UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 28, 2019
TILRAY, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware |
001-38594 |
82-4310622 |
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
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1100 Maughan Road Nanaimo, BC |
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V9X IJ2 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (844) 845-7291
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):
☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Class 2 Common Stock, $0.0001 par value per share |
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TLRY |
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The Nasdaq Global Select Market |
On March 4, 2019, Tilray, Inc. (“Tilray”) filed a Current Report on Form 8-K announcing that Tilray completed the acquisition (the “Acquisition”) of FHF Holdings Ltd. (“Manitoba Harvest”) on February 28, 2019 pursuant to a plan of arrangement under Division 5 of Part 9 of the Business Corporations Act (British Columbia) (the “Manitoba Arrangement”). A description of the consideration and the terms of the Manitoba Arrangement and a copy of the Arrangement Agreement pursuant to which the Manitoba Arrangement occurred are included in the Current Report on Form 8-K filed by Tilray on February 25, 2019.
Tilray is filing this Amendment on Form 8-K/A solely to provide the historical financial statements of Manitoba Harvest required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K in respect of the acquisition of Manitoba Harvest.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The audited financial statements of Manitoba Harvest as of and for the years ended December 31, 2018 and 2017, as well as accompanying notes thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and incorporated herein by reference. The consent of Grant Thornton LLP , the independent auditors of Manitoba Harvest, is filed herewith as Exhibit 23.1.
(b) Pro forma financial information.
The unaudited pro forma combined financial statements of Tilray and Manitoba Harvest as of and for the year ended December 31, 2018, as well as accompanying notes thereto, each giving effect to the Acquisition, are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated herein by reference.
(d) Exhibits.
Exhibit Number |
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Description |
2.2* |
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2.3* |
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23.1 |
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Consent of Grant Thornton LLP, independent auditors of FHF Holdings Ltd. |
99.1 |
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99.2 |
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Unaudited pro forma combined financial information of Tilray, Inc. |
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* Schedules have been omitted pursuant to Item 601(b)(2) of Regulations S-K. The registrant will furnish copies of any such schedules to the Securities and Exchange Commission upon request.
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1
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.
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Tilray, Inc. |
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Date: May 13, 2019 |
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By: |
/s/ Brendan Kennedy |
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Brendan Kennedy |
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Chief Executive Officer |
2
Exhibit 23.1
Consent of Independent Chartered Public Accountants
We have issued our report dated March 6, 2019, with respect to the consolidated financial statements of FHF Holdings Ltd. for the year ended December 31, 2018 included in the Current Report on Form 8-K/A of Tilray, Inc. dated May 13, 2019. We consent to the incorporation by reference of said report in the Registration Statement of Tilray, Inc. on Form S-8 (File No. 333-226267).
/s/ GRANT THORNTON LLP
Mississauga, Canada
May 13, 2019
Exhibit 99.1
Consolidated Financial Statements and Report of Independent Chartered Professional Accountants
FHF HOLDINGS LTD. AND SUBSIDIARIES
December 31, 2018 and 2017
FHF Holdings Ltd. and Subsidiaries
Contents
|
Page |
Report of Independent Chartered Professional Accountants |
1 |
Consolidated Balance Sheets |
2 |
Consolidated Statements of Comprehensive Loss |
3 |
Consolidated Statements of Preferred Stock and Stockholders’ Equity |
4 |
Consolidated Statements of Cash Flows |
5 |
Notes to Consolidated Financial Statements |
6 |
Report of Independent
Chartered Professional Accountants
Board of Directors
FHF Holdings Ltd. and Subsidiaries
Grant Thornton LLP
Suite 501
201 City Centre Drive Mississauga, ON L5B 2T4
T +1 416 366 0100
F +1 905 804 0509
We have audited the accompanying consolidated financial statements of FHF Holdings Ltd. and Subsidiaries (collectively, the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and December 31, 2017, and the related consolidated statements of comprehensive loss, preferred stock and stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FHF Holdings Ltd. and Subsidiaries as of December 31, 2018 and December 31, 2017, and the consolidated results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP |
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Mississauga, Canada |
Chartered Professional Accountants |
March 6, 2019 |
Licensed Public Accountants |
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grantthornton.ca
FHF Holdings Ltd. and Subsidiaries
As at December 31, 2018 and 2017
(in thousands, except share data)
TOTAL ASSETS
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December 31, |
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December 31, |
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Current assets: |
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2018 |
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2017 |
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Cash |
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$ |
3,591 |
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$ |
1,579 |
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Accounts receivable, net of allowance for doubtful accounts of $146 (2017: $89) |
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9,345 |
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6,684 |
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Inventory, net (note 2) |
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15,939 |
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12,353 |
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Income tax receivable |
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216 |
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330 |
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Prepaid expenses |
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1,032 |
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|
633 |
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Other current assets |
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34 |
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34 |
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Total current assets |
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30,157 |
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21,613 |
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Property and equipment, net (note 3) |
