EXHIBIT 99.26
Consolidated Financial Statements
For the years ended October 31, 2019 and 2018
(Stated In thousands of Canadian dollars, except share and per share amounts)
High Tide Inc. Consolidated Statements of Financial Position As at October 31, 2019 and 2018 (Stated – In thousands of Canadian dollars) |
Notes | 2019 | 2018 | ||||||||
$ | $ | |||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | 806 | 8,198 | ||||||||
Restricted marketable securities | 50 | - | ||||||||
Accounts receivable | 22 | 2,385 | 855 | |||||||
Inventory | 10 | 6,800 | 3,463 | |||||||
Prepaid expenses, deposits and other receivables | 9 | 2,518 | 4,931 | |||||||
Current portion of loans receivable | 11 | 261 | 62 | |||||||
Total current assets | 12,819 | 17,509 | ||||||||
Non-current assets | ||||||||||
Loans receivable | 11 | 878 | - | |||||||
Property and equipment | 6 | 12,382 | 3,598 | |||||||
Long term prepaid expenses, deposits and other receivables | 9 | 1,380 | 1,200 | |||||||
Long term accounts receivable | - | 706 | ||||||||
Deferred tax asset | 16 | 2,964 | 1,975 | |||||||
Intangible assets | 7 | 6,500 | 934 | |||||||
Goodwill | 4, 8 | 5,258 | - | |||||||
Total non-current assets | 29,362 | 8,413 | ||||||||
Total assets | 42,180 | 25,922 | ||||||||
Liabilities | ||||||||||
Current liabilities | ||||||||||
Accounts payable and accrued liabilities | 22 | 4,428 | 2,515 | |||||||
Notes payable current | 14 | 3,570 | - | |||||||
Short term contract liability | 7 | - | ||||||||
Income taxes payable | - | 33 | ||||||||
Current portion of finance lease obligation | 13 | 6 | 6 | |||||||
Shareholder loans | 26 | 701 | 36 | |||||||
Derivative liability | 12 | 2,121 | - | |||||||
Total current liabilities | 10,833 | 2,590 | ||||||||
Non-current liabilities | ||||||||||
Notes payable | 14 | 62 | - | |||||||
Convertible debentures | 15 | 19,664 | - | |||||||
Long term contract liability | 89 | - | ||||||||
Finance lease obligations | 13 | 11 | 17 | |||||||
Deferred tax liability | 4 | 782 | - | |||||||
Total non-current liabilities | 20,608 | 17 | ||||||||
Total liabilities | 31,441 | 2,607 | ||||||||
Shareholders’ equity | ||||||||||
Share capital | 17 | 26,283 | 35,695 | |||||||
Contributed surplus | 18 | 2,119 | - | |||||||
Convertible debentures – equity | 15 | 600 | - | |||||||
Warrants | 20 | 8,756 | 16,904 | |||||||
Special warrants | 19 | - | 905 | |||||||
Accumulated other comprehensive income | (366 | ) | - | |||||||
Accumulated deficit | (26,474 | ) | (30,176 | ) | ||||||
Equity attributable to owners of the Company | 10,918 | 23,328 | ||||||||
Non-controlling interest | 26 | (179 | ) | (13 | ) | |||||
Total shareholders’ equity | 10,739 | 23,315 | ||||||||
Total liabilities and shareholders’ equity | 42,180 | 25,922 |
President and Chairman of the Board | Director and Chairman of the Audit Committee |
2
High Tide Inc. Consolidated Statements of Loss and Other Comprehensive Loss For the year ended October 31, 2019 and 2018 (Stated – In thousands of Canadian dollars) |
Notes | 2019 | 2018 | ||||||||
$ | $ | |||||||||
Revenue | ||||||||||
Merchandise sales | 29,445 | 7,676 | ||||||||
Royalty revenue | 1,516 | 835 | ||||||||
Interest and other revenue | 333 | 238 | ||||||||
Net revenue | 5 | 31,294 | 8,749 | |||||||
Cost of sales | (19,897 | ) | (5,639 | ) | ||||||
Gross profit | 11,397 | 3,110 | ||||||||
Expenses | ||||||||||
Salaries, wages and benefits | (10,482 | ) | (2,938 | ) | ||||||
Share-based compensation | 18 | (2,209 | ) | - | ||||||
General and administration | (8,111 | ) | (2,012 | ) | ||||||
Professional fees | (6,463 | ) | (970 | ) | ||||||
Advertising and promotion | (2,252 | ) | (698 | ) | ||||||
Depreciation and amortization | 5, 6 | (1,416 | ) | (86 | ) | |||||
Interest and bank charges | (324 | ) | (140 | ) | ||||||
Total expenses | (31,257 | ) | (6,843 | ) | ||||||
Loss from operations | (19,860 | ) | (3,734 | ) | ||||||
Other income (expenses) | ||||||||||
FV Change in Conversion Feature and warrants liability | - | 28 | ||||||||
Revaluation of derivative liability | 12 | 733 | - | |||||||
Impairment loss | 6, 8 | (4,820 | ) | - | ||||||
Reclassification of available for sale reserve upon settlement of marketable securities | - | 29 | ||||||||
Related party balances written off | - | (1,419 | ) | |||||||
Discount on accounts receivable | - | (475 | ) | |||||||
Financing Costs | (3,089 | ) | (499 | ) | ||||||
Foreign exchange gain (loss) | (45 | ) | 42 | |||||||
Gain on extinguishment of financial liability | 15(x), 24 | 129 | - | |||||||
Total other income (expenses) | (7,092 | ) | (2,295 | ) | ||||||
Loss before taxes | (26,952 | ) | (6,029 | ) | ||||||
Deferred tax recovery (expense), net | 16 | 883 | 1,495 | |||||||
Loss for the year | (26,069 | ) | (4,533 | ) | ||||||
Other comprehensive loss | ||||||||||
Translation difference on re-valuation of foreign subsidary | (367 | ) | - | |||||||
Unrealized loss on available for sale marketable securities | - | (22 | ) | |||||||
Reclassification of available for sale reserve upon settlement of marketable securities | - | (29 | ) | |||||||
Total comprehensive loss for the year | (26,436 | ) | (4,584 | ) | ||||||
Net loss and comprehensive loss attributable to: | ||||||||||
Owners of the Company | (26,270 | ) | (4,571 | ) | ||||||
Non-controlling interest | 26 | (166 | ) | (13 | ) | |||||
(26,436 | ) | (4,584 | ) | |||||||
Loss per share | ||||||||||
Basic | 21 | (0.13 | ) | (0.04 | ) | |||||
Diluted | 21 | (0.13 | ) | (0.04 | ) |
Commitments and Contingencies (Note 25)
Subsequent Events (Note 27)
3
High Tide Inc. Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) (Stated – In thousands of Canadian dollars) |
Note | Share capital | Special warrants | Warrants | Contributed surplus | Equity portion of convertible debt | Accumulated | Accumulated | Attributable of the | NCI | Total | ||||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
Balance, October 31, 2017 | 668 | - | - | - | - | 51 | (10,375 | ) | (9,656 | ) | - | (9,656 | ) | |||||||||||||||||||||||||||||
Shares issued for cash | 17(i) | 445 | - | - | - | - | - | - | 445 | - | 445 | |||||||||||||||||||||||||||||||
Shares issued on debt conversion | 17(ii) | 852 | - | - | - | - | - | - | 852 | - | 852 | |||||||||||||||||||||||||||||||
Shares issued for services rendered | 17(iii) | 146 | - | - | - | - | - | - | 146 | - | 145 | |||||||||||||||||||||||||||||||
Shares issued - convertible debentures | 20(i) | 669 | - | - | - | - | - | - | 669 | - | 669 | |||||||||||||||||||||||||||||||
Shares and warrants issued on reorganization | 17(v) | 31,987 | - | 242 | - | - | - | (10,789 | ) | 21,440 | - | 21,440 | ||||||||||||||||||||||||||||||
Eliminated on corporate reorganization | 17(v) | (2,779 | ) | - | - | - | - | - | - | (2,779 | ) | - | (2,779 | ) | ||||||||||||||||||||||||||||
Dividends on corporate reorganization | - | - | - | - | - | - | (4,492 | ) | (4,492 | ) | - | (4,492 | ) | |||||||||||||||||||||||||||||
Shares issued on High Tide incorporation | 17(iv) | 20 | - | - | - | - | - | - | 20 | - | 20 | |||||||||||||||||||||||||||||||
Private placement | 17(vi) | 3,705 | - | - | - | - | - | - | 3705 | - | 3,705 | |||||||||||||||||||||||||||||||
Share issue costs – cash | 17(vii) | (263 | ) | - | - | - | - | - | - | (263 | ) | - | (263 | ) | ||||||||||||||||||||||||||||
Broker warrants | 17(vi) | (158 | ) | - | 158 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Unrealized (loss) gain on marketable securities | - | - | - | - | - | (22 | ) | 22 | - | - | - | |||||||||||||||||||||||||||||||
Marketable securities upon settlement | - | - | - | - | - | (29 | ) | 29 | - | - | - | |||||||||||||||||||||||||||||||
Intangible assets acquisition | 17(vii) | 290 | - | - | - | - | - | - | 290 | - | 290 | |||||||||||||||||||||||||||||||
Special warrants | 19 | - | 18,364 | - | - | - | - | - | 18,364 | - | 18,364 | |||||||||||||||||||||||||||||||
Warrant issue costs | - | (2,000 | ) | 506 | - | - | - | - | (1,494 | ) | - | (1,494 | ) | |||||||||||||||||||||||||||||
Tax effect of share issue costs | 113 | 540 | - | - | - | - | - | 653 | - | 654 | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (4,571 | ) | (4,571 | ) | (13 | ) | (4,584 | ) | ||||||||||||||||||||||||||||
Balance, October 31, 2018 | 35,695 | 16,904 | 906 | - | - | - | (30,176 | ) | 23,329 | (13 | ) | 23,316 | ||||||||||||||||||||||||||||||
Transition adjustment – IFRS 9 | 2d | - | - | - | - | - | - | (26 | ) | (26 | ) | - | (26 | ) | ||||||||||||||||||||||||||||
Transition adjustment – IFRS 15 | 2d | - | - | - | - | - | - | (66 | ) | (66 | ) | - | (66 | ) | ||||||||||||||||||||||||||||
Conversion of special warrants | 19 | 13,051 | (16,904 | ) | 3,853 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Warrants issued December, 2018 | 15(i) | - | - | 1,784 | - | - | - | - | 1,784 | - | 1,784 | |||||||||||||||||||||||||||||||
Acquisition - Grasscity | 4a | 3,047 | - | - | - | - | - | - | 3,047 | - | 3,047 | |||||||||||||||||||||||||||||||
Share-based compensation | 18 | 71 | - | - | 2,119 | - | - | - | 2,190 | - | 2,190 | |||||||||||||||||||||||||||||||
Equity portion of convertible debentures | 15 | - | - | - | - | 600 | - | - | 600 | - | 600 | |||||||||||||||||||||||||||||||
Cumulative translation adjustment | - | - | - | - | - | (366 | ) | (366 | ) | - | (366 | ) | ||||||||||||||||||||||||||||||
Interest payment paid in shares | 15 | 1,156 | - | - | - | - | - | - | 1,156 | - | 1,156 | |||||||||||||||||||||||||||||||
Warrants issued April, 2019 | 15 | - | - | 1,213 | - | - | - | - | 1,213 | - | 1,213 | |||||||||||||||||||||||||||||||
Acquisition - Dreamweavers | 4b | 1,147 | - | 295 | - | - | - | - | 1,442 | - | 1,442 | |||||||||||||||||||||||||||||||
Acquisition - Jasper Ave. | 4d | 205 | - | - | - | - | - | - | 205 | 205 | ||||||||||||||||||||||||||||||||
Warrants issued June, 2019 | 15 | - | - | 468 | - | - | - | - | 468 | - | 468 | |||||||||||||||||||||||||||||||
Corporate reorganization | 17(ix) | (29,699 | ) | - | - | - | - | - | 29,699 | - | - | - | ||||||||||||||||||||||||||||||
Fee paid in shares & warrants | 17(x) | 1,607 | - | 132 | - | - | - | - | 1,739 | - | 1,739 | |||||||||||||||||||||||||||||||
Warrants issued September, 2019 | 14 | - | - | 105 | - | - | - | - | 105 | - | 105 | |||||||||||||||||||||||||||||||
Warrant exercise | 3 | - | - | - | - | - | - | 3 | - | 3 | ||||||||||||||||||||||||||||||||
Comprehensive loss for the year | - | - | - | - | - | - | (25,905 | ) | (25,905 | ) | (166 | ) | (26,071 | ) | ||||||||||||||||||||||||||||
Balance, October 31, 2019 | 26,283 | - | 8,756 | 2,119 | 600 | (366 | ) | (26,474 | ) | 10,918 | (179 | ) | 10,739 |
4
High Tide Inc. Consolidated Statements of Cash Flows For the year ended October 31, 2019 and 2018 (Stated – In thousands of Canadian dollars) |
Notes | 2019 | 2018 | ||||||||
$ | $ | |||||||||
Operating activities | ||||||||||
Loss for the year | (26,068 | ) | (4,533 | ) | ||||||
Income tax recovery | (990 | ) | (1,495 | ) | ||||||
Finance costs and fees for services paid in shares | 2,586 | 8 | ||||||||
Depreciation and amortization | 6,7 | 1,416 | 86 | |||||||
Impairment loss | 4,820 | - | ||||||||
Revaluation of derivative liability | 12 | (733 | ) | (28 | ) | |||||
Share-based compensation | 18 | 2,209 | 146 | |||||||
Inventory Obsolesence | - | 182 | ||||||||
Related party balances written-off | - | 1,419 | ||||||||
Provision for impairment on accounts receivable | - | 19 | ||||||||
Discount on accounts receivable | - | 475 | ||||||||
(16,760 | ) | (3,722 | ) | |||||||
Changes in non-cash working capital | ||||||||||
Accounts receivable | (737 | ) | (673 | ) | ||||||
Inventory | (1,892 | ) | (102 | ) | ||||||
Loans receivable | 11 | (1,077 | ) | 313 | ||||||
Prepaid expenses and deposits | 9 | 2,384 | (5,898 | ) | ||||||
Accounts payable and accrued liabilities | 22 | 2,905 | 1,716 | |||||||
Income tax payable | (73 | ) | - | |||||||
Contract liability | 30 | - | ||||||||
Shareholder loans | 26 | 665 | (413 | ) | ||||||
Net cash used in operating activities | (14,555 | ) | (8,779 | ) | ||||||
Investing activities | ||||||||||
Purchase of property and equipment | 6 | (8,059 | ) | (3,581 | ) | |||||
Purchase of intangible assets | 7 | (2,135 | ) | (646 | ) | |||||
Notes Payable | 14 | 2,000 | - | |||||||
Acquisition costs | 4 | (6,972 | ) | - | ||||||
Net cash used in investing activities | (15,167 | ) | (4,227 | ) | ||||||
Financing activities | ||||||||||
Repayment of finance lease obligations | 13 | (6 | ) | (31 | ) | |||||
Proceeds from convertible debentures net of issue costs | 15 | 22,385 | 566 | |||||||
Net proceeds from share issuance | - | 3,887 | ||||||||
Net proceeds special warrant issuance | - | 16,870 | ||||||||
Restricted marketable securities | (50 | ) | - | |||||||
Payment of dividends | - | (1,155 | ) | |||||||
Net cash provided by financing activities | 22,329 | 20,137 | ||||||||
Net (decrease) increase in cash and cash equivalents | (7,392 | ) | 7,131 | |||||||
Cash and cash equivalents, beginning of the year | 8,198 | 1,067 | ||||||||
Cash and cash equivalents, end of the year | 806 | 8,198 |
5
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
1. | Nature of Operations |
High Tide Inc. (the “Company” or “High Tide”) is a downstream focused retailer of cannabis products, distributor, and a seller of smoking accessories, as well as a vertically integrated manufacturer of smoking accessories. The Company’s shares are listed on the Canadian Stock Exchange (“CSE”) under the symbol “HITI”, the Frankfurt Stock Exchange (“FSE”) under the securities identification code ‘WKN: A2PBPS’ and the ticker symbol “2LY”, and on the OTCQB Market (“OTCQB”) under the symbol “HITIF”. The address of the Company’s corporate and registered office is # 120 – 4954 Richard Road SW, Calgary, Alberta T3E 6L1.
