CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31, 2022 AND 2021
EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS
THE VALENS COMPANY INC.
TABLE OF CONTENTS
Condensed Interim Consolidated Statements of Financial Position | 1 |
Condensed Interim Consolidated Statements of 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 | 5-32 |
THE VALENS COMPANY INC.
Condensed Interim Consolidated Statements of Financial Position
As at May 31, 2022 and November 30, 2021
(Unaudited, Expressed in Thousands of Canadian Dollars)
May 31, 2022 | November 30, 2021 | ||||||||||
Notes | $ | $ | |||||||||
ASSETS | |||||||||||
Current | |||||||||||
Cash | 24,899 | 16,053 | |||||||||
Marketable securities and derivatives | 4 | 1,244 | 3,072 | ||||||||
Trade and other receivables | 5 | 28,826 | 28,698 | ||||||||
Prepaid expenses and other current assets | 6,024 | 16,261 | |||||||||
Income tax receivable | 19 | 4,430 | 4,430 | ||||||||
Indemnity assets | 17 | 11,293 | 11,368 | ||||||||
Inventory | 6 | 31,858 | 42,039 | ||||||||
Assets held for sale | 10 | 3,680 | - | ||||||||
Biological assets | 7 | - | 227 | ||||||||
112,254 | 122,148 | ||||||||||
Non-Current | |||||||||||
Property, plant and equipment | 8 | 71,973 | 77,411 | ||||||||
Intangible assets | 9,17 | 18,837 | 91,903 | ||||||||
Goodwill | 9,17 | - | 53,222 | ||||||||
TOTAL ASSETS | 203,064 | 344,684 | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Current | |||||||||||
Accounts payable and accrued liabilities | 37,102 | 36,926 | |||||||||
Term loan and other debt - current | 11 | 14 | 9,723 | ||||||||
Contractual obligation - current | 12 | 1,642 | 1,817 | ||||||||
Lease liabilities - current | 13 | 1,409 | 1,406 | ||||||||
Contingent consideration - current | 17 | - | 761 | ||||||||
Other liability | 17 | 11,293 | 11,368 | ||||||||
51,460 | 62,001 | ||||||||||
Non-Current | |||||||||||
Term loan and other debt | 11 | 38,159 | 16 | ||||||||
Contractual obligation | 12 | 4,632 | 7,062 | ||||||||
Lease liabilities | 13 | 3,490 | 4,238 | ||||||||
Contingent consideration | 17 | - | 1,857 | ||||||||
Deferred tax liability | 17,19 | - | 10,072 | ||||||||
97,741 | 85,246 | ||||||||||
Shareholders' equity | |||||||||||
Share capital | 16 | 359,189 | 336,097 | ||||||||
Reserves | 16 | 35,510 | 25,122 | ||||||||
Obligation to issue shares | 16 | 1,130 | 1,463 | ||||||||
Accumulated other comprehensive income | 1,866 | 2,573 | |||||||||
Deficit | (292,372 | ) | (105,817 | ) | |||||||
105,323 | 259,438 | ||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 203,064 | 344,684 |
Commitments and contingencies (Note 23)
Approved on behalf of the Board on July 13, 2022:
Signed | Signed | |
"Tyler Robson" | "Drew Wolff" | |
Director | Director |
The accompanying notes are an integral part of these Condensed Interim Consolidated Financial Statements
1
THE VALENS COMPANY INC.
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
For the Three and Six Months Ended May 31,
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
For the three months ended | For the six months ended | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||
Notes | $ | $ | $ | $ | ||||||||||||||||
Revenue | 29,275 | 20,469 | 59,142 | 42,243 | ||||||||||||||||
Excise taxes | (5,276 | ) | (1,705 | ) | (11,963 | ) | (3,465 | ) | ||||||||||||
Net revenue | 14 | 23,999 | 18,764 | 47,179 | 38,778 | |||||||||||||||
Cost of sales | 6,8,18 | 20,639 | 14,434 | 40,444 | 29,327 | |||||||||||||||
Inventory valuation allowance | 6 | 13,875 | 194 | 15,215 | 545 | |||||||||||||||
Gross profit (loss), excluding fair value items | (10,515 | ) | 4,136 | (8,480 | ) | 8,906 | ||||||||||||||
Fair value changes on growth of biological assets | 7 | 86 | - | (30 | ) | - | ||||||||||||||
Realized fair value changes on inventory sold or impaired | 7 | 148 | - | 338 | - | |||||||||||||||
Gross profit (loss) | (10,749 | ) | 4,136 | (8,788 | ) | 8,906 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
General and administrative | 14,250 | 9,605 | 30,050 | 16,190 | ||||||||||||||||
Selling and marketing | 6,654 | 1,422 | 13,150 | 2,514 | ||||||||||||||||
Depreciation and amortization | 8,9 | 2,945 | 2,702 | 6,131 | 5,211 | |||||||||||||||
Share-based payments | 15,16 | 2,250 | 1,245 | 4,003 | 2,976 | |||||||||||||||
Impairment loss on prepaid deposits | 6 | 4,075 | - | 4,075 | - | |||||||||||||||
Restructuring charges | 25 | 3,341 | - | 4,123 | - | |||||||||||||||
33,515 | 14,974 | 61,532 | 26,891 | |||||||||||||||||
Loss from operations | (44,264 | ) | (10,838 | ) | (70,320 | ) | (17,985 | ) | ||||||||||||
Other income (expense) | ||||||||||||||||||||
Financing costs, net | 11,12,13 | (1,427 | ) | (150 | ) | (2,779 | ) | (763 | ) | |||||||||||
Remeasurement of contingent consideration | 17 | 1,944 | - | 2,617 | - | |||||||||||||||
Foreign exchange gain | 14 | 449 | 27 | 658 | ||||||||||||||||
Gain (loss) on disposal of capital assets | (22 | ) | - | (22 | ) | 34 | ||||||||||||||
Gain (loss) on marketable securities and derivatives | (1,598 | ) | - | (2,328 | ) | 395 | ||||||||||||||
Impairment loss | 9,10 | (123,788 | ) | - | (123,788 | ) | - | |||||||||||||
Other income | (7 | ) | - | (3 | ) | - | ||||||||||||||
(124,884 | ) | 299 | (126,276 | ) | 324 | |||||||||||||||
Loss before income taxes | (169,148 | ) | (10,539 | ) | (196,596 | ) | (17,661 | ) | ||||||||||||
Recovery of income taxes | 19 | |||||||||||||||||||
Current | - | (1,603 | ) | - | (2,488 | ) | ||||||||||||||
Deferred | (8,341 | ) | (277 | ) | (10,041 | ) | (361 | ) | ||||||||||||
(8,341 | ) | (1,880 | ) | (10,041 | ) | (2,849 | ) | |||||||||||||
Loss for the period | (160,807 | ) | (8,659 | ) | (186,555 | ) | (14,812 | ) | ||||||||||||
Basic and diluted loss per common share | (2.13 | ) | (0.16 | ) | (2.60 | ) | (0.30 | ) | ||||||||||||
Other comprehensive income | ||||||||||||||||||||
Foreign currency translation loss, net of tax | (741 | ) | - | (707 | ) | - | ||||||||||||||
Comprehensive loss for the period | (161,548 | ) | (8,659 | ) | (187,262 | ) | (14,812 | ) | ||||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||||||
Basic and diluted | 75,341,830 | 52,557,267 | 71,629,601 | 48,930,975 |
The accompanying notes are an integral part of these Condensed Interim Consolidated Financial Statements
2
THE VALENS COMPANY INC.
Condensed Interim Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
Share Capital | ||||||||||||||||||||||||||||
Number | Amount | Reserves | Obligation to issue shares |
Accumulated Other Comprehensive Income | Deficit | Total | ||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Balance, November 30, 2020 | 43,057,728 | 162,585 | 19,651 | 1,933 | - | (56,783 | ) | 127,386 | ||||||||||||||||||||
Exercise of RSUs (Note 16(d)) | 28,078 | 79 | (291 | ) | - | - | - | (212 | ) | |||||||||||||||||||
Shares issued for exercise of warrants (Note 16(e)) | 1,167 | 10 | (1 | ) | - | - | - | 9 | ||||||||||||||||||||
Shares issued for exercise of options (Note 16(f)) | 72,568 | 913 | (432 | ) | - | - | - | 481 | ||||||||||||||||||||
Units issued through bought deal financing (Note 16(g)) | 6,454,666 | 35,630 | 4,066 | - | - | - | 39,696 | |||||||||||||||||||||
Share issuance costs (Note 16(g)) | - | (2,929 | ) | - | - | - | - | (2,929 | ) | |||||||||||||||||||
Share-based payments (Note 16(h)) | 101,667 | 468 | 2,597 | (222 | ) | - | - | 2,843 | ||||||||||||||||||||
Shares issued for acquisition of LYF (Note 16(i)) | 3,106,032 | 16,214 | - | - | - | - | 16,214 | |||||||||||||||||||||
Loss for the period | - | - | - | - | - | (14,812 | ) | (14,812 | ) | |||||||||||||||||||
Balance, May 31, 2021 | 52,821,906 | 212,970 | 25,590 | 1,711 | - | (71,595 | ) | 168,676 | ||||||||||||||||||||
Balance, November 30, 2021 | 67,832,544 | 336,097 | 25,122 | 1,463 | 2,573 | (105,817 | ) | 259,438 | ||||||||||||||||||||
Exercise of RSUs (Note 16(a)) | 86,220 | 405 | (563 | ) | - | - | - | (158 | ) | |||||||||||||||||||
Share-based payments (Note 16(b)) | 70,000 | 471 | 3,810 | (333 | ) | - | - | 3,948 | ||||||||||||||||||||
Units issued through bought deal financing (Note 16(c)) | 12,205,186 | 25,203 | 7,141 | - | - | - | 32,344 | |||||||||||||||||||||
Share issuance costs (Note 16(c)) | - | (2,987 | ) | - | - | - | - | (2,987 | ) | |||||||||||||||||||
Foreign currency translation loss | - | - | - | - | (707 | ) | - | (707 | ) | |||||||||||||||||||
Loss for the period | - | - | - | - | - | (186,555 | ) | (186,555 | ) | |||||||||||||||||||
Balance, May 31, 2022 | 80,193,950 | 359,189 | 35,510 | 1,130 | 1,866 | (292,372 | ) | 105,323 |
The accompanying notes are an integral part of these Condensed Interim Consolidated Financial Statements
3
THE VALENS COMPANY INC.