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24,751 |
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25,917 |
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Intangible assets, net (note 4) |
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72,978 |
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78,771 |
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Goodwill (note 4) |
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51,499 |
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51,499 |
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Other long-term assets |
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- |
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36 |
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Total assets |
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$ |
179,385 |
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$ |
177,836 |
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TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities: |
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Accounts payable |
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$ |
5,806 |
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$ |
2,805 |
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Accrued expenses |
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7,502 |
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4,648 |
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Related party revolving line of credit (note 5) |
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12,954 |
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5,936 |
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Current portion of related party long-term debt (note 5) |
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2,375 |
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2,375 |
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Current portion of long-term debt (note 5) |
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691 |
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711 |
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Total current liabilities |
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29,328 |
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16,475 |
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Related party long-term debt (note 5) |
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49,807 |
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52,104 |
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Long-term debt (note 5) |
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2,854 |
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3,526 |
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Deferred tax liability (note 7) |
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17,506 |
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19,740 |
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Total liabilities |
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99,495 |
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91,845 |
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Commitments and contingencies (note 6)
Class A Preferred stock, no par value, issued and outstanding 325 (2017: 325) |
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(note 9) |
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48,301 |
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43,126 |
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Class A Common stock, no par value, issued and outstanding 865,419 (2017: |
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865,419) |
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66,127 |
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65,207 |
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Class B Common stock, no par value, issued and outstanding 263,748 (2017: |
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263,748) |
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18,990 |
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18,990 |
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Accumulated deficit |
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(53,038 |
) |
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(40,778 |
) |
Accumulated other comprehensive loss |
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(490 |
) |
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(554 |
) |
Total stockholders’ equity |
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31,589 |
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42,865 |
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Total liabilities, preferred stock and stockholders’ equity |
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$ |
179,385 |
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$ |
177,836 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
FHF Holdings Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the years ended December 31, 2018 and 2017
(in thousands)
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2018 |
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2017 |
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Net revenue from contracts with customers |
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$ |
87,415 |
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$ |
72,400 |
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Cost of sales |
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49,997 |
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39,775 |
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Gross profit |
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37,418 |
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32,625 |
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Intangible asset impairment loss (note 4) |
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- |
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2,900 |
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Goodwill impairment loss (note 4) |
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- |
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7,895 |
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Selling, general and administrative expenses |
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39,690 |
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33,978 |
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(2,272 |
) |
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(12,148 |
) |
Operating loss |
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Other income, net |
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- |
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(1 |
) |
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Interest expense |
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17 |
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52 |
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Related party interest expense (note 5) |
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6,709 |
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5,547 |
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Loss before provision for income taxes |
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(8,998 |
) |
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(17,746 |
) |
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Provision for income tax benefit (note 7) |