High Tide does not engage in any U.S. cannabis-related activities as defined by the Canadian Securities Administrators Staff Notice 51-352.
2. | Basis of Preparation |
2.1 Statement of Compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”).
These consolidated financial Statements were approved and authorized for issue by the Board of Directors on February 25, 2020.
2.1 Basis of measurement
The consolidated financial statements, presented in thousands of Canadian Dollars, have been prepared on a historical cost basis, stock options, warrants and certain financial instruments which are measured at fair value. The accounting policies set out below have been applied consistently by the Company and its wholly owned subsidiaries for the periods presented.
For comparative purposes, the Company has reclassified certain immaterial items on the comparative consolidated statement of financial position and the consolidated statements of comprehensive loss to conform with current period’s presentation.
2.2 Functional and presentation currency
The consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency.
The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar (“CAD”), and of the Company’s United States (“U.S.”) subsidiaries is the USD, and of the Company’s European subsidiaries is the Euro (“EUR”). Translation gains and losses resulting from the consolidation of operations in Canada, USA and Europe, are recognized in other comprehensive income in the statement of comprehensive loss and as a separate component of shareholders’ equity on the consolidated statement of changes in equity.
2.3 Basis of consolidation
Subsidiaries
Subsidiaries | Percentage Ownership | Functional Currency | ||||
Canna Cabana Inc. | 100.00 | % | Canadian Dollar | |||
RGR Canada Inc. | 100.00 | % | Canadian Dollar | |||
Famous Brandz Inc. | 100.00 | % | Canadian Dollar | |||
Canna Cabana (SK) Inc. | 100.00 | % | Canadian Dollar | |||
Smoker’s Corner Ltd. | 100.00 | % | Canadian Dollar | |||
KushBar Inc. | 50.10 | % | Canadian Dollar | |||
Kush West Distribution Inc. | 100.00 | % | Canadian Dollar | |||
HT Global Imports Inc. | 100.00 | % | Canadian Dollar | |||
High Tide BV (Grasscity) | 100.00 | % | European Euro | |||
Valiant Distrbutions Inc. | 100.00 | % | U.S. Dollar |
Subsidiaries are entities controlled by High Tide. Control is achieved where the entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of comprehensive loss from the effective date of acquisition and up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Company. Intra-group balances and transactions, and any unrealized gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.
6
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
3. | Accounting Policies |
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements, and have been applied consistently by the Company and its subsidiaries.
Use of estimates & accounting judgements
The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities and shareholders’ equity at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.
The estimates and assumptions are reviewed on an ongoing basis. Revisions in accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.
A. | Use of estimates |
Critical accounting estimates are those that require management to make assumptions about matters that are highly uncertain at the time the estimate or assumption is made. Critical accounting estimates are also those that could potentially have a material impact on the Company’s financial results where a different estimate or assumption is used. The significant areas of estimation uncertainty are:
Expected credit losses
The Company’s accounts receivables are typically short-term in nature and the Company recognizes an amount equal to the lifetime expected credit losses (“ECL”). The Company measures loss allowances based on historical experience and including forecasted economic conditions. The amount of ECLs is sensitive to changes in circumstances of forecast economic conditions.
Inventory valuation
Inventory is carried at the lower of cost and net realizable value; in estimating net realizable value, the Company makes estimates related to obsolescence, future selling prices, seasonality, customer behaviour, and fluctuations in inventory levels.
Estimated useful lives, residual values and depreciation of property and equipment
Depreciation of property and equipment is dependent upon estimates of useful lives and residual values, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
Estimated useful lives of Intangibles
Amortization of intangible assets is dependent upon estimates of useful lives, lease terms and residual values which are determined through the exercise of judgment.
Fair value of financial instruments
The individual fair values attributed to different components of a financing transaction are determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and in performing the fair value calculations in order to determine; (a) the values attributable to each component of a transaction at the time of their issuance; (b) the fair value measurement for certain instruments that require subsequent measurement at fair value on a recurring basis; and (c) for disclosing the fair value of financial instruments subsequently carried at amortized cost. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of these instruments that are not quoted in an active market.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The estimated future cash flows are derived from management estimates, budgets and past performance and do not include activities that the Company is not yet committed to or significant future investments that will enhance the asset’s performance of the cash generating unit being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash flows and the growth rate used for extrapolation purposes.
7
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
A. | Use of estimates (continued) |
Business combinations
In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using approximate valuation techniques, which are generally based on a forecast of the total expected future cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. When provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for up to one year from the acquisition date.
Taxation
The calculations for current and deferred taxes require management’s interpretation of tax regulations and legislation in the various tax jurisdictions in which the Company operates, which are subject to change. The measurement of deferred tax assets and liabilities requires estimates of the timing of the reversal of temporary differences identified and management’s assessment of the Company’s ability to utilize the underlying future tax deductions against future taxable income before they expire, which involves estimating future taxable income.
The Company is subject to assessments by various taxation authorities in the tax jurisdictions in which it operates, and these taxation authorities may interpret the tax legislation and regulations differently. In addition, the calculation of income taxes involves many complex factors. As such, income taxes are subject to measurement uncertainty and actual amounts of taxes may vary from the estimates made by management.
Deferred tax assets
Deferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable income in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.
Measurement of share-based payments, warrants and stock options
In calculating the value of share-based payments, warrants and stock options, key estimates such as the value of the common shares, the rate of forfeiture, the expected life, the volatility of the value of the Company’s common shares and the risk-free interest rate are used.
B. | Judgements |
Judgment is used in situations when there is a choice and/or assessment required by management. The following are critical judgements apart from those involving estimations, that management has made in the process of applying the Company’s accounting policies and that have a significant effect on the amounts recognized in the consolidated financial statements.
Going concern
Determining if the Company has the ability to continue as a going concern is dependent on its ability to achieve to raise additional financing and/orprofitable operations. Certain judgements are made when determining if the Company will achieve profitable operations. At each reporting period, management assesses the basis of preparation of the consolidated financial statements. The assumption that the Company will be able to continue as a going concern is subject to critical judgements of management with respect to assumptions surrounding the short and long-term operating budget, expected profitability, investment and financing activities and management’s strategic planning.
Determination of CGUs
For the purposes of assessing impairment of non-financial assets, the Company must determine CGUs. Assets and liabilities are allocated into CGUs at the lowest level of separately identified cash flows. Determination of what constitutes a CGU is subject to management judgment. The asset composition of a CGU can directly impact the recoverability of assets included within the CGU. The determination of the Company’s CGUs was based on management’s judgment in regard to shared infrastructure, geographical proximity and similar exposure to market risk and materiality.
8
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
B. | Judgements (continued) |
Business combinations and asset acquisitions
Classification of an acquisition as a business combination or an asset acquisition depends on whether the assets acquired constitute a business, which can be a complex judgment. Where an acquisition is classified as a business combination or an asset acquisition can have a significant impact on the entries made on and after the acquisition. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using approximate valuation techniques, which are generally based on a forecast of the total expected future cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process.
Consolidation
The determination of which entities require consolidation is subject to management judgment regarding levels of control, assumptions of risk and other factors that may ultimately include or exclude an entity from the classification of a subsidiary or other entity requiring consolidation.
Segmented information
Operating segments are determined based on internal reports used in making strategic decisions that are reviewed by the Chief Operating Decision Makers (CODMs). The Company’s CODMs are the Chief Financial Officer, Chief Executive Officer and Chief Operating Officer.
Contingencies
Management uses judgment to assess the existence of contingencies. By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. Management also uses judgment to assess the likelihood of the occurrence of one or more future events.
Derivative liability
Management applies judgement in determining the fair value of the derivative liability component of its put option on Grasscity acqusition by applying assumptions and estimates using the Black-Scholes valuation model. These assumptions and estimates require a high degree of judgment and a change in these estimates may result in a material effect to the consolidated financial results.
C. | Summary of significant accounting policies |
Cash and cash equivalents
Cash and cash equivalents consist of bank balances and highly liquid short-term investments with a maturity date of 90 days or less which are convertible to known amounts of cash at any time by the Company without penalties.
Marketable securities
Marketable securities comprise of the Company’s investments in money market mutual funds held through a large commercial bank in Canada and are classified as restricted marketable securities. Such securities are measured at fair market value in the consolidated financial statements with unrealized gains or losses recorded in other comprehensive income. Fair values for marketable securities are estimated using quoted market prices in active markets, obtained from securities exchanges. At the time securities are sold or otherwise disposed of, gains or losses are included in net income or loss.
Inventory
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is calculated on a weighted average cost basis and includes expenditures incurred in acquiring the inventories and other costs incurred in bringing them to their existing location and condition.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory are written down to net realizable value. Any write-downs of inventory to net realizable value are recorded in the statement of loss and comprehensive loss of the related year.
9
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
C. | Summary of significant accounting policies (continued) |
Property and equipment
Property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. During the construction of leasehold improvements, items are classified as construction in progress. When the asset is available for use, it is transferred from construction in progress to the appropriate category of property and equipment and depreciation on the item commences.
Depreciation is provided using the following methods at rates intended to depreciate the costs of the assets over their estimated use lives:
Asset | Method | Useful life | ||
Office equipment and computers | Straight-line | 3 to 5 years | ||
Leasehold improvements | Straight-line | Term of lease | ||
Vehicles | Straight-line | 5 years | ||
Buildings | Straight-line | 25 years |
When a property and equipment asset includes significant components with different useful lives, each significant component is depreciated separately.
The estimated useful lives and depreciation methods are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in consolidated statement of loss and other comprehensive loss of the related year.
Assets under construction are not ready for use and are not depreciated.
Repairs and maintenance costs that do not improve or extend productive life are recognized in the consolidated statement of loss and other comprehensive loss in the year in which the costs are incurred.
Intangible assets
Intangible assets acquired separately are measured initially at cost and consists of software and lease buy-outs. Following initial recognition, intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. The cost of intangible assets acquired in an asset acquisition are initially measured using an allocation of the purchase consideration using a relative fair value approach.
The useful lives of intangible assets are assessed as either finite or indefinite. The Company does not have any indefinite life intangible assets. Amortization of finite life intangible assets is provided, when the intangible asset is available for use, on a straight-line basis over their estimated useful lives, which for leases is the lower of the useful life of the asset, or the primary lease term, including renewals at the Company’s option, if any, as follows:
Intangible asset | Method | Useful life | ||
Software | Straight-line | 5 years | ||
Lease buy-outs | Straight-line | Remaining term of the lease | ||
Licenses and brand names | Straight-line | Remaining term of the lease |
The estimated useful lives and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. Intangible assets not yet available for use are not subject to amortization.
Goodwill
Goodwill arises on the acquisition of subsidiaries and is tested for impairment annually or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. Goodwill is initially recognized as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Subsequently, goodwill is measured at cost less accumulated impairment losses.
10
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
C. | Summary of significant accounting policies (continued) |
Business combinations
The Company assesses whether an acquisition should be accounted for as an asset acquisition or a business combination under IFRS 3 Business Combinations (“IFRS 3”). This assessment requires management to make judgements on whether the assets acquired, and liabilities assumed constitute a business as defined in IFRS 3 and if the integrated set of activities, including inputs and processes acquired, are capable of being conducted and managed as a business and the Company obtains control of the business inputs and processes.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Foreign currencies
The Company’s functional currency is the Canadian dollar. Transactions undertaken in foreign currencies are translated into Canadian dollars at daily exchange rates prevailing when the transactions occur. Monetary assets and liabilities denominated in foreign currencies are translated at period-end exchange rates and non-monetary items are translated at historical exchange rates. Realized and unrealized exchange gains and losses are recognized in consolidated statement of loss and other comprehensive loss in the period in which they arise.
The assets and liabilities of foreign operations are translated into Canadian dollars using the period-end exchange rates. Income, expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from the translation of foreign operations into Canadian dollars are recognized in other comprehensive (loss) income and accumulated in equity.
Revenue recognition
The Company has adopted IFRS 15 on November 1, 2018. Revenue recognition is based on a 5-step approach which includes identifying the contract with the customer, identifying the performance obligations, determining the individual transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the relevant performance obligations are satisfied. Revenue is recognized when the entity satisfies the performance obligation upon delivery and acceptance by the customer. Revenue in the consolidated financial statements is disaggregated into retail, wholesale and royalty revenue.