Condensed Interim Consolidated Statements of Cash Flows
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars)
2022 | 2021 | |||||||||||
Notes | $ | $ | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Loss for the period | (186,555 | ) | (14,812 | ) | ||||||||
Adjustment for non-cash items: | ||||||||||||
Depreciation and amortization | 7,587 | 5,935 | ||||||||||
Share-based payments | 4,003 | 2,976 | ||||||||||
Inventory valuation allowance | 15,215 | 545 | ||||||||||
Fair value changes on growth of biological assets and inventory sold | 7 | 308 | - | |||||||||
Impairment loss on trade receivables | 2,017 | 186 | ||||||||||
Impairment loss on goodwill and intangible assets | 9 | 121,021 | - | |||||||||
Impairment loss on assets held for sale | 10 | 2,767 | - | |||||||||
Impairment loss on prepaid deposits | 6 | 4,075 | - | |||||||||
Recovery of income taxes | 19 | (10,041 | ) | (2,849 | ) | |||||||
Interest expense on lease liability | 13 | 107 | 107 | |||||||||
Modification of lease liability | 13 | (38 | ) | - | ||||||||
Accretion | 781 | 826 | ||||||||||
Foreign exchange gain | (27 | ) | (658 | ) | ||||||||
Interest income on promissory note receivable | - | (217 | ) | |||||||||
Loss (gain) on disposal of capital assets | 22 | (34 | ) | |||||||||
Loss (gain) on marketable securities and derivatives | 2,328 | (395 | ) | |||||||||
Gain on remeasurement of contingent consideration | (2,617 | ) | - | |||||||||
Working capital adjustments: | ||||||||||||
Trade and other receivables | (2,160 | ) | (11,407 | ) | ||||||||
Prepaid expenses and other current assets | (188 | ) | 1,226 | |||||||||
Inventory and biological assets | 522 | (844 | ) | |||||||||
Contractual obligation | (2,744 | ) | (1,545 | ) | ||||||||
Income taxes recovered | - | 798 | ||||||||||
Accounts payable and accrued liabilities | 756 | 2,911 | ||||||||||
(42,861 | ) | (17,251 | ) | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Acquisition of property, plant and equipment | (3,919 | ) | (12,562 | ) | ||||||||
Acquisition of intangible assets | (161 | ) | (157 | ) | ||||||||
Purchase of marketable securities and derivatives | (500 | ) | - | |||||||||
Repayment of promissory note receivable | 9 | 1,614 | ||||||||||
Proceeds from sale of capital assets | 87 | 73 | ||||||||||
Proceeds from sale of marketable securities and derivatives | - | 794 | ||||||||||
Acquisition of LYF | - | (3,713 | ) | |||||||||
Issuance of promissory note receivable | - | (750 | ) | |||||||||
(4,484 | ) | (14,701 | ) | |||||||||
FINANCING ACTIVITES | ||||||||||||
Proceeds from term loan | 11 | 40,000 | - | |||||||||
Proceeds from bought deal, net of share issue costs | 16 | 29,357 | 36,767 | |||||||||
Proceeds from exercise of warrants | - | 9 | ||||||||||
Proceeds from exercise of stock options | - | 481 | ||||||||||
Payment on exercise of RSUs | (158 | ) | (212 | ) | ||||||||
Payment to settle obligation to issue shares | (54 | ) | (133 | ) | ||||||||
Repayments of term loan and other debt | (9,754 | ) | (1,000 | ) | ||||||||
Financing fees paid | (2,400 | ) | - | |||||||||
Payments on lease liability | (808 | ) | (378 | ) | ||||||||
56,183 | 35,534 | |||||||||||
Effect of exchange rate changes on cash | 8 | - | ||||||||||
CHANGE IN CASH | 8,846 | 3,582 | ||||||||||
Cash, beginning of period | 16,053 | 20,344 | ||||||||||
Cash, end of period | 24,899 | 23,926 |
Supplemental disclosure with respect to cash flows (Note 22)
The accompanying notes are an integral part of these Condensed Interim Consolidated Financial Statements
4
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
1. DESCRIPTION OF BUSINESS
The Valens Company Inc. (the "Company") was incorporated under the laws of British Columbia on January 14, 1981. On June 18, 2020, the Company completed a continuance under the Canada Business Corporations Act ("CBCA"), making the Company a federal corporation governed by the CBCA. At the same time, the Company changed its name from Valens GroWorks Corp. to The Valens Company Inc. The Company operates in the cannabis industry and is focused on delivering a diverse suite of extraction methodologies, end-to-end development and manufacturing of innovative cannabinoid-based products and analytical testing. The Company's common shares trade under the trading symbol "VLNS" on the Toronto Stock Exchange ("TSX") and Nasdaq and under the trading symbol "VLNS".
On November 16, 2021, the Company effected a three for one consolidation of its common shares in order to meet Nasdaq listing requirements. Comparative period common share and share-based instrument balances have been updated to reflect the share consolidation.
The address of the Company's registered office is Suite 400, 96 Spadina Avenue, Toronto, ON, M5V 2J6.
2. BASIS OF PREPARATION
Statement of compliance
These condensed interim consolidated financial statements have been prepared in conformity with International Accounting Standard ("IAS") 34, Interim Financial Reporting, using the same accounting policies as detailed in the Company's annual audited consolidated financial statements for the year ended November 30, 2021. These condensed interim consolidated financial statements do not include all the information required for full annual financial statements in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). These condensed interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements.
These condensed interim consolidated financial statements of the Company were approved and authorized for issue by the Board of Directors on July 13, 2022.
Basis of consolidation
These condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases. Wholly owned subsidiaries of the Company, included in these condensed interim consolidated financial statements are as follows:
5
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
2. BASIS OF PREPARATION - continued
Subsidiary | Geographical Region | Functional Currency | Date of Consolidation | |||||
Valens Agritech Ltd. ("VAL") | Canada | CAD | April 14, 2014 | |||||
Valens Farms Ltd. ("Farms") | Canada | CAD | July 19, 2018 | |||||
Valens Labs Ltd. ("Labs") | Canada | CAD | October 18, 2018 | |||||
Southern Cliff Brands Inc. ("Pommies") | Canada | CAD | November 8, 2019 | |||||
Valens Australia Pty Ltd. ("VAPL") | Australia | CAD | June 26, 2020 | |||||
LYF Food Technologies Inc. ("LYF") | Canada | CAD | March 5, 2021 | |||||
Green Roads, Inc. ("Green Roads" or "GR") | United States | USD | June 17, 2021 | |||||
Citizen Stash Cannabis Corp. ("Citizen Stash" or "CS") | Canada | CAD | November 8, 2021 |
All intra-company transactions, balances, income, and expenses were eliminated in full on consolidation.
Basis of measurement
These condensed interim consolidated financial statements have been prepared on the accrual basis of accounting except for cash flow information, and on a historical cost basis except for certain financial assets and liabilities measured at fair value or fair value less costs to sell. The financial statements are presented in thousands of Canadian Dollars, which is also the Company's functional currency with exception to Green Roads, which has a functional currency of the U.S. Dollar.
Comparative figures
Certain immaterial comparative figures have been reclassified to conform to the current period's presentation.
Critical accounting estimates and judgments
IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Aside from those included within their respective notes to the condensed interim consolidated financial statements, there have been no material revisions or changes to the nature and amount of estimates and judgments from the annual audited consolidated financial statements for the year ended November 30, 2021.
Estimates and assumptions are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates.
Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, are disclosed throughout the notes to the condensed interim consolidated financial statements.
3. APPLICATION OF NEW ACCOUNTING STANDARDS
A. | New IFRS Standards in issue but not yet effective |
(i) | Amendments to IAS 37: Onerous Contracts and the Cost of Fulfilling a Contract |
The amendment specifies that 'cost of fulfilling' a contract comprises the 'costs that relate directly to the contract'. Costs that relate directly to a contract can either be 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 condensed interim consolidated financial statements.
6
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
3. APPLICATION OF NEW ACCOUNTING STANDARDS - continued
(ii) | Amendments to IAS 1: Classification of Liabilities as Current or Non-current |
The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2023. The Company is currently evaluating the potential impact of these amendments on the Company's condensed interim consolidated financial statements.
(iii) | Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising from a Single Transaction |
The amendment narrowed the scope of certain recognition exemptions so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. An entity applies the amendments to transactions that occur on or after the beginning of the earliest comparative period presented. It also, at the beginning of the earliest comparative period presented, recognizes deferred tax for all temporary differences related to leases and decommissioning obligations and recognizes the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date. The amendment is effective for annual periods beginning on or after January 1, 2023 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company's condensed interim consolidated financial statements
(iv) | Amendments to IAS 41: Agriculture |
As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued amendments to IAS 41. The amendment removes the requirement in paragraph 22 of IAS 41 for entities to exclude taxation cash flow when measuring the fair value of a biological asset using a present value technique. This will ensure consistency with the requirements in IFRS 13. The amendment is effective for annual reporting periods beginning on or after January 1, 2022. The Company is currently evaluating the potential impact of these amendments on the Company's condensed interim consolidated financial statements.
(v) | Definition of Accounting Estimates (Amendments to IAS 8) |
On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS 8).
The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy.
The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. The Company is currently evaluating the potential impact of these amendments on the Company's condensed interim consolidated financial statements.
