UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 22, 2023
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (844 ) 845-7291
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which
registered
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this
chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
As previously disclosed in the Current Report on Form 8-K filed by Tilray Brands, Inc., a Delaware corporation (the “Company”), with the Securities and
Exchange Commission (the “SEC”) on June 22, 2023 (the “Original Form 8-K”), the Company consummated an arrangement on June 22, 2023 with HEXO Corp., a corporation existing under the laws of the Province of Ontario (“HEXO”), whereby the Company
acquired all of the issued and outstanding common and preferred shares of HEXO pursuant to a plan of arrangement under the Business Corporations Act (Ontario) (the “Arrangement”).
This Amendment No. 1 on Form 8-K/A amends the Original Form 8-K solely to provide the disclosures required by Item 9.01 of Form 8-K that were omitted from
the Original Form 8-K, including the required financial statements of HEXO and the required pro forma financial information of the Company. Except as otherwise provided herein, the disclosures made in the Original Form 8-K remain unchanged.
Cautionary Note Regarding Forward-Looking Statements
Statements in this Amendment No. 1 on Form 8-K/A, including the pro forma condensed combined financial information attached hereto, contain “forward-looking
statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. The pro forma condensed combined financial information is based on preliminary estimates and assumptions that could cause
actual results to differ materially from those expected or implied by the pro forma condensed combined financial information or the estimates and assumptions used in preparing the pro forma condensed combined financial information. The pro forma
condensed combined financial information and forward-looking statements are based on current expectations and projections about future events. Investors are cautioned that forward-looking statements are not guarantees of future performance or results
and involve risks and uncertainties that cannot be predicted or quantified and, consequently, the actual performance of the Company may differ materially from that expressed or implied by such forward-looking statements. Certain factors that could
cause actual results to differ materially from the Company’s expectations include the risks detailed under “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022, as amended, and in the
other documents the Company files with the SEC. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance.
| Item 9.01. |
Financial Statements and Exhibits.
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(a)
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Financial Statements of Business Acquired.
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Audited consolidated financial statements of HEXO and its consolidated subsidiaries as of and for the years ended July 31, 2022 and
2021, and the notes related thereto, are included as Exhibit 99.1 hereto and are incorporated herein by reference. Unaudited interim consolidated financial statements of HEXO and its consolidated subsidiaries as of April 30, 2023 and for the three
and nine months ended April 30, 2023 and 2022, and the notes related thereto, are included as Exhibit 99.2 hereto and are incorporated herein by reference. Also included as Exhibit 99.3 hereto and incorporated herein by reference is HEXO’s
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended July 31, 2022.
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(b)
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Pro Forma Financial Information.
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The unaudited pro forma condensed combined balance sheet as of February 28, 2023, giving effect to the Arrangement as if it had
occurred on February 28, 2023, and the unaudited pro forma condensed combined statement of operations for the year ended May 31, 2022 and the nine months ended February 28, 2023, giving effect to the Arrangement as if it had occurred on June 1, 2021,
and the related notes, are included as Exhibit 99.3 hereto and are incorporated herein by reference.
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(d)
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Exhibits.
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Exhibit
Number
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Exhibit Description
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Consent of Independent Registered Public Accounting Firm.
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Audited consolidated financial statements of HEXO Corp. as of and for the years ended July 31, 2022 and 2021 (incorporated by reference to Exhibit 99.2 of HEXO Corp.’s Annual Report on Form
40-F for the fiscal year ended July 31, 2022, including the report of Independent Registered Public Accounting Firm, filed with the SEC on November 1, 2022).
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Unaudited interim consolidated financial statements of HEXO Corp. as of April 30, 2023 and for the three and nine months ended April 30, 2023 and 2022 (incorporated by reference to Exhibit
99.1 of HEXO Corp.’s Report on Form 6-K filed with the SEC on June 14, 2023).
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HEXO Corp. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended July 31, 2022 (incorporated by reference to Exhibit 99.3 of HEXO Corp.’s
Annual Report on Form 40-F for the fiscal year ended July 31, 2022 filed with the SEC on November 1, 2022).
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Unaudited pro forma condensed combined financial statements of Tilray Brands, Inc.
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104
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Cover Page Interactive Data File (embedded within the Inline XBRL document).
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SIGNATURE
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 hereunto duly authorized.
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TILRAY, INC.
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Dated: July 25, 2023
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By:
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/s/ Mitchell Gendel
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Mitchell Gendel
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Global General Counsel
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-267788 and 333-255850) and Form S-8 (Nos. 333-272838;
333-266695; 333-256023; 333-238179; 333-235581; 333-231539 and 333-226267) of Tilray Brands, Inc. of our report dated October 31, 2022, relating to the consolidated financial statements of HEXO Corp. which appears in this Current Report on Form
8-K/A.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Ottawa, Canada
July 25, 2023
PricewaterhouseCoopers LLP
99 Bank Street, Suite 710, Ottawa, Ontario, Canada K1P 1E4
T: +1 613 237 3702, F: +1 613 237 3963, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Exhibit 99.4
APPENDIX “A”
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF TILRAY
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On April 10, 2023, amended June 1, 2023, Tilray Brands, Inc. (“Tilray”) and HEXO Corp. (“HEXO”), entered into an Arrangement Agreement, under which Tilray acquired, by
way of court-approved plan of arrangement (the “Arrangement”), all the issued and outstanding common shares of HEXO on June 22, 2023. Common shareholders of HEXO received 0.4352 of a share of Tilray common stock for each whole common share of HEXO
held, while holders of the recently issued non-voting Series 1 Preferred Shares received a fraction or a number of Tilray Shares based on the Preferred Share Exchange Ratio.
The following unaudited pro forma condensed combined financial statements (the “pro forma financial statements”) are based on the historical consolidated financial
statements of Tilray and HEXO, as adjusted to give effect to the Arrangement. The unaudited pro forma condensed combined balance sheet as at February 28, 2023 (the “pro forma balance sheet”) gives effect to the Arrangement as if it had occurred on
February 28, 2023. The unaudited pro forma condensed combined statement of operations for the year ended May 31, 2022 and nine months ended February 28, 2023 (the “pro forma statement of operations”) gives effect to the Arrangement as if it had
occurred on June 1, 2021.
The transaction accounting adjustments consist of those necessary to account for the Arrangement as an acquisition in accordance with generally accepted accounting
principles in the United States of America (“US GAAP”).