Recognition
The nature, timing of recognition of satisfied performance obligations, and payment terms for the Company’s goods and services are described below:
For performance obligations related to retail and wholesale contracts, the Company typically transfers control, completes the performance obligation, and recognizes revenue at the point in time when delivery of the items to the customer occurs, with the exception of bill and hold arrangements as noted below. Upon delivery the customer can obtain substantially all of the benefits from the items purchased.
For performance obligations related to franchise contracts, the Company typically satisfies its performance obligations at a point in time, or over time as services are rendered, depending on the obligation and the specifics of the contract.
The Company recognizes a contract asset or contract liability for contracts where only one party has satisfied its performance obligations. A contract liability is recorded when the Company receives consideration before the performance obligations have been satisfied. A contract asset is recorded when the Company has rights to consideration for the completion of a performance obligation before it has invoiced the customer. The Company recognizes unconditional rights to consideration separately as a receivable. Contract assets and receivables are evaluated at each reporting period to determine whether there is any objective evidence that they are impaired.
11
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
C. | Summary of significant accounting policies (continued) |
Revenue recognition (continued)
The Company recognizes a significant financing component where the timing of payment from the customer differs from the Company’s performance under the contract and where that difference is the result of the Company financing the transfer of goods and services. For the majority of the contracts, revenue excludes the impact of a significant financing component since, as a practical expedient, the standard provides that an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Identification of performance obligations
Where contracts contain multiple promises for goods or services, management exercises judgement in determining whether goods or services constitute distinct goods or services or a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The determination of a performance obligation affects whether the transaction price is recognized at a point in time or over time. Management considers both the mechanics of the contract and the economic and operating environment of the contract in determining whether the goods or services in a contract are distinct.
Transaction price
In determining the transaction price and estimates of variable consideration, management considers the history of the customer in estimating the goods and services to be provided to the customer as well as other variability in the contract.
Allocation of transaction price to performance obligations
The Company’s contracts generally outline a specific amount to be invoiced to a customer associated with each performance obligation in the contract. Where contracts do not specify amounts for individual performance obligations, the Company estimates the amount of the transaction price to allocate to individual performance obligations based on their standalone selling price, which is primarily estimated based on the amounts that would be charged to customers under similar market conditions.
Satisfaction of performance obligations
The satisfaction of performance obligations requires management to make judgment as to when control of the underlying good or service transfers to the customer. Determining when a performance obligation is satisfied affects the timing of revenue recognition. Management considers both customer acceptance of the good or service, and the impact of laws and regulations such as standard shipping practices, in determining when this transfer occurs. Management also applies judgment in determining whether the invoice can be relied upon in measuring progress toward complete satisfaction of performance obligations. The invoice permits recognition of revenue at the invoiced amount, if that invoiced amount corresponds directly with the entity’s performance to date.
Wholesale revenue
Revenue from sales to customers through the Company’s wholesale distribution arm are recognized when control of the goods has transferred to the customer. Where the Company arranges the shipping of goods, revenue is recognized on the date of delivery of goods to the customer’s location (FOB destination). Where the customer arranges for the pickup of goods, revenue is recognized at the time the goods are transferred to the customers carrier (FOB shipping point). Costs to ship orders to customers are included as an expense in cost of goods sold.
Retail revenue
Revenue consists of sales through the Company’s network of retail stores and includes sales through the Company’s ecommerce platform. Merchandise sales through retail stores are recognized at the time of delivery to the customer which is generally at the point of sale. Merchandise sales through the Company’s e-commerce operations are recognized upon date of receipt by the customer.
Royalty revenue
The Company earns fixed and variable royalty income from its franchisees. The fixed royalty income is earned based on an agreed fixed amount per month whereas the variable royalty income is calculated at an agreed rate on the revenue earned by franchisees. Royalty revenue is recognized in consolidated statement of loss and other comprehensive loss when earned.
Sales returns
The Company does allow returns. Defective products or products that get damaged upon shipping by the Company are considered for exchanges. Due to negligble amount of returns the Company does not record any provision for returns.
12
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
C. | Summary of significant accounting policies (continued) |
Taxes
Tax expense is comprised of current and deferred tax. Tax is recognized in the consolidated statement of loss and other comprehensive loss except to the extent that it relates to items recognized in other comprehensive income (loss) or equity on the statement of financial position.
Current tax
Current tax is calculated using tax rates which are enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to taxation authorities.
Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates which are enacted or substantively enacted at the end of the reporting period and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.
Deferred tax liabilities are generally recognized for all taxable temporary differences, except for temporary differences that arise from goodwill, which is not deductible for tax purposes. Deferred tax liabilities are also recognized for taxable temporary differences arising on investments in subsidiaries except where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future.
Deferred tax assets are recognized to the extent it is probable that taxable profits will be available against which the deductible balances can be utilized. All deferred tax assets are analyzed at each reporting period and reduced to the extent that it is no longer probable that the asset will be recovered. Deferred tax assets and liabilities are not recognized with respect to temporary differences that arise on initial recognition of assets and liabilities acquired other than in a business combination.
Share-based payments
The fair value of stock options issued to directors, officers and consultants under the Company’s stock option plan is estimated at the date of issue using the Black-Scholes option pricing model, and charged to consolidated statement of loss and comprehensive loss and contributed surplus. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. On the exercise of options, the cash consideration received and the fair value of the option previously credited to contributed surplus are credited to share capital.
The fair value of options issued to advisors in conjunction with financing transactions is estimated at the date of issue using the fair value of the goods and services received first, if determinable, then by the Black-Scholes option pricing model, and charged to share capital and contributed surplus over the vesting period. On the exercise of agent options, the cash consideration received and the fair value of the option previously credited to contributed surplus are credited to share capital.
Where stock options are cancelled, it is treated as if the stock options had vested on the date of cancellation and any expense not yet recognized for the award is recognized immediately. However, if a new option is substituted for the cancelled option and is designated as a replacement option on the date that it is granted, the cancelled and the new options are treated as if they were a modification of the original option.
Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s share purchase options. Forfeitures are estimated for each reporting period and adjusted as required to reflect actual forfeitures that have occurred in the period.
Earnings per share
Basic earnings per share is calculated by dividing the profit or loss attributable to owners of the Company by the weighted average number of common shares outstanding during the year.
Diluted income per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of common shares outstanding, adjusted for the effects of all dilutive potential common shares. The weighted average number of common shares outstanding is increased by the total number of additional common shares that would have been issued by the Company assuming exercise of all convertible equity instruments with exercise prices below the average market price for the year.
Segment reporting
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The operating results of all operating segments for which discrete financial information is available are reviewed regularly by executive management to make decisions about resources to be allocated to the segments and assess their performance. Segment results that are important to executive management generally include items directly attributable to a segment.
13
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
C. | Summary of significant accounting policies (continued) |
Leases
Payments made under operating leases are recognized in earnings on a straight-line basis over the term of the lease. Lease incentives/inducements received are deferred and amortized over the primary term of the lease, or the contractual term if the lease provides for renewals at the option of the Company which management intends to utilize. Operating lease payments are recognized as an operating expense in the consolidated financial statements of loss and comprehensive loss on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed.
Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Impairment of non-financial assets
At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite life intangible assets are tested annually for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Asset acquisitions
Acquisitions that do not meet the definition of a business combination are accounted for as an asset acquisition. Consideration paid for an asset acquisition is allocated to the individual identifiable assets acquired and liabilities assumed based on their relative fair values. Asset acquisitions do not give rise to goodwill.
14
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
D. | Current Accounting Policy Changes |
IFRS 9 Financial Instruments:
Effective November 1, 2018, the Company adopted IFRS 9, which introduces new requirements for:
i) | The classification and measurement of financial assets and liabilities, |
ii) | The recognition and measurement of impairment of financial assets, and |
iii) | General hedge accounting |
In accordance with the transition provisions of the standard, the Company has elected to not restate prior periods. The impact of adopting IFRS 9 was recognized in Accumulated Deficit at November 1, 2018 and related to the recognition of additional expected credit losses. The net impact resulted in an increase in the expected credit losses allowance of $36, an increase in deferred income tax assets of $10, and a $26 increase in Accumulated Deficit.
The Company’s accounting policies under IFRS 9 are outlined below. For more information on the Company’s accounting policies under IAS 39, refer to Note 4 of the Company’s consolidated financial statements for the annual period ended October 31, 2018.
a. Classification and Measurement
IFRS 9 introduces the requirement to classify and measure financial assets based on their contractual cash flow characteristics and the Company’s business model for the financial asset. All financial assets and financial liabilities, including derivatives, are recognized at fair value on the consolidated statements of financial position when the Company becomes party to the contractual provisions of a financial instrument or non-financial derivative contract. Financial assets must be classified and measured at either amortized cost, at fair value through profit or loss (“FVTPL”), or at fair value through other comprehensive income (“FVTOCI”).
Financial assets with contractual cash flows arising on specified dates, consisting solely of principal and interest, and that are held within a business model whose objective is to collect the contractual cash flows are subsequently measured at amortized cost. Financial assets measured at FVTOCI are those which have contractual cash flows arising on specific dates, consisting solely of principal and interest, and that are held within a business model whose objective is to both to collect the contractual cash flows and to sell the financial asset. All other financial assets are subsequently measured at FVTPL.
Derivative instruments, when utilized, would initially be recognized at the fair value at the date the derivative contracts were entered into, and would be subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss would be recognized in net loss immediately, unless the derivative was designated and effective as a hedging instrument, in which case the timing of the recognition in net earnings would be dependent on the nature of the hedging relationship.
Derivatives embedded in non-derivative host contracts that are not financial assets within the scope of IFRS 9 (i.e. financial liabilities) are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts, and the host contracts are not measured at FVTPL. Derivatives embedded in hybrid financial asset host contracts that are within the scope of IFRS 9 are not separated and the entire contract is measured at either FVTPL or amortized cost, as appropriate. The Company’s management reviewed and assessed the classifications of its existing financial instruments as at November 1, 2018, based on the facts and circumstances that existed at that date, as shown below.
Financial Instrument | IFRS 9 Classification | IAS 39 Category | ||
Cash and cash equivalents | Amortized cost | FVTPL | ||
Loans receivable | Amortized cost | Loans and receivables | ||
Marketable securities | FVTPL | Available for sale | ||
Loans payable and other liability | Amortized cost | Other financial liabilities | ||
Shareholder loans | Amortized cost | Other financial liabilities | ||
Convertible debt | Amortized cost | Other financial liabilities | ||
Accounts receivable | Amortized cost | Loans and receivables | ||
Accounts payable and accrued liabilities | Amortized cost | Other financial liabilities | ||
Notes payable | Amortized cost | Other financial liabilities | ||
Derivative liability | FVTPL | FVTPL |
15
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
D. | Current Accounting Policy Changes (continued) |
b. Impairment of Financial Assets
IFRS 9 introduces a new impairment model for financial assets measured at amortized cost as well as certain other instruments. The expected credit loss model requires entities to account for expected credit losses on financial assets at the date of initial recognition, and to account for changes in expected credit losses at each reporting date to reflect changes in credit risk. IFRS 9 introduces a new impairment model for financial assets measured at amortized cost as well as certain other instruments. The expected credit loss model requires entities to account for expected credit losses on financial assets at the date of initial recognition, and to account for changes in expected credit losses at each reporting date to reflect changes in credit risk.
The loss allowance for a financial asset is measured at an amount equal to the lifetime expected credit loss if its credit risk has increased significantly since initial recognition, or if the financial asset is a purchased or originated credit-impaired financial asset.
If the credit risk on a financial asset has not increased significantly since initial recognition, its loss allowance is measured at an amount equal to the 12-month expected credit loss.
IFRS 9 states that an entity must measure trade receivables at their transaction price (as defined in IFRS 15 Revenue from Contracts with Customers) if the trade receivables do not contain a significant financing component (or when the entity applies the available practical expedient). This ‘simplified approach’ permits the use of a provision matrix model for measuring the loss allowance for trade receivables, contract assets and lease receivables at an amount equal to lifetime expected credit losses under certain circumstances.
The Company measures its trade receivables and contract assets using the simplified approach. Expected credit losses measurement takes into consideration historical customer default rates, adjusted by forward-looking information including household consumption and consumer price indices, as well as real gross domestic product. The Company also contemplates the grouping of receivables into various customer segments that have similar loss patterns (e.g. by geography). The Company uses the general approach to measure the expected credit loss for certain loans receivable and lease receivables.
The Company’s management reviewed and assessed its existing financial assets for impairment using reasonable and supportable information in accordance with the requirements of IFRS 9 to determine the credit risk of the respective items at the date they were initially recognized and compared that to the credit risk as at November 1, 2018. There was an increase in credit risk determined upon application of IFRS 9 and therefore an additional loss allowance of $26 was recognized.
c. | General Hedge Accounting |
IFRS 9 retains the three types of hedges from IAS 39 (fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation) but increases flexibility as to the types of transactions that are eligible for hedge accounting. The effectiveness test of IAS 39 is replaced by the principle of an “economic relationship”, which requires that the hedging instrument and the hedged item have values that generally move in opposite directions because of the hedged risk. Additionally, retrospective hedge effectiveness testing is no longer required under IFRS 9. As the Company does not engage in hedge accounting, the application of IFRS 9 hedge accounting requirements has had no impact on the results and financial position of the Company.
IFRS 15 Revenue from Contracts with Customers
The Company has adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) with an initial adoption date of November 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition, which is outlined below. The Company has elected to adopt IFRS 15 retrospectively with the modified retrospective method of transition practical expedient and has elected to apply IFRS 15 only to contracts that are not completed contracts at the date of initial application. Comparative information has not been restated and is reported under IAS 18 Revenue (“IAS 18”). For more information on the Company’s accounting policies under IAS 18, refer to Note 4 of the Company’s consolidated financial statements for the annual period ended October 31, 2018.
The Company recognized the cumulative impact of the initial application of the standard as a reclassification on the Consolidated Statement of Financial Position as well as an increase in Accumulated Deficit as at November 1, 2018. Applying the significant performance obligation requirements to specific contracts resulted in an increase in Accumulated Deficit of $66.
The impact to Accumulated Deficit related to franchise arrangements. IFRS 15 requires that, in determining the timing of revenue recognition, that if there is a reasonable expectation that the franchisor will undertake activities that will significantly affect the brand name to which the franchisee has rights, and the franchisee is directly exposed to any positive or negative effects of that brand and image throughout the franchise period, that the performance obligation is satisfied over the period of the franchise agreement, or in the case of specific brand development activities, deferred as a contract liability until such time as the related activity and associated costs are incurred. There were no impacts to the consolidate statement of cash flows as a result of adopting IFRS 15.