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(1,913 |
) |
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(1,884 |
) |
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Net loss |
|
|
(7,085 |
) |
|
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(15,862 |
) |
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|
|
|
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Other comprehensive income (loss), net of tax: |
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|
|
|
|
|
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Foreign currency translation adjustments |
|
|
64 |
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|
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(554 |
) |
|
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|
|
|
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Comprehensive loss |
|
$ |
(7,021 |
) |
|
$ |
(16,416 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
3
FHF Holdings Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
For the years ended December 31, 2018 and 2017
(in thousands, except share data)
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Stockholders’ Equity |
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Preferred Stock (note 9) |
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Class A Common Stock |
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Class B Common Stock |
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Accumulated Other Comprehensive Loss |
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Accumulated Deficit |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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|||||||||||||||
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Balance as at January 1, 2017 |
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325 |
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$ |
38,506 |
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865,419 |
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$ |
63,915 |
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|
263,748 |
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|
$ |
18,990 |
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|
$ |
- |
|
|
$ |
(20,296 |
) |
|
$ |
62,609 |
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|
|
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Stock-based compensation |
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- |
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- |
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|
|
- |
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1,292 |
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,292 |
|
Accretion of preferred stock liquidation amount (note 9) |
|
|
- |
|
|
|
4,620 |
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,620 |
) |
|
|
(4,620 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,862 |
) |
|
|
(15,862 |
) |
Other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(554 |
) |
|
|
- |
|
|
|
(554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
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Balance as at December 31, 2017 |
|
|
325 |
|
|
$ |
43,126 |
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|
|
865,419 |
|
|
$ |
65,207 |
|
|
|
263,748 |
|
|
$ |
18,990 |
|
|
$ |
(554 |
) |
|
$ |
(40,778 |
) |
|
$ |
42,865 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
920 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
920 |
|
Accretion of preferred stock liquidation amount (note 9) |
|
|
- |
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|
|
5,175 |
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,175 |
) |
|
|
(5,175 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,085 |
) |
|
|
(7,085 |
) |
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
64 |
|
|
|
- |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Balance as at December 31, 2018 |
|
|
325 |
|
|
$ |
48,301 |
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|
865,419 |
|
|
$ |
66,127 |
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|
|
263,748 |
|
|
$ |
18,990 |
|
|
$ |
(490 |
) |
|
$ |
(53,038 |
) |
|
$ |
31,589 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
FHF Holdings Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2018 and 2017
(in thousands)
|
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2018 |
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2017 |
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Cash flows from operating activities : |
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Net loss |
|
$ |
(7,085 |
) |
|
$ |
(15,862 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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|
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|
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Depreciation and amortization |
|
|
8,083 |
|
|
|
8,227 |
|
Stock-based compensation |
|
|
920 |
|
|
|
1,292 |
|
Other non-cash items |
|
|
96 |
|
|
|
(605 |
) |
Deferred tax, net |
|
|
(2,084 |
) |
|
|
(2,036 |
) |
Intangible asset impairment loss |
|
|
- |
|
|
|
2,900 |
|
Loss on sales of assets and other non-cash losses |
|
|
20 |
|
|
|
- |
|
Goodwill impairment loss |
|
|
- |
|
|
|
7,895 |
|
Changes in: |
|
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|
|
|
|
Accounts receivable |
|
|
(2,661 |
) |
|
|
1,743 |
|
Other current assets |
|
|
(399 |
) |
|
|
107 |
|
Inventory, net |
|
|
(3,586 |
) |
|
|
(1,678 |
) |
Accounts payable |
|
|
3,001 |
|
|
|
(894 |
) |
Accrued expenses |
|
|
2,854 |
|
|
|
971 |
|
Net cash (used in) provided by operating activities |
|
|
(841 |
) |
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities : |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net of dispositions |
|
|
(1,055 |
) |
|
|
(1,345 |
) |
Investment in intellectual property |
|
|
(89 |
) |
|
|
(23 |
) |
Net cash used in investing activities |
|
|
(1,144 |
) |
|
|
(1,368 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from related party loans and line of credit |
|
|
7,000 |
|
|
|
4,000 |
|
Repayment on related party loans and line of credit |
|
|
(2,375 |
) |
|
|
(5,125 |
) |
Payments on loans and lease obligations |
|
|
(692 |
) |
|
|
(700 |
) |
Net cash provided by (used in) financing activities |
|
|
3,933 |
|
|
|
(1,825 |
) |
Translation impact |
|
|
64 |
|
|
|
- |
|
Net increase (decrease) in cash |
|
|
2,012 |
|
|
|
(1,133 |
) |
Cash, beginning of year |
|
|
1,579 |
|
|
|
2,712 |
|
Cash, end of year |
|
$ |
3,591 |
|
|
$ |
1,579 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash payments made for interest expense |
|
$ |
16 |
|
|
$ |
5,454 |
|
Cash payments made for income taxes |
|
$ |
141 |
|
|
$ |
881 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
FHF Holdings Ltd. and Subsidiaries (the “Company” or “FHF”) is a private company incorporated in 2015 under the Canada Business Corporations Act . FHF manufactures, markets and distributes food products from hemp seed. FHF offers a broad range of natural and organic food products and ingredients that are sold through more than 450 retailers and websites in Canada, the United States (“U.S.”) and internationally under the brand names of Manitoba Harvest and Just Hemp Foods and to distributors as Hemp Oil Canada Inc. (“HOCI”). FHF is headquartered in Winnipeg, Manitoba, Canada and has offices and manufacturing facilities in Winnipeg and St. Agathe, Manitoba, Canada and offices in Minneapolis, Minnesota, U.S.
