontario Inc., through its wholly owned subsidiaries 9037136 Canada Inc. (o/a Redecan Pharm) and 2526356 Ontario Inc. (collectively referred to as the Company), operate as a licensed cultivator, processor and seller of medical and recreational cannabis in Canada under the Cannabis Act.
2. |
Significant accounting policies |
The interim consolidated financial statements have been prepared in accordance with Canadian accounting standards for private enterprises set out in Part II of the CPA Canada Handbook - Accounting, as issued by the Accounting Standards Board in Canada and include the following significant accounting policies:
Basis of consolidation
The Company consolidates all subsidiaries. As such, assets, liabilities, revenues and expenses of all subsidiaries have been consolidated and all inter company transactions and balances have been eliminated.
Inventory
Inventory includes biological assets (growing cannabis plants), agriculture inventories (harvested cannabis) and related supplies and packaging materials. All inventory is valued at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs.
Property, plant and equipment
Property, plant and equipment are initially recorded at cost. Amortization is provided using the declining balance method at rates intended to amortize the cost of assets over their estimated useful lives.
Method | Rate | |||||||
Land and land improvement |
Not amortized | |||||||
Buildings |
declining balance | 10 | % | |||||
Automotive |
declining balance | 30 | % | |||||
Computer equipment |
declining balance | 67 | % | |||||
Computer software |
declining balance | 100 | % | |||||
Equipment |
declining balance | 30 | % | |||||
Fences |
declining balance | 10 | % | |||||
Furniture and fixtures |
declining balance | 20 | % | |||||
Office equipment |
declining balance | 20 | % | |||||
Machinery and equipment |
declining balance | 30 | % |
Property, plant and equipment acquired during the period but not placed into use during this time are not amortized in the period of acquisition.
Revenue recognition
Revenue from the sale of cannabis to customers is recognized when the Company transfers the control of the goods to the customer, which occurs upon delivery and acceptance by the customer. The Company recognizes revenue for the amount of consideration the Company expects to receive, taking into account the impact from any rights of return on sales, price concessions or similar obligations.
Income taxes
The Company accounts for income taxes using the taxes payable method. Under this method, a provision is only made for taxes payable or recoverable in the current year. Income taxes payable/recoverable are measured using the income tax rates and laws established by taxation authorities and in effect at the balance sheet date.
5
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
2. |
Significant accounting policies (Continued from previous page) |
Leases
A lease that transfers substantially all of the benefits and risks of ownership is classified as a capital lease. At the inception of a capital lease, an asset and a payment obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the propertys fair market value. Assets under capital leases are amortized using the declining balance method, over their estimated useful lives. All other leases are accounted for as operating leases and rental payments are expensed as incurred.
An arrangement contains a lease where the arrangement conveys a right to use the underlying tangible asset, and whereby its fulfillment is dependent on the use of the specific tangible asset. After the inception of the arrangement, a reassessment of whether the arrangement contains a lease is made only in the event that:
- |
there is a change in contractual terms; |
- |
a renewal option is exercised or an extension is agreed upon by the parties to the arrangement; |
- |
there is a change in the determination of whether the fulfillment of the arrangement is dependent on the use of the specific tangible asset; or |
- |
there is a substantial physical change to the specified tangible asset. |
Foreign currency translation
These financial statements have been presented in Canadian dollars, the principal currency of the Companys operations.
Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at the balance sheet date. Gains and losses on translation or settlement are included in the determination of net earnings (loss) for the current period.
Long-lived assets
Long-lived assets consist of property, plant and equipment. Long-lived assets held for use are measured and amortized as described in the applicable accounting policies.
The Company performs impairment testing on long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted future cash flows from its use and disposal. If the carrying amount is not recoverable, impairment is then measured as the amount by which the assets carrying amount exceeds its fair value. Fair value is measured using discounted future cash flows. Any impairment is included in net earnings (loss) for the period.
Use of estimates
The preparation of financial statements in conformity with Canadian accounting standards for private enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period.
Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. Provisions are made for slow moving and obsolete inventory, and for potential returns, allowance and price concessions on product sold. Amortization is based on the estimated useful lives of property, plant and equipment.
By their nature, these estimates are subject to measurement uncertainty, and the effect on the financial statements from changes in such estimates in future periods could be material. These estimates and assumptions are reviewed periodically and, as adjustments become necessary they are reported in earnings in the periods in which they become known.
Financial instruments
The Company recognizes its financial instruments when the Company becomes party to the contractual provisions of the financial instrument. All financial instruments are initially recorded at their fair value, including financial assets and liabilities originated and issued in a related party transaction with management. Financial assets and liabilities originated and issued in all other related party transactions are initially measured at their carrying or exchange amount in accordance with Section 3840 Related Party Transactions.
6
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
2. |
Significant accounting policies (Continued from previous page) |
Financial instruments (Continued from previous page)
At initial recognition, the Company may irrevocably elect to subsequently measure any financial instrument at fair value. The Company has not made such an election during the period.
Transaction costs and financing fees directly attributable to the origination, acquisition, issuance or assumption of financial instruments subsequently measured at fair value are immediately recognized in net earnings (loss). Conversely, transaction costs and financing fees are added to the carrying amount for those financial instruments subsequently measured at cost or amortized cost.
3. |
Inventory |
March 31
2021 |
December 31
2020 |
|||||||
Packaging materials |
9,552,491 | 4,571,980 | ||||||
Cannabis plants |
1,812,457 | 1,833,898 | ||||||
Bulk cannabis flower |
10,214,097 | 12,489,460 | ||||||
Bulk cannabis extracts |
4,964,932 | 3,218,154 | ||||||
Finished goods |
4,762,805 | 4,678,890 | ||||||
31,306,782 | 26,792,382 |
The cost of inventories recognized as an expense and included in cost of sales amounted to $10,279,719 (March 31, 2020 $8,228,063).
Included in cost of sales is amortization of production equipment of $3,069,742 (March 31, 2020 - $1,708,721).
4. |
Receivable from shareholder |
The balance due from the shareholder is unsecured, non-interest bearing and due on demand.
7
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
5. |
Property, plant and equipment |
Cost |
Accumulated
amortization |
March 31
2021 Net book value |
December 31
2020 Net book value |
|||||||||||||
Land and land improvements |
5,342,316 | | 5,342,316 | 5,337,750 | ||||||||||||
Buildings |
61,226,893 | 9,036,892 | 52,190,001 | 52,106,153 | ||||||||||||
Automotive |
330,327 | 102,712 | 227,615 | 127,836 | ||||||||||||
Computer equipment |
1,795,158 | 1,402,256 | 392,902 | 425,424 | ||||||||||||
Computer software |
4,013,623 | 3,659,593 | 354,030 | 479,073 | ||||||||||||
Equipment |
36,389,087 | 9,874,708 | 26,514,379 | 25,189,288 | ||||||||||||
Fences |
21,187 | 11,133 | 10,054 | 10,312 | ||||||||||||
Furniture and fixtures |
316,282 | 84,807 | 231,475 | 247,401 | ||||||||||||
Office equipment |
151,511 | 38,351 | 113,160 | 114,416 | ||||||||||||
Machinery and equipment |
386,226 | 280,445 | 105,781 | 98,877 | ||||||||||||
109,972,610 | 24,490,897 | 85,481,713 | 84,136,530 |
Deposits included in the consolidated balance sheet represent deposits placed for certain property, plant and equipment to be used in the Companys production operations, which has not been delivered as of March 31, 2021. Additional commitments relating to these items is disclosed in Note 10.
6. |
Advances from related parties |
March 31
2021 |
December 31
2020 |
|||||||
2516576 Ontario Inc. (controlling shareholder) |
115,843,448 | 115,847,648 | ||||||
Minority shareholders |
1,060 | 1,060 | ||||||
Member of immediate family of minority shareholders |
390,500 | 367,250 | ||||||
116,235,008 | 116,215,958 |
Amounts owing to the above related parties are unsecured, non-interest bearing and due on demand.
7. |
Share capital |
Authorized
Unlimited number of common shares
March 31
2021 |
December 31
2020 |
Issued
Common shares |
||||||
100 Common shares |
48 | 48 |
8
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
8. |
Revenue |
The Company earns revenues from sales to medical patients (medical) and through provincial distributors for the recreational market (recreational). The revenue before excise taxes recognized by major category is as follows:
3 Months
Ended March 31 2021 |
3 Months
Ended March 31 2020 |
|||||||
Revenue |
||||||||
Medical |
1,610,210 | 1,078,589 | ||||||
Recreational |
33,428,158 | 11,972,611 | ||||||
Returns and allowances |
(1,121,304 | ) | (56,925 | ) | ||||
Revenue before excise taxes |
33,917,064 | 12,994,275 |
9. |
Income taxes |
The reconciliation of the Companys effective income tax expense is as follows:
3 Months
Ended March 31 2021 |
3 Months
Ended March 31 2020 |
|||||||
Expected tax expense (recovery) |
1,677,760 | (372,565 | ) | |||||
Increase (decrease) in income tax expense resulting from: |
||||||||
Impact of difference between amortization for accounting purposes and CCA taken in the period |
265,433 | (542,168 | ) | |||||
Intercompany charges capitalized for tax purposes |
(1,095,847 | ) | 2,151,701 | |||||
Non-deductible expenses |
4,787 | 2,972 | ||||||
Impact of tax loss carried forward against period taxable income |
377,867 | (630,274 | ) | |||||
Actual tax expense |
1,230,000 | 609,666 |
10. |
Commitments |
The Company has entered into various lease agreements with estimated minimum annual payments as follows:
2021 |
154,451 | |||
2022 |
210,000 | |||
2023 |
210,000 | |||
2024 |
210,000 | |||
2025 |
210,000 | |||
Thereafter, to 2029 |
390,000 | |||
1,384,451 |
During the period, the Company signed various agreement to purchase items of manufacturing equipment. As at March 31, 2021, outstanding commitments for manufacturing equipment were $16,112,812.
