Form 6-K HEXO Corp. For: Jun 14

June 14, 2021 8:17 AM EDT

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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 June 2021

Commission File Number: 001-38781

 

 

HEXO Corp.

(Translation of registrant’s 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

Exhibits 99.1 and 99.2 included with this Report on Form 6-K are 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

   Condensed interim consolidated financial statements for the three and nine months ended April 30, 2021 and 2020

99.2

   Management’s Discussion and Analysis for the three and nine months ended April 30, 2021

99.3

   Form 52-109F2 — Certification of Interim Filings - CEO

99.4

   Form 52-109F2 — Certification of Interim Filings - CFO


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: June 14, 2021      

/s/ Sébastien St-Louis

      President and Chief Executive Officer

Exhibit 99.1

 

LOGO

HEXO Corp. Condensed Interim Consolidated Financial Statements For the three and nine months ended April 30, 2021 and 2020


Table of Contents

 

Condensed Interim Consolidated Statements of Financial Position      1  
Condensed Interim Consolidated Statements of Net Loss and Comprehensive Loss      2  
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity      3  
Condensed Interim Consolidated Statements of Cash Flows      4  
Notes to the Condensed Interim Consolidated Financial Statements:   
1. Description of Business      5  
2. Basis of Preparation      5  
3. New Accounting Policies and Pronouncements      5  
4. Restricted Funds      6  
5. Commodity Taxes Recoverable and Other Receivables      6  
6. Inventory      6  
7. Biological Assets      7  
8. Investments in Associates & Joint Ventures      7  
9. Long-term Investments      8  
10. Property, Plant and Equipment      8  
11. Intangible Assets      9  
12. Convertible Debenture Receivable      9  
13. Warrant Liabilities      9  
14. Convertible Debentures      10  
15. Lease Liabilities      10  
16. Term Loan      11  
17. Share Capital      11  
18. Common Share Purchase Warrants      12  
19. Share-based Compensation      13  
20. Net Loss per Share      15  
21. Financial Instruments      15  
22. Operating Expenses by Nature      17  
23. Other Income and Losses      17  
24. Related Party Disclosure      18  
25. Capital Management      18  
26. Commitments and Contingencies      19  
27. Fair Value of Financial Instruments      20  
28. Non-Controlling Interest      20  
29. Revenue from Sale of Goods      21  
30. Segmented Information      21  
31. Operating Cash Flow      21  
32. Comparative Information      22  
33. Income Taxes      22  
34. Subsequent Events      22  


Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in thousands of Canadian Dollars)

 

As at

   Note      April 30, 2021     July 31, 2020  

Assets

       

Current assets

       

Cash and cash equivalents

      $ 81,038     $ 184,173  

Restricted funds

     4        32,551       8,261  

Trade receivables

        19,049       19,426  

Commodity taxes recoverable and other receivables

     5        10,202       16,733  

Prepaid expenses

        4,386       4,606  

Inventory

     6        95,223       64,933  

Biological assets

     7        9,222       7,571  
     

 

 

   

 

 

 
        251,671       305,703  
     

 

 

   

 

 

 

Non-current assets

       

Property, plant and equipment

     10        280,183       285,366  

Intangible assets

     11        16,412       16,008  

Convertible debenture receivable

     12        20,246       —    

Investment in associate and joint ventures

     8        73,379       76,306  

Lease receivable

        3,795       3,865  

License and prepaid royalty

        —         1,020  

Long-term investments

     9        4,402       3,209  

Prepaid expenses

        3,101       1,392  
     

 

 

   

 

 

 
        653,189       692,869  
     

 

 

   

 

 

 

Liabilities

       

Current liabilities

       

Accounts payable and accrued liabilities

        42,968       32,451  

Excise taxes payable

        4,315       7,121  

Warrant liabilities

     13        13,037       3,450  

Lease liability

     15        4,659       4,772  

Term loan

     16        —         29,930  

Onerous contract

     26        4,763       4,763  
     

 

 

   

 

 

 
        69,742       82,487  
     

 

 

   

 

 

 

Non-current liabilities

       

Lease liability

     15        22,566       24,344  

Convertible debentures

     14        31,951       28,969  

Other long-term liabilities

        1,805       393  
     

 

 

   

 

 

 
        126,064       136,193  
     

 

 

   

 

 

 

Shareholders’ equity

       

Share capital

     17        1,031,525       1,023,788  

Share-based payment reserve

     19        66,381       65,746  

Warrant reserve

     18        93,429       95,617  

Contributed surplus

        37,386       27,377  

Accumulated deficit

        (704,978     (659,231

Accumulated other comprehensive income

        3       —    

Non-controlling interest

     28        3,379       3,379  
     

 

 

   

 

 

 
        527,125       556,676  
     

 

 

   

 

 

 
        653,189       692,869  
     

 

 

   

 

 

 
Commitments and contingencies (Note 26)         
Subsequent events (Note 34)         

Approved by the Board of Directors

/s/ Jason Ewart, Director

/s/ Michael Munzar, Director

 

1


Condensed Interim Consolidated Statements of Net Loss and Comprehensive Loss

(Unaudited, expressed in thousands of Canadian Dollars, except per share data)

 

            For the three months ended     For the nine months ended  
     Note      April 30,
2021
    April 30,
2020
    April 30,
2021
    April 30,
2020
 

Revenue from sale of goods

     29        33,082       30,895       120,059       74,009  

Excise taxes

        (10,482     (8,817     (35,219     (20,516
     

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue from sale of goods

        22,600       22,078       84,840       53,493  

Ancillary revenue

        60       54       168       145  
     

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

        22,660       22,132       85,008       53,638  

Cost of goods sold

     6,22        18,281       13,530       57,391       76,914  
     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit/(loss) before fair value adjustments

        4,379       8,602       27,617       (23,276

Realized fair value amounts on inventory sold

     6        6,426       9,251       17,619       21,362  

Unrealized gain on changes in fair value of biological assets

     7        (10,863     (6,379     (35,616     (21,378
     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit/(loss)

        8,816       5,730       45,614       (23,260

Operating expenses

           

Selling, general and administrative

     22        14,822       11,238       39,039       40,833  

Marketing and promotion

        2,452       2,131       6,682       9,621  

Share-based compensation

     22        2,715       6,171       10,904       22,237  

Research and development

        730       1,017       2,901       3,962  

Depreciation of property, plant and equipment

     10        1,612       1,566       4,369       4,890  

Amortization of intangible assets

     11        371       341       1,043       3,690  

Restructuring costs

        336       865       1,721       4,846  

Impairment of property, plant and equipment

     10        16       220       881       33,004  

Impairment of intangible assets

     11        —         —         —         106,189  

Impairment of goodwill

        —         —         —         111,877  

Recognition of onerous contract

        —         —         —         3,000  

Disposal of long-lived assets

        —         —         1,294       —    

Loss/(gain) on disposal of property, plant and equipment

        (19     3,237       45       3,734  

Acquisition and transaction costs

        1,871       —         2,307       —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        24,906       26,786       71,186       347,883  
     

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

        (16,090     (21,056     (25,572     (371,143
     

 

 

   

 

 

   

 

 

   

 

 

 

Finance income (expense), net

     23        (2,947     (2,926     (7,311     (6,073

Non-operating income (expense), net

     23        (1,674     4,463       (12,864     (6,717
     

 

 

   

 

 

   

 

 

   

 

 

 

Loss and comprehensive loss attributable to shareholders before tax

        (20,711     (19,519     (45,747     (383,933
     

 

 

   

 

 

   

 

 

   

 

 

 

Income tax recovery

        —         —         —         6,023  
     

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

           

Foreign currency translation

        3       —         3       —    
     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

        (20,708     (19,519     (45,744     (377,910
     

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to:

           
     

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders of HEXO Corp.

        (20,708     (19,519     (45,744     (377,910
     

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest

        —         —         —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (20,708     (19,519     (45,744     (377,910
     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

        (0.17     (0.26     (0.38     (5.56
     

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of outstanding shares

           

Basic and diluted

     20        122,397,731       73,852,844       121,749,456       67,936,412  
     

 

 

   

 

 

   

 

 

   

 

 

 

 

2


Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited, expressed in thousands of Canadian Dollars, except per share data)

 

For the nine months ended

   Note      Number of
common shares
     Share
capital
    Share-based
payment
reserve
    Warrant
reserve
    Contributed
surplus
    Non-controlling
interest
     Other
comprehensive
Income
     Accumulated
deficit
    Shareholders’
equity
 

Balance at July 31, 2019

        64,245,438        799,706       40,315       60,433       —         1,000        —          (112,742     788,712  

April 2020 underwritten offering

        14,950,000        25,864       —         20,182       —         —          —          —         46,046  

$70m private placement unsecured convertible debentures

        —          —         —         —         23,902       —          —          —         23,902  

USD$25m registered offering

        3,742,516        26,782       —         —         —         —          —          —         26,782  

USD$20m registered offering

        2,994,012        22,323       —         —         —         —          —          —         22,323  

Issuance fees

        —          (5,570     —         —         (27     —          —          —         (5,597

Expiry of warrants

        —          —         —         (7,141     7,141       —          —          —         —    

Exercise of warrants

        17,856        177       —         —         —         —          —          —         177  

Exercise of stock options

     19        29,133        223       (88     —         —         —          —          —         135  

Expiry of stock options

        —          —         (312     —         312       —          —          —         —    

Equity-settled share-based payments

     19,22        —          —         27,326       —         —         —          —          —         27,326  

Net loss and comprehensive loss

        —          —         —         —         —         —          —          (377,910     (377,910
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance at April 30, 2020

        85,978,955        869,505       67,241       73,474       31,328       1,000        —          (490,652     551,896  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance at July 31, 2020

        120,616,441        1,023,788       65,746       95,617       27,377       3,379        —          (659,231     556,676  

June 2020 at the market offering

     17        244,875        —         —         —         —         —          —          —         —    

Issuance fees

        —          (192     —         —         —         —          —          —         (192

Exercise of stock options

     19        82,083        499       (195     —         —         —          —          —         304  

Expiry of stock options

        —          —         (9,507     —         9,507       —          —          —         —    

Exercise of warrants

        1,522,139        7,430       —         (2,188     131       —          —          —         5,373  

Expiry of warrants

        —          —         —         —         —         —          —          —         —    

Equity-settled share-based payments

     19,22        —          —         10,337       —         —         —          —          —         10,337  

Other comprehensive income

        —          —         —         —         —         —          3        —         3  

Non-controlling interest

     28        —          —         —         —         371       —          —          —         371  

Net loss and comprehensive loss

        —          —         —         —         —         —          —          (45,747     (45,747
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance at April 30, 2021

        122,465,538        1,031,525       66,381       93,429       37,386       3,379        3        (704,978     527,125  
     

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

3


Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in thousands of Canadian Dollars)

 

For the nine months ended

   Note      April 30, 2021     April 30, 2020  

Operating activities

       

Total net loss

      $ (45,744   $ (377,910

Items not affecting cash

     31        24,102       343,929  

Changes in non-cash operating working capital items

     31        4,804       (59,650
     

 

 

   

 

 

 

Cash used in operating activities

        (16,838     (93,631
     

 

 

   

 

 

 

Financing activities

       

Issuance of common shares

        883       104,748  

Issuance fees

        (192     (5,773

Proceeds from the exercise of stock options

     19        304       135  

Proceeds from the exercise of warrants

     18        5,373       71  

Payments on term loan

     16        (30,625     (2,625

Lease payments

     15        (3,476     (3,196

Issuance of unsecured convertible debentures

     14        —         70,000  

Interest paid on unsecured convertible debentures

     14        (2,409     (1,804
     

 

 

   

 

 

 

Cash used financing activities

        (30,142     161,556  
     

 

 

   

 

 

 

Investing activities

       

Settlement of short-term investments

        —         24,726  

Proceeds from sale of investments

        —         8,258  

Restricted cash

     4        (24,290     4,967  

Issuance of convertible debenture receivable

     12        (19,500     —    

Proceeds from sale of property, plant and equipment

        102       716  

Acquisition of property, plant and equipment

        (8,045     (95,998

Purchase of intangible assets

        (1,447     (617

Investment in associate and joint ventures

     8        (2,975     (29,220
     

 

 

   

 

 

 

Cash used in investing activities

        (56,155     (87,168
     

 

 

   

 

 

 

Cash used

        (103,135     (19,243

Cash and cash equivalents, beginning of period

        184,173       113,568  
     

 

 

   

 

 

 

Cash and cash equivalents, end of period

        81,038       94,325  
     

 

 

   

 

 

 

 

Supplemental cashflow information in Note 31.

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Notes to the Consolidated Financial Statements

For the three and nine months ended April 30, 2021 and 2020

(Unaudited, expressed in thousands of Canadian Dollars, except share amounts or where otherwise stated)

1. Description of Business

HEXO Corp. (the “Company”), is a publicly traded corporation, incorporated in Ontario. HEXO is licensed to produce and sell cannabis and cannabis products under the Cannabis Act. Its head office is located at 3000 Solandt Road Ottawa, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”), both under the trading symbol “HEXO”.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non- essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. These measures are continuously monitored and modified by the applicable governmental authorities in Canada and remained in effect as at April 30, 2021. The production and sale of cannabis in Canada was deemed an essential service throughout the three and nine months ended April 30, 2021.

The Company regularly monitors the impact of the ongoing pandemic on all aspects of its business and operations and as of April 30, 2021, we have not observed any material changes.

2. Basis of Preparation

Statement of Compliance

These condensed interim consolidated financial statements (“interim consolidated financial statements”) have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”), using accounting policies consistent with International Financial Reporting Standards as issued by the International Accounting Standards Board and IFRS Interpretations Committee (“IFRS”). These interim consolidated financial statements do not contain all the disclosures required in annual consolidated financial statements and should be read in conjunction with the amended and restated annual consolidated financial statements of the Company for the year ended July 31, 2020, prepared in accordance with IFRS.

The interim consolidated financial statements have been prepared using accounting policies consistent with those described in the annual consolidated financial statements for the year ended July 31, 2020.

These interim consolidated financial statements were approved and authorized for issue by the Board of Directors on June 14, 2021.

3. New Accounting Policies and Pronouncements

New Accounting Policy

CAPTIVE INSURANCE

Insurance coverage for the Company’s directors and officers has been secured through a Captive Cell program (“the Captive Program”). The Captive Program was effected by entering into a participation agreement with a registered insurer for the purposes of holding and managing the Company’s coverage funds through a separate cell account (the “Cell Captive”). The Company applies IFRS 10 Consolidated Financial Statements in its assessment of control as it relates to the Cell Captive. The Company’s accounting policy is to consolidate the Cell Captive. Currently the Captive Program funds are held as cash in the Cell Captive with the possibility of reinvestment into short-term investments and/or marketable securities in the future. As the funds cannot be transferred to other parts of the group without providing 6 month notice, the funds are disclosed as Restricted cash. The Company recognizes gains and losses from, interest, foreign exchange activity and/or fair market value adjustments through the Statement of Loss and Comprehensive Loss.

New Accounting Procurement Not Yet Effective

AMENDMENTS TO IAS 37: ONEROUS CONTRACTS AND THE COST OF FULFILLING A CONTRACT

The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. The amendment is effective for annual periods beginning on or after January 1, 2022 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

5


4. Restricted Funds

 

     April 30, 2021      July 31, 2020  
     $      $  
Debt service reserve account – term loan (Note 16)      —          8,191  

Letters of credit, collateral and guarantees for purchases

     2,552        70  

Captive insurance

     29,999        —    
  

 

 

    

 

 

 

Total

     32,551        8,261  
  

 

 

    

 

 

 

5. Commodity Taxes Recoverable and Other Receivables

 

     April 30, 2021      July 31, 2020  

Commodity taxes recoverable

   $ 3,167      $ 12,821  

Lease receivable – current1

     630        630  

Other receivables

     6,405        3,282  
  

 

 

    

 

 

 

Total

   $ 10,202      $ 16,733  
  

 

 

    

 

 

 

 

1 

A related party capital lease receivable related to Truss Limited Partnership (Note 24).