16
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
D. | Current Accounting Policy Changes (continued) |
IFRS 15 Revenue from contracts with customers
The majority of the Company’s revenues from contracts with customers are derived from the wholesale and retail sale of smoking accessories and cannabis products, and from franchise arrangements.
The Company evaluates whether the contracts it enters into meet the definition of a contract with a customer at the inception of the contract and on an ongoing basis if there is an indication of significant changes in facts and circumstances. Revenue is measured based on the transaction price specified in a contract with a customer. Revenue is recognized when control of the goods or services is transferred to the customer. For certain contracts, revenue may be recognized at the invoiced amount, as permitted using the invoice, if such amount corresponds directly with the Company’s performance to date. The Company excludes amounts collected on behalf of third parties from revenue.
Performance Obligations
Each promised good or service is accounted for separately as a performance obligation if it is distinct. The Company’s contracts may contain more than one performance obligation.
Transaction Price
The Company allocates the transaction price in the contract to each performance obligation. Transaction price allocated to performance obligations may include variable consideration. Variable consideration is included in the transaction price for each performance obligation when it is highly probable that a significant reversal of the cumulative variable revenue will not occur. Variable consideration includes variability in quantity and pricing as well as the right of return in certain distribution agreements. The consideration contained in the majority of the Company’s contracts with customers is primarily non-variable.
When multiple performance obligations are present in a contract, transaction price is allocated to each performance obligation in an amount that depicts the consideration the Company expects to be entitled to in exchange for transferring the good or service. The Company estimates the amount of the transaction price to allocate to individual performance obligations based on their relative standalone selling prices, which is primarily estimated based on the amounts that would be charged to customers under similar market conditions or is based on details of the respective agreements.
Other Items
Contract acquisition costs (including commissions)
Contract acquisition costs related to sales order and service type contracts are expensed immediately. The Company elects to use the practical expedient that permits immediate expensing of all contract acquisition costs where that contract is anticipated to be complete within one year.
Warranties
The Company does not offer an option to purchase additional warranties and does not provide any additional services as part of any warranty. The warranties provided relate to product compliance to agreed-upon specifications and are considered an assurance type warranty. Warranties will continue to be accounted for under previous IFRS guidance.
Consignment and principal verse agent considerations
The new revenue standard focuses on recognizing revenue as an entity transfers control of a good or service to a customer. This could affect how an entity evaluates its position in a transaction as either a principal or an agent. The new revenue standard provides that an entity is a principal in a transaction if it controls the specified goods or services before they are transferred to the customer. The Company has entered into an arrangement whereby assets are transferred by the Company to another party (a “Consignee”) for storage. The Company continues to act in the capacity of the principal as evidenced by the Company’s ability to control the assets until the sale of the product to an external customer.
17
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
D. | Current Accounting Policy Changes (continued) |
Right of return
The Company has entered into distribution agreements whereby the Company provides for a right of return to the distributor (reseller) of the Company’s products. The Company recognizes revenue based on the amount to which it expects to be ‘entitled’ through to the end of the return period (considering expected product returns). The Company recognizes the portion of the revenue subject to the right of return constraint once the amount is no longer constrained. The Company continually assesses the position that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration related to the right to return has been resolved.
Bill and hold arrangements
In some sales transactions, the Company fulfils its obligations and bills the customer for the work performed but does not ship the goods until a later date. These transactions are designed this way at the request of the customer and are typically due to the customer’s lack of available storage space for the product, or due to delays in the customer’s retail location construction schedules.
E. | New Accounting Pronouncements |
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases, which will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term greater than twelve months, unless the underlying asset’s value is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessors will continue to classify leases as operating or finance, with lessor accounting remaining substantially unchanged from the preceding guidance under IAS 17, Leases.
Management is currently executing its implementation plan. The most significant impact of IFRS 16 will be our initial recognition of the present value of unavoidable future lease payments as right-of-use assets under property, plant and equipment and the concurrent recognition of a lease liability on the consolidated statement of financial position. Majority of our property leases, which are currently treated as operating leases, are expected to be impacted by the new standard which will result in lower rent expense, higher depreciation expense and higher finance costs related to accretion and interest expense of the lease liability. IFRS 16 will also impact the presentation of the consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.
The standard will be effective for the Company for the fiscal year commencing November 1, 2019. The Company will be adopting the standard retrospectively by recognizing the cumulative impact of initial adoption in opening retained earnings (i.e. the difference between the right-of-use asset and the lease liability). The Company will measure the right-of-use asset at an amount equal to the lease liability on November 1, 2019, apply a single discount rate to leases with similar remaining lease terms for similar classes of underlying assets and will not separate non-lease components from lease components for certain classes of underlying assets.
Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.
18
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
4. | Business Combinations |
In accordance with IFRS 3, Business Combinations, these transaction meets the definition of a business combination and, accordingly, the assets acquired, and the liabilities assumed have been recorded at their respective estimated fair values as of the acquisition date.
A. | Grasscity Acquisition |
Total consideration | $ | |||
Cash paid | 4,732 | |||
Share consideration | 3,047 | |||
Put option (Note 8) | 2,853 | |||
10,632 | ||||
Net identifiable assets acquired (liabilities assumed) | ||||
Cash | 44 | |||
Accounts receivable | 80 | |||
Prepaid expenses and deposits | 125 | |||
Inventory | 1,274 | |||
Property and equipment | 63 | |||
Intangible assets | ||||
Software - Webstore | 742 | |||
Software - Forums | 82 | |||
Brand name | 1,539 | |||
Grasscity Forums | 312 | |||
4,261 | ||||
Accounts payable and accrued liabilities | (704 | ) | ||
Deferred tax liability | (498 | ) | ||
3,059 | ||||
Purchase price allocation | ||||
Net identifiable assets acquired | 3,059 | |||
Goodwill | ||||
Assembled workforce | 473 | |||
Goodwill other than workforce | 7,100 | |||
10,632 | ||||
Net cash outflows | ||||
Cash consideration paid | (4,732 | ) | ||
Cash acquired | 44 | |||
(4,688 | ) |
The Company acquired all of the issued and outstanding shares of Grasscity for aggregate consideration of $10,632 which included 8,410,470 common shares with a fair value of $3,047.
On December 6, 2018, the Company entered into a share purchase agreement to acquire all of the issued and outstanding shares of three entities, SJV B.V., SJV2 B.V. and SJV USA Inc. that together operate under the name Grasscity. The transaction closed on December 18, 2018. Based in Amsterdam, Netherlands, Grasscity is an online retailer of smoking accessories and cannabis lifestyle products that has been operating for over 20 years. The Company acquired Grasscity to increase its customer base, establish an international presence, and to leverage synergies to further enhance High Tide’s vertically integrated supply chain, manufacturing expertise, and distribution networks. Grasscity’s existing e-commerce channel will allow the Company to quickly establish an online presence and to expand its retail platform beyond the exisitng bricks-and-mortar locations. For the year ended October 31, 2019, Grasscity accounted for $4,349 in revenues and $1,285 in net loss since December 19, 2018. If the acquisition had been completed on November 1, 2018, the Company estimates it would have recorded an increase of $621 in revenues and an increase of $183 in net loss for the year ended October 31, 2019.
19
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
4. | Business Combinations (continued) |
B. | Dreamweavers Acquisition |
Total consideration | $ | |||
Cash paid | 1,550 | |||
Notes Payable | 102 | |||
Common shares | 1,147 | |||
Warrants | 295 | |||
Total | 3,094 | |||
Net identifiable assets acquired | ||||
Prepaid expenses and deposits | 4 | |||
Inventory | 131 | |||
Property and equipment | 272 | |||
Intangible assets - licenses | 1,049 | |||
Deferred tax liability | (283 | ) | ||
Total | 1,173 | |||
Purchase price allocation | ||||
Net identifiable assets acquired | 1,173 | |||
Goodwill | 1,921 | |||
Total | 3,094 |
On May 23, 2019, the Company, entered into a share purchase agreement to acquire all of the issued and outstanding shares of Dreamweavers Cannabis Products Ltd. (“Dreamweavers”). Based in Swift Current, Saskatchewan, Dreamweavers is a retailer for cannabis products smoking accessories. The Company acquired Dreamweavers to increase its retail footprint, and to establish a presence in the province of Saskatchewan, it also allows the Company to sell cannabis through e-commerce and provides an opportunity to operate a wholesale cannabis operation. The Company acquired all of the issued and outstanding shares of Dreamweavers for aggregate consideration of $3,157 which included 3,100,000 common shares with a fair value of $1,147, 1,550,000 purchase warrants exercisable at $0.75 per common share of High Tide and notes payables of $300 over five years with zero interest rate due at each aniversary date. Warrants valued at $295 using Black-Scholes model with the following assumptions: stock price of $0.37; expected life of 2 years; $Nil dividends; 130% volatility; and riskfree interest rate of 1.60%. Notes payable was valued at $165 by discounting it over five years at market interest rate of 11%. The Company incurred various legal and due diligence related fees totalling $38; these costs have been included as professional fees in the consolidated financial statements. For the year ended October 31, 2019, Dreamweavers accounted for $841 in revenues and $7 in net loss since May 24, 2019. If the acquisition had been completed on November 1, 2018, the Company estimates it would have recorded an increase of $572 in revenues and an increase of $89 in net loss for the year ended October 31, 2019.
20
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
4. | Business Combinations (continued) |
C. | MK Light Acquisition |
Total consideration | $ | |||
Cash paid | 202 | |||
Liabilities assumed | 48 | |||
Total | 250 | |||
Net identifiable assets acquired | ||||
Leasehold improvements | 21 | |||
Inventory | 4 | |||
Total | 25 | |||
Purchase price allocation | ||||
Net identifiable assets acquired | 25 | |||
Goodwill | 225 | |||
Total | 250 |
On November 1, 2018, the Company purchased all the assets of 2107746 Alberta Ltd. and MK Light It Up Inc. which had been operating a Smoker’s Corner franchise on Edmonton Trail in Calgary Alberta. The assets which included the franchise rights, leaseholds and inventory were purchased for the amount $371 with $200 being settled in cash and the balance being used to settle all outstanding debts between MK Light It Up Inc., Smoker’s Corner Ltd. and RGR Canada Inc. The Company currently use this location as a Canna Cabana retail store; which became operational on October 31, 2019.
D. | Jasper Ave. Acquisition |
Total consideration | $ | |||
Cash paid | 109 | |||
Liabilities assumed | 161 | |||
Common shares | 205 | |||
Total | 475 | |||
Net identifiable assets acquired | - | |||
Total | - | |||
Purchase price allocation | ||||
Net identifiable assets acquired | - | |||
Goodwill | 475 | |||
Total | 475 |
On September 4, 2019, the Company acquired a Smoker’s Corner franchise located at 10275 Jasper Avenue in Edmonton, Alberta. The total consideration paid to acquire the franchise was $475, of which $270 was paid in cash and the remainder was paid through the issuance of 559,742 common shares. In accordance with the applicable municipal development permit in hand, the Company has begun the process of converting the Jasper Avenue Store to a Canna Cabana retail location for the sale of recreational cannabis for adult use, subject to inspection and licensing by Alberta Gaming, Liquor and Cannabis.