9
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
11. |
Financial instruments |
The Company, as part of its operations, carries a number of financial instruments. It is managements opinion that the Company is not exposed to significant interest, currency, credit, liquidity or other price risks arising from these financial instruments except as otherwise disclosed.
Credit concentration
For the three months ended March 31, 2021, 3 customers (March 31, 2020 3) accounted for 89% ( March 31, 2020 92%) of revenues before excise duties and as at March 31, 2020, 3 customers (December 31, 2020 3) accounted for 94% (December 31, 2020 97%) of the accounts receivable. The Company believes that there is no unusual exposure associated with the collection of these receivables as the customers are government agencies that distribute cannabis in their respective provinces.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Companys objective is to have sufficient liquidity to meet its liabilities from due. The Company monitors cash balances and cash flows generated from operations to meet its requirements. The Company is exposed to liquidity risk relating to its trade and other payables and advances from related parties which are due on demand.
12. |
Subsequent events |
On May 28, 2021, HEXO Corp. announced that it has entered into a definitive share purchase agreement to acquire all the outstanding shares of the Company for a purchase price of $925 million payable in cash and through the issuance of common shares of HEXO Corp. (the Transaction). The Transaction is subject to certain customary adjustments, closing conditions, applicable regulatory approvals, and HEXO Corp. shareholder approval. The close date of the Transaction is not determinable as of the date of these financial statements. As part of the Transaction and related customary adjustments, the parties have agreed that the balance owing to the controlling shareholder 2516576 Ontario Inc., as disclosed in Note 6, will be settled in full on close of the Transaction. Accordingly, the balance owing to 2516576 Ontario Inc. has been classified as a current liability in advances from related parties in the consolidated balance sheet.
On May 14, 2021, 2579951 Ontario Inc. was amalgamated with its parent company, 2516576 Ontario Inc., to form 5048963 Ontario Inc. (the Company).
10
2579951 Ontario Inc.
Notes to the Interim Consolidated Financial Statements
For the period ended March 31, 2021 and 2020
(Unaudited)
13. |
ASPE to International Financial Reporting Standards Reconciliation |
As discussed in Note 12, the Company entered into a definitive share purchase agreement on May 28, 2021 to sell all of the outstanding shares of the Company to HEXO Corp. The Company has presented an ASPE to International Financial Reporting Standards (IFRS) reconciliation for the statement of earnings (loss), balance sheet and a description of the impact of each adjustment for each period presented. The tables below quantify the significant differences on the Companys net earnings between ASPE and IFRS as at and for the 3 month periods ended March 31, 2021 and 2020 with descriptions thereto of such differences.
Notes |
Three
31, 2021 |
Three
31, 2020 |
||||||||||||||
Net income (loss) after tax under ASPE |
6,913,624 | (2,015,572 | ) | |||||||||||||
IFRS Adjustments |
||||||||||||||||
Variable consideration adjustment to gross revenue |
(i) | (278,998 | ) | (218,260 | ) | |||||||||||
Realized fair value amounts on inventory sold |
(ii) | (15,472,095 | ) | (3,561,756 | ) | |||||||||||
Unrealized gain on biological asset transformation |
(ii) | 20,832,187 | 13,953,043 | |||||||||||||
Reversal of cost of sales |
(iii) | 25,000 | 25,000 | |||||||||||||
Depreciation on right-of-use assets |
(iii) | (62,323 | ) | (62,323 | ) | |||||||||||
Interest expense on lease liability |
(iii) | (36,925 | ) | (36,928 | ) | |||||||||||
Reversal of rent expense |
(iii) | 35,792 | 37,347 | |||||||||||||
Deferred income tax expense |
(iv) | (3,048,337 | ) | (1,589,577 | ) | |||||||||||
|
|
|
|
|
|
|||||||||||
Net and comprehensive income under IFRS |
8,907,925 | 6,530,974 | ||||||||||||||
|
|
|
|
|
|
Notes |
As reported
under ASPE |
Adjustments |
As reported
under IFRS |
|||||||||||||
As at March 31, 2021 |
||||||||||||||||
Inventory |
(ii) | 31,306,782 | 52,366,927 | 83,673,709 | ||||||||||||
Biological assets |
(ii) | | 11,401,324 | 11,401,324 | ||||||||||||
Right-of-use assets, net |
(iii) | | 1,674,846 | 1,674,846 | ||||||||||||
Trade and other payables |
(iii) | 6,172,256 | (135,000 | ) | 6,037,256 | |||||||||||
Current lease liability |
(iii) | | 230,716 | 230,716 | ||||||||||||
Non-current lease liability |
(iii) | | 2,000,225 | 2,000,225 | ||||||||||||
Provisions |
(i), (iii) | | 520,212 | 520,212 | ||||||||||||
Deferred tax liability |
(iv) | | 17,623,787 | 17,623,787 | ||||||||||||
Retained earnings |
(i),(ii),(iii),(iv) | 17,141,863 | 45,203,157 | 62,345,020 | ||||||||||||
Notes |
As reported
under ASPE |
Adjustments |
As reported
under IFRS |
|||||||||||||
As at December 31, 2020 |
||||||||||||||||
Inventory |
(ii) | 26,792,382 | 49,309,456 | 76,101,838 | ||||||||||||
Biological assets |
(ii) | | 9,098,703 | 9,098,703 | ||||||||||||
Right-of-use assets, net |
(iii) | | 1,737,168 | 1,737,168 | ||||||||||||
Trade and other payables |
(iii) | 9,407,837 | (120,000 | ) | 9,287,837 | |||||||||||
Current lease liability |
(iii) | | 238,650 | 238,650 | ||||||||||||
Non-current lease liability |
(iii) | | 2,001,156 | 2,001,156 | ||||||||||||
Provisions |
(i), (iii) | | 405,071 | 405,071 | ||||||||||||
Deferred tax liability |
(iv) | | 14,575,450 | 14,575,450 | ||||||||||||
Retained earnings |
(i),(ii),(iii),(iv) | 10,828,239 | 43,045,000 | 53,873,239 |
11
(i) Under IFRS, an adjustment is required to record the constraint on variable consideration resulting from the markdown / price reductions arrangements with customers.
(ii) Under IFRS, an adjustment is required to record biological assets at fair value less cost to sell. Further, biological assets are transferred to inventory at fair value less cost to sell. An adjustment is made to recognize inventory at cost which is the fair value less cost of sell at the point where it transferred from biological assets. The following represent the key assumptions used in the determination of the fair value of the biological assets:
Weighted average selling price (per gram) - $3.60 (December 31, 2020 - $3.18)
Yield per plant (dried bud and trim) - 1,143 grams (December 31, 2020 - 1,144 grams)
Stage of growth - 51% (December 31, 2020 - 43%)
Attrition rate - 1% (December 31, 2020 - 1%)
(iii) Under IFRS, an adjustment is required to record right-of-use assets and lease liabilities for items leased. After initial recognition, IFRS requires the discounted lease liability to be accreted to the full liability amount and associated interest expense is recognized. In preparing the estimate for the value of the lease liability, management has determined a range of incremental borrowing rates attributable to underlying leases to be 2.28% - 6.84%. Depreciation expense is recognized on the right-of use assets over the lease term or the non-cancellable lease term ranging from 2 - 21 years. Additionally, an adjustment for lease restitution costs is also required to be recognized under IFRS as a provision.
(iv) Under ASPE, the Company uses the taxes payable method of accounting for income taxes. Under IFRS, the Company is required to recognize both current and deferred taxes. Deferred tax has been recognized on any temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.
12
SCHEDULE D
(See attached)
HEXO Corp.