6. Inventory

 

     As at April 30, 2021  
     Capitalized
cost
     Biological asset fair
value adjustment
     Total  

Dried cannabis

   $ 46,707      $ 28,309      $ 75,016  

Purchased dried cannabis

     1,666        —          1,666  

Extracts

     10,688        96        10,784  

Purchased extracts

     856        —          856  

Hemp derived distillate

     49        —          49  

Packaging and supplies

     6,852        —          6,852  
  

 

 

    

 

 

    

 

 

 
   $ 66,818      $ 28,405      $ 95,223  
  

 

 

    

 

 

    

 

 

 

 

     As at July 31, 2020  
     Capitalized
cost
     Biological asset fair
value adjustment
     Total  

Dried cannabis

   $ 29,702      $ 16,981      $ 46,683  

Purchased dried cannabis

     1,956        —          1,956  

Extracts

     4,828        385        5,213  

Purchased extracts

     5,977        —          5,977  

Hemp derived distillate

     566        —          566  

Packaging and supplies

     4,538        —          4,538  
  

 

 

    

 

 

    

 

 

 
   $ 47,567      $ 17,366      $ 64,933  
  

 

 

    

 

 

    

 

 

 

Capitalized costs relating to inventory expensed and included in Cost of goods sold were $17,654 and $57,934 for the three and nine months ended April 30, 2021, respectively (April 30, 2020 – $13,349 and $34,765). The unrealized fair value gain on biological asset fair value adjustments on the consolidated statement of loss for the three and nine months ended April 30, 2021 were $10,863 and $35,616, respectively (April 30, 2020 – $6,379 and $21,378). The realized fair value amounts on inventory sold on the consolidated statement of loss was $6,426 and $17,619 for the three and nine months ended April 30, 2021, respectively (April 30, 2020 – $9,251 and $21,362). During the three and nine months ended April 30, 2021, the Company reversed certain prior period inventory write downs of $nil and $1,543, respectively (April 30, 2020 – $nil and $nil) recorded in costs of sales on the consolidated statement of loss and $nil and $688 (April 30, 2020 – $nil and $nil) of fair value recorded in fair value amounts on inventory sold.

Total share-based compensation capitalized to inventory in the nine months ended April 30, 2021 was $1,283 (April 30, 2020 –$5,089). Total depreciation capitalized to inventory in the nine months ended April 30, 2021 was $10,850 (April 30, 2020 – $8,221).

 

6


7. Biological Assets

The Company’s biological assets consist of cannabis plants throughout the growth cycle, from mother plants to plants in propagation, vegetative and flowering stages. The changes in the carrying value of biological assets are as follows:

 

     For the nine
months ended
April 30, 2021
     For the year ended
July 31, 2020
 
     $      $  

Balance, beginning of year

     7,571        7,371  

Production costs capitalized

     23,819        38,638  

Net increase in fair value due to biological transformation and estimates

     35,616        29,356  

Transferred to inventory upon harvest

     (57,784      (67,131

Disposal of biological assets

     —          (663
  

 

 

    

 

 

 

Balance, end of period

     9,222        7,571  
  

 

 

    

 

 

 

The valuation of biological assets is based on an income approach (Level 3) in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in process biological assets, the fair value at the point of harvest is adjusted based on the stage of growth at period-end.

The significant estimates used in determining the fair value of cannabis plants are as follows:

 

   

yield per plant;

 

   

stage of growth percentage estimated as costs incurred as a percentage of total cost as applied to the estimated total fair value per gram (less fulfilment costs) to arrive at an in-process fair value for estimated biological assets, which have not yet been harvested;

 

   

percentage of costs incurred for each stage of plant growth.

 

   

fair value selling price per gram less cost to complete and cost to sell.

 

   

destruction/wastage of plants during the harvesting and processing process.

Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the tables below.

 

     Input values   An increase or decrease of 5% applied to
the unobservable input would result in a change
to the fair value of approximately

Unobservable inputs

  April 30, 2021   July 31, 2020   April 30, 2021   July 31, 2020

Weighted average selling price

Derived from actual retail prices on a per product basis using the expected Flower and Trim yields per plant.

  $2.81 per dried

gram

  $3.23 per dried

gram

  $746   $550

Yield per plant

Derived from historical harvest cycle results on a per strain basis.

  80 – 113 grams

per plant

  46 – 135 grams

per plant

  $746   $376

Stage of growth

Derived from the estimates of stage of completion within the harvest cycle.

  Average of 50%

completion

  Average of 43%

completion

  $460   $376

Waste

Derived from the estimates of planned removal and naturally occurring waste within the cultivation and production cycle.

  0%–21%

dependent upon
the stage within
the harvest cycle

  0%–21%

dependent upon
the stage within
the harvest cycle

  No material variance   No material variance

8. Investments in Associates & Joint Ventures

 

     For the nine months ended April 30, 2021     For the year ended July 31, 2020  
     Truss LP     Other     Total     Truss LP     Other     Total  
     $     $     $     $     $     $  

Opening Balance

     74,966       1,340       76,306       51,786       1,063       52,849  

Cash contributed to investment

     2,975       —         2,975       29,155       1,231       30,386  

Capitalized transaction costs

     —         —         —         —         109       109  

Share of net (loss)

     (5,638     (264     (5,902     (5,975     (356     (6,331

Impairment

     —         —         —         —         (707     (707
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     72,303       1,076       73,379       74,966       1,340       76,306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Truss LP

The Truss Limited Partnership (“Truss LP”) is a joint arrangement between the Company and Molson Coors Canada (the “Partner”) and is a standalone entity, incorporated in Canada, with its own board of directors and an independent management team. The Partner holds 57,500 common shares representing 57.5% controlling interest in Truss with the Company holding 42,500 common shares and representing the remaining 42.5%. Truss is a private limited partnership and its principal operating activities consist of pursuing opportunities to develop non-alcoholic, cannabis-infused beverages (Note 24). During the nine months ended April 30, 2021 the Company contributed $2,975 of additional capital to Truss as required under the shareholders agreement.

9. Long-term Investments

 

     Units      Fair value
July 31,
2020
     Divestiture     Change in
fair value
     Fair value
April 30,
2021
 
            $      $     $      $  

Level 1 Investments

             

Fire and Flower common shares

     1,319,377        1,292        —         171        1,463  

Inner Spirit common shares

     8,994,500        1,260        —         1,033        2,293  

Other long-term investments

     n/a        517        (11     —          506  

Level 3 Investments

             

Segra International Corp.

     400,000        140        —         —          140  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

        3,209        (11     1,204        4,402  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

10. Property, Plant and Equipment

 

Cost

  Land     Buildings     Leasehold
improvements
    Cultivation
and production
equipment
    Furniture,
computers,
vehicles and
equipment
    Construction
in progress
    Right-of-Use
assets
    Total  
    $     $     $     $     $     $     $     $  

At July 31, 2019

    5,339       150,834       627       42,029       10,368       57,550       —         266,747  

Additions

    —         24,432       1,395       14,969       9,404       66,246       24,405       140,851  

Disposals

    (3,683     (18,260     —         (13,402     (909     (5,428     —         (41,682

Transfers

    —         7,943       22,417       (10,135     8       (20,233     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At July 31, 2020

    1,656       164,949       24,439       33,461       18,871       98,135       24,405       365,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

    —         873       63       2,014       234       7,978       —         11,162  

Disposals

    —         (5     —         (51     —         —         (1,055     (1,111

Transfers

    —         3,929       15,685       764       888       (21,089     —         177  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At April 30, 2021

    1,656       169,746       40,187       36,188       19,993       85,024       23,350       376,144  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation and impairments

 

           

At July 31, 2019

    —         4,392       130       2,216       1,216       —         —         7,954  

Depreciation

    —         7,395       879       3,702       3,562       —         2,522       18,060  

Transfers

    —         —         —         271       (271     —         —         —    

Disposals

    —         (17,081     —         (7,435     (366     —         —         (24,882

Impairments

    307       19,006       —         9,937       —         48,990       1,178       79,418  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At July 31, 2020

    307       13,712       1,009       8,691       4,141       48,990       3,700       80,550  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

    —         5,529       1,525       3,481       2,865       —         1,819       15,219  

Transfers

    —         454       (16     27       (190     —         —         275  

Disposals

    —         —         —         —         —         —         (964     (964

Impairments

    —         —         85       (20     61       (6     761       881  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At April 30, 2021

    307       19,695       2,603       12,179       6,877       48,984       5,316       95,961  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net book value

 

           

At July 31, 2019

    5,339       146,442       497       39,813       9,152       57,550       —         258,793  

At July 31, 2020

    1,349       151,237       23,430       24,770       14,730       49,145       20,705       285,366  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At April 30, 2021

    1,349       150,051       37,584       24,009       13,116       36,040       18,034       280,183  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In the nine months ended April 30, 2021, the Company capitalized $10,850 (July 31, 2020 — $11,988) of depreciation to inventory. During the three and nine months ended April 30, 2021, depreciation expensed to the consolidated statement of loss and comprehensive loss was $1,612 and $4,369 (April 30, 2020 — $1,566 and $4,890).

Capitalized borrowing costs to buildings in the nine months ended April 30, 2021 were $1,269 (July 31, 2020 — $2,385) at an average interest rate of 5.6% (July 31, 2020 — 7.22%).

 

8


11. Intangible Assets

 

Cost

   Cultivating and
processing license
     Brand      Software     Domain
names
     Patents     Total  
     $      $      $     $      $     $  

At July 31, 2019

     116,433        8,440        3,558       585        1,231       130,247  

Additions

     —          —          702       —          875       1,577  

Disposals

     —          —          (550     —          (173     (723
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At July 31, 2020

     116,433        8,440        3,710       585        1,933       131,101  

Additions

     —          —          896       —          551       1,447  

Disposals

     —          —          (872     —          —         (872
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At April 30, 2021

     116,433        8,440        3,734       585        2,484       131,676  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Accumulated amortization

               

At July 31, 2019

     1,601        —          1,269       66        29       2,965  

Amortization

     3,167        —          697       59        16       3,939  

Impairment

     106,189        2,000        —         —          —         108,189  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At July 31, 2020

     110,957        2,000        1,966       125        45       115,093  

Amortization

     384        —          521       44        94       1,043  

Disposals

     —          —          (872     —          —         (872
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At April 30, 2021

     111,341        2,000        1,615       169        139       115,264  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net book value

               

At July 31, 2019

     114,832        8,440        2,289       519        1,202       127,282  

At July 31, 2020

     5,476        6,440        1,744       460        1,888       16,008  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

At April 30, 2021

     5,092        6,440        2,119       416        2,345       16,412  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Research and development expenses in the three and nine months ended April 30, 2021 were $730 and $2,901, respectively (April 30, 2020 - $1,017 and $3,962, respectively).

12. Convertible Debenture Receivable

On February 15, 2021 Zenabis entered into an agreement with HEXO for the issuance of an unsecured convertible debenture to the Company in a principal amount of $19,500. On this date, HEXO advanced Zenabis $12,500 in cash and converted the previous supply prepayment of $7,000 to a convertible debenture receivable. The debenture is convertible into common shares of Zenabis at a conversion price equal to the 5-day volume weighted average price (“VWAP”) of the Zenabis common shares on TSX for the five trading days prior to the date of conversion. The debenture may be prepaid by Zenabis, at its option and without penalty or premium. The unsecured convertible debenture bears interest at a rate of 8% per annum and matures on February 15, 2023.

Upon initial recognition of the $19,500 face value convertible debenture receivable (Level 2) on February 16, 2021, the fair value was derived using the calculated 5-day VWAP of $0.1724 and the closing market price of $0.18. The estimated fair value upon recognition was $20,360.

The fair value of the convertible debenture receivable as at April 30, 2021 was estimated using the calculated 5-day VWAP of $0.1174 and the closing market price of $0.12. The estimated fair value as at April 30, 2021 was $20,246. The gain on revaluation of the instrument was $434.

13. Warrant Liabilities

 

     USD$25,000
Registered Direct
Offering
     USD$20,000
Registered Direct
Offering
     Total  
     $      $      $  

Balance as at July 31, 2020

     1,917        1,533        3,450  

Loss on revaluation of financial instruments

     5,326        4,261        9,587  
  

 

 

    

 

 

    

 

 

 

Balance as at April 30, 2021

     7,243        5,794        13,037  
  

 

 

    

 

 

    

 

 

 

The warrants are classified as a liability because the exercise price is denominated in US dollars, which is different to the functional currency of the Company.

The warrant liabilities were revalued on April 30, 2021 using the Black-Scholes-Merton option pricing model (Level 2) using the following assumptions:

 

   

stock price of USD$6.70;

 

   

expected life of 2.5 years;

 

   

$nil dividends;

 

   

96.54% volatility based upon historical data;

 

   

risk-free interest rate of 0.29%; and

 

   

USD/CAD exchange rate of 1.2285.

 

9


USD$20,000 Registered Direct Offering – Warrants

On April 30, 2021 the Company had 1,497,007 common share purchase warrants outstanding (Note 18) with an exercise price of USD$9.80 per share with a five year-term.

The loss/(gain) on the revaluation of the warrant liability during the three and nine months ended April 30, 2021 was $170 and $4,261, respectively (April 30, 2020 – ($4,261) and ($3,071), respectively) which is recorded in Other income and losses on the consolidated statements of loss and comprehensive loss.

USD$25,000 Registered Direct Offering – Warrants

On April 30th, 2021 the Company had 1,871,259 common share purchase warrants outstanding (Note 18) with an exercise price of USD$9.80 per share with a five year- term.

The loss/(gain) on the revaluation of the warrant liability during the three and nine months ended April 30, 2021 was $212 and $5,326, respectively (April 30, 2020 – ($2,752) and ($4,508), respectively) which is recorded in Other income and losses on the consolidated statements of loss and comprehensive loss.

14. Convertible Debentures

 

Balance as at July 31, 2020

   $ 28,969  

Interest expense

     5,391  

Interest paid

     (2,409
  

 

 

 

Balance as at April 30, 2021

   $ 31,951  
  

 

 

 

On December 5, 2019, the Company closed a $70,000 private placement of convertible debentures. The Company issued a total of $70,000 principal amount of 8.0% unsecured convertible debentures maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $12.64 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $30.00 for any 15 consecutive trading days.

The Company had the option to at any time on or before December 4, 2020, to repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest. Upon maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the five trading days immediately preceding the payment date.

In May 2020, the Company provided notice to all holders of the Debentures of an option to voluntarily convert their Debentures into units of the Company (the “Conversion Units”) at a discounted early conversion price of $0.80 (the “Early Conversion Price”) calculated based on the 5-day volume weighted average HEXO Corp. market prices (the “VWAP”) preceding the announcement. The VWAP unitized data from both the TSX and NYSE. Each Conversion Unit will provide the holder one common share and one half common share purchase warrant (with an exercise price of $4.00 and term of three years). The early conversion occurred in two phases, the first being on June 10, 2020 followed by the second and final phase June 30, 2020. During phases one and two, $23,595 principal amount, or approximately 34%, and $6,265 principal amount, or approximately 9% of the Debentures were converted under the Early Conversion Price into 7,373,438 and 1,957,813 common shares and 3,686,719 and 978,906 common share purchase warrants of HEXO Corp, respectively.

On April 30, 2021, there remains $40,140 in principal debentures, the net present value of the debt was $26,600 and the remaining balance of $13,540, was allocated to the conversion feature.

The accrued and unpaid interest as at April 30, 2020 was $483.

15. Lease Liabilities

The following is a continuity schedule of lease liabilities for the nine months ended April 30, 2021:

 

     $  

Balance as at July 31, 2020

     29,116  

Lease disposals

     (789

Lease payments

     (3,476

Interest expense on lease liabilities

     2,374  
  

 

 

 

Balance as at April 30, 2021

     27,225  
  

 

 

 

Current portion

     4,659  
  

 

 

 

Long-term portion

     22,566  
  

 

 

 

 

10


The Company’s leases consist of administrative real estate leases and a production real estate property. Effective August 1, 2020, the Company exited two real estate leases and the corresponding liability was written off for a realized a gain $181 recognized in Other income and losses on the consolidated statements of loss. The Company expensed variable lease payments of $815 and $2,412, respectively for the three and nine months ended April 30, 2021 (April 30, 2020 – $895 and $2,818, respectively).

The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at April 30, 2021:

 

Fiscal year

   2021      2022 – 2023      2024 – 2025      Thereafter      Total  
     $      $      $      $      $  

Lease obligations

     1,143        9,186        8,749        31,082        50,160  

16. Term Loan

Term Loan

On February 14, 2019, the Company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce (“CIBC”) as Sole Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as Co-Lead Arranger and Syndication Agent (together “the Lenders”). The Lenders provided the Company with up to $65,000 in secured debt financing at a rate of interest that is expected to average in the mid-to-high 5% per annum range. The credit facility consisted of an up to $50,000 term loan (“Term Loan”) and up to a $15,000 in a revolving credit facility which is limited to the Company’s working capital assets available to support funded balances. The credit facility had a maturity date of February 14, 2022 and was secured against the Company’s property, plant and equipment. The Company was to repay at minimum 2.5% of the initial amount drawn each quarter per the terms of the credit facility agreement. On February 14, 2019, the Company received $35,000 on the Term Loan and incurred financing costs of $1,347.

Under the terms of the credit facility the Company was able to repay the loan without penalty, at any time and did so, in full, on April 30, 2021.