The pro forma financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the
Arrangement occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial condition and results of operations of the combined company
may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
Unaudited Pro Forma Condensed Combined Balance Sheet
February 28, 2023
(in ‘000 of United States dollars)
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Tilray
historical
February 28,
2023
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HEXO adjusted
historical
April 30,
2023
(note 6)
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Transaction
accounting
adjustments
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Notes
(note 4)
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Pro forma
combined
February 28,
2023
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||||||||||||||
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Assets
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Current assets
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Cash and cash equivalents
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$
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164,997
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$
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14,764
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$
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179,761
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Restricted cash
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—
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1,609
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1,609
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Marketable securities
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243,286
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—
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243,286
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Accounts receivable, net
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78,342
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15,588
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(3,000
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)
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C
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90,930
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Inventory
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202,800
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20,648
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(4,000
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)
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D
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219,448
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Assets held for sale
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—
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797
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797
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Prepaids and other current assets
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69,087
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8,579
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(1,500
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)
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E
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76,166
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|||||||||||||
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Total current assets
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758,512
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61,985
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(8,500
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)
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811,997
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||||||||||||||
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Capital assets
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425,263
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151,961
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(70,724
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)
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F
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506,500
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|||||||||||||
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Right-of-use assets
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6,492
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—
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6,492
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||||||||||||||||
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Intangible assets
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994,325
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51,957
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(51,957
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)
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G
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994,325
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Goodwill
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2,005,701
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—
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2,005,701
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||||||||||||||||
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Interest in equity investees
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4,638
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10,094
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(10,094
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)
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H
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4,638
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Long-term investments
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7,620
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—
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7,620
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||||||||||||||||
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Convertible notes receivable
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168,356
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—
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(28,720
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)
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A
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74,681
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(64,955
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)
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I
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Other assets
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4,993
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8,154
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13,147
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||||||||||||||||
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Total assets
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$
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4,375,900
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$
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284,151
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$
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(234,950
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)
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$
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4,425,101
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Liabilities
|
|||||||||||||||||||
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Current liabilities
|
|||||||||||||||||||
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Bank indebtedness
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$
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18,125
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$
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—
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$
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18,125
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|||||||||||||
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Accounts payable and accrued liabilities
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163,422
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42,245
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4,600
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J
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229,667
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||||||||||||||
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12,400
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L
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|||||||||||||||||
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7,000
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M
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|||||||||||||||||
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Contingent consideration
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16,219
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—
|
16,219
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||||||||||||||||
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Warrant liability
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7,414
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170
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7,584
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||||||||||||||||
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Current portion of lease liabilities
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2,528
|
548
|
3,076
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||||||||||||||||
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Current portion of long-term debt
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77,892
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—
|
77,892
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||||||||||||||||
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Current portion of convertible debentures payable
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184,082
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131,415
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(131,415
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)
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K
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184,082
|
|||||||||||||
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Total current liabilities
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469,682
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174,378
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(107,415
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)
|
536,645
|
||||||||||||||
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Long - term liabilities
|
|||||||||||||||||||
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Contingent consideration
|
10,596
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—
|
10,596
|
||||||||||||||||