Unaudited pro forma condensed consolidated financial statements
As at April 30, 2021 and for the nine months ended April 30, 2021 and for the year ended July 31, 2020
1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at April 30, 2021 (In thousands of Canadian dollars)
|
||||||||||||||||||||
HEXO Corp. April 30, 2021 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
April 30, 2021 |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
81,038 | 2,812 | 384,096 | 5 | ) | 67,946 | ||||||||||||||
(400,000 | ) | 6b | ) | |||||||||||||||||
Restricted funds |
32,551 | | | 32,551 | ||||||||||||||||
Trade receivables |
19,049 | 14,708 | | 33,757 | ||||||||||||||||
Commodity taxes recoverable and other receivables |
10,202 | 1,533 | | 11,735 | ||||||||||||||||
Prepaid expensescurrent |
4,386 | 5,656 | | 10,042 | ||||||||||||||||
Inventory |
95,223 | 83,673 | 16,327 | 6c | ) | 195,223 | ||||||||||||||
Biological assets |
9,222 | 11,401 | | 20,623 | ||||||||||||||||
Receivable from shareholders |
| 118 | | 118 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
251,671 | 119,901 | 423 | 371,995 | ||||||||||||||||
Non-current assets |
||||||||||||||||||||
Property, plant and equipment |
280,183 | 86,838 | 13,162 | 6d | ), 6e) | 380,183 | ||||||||||||||
Intangible assets |
16,412 | 319 | 99,681 | 6f | ) | 116,412 | ||||||||||||||
Convertible debenture receivable |
20,246 | | | 20,246 | ||||||||||||||||
Investment in associate and joint ventures |
73,379 | | | 73,379 | ||||||||||||||||
Lease receivable |
3,795 | | | 3,795 | ||||||||||||||||
License and prepaid royalty |
| | | | ||||||||||||||||
Long-term investments |
4,402 | | | 4,402 | ||||||||||||||||
Prepaid expenses |
3,101 | | | 3,101 | ||||||||||||||||
Deposits |
| 4,796 | | 4,796 | ||||||||||||||||
Goodwill |
| | 749,026 | 6g | ) | 749,026 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
653,189 | 211,854 | 862,292 | 1,727,335 | ||||||||||||||||
|
|
|
|
|
|
|
|
2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at April 30, 2021 (In thousands of Canadian dollars)
|
||||||||||||||||||||
HEXO Corp. April 30, 2021 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
April 30, 2021 |
||||||||||||||||
LIABILITIES |
||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||
Accounts payable and accrued liabilities |
42,968 | 6,037 | 67,285 | 6h | ) | 116,290 | ||||||||||||||
Excise taxes payable |
4,315 | | | 4,315 | ||||||||||||||||
Government remittances payable |
| 2,657 | | 2,657 | ||||||||||||||||
Advances from related parties current |
| 116,235 | | 116,235 | ||||||||||||||||
Warrant liabilities |
13,037 | | | 13,037 | ||||||||||||||||
Lease liability |
4,659 | 231 | | 4,890 | ||||||||||||||||
Term loan |
| | | | ||||||||||||||||
Onerous contract |
4,763 | | | 4,763 | ||||||||||||||||
Income taxes payable |
| 3,605 | | 3,605 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
69,742 | 128,765 | 67,285 | 265,792 | ||||||||||||||||
Non-current liabilities |
||||||||||||||||||||
Deferred tax liability |
| 17,624 | 82,376 | 6i | ) | 100,000 | ||||||||||||||
Lease liability |
22,566 | 2,000 | | 24,566 | ||||||||||||||||
Advances from related parties |
| | | | ||||||||||||||||
Convertible debentures |
31,951 | | 384,096 | 5 | ) | 416,047 | ||||||||||||||
Other long-term liabilities |
1,805 | 520 | | 2,325 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
126,064 | 148,909 | 533,757 | 808,730 | ||||||||||||||||
Shareholders equity |
527,125 | 62,945 | (62,945 | ) | 6a | ) | 918,605 | |||||||||||||
458,765 | 6b | ) | ||||||||||||||||||
(67,285 | ) | 6h | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
653,189 | 211,854 | 862,292 | 1,727,335 | ||||||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes
3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS) For the nine months ended April 30, 2021 (In thousands of Canadian dollars except per share amounts)
|
||||||||||||||||||||
HEXO Corp. April 30, 2021 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
April 30, 2021 |
||||||||||||||||
Revenue from sale of goods |
120,059 | 98,147 | | 218,206 | ||||||||||||||||
Excise taxes |
(35,219 | ) | (27,539 | ) | | (62,758 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net revenue from sale of goods |
84,840 | 70,608 | | 155,448 | ||||||||||||||||
Ancillary revenue |
168 | | | 168 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net revenue |
85,008 | 70,608 | | 155,616 | ||||||||||||||||
Cost of goods sold |
57,391 | 29,910 | (773 | ) | 6d | ) | 86,528 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit before fair value adjustments |
27,617 | 40,698 | 773 | 69,088 | ||||||||||||||||
Realized fair value amounts on inventory sold |
17,619 | 72,209 | | 89,828 | ||||||||||||||||
Unrealized gain on changes in fair value of biological assets |
(35,616 | ) | (115,454 | ) | | (151,070 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
45,614 | 83,943 | 773 | 130,330 | ||||||||||||||||
Operating expenses |
||||||||||||||||||||
Selling, general and administrative |
39,039 | 15,886 | | 54,925 | ||||||||||||||||
Marketing and promotion |
6,682 | 1,638 | | 8,320 | ||||||||||||||||
Share-based compensation |
10,904 | | | 10,904 | ||||||||||||||||
Research and development |
2,901 | | | 2,901 | ||||||||||||||||
Depreciation of property, plant and equipment |
4,369 | 1,153 | 195 | 6d | ) | 5,755 | ||||||||||||||
38 | 6e | ) | ||||||||||||||||||
Amortization of intangible assets |
1,043 | 55 | 1,445 | 6f | ) | 2,543 | ||||||||||||||
Restructuring costs |
1,721 | | | 1,721 | ||||||||||||||||
Impairment of property, plant and equipment |
881 | 626 | | 1,507 | ||||||||||||||||
Impairment of intangible assets |
| | | | ||||||||||||||||
Impairment of goodwill |
| | | | ||||||||||||||||
Recognition of onerous contract |
| | | | ||||||||||||||||
Disposal of long-lived assets |
1,294 | | | 1,294 | ||||||||||||||||
Loss on disposal of property, plant and equipment |
45 | | | 45 | ||||||||||||||||
Acquisition and transactions |
2,307 | | (447 | ) | 6h | ) | 1,860 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
71,186 | 19,358 | 1,231 | 91,775 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Earnings (loss) from Operations |
(25,572 | ) | 64,585 | (458 | ) | 38,555 | ||||||||||||||
Finance expense, net |
(7,311 | ) | (161 | ) | (42,951 | ) | 5 | ) | (50,423 | ) | ||||||||||
Non-operating expense, net |
(12,864 | ) | (148 | ) | | (13,012 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax |
(45,747 | ) | 64,276 | (43,409 | ) | (24,880 | ) | |||||||||||||
Provision for income taxes |
| (4,185 | ) | 272 | 6i | ) | (3,913 | ) | ||||||||||||
Income tax payable |
| (12,672 | ) | | (12,672 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Other comprehensive income |
||||||||||||||||||||
Foreign currency translation |
3 | | | 3 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net earnings (loss) and comprehensive income (loss) |
(45,744 | ) | 47,419 | (43,137 | ) | (41,462 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to: |
||||||||||||||||||||
Shareholders of Hexo Corp |
(45,744 | ) | 47,419 | (43,137 | ) | (41,462 | ) | |||||||||||||
Non-controlling interest |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
(45,744 | ) | 47,419 | (43,137 | ) | (41,462 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS) For the nine months ended April 30, 2021 (In thousands of Canadian dollars except per share amounts)
|
||||||||||||||||||||
HEXO Corp. April 30, 2021 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
April 30, 2021 |
||||||||||||||||
Basic net loss per common share |
$ | (0.38 | ) | 7 | $ | (0.22 | ) | |||||||||||||
Diluted net loss per common share |
$ | (0.38 | ) | 7 | $ | (0.22 | ) | |||||||||||||
Basic weighted average number of outstanding shares |
121,749,456 | 7 | 191,470,572 | |||||||||||||||||
Diluted weighted average number of outstanding shares |
121,749,456 | 7 | 191,470,572 |
See accompanying notes
5
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)
For the year ended July 31, 2020
(In thousands of Canadian dollars except per share amounts)
HEXO Corp. July 31, 2020 Note 3 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
July 31, 2020 |
||||||||||||||||
Revenue from sale of goods |
110,149 | 74,478 | | 184,627 | ||||||||||||||||
Excise taxes |
(29,598 | ) | (20,285 | ) | | (49,883 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net revenue from sale of goods |
80,551 | 54,193 | | 134,744 | ||||||||||||||||
Ancillary revenue |
233 | | | 233 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net revenue |
80,784 | 54,193 | | 134,977 | ||||||||||||||||
Cost of goods sold |
127,205 | 27,922 | 1,535 | 6d | ) | 156,662 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross (loss) / profit before fair value adjustments |
(46,421 | ) | 26,271 | (1,535 | ) | (21,685 | ) | |||||||||||||
Realized fair value amounts on inventory sold |
40,910 | 47,465 | | 88,375 | ||||||||||||||||
Unrealized gain on changes in fair value of biological assets |
(29,356 | ) | (102,715 | ) | | (132,071 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross (loss) / profit |
(57,975 | ) | 81,521 | (1,535 | ) | 22,011 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Selling, general and administrative |
52,793 | 14,127 | | 66,920 | ||||||||||||||||
Marketing and promotion |
12,474 | 421 | | 12,895 | ||||||||||||||||
Share-based compensation |
25,790 | | | 25,790 | ||||||||||||||||
Research and development |
4,639 | | | 4,639 | ||||||||||||||||
Depreciation of property, plant and equipment |
6,072 | 1,557 | 240 | 6d | ) | 7,920 | ||||||||||||||
51 | 6e | ) | ||||||||||||||||||
Amortization of intangible assets |
3,939 | 235 | 1,765 | 6f | ) | 5,939 | ||||||||||||||
Restructuring costs |
4,767 | | | 4,767 | ||||||||||||||||
Impairment of property, plant and equipment |
79,418 | | | 79,418 | ||||||||||||||||
Impairment of intangible assets |
108,189 | | | 108,189 | ||||||||||||||||
Impairment of goodwill |
111,877 | | | 111,877 | ||||||||||||||||
Recognition of onerous contract |
4,763 | | | 4,763 | ||||||||||||||||
Disposal of long-lived assets |
| | | | ||||||||||||||||
Loss on disposal of property, plant and equipment |
3,855 | | | 3,855 | ||||||||||||||||
Acquisition and transactions |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
418,576 | 16,340 | 2,056 | 436,972 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) from operations |
(476,551 | ) | 65,181 | (3,591 | ) | (414,961 | ) | |||||||||||||
Finance income (expense), net |
(8,141 | ) | (114 | ) | (60,853 | ) | 5 | ) | (69,108 | ) | ||||||||||
Non-operating income (expense), net |
(67,820 | ) | (2 | ) | | (67,822 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax |
(552,512 | ) | 65,065 | (64,444 | ) | (551,891 | ) | |||||||||||||
Provision for income taxes |
| (2,377 | ) | 1,241 | 6i | ) | (1,136 | ) | ||||||||||||
Income tax recovery (payable) |
6,023 | (15,528 | ) | | (9,505 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income |
||||||||||||||||||||
Foreign currency translation |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net earnings (loss) and comprehensive income (loss) |
(546,489 | ) | 47,160 | (63,203 | ) | (562,532 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to: |
||||||||||||||||||||
Shareholders of HEXO Corp. |
(546,489 | ) | 47,160 | (63,203 | ) | (562,532 | ) | |||||||||||||
Non-controlling interest |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(546,489 | ) | 47,160 | (63,203 | ) | (562,532 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
6
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)
For the year ended July 31, 2020
(In thousands of Canadian dollars except per share amounts)
HEXO Corp. July 31, 2020 Note 3 |
Redecan Group
Note 8 |
Pro Forma
Adjustments |
Note |
Pro Forma
July 31, 2020 |
||||||||||||||||
Basic net loss per common share |
$ | (1.77) | 7 | $ | (1.48) | |||||||||||||||
Diluted net loss per common share |
$ | (1.77) | 7 | $ | (1.48) | |||||||||||||||
Basic weighted average number of outstanding shares |
309,504,695 | 7 | 379,225,811 | |||||||||||||||||
Diluted weighted average number of outstanding shares |
309,504,695 | 7 | 379,225,811 |
See accompanying notes
7
1. |
Description of the Transaction |
On May 28, 2021 HEXO Corp. (HEXO or the Company) entered into a definitive share purchase agreement (the Share Purchase Agreement) to acquire the Redecan Group comprised of 2526356 Ontario Inc., 2579951 Ontario Inc. and 9037136 Canada Inc. (Redecan). Under the terms of the Share Purchase Agreement and based on the closing price of common shares on July 6, 2021, the consideration payable is estimated to be $858,765, payable in (i) $400,000 of cash, and (ii) an aggregate of 69,721,116 common shares to be issued by the Company. The Acquisition is expected to close in Q1 of the Companys 2022 fiscal year, subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals. HEXO has raised debt financing which the Company will use to finance the cash consideration payable in connection with the Acquisition.