On July 31, 2020 the Company was not in compliance with an administrative banking covenant which mandated that the Company does not utilize a Canadian dollar operating bank account with any institution other than the Lenders. The Company was subject to the covenant 90 days after entering the syndicated credit facility on February 14, 2019. The Company received an amendment on October 29, 2020 allowing it to rectify this administrative breach by April 27, 2021. Due to the amendment being received after July 31, 2020 and within the three months ended October 31, 2020 the Company classified its Term Loan as a current liability on July 31, 2020. On April 30, 2021, the Company repaid the credit facility in full and therefore is no longer subject to the credit facilities financial or administrative covenants. The credit facility has therefore been terminated and is no longer available to the Company.

In the nine months ended April 30, 2021, total interest expenses were $990 (April 30, 2020 - $567) and total interest capitalized was $419 (April 30, 2020 - $752). The non- cash interest expense relating to the amortization of deferred financing costs was $793 for the nine months ended April 30, 2021 (April 30, 2020 - $364).

The following table illustrates the continuity schedule of the term loan as at April 30, 2021 and July 31, 2020:

 

     April 30, 2021      July 31, 2020  
     $      $  

Term loan

     

Opening balance

     30,625        34,125  

Repayments

     (30,625      (3,500
  

 

 

    

 

 

 

Ending balance

     —          30,625  
  

 

 

    

 

 

 

Deferred financing costs

     $        $  

Opening balance

     (695      (751

Additions

     (98      (445

Amortization of deferred finance costs

     793        501  
  

 

 

    

 

 

 

Ending balance

     —          (695
  

 

 

    

 

 

 

Total term loan

     —          29,930  
  

 

 

    

 

 

 

Current portion

     —          29,930  
  

 

 

    

 

 

 

Long-term portion

     —          —    
  

 

 

    

 

 

 

17. Share Capital

(a) Authorized

An unlimited number of common shares and an unlimited number of special shares, issuable in series.

(b) Consolidation Announcement

The Company finalized the share consolidation on the basis of four pre-consolidation common shares for one post-consolidation common share (4:1) by way of shareholder approval at the annual and special meeting of shareholders held December 11, 2020 (the “Consolidation”). The Consolidation was effected by the filing of articles of amendment to the Company’s articles under the Business Corporations Act (Ontario) on December 18, 2020. The purpose of the proposed share consolidation is to increase the Company’s

 

11


common share price to regain compliance with the USD$1.00 minimum share price continued listing standard of the New York Stock Exchange.

All balances of common shares, common share purchase warrants, stock options and restricted share units herein are reflective of the Consolidation.

(c) Issued and Outstanding

As at April 30, 2021, a total of 122,465,538 (July 31, 2020 – 120,616,441) common shares were issued and outstanding. No special shares have been issued or are outstanding.

 

            Number of shares      Share Capital  

Balance at July 31, 2020

        120,616,441      $ 1,023,788  

June 2020 at the market offering

     (i      244,875        —    

Exercise of warrants

        1,522,139        7,430  

Exercise of stock options

        82,083        499  

Issuance fees

        —          (192
     

 

 

    

 

 

 

Balance at April 30, 2021

        122,465,538      $ 1,031,525  
     

 

 

    

 

 

 

 

(i)

June 2020 At-the-market (“ATM”) Offering

On June 16, 2020, the Company established an ATM equity program allowing the Company to issue up to $34,500 (or its U.S. dollar equivalent) of common shares to the public. The common shares sold through the ATM program were sold through the TSX, the NYSE and other marketplaces on which the common shares were listed, quoted or otherwise traded, at the prevailing market price at the time of sale. The program closed on July 31, 2020 and a total of approximately $34,551 (after foreign exchange gains) was generated through the issuance of 8,235,620 common shares in the year ended July 31, 2020. On July 31, 2020 a receivable of $883 remained for irrevocable sales which occurred prior to year end and subsequently settled on August 5, 2020, at which time the remaining 244,875 shares were issued.

18. Common Share Purchase Warrants

The following table summarizes warrant activity during the nine months ended April 30, 2021 and year ended July 31, 2020.

 

     April 30, 2021      July 31, 2020  
     Number of      Weighted average      Number of      Weighted average  
     warrants      exercise price1      warrants      exercise price1  

Outstanding, beginning of year

     33,379,408      $ 7.60        7,396,359      $ 39.80  

Expired

     (97,123      3.92        (3,889,871      49.00  

Issued

     —          —          30,976,389        4.96  

Exercised

     (1,522,139      3.85        (1,103,469      3.88  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of year

     31,760,146      $ 7.66        33,379,408      $ 7.60  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

USD denominated warrant’s exercise price have been converted to the CAD equivalent as at the period end for presentation purposes.

The 97,123 expired and cancelled warrants during the nine months ended April 30, 2021 were due to cashless exercises of the Company’s April 2020 and May 2020 warrants. In lieu of cash equal to the number of warrants exercised multiplied by the exercise price, the warrant holder forgoes the corresponding number of warrants which are effectively cancelled.

The following is a consolidated summary of warrants outstanding as at April 30, 2021 and July 31, 2020.

 

     April 30, 2021      July 31, 2020  
     Number
outstanding
     Book value      Number
outstanding
     Book value  

Classified as Equity

      $           $    

June 2019 financing warrants

           

Exercise price of $63.16 expiring June 19, 2023

     546,135        10,022        546,135        10,022  

April 2020 underwritten public offering warrants

           

Exercise price of $3.84 expiring April 13, 2025

     12,459,750        16,821        14,004,375        18,906  

May 2020 underwritten public offering warrants

           

Exercise price of $4.20 expiring May 21, 2025

     7,777,876        10,702        7,852,513        10,805  

Conversion Unit warrants

           

Exercise price of $4.00 expiring June 10, 2023

     3,686,721        11,426        3,686,721        11,426  

Exercise price of $4.00 expiring June 30, 2023

     978,907        1,928        978,907        1,928  

Broker / Consultant warrants

           

Exercise price of $3.00 expiring November 3, 2021

     43,905        78        43,905        78  

Exercise price of $3.00 expiring March 14, 2022

     23,571        66        23,571        66  

Exercise price of $63.16 expiring June 19, 2023

     15        —          15        —    

Molson warrants

           

 

12


     April 30, 2021      July 31, 2020  
     Number
outstanding
     Book value      Number
outstanding
     Book value  

Exercise price of $24.00 expiring October 4, 2021

     2,875,000        42,386        2,875,000        42,386  
  

 

 

    

 

 

    

 

 

    

 

 

 
     28,391,880        93,429        30,011,142        95,617  

Classified as Liability

           

USD$25m Registered Direct Offering Warrants

           

Exercise price of USD$9.80 expiring December 31, 2024

     1,871,259        7,243        1,871,259        1,917  

USD$20m Registered Direct Offering Warrants

           

Exercise price of USD$9.80 expiring January 22, 2025

     1,497,007        5,794        1,497,007        1,533  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,368,266        13,037        3,368,266        3,450  
  

 

 

    

 

 

    

 

 

    

 

 

 
     31,760,146        106,466        33,379,408        99,067  
  

 

 

    

 

 

    

 

 

    

 

 

 

19. Share-based Compensation

Stock Options

The following table summarizes stock option activity during the nine months ended April 30, 2021 and the year ended July 31, 2020.

 

     April 30, 2021      July 31, 2020  
     Number of
options
     Weighted average
exercise price
     Number of
options
     Weighted average
exercise price
 

Opening balance

     7,503,689      $ 16.30        6,072,243      $ 23.48  

Granted

     2,091,172        5.03        2,986,507        6.48  

Forfeited

     (593,408      13.03        (1,145,610      22.20  

Expired

     (462,550      27.82        (380,318      26.64  

Exercised

     (82,083      3.70        (29,133      4.60  
  

 

 

    

 

 

    

 

 

    

 

 

 

Closing balance

     8,456,820      $ 13.23        7,503,689      $ 16.30  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the stock option grants during the nine months ended April 30, 2021.

 

            Options granted                

Grant date

   Exercise
price ($)
     Executives and
directors
     Non-executive
employees
     Total      Vesting terms      Expiry period  

October 30, 2020

     3.88        349,652        315,358        665,010        Terms A        10 years  

December 22, 2020

     5.44        380,673        960,100        1,340,773        Terms A        10 years  

April 28, 2021

     7.54        —          85,389        85,389        Terms A        10 years  
     

 

 

    

 

 

    

 

 

       

Total

        730,325        1,360,847        2,091,172        
     

 

 

    

 

 

    

 

 

       

Vesting terms A – One-third of the options will vest on each of the one-year anniversaries of the date of grant over a three-year period.

The following table summarizes information concerning stock options outstanding as at April 30, 2021.

 

Exercise price

   Number
outstanding
     Weighted average
remaining life (years)
     Number
exercisable
     Weighted average
remaining life (years)
 

$2.32–$10.76

     4,566,444        8.86        943,941        6.78  

$15.56–$26.16

     1,664,895        8.00        1,051,887        7.78  

$28.52–$34.00

     2,220,732        7.65        1,205,879        7.53  

$47.36–$66.96

     4,749        0.41        4,749        0.41  
  

 

 

       

 

 

    
     8,456,820           3,206,456     
  

 

 

       

 

 

    

Restricted Share Units (“RSUs”)

Under the Omnibus Plan, the Board of Directors is authorized to issue RSUs up to 10% of the issued and outstanding common shares, inclusive of the outstanding stock options. At the time of issuance, the Board of Directors establishes conversion values and expiry dates, which are up to 10 years from the date of issuance. The restriction criteria of the units are at the discretion of the Board of Directors and from time to time may be inclusive of Company based performance restrictions, employee-based performance restrictions or no restrictions to the units.

The following table summarizes RSU activity during the nine months ended April 30, 2021 and the year ended July 31, 2020.

 

13


     April 30, 2021      July 31, 2020  
            Value of units on             Value of units on  
     Units      grant date      Units      grant date  

Opening balance

     587,108      $ 8.41        —        $ —    

Granted

     7,161        3.16        609,636        8.52  

Exercised

     (25,483      8.60        —          —    

Forfeited

     (34,801      11.76        (22,528      11.76  
  

 

 

    

 

 

    

 

 

    

 

 

 

Closing balance

     533,985      $ 7.96        587,108      $ 8.41  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the RSUs granted during the nine months ended April 30, 2021.

 

            RSUs granted                

Grant date

   Unit value      Executive and
directors
     Non-executive
employees
     Vesting
terms
     Expiry
period
 

October 30, 2020

   $ 3.16        7,161        —          Terms A        10 years  
     

 

 

          

Total

        7,161           
     

 

 

          

Vesting terms A – One-third of the units vest on each of the one-year anniversaries for the first three years after the grant date.

Share-based Compensation

Share-based compensation is measured at fair value at the date of grant and are expensed over the vesting period (See Note 22 for share-based compensation allocation by expense group). In determining the amount of share-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of stock options and RSUs granted at grant date by applying the following assumptions:

 

     April 30, 2021     July 31, 2020  

Exercise price (weighted average)

   $ 17.97     $ 26.04  

Market price (weighted average)

   $ 18.16     $ 26.44  

Risk-free interest rate (weighted average)

     1.30     1.79

Expected life (years) of options (weighted average)

     5       5  

Expected annualized volatility (weighted average)

     83     75

Volatility was estimated using the average historical volatility of the Company and comparable companies in the industry that have trading history and volatility history.

For the three and nine months ended April 30, 2021, the Company allocated to inventory $444 and $1,284, respectively (April 30, 2020 – $1,358 and $5,088) of share-based compensation applicable to direct and indirect labour in the cultivation and production process..     

The cash-settled share-based compensation liability is presented in Other liabilities. The following table summarizes the Company’s equity-settled and cash-settled share- based payments for the nine months ended April 30, 2021 and 2020.

 

     April 30, 2021      April 30, 2020  
     $        $  

Stock option share-based compensation

     10,337        18,599  

RSU share-based compensation

     —          —    
  

 

 

    

 

 

 

Total equity-settled share-based compensation

     10,337        18,599  
  

 

 

    

 

 

 

RSU share-based compensation

     1,850        —    
  

 

 

    

 

 

 

Total cash-settled share-based compensation

     1,850        —    
  

 

 

    

 

 

 

 

14


20. Net Loss per Share

The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:

 

Instrument

   April 30, 2021      July 31, 2020  

Stock Options

     8,456,820        7,503,690  

RSUs

     533,985        587,108  

2019 June financing warrants

     546,135        546,135  

USD$25m registered direct offering warrants

     1,871,259        1,871,259  

USD$20m registered direct offering warrants

     1,497,007        1,497,007  

2020 April underwritten public offering warrants

     12,459,750        14,004,375  

2020 May underwritten public offering warrants

     7,777,876        7,852,513  

Warrants issued under conversion of debentures

     4,665,628        4,665,628  

Joint venture and Inner Spirit issued warrants

     2,875,000        2,875,000  

Convertible debenture broker/finder warrants

     67,491        67,491  
  

 

 

    

 

 

 
     40,750,951        41,470,206  
  

 

 

    

 

 

 

21. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to any investments of cash and cash equivalents. The Company may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at April 30, 2021, the Company had no term loans (July 31, 2020 – $29,930) (Note 16).

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities is based on quoted market prices, which the shares of the investments can be exchanged for. The Company elected an early conversion option in the year ended July 31, 2020 in which $29,860 of the aggregate principal amount of its 8% unsecured convertible debentures (Note 14) were converted, which partially mitigates the Company’s Price Risk.

There would be no material impact (July 31, 2020 – no material impact) if the fair value of these financial assets were to increase or decrease by 10% as of April 30, 2021. The price risk exposure as at April 30, 2021 and July 31, 2020 is presented in the table below.

 

     April 30, 2021      July 31, 2020  
     $        $  

Financial assets

     4,402        2,692  

Financial liabilities

     (13,037      (3,450
  

 

 

    

 

 

 

Total exposure

     (8,635      (758
  

 

 

    

 

 

 

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables and convertible debentures receivable. As at April 30, 2021, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the medical sales are transacted with clients that are covered under various insurance programs, and adult use sales are transacted with crown corporations, the Company has limited credit risk.

Cash and cash equivalents, certain restricted funds and short-term investments are held with four Canadian commercial banks that hold Dun and Bradstreet credit ratings of AA (July 31, 2020 – AA) and $111 is held with a credit union that does not have a publicly available credit rating. Certain restricted funds in the amount of $30,000 are managed by an insurer and are held as a cell captive within a Bermuda based private institution which does not have a publicly available credit rating; however the utilized custodian is Citibank which holds a credit rating of A+. The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario and Alberta. Creditworthiness of a counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss approach. The current expected credit loss for the nine months ended April 30, 2021 is $36 (July 31, 2020 - $35).

 

15


In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they have similar credit risk characteristics. They have been grouped based on the days past due.

Credit risk from the convertible debenture receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.

The carrying amount of cash and cash equivalents, restricted cash and trade receivables represents the maximum exposure to credit risk and as at April 30, 2021; this amounted to$132,638 (July 31, 2020 – $211,860).

The following table summarizes the Company’s aging of trade receivables as at April 30, 2021 and July 31, 2020:

 

     April 30,
2021
     July 31,
2020
 
     $        $  

0–30 days

     14,830        15,253  

31–60 days

     2,407        2,972  

61–90 days

     375        412  

Over 90 days

     1,437        789  
  

 

 

    

 

 

 

Total

     19,049        19,426  
  

 

 

    

 

 

 

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three months ended April 30, 2021, the Company’s recorded sales to the crown corporations; Société québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency (“ALGC”) representing 44%, 26% and 15%, respectively (April 30, 2020 – one crown corporation representing 83%) of total applicable periods gross cannabis sales.

For the nine months ended April 30, 2021, the Company’s recorded sales to the crown corporations; Société québécoise du cannabis (“SQDC”) the Ontario Cannabis Store (“OCS”) and the Alberta Gaming, Liquor and Cannabis agency (“ALGC”) representing 50%, 20% and 17%, respectively (April 30, 2020 – one crown corporation representing 75%) of total applicable periods gross cannabis sales.

The Company holds trade receivables from the crown corporations SQDC, OCS and the AGLC representing 30%, 35% and 14%, respectively, of total trade receivable, respectively as at April 30, 2021 (July 31, 2020 – two crown corps SQDC and OCS representing 47% and 25% of total trade receivables, respectively).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at April 30, 2021, the Company had $81,038 (July 31, 2020 –$184,173) of cash and cash equivalents and $19,049 (July 31, 2020 –$19,426) in trade receivables.

The Company has current liabilities of $69,742 and contractual commitments of $9,472 due before July 31, 2022. The Company’s existing cash and cash equivalents and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months.