21
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
5. | Revenue from Contracts with Customers |
For the year ended October 31, 2019 | Retail | Wholesale | Corporate | Total | ||||||||||||
$ | $ | $ | $ | |||||||||||||
Primary geographical markets | ||||||||||||||||
Canada | 19,875 | 4,693 | 606 | 25,174 | ||||||||||||
USA | 3,684 | 1,901 | - | 5,585 | ||||||||||||
International | 443 | 92 | - | 535 | ||||||||||||
Total revenue | 24,002 | 6,686 | 606 | 31,294 | ||||||||||||
Major products and services | ||||||||||||||||
Cannabis | 16,366 | - | - | 16,366 | ||||||||||||
Smoking accessories | 6,603 | 6,478 | - | 13,081 | ||||||||||||
Franchise royalties and fees | 953 | - | 562 | 1,515 | ||||||||||||
Interest and other revenue | 80 | 208 | 44 | 332 | ||||||||||||
Total revenue | 24,002 | 6,686 | 606 | 31,294 | ||||||||||||
Timing of revenue recognition | ||||||||||||||||
Transferred at a point in time | 22,968 | 6,478 | - | 29,446 | ||||||||||||
Transferred over time | 1,034 | 208 | 606 | 1,848 | ||||||||||||
Total revenue | 24,002 | 6,686 | 606 | 31,294 |
22
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
6. | Property and Equipment |
Office equipment and computers | Leasehold improvements | Vehicles | Buildings | Total | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Cost | ||||||||||||||||||||
Balance, October 31, 2017 | 49 | 321 | 163 | - | 533 | |||||||||||||||
Additions | 144 | 3,288 | 4 | 145 | 3,581 | |||||||||||||||
Balance, October 31, 2018 | 193 | 3,609 | 167 | 145 | 4,114 | |||||||||||||||
Additions (i) (Note 13) | 188 | 6,844 | - | 2,654 | 9,686 | |||||||||||||||
Additions from business combinations (ii) | 71 | 273 | - | - | 344 | |||||||||||||||
Impairment loss (iii) | - | (220 | ) | - | - | (220 | ) | |||||||||||||
Balance, October 31, 2019 | 452 | 10,506 | 167 | 2,799 | 13,924 | |||||||||||||||
Accumulated depreciation | ||||||||||||||||||||
Balance, October 31, 2017 | 25 | 311 | 96 | - | 432 | |||||||||||||||
Depreciation | 24 | 14 | 46 | - | 84 | |||||||||||||||
Balance, October 31, 2018 | 49 | 325 | 142 | - | 516 | |||||||||||||||
Depreciation | 78 | 940 | 6 | 2 | 1,026 | |||||||||||||||
Balance, October 31, 2019 | 127 | 1,265 | 148 | 2 | 1,542 | |||||||||||||||
Net book value | ||||||||||||||||||||
Balance, October 31, 2018 | 144 | 3,284 | 25 | 145 | 3,598 | |||||||||||||||
Balance, October 31, 2019 | 325 | 9,241 | 19 | 2,797 | 12,382 |
(i) | $1,227 was incurred for new buildout of leasehold improvements for head office and warehouse in November and December 2018. The new head office and warehouse was available for use on January 1, 2019. The Company purchased a building in Niagara, Ontario, for the purpose of opening a Canna Cabana retail location. The consideration for the building consisted of $700 in cash, a $1,600 vendor take back loan (notes payable), and $300 paid in shares. |
(ii) | Leasehold improvement addition of $273 and office equipment and computers addition of $71 were acquired as part of the acquisition of Grasscity and Dreamweavers. |
(iii) | In fiscal year 2019, the Company undertook a strategic shift with regards to its Smoker’s Corners operations, pivoting focus towards Canna Cabana. As a result of the strategic shift, an impairment test was performed on the CGU’s related to the Smoker’s Corner. In assessing if an impairment loss was required, the recoverable amount of each CGU was determined to be equal to its value in use. In estimating the value in use for each CGU, cash flow projections were prepared for a period of five years and discounted using a rate of 11%. Key assumptions that were used in the cash flow projections include using a negative growth rate of 60% for the first year and steady revenue going forward and applying a tax rate of 27%. The results of the cash flow projections indicated impairment as their carrying value exceeded the respective recoverable amount of the corresponding CGU. |
23
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
7. | Intangible Assets |
Software | Licenses | Lease buy-out | Brand Name | Total | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Cost | ||||||||||||||||||||
Balance, October 31, 2017 | - | - | - | - | - | |||||||||||||||
Additions | 159 | - | 777 | - | 936 | |||||||||||||||
Balance, October 31, 2018 | 159 | - | 777 | - | 936 | |||||||||||||||
Additions | 553 | - | 1,780 | - | 2,333 | |||||||||||||||
Additions from business combinations (i), (ii), (iii) | 1,136 | 1,049 | - | 1,539 | 3,724 | |||||||||||||||
Balance, October 31, 2019 | 1,848 | 1,049 | 2,557 | 1,539 | 6,994 | |||||||||||||||
Accumulated depreciation | ||||||||||||||||||||
Balance, October 31, 2017 | - | - | - | - | - | |||||||||||||||
Amortization | 2 | - | - | - | 2 | |||||||||||||||
Balance, October 31, 2018 | 2 | - | - | - | 2 | |||||||||||||||
Amortization | 109 | 75 | 191 | - | 375 | |||||||||||||||
Balance, October 31, 2019 | 111 | 75 | 191 | - | 377 | |||||||||||||||
Foreign currency translation | ||||||||||||||||||||
Balance, October 31, 2018 | - | - | - | - | - | |||||||||||||||
Charge for the period 60 | - | - | 58 | 118 | ||||||||||||||||
Balance, October 31, 2019 | 60 | - | - | 58 | 118 | |||||||||||||||
Net book value | ||||||||||||||||||||
Balance at October 31, 2017 | - | - | - | - | - | |||||||||||||||
Balance at October 31, 2018 | 157 | - | 777 | - | 934 | |||||||||||||||
Balance, October 31, 2019 | 1,677 | 974 | 2,367 | 1,481 | 6,500 |
(i) | Software intangible additions of $1,136 were acquired as part of the acquisition of Grasscity (described under Note 4a). |
(ii) | Licenses additions of $1,049 were acquired as part of the Dreamweavers acquisition (described under Note 4b). |
(iii) | Brand name intangible additions of $1,539 were acquired as part of the acquisition of Grasscity (described under Note 4a). |
24
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
8. | Impairment |
At the end of each reporting period, the Company assesses whether there were events or changes in circumstances that would indicate that a CGU or group of CGUs were impaired. The Company considers external and internal factors, including overall financial performance and relevant entity specific factors, as part of this assessment. The following factors were identified as impairment indicators:
i) | Higher operating expenses. This has resulted in a decrease of profitability as compared to outcomes initially forecasted by management. |
The Company allocated all its goodwill to the retail operating segment for the purpose of the impairment test as this represented the lowest level at which management monitored goodwill. As the retail operating segment is comprised of various CGUs, management tested the individual CGUs, which had indicators of impairment, for impairment before the retail operating segment which contains the associated goodwill. The recoverable amount of all CGUs was determined based on a Fair Value Less Cost of Disposal (“FVLCD”) using level 3 inputs in a Discounted Cash Flow (“DCF”) methodology. The significant assumptions applied in the determination of the recoverable amount are described below:
i) | Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. The forecasts are extended to a total of five years (and a terminal year thereafter). |
ii) | Terminal value growth rate: The terminal growth rate was based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth. |
iii) | Post-tax discount rate: The post-tax discount rate is reflective of the CGUs Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, an unsystematic risk premium, and after-tax cost of debt based on corporate bond yields; and |
iv) | Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date. Key assumptions used in calculating the recoverable amount for each CGU tested for impairment as at October 31, 2019 is outlined in the following table: |
$ | ||||
Terminal value growth rate | ||||
Discount rate | ||||
Budgeted revenue growth rate (average of next five years) | ||||
Fair value less cost to dispose | ||||
Carrying value | ||||
Impairment loss | 4,600 |
As a result, management concluded that the carrying value of the Grasscity was higher than the recoverable amount and recorded impairment losses of $4,600 during the year ended October 31, 2019 (October 31, 2018 - nil). The impairment was allocated entirely to reduce goodwill. The impairment loss was recognized due to a change in overall industry/market conditions, a change in management’s forecasted sales and profitability outlook and a realignment and refocus of strategic plans to meet market demand.
25
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
9. | Prepaid expenses and deposits |
2019 | 2018 | |||||||
$ | $ | |||||||
Business acquisition deposit | 300 | 897 | ||||||
Deposits on cannabis retail outlets and warehouse | 1,380 | 1,039 | ||||||
Prepaid insurance, licenses and other | 1,336 | 405 | ||||||
Prepaid marketing contract | - | 2,400 | ||||||
Advances to related party for purchases of inventory | - | 863 | ||||||
Advances to third party vendor for purchases of inventory (i) | 882 | 504 | ||||||
Other receivable from related parties | - | 23 | ||||||
Total | 3,898 | 6,131 | ||||||
Less current portion | (2,518 | ) | (4,931 | ) | ||||
Long term portion | 1,380 | 1,200 |
(i) | Advances for the purchase of inventory from an arm’s length vendor, are accounted for at fair value. |
10. | Inventory |
2019 | 2018 | |||||||
$ | $ | |||||||
Finished goods | 7,173 | 4,054 | ||||||
Provision for obsolescence | (373 | ) | (591 | ) | ||||
6,800 | 3,463 |
(i) | Inventories recognized as an expense and included in cost of sales during the year ended October 31, 2019 totaled $17,728 (2018 – $3,960). |
11. | Loans Receivable |
2019 | 2018 | |||||||
$ | $ | |||||||
Term loans (i) | 1,139 | 62 | ||||||
Demand loan (ii) | - | 1,094 | ||||||
Demand loan written-off (Note 23) | - | (1,094 | ) | |||||
Total loans receivable | 1,139 | 62 | ||||||
Less current portion | 261 | 62 | ||||||
Long-term portion | 878 | - |
(i) | Term loans are due from franchisees and relate to acquisitions of the sub-lease location from the Company and initial inventory. Term loans are secured by promissory notes, bear interest between 6.95% and 8.00 % (2018 - ranging between 5.00 % and 7.00 %) per annum and require blended payments of principal and interest between $4 and $10 monthly. (2018 - ranging between $0.8 and $4 monthly). The Company maintains the head lease to all franchisee locations. |
(ii) | Demand loans are unsecured, non-interest bearing and are due on demand. |
26
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
12. | Derivative Liability |
The derivative component of the Grasscity acquistion on Dec 18, 2019 was initially measured at $2,854 using monte-carlo simulation and the following assumptions: stock price: $0.3623; expected life of 1 year; $nil dividends; expected volatility of 126% based on comparable companies; exercise price of $0.50; and risk-free interest rate of 1.65%.
On October 31, 2019, the Company revalued the fair value of the derivative liability and recognized an unrealized gain of $733 in the consolidated statements of loss and comprehensive loss. The derivative liability was revalued to $2,121 using monte-carlo simulation and the following assumptions: stock price: $0.25; expected life of 1 year; $nil dividends; expected volatility of 96% based on comparable companies; exercise price of $0.50; and risk-free interest rate of 1.65%.
13. | Finance Lease Obligation |
2019 | 2018 | |||||||
$ | $ | |||||||
3.49% per annum vehicle loan, payable in monthly installments of $0.5 including principal and interest, maturing in June 2022. The vehicle has been pledged as security. | 17 | 23 | ||||||
Less: current portion | (6 | ) | (6 | ) | ||||
11 | 17 |
14. | Notes payable |
On June 26, 2019, the Company purchased a building in Niagara, Ontario, for the purpose of opening a Canna Cabana retail location. The consideration for the building consisted of $700 in cash, a $1,600 vendor take back loan, and $300 paid in shares. The loan had a tewleve-month term and carried an interest rate of 5.5% per annum payable monthly with a maturity date of June 30th, 2020.
On May 23, 2019, the Company acquired all of the issued and outstanding shares of Dreamweavers for aggregate consideration of $3,157 which included 3,100,000 common shares with a fair value of $1,147, 1,550,000 purchase warrants exercisable at $0.75 per common share of High Tide and notes payables of $300 over five years with zero interest rate due at each anniversary date. Notes payable was valued at $122 by discounting it over five years at market interest rate of 22%.
On September 4, 2019, the Company entered into a $2,000 loan agreement with a private lender. The loan had a tewelve-month term and carried an interest rate of 12% per annum payable monthly. In connection with the advance of the loan, the Company issued 1,600,000 warrants to the lender. Each warrant is redeemable for one common share in the capital of the Company at a price of $0.85 per Common Share for a period of two years from the date of the loan agreement. The warrants issued were valued at $105. The warrants were valued using the present value method using the following assumptions: expected life of 1 year and market interest rate of 22%. During, the year the Company incurred accretion of $15. The loan was personally guranteed by the CEO and Shareholder.
2019 | 2018 | |||||||
$ | $ | |||||||
Opening balance | - | - | ||||||
Vendor loan | 1,600 | - | ||||||
Term loan | 1,910 | - | ||||||
Other notes payable | 122 | - | ||||||
Total | 3,632 | - | ||||||
Less current portion | 3,570 | - | ||||||
Long-term | 62 | - |
27
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
15. | Convertible Debentures |
(i) | On November 28, 2018, the Company entered into an agreement for a brokered private placement for the sale of up to 20,000 unsecured convertible debentures of the Company, at a price of $1 per debenture for gross proceeds of up to $20,000. The net proceeds of the offering will be used by the Company to fund retail acquisitions, Canna Cabana and Smoker’s store upgrades, for strategic acquisition opportunities as well as for general working capital purposes. The debentures bear interest at a rate of 8.5% per annum, payable on the last business day of each calendar quarter. The debentures are convertible to common shares of the Company at a price of $0.75 per common share and mature two years from the closing of the offering. The lead agent has the option, at its discretion, to arrange for the purchase of up to an additional $20,000 in Debentures, for total proceeds of up to $40,000. The first closing occurred on December 13, 2018 issuing 11,330 debentures at a price of $1 per debenture for gross proceeds of $11,330. The company incurred $617 in issue costs in relation to the first closing which included the 504,733 broker warrants valued at $1,784 using the present value method using the following assumptions: expected life of 2 years and effective interest rate of 22%. Each broker warrant is exercisable for one common share of the Company at a price of $0.75 per share until Dec 11, 2020. The debenture component was recognized and measured at amortized cost and accreted such that the carrying amount at maturity will equal $11,330, using an effective interest rate of 22%. |
(ii) | On April 10, 2019, the Company closed the first tranche of the sale of unsecured convertible debentures of the Company under the non-brokered private placement with gross proceeds of $8,360. The outstanding principal amount under the Debentures is convertible at any time before maturity and at the option of the holder, into common shares of the Company at a conversion price of $0.75 per share and mature two years from the closing of the offering. Under the Offering, the Company also issued common share purchase warrants such that each subscriber received one Warrant for each $0.75 original principal amount of its Debenture, resulting in 11,146,667 Warrants being issued as part of the Offering. Each Warrant entitles the holder to acquire one Share at an exercise price of $0.85 per Share for two years from the date of issuance. The company incurred $50 in legal costs which was paid by the issuance of 100,000 shares with a fair value of $0.50 per share. The Debentures bear interest at a rate of 10% per annum, payable annually upfront in common shares of High Tide based on the 10-day volume weighted average price of $0.48 prior to the closing date of the Offering. Concurrent with the issuance of the Debentures, the Company paid the annual amount of interest due to holders upfront in the form of 1,752,621 Shares. |
The proceeds of $8,360 were first allocated to the debenture component, and the remainder allocated to the equity conversion option and warrants as follows: i) the debenture component for $8,310, ii) the equity conversion option and warrants for $1,213. The warrants were valued using the present value method using the following assumptions: expected life of 2 years and effective interest rate of 22%.
(iii) | On June 17, 2019, the Company closed the final tranche of the sale of unsecured convertible debentures of the Company under the non-brokered private placement with gross proceeds of $3,200. The outstanding principal amount under the Debentures is convertible at any time before maturity and at the option of the holder, into common shares of the Company at a conversion price of $0.75 per share and mature two years from the closing of the offering. Under the Offering, the Company also issued common share purchase warrants such that each subscriber received one Warrant for each $0.75 original principal amount of its Debenture, resulting in 4,266,667 Warrants being issued as part of the Offering. Each Warrant entitles the holder to acquire one Share at an exercise price of $0.85 per share for two years from the date of issuance. The Debentures will bear interest at a rate of 10% per annum, payable annually upfront in common shares of High Tide based on the 10-day volume weighted average price of $0.384 prior to the closing date of the Offering. Concurrent with the final tranche issuance of the Debentures, the Company paid the annual amount of interest due to holders upfront in the form of 855,615 Shares. |
The proceeds of $3,200 were first allocated to the debenture component, and the remainder allocated to the equity conversion option and warrants as follows: i) the debenture component for $3,180, ii) the equity conversion option and warrants for $468. The warrants were valued using the present value method using the following assumptions: expected life of 2 years and market interest rate of 22%.