These unaudited pro forma condensed consolidated financial statements present the impact of the following transactions and have been prepared on the basis described in Note 2, Basis of Preparation:
a) |
The Acquisition as described in Note 4, The Acquisition |
b) |
The incurrence of indebtedness under the senior secured convertible notes (the Notes) with proceeds of $384,096 (USD$312,655), as described in Note 5, Senior Secured Convertible Notes |
2. |
Basis of Preparation |
The Companys unaudited pro forma condensed consolidated statement of financial position as at April 30, 2021 and the unaudited pro forma condensed consolidated statements of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 have been prepared by management for the purpose of presenting the impact of the Acquisition, as described herein. Although the Acquisition had not closed as of the date of these pro forma financial statements, the unaudited pro forma condensed consolidated statement of financial position includes the effect of these transactions as if they had occurred on April 30, 2021. The unaudited pro forma condensed consolidated statement of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020 give effect to these transactions as if they had occurred on August 1, 2019. These unaudited pro forma condensed consolidated financial statements also reflect and give effect to the issuance of the Notes, which were issued in order to finance the cash component of the purchase price of the Acquisition as described in Note 5Senior Secured Convertible Notes, however, they do not reflect or assume the issuance of any number of HEXO common shares upon conversion, redemption or exchange of any Notes.
The accounting policies used in the preparation of these unaudited pro forma condensed consolidated financial statements, incorporate the significant accounting policies used by HEXO Corp. for the respective periods in the Companys consolidated financial statements filed with or furnished to, as applicable, the Canadian and U.S. securities regulatory authorities. The unaudited pro forma condensed consolidated financial statements include all adjustments necessary for the fair presentation of these unaudited pro forma financial statements.
Pro forma adjustments reflected in these unaudited pro forma condensed consolidated financial statements are based on items that are factually supportable, directly attributable to the Acquisition for which there are firm commitments, and are expected to have a continuing impact on these unaudited pro forma condensed consolidated financial statements for which completed financial effects are objectively determinable.
All dollar amounts, except for per share information, or unless otherwise specified are expressed in thousands of Canadian dollars (CAD or $), which is the presentation currency of HEXO Corp.
These unaudited pro forma condensed consolidated financial statements have been prepared using the following information:
|
The unaudited condensed interim consolidated statement of financial position of HEXO as at April 30, 2021 and the unaudited condensed interim consolidated statement of net loss and comprehensive loss for the nine-month period ended April 30, 2021 have been extracted from the unaudited condensed interim consolidated financial statements prepared in accordance with International Accounting Standards 34 (IAS 34) as issued by the IASB. |
8
|
The consolidated statements of net loss and comprehensive loss of HEXO for the year ended July 31, 2020 has been extracted from the Companys audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as filed with or furnished to the Canadian and U.S. securities regulatory authorities. |
|
The unaudited condensed interim consolidated balance sheet of Redecan as at March 31, 2021 and the unaudited condensed interim consolidated statements of earnings (loss) for the three months ended March 31, 2021 have been extracted from Redecans unaudited condensed interim consolidated financial statements prepared in accordance with Canadian accounting standards for private enterprises (ASPE) as issued by the Accounting Standards Board in Canada (AcSB). |
|
The unaudited condensed interim consolidated statement of net earnings (loss) of Redecan for the nine month period ended March 31, 2021 has been derived from the audited consolidated statement of earnings (loss) of Redecan for the year ended December 31, 2020 prepared in accordance with ASPE as issued by the AcSB. The unaudited interim statement of earnings (loss) of Redecan for the nine-month period ended March 31, 2021 has been constructed by subtracting the unaudited financial information from the accounting records for the six-month period ended June 30, 2020 from the audited income statement for the year ended December 31, 2020 and adding the unaudited financial information extracted from the unaudited condensed interim consolidated statements of statements of earnings (loss) for the three months ended March 31, 2021. Adjustments have been made to Redecans historical financial information to conform with HEXOs IFRS accounting policies (see Note 8, Adjustments to the Historical Financial Statements of Redecan). |
|
The unaudited condensed consolidated statement of net earnings (loss) of Redecan for the twelve months ended September 30, 2020 has been derived from the unaudited consolidated statement of earnings (loss) of Redecan for the year ended December 31, 2019 prepared in accordance with ASPE and the unaudited financial information is derived from the accounting records of Redecan for the nine-month periods ended September 30, 2020 and September 30, 2019. The unaudited condensed consolidated statement of net earnings (loss) of Redecan for the twelve-month period ended September 30, 2020 has been constructed by subtracting the unaudited financial information from the accounting records for the nine-month period ended September 30, 2019 from the unaudited consolidated statement of earnings (loss) for the year ended December 31, 2019 and adding the unaudited financial information derived from the accounting records for the nine-month period ended September 30, 2020. Adjustments have been made to Redecans historical financial information to conform with HEXOs IFRS accounting policies (see Note 8, Adjustments to the Historical Financial Statements of Redecan). |
These unaudited pro forma condensed consolidated financial statements, including the notes thereto, should be read in conjunction with HEXOs historical financial statements, and respective Managements Discussion and Analysis of financial condition and results of operations as filed with or furnished to, as applicable, the Canadian and U.S. securities regulatory authorities and Redecans historical financial statements.
These unaudited pro forma condensed consolidated financial statements are based on assumptions and adjustments that are described in the accompanying notes. The unaudited pro forma condensed consolidated financial statements do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the Acquisition. The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized if HEXO and the acquired company (being the Redecan Group) had been a consolidated company during the specified periods.
The application of the acquisition method of accounting depends on certain valuations and other studies that have yet to be completed. Accordingly, the pro forma adjustments are preliminary, subject to further revisions as additional information becomes available and additional analyses are performed and have been made solely for the purposes of providing unaudited pro forma condensed consolidated financial statements. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed consolidated financial statements and the consolidated companys
9
future earnings and financial position. Further, differences between the preliminary and final amounts will likely occur as a result of changes in the fair value of HEXOs common shares to determine the actual purchase consideration as well as the actual amount of cash used in Redecans operations, and other changes in assets and liabilities.