The Company’s success in executing on its longer-term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

The carrying values of cash and cash equivalents, trade receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

Foreign Currency Risk

On April 30, 2021, the Company holds certain financial assets and liabilities denominated in United States Dollars (“USD”) which consist of cash and cash equivalents, and warrant liabilities. The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not significant. The Company closely monitors relevant economic information to minimize its net exposure to foreign currency risk. The Company is exposed to unrealized foreign exchange risk through its cash and cash equivalents. As at April 30, 2021, approximately $35,614 (USD$29,492) (July 31, 2020 – $42,981 (USD$57,652)) of the Company’s cash and cash equivalents was in USD. A 1% change in the foreign exchange rate would result in a change of $356 to the unrealized gain or loss on foreign exchange or on the gain or loss on financial instrument revaluation of USD denominated warrants.

 

16


22. Operating Expenses by Nature

The following table disaggregates the selling, general and administrative expenses as presented on the Statement of Loss and Comprehensive Loss into specified classifications based upon their nature:

 

     For the three months ended      For the nine months ended  
     April 30,
2021
     April 30,
2020
     April 30,
2021
     April 30,
2020
 
     $        $        $        $  

Salaries and benefits

     3,448        2,633        13,711        8,657  

Professional fees

     3,023        1,924        8,523        7,534  

Facilities

     1,348        1,996        3,822        5,398  

Selling, general and administrative

     5,940        2,947        9,979        11,284  

Consulting

     1,019        1,447        2,791        6,044  

Travel

     44        291        213        1,916  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     14,822        11,238        39,039        40,833  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the nature of share-based compensation in the period:

 

     For the three months ended      For the nine months ended  
     April 30,
2021
     April 30,
2020
     April 30,
2021
     April 30,
2020
 
     $      $      $      $  

General and administrative related share-based compensation

     2,502        5,941        10,323        21,543  

Marketing and promotion related share-based compensation

     213        230        581        694  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expense related share-based compensation

     2,715        6,171        10,904        22,237  

Share based compensation capitalized to inventory

     444        1,357        1,283        5,089  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

     3,159        7,528        12,187        27,326  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the total payroll related wages and benefits by nature in the period:

 

     For the three months ended      For the nine months ended  
     April 30,
2021
     April 30,
2020
     April 30,
2021
     April 30,
2020
 
     $      $      $      $  

General and administrative related wages and benefits

     3,448        2,633        13,711        8,657  

Marketing and promotion related wages and benefits

     1,560        1,148        4,064        3,796  

Research and development related wages and benefits

     433        513        2,247        2,226  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expense related wages and benefits

     5,441        4,294        20,022        14,679  

Wages and benefits capitalized to inventory

     3,465        3,991        11,795        17,317  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total wages and benefits

     8,906        8,285        31,817        31,996  
  

 

 

    

 

 

    

 

 

    

 

 

 

23. Other Income and Losses

 

     For the three months ended      For the nine months ended  
     April 30,
2021
     April 30,
2020
     April 30,
2021
     April 30,
2020
 
     $      $      $      $  

Interest and financing expenses

     (3,296      (3,279      (8,368      (7,312

Interest income

     349        353        1,057        1,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

Finance income (expense), net

     (2,947      (2,926      (7,311      (6,073
  

 

 

    

 

 

    

 

 

    

 

 

 

Revaluation of financial instruments gain

     (383      4,955        (9,587      7,966  

Share of loss from investment in associate and joint ventures

     (2,244      (1,195      (5,902      (4,468

Loss on convertible debenture receivable

     746        (212      746        (3,253

Unrealized gain/(loss) on investments

     544        (311      1,204        (8,535

Realized gain on investments

     —          (1,217      —          (1,444

Foreign exchange gain/(loss)

     (1,514      2,443        (3,836      3,017  

Other income

     1,177        —          4,511        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-operating income (expense), net

     (1,674      4,463        (12,864      (6,717
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


24. Related Party Disclosure

Compensation of Key Management

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors.

Compensation provided to key management during the year was as follows:

 

     For the three months ended      For the nine months ended  
     April 30,
2021
     April 30,
2020
     April 30,
2021
     April 30,
2020
 
     $      $      $      $  

Salary and/or consulting fees

     764        715        1,846        2,365  

Termination benefits

     —          427        1,008        427  

Bonus compensation

     210        —          620        42  

Stock-based compensation

     1,454        4,302        5,709        13,894  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,428        5,444        9,183        16,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Related Parties and Transactions

Belleville Complex Inc.

The Company holds a 25% interest in Belleville Complex Inc. (“BCI”) with the related party Olegna Holdings Inc., a company owned and controlled by a director of the Company, holding the remaining 75% in BCI. BCI purchased a configured 2,004,000 sq. ft. facility through a $20,279 loan issued and repaid during the year ended July 31, 2019. The Company will be the anchor tenant for a 15-year, with an option to renew for 15 years and additional space to rent. The Company has also subleased a portion of the space to Truss Limited Partnership (Note 8). Consideration for the 25% interest on the joint venture is deemed $nil. The carrying value of BCI as at April 30, 2021 is $479 (July 31, 2020 - $nil).

The Company leases a space in Belleville from a related party BCI, that supports its manufacturing activities and is based in Belleville, Ontario. Under this lease arrangement, the Company incurred $1,261 and $3,427 in lease and operating expenses during the three and nine months ended April 30, 2021, respectively (April 30, 2020 - $1,236 and $5,510). This lease liability is recognized on the Company’s balance sheet under IFRS 16 (Note 15).

Truss LP

The Company owns a 42.5% interest in Truss LP and accounts for the interest as an investment in an associate (Note 9).

The Company subleases section of its Belleville lease to Truss LP this sublease is recognized as a finance lease receivable on the Company’s balance sheet (Note 5). The Company recognizes a recovery on its partnership with Truss LP in Other receivables and Other income.

Under a Temporary Supply and Services Agreement (“TSSA”) with Truss LP, the Company produces and packages cannabis infused beverages in the CIB Facility (located at the Belleville Facility) and in the Gatineau Facility, an markets and sells beverages for the legal adult-use markets in Canada, in each case subject to the terms of its regulatory approvals and applicable laws, all for its own account and as a stand-alone division of HEXO. Truss LP applied to be a licensed producer of Cannabis during the period, but until the time where Truss LP obtains all regulatory approval required under the Cannabis Act (Canada), the TSSA will remain in place. Under the TSSA, Truss LP will be an exclusive supplier to the Company of all property and all services required to carry on the business, other than specific services which are required to be provided by HEXO. As a result of this arrangement, there is a receivable from Truss of $1,908 at April 30, 2021 (July 31, 2020 – $3,405). During the three and nine months ended April 30, 2021, the Company purchased $782 and $5,955 (April 30, 2020 – $nil and $nil) of raw materials from Truss LP under the arrangement and received $1,045 (April 30, 2020 – $nil) of Income.

25. Capital Management

The Company’s objectives when managing capital are to (1) safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and (2) maintain an optimal capital structure to reduce the cost of capital.

Management defines capital as the Company’s shareholders’ equity and interest-bearing debt. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements, with the exception of covenants related to the Company’s Term Loan as set out in Note 16.

As at April 30, 2021, total managed capital was $527,125 (July 31, 2020 – $556,676).

 

18


26. Commitments and Contingencies

COMMITMENTS

The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental agreements and construction contracts.

Some of these contracts have optional renewal terms that the Company may exercise at its option. The annual minimum payments payable under these obligations over the next five fiscal years and thereafter are as follows:

 

July 31, 2022

   $ 9,472  

July 31, 2023

     5,050  

July 31, 2024

     3,677  

July 31, 2025

     3,531  

July 31, 2026

     2,429  

Thereafter

     19,274  
  

 

 

 
   $  43,433  
  

 

 

 

See Note 15 for recognized contractual commitments regarding the Company’s lease obligations under IFRS 16.

LETTERS OF CREDIT

On August 21, 2019, the Company entered into a five-year letter of credit with a Canadian financial institution to provide a maximum of $250 that amortizes $50 annually until its expiry on July 14, 2024. The letter of credit has not been drawn upon as at April 30, 2021. As at April 30, 2021, the $200 letter of credit is secured by cash held in collateral (Note 4).

On August 1, 2020, the Company reissued a pre-existing letter of credit with a Canadian financial institution under an agreement with a public utility provider entitling the utility provider to a maximum of $2,581, subject to certain operational requirements. The letter of credit has a one-year expiry from the date of issuance with an autorenewal feature. On January 1, 2021, the letter of credit was reduced to $2,352 by way of amendment. The letter of credit has not been drawn upon as at April 30, 2021. The letter of credit is secured by cash held in collateral (Note 4).

CONTINGENCIES

The Company may be, from time to time, subject to various administrative and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.

As of April 30, 2021, the Company is named as a defendant in securities class actions that have been filed in the superior court of the province of Quebec and in the Supreme Court of the State of New York. One or more of the Company’s current and/or former officers and directors, and/or certain underwriters of past public offerings by the Company, are also named as defendants in certain of the actions. The lawsuits assert causes of action under Canadian and U.S. securities legislation in connection with statements made by the defendants that are alleged to have been materially false and/or misleading statements and their alleged failure to disclose material adverse facts. The alleged misrepresentations relate to, among other things, the Company’s forward-looking information, including but not limited to the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing” and the Company’s supply agreement with the Province of Quebec. As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions. In November 2020, the Superior Court of Justice of Ontario ordered the discontinuance of two putative securities class actions commenced in Ontario relating to the same matters on a without costs basis. On March 9, 2021, the United States District Court for the Southern District of New York dismissed the U.S. federal securities class action pending against the company relating to the same matters on a without costs basis, with the dismissal not having been appealed from.

As of April 30, 2021, the Company was named as a defendant in a proposed consumer protection class action filed on June 18, 2020 in the Court of Queens’ Bench in Alberta on behalf of residents of Canada who purchased cannabis products over specified periods of time. Several other licensed producers are also named as co-defendants in the action. The lawsuit asserts causes of action, including for breach of contract and breach of consumer protection legislation, arising out of allegations that the Tetrahydrocannabinol (THC) or Cannabidiol (CBD) content of medicinal and recreational cannabis products sold by the Company and the other defendants to consumers was different from what was advertised on the products’ labels. Many of the cannabis products sold by the Company and other defendants were allegedly sold to consumers in containers using plastic bottles or caps that may have rapidly absorbed or degraded the THC or CBD content within them. By allegedly over-representing the true amount of THC or CBD in the products, the plaintiff claims that consumers would be required to consume substantially more product than they otherwise would have in order to obtain the desired effects or, in the alternative, would have consumed the product without obtaining the desired effects. The action has not yet been certified as a class action.

ONEROUS CONTRACT

During the year ended July 31, 2020, the Company recognized a $4,763 onerous contract provision related to a fixed price supply agreement for the supply of certain cannabis products. The supply agreement is currently the subject of legal proceedings as disclosed above. The costs and purchase obligations under the contract exceed the economic benefits expected to be received. The related loss has been included in Other gains and losses. The onerous contract liability remains as at April 30, 2021.

 

19


27. Fair Value of Financial Instruments

The carrying values of the financial instruments as at April 30, 2021 are summarized in the following table:

 

     Amortized                
     cost      FVTPL      Total  

Assets

     $        $        $  

Cash and cash equivalents

     81,038        —          81,038  

Restricted funds

     32,551        —          32,551  

Trade receivables

     19,049        —          19,049  

Convertible debenture receivable

     —          20,246        20,246  

Commodity taxes recoverable and other receivables

     10,202        —          10,202  

Lease receivable – long term

     3,795        —          3,795  

Long – term investments

     —          4,402        4,402  
  

 

 

    

 

 

    

 

 

 

Liabilities

     $        $        $  

Accounts payable and accrued liabilities

     42,968        —          42,968  

Warrant liability

     —          13,037        13,037  

Lease liability – current

     4,659        —          4,659  

Lease liability – long term

     22,566        —          22,566  

Convertible debentures

     31,951        —          31,951  

Term loan – current

     —          —          —    

Other long-term liabilities(1)

     —          1,805        1,805  
  

 

 

    

 

 

    

 

 

 

 

1 

Financial liability designated as FVTPL.

The carrying values of the financial instruments as at July 31, 2020 are summarized in the following table:

 

     Amortized                
     cost      FVTPL      Total  

Assets

     $        $        $  

Cash and cash equivalents

     184,173        —          184,173  

Restricted funds

     8,261        —          8,261  

Trade receivables

     19,426        —          19,426  

Commodity taxes recoverable and other receivables

     16,773        —          16,773  

Lease receivable – long term

     3,865        —          3,865  

Long – term investments

     —          3,209        3,209  
  

 

 

    

 

 

    

 

 

 

Liabilities

     $        $        $  

Accounts payable and accrued liabilities

     32,451        —          32,451  

Warrant liability

     —          3,450        3,450  

Lease liability – current

     4,772        —          4,772  

Lease liability – long term

     24,344        —          24,344  

Convertible debentures

     28,969        —          28,969  

Term loan – current

     29,930        —          29,930  

Other long-term liabilities(1)

     —          393        393  
  

 

 

    

 

 

    

 

 

 

 

1 

Financial liability designated as FVTPL.

The carrying values of cash and cash equivalents, restricted funds, short term investments, trade and other receivables, lease receivables, accounts payable and accrued liabilities, lease liabilities and term loan approximate their fair values due to their relatively short periods to maturity.

28. Non-Controlling Interest

The following table summarizes the information relating to the Company’s non-controlling interests, before intercompany eliminations.

 

     April 30, 2021     July 31, 2020  

Current assets

   $ —       $ —    

Non-current assets

     8,448       7,455  

Current liabilities

     —         —    

Non-current liabilities

     —         —    
  

 

 

   

 

 

 

Non-controlling interest (%)

     40     40
  

 

 

   

 

 

 

Non-controlling interest

   $ 3,379     $  3,379  
  

 

 

   

 

 

 

The Company holds a 60% interest in Keystone Isolation Technology Inc. (“KIT”) which is intended to principally operate out of Belleville Facility, and the remaining 40% represents the non-controlling interest held by Chroma Global Technologies Ltd (the “Partner”). Under the terms of the shareholder agreement, the Company has contributed cash of $4,699 (USD$3,100). The non-controlling interest value of $3,750 represents the value of the Partners contribution in kind for their respective equity interest in the

 

20


entity. During the three months ended October 31, 2020, the Partner contributed capital equipment in-kind of $371 as required under the terms of the shareholders agreement. There remains approximately $325 of an in-kind commissioning contribution to satisfy the acquisition terms of the shareholders agreement. KIT had no revenues or expenses during the nine months ended April 30, 2021 and the year ended July 31, 2020.

29. Revenue from Sale of Goods

The Company disaggregated its revenues from the sale of goods between sales of cannabis beverages (“Cannabis beverage sales”) and dried flower, vapes, and other cannabis products (“Cannabis sales excluding beverages”). The Company’s cannabis beverage sales are derived from the Cannabis Infused Beverage (“CIB”) line, which was established in order to manufacture, produce and sell cannabis beverage products. CIB operates under the Company’s cannabis licensing and in compliance with Health Canada and the Cannabis Act’s regulations. The Company has assessed the beverage revenue stream to be realized by the Company and presented on a gross basis as defined under IFRS 15. The Company will continue to operate CIB until Truss has obtained its independent licensing to manufacture and sell cannabis products, at which point these operations will shift to Truss.

 

For the three months ended

   April 30, 2021      April 30, 2020  

Revenue stream

   Cannabis sales
excluding
beverages
     Cannabis
beverage
sales
     Total      Cannabis sales
excluding
beverages
     Cannabis
beverage
sales
     Total  
     $      $      $      $      $      $  

Retail

     29,273        3,330        32,603        29,316        465        29,781  

Medical

     430        —          430        774        —          774  

Wholesale

     49        —          49        340        —          340  

International

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue from sale of goods

     29,752        3,330        33,082        30,430        —          30,895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

For the nine months ended

   April 30, 2021      April 30, 2020  

Revenue stream

   Cannabis sales
excluding
beverages
     Cannabis
beverage
sales
     Total      Cannabis sales
excluding
beverages
     Cannabis
beverage
sales
     Total  
     $      $      $      $      $      $  

Retail

     104,587        10,280        114,867        70,549        465        71,014  

Medical

     1,508        —          1,508        2,655        —          2,655  

Wholesale

     559        —          559        340        —          340  

International

     3,125        —          3,125        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue from sale of goods

     109,779        10,280        120,059        73,544        —          74,009  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue from the sale of goods is presented net of provisions for sales returns and price concessions. During the three and nine months ended April 30, 2021 the Company incurred $936 and $2,474 (April 30, 2020—$1,950 and $5,370) of net sales provisions and price concessions, respectively.

30. Segmented Information

The Company operates under one material operating segment. All property, plant and equipment and intangible assets are located in Canada.

31. Operating Cash Flow

The following items comprise the Company’s operating cash flow activity for the periods herein.