28
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
16. | Taxes |
Reconciliation of effective tax rate:
The provision for income taxes differs from the result that would have been obtained by applying the consolidated federal and provincial tax rates to the income before taxes. The difference results from the following items:
2019 | 2018 | |||||||
(Loss) income before taxes | (19,502 | ) | (6,029 | ) | ||||
Statutory income tax rate (%) | 27 | % | 27 | % | ||||
Expected taxes at statutory rate | (5,266 | ) | (1,628 | ) | ||||
Increase in taxes resulting from: | ||||||||
Rate differential | 27 | 382 | ||||||
Non-deductible items | 21 | 18 | ||||||
Other items | 325 | (267 | ) | |||||
Change in tax benefits not recognized | 3,903 | - | ||||||
Income taxes (recovery) expense | (989 | ) | (1,495 | ) |
Income taxes
The income tax expense (recovery) for the year is made up of the following:
2019 | 2018 | |||||||
Current tax expense | 106 | - | ||||||
Deferred tax recovery | (989 | ) | (1,495 | ) | ||||
(883 | ) | (1,495 | ) |
Deferred tax asset
Changes in the deferred tax asset are as follows:
2019 | 2018 | |||||||
Balance, beginning of year | 1,974 | 479 | ||||||
Deferred tax recovery | 883 | 1,495 | ||||||
Balance, end of year | 2,857 | 1,974 |
Deferred tax asset is comprised of the following: | 2019 | 2018 | ||||||
Non-capital loss carry forwards | 2,237 | 1,162 | ||||||
Property and equipment and intangible assets | 227 | (76 | ) | |||||
Other items | 235 | 729 | ||||||
Capital loss carry forwards | 158 | 158 | ||||||
Net deferred tax asset | 2,857 | 1,974 |
As at October 31, 2019, the Company’s estimated non-capital losses that can be applied against future taxable profit at approximately $9,115. These non-capital losses expire in the years ended:
October 31, 2037 - $77
October 31, 2038 - $186
October 31, 2039 - $3,309
October 31, 2040 - $5,543
29
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
17. | Share Capital |
(a) | Issued: |
Common shares:
Number of shares | Amount | |||||||
# | $ | |||||||
Balance, October 31, 2017 | 18,400,200 | 668 | ||||||
Issued for cash (i) | 11,113,817 | 445 | ||||||
Issued on debt conversion (ii) | 20,486,183 | 852 | ||||||
Issued for services rendered (iii) | 3,500,000 | 146 | ||||||
Issued on conversion of convertible debentures (Note 19(i)) | 5,017,012 | 669 | ||||||
Issued on incorporation of High Tide Inc. (iv) | 2,760,000 | 20 | ||||||
Issued to acquire common shares of RGR ((v)(i)) | 6,128,304 | 1,196 | ||||||
Issued to acquire preferred shares of RGR ((v)(i)) | 45,128,840 | 8,804 | ||||||
Issued to acquire common shares of Smoker’s ((v)(ii)) | 6,024,250 | 1,175 | ||||||
Issued to acquire preferred shares of Smoker’s ((v)(ii)) | 50,358,600 | 9,825 | ||||||
Issued to acquire common shares of Famous Brandz ((v)(iii)) | 30,324,120 | 10,987 | ||||||
Eliminated upon reorganization ((v)(iii)) | (58,517,212 | ) | (2,779 | ) | ||||
Issued for cash on private placement (vi) | 10,225,800 | 3,704 | ||||||
Share issue costs – broker warrants (vi) | - | (158 | ) | |||||
Share issue cost – cash (vii) | - | (263 | ) | |||||
Tax effect on share issue costs | - | 114 | ||||||
Issued upon asset acquisition (vii) | 800,000 | 290 | ||||||
Balance, October 31, 2018 | 151,749,914 | 35,695 | ||||||
Issued upon listing of securities (viii), (Note 18) | 36,728,456 | 13,051 | ||||||
Issued upon closing of Grasscity acquisition (Note 4a) | 8,410,470 | 3,047 | ||||||
Issued to pay fee in shares (x) | 4,042,220 | 1,607 | ||||||
Issued to pay interest via shares (Note 10) | 2,608,237 | 1,156 | ||||||
Corporate re-organization (ix) | - | (29,699 | ) | |||||
Issued upon closing of Dreamweavers acquisition (Note 4b) | 3,100,000 | 1,147 | ||||||
Share-based compensation (Note 23) | 200,000 | 71 | ||||||
Exercise - broker warrants | 7,590 | 3 | ||||||
Issued upon asset purchase (Note 4(iv)) | 559,742 | 205 | ||||||
Balance, October 31, 2019 | 207,406,629 | 26,283 |
(i) | Famous Brandz issued 11,113,817 common shares to existing shareholders for cash totalling $445. |
(ii) | Balances due to Smoker’s and RGR by Famous Brandz totalling $852 were converted into 20,486,183 common shares at fair value determined upon conversion. |
(iii) | Famous Brandz issued 3,500,000 common shares to arms length parties for consulting services having a value of $146. |
(iv) | Upon incorporation of High Tide on February 8, 2018, 2,760,000 (pre-share split: 1,000,000) common shares at a price of $0.0073 per share (pre-share split: $0.02 per share), totalling $20 were issued. |
30
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
17. | Share Capital (continued) |
(v) | On February 28, 2018 and April 30, 2018 (“Reorganization Date”), both RGR Canada Inc. (“RGR”), Smoker’s Corner Ltd. (“Smoker’s”), and then Famous Brandz Inc. (“Famous Brandz”), respectively, became wholly owned subsidiaries of a newly created High Tide following a corporate reorganization whereby the shareholders of RGR, Smoker’s and Famous Brandz transferred all of their ownership interests in exchange for fully-paid common shares of High Tide as follows: |
(i) | On February 28, 2018, High Tide issued 6,128,304 (pre-share split: 2,220,400) Class A common shares at a price of $0.1949 per share (pre-share split: $0.538 per share) totalling $1,196 to acquire 100 Class A common shares of RGR from its shareholders and issued 45,128,840 (pre-share split: 16,351,029) Class A common shares at a price of $0.1949 per share (pre-share split: $0.538 per share) totalling $8,804 to acquire 88,044 preferred shares of RGR from its holders; |
(ii) | On February 28, 2018, High Tide issued 6,024,250 (pre-share split: 2,182,700) Class A common shares at a price of $0.1949 per share (pre-share split: $0.538 per share) totalling $1,175 to acquire 100 Class A common shares of Smoker’s from its shareholders and issued 50,358,600 (pre-share split: 18,245,871) Class A common shares at a price of $0.1949 per share (pre-share split: $0.538 per share) totalling $9,825 to acquire 98,247 preferred shares of Smoker’s from its holders; |
(iii) | On April 30, 2018, High Tide issued 30,324,120 (pre-share split: 10,987,000) Class A common shares at a price of $0.3623 per share (pre-share split: $1.00 per share) totaling $10,987 to acquire 58,517,012 Class A common shares of Famous Brandz and issued High Tide warrants with fair value of $241 to acquire Famous Brandz’ warrants; and |
(iv) | Declared dividends totalling $4,492, which were settled as follows: cash of $1,155, assignment of marketable securities with carrying value at the date of dividend declaration totaling $675, assignment of common shares of Famous Brandz owned by RGR and Smoker’s totaling $1,006 and assignment of net related party balance totaling $1,654 (comprised of advances to related companies, related through common shareholders, and shareholder loans). |
The carrying values of the common shares, preferred shares and warrants acquired by High Tide totalled $2,779, $18,629, and $31, respectively in the accounting records of respective entities. Since the carrying values were lower than the fair value of High Tide common shares and warrants (totalling $32,228) issued, the additional value of $10,789 was recorded against accumulated deficit as this was a related party transaction.
(vi) | On May 2, 2018, the Company closed a private brokered placement offering for 10,225,800 (pre-share split: 3,705,000) common shares at $0.3623 per share (pre-share split: $1.00 per share), for gross proceeds totalling $3,704. The Company paid brokers’ fees consisting of a cash payment of $263 and 670,680 (pre-share split: 243,000) broker warrants, which are exercisable at $0.3623 each (pre-share split: $1.00 each). These warrants were valued at $158 using Black Scholes option pricing model using the following assumptions: - Rate free interest rate: 1.77% - Expected volatility: 130% - Expected life in years: 2 - Expected dividends: Nil |
(vii) | On October 17, 2018, the Company completed the acquisition of all the issued and outstanding shares of Smiley’s Cannabis and Budz Ltd. in Okotoks, Alberta (“Smiley’s”). The acquisition provides the Company with an additional retail location and development permit to operate a recreational cannabis store. Management determined that the acquisition of Smiley’s did not meet the definition of a business in accordance with IFRS 3 Business Combinations, as it did not have the inputs, processes and outputs required to meet the definition of a business. Accordingly, the acquisition has been accounted for as an asset acquisition. As consideration, 800,000 common shares of the Company were issued having a value of $290, based on the share price of the Company on October 17, 2018 of $0.3623 per share. Smiley’s assigned its assets, being a permitted lease, and a cash lease deposit totaling $12, to Canna Cabana and then Smiley’s was dissolved on October 29, 2018. The deposit, representing the first two monthly lease payments, was expensed during the year. As a result of the transaction, $277, representing the value of the lease, was recorded as an intangible asset. |
(viii) | On November 20, 2018, the Company filed its final prospectus in connection with its proposed initial public offering. The final prospectus qualified, and the Company distributed, 36,728,474 common shares for gross proceeds of $13,051. |
(ix) | The Board of Directors got an approval from the shareholders at the Company’s Annual General Meeting, through a special resolution, to reduce its stated capital, in accordance with Part V, paragraph 37 of the Business Corporations Act, and reduce its retained deficit by $29,699 (the “Reduction Amount”). The Reduction Amount was created by the increased value of the common shares issued on the corporate re-organization. |
(x) | During, the year ended October 31, 2019, the Company settled payables of $1,717 through issuance of 4.042,220 common shares of the Company which were valued at $1,607. The difference of $110 was recognized as a gain on extinguishment of financial liability. |
31
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
18. | Stock Option Plan: |
The Company’s stock option plan limits the number of common shares reserved under the plan from exceeding a “rolling maximum” of ten (10%) percent of the Company’s issued and outstanding common shares from time to time. The stock options vest at the discretion of the Board of Directors, upon grant to directors, officers, employees and consultants of the Company and its subsidiaries. The maximum exercise period of an option shall not exceed 10 years from the grant date. Changes in the number of stock options, with their weighted average exercise prices, are summarized below:
October 31, 2019 | October 31, 2018 | |||||||||||||||
Number of options | Weighted Average Exercise Price ($) | Number of options | Weighted Average Exercise Price ($) | |||||||||||||
Balance, beginning of period | - | - | - | - | ||||||||||||
Granted | 12,410,000 | 0.50 | - | - | ||||||||||||
Forfeited | (1,800,000 | ) | 0.50 | - | - | |||||||||||
Balance, end of period | 10,610,000 | 0.50 | - | - | ||||||||||||
Exercisable, end of period | 5,966,875 | 0.50 | - | - |
During, the year ended October 31, 2019, the Company granted 12,410,000 incentive stock options to various officers, directors, employees and consultants. Subsequent to the grant date, 1,550,000 options were forfeited. The options were valued using the Black-Scholes model utilizing the following, weighted average assumptions:
Risk Free Rate – 1.56%
Volatility – 130%
Option life – 3 years
Exercise price - $0.50
Forfeiture rate – 0%
Outstanding | Exercisable | |||||||||||||||||||
Expiry date | Exercise price | Number of Options | Remaining contractual life | Number of Options | Remaining contractual life | |||||||||||||||
$ | # | (years) | # | (years) | ||||||||||||||||
November 21, 2018 | 0.50 | 7,862,500 | 2.06 | 4,342,500 | 2.06 | |||||||||||||||
April 30, 2019 | 0.50 | 2,247,500 | 2.50 | 1,499,375 | 2.50 | |||||||||||||||
June 20, 2019 | 0.50 | 500,000 | 2.64 | 125,000 | 2.64 | |||||||||||||||
0.50 | 10,610,000 | 2.40 | 5,966,875 | 2.40 |
For the year ended Oct 31, 2019, the Company recorded an expense of $2,209 (2018 -$0) related to stock options in share-based compensation expense and contributed surplus of $2,119 (2018 -$0). The weighted average fair value of stock options granted during the year ended October 31, 2019 was $0.21 (2018 - nil) per option.