3. |
Presentation Reclassification Adjustments to HEXOs Condensed Consolidated Statement of Net Earnings (Loss) for the Year ended July 31, 2020 |
For the nine months ended April 30, 2021, HEXO simplified its presentation for the condensed interim consolidated statements of net loss and comprehensive loss. For consistency between the unaudited pro forma condensed consolidated statement of net earnings (loss) for the nine months ended April 30, 2021 and the year ended July 31, 2020, the following presentation reclassification adjustments which had a $nil impact on net earnings (loss) and comprehensive income (loss) were made to HEXOs condensed consolidated statement of net earnings (loss) for the year ended July 31, 2020:
HEXO CONDENSED CONSOLIDATED STATEMENT OF NET EARNINGS (LOSS)
For the year ended July 31, 2020
(In thousands of Canadian dollars except per share amounts)
As reported
HEXO Corp. July 31, 2020 |
Presentation
reclassification |
Adjusted
Presentation |
||||||||||
Revenue from sale of goods |
110,149 | | 110,149 | |||||||||
Excise taxes |
(29,598 | ) | | (29,598 | ) | |||||||
|
|
|
|
|
|
|||||||
Net revenue from sale of goods |
80,551 | | 80,551 | |||||||||
Ancillary revenue |
233 | | 233 | |||||||||
|
|
|
|
|
|
|||||||
Net revenue |
80,784 | | 80,784 | |||||||||
Cost of goods sold |
127,205 | | 127,205 | |||||||||
|
|
|
|
|
|
|||||||
Gross loss before fair value adjustments |
(46,421 | ) | | (46,421 | ) | |||||||
Realized fair value amounts on inventory sold |
40,910 | | 40,910 | |||||||||
Unrealized gain on changes in fair value of biological assets |
(29,356 | ) | | (29,356 | ) | |||||||
|
|
|
|
|
|
|||||||
Gross loss |
(57,975 | ) | (57,975 | ) | ||||||||
Operating expenses |
||||||||||||
Selling, general and administrative |
52,793 | | 52,793 | |||||||||
Marketing and promotion |
12,474 | | 12,474 | |||||||||
Share-based compensation |
25,790 | | 25,790 | |||||||||
Research and development |
4,639 | | 4,639 | |||||||||
Depreciation of property, plant and equipment |
6,072 | | 6,072 | |||||||||
Amortization of intangible assets |
3,939 | | 3,939 | |||||||||
Restructuring costs |
4,767 | | 4,767 | |||||||||
Impairment of property, plant and equipment |
79,418 | | 79,418 | |||||||||
Impairment of intangible assets |
108,189 | | 108,189 | |||||||||
Impairment of goodwill |
111,877 | | 111,877 | |||||||||
Recognition of onerous contract |
| 4,763 | 4,763 | |||||||||
Loss on onerous contract |
4,763 | (4,763 | ) | | ||||||||
Loss on disposal of property, plant and equipment |
3,855 | | 3,855 | |||||||||
|
|
|
|
|
|
|||||||
418,576 | | 418,576 | ||||||||||
|
|
|
|
|
|
|||||||
Loss from operations |
(476,551 | ) | | (476,551 | ) | |||||||
|
|
|
|
|
|
|||||||
Finance expense, net |
| (8,141 | ) | (8,141 | ) | |||||||
Non-operating expense, net |
| (67,820 | ) | (67,820 | ) | |||||||
Revaluation of financial instruments gain |
6,533 | (6,533 | ) | | ||||||||
Share of loss from investment in associate and joint ventures |
(6,331 | ) | 6,331 | |
10
Loss on induced conversion of debentures |
(54,283 | ) | 54,283 | | ||||||||
Realized loss on convertible debentures receivable |
(4,806 | ) | 4,806 | | ||||||||
Unrealized loss on investments |
(12,880 | ) | 12,880 | | ||||||||
Realized gain on investments |
24 | (24 | ) | | ||||||||
Foreign exchange gain |
1,392 | (1,392 | ) | | ||||||||
Interest and financing expenses |
(10,043 | ) | 10,043 | | ||||||||
Interest income |
1,902 | (1,902 | ) | | ||||||||
Other income |
2,531 | (2,531 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Loss and comprehensive loss attributable to shareholders before tax |
(552,512 | ) | | (552,512 | ) | |||||||
Income tax recovery |
6,023 | | 6,023 | |||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income |
||||||||||||
Foreign currency translation |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net loss and comprehensive loss |
(546,489 | ) | | (546,489 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive loss attributable to: |
||||||||||||
Shareholders of HEXO Corp. |
(546,489 | ) | | (546,489 | ) | |||||||
Non-controlling interest |
| | | |||||||||
|
|
|
|
|
|
|||||||
(546,489 | ) | | (546,489 | ) | ||||||||
|
|
|
|
|
|
4. |
The Acquisition |
Upon completion of the Acquisition, HEXO will pay cash and issue common shares of its capital to the shareholders of Redecan in consideration and exchange for all of the issued and outstanding shares of the Redecan Group. The purchase consideration is approximately $400,000 of cash and 69,721,116 common shares with an estimated value of approximately $458,765 for total consideration of $858,765. The cash consideration component is subject to adjustments on and following the closing date for working capital target surplus (deficit).
The estimated purchase price for Redecan is based on the closing price of HEXO common shares on July 6, 2021. The requirement to base the final purchase price on the share price as of the closing date could result in a purchase price that is materially different (either higher or lower) from that assumed in these unaudited pro forma condensed consolidated financial statements and the purchase price included in these pro forma financial statements should not be taken to represent what the actual consideration transferred will be when the Acquisition is completed. The actual purchase price will fluctuate until the effective date of the Acquisition and the final valuation could differ significantly from the current estimate.
Number of HEXO common shares to be issued |
69,721,116 | |||
|
|
|||
HEXO share price per share(i) |
$ | 6.58 | ||
|
|
|||
Equity portion of purchase price |
$ | 458,765 | ||
Cash consideration |
$ | 400,000 | ||
|
|
|||
Purchase price |
$ | 858,765 | ||
|
|
(i) |
HEXOs Canadian dollar closing share price of $6.58 from the TSX on July 6, 2021. |
The following table shows the effect of an increase (decrease) in the purchase price and the change in timing of the close of the Acquisition on the purchase price and goodwill:
Purchase Price
$ |
Goodwill
$ |
|||||||
As presented in the pro forma combined results |
$ | 858,765 | 749,026 | |||||
|
|
|
|
|||||
15% increase in common share price |
$ | 927,580 | 817,841 | |||||
15% decrease in common share price |
$ | 789,950 | 680,211 | |||||
|
|
|
|
As of the date of these pro forma financial statements, the Companys detailed identification and valuation exercise of Redecans net assets has not yet significantly begun. Therefore, the Company has prepared a preliminary estimate of
11
the fair market values of the assets to be acquired and the liabilities assumed under the Acquisition using high level approximations of a consistent $100,000 value for inventory, property, plant and equipment, identifiable intangible assets and the deferred tax liability. Pro forma adjustments have been made to eliminate Redecans historical carrying values and to reflect the allocation of the preliminary purchase price where there is a difference between the carrying value and fair value.
The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation and may include changes in fair values of property, plant and equipment, changes in allocation to intangibles assets such as brands, trade names, technology, licenses and customer relationships as well as goodwill.
The following table summarizes the allocation of the preliminary purchase price:
Net identifiable assets acquired |
As at April 30, 2021
$ |
|||
Financial assets |
29,623 | |||
Inventory |
100,000 | |||
Biological assets |
11,401 | |||
Property, plant and equipment |
100,000 | |||
Identifiable intangible assets |
100,000 | |||
Financial liabilities |
(124,929 | ) | ||
Lease liability |
(2,231 | ) | ||
Income taxes payable |
(3,605 | ) | ||
Deferred tax liability |
(100,000 | ) | ||
Other long-term liabilities |
(520 | ) | ||
|
|
|||
Total net identifiable assets |
109,739 | |||
Goodwill |
749,026 | |||
|
|
|||
Purchase price |
858,765 | |||
|
|
5. |
Senior Secured Convertible Notes |
On May 27, 2021, the Company closed an offering of US$360 million aggregate principal amount of senior secured convertible notes (the Notes) directly to an institutional purchaser and certain of its affiliates or related funds.
The Notes were sold at a purchase price of US$327.6 million, or approximately 91.0% of their principal amount. The Notes mature on May 1, 2023. Subject to certain limitations, the Notes will be convertible into freely tradable common shares of the Company at the option of the holder and, subject to conditions and limitations, at the option of the Company. If not previously converted, all principal repayments of the Notes will be made at a price equal to 110% of the principal amount of the Notes being repaid. The Notes do not bear interest except upon the occurrence of an event of default. The Notes were issued in registered form, without coupons, under a trust indenture.
The unaudited pro forma condensed consolidated statement of financial position has been adjusted to reflect an increase in cash and Notes of $384,096 (US$312,655), net of estimated transaction costs of $18,360 (USD$14,945). The following table shows the interest expense incurred on the new Notes assuming such Notes had been issued on the first day of the periods presented therein:
For the nine
months ended April 30, 2021 $ |
For the year ended
July 31, 2020 $ |
|||||||
Finance income (expense), net(i) |
(42,951 | ) | (60,853 | ) |
(i) |
Although the notes do not carry an interest rate (other than after the occurrence of an event of default), the above interest expense (presented as net finance expense) represents for accounting purposes, the implied finance expense attributable to the difference between the discounted price at which the Notes were originally issued and the principal amount outstanding under the Notes. |
12
6. |
Pro Forma Adjustments and Assumptions for the Acquisition of Redecan |
The unaudited pro forma condensed consolidated financial statements include the following pro forma assumptions and adjustments:
a) |
Equity |
This pro forma adjustment eliminates Redecans historical equity of $62,945.
b) |
Purchase Price |
Records the purchase price consideration, which is cash of $400,000 and the fair value of the equity interests of $458,765 to be issued by HEXO to acquire Redecan (Note 4, The Acquisition).
c) |
Inventory |
Increases Redecans inventory to an estimated fair value of approximately $100,000, an increase of $16,327 from the carrying value. The fair value was determined based on the estimated selling price of the inventory, less the manufacturing processing and selling costs and a normal profit margin on those manufacturing and selling efforts. After the Acquisition the $16,327 increase in inventory value will increase cost of goods sold over approximately 12 months as the inventory is sold. This increase is not reflected in the unaudited pro forma condensed consolidated statements of net earnings (loss) because it does not have a continuing impact.
d) |
Property, plant and equipment |
Increases Redecans property, plant and equipment to an estimated fair value of approximately $100,000, an overall increase of $13,162 from the carrying value. The estimated useful lives (excluding land) range from 3 to 20 years. The Company capitalizes a portion of depreciation and amortization to biological assets and inventory and the increase in property, plant and equipment value will increase cost of goods sold. The estimated adjustment to depreciation of property, plant and equipment and cost of goods sold related to the acquired property, plant and equipment calculated on a straight line basis was $195 and $(773) respectively for the nine months ended April 30, 2021 and $240 and $1,535 respectively for the twelve months ended July 31, 2020.
e) |
Leases |
Included in property, plant and equipment is $1,675 related to right-of-use lease assets. The carrying value has been adjusted to the corresponding carrying value of the lease liability of $2,231, resulting in a pro forma increase of $556. The corresponding impact to depreciation of property, plant and equipment related to the acquired leases was $38 for the nine months ended April 30, 2021 and $51 for the twelve months ended July 31, 2020.
f) |
Intangible assets |
Reflects the fair value adjustment to intangible assets of approximately $100,000, an overall increase of $99,681 from the carrying value. Intangible assets currently identified as part of the preliminary valuation study for intangible assets include brands, trade names, technology, licenses and customer relationships. The preliminary valuation used an income approach that forecasts the expected future cash flows. The midpoint of the estimated range of fair values was used.