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Lease liabilities
|
8,598
|
783
|
9,381
|
||||||||||||||||
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Long-term debt
|
89,419
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—
|
89,419
|
||||||||||||||||
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Convertible debentures payable
|
223,087
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—
|
223,087
|
||||||||||||||||
|
Deferred tax liabilities
|
164,412
|
9,422
|
(9,422
|
)
|
N
|
164,412
|
|||||||||||||
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Other liabilities
|
3,335
|
695
|
4,030
|
||||||||||||||||
|
Total liabilities
|
969,129
|
185,278
|
(116,837
|
)
|
1,037,570
|
||||||||||||||
|
Stockholders' equity
|
|||||||||||||||||||
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Common stock
|
62
|
—
|
40
|
A
|
102
|
||||||||||||||
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Additional paid-in capital
|
5,723,342
|
1,583,897
|
65,075
|
A
|
5,788,417
|
||||||||||||||
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(1,583,897
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)
|
B
|
||||||||||||||||
|
Accumulated other comprehensive loss
|
(42,948
|
)
|
9,414
|
(9,414
|
)
|
B
|
(42,948
|
)
|
|||||||||||
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Accumulated deficit
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(2,276,794
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)
|
(1,494,438
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)
|
1,494,438
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B
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(2,361,149
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)
|
|||||||||||
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(64,955
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)
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I
|
||||||||||||||||
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(12,400
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)
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L
|
||||||||||||||||
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(7,000
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)
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M
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||||||||||||||||
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Stockholders' equity
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3,403,662
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98,873
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(118,113
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)
|
3,384,422
|
||||||||||||||
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Non-controlling interests
|
3,109
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—
|
3,109
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||||||||||||||||
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Total stockholders' equity
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3,406,771
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98,873
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(118,113
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)
|
3,387,531
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||||||||||||||
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Total liabilities and stockholders' equity
|
$
|
4,375,900
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$
|
284,151
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$
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(234,950
|
)
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$
|
4,425,101
|
||||||||||
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended February 28, 2023
(in ‘000 of United States dollars, except per share and share amounts)
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Tilray
nine months
ended
February 28,
2023
|
HEXO adjusted
nine months
ended
April 30,
2023
(note 6)
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Transaction
accounting
adjustments
|
Notes
(note 4)
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Pro forma
combined
February 28,
2023
|
|||||||||||||||
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Net revenue
|
$
|
442,936
|
$
|
60,648
|
$
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(27,339
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)
|
O
|
$
|
476,245
|
|||||||||
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Cost of goods sold
|
363,139
|
65,079
|
(2,705
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)
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F
|
422,716
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|||||||||||||
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(2,797
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)
|
O
|
|||||||||||||||||
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Gross profit
|
79,797
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(4,431
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)
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(21,837
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)
|
53,529
|
|||||||||||||
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Operating expenses:
|
|||||||||||||||||||
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General and administrative
|
117,385
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24,261
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—
|
141,646
|
|||||||||||||||
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Selling
|
25,792
|
8,310
|
—
|
34,102
|
|||||||||||||||
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Amortization
|
71,872
|
8,581
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(8,581
|
)
|
G
|
71,872
|
|||||||||||||
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Marketing and promotion
|
23,137
|
1,434
|
—
|
24,571
|
|||||||||||||||
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Research and development
|
502
|
196
|
—
|
698
|
|||||||||||||||
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Change in fair value of contingent consideration
|
563
|
—
|
—
|
563
|
|||||||||||||||
|
Impairments
|
1,115,376
|
55,066
|
(63,597
|
)
|
I
|
1,106,845
|
|||||||||||||
|
Litigation (recovery) costs
|
(1,970
|
)
|
583
|
—
|
(1,387
|
)
|
|||||||||||||
|
Restructuring costs
|
10,727
|
1,211
|
—
|
11,938
|
|||||||||||||||
|
Transaction (income) costs
|
(3,882
|
)
|
20,908
|
(17,063
|
)
|
K
|
(2,037
|
)
|
|||||||||||
|
(2,000
|
)
|
O
|
|||||||||||||||||
|
Total operating expenses
|
1,359,502
|
120,550
|
(91,241
|
)
|
1,388,811
|
||||||||||||||
|
Operating loss
|
(1,279,705
|
)
|
(124,981
|
)
|
69,404
|
(1,335,282
|
)
|
||||||||||||
|
Interest expense, net
|
(8,560
|
)
|
(1,955
|
)
|
(5,549
|
)
|
I
|
(16,064
|
)
|
||||||||||
|
Non-operating (expense) income, net
|
(50,229
|
)
|
7,847
|
(6,901
|
)
|
K
|
(49,283
|
)
|
|||||||||||
|
Loss before income taxes
|
(1,338,494
|
)
|
(119,089
|
)
|
56,954
|
(1,400,629
|
)
|
||||||||||||
|
Income taxes (benefit) expense
|
(15,313
|
)
|
(5,082
|
)
|
—
|
(20,395
|
)
|
||||||||||||
|
Net Loss
|
$
|
(1,323,181
|
)
|
$
|
(114,007
|
)
|
$
|
56,954
|
$
|
(1,380,234
|
)
|
||||||||
|
Net loss per share - basic and diluted
|
(2.21
|
)
|
(2.16
|
)
|
|||||||||||||||
|
Weighted average shares used in computation of net loss per share - basic and diluted
|
597,829,714
|
39,705,962
|
637,535,676
|
||||||||||||||||
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended May 31, 2022
(in ‘000 of United States dollars, except per share and share amounts)
|
|
Tilray
twelve months
ended
May 31,
2022
|
HEXO adjusted
twelve months
ended
July 31,
2022
(note 6)
|
Transaction
accounting
adjustments
|
Notes
(note 4)
|
Pro forma
combined
May 31,
2022
|
||||||||||||||
|
Net revenue
|
$
|
628,372
|
$
|
150,608
|
$
|
—
|
$
|
778,980
|
|||||||||||
|
Cost of goods sold
|
511,555
|
219,933
|
(3,607
|
)
|
F
|
727,881
|
|||||||||||||
|
Gross profit
|
116,817
|
(69,325
|
)
|
3,607
|
51,099
|
||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||
|
General and administrative
|
162,801
|
79,416
|
(1,500
|
)
|
E
|
240,717
|
|||||||||||||
|
Selling
|
34,926
|
11,513
|
—
|
46,439
|
|||||||||||||||
|
Amortization
|
115,191
|
22,678
|
(16,010
|
)
|
G
|
121,859
|
|||||||||||||
|
Marketing and promotion
|
30,934
|
9,646
|
—
|
40,580
|
|||||||||||||||
|
Research and development
|
1,518
|
1,086
|
—
|
2,604
|
|||||||||||||||
|
Change in fair value of contingent consideration
|
(44,650
|
)
|
—
|
—
|
(44,650
|
)
|
|||||||||||||
|
Impairments
|
378,241
|
621,528
|
—
|
999,769
|
|||||||||||||||
|
Litigation (recovery) costs
|
16,518
|
—
|
—
|
16,518
|
|||||||||||||||
|
Restructuring costs
|
795
|
11,904
|
—
|
12,699
|
|||||||||||||||
|
Transaction (income) costs
|
30,944
|
28,007
|
(940
|
)
|
K
|
77,411
|
|||||||||||||
|
|
12,400
|
L
|
|||||||||||||||||
|
|
7,000
|
M
|
|||||||||||||||||
|
Total operating expenses
|
727,218
|
785,778
|
950
|
1,513,946
|
|||||||||||||||
|
Operating loss
|
(610,401
|
)
|
(855,103
|
)
|
2,657
|
(1,462,847
|
)
|
||||||||||||
|
Interest expense, net
|
(27,944
|
)
|
1,664
|
—
|
(26,280
|
)
|
|||||||||||||
|
Non-operating income (expense), net
|
197,671
|
31,655
|
(1,434
|
)
|
K
|
227,892
|
|||||||||||||
|
Loss before income taxes
|
(440,674
|
)
|
(821,784
|
)
|
1,223
|
(1,261,235
|
)
|
||||||||||||
|
Income taxes (benefit) expense
|
(6,542
|
)
|
(36,681
|
)
|
—
|
(43,223
|
)
|
||||||||||||
|
Net Loss
|
$
|
(434,132
|
)
|
$
|
(785,103
|
)
|
$
|
1,223
|
$
|
(1,218,012
|
)
|
||||||||
|
Net loss per share - basic and diluted
|
(0.90
|
)
|
(2.34
|
)
|
|||||||||||||||
|
Weighted average shares used in computation of net loss per share - basic and diluted
|
481,219,130
|
39,705,962
|
520,925,092
|
||||||||||||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in ‘000 of United States dollars, except for shares, warrants, per share amounts and per warrant amounts, unless otherwise noted)
1. Basis of Presentation
The pro forma financial statements are based on the historical consolidated financial statements of Tilray and HEXO, adjusted to give effect to the Arrangement, and
should be read in conjunction with the historical financial statements from which they are derived. Pro forma adjustments are limited to the transaction accounting adjustments that reflect the accounting for the Arrangement in accordance with US
GAAP.
The pro forma financial statements were prepared using the purchase method of accounting. The Arrangement is accounted for as a business acquisition in which Tilray is
the acquirer. Accordingly, the pro forma financial statements represent a continuation of the financial statements of Tilray; the assets and liabilities of Tilray are presented at their historical carrying values and the assets and liabilities of
HEXO are recognized on the effective date of the Arrangement and measured at fair value.
The pro forma financial statements are presented in United States dollars (“USD”) and prepared in accordance with US GAAP. Since HEXO’s historical consolidated
financial statements are presented in Canadian dollars (“CAD” or “C$”) and prepared in accordance with International Financial Reporting Standards (“IFRS”), the historical financial information of HEXO used in the pro forma financial statements
reflects US GAAP adjustments for accounting policies that are consistent with those applied by Tilray and are translated into USD (note 6).