(vi) | Disclosure initiative - Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) |
On February 12, 2021, the IASB issued Disclosure Initiative - Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements). The amendments help companies provide useful accounting policy disclosures. The key amendments include:
· | requiring companies to disclose their material accounting policies rather than their significant accounting policies; |
· | clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and, |
7
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
· | clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company's financial statements. |
3. APPLICATION OF NEW ACCOUNTING STANDARDS - continued
The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted. The Company is currently evaluating the potential impact of these amendments on the Company's condensed interim consolidated financial statements.
4. MARKETABLE SECURITIES AND DERIVATIVES
May 31, 2022 $ |
November 30, 2021 $ | |||||||
Common shares of Canadian licensed producer | 1,092 | 3,000 | ||||||
Purchase warrants of Canadian licensed producer | 152 | 72 | ||||||
1,244 | 3,072 |
On September 26, 2021, the Company subscribed for $3,000 of units in a Canadian licensed producer's private placement. The Company received 375,000 common shares and 375,000 warrants with an exercise price of $9.20 for a term of two years. During the six months ended May 31, 2022, the Canadian licensed producer completed a qualifying transaction. As part of the listing agreement, the Company's initial investment was revised to include receipt of 473,598 common shares and 473,598 warrants with a revised exercise price of $7.28 for a term of two years.
On December 23, 2021, the Company subscribed for $500 of units in a Canadian licensed producer. The Company received 10,000,000 common shares and 10,000,000 warrants with an exercise price of $0.02 for a term of two years.
For the three and six months ended May 31, 2022, the Company recognized an unrealized loss on the common shares of $1,073 and $2,408, respectively, and an unrealized loss on the purchase warrants of $524 for the three months ended May 31, 2022 and an unrealized gain on the purchase warrants of $80 for the six months ended May 31, 2022.
5. TRADE AND OTHER RECEIVABLES
May 31, 2022 $ |
November 30, 2021 $ | |||||||
Trade accounts receivable | 29,470 | 28,741 | ||||||
Less: trade receivables valuation allowance | (3,686 | ) | (1,679 | ) | ||||
Net trade accounts receivable | 25,784 | 27,062 | ||||||
Unbilled revenue on products/services transferred over time | 430 | 387 | ||||||
GST recoverable | 23 | 140 | ||||||
Government assistance receivable (Note 18) | 114 | 114 | ||||||
Other receivables | 2,475 | 995 | ||||||
28,826 | 28,698 |
8
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
6. INVENTORY
May 31, 2022 $ |
November 30, 2021 $ | |||||||
Dried cannabis and hemp biomass | 10,345 | 7,799 | ||||||
Extracted cannabis and hemp oils | 27,716 | 26,533 | ||||||
Finished goods | 4,619 | 5,073 | ||||||
Packaging and supplies | 8,878 | 7,437 | ||||||
51,558 | 46,842 | |||||||
Less: inventory valuation allowance | (19,700 | ) | (4,803 | ) | ||||
31,858 | 42,039 |
Inventory expensed to cost of sales for the three and six months ended May 31, 2022 was $19,245 and $36,979, respectively (May 31, 2021 - $37,150 and $49,346). During the three and six months ended May 31, 2022, the Company recorded an inventory valuation allowance of $13,875 and $15,215, respectively (May 31, 2021 - $194 and $545). The valuation allowance was related to dried cannabis, oils, finished goods, and packaging and supplies, in which the cost exceeds its net realizable value based on the current selling prices of the Company's products.
In fiscal 2020, the Company had made a prepaid deposit for the purchase of certain raw materials at a fixed price. During the period ended May 31, 2022, the Company re-assessed the value of this deposit based on updated market prices for the raw materials and determined it to be onerous. The re-assessment resulted in an impairment loss of $4,075 for the three and six months ended May 31, 2022, which is included in impairment loss on prepaid deposits in the condensed interim consolidated statements of loss and comprehensive loss.
7. BIOLOGICAL ASSETS
The Company's biological assets related to cannabis cultivation out of the Company's facility in Mission, BC. As at May 31, 2022, the Company is no longer cultivating biological assets, and the facility is currently classified as a disposal group as assets held for sale, as described in Note 10. No further fair value changes are expected, as the Company no longer produces biological assets.
9
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
8. PROPERTY, PLANT AND EQUIPMENT
Land | Buildings | Leaseholds |
Computer equipment and software |
Office furniture and equipment |
Lab and production equipment |
Right-of-use asset | Total | |||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||
Balance, November 30, 2021 | 6,336 | 46,801 | 2,086 | 1,300 | 1,889 | 25,130 | 6,675 | 90,217 | ||||||||||||||||||||||||
Additions | - | 314 | 23 | 68 | 72 | 3,682 | - | 4,159 | ||||||||||||||||||||||||
Amendments to CS acquisition (Note 17) | - | (106 | ) | - | - | - | - | - | (106 | ) | ||||||||||||||||||||||
Foreign exchange adjustments | - | - | (1 | ) | - | (2 | ) | (5 | ) | (18 | ) | (26 | ) | |||||||||||||||||||
Disposals | - | - | (13 | ) | (2 | ) | - | (86 | ) | (47 | ) | (148 | ) | |||||||||||||||||||
Transfers to assets held for sale (Note 10) | (1,477 | ) | (4,024 | ) | - | (130 | ) | (8 | ) | (297 | ) | - | (5,936 | ) | ||||||||||||||||||
Balance, May 31, 2022 | 4,859 | 42,985 | 2,095 | 1,236 | 1,951 | 28,424 | 6,610 | 88,160 | ||||||||||||||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||||||||||
Balance, November 30, 2021 | - | 2,438 | 51 | 752 | 906 | 7,307 | 1,352 | 12,806 | ||||||||||||||||||||||||
Depreciation | - | 722 | 139 | 148 | 177 | 1,647 | 736 | 3,569 | ||||||||||||||||||||||||
Foreign exchange adjustments | - | - | - | - | - | (1 | ) | (3 | ) | (4 | ) | |||||||||||||||||||||
Disposals | - | - | (13 | ) | - | - | (26 | ) | - | (39 | ) | |||||||||||||||||||||
Transfers to assets held for sale (Note 10) | - | (73 | ) | - | (37 | ) | (2 | ) | (33 | ) | - | (145 | ) | |||||||||||||||||||
Balance, May 31, 2022 | - | 3,087 | 177 | 863 | 1,081 | 8,894 | 2,085 | 16,187 | ||||||||||||||||||||||||
Carrying value | ||||||||||||||||||||||||||||||||
November 30, 2021 | 6,336 | 44,363 | 2,035 | 548 | 983 | 17,823 | 5,323 | 77,411 | ||||||||||||||||||||||||
May 31, 2022 | 4,859 | 39,898 | 1,918 | 373 | 870 | 19,530 | 4,525 | 71,973 |
During the three and six months ended May 31, 2022, the Company recognized $1,868 and $3,569 of depreciation, respectively (May 31, 2021 - $1,276 and $2,264). Of this amount, $761 and $1,456 was allocated to cost of sales during the three and six months ended May 31, 2022, respectively (May 31, 2021 - $240 and $407).
10
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
9. INTANGIBLE ASSETS AND GOODWILL
SoRSE $ |
Health $ |
Customer $ | Brand $ | Software $ | Goodwill $ | Total $ | ||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
Balance, November 30, 2021 | 38,449 | 13,093 | 2,602 | 55,058 | 1,109 | 53,222 | 163,533 | |||||||||||||||||||||
Additions | - | - | - | - | 161 | - | 161 | |||||||||||||||||||||
Amendments to CS acquisition (Note 17) | - | (125 | ) | - | - | - | (106 | ) | (231 | ) | ||||||||||||||||||
Amendments to GR acquisition (Note 17) | - | - | - | - | - | 109 | 109 | |||||||||||||||||||||
Reclassification adjustments | - | - | - | 36 | (36 | ) | - | - | ||||||||||||||||||||
Foreign exchange adjustments | - | - | (7 | ) | (338 | ) | (5 | ) | (289 | ) | (639 | ) | ||||||||||||||||
Transfers to assets held for sale (Note 10) | - | (668 | ) | - | - | - | - | (668 | ) | |||||||||||||||||||
Balance, May 31, 2022 | 38,449 | 12,300 | 2,595 | 54,756 | 1,229 | 52,936 | 162,265 | |||||||||||||||||||||
Accumulated amortization and impairment | ||||||||||||||||||||||||||||
Balance, November 30, 2021 | 17,091 | 141 | 436 | 715 | 25 | - | 18,408 | |||||||||||||||||||||
Amortization | 3,224 | 258 | 206 | 128 | 200 | - | 4,016 | |||||||||||||||||||||
Impairment | 15,437 | - | 1,579 | 50,917 | 152 | 52,936 | 121,021 | |||||||||||||||||||||
Reclassification adjustments | - | - | 192 | (390 | ) | 198 | - | - | ||||||||||||||||||||
Foreign exchange adjustments | - | - | (2 | ) | - | (3 | ) | - | (5 | ) | ||||||||||||||||||
Transfers to assets held for sale (Note 10) | - | (12 | ) | - | - | - | - | (12 | ) | |||||||||||||||||||
Balance, May 31, 2022 | 35,752 | 387 | 2,411 | 51,370 | 572 | 52,936 | 143,428 | |||||||||||||||||||||
Carrying value | ||||||||||||||||||||||||||||
November 30, 2021 | 21,358 | 12,952 | 2,166 | 54,343 | 1,084 | 53,222 | 145,125 | |||||||||||||||||||||
May 31, 2022 | 2,697 | 11,913 | 184 | 3,386 | 657 | - | 18,837 |
11
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
9. INTANGIBLE ASSETS AND GOODWILL - continued
Impairment of goodwill and intangible assets
During the three months ended May 31, 2022, indicators of impairment were identified as a result of market conditions surrounding the Company and capital markets within the cannabis industry as a whole. This included an excess in the carrying value of the Company's net assets compared to its market capitalization, as well as an increase in market interest rates. These indicators resulted in management re-assessing its future cash flow forecasts, as well as the current valuation of certain intangible assets and goodwill. During the three and six months ended May 31, 2022, a total of $120,869 in impairment losses have been recognized in the condensed interim consolidated statements of loss and comprehensive loss. Impairment losses recognized within the Canadian cash generating unit ("Canadian CGU") totalled $63,952, with an additional $56,917 recognized within the United States and international cash generating unit ("US CGU"). Details of impairment losses recognized, as well as all significant assumptions, estimates, inputs, and recoverable amounts are as follows:
Valuation of CGUs
In accordance with IAS 36 Impairment of Assets, management used a value in use ("VIU") to determine each CGU's recoverable amount. In assessing each CGU's VIU, management employed a five-year free cash flow forecast for each CGU tested.