The estimated value fair of the currently identifiable intangible assets has been equally allocated across the assets due to the limitation of information held at the very early stages of the identification and valuation assessment. The estimated fair value and useful lives of the acquired intangibles are as follows
Estimated Fair Value
$ |
Estimated useful life
(years) |
|||||||
Domain names |
20,000 | 10 years | ||||||
Health Canada licenses |
20,000 | 20 years | ||||||
Software |
20,000 | 3 to 5 years | ||||||
Patents |
20,000 | 20 years | ||||||
Brands |
20,000 | Indefinite | ||||||
|
|
|||||||
100,000 | ||||||||
|
|
After the Acquisition, the estimated adjustment to amortization expense related to the acquired intangibles calculated on a straight line basis was $1,445 for the nine months ended April 30, 2021 and $1,765 for the twelve months ended July 31, 2020.
13
The preliminary estimates of fair value and estimated useful lives will likely differ from the final amounts after completing the valuation study, and the difference could have a material effect on the pro forma financial statements. A 15% change in the estimated fair value of intangible assets would cause a corresponding increase or decrease of $15,000 in the balance of goodwill. A 15% change would also cause the amortization expense in the unaudited pro forma condensed consolidated statement of earnings (loss) for the nine months ended April 30, 2021 and for the twelve months ended July 31. 2020 to increase or decrease by approximately $256 and $341 respectively (assumes a weighted average useful life of 11 years).
g) |
Goodwill |
Recognizes goodwill of $749,026 to reflect the purchase price allocation described in Note 4, The Acquisition.
h) |
Transaction costs |
Represents the elimination of non-recurring transaction costs incurred and recognized during the nine month period ended April 30, 2021 of $447 that are directly related to the acquisition of Redecan. This amount has been removed from the pro forma statement of earnings and loss because it is non-recurring in nature and would not reflect expense of the combined entity on an ongoing basis.
Transaction costs that are directly attributable to the acquisition of Redecan and factually supportable but have not yet been expensed in HEXO or Redecans historical income statements or accrued in the balance sheet are reflected as an increase to accounts payable and accrued liabilities and a corresponding decrease in shareholders equity of $67,285 on the unaudited pro forma condensed consolidated statement of financial position.
i) |
Income taxes For the purpose of the pro forma adjustments included in these unaudited pro forma condensed consolidated financial statements, the following tax rates were applied: |
|
HEXOs effective income tax rate was nil% for the nine months ended April 30, 2021 and for the year ended July 31, 2020. The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets for unused tax losses. As a result, no tax is recorded on the pro-forma adjustment of acquisition related costs incurred by HEXO. |
|
Redecans effective income tax rates of 30.13% for the nine months ended April 30, 2021 and 34.57% for the year ended July 31, 2020 were used in determining a corresponding decrease in provision for income taxes of $272 and $1,241, respectively, as a result of adjustments to cost of goods sold, depreciation of property, plant and equipment and amortization of intangible assets. |
|
The deferred tax liability of $100,000 (an overall increase of $82,376 from the carrying value) arising on the Acquisition is composed of the cumulative amount of tax applicable to temporary differences between the accounting and tax values of assets and liabilities related to the Acquisition. Deferred income tax assets and liabilities are measured at the tax rates expected to be in effect when these differences reverse. |
7. |
Pro Forma Earnings (Loss) Per Share |
Basic and diluted net income or loss per share is calculated by dividing the net income or loss for the period by the pro forma weighted average numbers of common shares that would have been outstanding during the period using the treasury stock method. The weighted average number of common shares was determined by taking the historical weighted average number of common shares outstanding and adjusting for the shares issued under the Acquisition as follows:
For the nine months
ended April 30, 2021 |
For the year ended
July 31, 2020 |
|||||||
Numerator |
||||||||
Numerator for basic and diluted earnings per common sharePro forma net earnings(i) |
$ | (41,462,000 | ) | $ | (562,532,000 | ) | ||
Denominator |
||||||||
|
|
|
|
|||||
Denominator for basic earnings per common share weighted average number of common shares |
121,749,456 | 77,376,174 | ||||||
Pro forma adjustment for newly-issued shares related to the Acquisition |
69,721,116 | 69,721,116 | ||||||
|
|
|
|
14
For the nine months
ended April 30, 2021 |
For the year ended
July 31, 2020 |
|||||||
Pro Forma denominator for basic earnings per common shares weighted average common shares |
191,470,572 | 147,097,290 | ||||||
Effect of dilutive securities |
40,750,951 | 165,862,789 | ||||||
|
|
|
|
|||||
Pro forma denominator for diluted earnings per common shares weighted average common shares |
232,221,523 | 312,960,079 | ||||||
Pro forma basic earnings per common share |
$ | (0.22 | ) | $ | (3.82 | ) | ||
Pro forma diluted earnings per common share |
$ | (0.22 | ) | $ | (3.82 | ) |
(i) |
For the purpose of this footnote, Pro forma net earnings is in whole dollars |
The denominator figures for common shares reflect the 4:1 stock consolidation executed December 18, 2020
15
8. |
Adjustments to the Historical Financial Statements of Redecan |
The historical financial information of Redecan was prepared in accordance with ASPE as issued by the AcSB and presented in Canadian dollars. Redecans fiscal year end is December 31 and historical financial information was used to present pro forma financial statements based on the fiscal year end of HEXO being July 31.
The following tables present the conversion from ASPE to IFRS and shows the presentation and reclassification adjustments which had a $nil impact on the total assets, liabilities, shareholders equity and net earnings (loss) for the periods presented:
Redecan Adjusted Unaudited Condensed Consolidated Statement of Financial Position
ASPE | IFRS | |||||||||||||||||||||||
As at March
31, 2021 |
ASPE to
IFRS differences |
Note 8 |
As at
March 31, 2021 |
Presentation
reclassification |
Adjusted
Presentation |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
2,812 | | 2,812 | 2,812 | ||||||||||||||||||||
Trade receivables |
14,708 | | 14,708 | 14,708 | ||||||||||||||||||||
Government remittances receivable |
1,533 | | 1,533 | (1,533 | ) | | ||||||||||||||||||
Commodity taxes recoverable and other receivables |
| | | 1,533 | 1,533 | |||||||||||||||||||
Inventory |
31,306 | 52,367 | (i | ) | 83,673 | 83,673 | ||||||||||||||||||
Biological assets |
| 11,401 | (i | ) | 11,401 | 11,401 | ||||||||||||||||||
Prepaid expensescurrent |
5,656 | | 5,656 | 5,656 | ||||||||||||||||||||
Receivable from shareholders |
118 | | 118 | 118 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
56,133 | 63,768 | 119,901 | | 119,901 | |||||||||||||||||||
Property and equipment |
85,482 | | 85,482 | 1,356 | 86,838 | |||||||||||||||||||
Intangible assets |
| | | 319 | 319 | |||||||||||||||||||
Deposits |
4,796 | | 4,796 | 4,796 | ||||||||||||||||||||
Right of use assets, net |
| 1,675 | (ii | ) | 1,675 | (1,675 | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
146,411 | 65,443 | 211,854 | | 211,854 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Liabilities |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Trade and other payables |
6,172 | (135) | (ii | ) | 6,037 | (6,037 | ) | | ||||||||||||||||
Accounts payable and accrued liabilities |
| | | 6,037 | 6,037 | |||||||||||||||||||
Government remittances payable |
2,657 | | 2,657 | 2,657 | ||||||||||||||||||||
Lease liability |
| 231 | (ii | ) | 231 | 231 | ||||||||||||||||||
Income taxes payable |
3,605 | | 3,605 | 3,605 | ||||||||||||||||||||
Advances from related parties |
116,235 | | 116,235 | 116,235 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
128,669 | 96 | 128,765 | | 128,765 | |||||||||||||||||||
Lease liability |
| 2,000 | (ii | ) | 2,000 | 2,000 | ||||||||||||||||||
Provisions |
| 23 | (ii | ) | 520 | (520 | ) | | ||||||||||||||||
497 | (iii | ) | ||||||||||||||||||||||
Advances from related parties |
| | | | ||||||||||||||||||||
Deferred tax liability |
| 17,624 | (iv | ) | 17,624 | 17,624 | ||||||||||||||||||
Other long term liabilities |
| | | 520 | 520 | |||||||||||||||||||
Total liabilities |
128,669 | 20,240 | 148,909 | | 148,909 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Shareholders equity |
17,742 | 63,768 | (i | ) | 62,945 | 62,945 | ||||||||||||||||||
(444) | (ii | ) | ||||||||||||||||||||||
(497) | (iii | ) | ||||||||||||||||||||||
(17,624) | (iv | ) | ||||||||||||||||||||||
Total liabilities and shareholders equity |
146,411 | 65,443 | 211,854 | | 211,854 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
16
Redecan Adjusted Unaudited Condensed Consolidated Statement of Net EarningsInterim
ASPE | IFRS | |||||||||||||||||||||||||||||||||||
Year
ended December 31, 2020 |
Six
months ended June 30, 2020 |
Three