The pro forma balance sheets give effect to the Arrangement as if it had occurred on February 28, 2023. The pro forma statement of operations gives effect to the
Arrangement as if it had occurred on June 1, 2021.
The February 28, 2023, pro forma balance sheet combines the consolidated balance sheet of Tilray as at February 28, 2023 with the unaudited consolidated statement of
financial position (balance sheet) of HEXO as at April 30, 2023, which has been adjusted, as described in note 6, for purposes of these pro forma financial statements. The unaudited pro forma statement of operations for the year ended May 31, 2022,
was derived by combining financial information from the audited consolidated statements of net loss and comprehensive loss of Tilray for the year ended May 31, 2022 with the audited consolidated statements of net loss and comprehensive loss of HEXO
for the year ended July 31, 2022, which has been adjusted, as described in note 6, for purposes of these pro forma financial statements. The unaudited pro forma statement of operations for the nine months ended February 28, 2023, was derived by
combining financial information from the unaudited consolidated statements of net loss and comprehensive loss of Tilray for the nine months ended February 28, 2023, with the unaudited consolidated statements of net loss and comprehensive loss of HEXO
for the nine months ended April 30, 2023, which has been adjusted, as described in note 6, for purposes of these pro forma financial statements.
The assumptions and estimates underlying the adjustments to the pro forma financial statements are described in the accompanying notes.
The pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed. The pro forma
adjustments have been made solely for the purpose of providing unaudited pro forma combined financial information and actual adjustments, when recorded, may differ materially.
The pro forma financial statements have been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would
have been achieved if the Arrangement had been completed on the dates or for the periods presented, nor do they purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro
forma adjustments, various other factors will have an effect on the financial condition and results of operations after the completion of the Arrangement. The actual financial position and results of operations may differ materially from the pro
forma amounts reflected herein due to a variety of factors.
The unaudited pro forma financial statements do not reflect operational and administrative cost savings that may be achieved as a result of the Arrangement.
2. Estimated Purchase Price
Tilray is the acquirer and, pursuant to the Plan of Arrangement, Tilray (i) issued 0.4352 of a Tilray common share in exchange for each outstanding HEXO common share
(the “Exchange Ratio”), (ii) Tilray also issued 19,551,282 Tilray Shares in consideration for the acquisition of the 25,000,000 issued and outstanding Series 1 Preferred Shares, (iii) Tilray converted the outstanding convertible notes receivable with
HEXO for 40,990,098 HEXO common shares, and (iv) exchanged outstanding equity instruments exercisable into HEXO common shares for instruments with similar terms that are exercisable into Tilray common shares, adjusted to reflect the Exchange Ratio.
The estimated purchase price of $93,835 is based on the number of equity instruments Tilray issued at the closing share price of Tilray of $1.61 on June 22, 2023 (the
“Measurement Date”).
The following table summarizes the calculation of the purchase price paid by Tilray (in thousands, except warrants, share and per share data):
|
Tilray common stock issued based on Exchange Ratio
|
39,705,962
|
|||
|
Price per common stock of Tilray on Measurement Date
|
$
|
1.61
|
||
|
Total fair value of Tilray common stock
|
63,927
|
|||
|
Total fair value of HEXO convertible notes receivable
|
28,720
|
|||
|
Estimated fair value of HEXO stock-based compensation on the Measurement Date
|
1,188
|
|||
|
Total purchase price
|
$
|
93,835
|
The fair value of the HEXO stock-based compensation on the Measurement Date consisted solely of stock options. The fair values of the options included in the purchase
price are calculated using the Black Scholes model, using the following assumptions:
|
Volatility
|
90
|
%
|
||
|
Dividend yield
|
0
|
%
|
||
|
Risk-free interest rate
|
3.53% to 4.69%
|
|||
|
Expected term
|
1.41 to 9.85 years
|
|||
The outstanding Canadian dollar denominated replacement warrants were valued
using the Black-Scholes option pricing model as at the acquisition date of June 22, 2023, and were concluded to be $nil.
3. Preliminary Purchase Price Allocation
A preliminary valuation analysis of the fair value of HEXO’s assets and liabilities has been performed at April 30, 2023, with the following adjustments:
| • |
Accounts receivable which includes an additional $3,000 fair value adjustment (note 4C);
|
| • |
Inventory which includes an additional $4,000 provision for inventory to adjust to fair value as the inventory is not anticipated to be utilized as part of the combined company (note
4D);
|
| • |
Prepayments and other current assets which included $1,500 of prepayments which will provide no benefits for the combined company (note 4E);
|
| • |
Capital assets has been reduced by $70,724 to reflect the recoverable value of the remaining facilities and equipment (note 4F); and
|
| • |
Accounts payable and accrued liabilities which has been adjusted to include $4,600 of costs associated with outstanding litigations and other additional costs anticipated to be
incurred prior to closing (note 4I).
|
The purchase price has been allocated to such assets and liabilities. The following table summarizes the preliminary purchase price allocation:
|
Cash and cash equivalents
|
$
|
14,764
|
||
|
Restricted cash
|
1,609
|
|||
|
Accounts receivable
|
12,588
|
|||
|
Inventory
|
16,648
|
|||
|
Assets held for sale
|
797
|
|||
|
Prepayments and other current assets
|
7,079
|
|||
|
Capital assets
|
81,237
|
|||
|
Other assets
|
8,154
|
|||
|
Accounts payable and accrued liabilities
|
(46,845
|
)
|
||
|
Lease liabilities
|
(1,331
|
)
|
||
|
Warrant liability
|
(170
|
)
|
||
|
Other liabilities
|
(695
|
)
|
||
|
Total net assets
|
$
|
93,835
|
The preliminary purchase price allocation has been used to prepare the pro forma adjustments (note 4). The purchase price allocation will be finalized following the
effective date of the Arrangement when the valuation analysis is complete. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.
4. Pro Forma Adjustments
Adjustments to the pro forma financial statements are limited to those that reflect the accounting for the Arrangement in accordance with US GAAP. The pro forma
financial statements give effect to the Arrangement as if it had occurred on February 28, 2023 for purposes of the pro forma balance sheet and June 1, 2021 for purposes of the pro forma statements of operations.
The pro forma adjustments are as follows:
A – Purchase price
Records the purchase price consideration, which is the fair value of the equity interests issued by Tilray and the fair value of the convertible notes receivable settled
to acquire HEXO (note 2).