On July 10, 2015, the Company acquired 100% of Fresh Hemp Foods Ltd. (“FHFL”), incorporated in 2015 under the Canada Business Corporations Act . Compass Group Diversified Holdings LLC (“Compass”), the majority owner of the Company, made loans to the Company of $30.4 million and purchased a controlling interest in the Company.
On January 1, 2017, as part of a reorganization, FHFL amalgamated with its wholly owned subsidiary, HOCI. The transaction was between entities under common control and, accordingly, the acquired assets and liabilities were recorded at the carrying amount. The consolidated financial statements of the Company report the results of operations of HOCI for the period in which the transfer occurs and all prior periods during which the entities were under common control.
Principles of Consolidation
These consolidated financial statements represent the consolidated operations of FHF Holdings Ltd., Fresh Hemp Foods Ltd., and Manitoba Harvest USA LLC. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 revenue and expenses during the reporting periods. Such estimates include sales allowances, spoil and returns reserves on inventory, allowances for product demonstrations, allowance for doubtful accounts, reserves for excess or obsolete inventory, estimated useful lives of property and equipment and intangible assets, valuation allowance for deferred tax assets and uncertain tax positions, assumptions in the valuation of stock-based compensation, and impairment of intangibles, goodwill and other long-term assets. Actual results could differ from those estimates.
6
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers . The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this ASU on January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements including the presentation of revenues in the consolidated statements of comprehensive loss.
The performance obligation on sales of products is satisfied upon receipt by the customers for branded products sold through the natural and organic distribution channel and upon shipment for ingredient products, including freight revenue, provided that persuasive evidence of an agreement exists, the price is fixed and determinable, title has transferred and collection of the resulting receivable is reasonably assured. Revenue is recorded at a point in time net of sales tax and payments are due within 30 days of invoicing date. The Company estimates its variable consideration which includes returns and sales allowances using the expected value method as a reduction of product revenue based on historical rates of returns and vendor allowances.
Cash
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable, net
Accounts receivable are unsecured customer obligations which generally require payment within various terms from the invoice date. Accounts receivable are stated at the invoice amount. Financing terms vary by customer. Payments of accounts receivable are applied to the specific invoices identified on the customer’s remittance advice or, if unspecified, to the earliest unpaid invoices.
The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflect management’s best estimate of amounts that may not be collected. The Company records an allowance for doubtful accounts in assessing collectability of amounts outstanding. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable, and historical experience. If there is a deterioration of a major customer’s creditworthiness, or actual defaults are higher than the historical experience, management’s estimates of the recoverability of amounts due to the Company could be adversely affected. All accounts or portions thereof deemed to be uncollectible or that may require an excessive collection cost are written off to the allowance for doubtful accounts. The Company also records accruals for chargebacks which includes an estimate of fees charged by retail customers primarily for promotions, discounts and returns. The charges for these estimated fees are based on historical experience and are reflected as a reduction to net sales and included in accrued liabilities.
7
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Activity in the Company’s allowance for doubtful accounts consists of the following, (in thousands):
|
|
2018 |
|
|
2017 |
|
||
Allowance, beginning of the year |
|
$ |
89 |
|
|
$ |
257 |
|
Provision recorded for estimated bad debts |
|
|
106 |
|
|
|
9 |
|
Recoveries of allowances previously accrued |
|
|
15 |
|
|
|
(177 |
) |
Write off of accounts receivable |
|
|
(64 |
) |
|
|
- |
|
Allowance, end of the year |
|
$ |
146 |
|
|
$ |
89 |
|
Inventory, net
Inventories are valued at the lower of weighted average cost or market. Raw materials are hempseed, packaging and other minor ingredients whose costs are determined on a weighted average first-in, first-out basis of actual costs paid. Work-in-process and finished goods inventory are composed of raw materials, labour and overhead. Inventory is reflected net of reserves for excess and obsolete inventory.
The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s consolidated financial position, results of operations, and cash flows.
Property and Equipment, net
Property and equipment are stated at cost and depreciated and amortized using the straight-line method over the estimated useful lives of the depreciable assets as follows:
Land |
Indefinite |
Buildings |
25 years |
Machinery and equipment |
15 years |
Leasehold improvements |
10 years |
Furniture and fixtures |
10 years |
Computer hardware and software |
5 years |
Costs incurred for property and equipment are recorded as construction in progress until placed in service. Once placed in service, depreciation expense is recorded in accordance with the Company’s policy for the class of asset as noted above. Property and equipment that have definite lives are evaluated for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable (“triggering event”). Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to its fair value. Based on this criteria, there were no impairment charges for the years ended December 31, 2018 and 2017.