Significant Assumptions, Estimates, and Inputs of Cash Flow Model
Revenue
For the Canadian CGU, management applied a 9% increase in revenue for the remainder of fiscal 2022 from fiscal 2021. The estimated revenue from fiscal 2023 to 2026 is expected to increase by an average of 37%, due to realized synergies from acquisitions, continued capture of Canadian recreational market share, and the continued growth of the overall industry as it matures. For the US CGU, management applied a 5% quarterly increase throughout the remainder of fiscal 2022. The estimated revenue from fiscal 2023 to 2026 is expected to increase by an average of 28%, due to further e-commerce growth, implementation of new direct to consumer media, and realized growth from increased marketing spend since acquisition.
Gross Margin
For the Canadian CGU, management applied a 10% gross margin for the remainder of fiscal 2022, as the Company aims to become more lean and focus on its most profitable products. Management has applied gross margins between 27% and 36% between fiscal 2023 and 2026. For the US CGU, management has applied gross margins ranging between 54% and 60% between the remainder of fiscal 2022 and 2026.
Operating Expenses
For the Canadian CGU, after initial cost saving measures are expected to be realized throughout the remainder of fiscal 2022, annual operating expenses are expected to increase at a steady rate. Management applied annual increases between 3% and 5% from fiscal 2023 to 2026. For the US CGU, increased marketing spend is expected throughout the remainder of fiscal 2022, which thereafter are expected to stabilize. Management has applied a consistent annual increase in operating expenses of 3% from fiscal 2023 to 2026.
Capital Expenditures
For the Canadian CGU, management expects that capacity at all Canadian facilities will be sufficient to support revenue growth from fiscal 2023 to 2026. As such, management has applied significant decreases in capital expense spending for the remainder of fiscal 2022 and 2023, as compared to prior periods. Thereafter, increases ranging between 1% and 2% have been applied between fiscal 2024 and 2026. For the US CGU, operations are expected to be sufficiently managed under current capacity. Management has applied consistent increases of 1% annually from fiscal 2023 to 2026.
Tax Rate
For the Canadian CGU and US CGU, the Company used tax rates applicable to each CGU's jurisdiction.
12
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
9. INTANGIBLE ASSETS AND GOODWILL - continued
Discount Rate
For the Canadian CGU and US CGU, respectively, a discount rate of 24.2% and 23% have been applied in the model. Discount rates applied are reflective of each CGU's weighted average cost of capital.
Terminal Growth Rate
For both the Canadian and US CGUs, management applied a 2% terminal growth increase for periods beyond fiscal 2026, based on expected inflationary increases.
Valuation Conclusion
Based on the above assumptions and forecasted free cash flow model, the total VIU of the Company as a whole is calculated to be $128,553, comprising the Canadian CGU at $125,393 and the US CGU at $3,160. An impairment loss during the period was recognized in the amount of $120,869. Total impairment recognized within the Canadian CGU was $63,952, with $56,917 recognized within the US CGU.
Recognition, Measurement, and Allocation of Impairment Losses
In accordance with IAS 36 Impairment of Assets, the carrying value of any goodwill allocated to each CGU is to be reduced first, followed by other assets of the CGU on a pro-rata basis, based on the carrying amount of each asset within the CGU. In this case, a reduction to intangible assets was deemed most appropriate, given the nature of the CGUs identified.
The recoverable amount of goodwill within both CGUs after allocation of impairment losses was $nil. This resulted in impairment losses recognized of $25,233 and $27,703 within the Canadian and US CGUs, respectively for the three and six months ended May 31, 2022.
The recoverable amount of these assets was determined to be $3,488 for the Canadian CGU and $3,640 for the US CGU. This resulted in impairment losses recognized of $38,719 and $29,214 within the Canadian and US CGUs, respectively for the three and six months ended May 31, 2022.
Other Impairment
Unrelated to the above impairment assessment, during the three and six months ended May 31, 2022, an additional $152 was recognized in impairment for obsolete software which had a carrying value exceeding its fair value, which has been included in impairment loss in the condensed interim consolidated statements of loss and comprehensive loss.
10. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Accounting Policy
The Company accounts for its assets held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. The Company designates its assets and disposal groups as being held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through their continued use. For assets and disposal groups to be classified as being held for sale, their ultimate sale must be highly probable within one year, they must be available for immediate sale in their current condition, and they must be actively marketed by management. Assets held for sale are carried at the lower of their carrying amount and fair value less costs to sell and are presented separately in the condensed interim consolidated statements of financial position.
13
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
10. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS - continued
Accounting Estimates and Judgments
Judgment is required in determining whether an asset or group of assets meets the criteria for being classified as "assets held for sale" in the condensed interim consolidated statements of financial position. The criteria that must be considered by management includes the existence of an active plan to dispose of the assets or disposal group, the expected selling price of the assets or disposal group, the expected timing of the completion of the sale, and the period of time for which the assets or disposal group have been classified as being held for sale. The Company will review the criteria for assets held for sale each reporting period and will reclassify assets to or from this category, as appropriate. In addition, there is a requirement to evaluate and record assets held for sale at the lower of their carrying value and fair value less costs to sell.
During the period ended May 31, 2022, the Company designated its production facility and Health Canada license in Mission, British Columbia as being held for sale (the "Disposal Group"). The Disposal Group includes all property, plant and equipment associated with the facility (Note 8), as well as the facility's associated production license (Note 9). The Disposal Group is ready for sale in its current condition as at May 31, 2022. In accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, the Disposal Group has been presented separately on the condensed interim consolidated statements of financial position. All assets within the disposal group are within the Canada operating segment.
A net balance of property, plant and equipment of $5,791 and intangible assets of $656 have been designated as assets held for sale. During the period ended May 31, 2022, the Company recognized an impairment on the Disposal Group, as its carrying value was higher than its fair market value less costs of disposal. The fair market value less costs of disposal of the Disposal Group totals $3,680, resulting in a loss on impairment of assets held for sale of $2,767 in the three and six months ended May 31, 2022, which has been included in impairment loss in the condensed interim consolidated statements of loss and comprehensive loss.
11. TERM LOAN AND OTHER DEBT
Term Loan | $ | |||
Balance, November 30, 2021 | 9,750 | |||
Additions | 40,000 | |||
Repayment | (9,750 | ) | ||
Balance, May 31, 2022 | 40,000 | |||
Deferred financing costs | ||||
Balance, November 30, 2021 | 38 | |||
Accelerated accretion on repayment | (38 | ) | ||
Additions | 2,400 | |||
Accretion | (550 | ) | ||
Balance, May 31, 2022 | 1,850 | |||
Total term loan, net of deferred financing costs | 38,150 | |||
Current portion | - | |||
Non-current portion | 38,150 |
14
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
11. TERM LOAN AND OTHER DEBT - continued
On December 16, 2021, the Company entered into a secured non-revolving term loan with a private institutional lender for an aggregate principal amount of $40 million. The loan accrues interest at a rate of 10% per annum, which is payable quarterly, and matures on December 15, 2023, at which point the full outstanding principal amount becomes payable. The loan carries a minimum liquidity requirement, whereby the Company must maintain a minimum unrestricted cash balance of $3,000. As at May 31, 2022, the Company is in compliance with all covenant requirements. A portion of the proceeds were used to repay the existing term loans and mortgage assumed in the acquisition of Citizen Stash, in full on December 20, 2021. The Company incurred and deferred $2,400 of costs to secure the loan. The term loan is recorded at amortized cost, with the deferred financing costs included in the carrying value of the term loan and amortized using the effective interest rate method.
The Company's required repayments on the term loan due in each of the next reporting years are as follows:
2022 | $ | - | ||
2023 | - | |||
2024 | 40,000 | |||
40,000 |
In addition to the credit facility discussed above, there is also debt held in relation to a vehicle used at Green Roads. The vehicle debt contributes $14 and $9 to the term loan current and non-current balances, respectively.
12. CONTRACTUAL OBLIGATION
The following is a continuity schedule of the contractual obligation related to the SoRSE manufacturing and sales license agreement for the six months ended May 31, 2022:
Balance, November 30, 2021 | $ | 8,879 | ||
Accretion | 193 | |||
Payment | (2,744 | ) | ||
Foreign exchange gain | (54 | ) | ||
Balance, May 31, 2022 | 6,274 | |||
Current portion | (1,642 | ) | ||
Non-current portion | 4,632 |
13. LEASE LIABILITIES
The following is a continuity schedule of lease liabilities for the six months ended May 31, 2022:
Balance, November 30, 2021 | $ | 5,644 | ||
Lease payments | (808 | ) | ||
Foreign exchange adjustments | (6 | ) | ||
Interest expense on lease liabilities | 107 | |||
Lease modification | (38 | ) | ||
Balance, May 31, 2022 | 4,899 | |||
Current portion | (1,409 | ) | ||
Non-current portion | 3,490 |
When measuring lease liabilities, the Company discounts lease payments using its incremental borrowing rate. For leases recognized in the six months ended May 31, 2022, the weighted average rate applied is 4.82% (May 31, 2021 - 5.02%). During the six months ended May 31, 2022, the Company recorded rent expense of $589 (May 31, 2021 - $322) related to short-term and low value agreements.