B – Equity
Eliminates HEXO’s historical equity balances.
C – Accounts receivable
A fair value reduction of $3,000 as a result of higher than expected returns subsequent to the Arrangement, compared to the historical return rate.
D – Inventory
Decrease HEXO’s inventory to a fair value of approximately $16,648, an overall decrease from the carrying value of $4,000. The fair value was determined based on the
estimated selling price of the inventory, less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts.
E – Prepayment and other current assets
Decrease HEXO’s prepayment and other current assets to a fair value of approximately $7,079, an overall decrease from the carrying value of $1,500. The fair value was
determined based on the estimated recoverable value of the prepaids and other current assets. After the Arrangement, the $1,500 reduction in prepayment and other current assets will decrease the general and administrative costs over the following
twelve months when the prepayments or other current assets would have been recognized.
F – Capital assets
Decrease HEXO’s capital assets to a fair value of approximately $81,237, an overall decrease from the carrying value of $70,724. The estimated fair value of capital
assets is determined primarily using an income approach, which requires a forecast of expected future cash flows. After the Arrangement, the estimated impact of the combined change in the value and useful lives of capital assets will be an estimated
decrease in depreciation expense in the pro forma statement of operations recognized through a $2,705 and $3,607 decrease in cost of sales for the nine-month period and the twelve-month period, respectively.
G – Intangible assets
Eliminate HEXO’s historical intangible assets balances. After the Arrangement, the estimated impact of the combined change in the value of intangible assets will be an
estimated decrease in depreciation expense in the pro forma statement of operations recognized through a $8,581 and $16,010 decrease in amortization expense for the nine-month period and the twelve-month period, respectively.
H – Interest in equity investees
Eliminate HEXO’s interest in equity investees as a result of the investee continuing to operate at a deficit.
I – Convertible notes receivable
To record the change in fair value of the convertible note receivable between February 28, 2023 and the Measurement Date. The Company reversed the $5,549 of interest
revenue and $63,597 of impairments recognized on the convertible notes receivable for the nine months ended February 28, 2023.
J – Accounts payable and accrued liabilities
Increase HEXO’s accounts payable and accrued liabilities by $4,600 for an estimate on outstanding litigation prior to the Arrangement.
K – Convertible debentures payable
Eliminate HEXO’s convertible debentures payable as settlement with Tilray’s purchase of HEXO. The Company also eliminated $17,063 in transaction costs and $6,901 in net
gain on fair value and $940 in transaction costs and $1,434 in net gain on fair value associated with the elimination of these convertible debentures for the nine-month period and the twelve-month period, respectively. The transaction costs and fair
value adjustments include interest expense and any related convertible debenture advisory service fees.
L – Transaction costs
Recognize in both the pro forma balance sheet and pro forma statements of operations $12,400 of nonrecurring transaction costs directly related to the Arrangement that
are expected to be incurred subsequent to closing the Arrangement.
M – Compensation arrangements
Recognizes in both the pro forma balance sheet and pro forma income statement $7,000 of nonrecurring compensation costs related to severance payments and retention
payments. This pro forma adjustment excludes any related severance or other compensation costs which may be triggered upon an announcement of a new executive team or other headcount restructuring that may result from the Arrangement.
N – Income taxes
The pro forma income tax adjustments to the pro forma balance sheet results in an elimination of the HEXO deferred tax liability, and a full valuation allowance on the
deferred tax asset.
O – Intercompany elimination
To eliminate Tilray intercompany transactions related to, revenue recorded as a result of advisory services and other commercial transactions for $27,339, $2,797 of
related cost of goods sold, and $2,000 in reimbursed transaction costs for the nine months ended February 28, 2023.
5. Pro Forma Loss Per Share
|
May 31,
2022
|
February 28,
2023
|
|||||||
|
Historical Tilray basic weighted average shares
|
481,219,130
|
597,829,714
|
||||||
|
Incremental shares issued in merger transaction (note 2)
|
39,705,962
|
39,705,962
|
||||||
|
Pro forma combined basic and diluted weighted average shares
|
520,925,092
|
637,535,676
|
||||||
On a pro forma basis, the combined company incurred a net loss for the year ended May 31, 2022 and the nine months ended February 28, 2023. As such, all potential shares
are excluded from the calculation of pro forma diluted loss per share because they are anti-dilutive.
6. Adjustments to the Historical Financial Information of HEXO Corp.
The historical financial information of HEXO was prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) and presented in
CAD. HEXO’s fiscal year end is July 31 and historical financial information was used to present pro forma financial statements based on the fiscal year of Tilray being May 31. Reclassification adjustments have been made to HEXO’s historical
financial information to comply with Tilray’s presentation which resulted in a net impact of $nil on the net loss for the period presented and on the adjusted unaudited condensed consolidated statement of financial position of HEXO.