8
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill and Intangible Assets, net
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment tests annually and more frequently in certain circumstances. In accordance with accounting guidelines, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. The Company has selected March 31 as its annual goodwill test date.
The first step of the goodwill impairment process after the qualitative assessment fails is estimating the fair value of each of its reporting units based on a discounted cash flow (“DCF”) model using revenue and profit forecast and a market approach which compares peer data and earnings multiples. The Company then compares those estimated fair values with the carrying values, which include allocated goodwill. If the estimated fair value is less than the carrying value, then a goodwill impairment is recorded.
The Company cannot predict the occurrence of certain future events that might adversely affect the implied value of goodwill and/or the fair value of intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on its customer base, and material adverse effects in relationships with significant customers. The impact of over-estimating or under-estimating the implied fair value of goodwill could have a material effect on the results of operations and financial position. In addition, the value of the implied goodwill is subject to the volatility of the Company’s operations which may result in significant fluctuation in the value assigned at any point in time.
As a result of operating results that were above forecasted amounts, the Company determined that there is no indicator of impairment during the year 2018. Therefore, the Company did not perform impairment testing of the goodwill and indefinite lived tradename as at December 31, 2018 (note 4).
9
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill and Intangible Assets, net – Continued
Intangible Assets, net
Intangible assets with definite useful lives include customer relationships, manufacturing technology, the Hemp Oil trade name, trademarks and are subject to amortization over their respective useful lives. These intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. If facts and circumstances indicate that the carrying value might not be recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.
The Manitoba Harvest trade name is considered to have an indefinite life and is not amortized. The Manitoba Harvest trade name is subject to testing for impairment at least annually.
Definite life intangible assets are stated at cost and amortized using the straight-line method over the estimated useful lives as follows:
Customer relationships |
15 years |
Technology |
10 years |
Trade name – Hemp Oil Canada |
10 years |
Other assets – Trademark |
8 years |
Capitalized Software Development Costs
The Company capitalizes the costs of computer software developed or obtained for internal use in accordance with FASB Statement ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”). Capitalized computer software costs consist of purchased software licenses, implementation costs, consulting costs and payroll-related costs for certain projects that qualify for capitalization. The Company amortizes the capitalized computer software costs on a straight-line basis over the estimated useful life of the software upon being placed in service, which management has estimated to be three years. The Company expenses costs related to preliminary project assessment, training and application maintenance as incurred.
Loan Fees, net
Debt issuance costs, principally loan origination and related fees, are deferred and amortized to related party interest expense using the straight-line method, which approximates the effective interest method, and reflected as a reduction to debt.
10
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company accounts for income taxes under the asset and liability method under which it recognizes deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and its tax bases and net operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company applies a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit or obligation as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments.
Interest and penalties related to unrecognized tax benefits will be recognized in income tax expense. As at December 31, 2018 and 2017, no interest or penalties were included in income tax expense.
The Company is subject to Canadian federal, provincial and U.S. federal, state, and local tax regulations, and in the normal course of business, its income tax returns are subject to examination by the relevant taxing authorities with varying statutes of limitations. As at December 31, 2018 tax years after 2012 remain subject to examination in the U.S. federal tax jurisdiction and certain states, and tax years after 2011 remain subject to examination in Canada, Canadian provinces and certain U.S. states. The Company continued to have no material unrecognized tax benefit and does not expect its unrecognized tax benefits to change significantly over the next 12 months. As a result, the Company did not record a liability for unrecognized tax benefits.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact, positively or negatively, the Company for taxable years ended December 31, 2017 and thereafter. The impact of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal Revenue Service. Management has concluded there is no impact of the Tax Act on the Company.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for 100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through entities was added; U.S. federal income taxes on foreign earnings was eliminated (subject to several important exceptions), and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were added.
11
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In the United States, for taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest income and deductions are ignored. It is not expected that the provision will limit the deduction of interest by the Company for 2019.