15
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
14. NET REVENUE
Net revenue is disaggregated by revenue stream and timing of revenue recognition.
For the three months ended | For the six months ended | |||||||||||||||
May 31, 2022 $ | May 31, 2021 $ | May 31, 2022 $ | May 31, 2021 $ | |||||||||||||
Toll processing and co-packing | 1,289 | 1,489 | 2,205 | 3,234 | ||||||||||||
Product sales | 20,973 | 16,884 | 42,482 | 34,737 | ||||||||||||
Analytical testing | 664 | 391 | 1,041 | 807 | ||||||||||||
Other revenue | 1,073 | - | 1,451 | - | ||||||||||||
23,999 | 18,764 | 47,179 | 38,778 | |||||||||||||
Products transferred at a point in time | 22,710 | 17,275 | 44,974 | 35,544 | ||||||||||||
Products/services transferred over time | 1,289 | 1,489 | 2,205 | 3,234 | ||||||||||||
23,999 | 18,764 | 47,179 | 38,778 |
15. RELATED PARTY TRANSACTIONS
Key management personnel are those persons having the authority and responsibility for planning, directing, and controlling the activities of the Company, directly or indirectly. The Company has defined key management personnel to include the CEO, CFO, COO, CCO, President, Executive Vice Presidents, and directors of the Company.
The remuneration and other payments to the Company's directors and other key management personnel are as follows:
For the three months ended | For the six months ended | |||||||||||||||
May 31, 2022 $ | May 31, 2021 $ | May 31, 2022 $ | May 31, 2021 $ | |||||||||||||
Wages and salaries | 616 | 554 | 1,232 | 1,082 | ||||||||||||
Share-based payments | 1,475 | 985 | 2,746 | 2,210 | ||||||||||||
2,091 | 1,539 | 3,978 | 3,292 |
16. SHARE CAPITAL AND RESERVES
Authorized share capital
The Company is authorized to issue an unlimited number of common and preferred shares with no par value.
Issued shares
Six months ended May 31, 2022:
(a) | The Company issued 86,220 common shares in connection with the vesting and release of 172,419 RSUs resulting in an increase to share capital of $405 and a decrease in cash and cash equivalents of $158 in relation to withholding taxes paid. |
(b) | The Company issued 70,000 common shares in connection with employment compensation agreements, resulting in a decrease in the obligation to issue shares of $333 and increase in share capital of $471. |
16
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
16. SHARE CAPITAL AND RESERVES - continued
(c) | On April 5, 2022, the Company closed a bought deal financing pursuant to which the Company issued 12,205,186 units at a price of $2.65 per unit, valued at $32,344 which were comprised of one common share of the Company and one-half share purchase warrant. The total consideration of the units issued was allocated $25,203 to common shares and $7,141 to share purchase warrants. Each full share purchase warrant is exercisable at a price of $3.20 per share for a period of forty-eight months from the date of closing. In connection with the financing, the Company incurred share issuance costs of $2,987 that were recorded to equity. |
Six months ended May 31, 2021:
(d) | The Company issued 28,078 common shares in connection with the vesting and release of 56,152 RSUs resulting in an increase to share capital of $79 and a decrease in cash and cash equivalents of $212 in relation to withholding taxes paid. |
(e) | The Company issued 1,167 common shares at a price of $7.65 per common share in connection with the exercise of warrants for gross proceeds of $9. As a result of the exercise of the warrants, the fair value of the warrants amounting to $1 was reclassified from reserves to share capital. |
(f) | The Company issued 72,568 common shares in connection with the exercise of options for gross proceeds of $481. As a result of the exercise of options, the fair value of the options amounting to $432 was reclassified from reserves to share capital. |
(g) | On January 29, 2021, the Company closed a bought deal financing pursuant to which the Company issued 6,454,666 units valued at $39,696 which were comprised of one common share of the Company and one-half share purchase warrant. The total consideration of the units issued was allocated $32,701 to common shares and $4,066 to share purchase warrants. Each full share purchase warrant is exercisable at a price of $7.65 per share for a period of thirty-six from the date of closing. In connection with the financing, the Company incurred share issuance costs of $2,929 that were recorded to equity. |
(h) | The Company issued 101,667 common shares in connection with employment compensation agreements resulting in a decrease in the obligation to issue shares of $222 and increase in share capital of $468. |
(i) | The company issued 3,106,032 common shares valued at $16,214 in connection with the acquisition of LYF (Note 17) |
Warrants
The following table summarizes warrant activity during the six months ended May 31, 2022 and the year ended November 30, 2021:
Number of Warrants |
Weighted
Exercise Price | |||||||
Balance, outstanding November 30, 2021 | 17,646,150 | 9.75 | ||||||
Issued | 6,102,593 | 3.20 | ||||||
Balance, outstanding May 31, 2022 | 23,748,743 | 8.06 |
17
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
16. SHARE CAPITAL AND RESERVES - continued
The following table summarizes the warrants outstanding as at May 31, 2022:
Warrants | Warrants | Exercise price | |||||||||
Outstanding | Exercisable | $ | Expiry date | ||||||||
400,000 | 400,000 | 10.50 | October 26, 2023 | ||||||||
300,000 | 300,000 | 11.25 | October 26, 2023 | ||||||||
300,000 | 300,000 | 12.00 | October 26, 2023 | ||||||||
9,678,500 | 9,678,500 | 7.65 | January 29, 2024 | ||||||||
6,967,650 | 6,967,650 | 12.45 | June 4, 2024 | ||||||||
6,102,593 | 6,102,593 | 3.20 | April 5, 2026 | ||||||||
23,748,743 | 23,748,743 |
Obligation to issue shares
The Company has entered into agreements with officers, to issue the following shares:
Number of shares to be issued | ||||||||||||
2022 | 2023 | Total | ||||||||||
Officers | 100,000 | 150,000 | 250,000 |
Of the amount recognized for the obligation to issue shares, $87 and $192 was recorded as share-based payments expense related to the issue of 35,000 and 70,000 shares for the three and six months ended May 31, 2022, respectively (May 31, 2021 - $176 and $379 related to the issue of 100,000 and 200,000 shares).
Escrow shares
In connection with the acquisition of Pommies, 201,351 common shares were placed in escrow, which included 86,293 indemnity shares and 115,057 milestone shares. These shares' release was subject to certain indemnity provisions and the achievement of specific milestones and provisions outlined in the share purchase agreement. As of May 31, 2022, all indemnity shares had been released from escrow, while 28,764 of the milestone shares had been released from escrow, with a total of 86,293 milestone shares remaining in escrow.
In connection with the acquisition of LYF (Note 17), 755,555 common shares were placed in escrow subject to indemnity provisions and the achievement of specific milestones outlined in the share purchase agreement. As of May 31, 2022, these shares remain in escrow as the milestones have not yet been achieved.
In connection with the acquisition of GR (Note 17), there were 1,434,767 common shares placed in escrow subject to the resolution and settlement of certain tax matters, in which the sellers are required to indemnify the Company. As of May 31, 2022, these shares remain in escrow as the resolution and settlement has not yet occurred.
Omnibus long-term incentive plan
The Company has in place an omnibus LTIP, which allows for a variety of equity-based awards that provide different types of incentives to be granted to certain officers, employees, and consultants (in the case of options ("Options"), performance share units ("PSU") and restricted share units ("RSU")) and directors (in the case of deferred share units ("DSU")). Any existing options that were granted prior to the effective date of the LTIP pursuant to the Company's existing stock option plan ("Legacy Option Plan").
18
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
16. SHARE CAPITAL AND RESERVES - continued
LTIP option plan
The following table summarizes LTIP stock option activity during the six months ended May 31, 2022:
Number of Options |
Weighted Exercise Price $ | |||||||
Balance outstanding, November 30, 2021 | 499,244 | 5.71 | ||||||
Issued | 2,568,462 | 3.93 | ||||||
Cancelled and forfeited | (163,731 | ) | 4.21 | |||||
Balance outstanding, May 31, 2022 | 2,903,975 | 4.22 | ||||||
Options exercisable, May 31, 2022 | 781,014 | 4.63 |
The following table summarizes the LTIP stock options outstanding and exercisable as at May 31, 2022:
Options outstanding | Options exercisable | Exercise price $ | Expiry date | ||||||||
413,086 | 347,863 | 5.19 | October 18, 2025 | ||||||||
50,000 | 16,672 | 10.41 | May 16, 2026 | ||||||||
2,440,889 | 416,479 | 3.93 | January 17, 2026 | ||||||||
2,903,975 | 781,014 |
The Company used the Black-Scholes option pricing model to establish the fair value of LTIP options granted by applying the following weighted average assumptions at issuance:
2022 | 2021 | |||||||
Average dividend per share | - | - | ||||||
Average forecasted volatility | 90 | % | 97 | % | ||||
Average risk-free interest rate | 1.68 | % | 0.95 | % | ||||
Average expected life | 5 years | 5 years | ||||||
Forfeiture rate | 8.57 | % | 4.68 | % | ||||
Fair value - weighted average of options issued | $ | 2.75 | $ | 2.52 |
LTIP RSU's and DSU's
The omnibus LTIP plan permits the Board of Directors of the Company to grant RSU's to certain officers, employees, and consultants and DSU's to non-management directors. The RSU's vest quarterly over a period of three years from grant date.