The historical financial information was translated from CAD to USD using the following historical exchange rates:
|
CAD to USD
|
||||
|
Period end exchange rate as at April 30, 2023
|
0.7382
|
|||
|
Average exchange rate for the 9 months ended April 30, 2023
|
0.7440
|
|||
|
Average exchange rate for year ended July 31, 2022
|
0.7881
|
|||
The table below presents the adjustments from IFRS to US GAAP as well as the presentation and reclassification adjustments, which had an $nil impact on the total assets,
liabilities and deficit accounts and translation of HEXO’s adjusted unaudited condensed consolidated statement of financial position as at April 30, 2023:
Unaudited Schedule of Adjusted Condensed Consolidated Statement of Financial Position (Balance Sheet) of HEXO
April 30, 2023
(in ‘000)
|
|
IFRS
|
US GAAP
|
||||||||||||||||||||
|
|
HEXO
historical
April 30,
2023
CAD
|
IFRS to US
GAAP
differences -
CAD
|
Notes
|
Presentation
Reclassification
CAD
|
HEXO adjusted
historical
April 30,
2023
CAD
|
HEXO adjusted
IFRS to US
GAAP
differences -
USD
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Current assets
|
||||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
20,000
|
$
|
—
|
$
|
—
|
$
|
20,000
|
$
|
14,764
|
||||||||||||
|
Restricted cash
|
2,180
|
—
|
—
|
2,180
|
1,609
|
|||||||||||||||||
|
Accounts receivable, net
|
21,116
|
—
|
—
|
21,116
|
15,588
|
|||||||||||||||||
|
Inventory
|
32,564
|
(10,827
|
)
|
i
|
6,234
|
27,971
|
20,648
|
|||||||||||||||
|
Biological assets
|
7,159
|
(925
|
)
|
i
|
(6,234
|
)
|
—
|
—
|
||||||||||||||
|
Assets held for sale
|
1,080
|
—
|
—
|
1,080
|
797
|
|||||||||||||||||
|
Prepaids and other current assets
|
11,622
|
—
|
—
|
11,622
|
8,579
|
|||||||||||||||||
|
Total current assets
|
95,721
|
(11,752
|
)
|
—
|
83,969
|
61,985
|
||||||||||||||||
|
Capital assets
|
205,854
|
—
|
—
|
205,854
|
151,961
|
|||||||||||||||||
|
Intangible assets
|
70,383
|
—
|
—
|
70,383
|
51,957
|
|||||||||||||||||
|
Interest in equity investees
|
13,674
|
—
|
—
|
13,674
|
10,094
|
|||||||||||||||||
|
Other assets
|
11,046
|
—
|
—
|
11,046
|
8,154
|
|||||||||||||||||
|
Total assets
|
$
|
396,678
|
$
|
(11,752
|
)
|
$
|
—
|
$
|
384,926
|
$
|
284,151
|
|||||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Current liabilities
|
||||||||||||||||||||||
|
Accounts payable and accrued liabilities
|
$
|
57,228
|
$
|
—
|
$
|
—
|
$
|
57,228
|
$
|
42,245
|
||||||||||||
|
Warrant liability
|
230
|
—
|
—
|
230
|
170
|
|||||||||||||||||
|
Current portion of lease liabilities
|
742
|
—
|
—
|
742
|
548
|
|||||||||||||||||
|
Current portion of convertible debentures payable
|
178,021
|
—
|
—
|
178,021
|
131,415
|
|||||||||||||||||
|
Total current liabilities
|
236,221
|
—
|
—
|
236,221
|
174,378
|
|||||||||||||||||
|
Long - term liabilities
|
||||||||||||||||||||||
|
Lease liabilities
|
1,061
|
—
|
—
|
1,061
|
783
|
|||||||||||||||||
|
Deferred tax liabilities
|
15,723
|
(2,959
|
)
|
iv |
—
|
12,764
|
9,422
|
|||||||||||||||
|
Other liabilities
|
942
|
—
|
—
|
942
|
695
|
|||||||||||||||||
|
Total liabilities
|
253,947
|
(2,959
|
)
|
—
|
250,988
|
185,278
|
||||||||||||||||
|
Stockholders' equity
|
||||||||||||||||||||||
|
Common stock
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Share capital
|
1,893,650
|
—
|
(1,893,650
|
)
|
—
|
—
|
||||||||||||||||
|
Share-based payment reserve
|
65,517
|
1,316
|
ii |
(66,833
|
)
|
—
|
—
|
|||||||||||||||
|
Warrant reserve
|
80,798
|
—
|
(80,798
|
)
|
—
|
—
|
||||||||||||||||
|
Contributed surplus
|
104,340
|
—
|
(104,340
|
)
|
—
|
—
|
||||||||||||||||
|
Additional paid-in capital
|
—
|
—
|
2,145,621
|
2,145,621
|
1,583,897
|
|||||||||||||||||
|
Accumulated other comprehensive loss
|
12,752
|
—
|
—
|
12,752
|
9,414
|
|||||||||||||||||
|
Accumulated deficit
|
(2,014,326
|
)
|
(11,752
|
)
|
i
|
—
|
(2,024,435
|
)
|
(1,494,438
|
)
|
||||||||||||
|
|
(1,316
|
)
|
ii |
|||||||||||||||||||
|
|
2,959
|
iv |
||||||||||||||||||||
|
Total stockholders' equity
|
142,731
|
(8,793
|
)
|
—
|
133,938
|
98,873
|
||||||||||||||||
|
Total liabilities and stockholders' equity
|
$
|
396,678
|
$
|
(11,752
|
)
|
$
|
—
|
$
|
384,926
|
$
|
284,151
|
|||||||||||
On December 19, 2022, HEXO completed a share consolidation on the basis of fourteen (14) pre-consolidation common shares for one post-consolidation common share
(14:1), the post-consolidation outstanding common share balance at July 31, 2022, applied retrospectively was 42,927,745 (July 31, 2021 - 10,903,282). This share consolidation has not been reflected in the July 31, 2022 financial statements and has
no impact on the information contained in this pro forma.
Certain IFRS balances were combined with others in the “IFRS” column, also certain account names were modified to align with Tilray’s account names in the above
condensed consolidated statement of financial position (balance sheet) of HEXO.