Accounting for Stock-Based Compensation
Stock-based compensation cost is calculated on the date of grant using the estimated fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized ratably over the vesting period of the individual option grants. The Black-Scholes valuation calculation requires the Company to estimate key assumptions including the value of common stock, expected term, volatility and interest rates to determine the fair value of the stock options. The estimate of these key assumptions is based on an analysis of comparable companies, the Company’s leverage and judgment regarding market factors and trends. The Company has estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Fair Value Measurements
U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under U.S. GAAP must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
|
• |
Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
• |
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
• |
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
|
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between different levels will be rare.
12
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Fair Value Measurements - Continued
The carrying value of the Company’s cash, accounts receivable, accounts payable and accrued expenses, approximate their fair value due to the short period of time to maturity. Debt with a carrying value of $68.6 million at December 31, 2018 (2017:
$64.4 million) approximates fair value, net of loan fees. The fair value is based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.
Advertising
Advertising costs are expensed as incurred and recorded in selling, general and administrative expenses. Costs incurred for advertising totaled $2 million for the year ended December 31, 2018 (2017: $0.8 million).
Shipping and Handling
Shipping and handling costs are expensed as incurred and recorded in selling, general and administrative expenses. Costs incurred for shipping and handling totaled $3.7 million for the year ended December 31, 2018 (2017: $3.6 million).
Comprehensive Income
Accounting Standards Codification (“ASC”) 220, Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. The Company’s other comprehensive loss consists of foreign currency translation adjustments of the Company’s U.S. operations. Other comprehensive loss is presented net of tax in the consolidated statements of comprehensive loss.
Concentration of Credit Risk
The Company maintains cash balances at various banks where balances are insured by the Canadian Deposit Insurance Corporation up to $100,000 for Canadian based accounts and by the U.S. Federal Deposit Insurance Corporation up to $341,000. From time to time, the Company maintains cash balances in excess of the insured limits. The Company performs periodic credit evaluations of its customers. The Company maintains allowances for potential credit losses and such losses have historically been within management’s expectation.
In 2018, the Company’s top ten customers accounted for 72.7% of gross sales (2017: 73.0%). One customer accounted for 38.8% of the Company’s net sales for the year ended December 31, 2018 (2017: 32.7%); the top two combined accounted for 50.3% of the Company’s net sales for the year ended December 31, 2018 (2017: 46.3%). Three customers accounted for approximately 44.9% of accounts receivable, net as at December 31, 2018 (2017: 36.5%).
13
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company sources 100% of its raw seed material in Canada with a minimal amount of packaging from the U.S. and miscellaneous ingredients from Malaysia.
Foreign Currency
Unless otherwise stated, these financial statements and footnotes are in Canadian dollars.
Foreign Currency Transactions
Amounts held and transactions denominated in foreign currencies other than the Company’s functional currency give rise to foreign exchange gains and losses which are included in selling, general and administrative expenses, in the accompanying consolidated statements of comprehensive loss. For the year ended December 31, 2018 the transaction gains and losses aggregated to a gain of $73,000 (2017: gain of $70,000).
Foreign Currency Translation
The functional currency of the Company’s U.S. operations is the U.S dollar. The Company’s U.S. operations’ assets and liabilities are translated into Canadian dollars at exchange rates in effect at the year-end reporting date, and net sales and costs are translated using average exchange rates for the year. Foreign currency translation adjustments are reported in other comprehensive income/loss, in the accompanying consolidated statements of comprehensive income/loss.
14
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Certain 2017 amounts have been reclassified to conform to 2018 presentation. Such reclassification did not affect the previously reported 2018 net loss and comprehensive loss.
Future Accounting Pronouncements
In February 2016, the FASB issued an accounting standard update related to the accounting for leases (Leases "Topic 842") which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. In July 2018, the FASB issued two updates to Topic 842 to clarify how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. The Company will adopt the new standard using the optional transition method effective January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company expects to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally expect to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component and the practical expedient pertaining to land easements. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset.