The following table summarizes LTIP RSU and DSU activity during the six months ended May 31, 2022:
Number of RSUs and DSUs |
Weighted Average Issue Price of RSUs/DSUs | |||||||
Balance outstanding, November 30, 2021 | 199,771 | $ | 5.63 | |||||
Granted | 983,494 | $ | 2.01 | |||||
Released and issued | (172,419 | ) | $ | 3.27 | ||||
Cancelled and forfeited | (53,672 | ) | $ | 2.75 | ||||
Balance outstanding, May 31, 2022 | 957,174 | $ | 2.50 |
19
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
16. SHARE CAPITAL AND RESERVES - continued
The following table summarizes the LTIP RSUs and DSUs outstanding as at May 31, 2022:
RSUs and DSUs outstanding | Grant date | ||
72,720 | October 19, 2020 | ||
16,851 | February 26, 2021 | ||
9,375 | May 27, 2021 | ||
16,125 | August 27, 2021 | ||
33,035 | November 26, 2021 | ||
603,088 | January 18, 2022 | ||
57,470 | March 1, 2022 | ||
148,510 | May 27, 2022 | ||
957,174 |
Legacy option plan
The following table summarizes legacy stock option activity during the six months ended May 31, 2022:
Number of Options | Weighted Average Exercise Price $ | |||||||
Balance outstanding, November 30, 2021 | 1,538,020 | 9.56 | ||||||
Cancelled and forfeited | (83,044 | ) | 11.42 | |||||
Balance outstanding, May 31, 2022 | 1,454,976 | 9.46 | ||||||
Options exercisable, May 31, 2022 | 1,413,057 | 9.37 |
The following table summarizes the legacy stock options outstanding and exercisable as at May 31, 2022:
Options outstanding | Options exercisable | Exercise price $ | Expiry date | ||||||
100,000 | 100,000 | 3.21 | July 9, 2023 | ||||||
553,051 | 553,051 | 5.85 | October 13, 2023 | ||||||
250,000 | 250,000 | 12.63 | May 26, 2024 | ||||||
528,592 | 490,562 | 12.96 | July 14, 2024 | ||||||
23,333 | 19,444 | 8.37 | October 14, 2024 | ||||||
1,454,976 | 1,413,057 |
Share-based payments
For the three and six months ended May 31, 2022 and 2021, the Company recorded the following share-based payments:
For the three months ended | For the six months ended | |||||||||||||||
May 31, 2022 $ | May 31, 2021 $ | May 31, 2022 $ | May 31, 2021 $ | |||||||||||||
LTIP and legacy stock options | 1,585 | 739 | 2,708 | 1,799 | ||||||||||||
LTIP RSUs and DSUs | 578 | 330 | 1,103 | 798 | ||||||||||||
Obligation to issue shares | 87 | 176 | 192 | 379 | ||||||||||||
2,250 | 1,245 | 4,003 | 2,976 |
20
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
17. BUSINESS ACQUISITIONS
Acquisition of LYF
On March 5, 2021, the Company entered into an agreement to acquire all of the shares of LYF ("LYF Agreement"). The transaction constituted a business combination under IFRS 3, Business Combinations.
The consideration paid at closing was $18,410, which is comprised of $3,909 cash and 2,777,827 common shares valued at $14,501. In addition, there were 328,205 common shares, valued at $1,713 placed in escrow subject to release based on the indemnity provisions of the LYF Agreement. Further, there was a $750 promissory note funded from the Company to LYF pre-acquisition, which gained $12 of accrued interest and was assumed at $762. In addition to the promissory note, there was also $310 of deferred revenue and $1,100 of accounts payable that was settled as a pre-existing relationship on acquisition.
The contingent consideration of $2,198 represents four earn-out EBITDA milestone payments of which two milestones ended February 28, 2022 (with a total potential payout of $7,500 and currently valued at $nil) and two milestones end February 28, 2023 (with a potential payout of $10,000 and currently valued at $nil). The contingent consideration can be settled using cash or common shares at the Company's discretion. 427,350 of the Company's shares were placed into escrow subject to release upon the achievement of the first earn-out EBITDA milestone ending February 28, 2022. As of May 31, 2022, these shares were still held in escrow, as milestone requirements were not yet met. Initial valuation of the contingent consideration was calculated using a Monte Carlo simulation and is subsequently reviewed and remeasured on a quarterly basis (Note 21).
During the six months ended May 31, 2022, remeasurement of the contingent consideration under the Monte Carlo simulation resulted in a liability of $nil (November 30, 2021 - $2,250) with a gain on remeasurement of $1,940 and $2,250 during the three and six months ended May 31, 2022, respectively.
21
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
17. BUSINESS ACQUISITIONS - continued
Consideration | Number of Shares | Amount $ | ||||||
Cash paid on closing | 3,909 | |||||||
Shares issued on closing | 2,777,827 | 14,501 | ||||||
Contingent consideration | Note (i) | 2,198 | ||||||
Indemnity shares | 328,205 | 1,713 | ||||||
Working capital adjustment | 1,110 | |||||||
Settlement of pre-existing relationships | 2,172 | |||||||
Total fair value of consideration | 25,603 | |||||||
Net assets acquired | ||||||||
Current assets | ||||||||
Cash | 196 | |||||||
Accounts receivable | 150 | |||||||
Prepaid expenses and other current assets | 243 | |||||||
Inventory | 1,612 | |||||||
Non-current assets | ||||||||
Prepaid deposits | 82 | |||||||
Intangible assets | 12,982 | |||||||
Property, plant and equipment | 7,070 | |||||||
Total assets | 22,335 | |||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | 1,215 | |||||||
Canadian Emergency Business Account ("CEBA") Loan | 40 | |||||||
Non-current liabilities | ||||||||
Deferred taxes | 2,090 | |||||||
Total liabilities | 3,345 | |||||||
Total net assets acquired | 18,990 | |||||||
Purchase price allocation | ||||||||
Net identifiable assets acquired | 18,990 | |||||||
Goodwill | 6,613 | |||||||
25,603 | ||||||||
Net cash outflows | ||||||||
Cash consideration paid | (3,909 | ) | ||||||
Cash acquired | 196 | |||||||
(3,713 | ) |
Goodwill arising from the business combination represents expected synergies, future income and growth that are not separately recognized. As at May 31, 2022, Goodwill related to LYF was $nil following the recognition of impairment losses (Note 9).
The Company finalized the determination of the fair value of the net identifiable assets acquired and liabilities assumed related to the acquisition of LYF as at February 28, 2022. There were no changes as compared to the preliminary values reported as at November 30, 2021.
Acquisition of Green Roads
On June 17, 2021, the Company entered into an agreement to acquire all of the shares of Green Roads ("GR Agreement"). The transaction constituted a business combination under IFRS 3, Business Combinations.
22
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
17. BUSINESS ACQUISITIONS - continued
The consideration paid at closing was $40,815, which is comprised of $14,400 cash and 2,659,959 common shares valued at $26,415. In addition, there were 1,434,767 common shares, valued at $14,248 placed in escrow subject to the resolution and settlement of certain tax matters, in which the sellers are required to indemnify the Company (indemnity asset and other liability of $10,957 was recognized in the purchase price allocation on the acquisition date). Furthermore, there was $1,902 in cash that was placed in escrow subject to adjustments related to net working capital.
The contingent consideration of $940 represents an earn-out EBITDA milestone payment in which the milestone ends November 30, 2022 (with a total potential payout of $24,556 and valued at $940 on acquisition date). The contingent consideration can be settled using cash or common shares at the Company's discretion. Preliminary valuation of the contingent consideration was calculated using a Monte Carlo simulation and is subsequently reviewed and remeasured on a quarterly basis (Note 21).
During the six months ended May 31, 2022, amendments were made to the provisional fair value of assets acquired and liabilities assumed. The result was an increase in goodwill of $109 and a corresponding decrease in inventory of $109.
During the six months ended May 31, 2022, remeasurement of the contingent consideration under the Monte Carlo simulation resulted in a liability of $nil (November 30, 2021 - $367) with a gain on remeasurement of $4 and $367 for the three and six months ended May 31, 2022, respectively.
Consideration | Number of Shares | Amount $ | ||||||
Cash paid on closing | 14,400 | |||||||
Cash held in escrow | 1,902 | |||||||
Shares issued on closing | 2,659,959 | 26,415 | ||||||
Tax escrow shares | 1,434,767 | 14,248 | ||||||
Contingent consideration | 940 | |||||||
Working capital adjustment | (1,462 | ) | ||||||
Total fair value of consideration | 56,443 | |||||||
Net assets acquired | ||||||||
Current assets | ||||||||
Cash | 669 | |||||||
Accounts receivable | 508 | |||||||
Promissory note receivable | 100 | |||||||
Prepaid expenses and other current assets | 385 | |||||||
Indemnity assets | 10,957 | |||||||
Inventory | 2,799 | |||||||
Non-current assets | ||||||||
Property, plant and equipment | 3,083 | |||||||
Intangible assets | 33,145 | |||||||
Other assets | 293 | |||||||
Total assets | 51,939 |
23
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
17. BUSINESS ACQUISITIONS - continued
Current liabilities | ||||
Accounts payable and accrued liabilities | 2,380 | |||
Lease liability - current | 682 | |||
Deferred revenue | 875 | |||
Other liability | 10,957 | |||
Non-current liabilities | ||||
Lease liability - non-current | 1,234 | |||
Deferred taxes | 6,543 | |||
Miscellaneous liabilities | 33 | |||
Total liabilities | 22,704 | |||
Total net assets acquired | 29,235 | |||
Purchase price allocation | ||||
Net identifiable assets acquired | 29,235 | |||
Goodwill | 27,208 | |||
56,443 | ||||
Net cash outflows | ||||
Cash consideration paid | (16,420 | ) | ||
Cash acquired | 669 | |||
(15,751 | ) |
Goodwill arising from the business combination represents expected synergies, future income and growth that are not separately recognized. As at May 31, 2022, Goodwill related to Green Roads was $nil following the recognition of impairment losses (Note 9).
During the period ended May 31, 2022, the Company finalized the determination of the fair value of the net identifiable assets acquired and liabilities assumed related to the acquisition of Green Roads. Aside from the changes mentioned above, there were no changes as compared to the preliminary values reported as at November 30, 2021.
Acquisition of Citizen Stash
On November 8, 2021, the Company finalized the plan of arrangement ("CS Arrangement") to acquire all of the shares of Citizen Stash. The transaction constituted a business combination under IFRS 3, Business Combinations.