Unaudited Schedule of Adjusted Condensed Consolidated Statement of Operations of HEXO
9 months ended April 30, 2023
(in ‘000)
|
IFRS
|
US GAAP
|
||||||||||||||||||||||
|
|
HEXO
nine months
ended
April 30,
2023
CAD
|
IFRS to US
GAAP
differences -
CAD
|
Notes
|
Presentation
Reclassification
CAD
|
HEXO adjusted
nine monthsended
April 30,
2023
CAD
|
HEXO adjusted
nine months
ended
April 30,
2023
USD
|
|||||||||||||||||
|
Net revenue
|
$
|
81,516
|
$
|
—
|
$
|
—
|
$
|
81,516
|
$
|
60,648
|
|||||||||||||
|
Cost of goods sold
|
90,974
|
—
|
(3,502
|
)
|
87,472
|
65,079
|
|||||||||||||||||
|
Gross profit (loss) before fair value adjustments
|
(9,458
|
)
|
—
|
3,502
|
(5,956
|
)
|
(4,431
|
)
|
|||||||||||||||
|
Realized fair value on inventory sold
|
28,006
|
(28,006
|
)
|
i
|
—
|
—
|
—
|
||||||||||||||||
|
Unrealized gain on changes in fair value of biological assets
|
(4,778
|
)
|
4,778
|
i |
—
|
—
|
—
|
||||||||||||||||
|
Gross profit (loss)
|
(32,686
|
)
|
23,228
|
3,502
|
(5,956
|
)
|
(4,431
|
)
|
|||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||||
|
General and administrative
|
30,895
|
—
|
1,714
|
32,609
|
24,261
|
||||||||||||||||||
|
Selling, marketing and promotion
|
9,595
|
—
|
(9,595
|
)
|
—
|
—
|
|||||||||||||||||
|
Selling
|
—
|
—
|
11,170
|
11,170
|
8,310
|
||||||||||||||||||
|
Share-based compensation
|
1,961
|
231
|
ii
|
(2,192
|
)
|
—
|
—
|
||||||||||||||||
|
Amortization
|
11,534
|
—
|
—
|
11,534
|
8,581
|
||||||||||||||||||
|
Marketing and promotion
|
—
|
—
|
1,927
|
1,927
|
1,434
|
||||||||||||||||||
|
Research and development
|
569
|
—
|
(305
|
)
|
264
|
196
|
|||||||||||||||||
|
Impairments
|
74,014
|
—
|
—
|
74,014
|
55,066
|
||||||||||||||||||
|
Litigation (recovery) costs
|
—
|
—
|
783
|
783
|
583
|
||||||||||||||||||
|
Restructuring costs
|
1,628
|
—
|
—
|
1,628
|
1,211
|
||||||||||||||||||
|
Transaction (income) costs
|
28,102
|
—
|
—
|
28,102
|
20,908
|
||||||||||||||||||
|
Total operating expenses
|
158,298
|
231
|
3,502
|
162,031
|
120,550
|
||||||||||||||||||
|
Operating loss
|
(190,984
|
)
|
22,997
|
—
|
(167,987
|
)
|
(124,981
|
)
|
|||||||||||||||
|
Interest expense, net
|
(2,628
|
)
|
—
|
—
|
(2,628
|
)
|
(1,955
|
)
|
|||||||||||||||
|
Non-operating income (expense), net
|
10,547
|
—
|
—
|
10,547
|
7,847
|
||||||||||||||||||
|
Loss before income taxes
|
(183,065
|
)
|
22,997
|
—
|
(160,068
|
)
|
(119,089
|
)
|
|||||||||||||||
|
Income taxes (benefit) expense
|
(10,323
|
)
|
3,493
|
iv
|
—
|
(6,830
|
)
|
(5,082
|
)
|
||||||||||||||
|
Net Loss
|
$
|
(172,742
|
)
|
$
|
19,504
|
$
|
—
|
$
|
(153,238
|
)
|
$
|
(114,007
|
)
|
||||||||||
Unaudited Schedule of Adjusted Condensed Consolidated Statement of Operations of HEXO
Year ended ended July 31, 2022
(in ‘000)
|
|
IFRS
|
US GAAP
|
|||||||||||||||||||||
|
|
HEXO
twelve months
ended
July 31,
2022
CAD
|
IFRS to US
GAAP
differences -
CAD
|
Notes
|
Presentation
Reclassification
CAD
|
HEXO adjusted
twelve months
ended
July 31,
2022
CAD
|
HEXO adjusted
twelve months
ended
July 31,
2022
USD
|
|||||||||||||||||
|
Net revenue
|
$
|
191,103
|
$
|
—
|
$
|
—
|
$
|
191,103
|
$
|
150,608
|
|||||||||||||
|
Cost of goods sold
|
282,985
|
—
|
(3,917
|
)
|
279,068
|
219,933
|
|||||||||||||||||
|
Gross profit (loss) before fair value adjustments
|
(91,882
|
)
|
—
|
3,917
|
(87,965
|
)
|
(69,325
|
)
|
|||||||||||||||
|
Realized fair value on inventory sold
|
43,455
|
(43,455
|
)
|
i |
|
—
|
—
|
—
|
|||||||||||||||
|
Unrealized gain on changes in fair value of biological assets
|
(59,665
|
)
|
59,665
|
i |
|
—
|
—
|
—
|
|||||||||||||||
|
Gross profit (loss)
|
(75,672
|
)
|
(16,210
|
)
|
3,917
|
(87,965
|
)
|
(69,325
|
)
|
||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||||
|
General and administrative
|
83,450
|
—
|
17,319
|
100,769
|
79,416
|
||||||||||||||||||
|
Selling, marketing and promotion
|
22,932
|
—
|
(22,932
|
)
|
—
|
—
|
|||||||||||||||||
|
Selling
|
—
|
—
|
14,609
|
14,609
|
11,513
|
||||||||||||||||||
|
Share-based compensation
|
14,396
|
1,085
|
ii
|
(15,481
|
)
|
—
|
—
|
||||||||||||||||
|
Amortization
|
28,775
|
—
|
—
|
28,775
|
22,678
|
||||||||||||||||||
|
Marketing and promotion
|
—
|
—
|
12,240
|
12,240
|
9,646
|
||||||||||||||||||
|
Research and development
|
3,216
|
—
|
(1,838
|
)
|
1,378
|
1,086
|
|||||||||||||||||
|
Impairments
|
788,641
|
—
|
—
|
788,641
|
621,528
|
||||||||||||||||||
|
Litigation (recovery) costs
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Restructuring costs
|
15,105
|
—
|
—
|
15,105
|
11,904
|
||||||||||||||||||
|
Transaction (income) costs
|
35,538
|
—
|
—
|
35,538
|
28,007
|
||||||||||||||||||
|
Total operating expenses
|
992,053
|
1,085
|
3,917
|
997,055
|
785,778
|
||||||||||||||||||
|
Operating loss
|
(1,067,725
|
)
|
(17,295
|
)
|
—
|
(1,085,020
|
)
|
(855,103
|
)
|
||||||||||||||
|
Interest expnese, net
|
2,112
|
—
|
—
|
2,112
|
1,664
|
||||||||||||||||||
|
Non-operating income (expense), net
|
(46,808
|
)
|
86,974
|
iii
|
—
|
40,166
|
31,655
|
||||||||||||||||
|
Loss before income taxes
|
(1,112,421
|
)
|
69,679
|
—
|
(1,042,742
|
)
|
(821,784
|
)
|
|||||||||||||||
|
Income taxes (benefit) expense
|
(38,813
|
)
|
(7,730
|
)
|
iv
|
—
|
(46,543
|
)
|
(36,681
|
)
|
|||||||||||||
|
Net Loss
|
$
|
(1,073,608
|
)
|
$
|
77,409
|
$
|
—
|
$
|
(996,199
|
)
|
$
|
(785,103
|
)
|
||||||||||
Certain IFRS balances were combined with others in the “IFRS” column, also certain account names were modified to align with Tilray’s account names in the above
condensed consolidated statements of operations of HEXO. IFRS differs in certain material respects from US GAAP. The following material US GAAP adjustments to HEXO’s historical consolidated statement of operations are for purposes of the unaudited
pro forma financial information (expressed in thousands of CAD), these adjustments are before certain reclassification adjustments:
i – Inventory and biological assets
Cannabis plants are accounted for as biological assets and agricultural products under IFRS and US GAAP, respectively. Under IFRS, biological assets are accounted for at
fair value less costs to sell and are revalued at each subsequent reporting date up to the point of harvest, upon which time they are transferred into inventories. Any change in fair value is recognized in the period of change within profit or loss.