32
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
19. | Special Warrants |
Number of special warrants | Amount | |||||||
# | $ | |||||||
Balance, October 31, 2017 | - | - | ||||||
Special warrants issued August 22, 2018 (i) | 17,911,459 | 8,956 | ||||||
Issue costs – Cash | - | (582 | ) | |||||
Issue costs – Broker warrants | - | (247 | ) | |||||
Issue costs – Legal fees | - | (178 | ) | |||||
Special warrants issued October 2, 2018 (ii) | 18,817,015 | 9,409 | ||||||
Issue costs – Cash | - | (612 | ) | |||||
Issue costs – Broker warrants | - | (259 | ) | |||||
Issue costs – Legal fees | - | (123 | ) | |||||
Tax effect on share issue costs | - | 540 | ||||||
Balance, October 31, 2018 | 36,728,474 | 16,904 | ||||||
Special warrants converted into units* on November 27, 2018 | (36,728,474 | ) | (16,904 | ) | ||||
Balance, October 31, 2019 | - | - |
* | Each unit comprised of 1 share and ½ purchase warrant, with each full warrant exercisable to acquire one common share at $0.75. |
(i) | On August 22, 2018, the Company closed a private placement offering of special warrants (the “Special Warrants”) for aggregate proceeds of $8,956. Pursuant to the Special Warrant offering, the Company issued 17,911,459 (preshare split 6,489,659) warrants at a price of $0.50 (pre-share split $1.38) per Special Warrant. Each Special Warrant is automatically exercisable, with no additional consideration, into units of the Company on the date the Company obtains receipt from the applicable securities’ regulatory authorities for a final prospectus. Each Special Warrant entitles the holder thereof to 1 common share and ½ common share purchase warrant of the Company. Each full purchase warrant will be exercisable to acquire one common share at a price of $0.75 (pre-split $2.07) per purchase warrant until November 26, 2020, being two years from the initial day of trading of the Company’s securities. On closing of the offering of Special Warrants, the Company paid agents’ commissions of $582 and legal fees and expenses of $178. The Company also issued 1,164,245 (pre-split: 421,828) broker warrants, with each broker convertible into units of the Company for $0.50 (pre-split - $1.38). Each unit will comprise 1 share and ½ purchase warrant, with each full warrant exercisable to acquire one common share at $0.75 (pre-split - $2.07). The broker warrants issued to the agents were fair valued at $246 calculated using Black Scholes option pricing model using the following assumptions: Risk free interest rate: 2.11%, Expected volatility: 130%, Expected life in years: 2, Expected dividends: $Nil |
(ii) | On October 2, 2018, the Company closed a private placement offering of special warrants (the “Special Warrants”) for aggregate proceeds of $9,409. Pursuant to the Special Warrant offering, the Company issued 18,817,015 (preshare split 6,817,759) Special Warrants at a price of $0.50 (pre-share split $1.38) per Special Warrant. Each Special Warrant is automatically exercisable, with no additional consideration, into Units of the Company on the date that the Company obtains receipt from the applicable security’s regulatory authorities for a final prospectus (the “Qualifying Prospectus”). Each Special Warrant entitles the holder thereof to 1 common share and ½ common share purchase warrant of the Company. Each full purchase warrant will be exercisable to acquire one common share at a price of $0.75 (pre-split $2.07) per purchase warrant until November 26, 2020, being two years from the initial day of trading of the Company’s securities. On closing of the offering of the Special Warrants, the Company paid agents’ commissions of $612 and legal fees and expenses of $123. The Company also issued 1,223,105 (pre-split: 443,154) broker warrants with each broker warrant convertible into units of the Company for $0.50 (pre-split - $1.38). Each unit will comprise 1 share and ½ purchase warrant, with each full warrant exercisable to acquire one common share at $0.75 (pre-split - $2.07). The broker warrants issued to the agents were fair valued at $259 calculated using the Black Scholes option pricing model using the following assumptions: Risk free interest rate: 2.27%, Expected volatility: 130%, Expected life in years: 2, Expected dividends: Nil |
33
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
20. | Warrants |
Outstanding warrants at October 31, 2019 were as follows:
Number of warrants | Amount | Weighted average exercise price | Weighted average number of years to expiry | Expiry dates | ||||||||||||||||
# | $ | $ | ||||||||||||||||||
Balance, October 31, 2017 | - | - | - | - | - | |||||||||||||||
Issued in exchange for Famous Brandz’s warrants (i) | 1,194,590 | 243 | 0.4975 | 0.14 | April 29, 2020 | |||||||||||||||
Issued to brokers for private placement (Note 16(vi)) | 670,680 | 158 | 0.3623 | 0.08 | April 29, 2020 | |||||||||||||||
Issued to brokers for special warrant financing (Note 18(i)) | 1,164,245 | 246 | 0.3246 | 0.22 | August 21, 2020 | |||||||||||||||
Issued to brokers for special warrant financing (Note 18(ii)) | 1,223,105 | 259 | 0.3246 | 0.26 | October 1, 2020 | |||||||||||||||
Balance, October 31, 2018 | 4,252,620 | 906 | 0.3773 | 0.70 | ||||||||||||||||
Special warrants converted into units November 27, 2018 (Note 18) | 18,364,236 | 3,853 | 0.7500 | 0.45 | November 26, 2020 | |||||||||||||||
Issued to brokers for financing (Note 14(i)) | 504,733 | 1,784 | 0.7500 | 0.01 | December 10, 2020 | |||||||||||||||
Issued warrants on Convertibile debt April 18, 2019 (Note 14(ii)) | 11,146,667 | 1,213 | 0.8500 | 0.37 | April 17, 2021 | |||||||||||||||
Issued warrants for acquisition - Dreamweavers (Note 4b) | 1,550,000 | 295 | 0.7500 | 0.06 | May 22, 2021 | |||||||||||||||
Issued warrants on convertibile debt June 17, 2019 (Note 14(iii)) | 4,266,667 | 468 | 0.8500 | 0.16 | June 16, 2021 | |||||||||||||||
Issued warrants for services (ii) | 2,000,000 | 132 | 0.5000 | 0.01 | January 24, 2020 | |||||||||||||||
Issued warrants on debt September 04, 2019 (Note 13) | 1,600,000 | 105 | 0.8500 | 0.07 | September 3, 2021 | |||||||||||||||
Warrants exercised | (7,590 | ) | - | - | - | - | ||||||||||||||
Balance, October 31, 2019 | 43,677,333 | 8,756 | 0.6083 | 1.13 |
Number of warrants | Amount | Weighted average exercise price | Weighted average number of years to expiry | |||||||||||||
# | $ | $ | ||||||||||||||
Balance, October 31, 2017 | - | - | - | - | ||||||||||||
Warrants issued | 4,252,620 | 906 | 0.3773 | 0.68 | ||||||||||||
Balance, October 31, 2018 | 4,252,620 | 906 | 0.3773 | 0.70 | ||||||||||||
Warrants issued | 39,432,303 | 7,850 | 0.6843 | 1.13 | ||||||||||||
Warrants exercised | (7,590 | ) | - | 1.0000 | - | |||||||||||
Balance, October 31, 2019 | 43,677,333 | 8,756 | 0.6083 | 1.13 |
i) | Prior to the corporate reorganization, Famous Brandz issued 721 units of unsecured convertible debentures with warrants at a price of $1,000 per unit for total proceeds of $721. The debentures were converted into common share of Famous Brandz prior to the corporate reorganization (Note 2). Total shares issued on conversion was 5,017,012 for a value of $669. The change in the fair value of the conversion feature and accretion totaled $28,415 and $7,709, respectively during the period the convertible debentures were outstanding during the year. As part of the corporate reorganization, the Company issued 1,194,590 (pre-share split: 432,822) warrants with an exercise price of $0.4975 (pre-share split: $1.373) in exchange for 3,403,333 Famous Brandz’s warrants of which 2,403,333 warrants related to the convertible debentures and 1,000,000 were other warrants. The 1,194,590 warrants were valued at $243 using Black Scholes option pricing model using the following assumptions: - Risk free interest rate: 1.77% - Expected volatility: 130% - Expected life in years: 2 - Expected dividends: Nil |
34
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
20. | Warrants (continued) |
ii) | On July 29, 2019, the Company issued 2,000,000 warrants for business development consultancy. Each warrant will allow the holder to acquire one common share at $0.50 for six months. The warrants were valued at $132 using the Black-Scholes model as, the fair value of the services provided cannot be measured reliably and the following assumptions were used: stock price of $0.42; expected life of six month; $nil dividends; expected volatility of 78% based on comparable companies; exercise price of $0.50; and a risk-free interest rate of 1.6%. |
21. | Loss Per Share |
Year ended October 31 | ||||||||
2019 | 2018 | |||||||
$ | $ | |||||||
Net Loss for the year | (26,069 | ) | (4,533 | ) | ||||
Non-controlling interest | 166 | 13 | ||||||
Net Loss for the year attributable to owners of the Company | (25,903 | ) | (4,521 | ) |
# | # | |||||||
Weighted average number of common shares - basic and diluted | 198,181,696 | 107,223,734 | ||||||
Basic loss per share | (0.13 | ) | (0.04 | ) | ||||
Dilutive loss per share(i) | (0.13 | ) | (0.04 | ) |
(i) | The Company did not have any options, warrants or other potential dilutive common share instruments outstanding during the year ended October 31, 2019. |
35
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
22. | Financial Instruments and Risk Management |
The Company’s activities expose it to a variety of financial risks. The Company is exposed to credit, liquidity, and market risk due to holding certain financial instruments. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.
Risk management is carried out by senior management in conjunction with the Board of Directors.
Fair value
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, marketable securities, loans receivable, accounts payable and accrued liabilities, notes payable, convertible debentures, shareholders’ loans and finance lease obligation.
IFRS 13 establishes a three-level hierarchy that prioritizes the inputs relative to the valuation techniques used to measure fair value. Fair values of assets and liabilities included in Level 1 of the hierarchy are determined by reference to quoted prices in active markets for identical assets and liabilities. Fair value of assets and liabilities in Level 2 are determined using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Fair value of assets and liabilities in Level 3 are determined based on inputs that are unobservable and significant to the overall fair value measurement. Accordingly, the Company has categorized its financial instruments carried at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The Company’s cash and cash equivalents and marketable securities is subject to level 1 valuation.
The carrying values of accounts receivable, accounts payable and accrued liabilities and shareholder loans approximate their fair values due to the short-term maturities of these financial instruments.
Loans receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The fair values of loans receivable are not materially different to their carrying amounts, since the interest rate on those loans is either close to current market rates or the notes are of a short-term nature.
Credit risk
Credit risk arises when a party to a financial instrument will cause a financial loss for the counter party by failing to fulfill its obligation. Financial instruments that subject the Company to credit risk consist primarily of cash, accounts receivable, marketable securities and loans receivable. The credit risk relating to cash and cash equivalents and marketable securities balances is limited because the counterparties are large commercial banks. The amounts reported for accounts receivable in the statement of financial position is net of expected credit loss and the net carrying value represents the Company’s maximum exposure to credit risk. Accounts receivable credit exposure is minimized by entering into transactions with creditworthy counterparties and monitoring the age and balances outstanding on an ongoing basis. Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. The following table sets forth details of the aging profile of accounts receivable and the allowance for doubtful accounts:
As at | October 31, 2019 | October 31, 2018 | ||||||
$ | $ | |||||||
Current (for less than 30 days) | 1,038 | 343 | ||||||
31 – 60 days | 336 | 233 | ||||||
61 – 90 days | 295 | 73 | ||||||
Greater than 90 days | 2,355 | 334 | ||||||
Loss allowance | (1,639 | ) | (128 | ) | ||||
2,385 | 855 |
During the year ended Oct 31, 2019, $1,024 in trade receivables were written off due to bad debts (year ended October 31, 2018 – $396). Individual receivables which are known to be uncollectible are written off by reducing the carrying amount directly. The remaining accounts receivable are assessed collectively to determine whether there is objective evidence that an impairment has been incurred but not yet been identified.
The Company performs a regular assessment of collectability of accounts receivables. The Company monitors the financial performance and/or cash flows of its franchisees through observation of their point of sale system, receipt of cash from customers and maintains regular contact/discussions. In fiscal 2018, the Company reviewed the expected payment schedule and discounted it using an average franchisee credit adjusted rate of 11% resulting in the receivables being discounted by $475. For the year ended October 31, 2019, management reviewed the estimates and have created loss allowances for the Smokers Corner’s franchisee receivable of $1,417.
36
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
22. | Financial Instruments and Risk Management (continued) |
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company generally relies on funds generated from operations and equity financings to provide sufficient liquidity to meet budgeted operating requirements and to supply capital to expand its operations. The Company continues to seek capital to meet current and future obligations as they come due. Maturities of the Company’s financial liabilities are as follows:
Contractual cash flows | Less than one year | 1-5 years | Greater than 5 years | |||||||||||||
$ | $ | $ | $ | |||||||||||||
October 31, 2018 | ||||||||||||||||
Accounts payable and accrued liabilities | 2,515 | 2,515 | - | - | ||||||||||||
Shareholder loans | 36 | 36 | - | - | ||||||||||||
Finance lease obligation | 23 | 6 | 17 | - | ||||||||||||
Total | 2,574 | 2,557 | 17 | - | ||||||||||||
October 31, 2019 | ||||||||||||||||
Accounts payable and accrued liabilities | 4,428 | 4,428 | - | - | ||||||||||||
Notes Payable | 3,632 | 3,570 | 62 | - | ||||||||||||
Shareholder loans | 701 | 701 | - | - | ||||||||||||
Finance lease obligation | 17 | 6 | 11 | - | ||||||||||||
Total | 8,778 | 8,705 | 73 | - |
Interest rate risk
The Company is not exposed to significant interest rate risk as its interest-bearing financial instruments carry a fixed rate of interest.
Foreign currency risk
Foreign currency risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company maintains cash balances and enters into transactions denominated in foreign currencies, which exposes the Company to fluctuating balances and cash flows due to variations in foreign exchange rates.
The Canadian dollar equivalent carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities as at October 31, 2019 was as follows:
(Canadian dollar equivalent amounts of US dollar and Euro balances) | October 31, 2019 (Euro) | October 31, 2019 (USD) | October 31, 2019 Total | October 31, 2018 | ||||||||||||
$ | $ | $ | $ | |||||||||||||
Cash | 32 | 220 | 252 | 90 | ||||||||||||
Accounts receivable (including long term portion) | 136 | 285 | 421 | 522 | ||||||||||||
Accounts payable and accrued liabilities | (618 | ) | (492 | ) | (1,110 | ) | (218 | ) | ||||||||
Net monetary assets | (450 | ) | 13 | (437 | ) | 394 |
Assuming all other variables remain constant, a fluctuation of +/- 5.0 percent in the exchange rate between the United States dollar and the Canadian dollar would impact the carrying value of the net monetary assets by approximately +/- $11 (October 31, 2018 - $20). Maintaining constant variables, a fluctuation of +/- 5.0 percent in the exchange rate between the Euro and the Canadian dollar would impact the carrying value of the net monetary assets by approximately +/- $23 (October 31, 2018 - $Nil). To date, the Company has not entered into financial derivative contracts to manage exposure to fluctuations in foreign exchange rates. The Company had no balances denominated in Euros as at October 31, 2018.
37
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
23. | Segmented Information |
Segments are identified by management based on the allocation of resources, which is done on a basis of selling channel rather than by legal entity. As such, the Company has established two main segments, being retail and wholesale, with a Corporate segment which includes oversight and start up operations of new entities until such time as revenue generation commences. The reportable segments are managed separately because of the unique characteristics and requirements of each business.
Retail | Retail | Wholesale | Wholesale | Corporate | Corporate | Total | Total | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
For the year ended Oct 31, | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||||
Net Revenue | 24,002 | 3,757 | 6,686 | 4,992 | 606 | - | 31,294 | 8,749 | ||||||||||||||||||||||||
Gross margin | 8,155 | 3,280 | 2,642 | (171 | ) | 600 | - | 11,397 | 3,109 | |||||||||||||||||||||||
Income (loss) from operations | (5,990 | ) | 126 | (2,448 | ) | (2,802 | ) | (10,105 | ) | (1,058 | ) | (18,543 | ) | (3,734 | ) | |||||||||||||||||
Net (loss) Income | (5,617 | ) | 520 | (2,006 | ) | (3,660 | ) | (12,529 | ) | (1,393 | ) | (20,152 | ) | (4,533 | ) | |||||||||||||||||
Total assets | 36,688 | 9,323 | 6,254 | 6,225 | 5,155 | 10,375 | 48,097 | 25,922 | ||||||||||||||||||||||||
Total liabilities | 4,618 | 847 | 682 | 1,000 | 26,141 | 761 | 31,441 | 2,607 |
24. | Related Party Transactions |
As at October 31, 2019, the Company had the following transactions with related parties as defined in IAS 24 – Related Party Disclosures, except those pertaining to transactions with key management personnel in the ordinary course of their employment and/or directorship arrangements and transactions with the Company’s shareholders in the form of various financing.