months ended March 31, 2021 |
Nine
months ended March 31, 2021 |
ASPE to
IFRS differences |
Note 8 |
Nine
months ended March 31, 2021 |
Presentation
reclassification |
Nine
months ended March 31, 2021 |
||||||||||||||||||||||||||||
Revenue before returns and allowances |
107,296 | 38,140 | 35,038 | 104,194 | (1,259) | (iii) | 102,935 | (102,935) | | |||||||||||||||||||||||||||
Revenue from sale of goods |
| | | | | | 98,147 | 98,147 | ||||||||||||||||||||||||||||
Returns and allowances |
(5,209 | ) | (1,542 | ) | (1,121 | ) | (4,788 | ) | | (4,788 | ) | 4,788 | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Revenue before excise taxes |
102,087 | 36,598 | 33,917 | 99,406 | (1,259) | 98,147 | | 98,147 | ||||||||||||||||||||||||||||
Excise taxes |
(28,438) | (10,164) | (9,265) | (27,539) | | (27,539) | | (27,539) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net revenue |
73,649 | 26,434 | 24,652 | 71,867 | (1,259) | 70,608 | | 70,608 | ||||||||||||||||||||||||||||
Cost of goods sold |
35,812 | 16,107 | 10,280 | 29,985 | (75) | (ii) | 29,910 | | 29,910 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross (loss) / profit before fair value adjustments |
37,837 | 10,327 | 14,372 | 41,882 | (1,184) | 40,698 | | 40,698 | ||||||||||||||||||||||||||||
Realized fair value amounts on inventory sold |
| | | | 72,209 | (i) | 72,209 | | 72,209 | |||||||||||||||||||||||||||
Unrealized gain on changes in fair value of biological assets |
| | | | (115,454) | (i) | (115,454) | | (115,454) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross profit |
37,837 | 10,327 | 14,372 | 41,882 | 42,061 | 83,943 | | 83,943 | ||||||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||||||
Selling, general and administrative |
| | | | | | 15,886 | 15,886 | ||||||||||||||||||||||||||||
Marketing and promotion |
| | | | | | 1,638 | 1,638 | ||||||||||||||||||||||||||||
Advertising and promotion |
997 | 86 | 727 | 1,638 | | 1,638 | (1,638) | | ||||||||||||||||||||||||||||
Amortization |
1,304 | 661 | 379 | 1,022 | 186 | (ii) | 1,208 | (1,208) | | |||||||||||||||||||||||||||
Depreciation of property, plant and equipment |
| | | | | | 1,153 | 1,153 | ||||||||||||||||||||||||||||
Amortization of intangible assets |
| | | | | | 55 | 55 | ||||||||||||||||||||||||||||
Business taxes and licences |
2,149 | 873 | 673 | 1,949 | | 1,949 | (1,949) | | ||||||||||||||||||||||||||||
Consulting fees |
1,316 | 931 | 142 | 527 | | 527 | (527) | | ||||||||||||||||||||||||||||
Donations |
| | | | | | | | ||||||||||||||||||||||||||||
Freight and logistics |
1,851 | 778 | 681 | 1,754 | | 1,754 | (1,754) | | ||||||||||||||||||||||||||||
Insurance |
811 | 304 | 276 | 783 | | 783 | (783) | | ||||||||||||||||||||||||||||
Interest and bank charges |
148 | 30 | 43 | 161 | | 161 | (161) | | ||||||||||||||||||||||||||||
Interest expense on lease liability |
| | | | 111 | (ii) | 111 | (111) | | |||||||||||||||||||||||||||
Meals and entertainment |
119 | 59 | 25 | 85 | | 85 | (85) | | ||||||||||||||||||||||||||||
Office and general |
1,904 | 763 | 513 | 1,654 | | 1,654 | (1,654) | | ||||||||||||||||||||||||||||
Professional fees |
261 | 81 | 16 | 196 | | 196 | (196) | | ||||||||||||||||||||||||||||
Property tax |
101 | 102 | 54 | 53 | | 53 | (53) | | ||||||||||||||||||||||||||||
Rental |
152 | 76 | 37 | 113 | (110) | (ii) | 3 | (3) | | |||||||||||||||||||||||||||
Repairs and maintenance |
1,123 | 421 | 259 | 961 | | 961 | (961) | | ||||||||||||||||||||||||||||
Salaries, wages and benefits |
6,189 | 2,014 | 1,404 | 5,579 | | 5,579 | (5,579) | | ||||||||||||||||||||||||||||
Supplies |
2,738 | 1,339 | 832 | 2,231 | | 2,231 | (2,231) | | ||||||||||||||||||||||||||||
Impairment of property, plant and equipment |
589 | | 37 | 626 | | 626 | | 626 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
21,752 | 8,518 | 6,098 | 19,332 | 187 | 19,519 | (161) | 19,358 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Earnings from operations |
16,085 | 1,809 | 8,274 | 22,550 | 41,874 | 64,424 | 161 | 64,585 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Finance expense, net |
| | | | | | (161) | (161) | ||||||||||||||||||||||||||||
Non-operating expense, net |
| | | | | | (148) | (148) | ||||||||||||||||||||||||||||
Earnings and comprehensive earnings attributable to shareholders before tax |
16,085 | 1,809 | 8,274 | 22,550 | 41,874 | 64,424 | (148) | 64,276 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Provision for income taxes |
(4,500) | (1,545) | (1,230) | (4,185) | | (4,185) | (4,185) | |||||||||||||||||||||||||||||
Deferred income tax expense |
| | | | (12,672) | (iv) | (12,672) | 12,672 | | |||||||||||||||||||||||||||
Income tax payable |
| | | | | | (12,672) | (12,672) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||||||
Foreign exchange gain (loss) |
37 | 55 | (130) | (148) | | (148) | 148 | | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net earnings and comprehensive income |
11,622 | 319 | 6,914 | 18,217 | 29,202 | 47,419 | | 47,419 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Redecan Adjusted Unaudited Condensed Consolidated Statement of Net Earnings Annual
ASPE | IFRS | |||||||||||||||||||||||||||||||||||
Year
ended December 31, 2019 |
Nine
months ended September 30, 2020 |
Nine
months ended September 30, 2019 |
Twelve
months ended September 30, 2020 |
ASPE to
IFRS differences |
Note 8 |
Twelve
months ended September 30, 2020 |
Presentation
reclassification |
Twelve
months ended September 30, 2020 |
||||||||||||||||||||||||||||
Revenue before returns and allowances |
17,337 | 10,545 | 72,015 | 78,807 | (367 | ) | (iii | ) | 78,440 | (78,440 | ) | | ||||||||||||||||||||||||
Revenue from sale of goods |
| | | | | | 74,478 | 74,478 | ||||||||||||||||||||||||||||
Returns and allowances |
(152 | ) | (121 | ) | (3,931 | ) | (3,962 | ) | | (3,962 | ) | 3,962 | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Revenue before excise taxes |
17,185 | 10,424 | 68,084 | 74,845 | (367 | ) | 74,478 | | 74,478 | |||||||||||||||||||||||||||
Excise taxes |
(3,965 | ) | (2,575 | ) | (18,895 | ) | (20,285 | ) | | (20,285 | ) | | (20,285 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net revenue |
13,220 | 7,849 | 49,189 | 54,560 | (367 | ) | 54,193 | | 54,193 | |||||||||||||||||||||||||||
Cost of goods sold |
6,028 | 3,946 | 25,940 | 28,022 | (100 | ) | (ii | ) | 27,922 | | 27,922 | |||||||||||||||||||||||||
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Gross (loss) / profit before fair value adjustments |
7,192 | 3,903 | 23,249 | 26,538 | (267 | ) | 26,271 | | 26,271 | |||||||||||||||||||||||||||
Realized fair value amounts on inventory sold |
| | | | 47,465 | (i | ) | 47,465 | | 47,465 | ||||||||||||||||||||||||||
Unrealized gain on changes in fair value of biological assets |
| | | | (102,715 | ) | (i | ) | (102,715 | ) | | (102,715 | ) | |||||||||||||||||||||||
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Gross profit |
7,192 | 3,903 | 23,249 | 26,538 | 54,983 | 81,521 | | 81,521 | ||||||||||||||||||||||||||||
Operating expenses |
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Selling, general and administrative |
| | | | | | 14,127 | 14,127 | ||||||||||||||||||||||||||||
Marketing and promotion |
| | | | | | 421 | 421 | ||||||||||||||||||||||||||||
Advertising and promotion |
319 | 169 | 271 | 421 | | 421 | (421 | ) | | |||||||||||||||||||||||||||
Amortization |
1,022 | 515 | 1,040 | 1,547 | 245 | (ii | ) | 1,792 | (1,792 | ) | | |||||||||||||||||||||||||
Depreciation of property, plant and equipment |
| | | | | | 1,557 | 1,557 | ||||||||||||||||||||||||||||
Amortization of intangible assets |
| | | | | | 235 | 235 | ||||||||||||||||||||||||||||
Business taxes and licences |
486 | 339 | 1,547 | 1,694 | | 1,694 | (1,694 | ) | | |||||||||||||||||||||||||||
Consulting fees |
| | 1,131 | 1,131 | | 1,131 | (1,131 | ) | | |||||||||||||||||||||||||||
Donations |
2 | 1 | | 1 | | 1 | (1 | ) | | |||||||||||||||||||||||||||
Freight and logistics |
284 | 177 | 1,385 | 1,492 | | 1,492 | (1,492 | ) | | |||||||||||||||||||||||||||
Insurance |
514 | 362 | 538 | 690 | | 690 | (690 | ) | | |||||||||||||||||||||||||||
Interest and bank charges |
89 | 54 | 79 | 114 | | 114 | (114 | ) | | |||||||||||||||||||||||||||
Interest expense on lease liability |
| | | | 148 | (ii | ) | 148 | (148 | ) | | |||||||||||||||||||||||||
Meals and entertainment |
100 | 79 | 87 | 108 | | 108 | (108 | ) | | |||||||||||||||||||||||||||
Office and general |
489 | 341 | 1,271 | 1,419 | | 1,419 | (1,419 | ) | | |||||||||||||||||||||||||||
Professional fees |
174 | 142 | 168 | 200 | | 200 | (200 | ) | | |||||||||||||||||||||||||||
Property tax |
64 | | 102 | 166 | | 166 | (166 | ) | | |||||||||||||||||||||||||||
Rental |
191 | 117 | 114 | 188 | (214 | ) | (ii | ) | (26 | ) | 26 | | ||||||||||||||||||||||||
Repairs and maintenance |
271 | 205 | 831 | 897 | | 897 | (897 | ) | | |||||||||||||||||||||||||||
Salaries, wages and benefits |
2,420 | 1,739 | 3,265 | 3,946 | | 3,946 | (3,946 | ) | | |||||||||||||||||||||||||||
Supplies |
727 | 574 | 2,108 | 2,261 | | 2,261 | (2,261 | ) | | |||||||||||||||||||||||||||
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7,152 | 4,814 | 13,937 | 16,275 | 179 | 16,454 | (114 | ) | 16,340 | ||||||||||||||||||||||||||||
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Earnings (loss) from operations |
40 | (911 | ) | 9,312 | 10,263 | 54,804 | 65,067 | 114 | 65,181 | |||||||||||||||||||||||||||