 

For the nine months ended

   April 30, 2021      April 30, 2020  
     $      $  

Items not affecting cash

     

Income tax recovery

     —          (6,023

Depreciation of property, plant and equipment

     4,369        4,890  

Depreciation of property, plant and equipment in cost of sales

     1,502        2,313  

Amortization of intangible assets

     1,043        3,690  

Loss/(gain) on convertible debentures

     (746      3,253  

Unrealized gain on changes in fair value of biological assets

     (35,616      (21,378

Unrealized fair value adjustment on investments

     (1,204      8,535  

Amortization of deferred financing costs

     793        —    

Accrued interest income

     4,890        6,850  

Accretion of convertible debenture

     2,956        —    

Gain/(Loss) on investment

     —          1,444  

License depreciation and prepaid royalty expenses

     118        301  

Write-off of inventory and biological assets

     1,001        2,838  

Write (up)/down of inventory to net realizable value

     —          39,311  

Realized fair value amounts on inventory sold

     17,619        21,362  

 

21


For the nine months ended

   April 30, 2021      April 30, 2020  

Loss from investment in associate and joint ventures

     5,902        4,468  

Share-based compensation

     12,000        22,237  

Revaluation of financial instruments (gain)/loss

     9,587        (7,966

Impairment losses

     (662      251,070  

Loss on onerous contract

     —          3,000  

Loss on long lived assets and disposal of property, plant and equipment

     1,339        3,734  

Gain on exit of lease

     (789      —    
  

 

 

    

 

 

 

Total items not affecting cash

     24,102        343,929  
  

 

 

    

 

 

 

Changes in non-cash operating working capital items

     

Trade receivables

     347        2,873  

Commodity taxes recoverable and other receivables

     5,648        (1,479

Prepaid expenses

     (1,851      5,170  

Inventory

     (36,768      (87,243

Biological assets

     33,965        22,168  

Accounts payable and accrued liabilities

     6,269        (1,866

Excise taxes payable

     (2,806      727  
  

 

 

    

 

 

 

Total non-cash operating working capital

     4,804        (59,650
  

 

 

    

 

 

 

Additional supplementary cash flow information is as follows:

 

For the

   nine months ended
April 30, 2021
     year ended
July 31, 2020
 
     $      $  

Property, plant and equipment in accounts payable

     4,150        19,751  

Right-of-use asset additions

     —          24,405  

Capitalized borrowing costs

     1,269        2,385  

Interest paid

     2,409        2,527  
  

 

 

    

 

 

 

32. Comparative Information

The Company has reclassified Impairment loss on inventory within Cost of goods sold, to conform with the current presentation. The amount is disclosed in Note 6. The Company has reclassified purchased extracts inventory from extracts to conform with the current presentation, the amount is disclosed in Note 6.

33. Income Taxes

The Company’s effective income tax rate was nil% for the nine months ended April 30, 2021 (April 30, 2020 – 1.57%). The effective tax rate is different than the statutory rate primarily due to the non-recognition of deferred tax assets.

34. Subsequent Events

Acquisition of Zenabis Global Inc.

On February 15, 2021, the Company entered into a definitive arrangement agreement with Zenabis Global Inc.(or “Zenabis”) under which the Company sought to acquire all of Zenabis’ issued and outstanding common shares through an all-share transaction. A special meeting of the Zenabis shareholders took place May 13, 2021 where the transaction was approved by way of special resolution. The acquisition was finalized on June 1, 2021 by way of a plan of arrangement.

On June 1, 2021, all of the Zenabis issued and outstanding common shares were acquired and converted to 17,579,336 HEXO shares at the prescription exchange ratio of 0.01772 entitling each former Zenabis shareholder 0.01772 of a HEXO common share in exchange for each Zenabis common share held. The estimated value of the acquired shares is $151,358.

The transaction is expected to be treated as business acquisition under IFRS 3, accounted for using the acquisition method.

At-the-Market Offering up to $150 Million

On May 11, 2021 Company established an at-the-market equity program (the “ATM Program”) that allows the Company to issue and sell up to $150,000 (or its U.S. dollar equivalent) of common shares in the capital of the Company (the “Common Shares”) from treasury to the public, from time to time, at the Company’s discretion.

The Company expects to use the net proceeds from the ATM Program for general corporate purposes, which may include: (i) costs associated with the Company’s U.S. expansion plans including the contemplated acquisition of a facility in the State of Colorado and its subsequent retrofitting and improvement; (ii) capital expenditures, including potential capital expenditures to make additional improvements to the production lines at the Company’s Belleville, Ontario facility; (iii) potential future acquisitions; (iv) working capital, including replenishing existing cash resources and working capital which will be used to fund certain transaction and integration costs

 

22


and minimum debt repayments related to the Company’s proposed acquisition of Zenabis; and (v) repayment of additional debts owed by Zenabis.

The Company has raised approximately $16,897 and USD$24,852 through the issuance of 2,298,901 and 4,075,025 common shares, respectively.

Definitive Arrangement to Acquire 48North Cannabis Corp. (“48North”)

On May 17 the Company entered into a definitive arrangement agreement (the “48North Arrangement Agreement”), subject to 48North’s shareholder approval, under which the Company intends to acquire, by way of a court-approved plan of arrangement under the Business Corporations Act (British Columbia), all of 48North’s issued and outstanding common shares in an all-share transaction valued at approximately $50,000 as at May 17, 2021 (the “ 48North Transaction”). Under the terms of the 48North Arrangement Agreement, 48North’s shareholders are expected to receive 0.02366 of a HEXO common share in exchange for each 48North common share held (the “48North Exchange Ratio”).

The 48North Transaction was unanimously approved by the board of directors of each of the Company and 48North (in the case of 48Norths board of directors, after receiving the unanimous recommendation of a special committee formed for purposes of the 48North Transaction). The 48North Transaction will require approval by at least 66 2/3% of the votes cast by the shareholders of 48North present at a special meeting of 48Norths shareholders at a pending future date.

The 48North Transaction also contemplates HEXO providing 48North with a $5,000 subordinated secured bridge loan with a 6-month term within 30 days following signing of the Arrangement Agreement to fund 48North’s short term working capital requirements.

The 48North Arrangement Agreement includes customary provisions, including non-solicitation provisions, subject to the right of 48North to accept a superior proposal in certain circumstances, with HEXO having a period of five business days to exercise a right to match any such superior proposal for 48North. The 48North Arrangement Agreement also provides for a termination fee of $2,000 payable by 48North to HEXO if the 48North Transaction is terminated in certain specified circumstances, as well as reciprocal expense reimbursement provisions if the 48North Transaction is terminated by either party in certain other specified circumstances.

The 48North Transaction is expected to be treated as business acquisition under IFRS 3, accounted for using the acquisition method.

Offering of USD$360m Senior Secured Convertible Notes

On May 27, 2021, the Company closed an offering of USD$360 million aggregate principal amount of senior secured convertible notes (the “Notes”) directly to an institutional purchaser and certain of its affiliates or related funds (collectively, the “Purchaser”).

The Notes were sold at a purchase price of USD $327.6 million or approximately 91.0% of their principal amount. The Notes mature on May 1, 2023. Subject to certain limitations, the Notes will be convertible into freely tradeable common shares of the Company at the option of the Purchaser and, subject to conditions and limitations, at the option of the Company. If not previously converted, all principal repayments of the Notes will 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 will be issued in registered form, without coupons, under a trust indenture dated May 27, 2021.

Upon closing of the offering, 70% of the net proceeds have been placed into escrow with a third party. The escrowed funds may be released upon the satisfaction of certain conditions related to the proposed Redecan Definitive Arrangement (below). If the release conditions are satisfied prior to December 1, 2021 the escrowed funds and the interest earned thereon will be released to HEXO and will be used for purposes of completing the Redecan acquisition.

The Company expects to use substantially all of the net proceeds from the Offering to fund the acquisition of Redecan.

Definitive Arrangement to Acquire Redecan

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, Canada’s largest privately-owned licensed producer, for a purchase price of $925 million payable in a combination of cash and through the issuance of common shares of HEXO and subject to certain customary adjustments (the “Redecan Transaction”).

Under the terms of the Share Purchase Agreement, the $925 million purchase price will be paid to the Redecan shareholders as $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 at an implied price per share of $7.53.

Under TSX rules, the Redecan Transaction requires a simple majority approval of HEXO’s shareholders. HEXO expects to convene a meeting of shareholders to be held in August 2021 for the purpose of submitting the Redecan Transaction to shareholders for approval. The Redecan Transaction has been unanimously approved by HEXO’s board of directors.

The Redecan Transaction is expected to be treated as business acquisition under IFRS 3, accounted for using the acquisition method.

 

23

Exhibit 99.2

 

LOGO

For the three and nine months ended April 30, 2021 and 2020


Management’s Discussion & Analysis

Table of Contents

 

INTRODUCTION & DISCLAIMERS

     3  

COMPANY OVERVIEW

     4  

UPDATE ON ZENABIS ACQUISITION

     4  

STRATEGIC PRIORITIES

     5  

OPERATIONAL EXCELLENCE

     6  

INNOVATION

     7  

MARKET LEADERSHIP

     7  

HOUSE OF BRANDS

     8  

TRUSS BEVERAGE CO.

     9  

HEXO GROUP OF FACILITIES

     10  

CANADIAN CANNABIS MARKET

     11  

ADULT-USE

     11  

MEDICAL

     12  

HEXO USA

     12  

COVID-19 UPDATE

     12  

CORPORATE SOCIAL & ENVIRONMENTAL RESPONSIBILITY

     13  

OTHER CORPORATE HIGHLIGHTS AND EVENTS

     13  

OPERATIONAL AND FINANCIAL HIGHLIGHTS

     19  

SUMMARY OF RESULTS

     20  

ADJUSTED EBITDA

     28  

FINANCIAL POSITION

     30  

LIQUIDITY AND CAPITAL RESOURCES

     31  

CAPITAL RESOURCES

     31  

CAPITALIZATION TABLE

     32  

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

     33  

PROPOSED TRANSACTIONS

     35  

FINANCIAL RISK MANAGEMENT

     36  

CRITICAL ACCOUNTING ASSUMPTIONS

     37  

RELATED PARTY TRANSACTIONS

     38  

INTERNAL CONTROLS OVER FINANCIAL REPORTING

     39  

RISK FACTORS

     42  

 

2    MD&A


Management’s Discussion and Analysis of Financial Condition and Results of Operations

for the three and nine months ended April 30, 2021

All dollar amounts in this MD&A are expressed in thousands of Canadian dollars, except for share and per share amounts, and where otherwise indicated. Amounts expressed in United States dollars (“USD”) are expressed as USD$ or US$.

Introduction & Disclaimers

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of HEXO Corp and our subsidiaries (collectively, “we” or “us” or “our” or “Company” or “HEXO”) is for the three and nine months ended April 30, 2021. HEXO is a publicly traded corporation, incorporated in Ontario, Canada. The common shares of HEXO trade under the symbol “HEXO” on both the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”). This MD&A is supplemental to, and should be read in conjunction with, our condensed interim consolidated financial statements for the three and nine months ended April 30, 2021 and our audited consolidated financial statements for the year ended July 31, 2020. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at hexocorp.com/investors or through the SEDAR website at sedar.com or the EDGAR website at www.sec.gov/edgar.

Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “may”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue”, “objective”, or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance, as well as statements with respect to:

 

   

the competitive and business strategies of the Company;

 

   

the intention to grow the business, operations and potential activities of the Company, including entering into joint ventures and partnerships and leveraging the brands of third parties through joint ventures and partnerships;

 

   

the ongoing expansion of the Company’s facilities, its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity;

 

   

the expansion of business activities, including current and potential acquisitions;;

 

   

the Company’s acquisition of Zenabis Global Inc. and the future impact thereof;

 

   

the Company’s proposed acquisition of 48North Cannabis Corp. and the future impact thereof;

 

   

the Company’s proposed acquisition of Redecan. and the future impact thereof;

 

   

the expected sales mix of offered products;

 

   

the development and authorization of new products, including cannabis edibles, beverages and extract products (“cannabis derivatives”), and the timing of launch of such new products;

 

   

the competitive conditions of the industry, including the Company’s ability to maintain or grow its market share;

 

   

the Company’s Truss and Truss CBD USA business ventures with Molson Coors and the future impact thereof;

 

   

the Company’s Keystone Isolation Technologies business venture and the future impact thereof;

 

   

the expansion of the Company’s business, operations and potential activities outside of the Canadian market, including but not limited to the U.S., Europe and other international jurisdictions;

 

   

whether the Company will have sufficient working capital and its ability to raise additional financing required in order to develop its business and continue operations;

 

   

the applicable laws, regulations and any amendments thereof;

 

   

the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof;

 

   

the filing of trademark and patent applications and the successful registration of same;

 

   

the anticipated future gross margins of the Company’s operations;

 

   

the performance of the Company’s business and operations;

 

   

securities class action and other litigation to which the Company is subject; and

 

   

the impact of the COVID-19 coronavirus pandemic on the operations of the Company.

Such statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations about future events and certain assumptions including, but not limited to:

 

   

the Company’s ability to implement its growth strategies;

 

   

the Company’s ability to complete the conversion, improvements or buildout of its owned and leased facilities on time and on budget;

 

   

the Company’s competitive advantages;

 

   

the development of new products and product formats for the Company’s products;

 

   

the Company’s ability to obtain and maintain financing on acceptable terms;

 

   

the impact of competition;

 

   

the changes and trends in the cannabis industry;

 

   

changes in laws, rules and regulations;

 

   

the Company’s ability to maintain and renew required licences;

 

   

the Company’s ability to maintain good business relationships with its customers, distributors and other strategic partners;

 

   

the Company’s ability to keep pace with changing consumer preferences;

 

3    MD&A


   

the Company’s ability to protect intellectual property;

 

   

the Company’s ability to manage and integrate acquisitions;

 

   

the Company’s ability to retain key personnel; and

 

   

the absence of material adverse changes in the industry or global economy, including as a result of the COVID-19 pandemic.

Although any forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from current expectations, see “Risk Factors”. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.

We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis, cannabis products in any jurisdiction where the sale of cannabis is unlawful under applicable laws. HEXO does not currently engage in any unlawful U.S. marijuana-related activities as defined in Canadian Securities Administrators Staff Notice 51-352 (Revised) - Issuers with U.S. Marijuana-Related Activities and will only do so in the future to the extent fully legal under all applicable U.S. federal or state laws.

On December 17, 2020, the Company completed a consolidation of all of its issued and outstanding common shares on the basis of four (4) old common shares for one (1) new common share. As a result of the share consolidation, the Company’s issued and outstanding common shares were reduced from 488,650,748 to approximately 122,162,687 (disregarding the treatment of any resulting fractional shares). In addition, the exercise or conversion price and the number of common shares issuable under the Company’s outstanding common share purchase warrants, convertible debentures, stock options and other securities exercisable for or convertible into common shares were proportionately adjusted to reflect the share consolidation in accordance with the respective terms thereof. All share and per share data presented in the Company’s consolidated financial statements and this MD&A have been retroactively adjusted to reflect the share consolidation unless otherwise noted.

This MD&A is dated June 14, 2021.

Company Overview

HEXO is an award winning, top consumer-packaged goods (“CPG”) cannabis company currently operating out of Quebec and Ontario, Canada. We are licensed to cultivate, process, market, research and develop and sell adult-use and medical cannabis, cannabis-derived extracts and derivative products in Canada under the provisions of the Cannabis Act and globally where applicable international and Canadian regulations permit. Our goal is to become a global cannabis industry leader with one of the highest market shares in Canada through a combination of organic growth and growth through acquisition. On June 1, 2021 we completed the acquisition of Zenabis Global Inc. (“Zenabis”) and we are in the process of acquiring two more established Canadian licensed producers, 48North Cannabis Corp. (“48North”) a public company listed on the TSX Venture Exchange and Redecan, a top performing licensed producer and Canada’s largest private licensed producer. We are focused on delivering a complete range of experiences for any occasion to our consumers who count on us for safe and reputable, high-quality cannabis products. We have taken HEXO international with our medical cannabis product offerings in Israel and CBD Powered by HEXO® products in the state of Colorado, USA. We have established a history of award-winning and innovative products driven by our deeply rooted passion for developing, manufacturing and bringing to market a diversified portfolio to our valued adult-use consumers and medical patients.

Our common shares are listed on the TSX in Canada and the NYSE in the U.S. under the symbol HEXO.

Update on Zenabis Acquisition

Zenabis is a significant Canadian-licensed cultivator of medical and recreational cannabis which employs staff coast-to-coast, across facilities in Atholville, New Brunswick; Langley, British Columbia; and Stellarton, Nova Scotia. Zenabis currently has 111,200 kg of licensed cannabis cultivation space across three licensed facilities in Canada, together with its cannabis import, export and processing joint venture, ZenPharm, operating from Birżebbuġa, Malta. The Company acquired all of the issued and outstanding shares of Zenabis, which was previously listed on the TSX, on June 1, 2021 by way of plan of arrangement. As of the date of this report, management’s evaluation of the Zenabis operations and their integration is still in process. The directional strategy for each site and brand is being carefully assessed in order to maximize the proforma value of the combined entity.