The consideration paid at closing was $35,760, which was comprised of 5,786,360 common shares.
During the six months ended May 31, 2022, amendments were made to the provisional fair value of assets acquired and liabilities assumed. The result was a decrease in property, plant and equipment of $108, a decrease in accounts payable and accrued liabilities of $339, and a corresponding decrease in goodwill of $231.
During the period ended May 31, 2022, the Company finalized the determination of the fair value of the net identifiable assets acquired and liabilities assumed related to the acquisition of Citizen Stash. Aside from the changes mentioned above, there were no changes as compared to the preliminary values reported as at November 30, 2021.
24
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
17. | BUSINESS ACQUISITIONS - continued |
Consideration |
Number of Shares | Amount $ | ||||||
Shares issued on closing | 5,786,360 | 35,760 | ||||||
Settlement of pre-existing relationships | 1,052 | |||||||
Total fair value of consideration | 36,812 | |||||||
Net assets acquired | ||||||||
Current assets | ||||||||
Cash | 1,417 | |||||||
Marketable securities and derivatives | 72 | |||||||
Accounts receivable | 1,282 | |||||||
Prepaid expenses and other current assets | 449 | |||||||
Inventory and biological assets (provisional) | 2,110 | |||||||
Non-current assets | ||||||||
Property, plant and equipment (provisional) | 5,970 | |||||||
Intangible assets (provisional) | 20,717 | |||||||
Other assets | 53 | |||||||
Total assets | 32,070 | |||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | 4,045 | |||||||
Term loan - non-current | 2,500 | |||||||
Non-current liabilities | ||||||||
Deferred taxes | 3,028 | |||||||
Lease liability - non-current (provisional) | 53 | |||||||
Total liabilities | 9,626 | |||||||
Total net assets acquired | 22,444 | |||||||
Purchase price allocation | ||||||||
Net identifiable assets acquired | 22,444 | |||||||
Goodwill (provisional) | 14,368 | |||||||
36,812 | ||||||||
Net cash inflows | ||||||||
Cash consideration paid | - | |||||||
Transaction costs paid | (62 | ) | ||||||
Cash acquired | 1,417 | |||||||
1,355 |
Goodwill arising from the business combination represents expected synergies, future income and growth that are not separately recognized. As at May 31, 2022, Goodwill related to Citizen Stash was $nil following the recognition of impairment losses (Note 9).
25
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
18. | GOVERNMENT ASSISTANCE |
The Company applied for COVID-19 financial relief in Canada under the Canada Emergency Wage Subsidy ("CEWS") program. The CEWS program was a wage subsidy program launched by the Canadian federal government to qualifying employers to subsidize payroll costs during the COVID-19 pandemic. The qualified subsidy amounts received under the CEWS program are non-repayable.
The CEWS program had ended prior to November 30, 2021; as such, the Company did not apply for any amounts in the three and six months ended May 31, 2022 (May 31, 2021 - $874 and $2,741), with $114 (May 31, 2021 - $1,357) accrued for under trade and other receivables (Note 5). For the amounts applied for in the three and six months ended May 31, 2022 and 2021, the Company has applied the CEWS as a reduction against the following:
For the three months ended | For the six months ended | |||||||||||||||
May 31, 2022 $ | May 31, 2021 $ | May 31, 2022 $ | May 31, 2021 $ | |||||||||||||
Inventory | - | 114 | - | 261 | ||||||||||||
Cost of sales | - | 322 | - | 510 | ||||||||||||
Wages and salaries | - | 1,795 | - | 3,327 | ||||||||||||
- | 2,231 | - | 4,098 |
19. | INCOME TAXES |
A reconciliation of income taxes at statutory rates with the reported taxes for the three and six months ended May 31, 2022 and 2021 is as follows:
For the three months ended | For the six months ended | |||||||||||||||
May 31, 2022 $ | May 31, 2021 $ | May 31, 2022 $ | May 31, 2021 $ | |||||||||||||
Loss before income taxes | (169,148 | ) | (10,539 | ) | (196,596 | ) | (17,661 | ) | ||||||||
Statutory rate | 27 | % | 27 | % | 27 | % | 27 | % | ||||||||
Expected income tax (recovery) at statutory rates | (45,670 | ) | (2,846 | ) | (53,081 | ) | (4,768 | ) | ||||||||
Change in statutory rates and other | 1,039 | 8 | 1,116 | 8 | ||||||||||||
Permanent differences | 14,313 | 384 | 14,541 | 856 | ||||||||||||
Share issue costs | - | 791 | - | - | ||||||||||||
Change in unrecognized deductible temporary differences | 21,977 | (217 | ) | 27,383 | 1,055 | |||||||||||
Income taxes | (8,341 | ) | (1,880 | ) | (10,041 | ) | (2,849 | ) |
20. | CAPITAL MANAGEMENT |
The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to maintain operations. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company defines capital that it manages as shareholders equity and debt.
The Company has historically relied on the equity markets and debt markets to fund its activities. Management reviews its capital management approach on an on-going basis and believes that this approach, given the relative size of the Company, is reasonable to ensure optimal capital structure to reduce the cost of capital.
The Company currently is not subject to externally imposed capital requirements.
26
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
21. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
The carrying values of the financial instruments as at May 31, 2022 are summarized in the following table:
Amortized cost $ |
Financial assets $ | Total $ | ||||||||||
Assets | ||||||||||||
Cash | 24,899 | - | 24,899 | |||||||||
Restricted short-term investments | - | 401 | 401 | |||||||||
Marketable securities and derivatives | - | 1,244 | 1,244 | |||||||||
Receivables (excluding unbilled revenue) | 28,396 | - | 28,396 | |||||||||
Indemnity asset | 11,293 | - | 11,293 | |||||||||
Liabilities | ||||||||||||
Accounts payable and accrued liabilities | 37,102 | - | 37,102 | |||||||||
Contingent consideration | - | - | - | |||||||||
Other liability | 11,293 | - | 11,293 | |||||||||
Contractual obligation | 6,274 | - | 6,274 | |||||||||
Lease liabilities | 4,899 | - | 4,899 | |||||||||
Term loan and other debt | 38,173 | - | 38,173 |
Fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants. The Company records certain financial instruments at fair value.
Fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
a) | Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date; |
b) | Level 2 inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and, |
c) | Level 3 inputs are unobservable inputs for the asset or liability. |
The carrying amounts of cash, receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term nature. Unbilled revenue on products/services transferred over time is not a financial instrument and is excluded from the table above.
The fair values of restricted short-term investments and marketable securities were measured based on Level 1 inputs for publicly traded companies and at Level 3 for private companies. The fair values of derivatives were measured based on Level 2 inputs.
The fair value of LYF contingent consideration payable was measured at fair value based on unobservable inputs and is considered a level 3 financial instrument. A Monte Carlo simulation was run to determine the fair value of contingent consideration based on the level 3 inputs. Any changes to primary inputs would not have a significant impact on the fair value of the contingent consideration payable. As at May 31, 2022, the fair value of the contingent consideration payable was $nil.
27
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
21. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - continued |
The fair value of GR contingent consideration payable was measured at fair value based on unobservable inputs and is considered a level 3 financial instrument. A Monte Carlo simulation was run to determine the fair value of contingent consideration based on the level 3 inputs. Any changes to primary inputs would not have a significant impact on the fair value of the contingent consideration payable. As at May 31, 2022, the fair value of the contingent consideration payable was $nil.
The Company is exposed to varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes, inclusive of counterparty limits, controlling and reporting structures. The type of risk exposure and the way in which such exposure is managed is provided as follows:
Interest risk
The Company's exposure to interest risk relates to its investment of surplus cash, and restricted short-term investments. The Company may invest surplus cash in highly liquid investments with short terms to maturity and would accumulate interest at prevailing rates for such investments. At May 31, 2022, the Company had cash and restricted short-term investments of $25,300 and a balance of $nil on term loans and other debt subject to fluctuations in interest rates (November 30, 2021 - $16,354 and $9,739). At May 31, 2022, a 1% decrease in interest rates would result in a reduction in interest income by $253 (November 30, 2021 - $164) and a reduction of interest expense of $nil (November 30, 2021 - $97), compared to a 1% increase in interest rates which would have an equal and opposite effect.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, marketable securities and derivatives, restricted short-term investments, and receivables. The Company's cash, and restricted short-term investments are held through large Canadian financial institutions and no losses have been incurred in relation to these items.
The Company's receivables are comprised of trade accounts receivable, GST input tax credits, unbilled revenues, and government assistance receivable. In addition, the Company has $9,885 in trade accounts receivable outstanding over 60 days at May 31, 2022 (November 30, 2021 - $6,820). The expected credit loss for overdue balances is estimated to be $3,405 (November 30, 2021 - $821) based on historical collection experience, discussions with associated customers and analysis of the credit worthiness of the customer. Of the total invoiced trade receivables at May 31, 2022, the Company has subsequently collected, has trade payables outstanding with the same customers, or has recorded a trade receivables valuation allowance loss provision representing 56% of the total balance. Of the Company's trade receivables outstanding at May 31, 2022, 38% are held with two Health Canada licensed customers of the Company and 25% are held with two provincial boards (November 30, 2021 - 43% held with four Health Canada licensed customers and 24% held with three provincial boards).
The carrying amount of cash, marketable securities and derivatives, restricted short-term investments, and trade and other receivables represent the maximum exposure to credit risk, and as at May 31, 2022, this amounted to $55,370 (November 30, 2021 - $48,124).
28
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
21. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - continued |
Economic dependence risk
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. The Company recorded sales from one Health Canada licensed customer of the Company representing 27% and 24% of total revenue in the three and six months ended May 31, 2022, respectively (2021 - four Health Canada licensed customers representing 44% and 44% of total revenue). The Company recorded sales from three provincial boards representing 69% and 69% of total revenue in the three and six months ended May 31, 2022, respectively (2021 - three provincial boards representing 32% and 36% of total revenue).