The Company has performed an assessment of the impact of the adoption of Topic 842 on the Company's consolidated financial position and results of operations for the Company's leases, which consist of manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicle leases. Based on our assessment to date, we expect that the adoption of Topic 842 will not have a material effect on our results of operations but will result in an increase in lease-related assets and liabilities recognized in our Consolidated Balance Sheets. We are unable to quantify the amount of that increase at this time.\
NOTE 2 – INVENTORY, net
Inventory, net consisted of the following at December 31, (in thousands):
|
|
2018 |
|
|
2017 |
|
||
Raw materials |
|
$ |
5,308 |
|
|
$ |
2,593 |
|
Work in progress |
|
|
5,913 |
|
|
|
6,829 |
|
Finished goods |
|
|
5,973 |
|
|
|
3,649 |
|
Reserves for excess and obsolete inventory |
|
|
(1,255 |
) |
|
|
(718 |
) |
Inventory, net |
|
$ |
12,353 |
|
|
$ |
12,353 |
|
15
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 3 - PROPERTY AND EQUIPMENT, net
Property and equipment, net consisted of the following at December 31, (in thousands):
|
|
2018 |
|
|
2017 |
|
||
Land |
|
$ |
392 |
|
|
$ |
392 |
|
Land improvement |
|
|
47 |
|
|
|
- |
|
Buildings |
|
|
10,199 |
|
|
|
10,198 |
|
Machinery and equipment |
|
|
14,944 |
|
|
|
14,520 |
|
Leasehold improvements |
|
|
1,786 |
|
|
|
1,716 |
|
Computers |
|
|
1,773 |
|
|
|
1,743 |
|
Furniture and fixtures |
|
|
543 |
|
|
|
534 |
|
Construction in progress |
|
|
2,080 |
|
|
|
1,663 |
|
|
|
|
31,764 |
|
|
|
30,766 |
|
Accumulated depreciation |
|
|
(7,013 |
) |
|
|
(4,849 |
) |
Property and equipment, net |
|
$ |
24,751 |
|
|
$ |
25,917 |
|
Depreciation expense was approximately $2,200,000 for the year ended December 31, 2018 (2017: $2,205,000) and is recorded in cost of sales and selling, general and administrative expenses. Additions during the year amounted to $1,062,000 (2017: $1,362,000) and disposals amounted to $65,000 (2017: $14,000) for the year ended December 31, 2018.
16
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS, net - Continued
Goodwill is comprised of the following, (in thousands):
|
|
Goodwill |
|
|
Balance as at January 1, 2017 |
|
|
59,394 |
|
Impairment loss |
|
|
(7,895 |
) |
Balance as at December 31, 2017 |
|
|
51,499 |
|
Impairment loss |
|
|
- |
|
Balance as at December 31, 2018 |
|
|
51,499 |
|
During the year ended December 31, 2017, Manitoba Harvest missed budget expectations, driven by a significant drop in ingredient sales in the Asian market and declining protein powder sales. As a result, the Company evaluated the fair value of the single reporting unit to the carrying value and as a result, recorded a goodwill impairment loss: $7,894,800 in 2017. There was no impairment in 2018. Fair value was determined using a discounted cash flow methodology and includes management’s assumptions on revenue growth rates, operating margins, appropriate discount rates and expected capital expenditures. The weighted average cost of capital used in the income approach was 11.7%.
Intangible Assets, net
Intangible assets, net are comprised of the following as at December 31, 2018 (in thousands):
Amortizable Intangible Assets (Not Goodwill) |
|
Gross Intangible Asset |
|
|
Accumulated Amortization |
|
|
Impairment Loss |
|
|
Net Intangible Asset |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships |
|
$ |
61,500 |
|
|
$ |
(13,959 |
) |
|
$ |
- |
|
|
$ |
47,541 |
|
Technology |
|
|
16,400 |
|
|
|
(5,514 |
) |
|
|
- |
|
|
|
10,886 |
|
Trade Name – Hemp Oil Canada |
|
|
1,100 |
|
|
|
(335 |
) |
|
|
- |
|
|
|
765 |
|
Other Assets – Trademark |
|
|
272 |
|
|
|
(86 |
) |
|
|
- |
|
|
|
186 |
|
|
|
|
79,272 |
|
|
|
(19,894 |
) |
|
|
- |
|
|
|
59,378 |
|
Trade Name not subject to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Manitoba Harvest) |
|
|
13,600 |
|
|
|
- |
|
|
|
- |
|
|
|
13,600 |
|
|
|
$ |
92,872 |
|
|
$ |
(19,894 |
) |
|
$ |
- |
|
|
$ |
72,978 |
|
17
FHF Holdings Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2018 and 2017
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS, net - Continued
Intangible assets, net are comprised of the following as at December 31, 2017, (in thousands):
Amortizable Intangible Assets (Not Goodwill) |
|
Gross Intangible Asset |
|
|
Accumulated Amortization |
|
|
Impairment Loss |
|
|
Net Intangible Asset |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships |
|