 

LOGO

 

 

4    MD&A


Strategic Priorities

Our strategy is to have strong standards of operational excellence, execute at scale, grow low-cost high-quality cannabis, build targeted brands for all types of cannabis consumer segments and partner with existing fortune 500 CPG companies to introduce Powered by HEXO® products across their existing manufacturing and distribution infrastructure. We are focused on building long-term sustainable shareholder value, which we believe requires consistent and profitable sales growth, careful management of selling, general and administrative expenses and maintaining a relatively low depreciable asset base.

HEXO believes in a few years a handful of companies will control a significant portion of the global market share, and that we are positioning ourselves to be one of these companies1. The consolidation of competition has already begun and HEXO is becoming an industry leader through the acquisition of Zenabis and the announced intended acquisitions of Redecan and 48North. Through the acquisition and integration of these entities and their top performing brands, HEXO expects to increase its market share while also cross leveraging the top operations of each entity to drive synergistic value.

In Canada, our goal is to hold a top market share position for adult use cannabis through developing and introducing high-quality, innovative products and brands that resonate with specific consumer segments. We believe distribution of our products is imperative to achieve this goal. To this end, we have to maintain a strong presence in Quebec, where we currently hold number one market share and have a five-year contract as a preferred supplier with Quebec’s Société québécoise du cannabis (“SQDC”), while simultaneously accessing the growth potential of other major Canadian markets outside of Quebec, such as Ontario, Alberta and BC. HEXO covers virtually 99.6% of the Canadian population through our governmental and private retail distribution agreements across all ten Canadian provinces. Throughout the full fiscal year of 2020, only 27% of HEXO’s net revenue for adult use cannabis (excluding beverage) came from outside of Quebec. These same sales during fiscal 2021, year to date have increased to 43% and have grown to 49% in both the second and third quarters of fiscal 2021. In addition to distribution, we believe being a number one market share leader requires competing directly against the illicit market. The Canadian black market for cannabis continues to account for approximately half of the total market2. HEXO was among the first to disrupt the illicit market through the creation of Original Stash and its value formats.

Trending towards a top two position in Canada, we are creating a gateway to U.S. and the world. Internationally, our growth strategy first starts in the United States. We believe partnering with large, established, global CPG companies, who wish to enter the cannabinoid industry as a means of brand proliferation, will provide the greatest long-term value to our shareholders. Developing and bringing new products to market under major recognizable brands and Powered by HEXO® whilst using their development teams, manufacturing capabilities, distribution channels and retail relationships, we believe, will be the winning formula. We’ve already achieved the number one market share position in Canada for cannabis beverages3 with our initial partner, Molson Coors, through our joint venture Truss Beverage Co.

We have adjusted our partnering model towards a more traditional royalty-based concept, allowing future CPG partners access to our cannabis food ingredients, Powered by HEXO. We’ve also entered the U.S. through our CBD beverage manufacturing and distribution in Colorado, leveraging Molson Coors infrastructure in the U.S. We look forward to the U.S. legal landscape evolving to permit national distribution, where we expect our advanced knowledge of the technology of cannabis, paired with the strength of consumer insights and distribution networks of our present and future anticipated partners will create significant operating leverage.

 

1 

Based on: (i) analyst commentary on the development of the cannabis industry in Canaccord Genuity Corp.’s report entitled “Cannabis Monthly, February 2019”, dated February 20, 2019; (ii) the example of how the alcohol industry developed and consolidated post-prohibition, general commentary and analysis about the adult-use cannabis industry to the effect that, as a similar regulated industry, it can be expected to develop and consolidate in a similar fashion, and evidence that this is currently the trend in the industry; (iii) the Company’s review of existing and developing cannabis sales by other licensed producers since the legalization of the adult-use cannabis market; (iv) the Company’s current position in the adult-use market and its belief as to its competitive advantages arising from: (A) being a market leader in Quebec, its expansion into other select markets in Canada particularly Ontario, and increasing market share of sales in those markets; (B) offering a selection of products at a variety of price points; (C) maintaining a competitive cost structure; and (D) its joint venture with Molson Coors.

2 

Source: StatsCan via BNN Bloomberg’s article: “StatsCan: Legal pot spending beat black market for first time in Q2.”

3 

Derived from internal review of third-party competition data for the periods of February 1, 2021 to April 30, 2021 for Ontario, Alberta and BC and March 2021 to June 2021 for Quebec.

 

5    MD&A


STRATEGIC PILLARS

 

LOGO

Our strategy is built on three pillars: operational excellence, innovation and market leadership. In striving to achieve operational excellence our immediate focus remains on effective demand planning and production. We are continuously looking to implement more effective techniques to streamline operations, align production with market demand, lower production costs, drive meaningful improvements in yields and improve inventory velocity; all as a part of the Company’s focus on profitability. The innovation department is consistently working towards developing modern, cutting edge cannabis products for the Canadian cannabis derivatives market. We plan to invest in even better, science-backed cannabis experiences and platform technology, as we continue to develop advanced ingredients for food formulations for use with our partners. To expand our market leadership, we will continue to strengthen distribution in all major markets across the country with our brands, HEXO, UP Cannabis, HEXO Plus, Bake Sale and Original Stash to drive market share and a top position in Canada, all the while maintaining our dominant position in the Province of Quebec.

Operational Excellence

We have been cultivating cannabis since 2014 under the Cannabis Act of 2018 regulatory regime and its predecessor (“Cannabis Regulations”), growing and producing high-quality cannabis. Maximizing our cultivating practices efficiency and technology to further drive improved yields and decrease costs is of critical importance.

We chose to initially locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production: an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people. These conditions allow us to continue to focus on ensuring that we maintain our low-cost production and move towards achieving profitability in the Canadian market.

On the border of Canada’s two largest consumer markets, Quebec and Ontario, our main campus in Gatineau positions us in close proximity to three of the country’s major urban areas, Montreal, Ottawa and Toronto. We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant business knowledge derived from a variety of industries and markets.

HEXO has developed a post cultivation manufacturing centre of excellence in Belleville, Ontario to complement the Gatineau facility. The Belleville location serves our two largest markets with optimum warehousing and distribution lead times and costs. The site has been engineered to provide significant expansion for cannabis post cultivation technologies and partnerships. Today, HEXO is investing in advanced manufacturing technologies and practices to rival well developed consumer goods manufacturing capabilities. Coupled with technology, HEXO is investing in people and supply chain enablers that will deliver fresh product to the market on a continuous basis.

 

6    MD&A


Innovation

Empowering the world to have safe and pleasurable cannabis experiences powered by HEXO technology.

Our focus on product development through research, innovation, and technology are reflective of our strategic priorities. HEXO’s product development team draws on extensive CPG experience in creating innovation that drives consumer value. At the core of our innovation are the platform technologies that when partnered with cannabinoids provide the solution base for infusion. These platforms enable distinct product differentiators for the next generation of cannabis products. Leveraging our experience in creating award winning products we continue to invest in platform technologies that will bring a new level of experience to both the new and traditional cannabis consumer. As a result of these developments HEXO possesses one of the industry’s top IP portfolios.4

During the period, HEXO launched a first of its kind brand Bake Sale, which currently offers all-purpose, cannabis flower ideally suited for cooking and baking home cannabis goods. Along with Bake Sales, HEXO’s current 2.0 derivative products consist of Original Stash hash, KLIK5, softgels, vapes and the beverage products as disclosed in section “Truss Beverage Co.” Original Stash’s hash products represent a first of its kind portfolio of dry sift hash. KLIK distillate formulations are also a first for the Canadian market providing an enhanced experience for the cannabis consumer.

These products along with others in our portfolio are targeted at several segments of the market from net new consumers to experienced traditional black-market consumers who may otherwise purchase cannabis from unlicensed dispensaries and black-market participants. Another example of this is the Original Stash dried flower 28g value format, which was one of Canada’s first bulk product offerings intended to directly combat the illicit market. Our proven innovation capability partnered with quality cannabis that the adult-use market has come to expect, allows HEXO to offer safe, regulated products that continue to help disrupt the illicit market and allow the legalized cannabis market to gain market share.

Keystone Isolation Technologies Inc.

We have established the joint venture Keystone Isolation Technologies Inc. (“KIT”) of which HEXO holds a 60% interest. The extraction, refining and isolation technologies involved in this venture will enable HEXO to bring quality extracts to our potential partners. Through KIT we believe we will be able to provide scalable capacity, potency and purity for distillates and isolates. This top tier technology will enable our extraction, refining and isolation capabilities for cannabinoids found in both cannabis and hemp. The end result will be a consistent supply of CBD and THC for the Canadian and global market. We plan to leverage this technology through KIT’s sister entity in the U.S. (see section “HEXO USA”).

Innovation and Trim Management

Cannabis trim is a product of the harvesting process. When the flower is harvested, additional leaf and other extraneous plant matter are removed as well and comprise what is referred to as trim. As trim is a by-product to flower, the total volume of trim, by its nature, is subject to overall cultivation volumes of the Company and therefore, from harvest to harvest may increase relative to total harvested volumes. Towards the end of fiscal 2020 a trim management initiative was established to increase the Company’s trim utilization systematically reducing the balance of this inventory on hand. This inventory is being used as the primary ingredient in the manufacturing of our Original Stash hash and pre-rolls products. Historically, the buildup of trim in inventory led to increased cost of sales, impairment losses and decreased gross margin due to limited value add options for trim usage. This effort aims to tactically reduce our trim inventory and to normalize these metrics. Going forward, trim is expected to be utilized in extraction as well as within select cannabis 2.0 products. The main catalyst for this initiative is getting KIT operational which is expected within the current calendar year.

Market Leadership

From the onset of legalization, we have sought to be a leader in shaping the future of the cannabis industry in Canada. We believe that in these first formative years brand recognition power, country-wide distribution and financial strength are the pillars on which a top market position is built. The regulatory environment for the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and the continuously evolving Canadian cannabis industry’s supply and demand conditions, amongst other factors, makes it clear that market penetration, market share capture and brand awareness are essential during this time. For this and other reasons we have deliberately set out to build a strong position in our initial jurisdiction, Quebec, where we maintain the number one adult-use market share6 while expanding to all ten provinces of Canada through provincial supply agreements and arrangements. In the current period, we have doubled our derived gross sales composition outside of Quebec to 49% from 24% in the same period of the prior fiscal year. We actively continue to diversify and increase our reach outside of Quebec in order to generate organic Canadian growth and increase market share. We believe by offering a diverse house of brands that resonate with consumers across market segments, representing innovation, quality and consistency of experience, we will obtain a leading Canadian market share.

 

4 

Based upon a third-party report which compares the Company’s published patent applications relative to its peers in the Canadian Cannabis market using the recently available public data.

5 

KLIK is a high-quality distillate which includes purified THC and CBD and plant derived terpenes and comes in a convenient, easy-to-use applicator for mess-free, metered dosing. OS. KLIK distillate can be vaporized or inhaled.

6 

Based upon sales volumes obtained from the SQDC for the period of March 2021 to June 2021.

 

7    MD&A


House of Brands

 

LOGO

HEXO is an award-winning cannabis brand that has earned a reputation for innovative products, consumer health and safety and premier customer service. All HEXO cannabis products are cultivated and processed in state-of-the-art facilities using natural biological controls.

 

8    MD&A


Truss Beverage Co.

We sought from the early onset of legalized adult-use cannabis in Canada to position ourselves to meet the cannabis beverage market head on. This was accomplished through the formation of Truss Limited Partnership, now Truss Beverage Co. (“Truss” or “Truss Beverage Co.”), our Canadian business venture with Molson Coors Canada (“Molson Canada”). Currently, offering one of the widest portfolios of cannabis infused beverages and extract products in the Canadian market, these “Powered by HEXO®” beverages have been made available across all Canadian provinces.

The average consumer’s appetite for smoke free alternatives to cannabis consumption7 continues to shift and solidify through the introduction of Cannabis 2.0 products into Canada. HEXO believes that through Truss beverages, a range of experiences from high CBD found in Veryvell sparkling flavored water to the latest offering XMG, which offers 10mg of THC per beverage well positions the Company to meet this demand through a well-balanced, broad suite of beverage offerings.

The total Canadian cannabis beverage category outpaced the growth of the total cannabis sector by 4%8. Although having only entered the Canadian market at the beginning of this fiscal year, Truss products have already had early success, most notably holding the top cannabis beverage market positions in the three largest Canadian markets Quebec9, Ontario10 and Alberta11. The captured market shares were 60%, 38% and 44%, respectively. Truss products also hold two of the top five beverage brand positions in Canada, including the number one position held by XMG12.

Truss is committed to developing and producing a range of cannabis beverages that focus on great taste, consistency and choice for consumers. The CBD and THC products within the portfolio have been developed with consumer input at every stage of development. The current portfolio consists of the following five brands:

Little Victory: Vibrant, naturally flavoured sparkling beverages to toast to any of life’s little victories.

House of Terpenes: A range of terpene-forward sparkling tonics that celebrate the flavours of cannabis.

Mollo: Crisp with an easy drinking taste.

Veryvell: A complete line-up of products to support your self-care journey.

XMG: A range of high intensity flavoured beverages.

 

LOGO

The Truss beverages are produced and distributed from HEXO’s Belleville facility. Currently, the beverage related operations are conducted by HEXO (through the operations of HEXO Cannabis Infused Beverages or “HEXO CIB”) under HEXO’s licensing, until Truss obtains its own separate license (see section ‘HEXO CIB—Cannabis Infused Beverages’). We expect Truss to acquire the appropriate selling license from Health Canada during calendar year 202113, at which point sales and operations will transfer to Truss. Truss submitted their independent application to Health Canada on October 26, 2020.

The Company and Molson Coors Beverage Company have created a second Truss business venture, Truss CBD USA LLC, to explore opportunities for non-alcoholic, hemp-derived CBD beverages in the State of Colorado, USA. See the section “HEXO USA”.

 

7 

Per Deloitte’s “Seeding New Opportunities – Listening to Canada’s Cannabis Consumer” 2021 report.

8 

Per Source: HiFyre Total Canada Recreational Sales from February 1, 2021 to April 30, 2021 compared to November 1, 2020 to January 31, 2021.

9 

Per SQDC derived metrics based on volumes sold during the period of March 2021 to June 2021.

10 

Per internal review of OCS competitive sales data for the period of February 1, 2021 to April 30, 2021.

11 

Internal review of accumulated private retail data for the period of February 1, 2021 to April 30, 2021.

12 

Per Headset data for first calendar quarter of 2021.

13 

Due to the experienced delay in obtaining the Belleville facility’s sales license, in part, due to Health Canada and the COVID-19 pandemic related delays, the expected timing for Truss acquiring their independent license has been delayed. The Company expects to receive licensing within the 2021 calendar year. The assumption of acquiring this licensing is derived through the Company’s internal expertise and historical experience in obtaining licensing from Health Canada.

 

9    MD&A


HEXO GROUP OF FACILITIES

The following provides information about HEXO’s facilities as at April 30, 2021 unless otherwise noted. The table does not reflect those facilities acquired through the Zenabis acquisition:

 

Gatineau, Quebec   

HEXO’s Gatineau, Quebec facility is its main cultivation facility, featuring 1,292,000 sq. ft. of greenhouse cultivation space on a 143-acre campus. The greenhouse space is comprised of a 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2016, a 250,000 sq. ft. greenhouse completed in June 2018 and a 1 million sq. ft. greenhouse completed in December 2018, known as Building 9 or B9. Except as noted below, the facility is licensed by Health Canada (Standard Cultivation, Standard Processing, Sale for Medical Purposes, (current license was amended effective April 7, 2020 and expires April 7, 2023), and Research (the previous license obtained October 25, 2019 was amended to include the Belleville and Vaughn facilities, with the result that the current license is effective August 27, 2020 and expires October 25, 2024)) and fully operational.

 

On January 17, 2021, the final phase of B9 received licensing, however, the space was not operational as at April 30, 2021. This zone is expected to become operational by the end of fiscal 2021.

 

As at April 30, 2021 the Gatineau facility is operational and directly and/or indirectly generates sales for the Company, with the exception of the final phase of B9 as stated above. The approved remaining budget is approximately $1,695 to be realized over the remaining course of fiscal 2021. The Company notes that a current incremental capital budget is under review and once approved may impact the remaining stated budget and/or the estimated timeline for completion.

Brantford, Ontario (R&D)    HEXO’s Brantford, Ontario facility is currently serving as a strain development site (with additional cultivation capability) facility, featuring 14,000 sq. ft. of indoor growing space on 1 acre of land. The facility was designed and engineered to permit pharmaceutical-quality management standards utilized by Canada’s pharmaceutical manufacturers to be used in the production of cannabis in all acceptable forms. The facility is fully licensed by Health Canada (Standard Cultivation, Standard Processing and Sale for Medical Purposes (current licence effective December 6, 2019 and expiring December 6, 2022)).