Finance expense, net |
| | | | | | (114 | ) | (114 | ) | ||||||||||||||||||||||||||
Non-operating expense, net |
| | | | | | (2 | ) | (2 | ) | ||||||||||||||||||||||||||
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Earnings (loss) and comprehensive income (loss) attributable to shareholders before tax |
40 | (911 | ) | 9,312 | 10,263 | 54,804 | 65,067 | (2 | ) | 65,065 | ||||||||||||||||||||||||||
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Provision for income taxes |
(123 | ) | | (2,254 | ) | (2,377 | ) | | (2,377 | ) | (2,377 | ) | ||||||||||||||||||||||||
Deferred income tax expense |
| | | | (15,528 | ) | (iv | ) | (15,528 | ) | 15,528 | | ||||||||||||||||||||||||
Income tax payable |
| | | | | | (15,528 | ) | (15,528 | ) | ||||||||||||||||||||||||||
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Other comprehensive income |
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Foreign exchange gain (loss) |
44 | 14 | (32 | ) | (2 | ) | | (2 | ) | 2 | | |||||||||||||||||||||||||
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Net earnings (loss) and comprehensive income (loss) |
(39 | ) | (897 | ) | 7,026 | 7,884 | 39,276 | 47,160 | | 47,160 | ||||||||||||||||||||||||||
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18
IFRS differs in material respects in certain areas from ASPE. The following material adjustments have been made to reflect Redecans historical consolidated statement of earnings on an IFRS basis for the purposes of the unaudited pro forma financial information, these adjustments are before the reclassification adjustments:
i. |
Biological assets and inventory |
Cannabis plants are recognized as biological assets under IFRS. Under IFRS, biological assets are accounted for using the income approach at fair value less costs to sell and are revalued at each subsequent reporting date up to the point of harvest, which becomes the basis for the cost of inventories after harvest. Under IFRS, unrealized gains or losses arising from changes in fair value less cost to sell during the period are included in the statement of net earnings.
Inventory is valued at the lower of cost and net realizable value. Under ASPE, cannabis plants are recorded at the lower of cost and net realizable value. Cost is determined by the weighted average method, and includes purchase price of direct materials, direct labour and an allocation of certain overheads. Inventories of harvested cannabis are transferred from biological assets at their fair value at harvest date, 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. The identified capitalized direct and indirect costs related to inventory are subsequently recorded within cost of goods sold on the statement of net earnings at the time the product is sold, with the exclusion of realized fair value amounts on inventory sold which are recorded as a separate line within gross profit.
The following table shows the addition of the fair value adjustment to the cost basis of biological assets and inventory under ASPE to reflect the fair value of cannabis plants in accordance with IFRS and includes a corresponding impact to shareholders equity:
As at March 31, 2021
$ |
||||
Inventory |
52,367 | |||
Biological assets |
11,401 | |||
Shareholders equity |
63,768 |
The following table reflects the addition of the changes in fair value recognized in the period of change within the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:
Year ended
December 31, 2020 $ |
Six months
ended June 30, 2020 $ |
Three months
ended March 31, 2021 $ |
Nine months
ended March 31, 2021 $ |
|||||||||||||
Realized fair value amounts on inventory sold |
81,213 | 24,476 | 15,472 | 72,209 | ||||||||||||
Unrealized gain on changes in fair value of biological assets |
(122,237 | ) | (27,615 | ) | (20,832 | ) | (115,454 | ) |
The following table reflects the addition of the changes in fair value recognized in the period of change within the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:
Year ended
December 31, 2019 $ |
Nine months
ended September 30, 2019 $ |
Nine months
ended September 30, 2020 $ |
Twelve months
ended September 30, 2020 $ |
|||||||||||||
Realized fair value amounts on inventory sold |
6,014 | 3,499 | 44,950 | 47,465 | ||||||||||||
Unrealized gain on changes in fair value of biological assets |
(18,933 | ) | (8,574 | ) | (92,356 | ) | (102,715 | ) |
ii. |
Leases |
For lessees, IFRS does not distinguish between operating and finance lease requirements and recognizes a right-of-use asset and lease liability at the commencement of all leases except short-term leases and leases of low value assets. To reflect the IFRS lease accounting requirements, the following adjustments were made to the unaudited condensed consolidated statement of financial position:
19
As at March 31, 2021
$ |
||||
Increase in right-of-use assets, net |
1,675 | |||
Decrease in trade and other payables |
(135 | ) | ||
Increase in current lease liability |
231 | |||
Increase in non-current lease liability |
2,000 | |||
Increase in provisions |
23 | |||
Decrease in shareholders equity |
(444 | ) |
To recognize the depreciation of the right-of-use assets and interest on lease liabilities in the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021, the following adjustments were made:
Year ended
December 31, 2020 $ |
Six months
ended June 30, 2020 $ |
Three months
ended March 31, 2021 $ |
Nine months
ended March 31, 2021 $ |
|||||||||||||
Cost of goods sold |
(100 | ) | (50 | ) | (25 | ) | (75 | ) | ||||||||
Amortization |
249 | 125 | 62 | 186 | ||||||||||||
Interest expense on lease liability |
148 | 74 | 37 | 111 | ||||||||||||
Rental expense |
(149 | ) | (75 | ) | (36 | ) | (110 | ) |
To recognize the depreciation of the right-of-use assets and interest on lease liabilities in the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020, the following adjustments were made:
Year ended
December 31, 2019 $ |
Nine months
ended September 30, 2019 $ |
Nine months
ended September 30, 2020 $ |
Twelve months
ended September 30, 2020 $ |
|||||||||||||
Cost of goods sold |
(75 | ) | (50 | ) | (75 | ) | (100 | ) | ||||||||
Amortization |
198 | 140 | 187 | 245 | ||||||||||||
Interest expense on lease liability |
146 | 109 | 111 | 148 | ||||||||||||
Rental expense |
(190 | ) | (88 | ) | (112 | ) | (214 | ) |
iii. |
Revenue |
IFRS applies a five step control based model for revenue recognition, whereas ASPE recognizes revenue once the risk and rewards have been transferred to the customer. Under IFRS, variable consideration in customer contracts can result in consideration paid or payable to customers if a distinct good or service is received from the customer as a reduction of the transaction price. As at March 31, 2021, to reflect the impact of variable consideration an increase of $497 was recognized as a contract liability with a corresponding adjustment to shareholders equity.
The impact of the variable consideration from discount features resulted in the following adjustments on the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:
Year ended
December 31, 2020 $ |
Six months
ended June 30, 2020 $ |
Three months
ended March 31, 2021 $ |
Nine months
ended March 31, 2021 $ |
|||||||||||||
Decrease to revenue before returns and allowances |
(250 | ) | 730 | (279 | ) | (1,259 | ) |
The impact of the variable consideration from discount features resulted in the following adjustments on the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:
20
Year ended
December 31, 2019 $ |
Nine months
ended September 30, 2019 $ |
Nine months
ended September 30, 2020 $ |
Twelve months
ended September 30, 2020 $ |
|||||||||||||
Decrease to revenue before returns and allowances |
(113 | ) | | (254 | ) | (367 | ) |
iv. |
Income taxes |
IFRS requires an entity to recognize both current and deferred taxes whereas ASPE permits the taxes payable method. Deferred tax is required to be recognized on any temporary differences between the carrying amount of assts and liabilities and the corresponding tax bases used in the calculation of taxable earnings. Deferred tax aessets and liabilities have been measured at the tax rates that are expected to apply in the period when the asset is realized, and the liability is settled. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets have been reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.
As at March 31, 2021, a deferred tax liability of $17,624 was recognized with a corresponding adjustment to shareholders equity.
The impact of the applying deferred tax accounting resulted in the following adjustment on the unaudited condensed consolidated statement of net earnings for the nine months ended March 31, 2021:
Year ended
December 31, 2020 $ |
Six months
ended June 30, 2020 $ |
Three months
ended March 31, 2021 $ |
Nine months
ended March 31, 2021 $ |
|||||||||||||
Deferred income tax expense |
(10,619 | ) | (995 | ) | (3,048 | ) | (12,672 | ) |
The impact of the applying deferred tax accounting resulted in the following adjustment on the unaudited condensed consolidated statement of net earnings for the twelve months ended September 30, 2020:
Year ended
December 31, 2019 $ |
Nine months
ended September 30, 2019 $ |
Nine months
ended September 30, 2020 $ |
Twelve months
ended September 30, 2020 $ |
|||||||||||||
Deferred income tax expense |
(3,956 | ) | (1,781 | ) | (13,353 | ) | (15,528 | ) |
21