Liquidity risk
Liquidity risk is the risk that the Company will not be able to pay financial liabilities as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements, as well as by forecasting cash flows from operations for future periods. As at May 31, 2022, the Company has $25,300 of cash, and restricted short-term investments (November 30, 2021 - $16,354). The Company is obligated to pay accounts payable and accrued liabilities, current portions of the lease liability, contractual obligation, contingent consideration, and term loan and other debt with a carrying amount of $40,167 (November 30, 2021 - $50,633).
Foreign currency risk
The Company is exposed to foreign currency risk on fluctuations related to cash, trade and other receivables, accounts payable and accrued liabilities, other liability, and contractual obligations (including contingent consideration) that are denominated in US dollars and Australian dollars. As at May 31, 2022, a 10% appreciation of the Canadian dollar relative to the US dollar would have decreased loss for the period by approximately $902 (November 30, 2021 - $1,048). A 10% depreciation of the Canadian dollar relative to the US dollar would have had the equal but opposite effect. A 10% appreciation of the Canadian dollar relative to the Australian dollar would have decreased loss for the period by approximately $75 (November 30, 2021 - $15). A 10% depreciation of the Canadian dollar relative to the Australian dollar would have had the equal but opposite effect.
In addition, the Company is exposed to foreign currency risk on fluctuations related to a commitment that is denominated in Australian dollars. As at May 31, 2022, a 10% appreciation of the Canadian dollar relative to the Australian dollar would have decreased the commitment by approximately $541 (November 30, 2021 - $631). A 10% depreciation of the Canadian dollar relative to the Australian dollar would have had the equal but opposite effect.
22. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS |
Non-cash transactions relate to the following:
May 31, 2022 | May 31, 2021 | |||||||
$ | $ | |||||||
Equipment accrued through accounts payable | 573 | 329 | ||||||
Share units released - non-cash portion | 563 | 291 | ||||||
Settlement of obligation to issue shares | 525 | 601 | ||||||
Exercise of warrants - non-cash portion | - | 1 | ||||||
Exercise of options - non-cash portion | - | 432 | ||||||
Reclassification of capital assets to assets held for sale | 6,447 | - | ||||||
Warrants issued pursuant to bought deal financing | 7,141 | 4,066 |
29
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
23. | COMMITMENTS AND CONTINGENCIES |
Effective May 14, 2020, the Company entered into a five-year non-exclusive distribution agreement with Cannvalate Pty Ltd. ("Cannvalate"). The agreement is based on a pay for performance model, providing Cannvalate achieves milestones based on certain financial targets and facility construction and licensing timelines outlined in the agreement. The Company will pay $9,247 in consulting fees over the term of the agreement, subject to Cannvalate meeting the milestones as defined in the agreement. As at May 31, 2022, there remains $5,406 (November 30, 2021 - $6,312) payable under the terms of this agreement.
Based on the above, the future commitments, which include other purchase commitments due in each of the next five reporting years are as follows:
$ | ||||
2022 | 901 | |||
2023 | 1,802 | |||
2024 | 1,802 | |||
2025 | 901 | |||
Thereafter | - | |||
5,406 |
24. | SEGMENTED INFORMATION |
The Company has two reportable segments: Canada and United States and International, which is the way the Company reports information to its chief decision makers and Board of Directors.
The Canada operating segment includes all business-to-business and business-to-consumer activity within Canada. This includes toll processing and co-packing, product sales, and analytical testing. Segment assets include those arising from the Company's main operations in Kelowna, BC, the Pommies beverage facility in Bolton, Ontario, the LYF manufacturing facility in Kelowna, BC, and the Citizen Stash cultivation facility in Mission, BC.
The United States and International operating segment includes all activity related to the Green Roads CBD health and wellness manufacturing facility in Florida, United States. Segment assets include those arising from Green Roads' operations. Also included are operations in Australia related to the distribution agreement with Cannvalate (Note 23).
The operating segments for the three months ended May 31, 2022 and 2021:
May 31, 2022 | ||||||||||||
Canada $ |
United States and $ | Total $ | ||||||||||
Net revenue | 17,252 | 6,747 | 23,999 | |||||||||
Cost of sales, inventory allowance, and fair value changes | 31,248 | 3,500 | 34,748 | |||||||||
(13,996 | ) | 3,247 | (10,749 | ) | ||||||||
Operating expenses | 26,075 | 7,440 | 33,515 | |||||||||
(40,071 | ) | (4,193 | ) | (44,264 | ) | |||||||
Impairment loss | 66,719 | 57,069 | 123,788 | |||||||||
Other non-operating (income) expense | (6,141 | ) | (1,104 | ) | (7,245 | ) | ||||||
Net loss | (100,649 | ) | (60,158 | ) | (160,807 | ) | ||||||
Total assets | 186,794 | 16,270 | 203,064 | |||||||||
Total liabilities | 86,642 | 11,099 | 97,741 |
30
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
24. | SEGMENTED INFORMATION - continued |
May 31, 2021 | ||||||||||||
Canada $ |
United States and $ | Total $ | ||||||||||
Net revenue | 18,716 | 48 | 18,764 | |||||||||
Cost of sales, inventory allowance, and fair value changes | 14,628 | - | 14,628 | |||||||||
4,088 | 48 | 4,136 | ||||||||||
Operating expenses | 14,974 | - | 14,974 | |||||||||
(10,886 | ) | 48 | (10,838 | ) | ||||||||
Non-operating income | (2,179 | ) | - | (2,179 | ) | |||||||
Net income (loss) | (8,707 | ) | 48 | (8,659 | ) | |||||||
Total assets | 209,984 | - | 209,984 | |||||||||
Total liabilities | 41,308 | - | 41,308 |
The geographical breakdown for the three months ended May 31, 2022 and 2021:
May 31, 2022 | May 31, 2021 | |||||||||||||||||||||||
Domestic $ | Foreign $ | Total $ | Domestic $ | Foreign $ | Total $ | |||||||||||||||||||
Net revenue | 17,252 | 6,747 | 23,999 | 18,716 | 48 | 18,764 |
Included in net revenue arising from the Canada operating segment is $5,452 from Customer A, $5,100 from Customer B, $4,908 from Customer C, and $2,719 from Customer D. Customers A through D each contributed 10 per cent or more to the Company's net revenue for the three months ended May 31, 2022 (2021 - Customer A $2,869, Customer B $2,423, Customer C $2,290, Customer D $2,100, and Customer E $2,068).
The operating segments for the six months ended May 31, 2022 and 2021:
May 31, 2022 | ||||||||||||
Canada $ |
United States and $ | Total $ | ||||||||||
Net revenue | 35,001 | 12,178 | 47,179 | |||||||||
Cost of sales, inventory allowance, and fair value changes | 49,793 | 6,174 | 55,967 | |||||||||
(14,792 | ) | 6,004 | (8,788 | ) | ||||||||
Operating expenses | 46,859 | 14,673 | 61,532 | |||||||||
(61,651 | ) | (8,669 | ) | (70,320 | ) | |||||||
Impairment loss | 66,719 | 57,069 | 123,788 | |||||||||
Other non-operating (income) expense | (6,466 | ) | (1,087 | ) | (7,553 | ) | ||||||
Net loss | (121,904 | ) | (64,651 | ) | (186,555 | ) | ||||||
Total assets | 186,794 | 16,270 | 203,064 | |||||||||
Total liabilities | 86,642 | 11,099 | 97,741 |
31
THE VALENS COMPANY INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the Six Months Ended May 31, 2022 and 2021
(Unaudited, Expressed in Thousands of Canadian Dollars Except Share Amounts)
24. | SEGMENTED INFORMATION - continued |
May 31, 2021 | ||||||||||||
Canada $ |
United States and $ | Total $ | ||||||||||
Net revenue | 38,672 | 106 | 38,778 | |||||||||
Cost of sales, inventory allowance, and fair value changes | 29,872 | - | 29,872 | |||||||||
8,800 | 106 | 8,906 | ||||||||||
Operating expenses | 26,891 | - | 26,891 | |||||||||
(18,091 | ) | 106 | (17,985 | ) | ||||||||
Non-operating income | (3,173 | ) | - | (3,173 | ) | |||||||
Net income (loss) | (14,918 | ) | 106 | (14,812 | ) | |||||||
Total assets | 209,984 | - | 209,984 | |||||||||
Total liabilities | 41,308 | - | 41,308 |
The geographical breakdown for the six months ended May 31, 2022 and 2021:
May 31, 2022 | May 31, 2021 | |||||||||||||||||||||||
Domestic $ | Foreign $ | Total $ | Domestic $ | Foreign $ | Total $ | |||||||||||||||||||
Net revenue | 35,001 | 12,178 | 47,179 | 38,672 | 106 | 38,778 |
Included in net revenue arising from the Canada operating segment is $12,704 from Customer A, $9,923 from Customer B, $9,457 from Customer C, and $4,295 from Customer D. Customers A through D each contributed 10 per cent or more to the Company's net revenue for the six months ended May 31, 2022 (2021 - Customer A $5,728, Customer B $4,752, Customer C $4,581, Customer D $4,552, and Customer E $3,927).
25. | RESTRUCTURING CHARGES |
In the fourth quarter of fiscal 2021, the Company implemented a cost saving strategic restructuring plan, whereby headcount reductions were initiated to focus on short-term and long-term profitability.
The restructuring resulted in expenses recognized on the condensed interim consolidated statements of loss and comprehensive loss, which continued through the first two quarters of fiscal 2022. The following table summarizes the Company's restructuring accrual for the six months ended May 31, 2022:
Employee $ | ||||
Restructuring charge accrual, November 30, 2021 | 1,358 | |||
Year-to-date expense | 4,123 | |||
Payments | (1,988 | ) | ||
Restructuring charge accrual, May 31, 2022 | 3,493 |
32
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Valens Company Inc. published this content on 13 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 13 July 2022 21:13:01 UTC.