Belleville, Ontario

(HEXO and Truss)

  

HEXO’s Belleville, Ontario facility is its centralized processing, manufacturing and distribution centre, featuring 932,190 sq. ft. of leased commercial space within a larger approximately 1.5 million sq. ft. industrial facility, with rights of first offer and first refusal to lease the remaining space in the facility. The facility acts as the Company’s main production facility for processing, extraction and packaging, and the manufacturing of cannabis derivative products. Truss Beverage Co, the Company’s venture with Molson Canada, is planned to operate at this facility once it obtains a separate license from Health Canada and it currently effectively operates under HEXO’s license through HEXO CIB. The Company has subleased 183,600 sq. ft. to Truss, which Truss has then subleased back to HEXO CIB pending Truss’ licensing. The facility is owned by Belleville Complex Inc., 25% of which is owned by the Company and the balance of which is owned by Olegna Holdings Inc. a company affiliated with a director of the Company, Vincent Chiara.

 

The Belleville facility is licensed by Health Canada for Standard Processing and Sale for Medical Purposes (current licence effective October 21, 2020 and expiring October 21, 2023) as well as for Cannabis Research (effective August 27, 2020 and expires October 25, 2024). HEXO received an amendment to the licence to authorize non-medical sale of additional cannabis product types, including derivative products on May 29, 2020.

Accordingly, the facility is now operational manufacturing and selling activity.

Belleville, Ontario

(KIT)

  

KIT is expected to operate out of a separate area within the Belleville facility and provide the Company with high quality extraction technology to facilitate production transformation for certain of the Company’s cannabis derivative products. KIT will effectively operate under the Company’s license as described in section ‘Belleville, Ontario (HEXO)’. Previously Management anticipated KIT to be operational by the end of this current fiscal year, however, due to delays in construction zoning, in part due to COVID-19, management now expects to have KIT operational before the end of the calendar year 2021.

 

KIT remains non-operational as at April 30, 2021.

 

As at April 30, 2021 the capital budget for KIT remains in draft and is approximately $14,100 of incremental spend to prepare the site and take KIT operational. To date the Company has injected USD$3.1 million for the initial acquisition of its 60% stake in the entity as well as $993 of site preparation costs. As previously disclosed, the budget remains in its early stages of formulation and continues to be subject to material change.

Montreal, Quebec

(SQDC

distribution)

   HEXO’s Montreal Quebec distribution facility is a warehouse and distribution centre, featuring 58,000 sq. ft. of leased commercial space. The facility serves as a warehouse and distribution centre for Quebec adult-use webstore orders for the SQDC, which are managed for the SQDC by HEXO and Metro Supply Chain Group Inc. It houses product from all the licensed producers who have contracts with the SQDC and serves as the sole distribution point for all direct-to-consumer shipments within the Province of Quebec for orders placed through the

 

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   SQDC online webstore. This facility is fully operational and is regulated by the SQDC and does not require licensing by Health Canada.
Vaughan, Ontario    HEXO’s Vaughan, Ontario facility is its planned cannabis research laboratory for the development of edible products and related intellectual property, featuring 14,200 sq. ft. of leased commercial space. The facility includes a sensory testing area and a complete commercial kitchen. The facility received its Cannabis Research license on August 27, 2020 which is effective until October 25, 2024.

Ottawa, Ontario

(Corporate headquarters)

   HEXO leases approximately 40,036 sq. ft. of office space in Ottawa, Ontario for its corporate head office.
Fort Collins, CO, USA    HEXO is currently in the process of acquiring an approximate 50,000 sq.ft. facility in the state of Colorado and will provide US CPGs and consumers access to the Powered by HEXO® technology (see section “HEXO’s First US Production Facility.”)

Canadian Cannabis Market

 

LOGO

ADULT-USE

The Canadian adult-use cannabis industry was legalized on October 17, 2018. All provinces and territories established their respective cannabis market retail approach, ranging from private entities to government-owned retail, as well as a combined approach in several jurisdictions. The Company holds supply agreements and arrangements within all ten provinces of Canada, including preferred supplier status with the SQDC14, covering approximately 99.6% of the nation allowing for market access within the major population centres of Canada. The Company’s availability of products may change within certain provinces from time to time, based upon the Company’s current demands, inventories and strategic focus.

Market trends and consumer tastes and preferences continue to be shaped in these early innings of the Canadian legalized cannabis industry, specifically regarding brand loyalty and product formats. Data shows that returning customers continue to represent the largest growth opportunity representing 75% of Canada’s cannabis volume consumption as compared to new, previously non-consumers of cannabis. Additionally, of existing consumers, only approximately 54% is purchased legally.15 Therefore, there still remains a largely untapped market of future consumers who desire non-combustible formats and mostly under health and wellness premises. A sizable population of existing illicit market consumers also remains to claimed for additional market share. Through HEXO broad suite of experiences, occasions and format we aim to maximize our captured market shares in these areas and continue towards a top position.

 

14 

As previously disclosed, HEXO does not expect to reach the initially anticipated tonnage of product in the first three years of the supply contract with the SQDC beginning in October 2018.

15 

Per Deloitte’s “Seeding New Opportunities – Listening to Canada’s Cannabis Consumer” 2021 report.

 

11    MD&A


MEDICAL

Since our inception as a medical cannabis company in 2013 we have prided ourselves on our dedication to serving the medical market and its patients. Our focus is on product innovation, advanced natural growing techniques, and client health and safety. We offer our medical clients exceptional, bilingual customer service. We are proudly committed to serving our medical patients by offering select products from our full portfolio to expand our medical offerings and provide a broad range of options to our valued clients.

With the recent acquisition of Zenabis and with the additional two announced acquisitions of 48North and Redecan underway, management is currently developing an integration plan in order to maximize the robustness of the combined medical portfolio of the future HEXO group.

HEXO USA

The Company’s wholly owned U.S. based entity HEXO USA Inc (“HEXO USA”) was established to facilitate expansion into the U.S. hemp market. We believe that strategic partners will be able to benefit from HEXO’s innovative product development, advanced research and development, intellectual property portfolio (pending patent approvals), low production cost, licensed infrastructure and regulatory know-how. These same strategic partnerships will provide the Company with established global distribution platforms and product expertise.

During the period, the Company established the sister entity of KIT in the U.S. (“KIT USA”) which will allow for in state, HEXO controlled cannabis extraction activity to support the manufacturing of CBD beverages and future products in the U.S. We have recently appointed a general manager for HEXO’s U.S operations whose role currently includes standing up and commissioning production facilities, overseeing operations, supply chain and logistics, and building the team. The Company has recently announced the intention to acquire a 50,000 sq. ft. facility in Colorado to use for its U.S. expansion plans, and that would be used by KIT USA in particular. As of the date of this MD&A the Company is in the inspection period for acquiring the facility.

The Company is aiming to enter select U.S. states and to offer its “Powered by HEXO®” products via KIT USA and our future partners, to the U.S. CBD markets, to the extent that such activities fully comply with applicable U.S. federal and state laws, including U.S. Food and Drug Administration requirements. Our first entry was made in April 2020, through the creation of our Truss CBD USA venture in the State of Colorado with partner Molson Coors.

Truss CBD USA Joint Business Venture

The Company and Molson Coors Beverage Company (“Molson Coors”) have created a second business venture, Truss CBD USA LLC (“Truss CBD USA”). The venture was conceived to explore opportunities for non-alcoholic, hemp-derived CBD beverages in the State of Colorado. Established in Colorado, Truss CBD USA is majority owned by Molson Coors and operates as a stand-alone entity with its own board of directors, management team, resources and go-to-market strategy. All production and distribution for Truss CBD USA will be kept within Colorado state lines since it is one of a few states that has an established regulatory framework for hemp-derived CBD in food and beverages.

During the current fiscal year, Truss CBD USA was rolled out across select grocery markets within Colorado. The operations of Truss CBD USA continue to be non-material, however management continues to roll out the Truss beverages to additional stores. Truss CBD USA and HEXO’s activities in relation to it will be conducted in accordance with all applicable laws. The Company does not currently have and is not in the process of developing marijuana-related activities in U.S., even in U.S. states where such activity has been authorized within a state regulatory framework. As such, the Company is not and would not be considered in the future a “U.S. Marijuana Issuer” within the meaning set forth in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.

COVID-19 Update

During the three and nine months ended April 30, 2021, certain Canadian provinces, most notably Ontario, Quebec and Alberta, re-enacted increased province wide restrictions and protocols as a response to the rapid increase in COVID 19 cases, hospitalizations and new variants/mutations of the virus. Towards the end of the Company’s fiscal third quarter the provinces of Ontario, Quebec and Alberta implemented new lockdowns and restrictions in attempts to minimize the impact of COVID-19 deemed “third wave” in Canada which includes highly transmittable variants of the COVID-19 virus. These restrictions included the limitation on retail cannabis to curbside delivery only options.

The current impact of COVID-19 and the various provincial restrictions cannot be accurately quantified and may have materially impacted the Company’s earnings. Due to the speed with which the COVID-19 situation is developing and the uncertainty of its magnitude, outcome and duration, it is not possible to estimate the future impact on our business, operations or financial results; however, the impact could be material. Refer to the section “Risk Factors” section for further COVID-19 related risks to the business.

As of the date of this MD&A, the cannabis industry continues to be deemed an essential service to Canadians.

People

In response to the pandemic, we established a COVID-19 response team which is tasked to manage the Company’s information flow of COVID-19 updates, review public health and safety protocols as outlined by the appropriate governmental authorities and develop in house action plans to mitigate these risks and comply accordingly. We continue to utilize a work from home strategy, for all functions which can do so. For those functions which require to remain ‘on site’ from day one we increased our focus on social distancing,

 

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additional personal sanitation stations and through full personal safety equipment such as gloves and masks, as well as additional hand sanitizing stations throughout our manufacturing and administrative facilities. We have implemented travel restrictions for work related travel where deemed unnecessary and restricted visitor access to our facilities. We implemented mandatory 14-day quarantines for all workers returning from vacations or out of country visits during the onset of the pandemic. We initiated a program ‘Hero Pay’ to support our cultivation and manufacturing employees who continue to work during the pandemic.

Operations

We performed a full review of all Health & Safety Standard Operating Procedures with specific focus on personal protective equipment as a result of the COVID-19 outbreak. We implemented protocols back in March 2020 that exceeded government health authorities’ recommendations, which remain in effect. HEXO’s operations have been minimally impacted by COVID-19 related issues. We currently do not foresee any impact to supply to the market and therefore, continue our cultivation, manufacturing and producing activities.

Distribution

Applicable provincial bodies have deemed cannabis retail as an essential service. As such our provincial distribution remains relatively unimpeded. It remains uncertain as to whether COVID-19 has or will ultimately increase or diminish demand and sales of cannabis across Canada, however, we continue to work with provincial and private entities towards the goal of penetrating deeper into all markets and allow for the public to safely and reliably consume our products.

Supply Chain

On a day-to-day basis, we continually monitor the economic response to COVID-19 and work together with our valued supply chain partners in order to mitigate various potential disruptions to our operations. To date, there have been no indicators of material issues to our supply chain.

Liquidity

At the date of this MD&A management believes that we possess sufficient resources and capital to meet any continuing COVID-19 health requirements in order to remain operationally compliant with the healthy authorities mandated regulations.

Corporate Social & Environmental Responsibility

At HEXO, our goal is to be one of Canada’s leading cannabis producers and processors. We know that if we want to achieve our goal, we need to think about more than just our products and prices. We must also examine the way our operations impact the natural and social environment on a local, provincial and national level. HEXO is monitoring and reporting on its greenhouse gas emissions, setting targets to reduce them, and offsetting its footprint. We will also be reporting on other Environment, Social and Governance (ESG) impact areas based on Global Reporting Initiatives (GRI) standards. Our Corporate Social Responsibility Charter focuses on four priorities: People, Public, Products and Planet.

HEXO recently entered into a partnership with The Offsetters to support the Great Bear Forest Carbon Project to offset the Company’s entire carbon emissions to become carbon neutral by September 2021. The Company has also entered into a partnership with Plastic Bank through Dymapak Canada in a commitment to offset the full plastic amount used in pouch packaging, having already offset the amount of plastic used during the first half of the year.

As one of Canada’s leading cannabis producers and processors, HEXO has pledged to re-examine the way its operations impact the natural and social environment on a local, provincial and global level. In addition to offsetting its own carbon footprint, the Company has pledged to also offset the average personal emissions of its employees.

Other Corporate Highlights and Events

THIRD QUARTER OF FISCAL 2021

Announcement and Subsequent Closing of Zenabis Global Inc. Acquisition

On February 16, 2021, the Company entered into a definitive arrangement agreement (the “Zenabis Arrangement Agreement”) with Zenabis Global Inc. (“Zenabis”) to acquire all of Zenabis’ issued and outstanding common shares in an all-share transaction valued at approximately $235 million (the “Zenabis Acquisition”) at the announcement date.

The Zenabis Transaction was unanimously approved by the board of directors of each the Company and Zenabis’ (in the case of Zenabis’ board of directors, after receiving the unanimous recommendation of a special committee formed for purposes of the Transaction and independent financial and legal advice), board of directors has unanimously recommended that its shareholders vote in favour of the Transaction.

On May 13, 2021, a special meeting of the Zenabis shareholders took place, where the Zenabis Transaction was approved by way of special resolution.

On June 1, 2021, by way of way of plan of arrangement the Company finalized the acquisition of Zenabis. The Company acquired all of Zenabis’ 992,061,851 issued and outstanding common shares at the prescribed conversion ratio of 0.01772 (the “Zenabis Exchange Ratio”) of a common share of the Company in exchange for each Zenabis common share held. The result was the issuance of

 

13    MD&A


17,579,336 HEXO common shares with an estimated value of $151,358. Warrants, convertible debt and stock options and other incentive securities of Zenabis will be adjusted in accordance with their terms to ultimately become exercisable to receive common shares of the Company based on the Zenabis Exchange Ratio.

Appointment of General Manager of US operations

On February 8, 2021, the Company appointed Charles Bowman as General Manager of its US operations. Mr. Bowman is based in the US and will be responsible for all implementation aspects of HEXO’s US operations including stand up and commissioning of production facilities, overseeing operations, supply chain and logistics, and building the team. Mr. Bowman has held senior leadership roles at leading global ingredient suppliers including BGG and Solix Algredients (Natural Antioxidants), Solazyme, now TerraVia (Algae Oils & Proteins), CP Kelco, and Cargill (Hydrocolloids). Throughout his career, Bowman has strengthened customer partnerships, customized innovations through extraction expertise and accelerated growth in customer facing operations. An executive known for talent and leadership development, Bowman has mentored nutrition and beverage executives in US, China, Japan, Brazil and across Europe. He graduated from Virginia Tech with a Degree in Food Science & Technology and holds a Master of Business Administration from Averett University.

Launch of the First of Its Kind “Bake Sale” Value Brand

In early April 2021, the Company launched its latest brand, Bake Sale. The first of its kind, Bake Sale was created for value seekers and is ideally suited for cannabis cooking consumers who are perfecting recipes or experimenting with decarboxylation and infused food for the first time. The large-format products also offer consumers convenience and the ability to blend with and extend their higher potency products. This marked another step forward for the Company in its continued effort to help eliminate the illicit cannabis market in Canada and protect public health and safety.

Filing of $1.2 Billion Equity Base Shelf Prospectus

On May 7, 2021 the Company filed a new short form equity base shelf prospectus (the “Equity Base Shelf Prospectus”) with securities regulators in each of the provinces and territories of Canada and a corresponding shelf registration statement on Form F–10 with the United States Securities and Exchange Commission. The Base Shelf Prospectus and Registration Statement, enables HEXO to make offerings of up to $1.2 billion of common shares, warrants, subscription receipts and units or a combination thereof from time to time, separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering and as set out in an accompanying prospectus supplement, during the 25-month period that the Base Shelf Prospectus and Registration Statement, when made final, remain valid. The specific terms of any future offering will be established in a prospectus supplement to the Base Shelf Prospectus (see section “Establishment and Launch At-the-Market Offering up to $150 Million”), which supplement will be filed with the applicable Canadian and U.S. securities regulatory authorities. Unless otherwise specified in the prospectus supplement relating to a particular offering of securities, the net proceeds from any sale of any securities may be used by HEXO for general corporate purposes, including expansion plans in the United States, potential future acquisitions, potential international expansion, capital projects, repaying indebtedness outstanding from time to time and funding ongoing operations and/or working capital requirements.