Under US GAAP, agricultural products are accounted for at cost in accordance with guidance on property, plant and equipment or inventories depending on their nature.
The following table reflects the removal of the fair value adjustment that was included in the cost basis of inventories and biological assets under IFRS to reflect
cannabis plants at cost in accordance with Accounting Standards Codification (“ASC”) 330, Inventory as required under US GAAP and includes a corresponding
impact to accumulated deficit:
|
As at April 30, 2023
|
||||
|
CAD
|
||||
|
Inventory
|
$
|
(10,827
|
)
|
|
|
Biological assets
|
(925
|
)
|
||
|
Accumulated deficit, net of tax of $2,959
|
(8,793
|
)
|
||
The following table reflects the removal of the changes in fair value recognized in the period of change within the statement of operations:
|
Year ended July 31,
2022
|
9 months ended April
30, 2023
|
|||||||
|
CAD
|
CAD
|
|||||||
|
Realized fair value amounts on inventory sold
|
(43,445
|
)
|
(28,006
|
)
|
||||
|
Unrealized gain on changes in fair value of biological assets
|
59,665
|
4,778
|
||||||
ii – Share-based payments
IFRS requires the fair value of a share-based award to be determined by estimating the value of each vesting tranche separately using a separate expected life and
expensing as such whereas US GAAP provides a policy choice to use the later approach or to estimate the fair value of the total award and recognize the expense over the related service period following a straight-line vesting expense schedule. HEXO
measures and recognizes compensation expense for these awards on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards based on their grant date
fair value.
The following table reflects the adjustment related to the straight-line expense under US GAAP in the period of change within the consolidated statement of operations:
|
As at April 30, 2023
|
||||
|
CAD
|
||||
|
Share-based payment reserve
|
1,316
|
|||
|
Accumulated deficit, net of tax impact of $nil
|
(1,316
|
)
|
||
The adjustment reflects the increase in share-based compensation expense of C$1,085 for the year ended July 31, 2022 and C$231 for the 9 months ended April 30, 2023, for
a total adjustment of C$1,316.
iii – Convertible note
As per IFRS 9.B5.1.2A, IFRS 9 indicates that the best evidence of fair value of a financial instrument at initial recognition is normally the transaction price unless
the fair value of the instrument is evidenced by observable market data. The IASB concluded that those conditions were necessary and sufficient to provide reasonable assurance that fair value was other than the transaction price for the purpose of
recognizing up-front gains or losses. US GAAP contains no specific requirements regarding the observability of inputs, thereby potentially allowing for the recognition of gains or losses at initial recognition for financial instruments even when the
fair value measurement is based on a valuation model with significant unobservable inputs (i.e., Level 3 measurements). Accordingly, the ability to recognize Day 1 gains and losses for financial instruments under IFRS is more restrictive than under
US GAAP. Under US GAAP, ASC 820, Fair Value Measurement does not impose a reliability threshold for the recognition of gains or losses upon the initial
measurement of an asset or liability at its fair value. As such, the recognition of Day 1 gains and losses is not prohibited, even for instruments whose fair value is measured using valuation models based on unobservable (i.e., Level 3) inputs.
The fair value of the Senior Secured Convertible Note as issued by High Trail Inc. on May 27, 2021 (the "Original Note') at initial recognition was determined using a
valuation technique that included unobservable inputs. HEXO identified a difference between the transaction price and the fair value of C$96.2 million (US$79.7 million) (the “Day 1 loss”) but was not permitted to recognize the loss immediately per
IFRS 9.B5.1.2A, given the valuation is based on unobservable inputs. Therefore, the unrecognized Day 1 loss was recognized on a straight-line basis in the statement of operations over the contractual life of the Original Note under IFRS.
The following reflects the adjustment related to recognizing the Day 1 loss, in full, at the inception of the Original Note as permitted under US GAAP in the period of
changes within the consolidated statement of operations:
|
Year ended July 31, 2022
|
||||
|
CAD
|
||||
|
Senior secured convertible note
|
86,974
|
|||
|
Accumulated deficit, net of tax impact of $nil
|
(86,974
|
)
|
||
iv – Income taxes
For the purposes of the IFRS to US GAAP adjustments income tax adjustments to the pro forma statement of financial position results in an overall decrease to the
deferred income tax liability of C$2,959 as at April 30, 2023, relate to the following:
| • |
A decrease in the taxable temporary differences of C$11,752, as at April 30, 2023, as a result of the reduction in the carrying value of inventory and biological assets under US
GAAP. The reduction in taxable temporary differences is offset by an increase in the valuation allowance on net operating losses carrying forward and other deductible temporary differences.
|
The pro forma income tax adjustments to the pro forma statement of operations are comprised of the following amounts:
|
|
Year ended July 31, 2022
|
Nine months ended April 30, 2023
|
||||||||||||||
|
|
CAD
|
CAD
|
||||||||||||||
|
|
Increase
(decrease)
|
Deferred tax
recovery
(expense)
|
Increase
(decrease)
|
Deferred tax
recovery
(expense)
|
||||||||||||
|
Share-based compensation
|
$
|
(1,085
|
)
|
$
|
—
|
$
|
(231
|
)
|
$
|
—
|
||||||
|
Inventory and biological assets
|
(16,210
|
)
|
7,730
|
23,228
|
(3,493
|
)
|
||||||||||
|
Senior secured notes
|
86,974
|
—
|
—
|
—
|
||||||||||||
|
Total
|
$
|
69,679
|
$
|
7,730
|
$
|
22,997
|
$
|
(3,493
|
)
|
|||||||
The deferred tax recovery is comprised of the following:
| • |
The tax-effect of the pro-forma adjustments related to inventory and biological assets. As the adjustments relate to multiple entities in the HEXO Group, a portion of the change in
temporary differences is not tax-effected due to the existence of a valuation allowance on non-capital losses and deductible temporary differences.
|
| • |
There are no tax-effects of the pro-forma adjustments related to share-based compensation as the amount is non-deductible, and the senior secured note as the amount is offset by a
reversal of a valuation allowance.
|