The Company subsequently reduced the amount available for offerings under the Equity Base Shelf Prospectus and the Equity Registration Statement from $1.2 billion to $700 million when it filed and amended and restated short form equity base shelf prospectus on May 25, 2021. See section “Filing of Preliminary $500m Debt Base Shelf Prospective.”

Early Repayment of Credit Facility

On April 30, 2021, the Company repaid the total outstanding balance on its credit facility established under its credit agreement dated February 14, 2019 with Canadian Imperial Bank of Commerce as sole bookrunner, co-lead arranger and administrative agent, and Bank of Montreal as co-lead arranger and syndication agent, together with accrued interest and associated fees, in the amount of approximately $28.9 million. The credit facility has therefore been terminated and is no longer available to the Company.

SUBSEQUENT TO APRIL 30, 2021

Establishment and Launch At-the-Market Offering up to $150 Million

On May 11, 2021 Company established an at-the-market equity program (the “ATM Program”) that allows the Company to issue and sell up to $150 million (or its U.S. dollar equivalent) of common shares in the capital of the Company (the “Common Shares”) from treasury to the public, from time to time, at the Company’s discretion. All Common Shares sold under the ATM Program will be made through “at-the-market distributions” as defined in the Canadian Securities Administrators’ National Instrument 44-102 - Shelf Distributions, including sales made through the Toronto Stock Exchange (the “TSX”), the New York Stock Exchange (the “NYSE”), or any other recognized marketplace on which the Common Shares are listed, quoted or otherwise traded in Canada and the United States.

The offering of Common Shares under the ATM Program is qualified by a prospectus supplement dated May 11, 2021 to the Company’s Canadian final short form base shelf prospectus dated May 7, 2021.

The Company expects to use the net proceeds from the ATM Program for general corporate purposes, which may include: (i) costs associated with the Company’s U.S. expansion plans including the contemplated acquisition of a facility in the State of Colorado and its subsequent retrofitting and improvement; (ii) capital expenditures, including potential capital expenditures to make additional improvements to the production lines at the Company’s Belleville, Ontario facility; (iii) potential future acquisitions; (iv) working capital, including replenishing existing cash resources and working capital which will be used to fund certain transaction and integration costs

 

14    MD&A


and minimum debt repayments related to the Company’s proposed acquisition of Zenabis Global Inc. (“Zenabis”); and (v) repayment of additional debts owed by Zenabis following the completion of the Zenabis acquisition.

As at the date of this MD&A the Company has raised an approximately $16,897 and USD$24,852 through the issuance of 2,298,901 and 4,075,025 common shares, respectively.

HEXO’s First US Production Facility

On May 14, 2021, the Company entered into an agreement to acquire an approximately 50,000 sq. ft. facility in Colorado to use for its U.S. expansion plans, and that would be used by KIT USA in particular. The Company anticipates the acquisition costs and subsequent capital expenditures for retrofitting and improvement of this facility will cost approximately US$6.0 million and between US$16.5 million and US$49.5 million, respectively. The Company contemplates funding any acquisition costs through existing cash resources while capital expenditures for subsequent retrofitting and improvement would occur in stages over time and be funded through future financing activities.

The closing of the transaction is subject to a due diligence period as well as usual customary closing conditions, which is anticipated in the fourth quarter.

Filing of Base Shelf Prospectus for Debt and Reduction in Previously Filed Shelf Prospectus for Equity

On May 13, 2021 the Company filed a new preliminary short form base shelf prospectus for debt securities (the “Debt Base Shelf Prospectus”) with securities regulators in each of the provinces and territories of Canada and a corresponding shelf registration statement on Form F–10 with the United States Securities and Exchange Commission (the “SEC”). The Company has also announced a planned, corresponding reduction to the final Equity Base Shelf Prospectus May 11, 2021, with securities regulators in each of the provinces and territories of Canada and the corresponding shelf registration statement on Form F–10 (with the SEC).

The Debt Base Shelf Prospectus and registration statement became final and effective on May 25, 2021, will enable HEXO to make offerings of up to $500 million of debt securities, which may consist of bonds, debentures, notes or other evidences of indebtedness of any kind, nature or description and which may be issuable in series, from time to time, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering and as set out in an accompanying prospectus supplement, during the 25-month period that the Debt Base Shelf Prospectus and Registration Statement, when made final, remain valid. The Base Shelf Prospectus and registration statement will also qualify the distribution of any common shares in the capital of the Company which may be issuable on conversion or repayment of the principal amount of any such debt securities and/or interest thereon as provided for in an accompanying prospectus supplement.

The specific terms of any future offering of debt securities will be established in a prospectus supplement to the Base Shelf Prospectus, which supplement will be filed with the applicable Canadian and U.S. securities regulatory authorities. Unless otherwise specified in the prospectus supplement relating to a particular offering, the net proceeds from any sale of any securities may be used by HEXO for general corporate purposes, including funding ongoing operations and/or working capital requirements, to repay other indebtedness outstanding from time to time, expansion plans in the United States, capital projects and potential future acquisitions, including in relation to international expansion.

On May 7, 2021, the Company filed the Equity Base Shelf Prospectus with securities regulators in each of the provinces and territories of Canada and a corresponding Equity Registration Statement on Form F–10 with the SEC on May 10, 2021, which enable HEXO to make offerings of up to $1.2 billion of common shares, warrants, subscription receipts and units or a combination thereof of the Company from time to time, separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of the offering and as set out in an accompanying prospectus supplement, during the 25-month period that the Equity Base Shelf Prospectus and Equity Registration Statement remain valid. Upon the Base Shelf Prospectus and Registration Statement being made final, the Company will reduce the amount available for offerings under the Equity Base Shelf Prospectus and the Equity Registration Statement from $1.2 billion to $700 million, so that the amount available for both equity and debt offerings under the Equity Base Shelf Prospectus and Equity Registration Statement and the Base Shelf Prospectus and Registration Statement, respectively, totals $1.2 billion.

HEXO to Acquire 48North Cannabis Corp.

On May 17, 2021, HEXO entered into a definitive arrangement agreement (the “48North Arrangement Agreement”) with 48North Cannabis Corp. (“48North”), under which HEXO expects acquire all of 48North’s issued and outstanding common shares in an all-share transaction valued at approximately $50.0 million by way of court-approved plan of arrangement under the Canada Business Corporations Act (the “48North Acquisition”). Under the terms of the 48North Arrangement Agreement, 48North shareholders will receive 0.02366 of a Common Share in exchange for each 48North common share held (the “48North Exchange Ratio”). Common share purchase warrants and incentive securities of 48North will be adjusted in accordance with their terms to ultimately become exercisable to receive Common Shares based on the 48North Exchange Ratio.

The 48North Acquisition needs to be approved by at least 66 2/3% of the votes cast by the shareholders of 48North present at a special meeting of 48North shareholders to be called by 48North to seek approval for the plan of arrangement to effect the 48North Acquisition. HEXO has entered into voting and support agreements with 48North’s directors and officers with respect to all 48North shares owned by them as well as voting and support agreements with certain other shareholders covering all of those shareholders’ common shares of

 

15    MD&A


48North. As a result, in total approximately 25.9% of 48North’s issued and outstanding common shares are subject to signed voting and support agreements with commitments to support and vote in favour of the 48North Acquisition.

The 48North Acquisition also contemplates HEXO providing 48North with a $5.0 million subordinated secured bridge loan with a 6-month term within 30 days following signing of the 48North Arrangement Agreement to fund 48North’s short term working capital requirements. The 48North Acquisition is not considered a significant probable acquisition under the significance tests set out in Part 8 of NI 51-102 as of the date of this MD&A.

Public Offering of USD$360m Senior Secured Convertible Notes

On May 27, 2021, the Company closed an offering of USD$360 million aggregate principal amount of senior secured convertible notes (the “Notes”) directly to an institutional purchaser and certain of its affiliates or related funds (collectively, the “Purchaser”).

The Notes were sold at a purchase price of USD $327.6 million or approximately 91.0% of their principal amount. The Notes will mature on May 1, 2023 (the “Maturity Date”). Subject to certain limitations, the Notes will be convertible into freely tradeable common shares of the Company at the option of the Purchaser and, subject to conditions and limitations, at the option of the Company. If not previously converted, all principal repayments of the Notes will made be at a price equal to 110% of the principal amount of the Notes being repaid. The Notes will not bear interest except upon the occurrence of an event of default. The Notes will be issued in registered form, without coupons, under a trust indenture dated May 27, 2021 between the Company and GLAS Trust Company LLC as trustee (the “Trustee”), as supplemented and modified by resolutions of the board of directors of the Company.

Upon closing of the offering, 70% of the net proceeds have been placed into escrow with a third party. The escrows funds may be released upon the satisfaction of certain conditions related to the proposed Redecan Definitive Arrangement (below). If the release conditions are satisfied prior to December 1, 2021 funds and the interest earned thereon will be released to HEXO and will be used for purposes of completing the Redecan acquisition. The Company shall be subject to certain financial covenants associated with the Notes, including minimum cash balances effective on the closing date and certain adjusted EBITDA minimums beginning January 31, 2022.

The Company expects to use substantially all of the net proceeds from the Offering to fund the acquisition of Redecan (see “HEXO Announces Acquisition of Redecan”). The Company’s obligations under the Notes will be secured by a first priority lien on substantially all of the Company’s assets. Payment of principal, premium, if any, and interest, if any, on the Notes will be fully and unconditionally guaranteed on a secured basis by the Company’s wholly-owned subsidiary, HEXO Operations Inc.

HEXO Announces Acquisition of Redecan

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, Canada’s largest privately-owned licensed producer, with leading market share across a number of categories, for a purchase price of $925 million payable in cash and through the issuance of common shares of HEXO and subject to certain customary adjustments (the “Redecan Acquisition”).

Acquisition Details

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 share represents the five trading day-period volume-weighted average price (VWAP) of HEXO common shares on the 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 HEXO’s issued and outstanding common shares immediately following the closing of the Redecan Transaction on a pro forma non-diluted basis. Under TSX rules, the Redecan Transaction requires a simple majority approval of HEXO’s shareholders. HEXO expects to convene a meeting of shareholders to be held in August 2021 for the purpose of submitting the Redecan Transaction to shareholders for approval.

The Redecan Transaction is expected to close in Q1 of fiscal 2022, 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 Redecan Transaction has been unanimously approved by HEXO’s board of directors.

Financing

As outlined above, the Company closed a public offering on May 27, 2021 of USD$360 million aggregate principal amount of senior secured convertible notes due May 1, 2023 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 Redecan Transaction.

 

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LOGO

 


Non-IFRS Measures

The Company has included certain non-IFRS performance measures in this MD&A, as defined in this section. We employ these measures internally to measure our operating and financial performance. We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.

As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“Adjusted EBITDA”)

The Company has identified Adjusted EBITDA as a relevant industry performance indicator. Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates Adjusted EBITDA as Total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense (income) net, plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments, plus (minus) non-recurring expenses, plus (minus) other non-cash items. See Adjusted EBITDA table for those items comprising investment (gains)/losses, non-cash fair value adjustments, non-recurring expenses and other non-cash items. Management believes this measure provides useful information as it is a commonly used measure in the capital markets to approximate operating earnings.

GROSS PROFIT BEFORE ADJUSTMENTS

This measure is utilized for those reasons as presented in “Gross profit before fair value adjustments” with the adjustment that this metric excludes the write-offs of inventory and biological assets, write downs to net realizable value and destruction costs. The Company has identified this metric as useful and relevant information as it represents the gross profit for operational purposes based on costs to produce, package and ship inventory sold, exclusive of impairments and other write downs due to changes to internal or external influences impacting the net realizable value of inventory and inventory disposal costs.

Key Operating Performance Indicators

We have included certain key operating performance indicators within this MD&A, as defined in this section. We utilize these metrics internally for a range of purposes such as critical inputs in fair valuation techniques to evaluating the operating performance results in a given period.

EXPECTED PLANT YIELD

The expected plant yield is utilized in the valuation of biological assets on hand as at the period end. This represents an unobservable input to a level 3 fair value estimate and is derived from the Company’s historical harvests as well as the expertise of the appropriate personnel. A sensitivity analysis over this input was performed and included in the ‘Biological Assets – Fair Value Measurement’ section below.

PRODUCTION CAPACITY

The production capacity disclosed throughout this MD&A represents management’s best estimate and is derived from the historical actual output of production as well as the use of cultivation expertise existing within the Company.

KILOGRAMS HARVESTED

The kilograms harvested during the period representing the amount of dried gram and dried gram equivalents harvested and produced from biological assets but not necessarily sold during the period.

Other Defined Additional IFRS Measure

We have included the below additional IFRS measures as these represent cannabis industry financial statement line items and are present within the Company’s statement of loss and comprehensive loss for the three and nine months ended April 30, 2021.

GROSS PROFIT BEFORE FAIR VALUE ADJUSTMENTS

We utilize this measure to provide a representation of performance in the period by excluding the fair value measurements as required by IFRS, realized fair value amounts on inventory sold and unrealized gain on changes in fair value of biological assets. We believe this measure provides useful information as it represents the gross profit for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold. In accordance with CSA Staff Notice 51-357 issued in October 2018, we utilize an adjusted gross profit to provide a representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross profit for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold as well as fair value adjustments to net realizable value, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold.

 

18    MD&A


ADULT-USE NON-BEVERAGE REVENUES & BEVERAGE REVENUES

We utilize this differentiation to allow the user to identify the revenue streams generated by the Company’s perpetual sales activity vs. the future “to be” discontinued sales stream, cannabis infused beverages. As discussed in section ‘Beverage Based Adult-Use Sales,’ the cannabis infused beverage revenues, as at the date of this MD&A, are intended to cease to be recognized by the Company as direct sales at the point in time when the business venture Truss obtains the appropriate cannabis licensing under Health Canada.

Operational and Financial Highlights

KEY FINANCIAL PERFORMANCE INDICATORS

Summary of results for the three months ended April 30, 2021 and January 31, 2021 and April 30, 2020, and the nine months ended April 30, 2021 and 2020.

 

     For the three months ended     For the nine months ended  

Income Statement Snapshot

   April 30,
2021
    January 31,
2021
    April 30,
2020
    April 30,
2021
    April 30,
2020
 
     $     $     $     $     $  

Revenue from sale of goods

     33,082       45,678       30,895       120,059       74,009  

Excise taxes

     (10,482     (12,851     (8,817     (35,219     (20,516
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue from sale of goods

     22,600       32,827       22,078       84,840       53,493  

Ancillary revenue

     60       53       54       168       145  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     22,660       32,880       22,132       85,008       53,638  

Gross profit before adjustments2

     5,006       11,688       8,783       27,075       18,873  

Gross profit/(loss) before fair value adjustments2

     4,379       11,314       8,783       27,617       (23,276

Gross profit/(loss)2

     8,816       18,584       5,730       45,614       (23,260

Operating expenses

     (24,906     (25,501     (26,786     (71,186     (347,883
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,090     (6,917     (21,056     (25,572     (371,143

Other expenses and losses

     (4,621     (13,922     1,537       (20,175     (12,790
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and comprehensive loss before tax

     (20,711     (20,839     (19,519     (45,747     (383,933

Tax recovery

     —         —         —         —         6,023  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     3       —         —         3       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net loss and comprehensive loss

     (20,708     (20,839     (19,519     (45,744     (377,910
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

The Company has adjusted the presentation of gross profit before fair value adjustments by removing inventory and biological asset write offs and impairment losses.

2

See section ‘Cost of Sales, Excise Taxes and Fair Value Adjustments’ for reconciliation of gross profits

Operational Results

 

For the three months ended

   April 30,
2021
     January 31,
2021
     October 31,
2020
     July 31,
2020
     April 30,
2020
 

Total kilograms harvested of dried gram equivalents (kg)

     25,833        25,608        17,462        16,540        19,130  

As at

   April 30,
2021
     January 31,
2021
     October 31,
2020
     July 31,
2020
     April 30,
2020
 
     $      $      $      $      $  

Total cash and cash equivalents

     81,038        129,355        149,773        184,173        94,325  

Working Capital

     181,929        242,963        250,312        223,216        215,661  

Inventory

     95,223        82,192        74,597        64,933        105,928  

 

19    MD&A


Summary of Results

Revenue

The following table represents the Company disaggregated gross and net revenues by sale stream for past rolling five fiscal quarters.

 

For the three months ended

   Units    Q3’21     Q2’21     Q1’21     Q4’20     Q3’20  

ADULT-USE (EXCLUDING BEVERAGES)

             

Adult-use cannabis gross revenue

   $      29,273       39,417       35,898       31,164       29,316  

Adult-use excise taxes

   $      (10,122     (12,513     (11,554     (8,589     (8,702
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adult-use cannabis net revenue

   $      19,151       26,904       24,344       22,575       20,614  

Dried grams and gram equivalents sold (kg)

   kg      8,645       10,450       11,241       7,661       9,271  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ADULT-USE (BEVERAGES)