Financing transactions
As at October 31, 2019, the Company owed the non-controlling interest shareholder of KushBar Inc. $701.The loan carries no interest and is due on demand. Included in the convertible debenture issued on December 12, 2018, was an investment by a related party, CannaIncome Fund Corporation, for a total subscription amount of $250.
Operational transactions
The Company paid $2,176 (2018 - $2,618), to 1990299 Alberta Ltd. (“199”), a company controlled by the President and CEO of the Company, for inventory purchases. 199 primarily facilitates the import of goods and sells these imported goods to the Company at 199’s purchasing and transportaion costs, without markup. High Tide has transitioned the process of facilitation of its imports from 199 to HT Global Imports. During the year, the Company recharged certain expenses to the President and CEO totalling $56 (2018 - $24). These items are included in accounts receivables. As well, the Company wrote-off related party balances totalling $34 (2018 - $1,419).
An office and warehouse unit has been developed by Grover Properties Inc., a company that is related through a common controlling shareholder and the President & CEO of the company. The office and warehouse space were leased to High Tide to accommodate the Company’s operational expansion. The lease was established by an independent real estate valuations services company at prevailing market rates and has annual lease payments totalling $386 per annum. The primary lease term is 5 years with two additional 5-year term extensions exercisable at the option of the Company. To facilitate the mortgage for the development of this unit, a loan guarantee of up to $1,500 has been provided by Smoker’s Corner Ltd., a subsidary of High Tide Inc.
Executive compensation
Key management personnel is comprised of 9 members of Company’s Executive Team and Board of Directors. Key management compensation for the years ended October 31 is as follows:
2019 | 2018 | |||||||
$ | $ | |||||||
Short-term compensation | 1,469 | 272 | ||||||
Share-based compensation (i) | 71 | 25 | ||||||
Total | 1,540 | 297 |
(i) | During, the year ended October 31, 2019, the Company paid bonus of $90 in form of 200,000 common shares to the officers of the company which were valued at $71 and the difference of $19 was recognized as a gain on extinguishment of financial liability (2018- $25). |
38
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
25. | Commitments and Contingencies |
The Company has commitments relating to operating leases for its office space and outlets under non-cancelable operating leases. The future minimal annual rental payments under these operating leases are as follows:
As at | October 31, 2019 | October 31, 2018 | ||||||
$ | $ | |||||||
Less than one year | 3,962 | 2,336 | ||||||
Between one and five years | 13,830 | 10,103 | ||||||
Greater than five years | 3,426 | 2,532 | ||||||
21,218 | 14,971 |
Included in the commitments schedule above, is the office and warehouse unit leased by High Tide for $386 per annum (Note 23).
Contingent liability
An action with the Court of Queen’s Bench (Alberta) (the “QB Claim”) and a complaint with the Human Rights Tribunal (Alberta) (the “HR Complaint”) was filed by a former employee. The amount claimed by the former employee is approximately $200 plus interest and other costs. The Company has calculated a provision based on the amount claimed and the probability of the QB Claim being successful.
A claim for 110 Euro was lodged against the Company in relation to non-payment under a service contract. The company has disclaimed liability and is defending the action. It is not practical to estimate the potential effect of this claim. However, management’s opinion is that the likelihood of any cash outflow as a result of these matters is remote, therefore, no amounts have been provided for in these consolidated financial statements.
26. | Non-Controlling Interests |
The following table presents the summarized financial information for KushBar, the Company’s subsidiaries which have NCI’s. This information represents amounts before intercompany eliminations.
2019 | ||||
$ | ||||
Total current assets | 458 | |||
Total non-current assets | 1,019 | |||
Total current liabilities | (996 | ) | ||
Total non-current liabilities | - | |||
Revenues for the year ended | 259 | |||
Net loss for the year ended | (294 | ) |
The net change in non-controlling interests is as follows:
Balance, October 31, 2018 | (13 | ) | ||
Share of loss for the period | (166 | ) | ||
Balance, October 31, 2019 | (179 | ) |
As of October 31, 2019, the Company held a 50.1% ownership interest in KushBar, with $179 NCI. As well, the Company owed the non-controlling interest shareholder $701. The loan carries no interest and is due on demand.
39
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
27. | Subsequent Events |
(i) | On November 5, 2019, the Company issued unsecured convertible debentures under a non-brokered private placement with proceeds of $2,000. Subject to the need for further growth capital, the Company’s Board of Directors has authorized the issuance of an optional second tranche of the offering for aggregate proceeds of up to $5,000. The outstanding principal amount under the Debentures is convertible at any time before maturity and at the holder’s option, into common shares of the Company at a conversion price of $0.252 per share. The Debentures are due 24 months from the date of issuance and carry an interest cost of 10% per annum, payable annually in advance in shares. The interest cost is payable in common shares at a price equal to the volume-weighted average price per common share for the 10-day period prior to the date upon which interest is due. Concurrent with the issuance of the Debentures, the Company paid the annual amount of interest due up-front in the form of 784,314 shares. Under the offering, the Company also issued common share purchase warrants such that each subscriber received one warrant for each $0.252 original principal amount of its Debenture, resulting in 7,936,507 warrants being issued as part of the offering. Each warrant entitles the holder to acquire one Share at an exercise price of $0.50 per common share for two years from the date of issuance. |
(ii) | On December 5, 2019, the Company closed the second tranche of the sale of unsecured convertible debentures of the Company under the private placement previously announced on November 5, 2019. Gross proceeds from the Second Tranche were $2,115. The outstanding principal amount under the Debentures is convertible at any time before maturity and at the holder’s option, into common shares of the Company at a conversion price of $0.252 per share. The debentures are due 24 months from the date of issuance and carry an interest cost of 10% per annum, payable annually in advance in common shares. The interest rate is payable in common shares at a price equal to the volume-weighted average price per common share for the 10-day period prior to the date upon which interest is due. Concurrent with the issuance of the debentures, the Company paid the annual amount of interest due up-front in the form of 1,016,826 common shares. Under the second tranche of the offering, the Company also issued common share purchase warrants such that each subscriber received one warrant for each $0.252 original principal amount of its debenture, resulting in 8,392,857 warrants being issued as part of the offering. Each warrant entitles the holder to acquire one common share at an exercise price of $0.50 per common share for two years from the date of issuance. |
(iii) | On December 10, 2019, the Company entered into a definitive share purchase agreement with 2651576 Ontario Inc. (the “Minority Holder”), a private Ontario company, to acquire the remaining 49.9% interest (the “Minority Interest”) in High Tide’s majority-owned subsidiary, KushBar Inc. (“KushBar”). Pursuant to the Definitive Agreement, High Tide, which presently holds a controlling interest of 50.1% in KushBar, will acquire the Minority Interest in a transaction (the “Transaction”) that will result in KushBar becoming a wholly owned subsidiary of High Tide. The consideration paid for the minority interest was by the issuance of a secured convertible debenture in the principal amount of approximately $700 and such number of common shares in the capital of High Tide (“Shares”) having an aggregate value of $500, with each common share priced at the 10-day volume weighted average trading price of the shares on the CSE immediately prior to the closing date. The outstanding principal amount under the Debenture is convertible, at the holder’s option, before the maturity date into Shares at a price of $0.25 per common share. The Debenture will be due 24 months from the issuance date and will not bear interest, provided however that any principal amount outstanding following the maturity date will bear interest at a rate of 10% per annum until repaid. If, following the expiry of all hold periods imposed by applicable Canadian securities laws, the volume-weighted average trading price of the common shares on the CSE exceeds $0.30 for a period of 30 consecutive days, High Tide will be entitled to, subject to certain other conditions being met, cause the holder to convert all or part of the outstanding principal amount of the debenture into Shares. In addition, if at any time during the term thereof, High Tide issues securities at a price deemed lower than the conversion price then in effect, then, subject to certain other conditions, such conversion price will be adjusted downward to such lower price. |
(iv) | On Dec 13, 2019, the Company issued to $2,000 in convertible debt and 7,936,508 warrants to the sellers of GrassCity to settle the put option valued at $2,121 as of October 31, 2019. |
(v) | On January 1, 2020, the Company launched its proprietary data analytics platform called “Cabanalytics”. Cabanalytics not only provides the Company a deep understanding of consumer behaviours and preferences, but also serves as a new high growth revenue and gross margin stream by providing consumer and product insights to licensed producers and other companies supporting the cannabis sector. The Company Is finalizing agreements with licensed producers across Canada, and expects to deliver Cabanalytics to 6 such partners by April, 2020. |
40
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
27. | Subsequent Events (continued) |
(vi) | On January 7, 2020, the Company entered into a loan agreement with Windsor Private Capital (“Windsor”), a Toronto-based merchant bank, to secure a senior secured, non-revolving term credit facility (“the facility”) in the amount of up to $10,000. The Company will have immediate access to an initial $6,000 in working capital, that can be drawn down at Company’s discretion, and subject to satisfaction of certain conditions, will provide the Company with access to an additional $4,000. Amounts drawn down under the Facility will bear interest at a rate of 11.5% per annum, payable monthly, in arrears, on the last day of each calendar month. Provided that certain conditions are satisfied, the Facility will automatically extend for an additional one-year term. The principal amount advanced under the facility is convertible, during its term at any time after an initial 6 month hold period, and at Windsor’s option, into common shares in the capital of the Company at a conversion price of $0.17. The conversion price is subject to downward adjustment if the Company, at any time during the term of the Facility, issues securities at a price deemed lower than the conversion price then in effect. Pursuant to the loan agreement, Windsor is entitled to a one-time placement fee equal to 3.5% of the initial Facility amount, which the Company intends to capitalize into the principal amount advanced under the Facility. In addition, Company will issue to Windsor such number of Share purchase warrants (the “Warrants”) equal to the aggregate principal amount of the Facility divided by the conversion price. The warrants will be subject to vesting as follows: (i) with respect to such number of warrants equal to the initial Facility amount divided by the conversion price, such warrants will vest on the earlier of the date on which Windsor advances to the Company the total initial Facility amount, and February 6, 2020, and (ii) with respect to the remaining warrants, such number of warrants equal to the quotient obtained by dividing the principal amount advanced to the Company (from the remaining Facility amount) by the conversion price, will vest on the date of each such advance. Each warrant will entitle the holder thereof, following the vesting date applicable to such Warrant, to acquire one at an exercise price equal to 150% of the conversion price per common share for a period of two years from the date of issuance. |
(vii) | On January 27, 2020, the Company completed the acquisition of the Canna Cabana retail cannabis store in Hamilton, Ontario. As consideration for the acquisition, the Company paid to the vendor $2,097 in cash and issued to the vendor 4,761,904 common shares in the capital of the Company. The Transaction, which was completed with the consent of the Alcohol and Gaming Commission of Ontario (the “AGCO”) following the expiry of certain restrictions on change of control established under the rules applicable to the first cannabis retail lottery conducted by the AGCO on January 11, 2019. In connection with the Transaction, the Company acquired all the issued and outstanding shares of a numbered company that was wholly owned by the holder of a cannabis retail store. |
In accordance with IFRS 3, Business Combinations (“IFRS 3”), the substance of the transaction constituted a business combination. Accordingly, the assets acquired, and the liabilities assumed have been recorded at their respective estimated fair values as of the acquisition date.
Total consideration | $ | |||
Cash paid | 2,860 | |||
Common shares | 1,100 | |||
Total | 3,960 | |||
Net identifiable assets acquired | ||||
Cash | 455 | |||
Prepaid expenses and deposits | 3 | |||
Inventory | 444 | |||
Property and equipment | 456 | |||
Intangible assets - licenses | 3,304 | |||
Deferred tax liability | (702 | ) | ||
Total | 3,960 | |||
Purchase price allocation | ||||
Net identifiable assets acquired | 3,960 | |||
Goodwill | - | |||
Total | 3,960 |
41
High Tide Inc. Notes to the Consolidated Financial Statements For the years ended October 31, 2019 and 2018 (In thousands of Canadian dollars, except share and per share amounts) |
27. | Subsequent Events (continued) |
(viii) | On January 28, 2020, the Company acquired a 50% interest in the Canna Cabana branded store in Sudbury, Ontario. As consideration for the transaction, the Company issued to a nominee of the partners of the partnership an aggregate of 5,319,149 common shares of the Company, which are subject to a four month and one day statutory hold period, as well as common share purchase warrants to purchase up to an aggregate of 2,500,000 shares of the Company. Each Warrant entitles the holder to acquire one share at an exercise price of $0.40 per share for a period of two years from the date of issuance. In addition, for a period of 2 years following the closing date, one of the outgoing partners will be entitled to receive, from the Company, a royalty of 1% of the gross revenues of the Sudbury store. The Sudbury store has a stable operating history with unaudited gross sales exceeding $6.4 million for the nine months since opening on April 20, 2019 and daily customer count of approximately 600. |
(ix) | On February 14, 2020, the Company entered into a binding asset purchase agreement with Halo Labs Inc. (“Halo”), under which High Tide will sell its KushBar retail cannabis assets and the rights to 5 permitted retail cannabis stores (the “Portfolio”) to Halo for $12,000, payable in the form of 46,153,846 common shares of Halo, of which $3,500 has been paid to the Company as a non-refundable deposit, subject to certain limited circumstances. In addition, Halo has agreed to engage the Company to substantially oversee all aspects of its retail cannabis operations with respect to the Portfolio and will pay the Company ongoing royalties for regulatory advisory services and retail management, and a fixed fee for managing the construction of the unopened stores. |
(x) | On February 21, 2020, the Company closed the acquisition of a retail cannabis store currently operating in Tisdale, Saskatchewan (the “Tisdale Store”) as licensed by the Saskatchewan Liquor and Gaming Authority. The consideration paid to acquire the Tisdale Store was $200 in cash, $500 in the form of a promissory note due six months from the time of closing of the transaction and 5,000,000 of common shares of the Company. |
In accordance with IFRS 3, Business Combinations (“IFRS 3”), the substance of the transaction constituted a business combination. Accordingly, the assets acquired, and the liabilities assumed have been recorded at their respective estimated fair values as of the acquisition date.
Total consideration | $ | |||
Cash paid | 219 | |||
Common shares | 975 | |||
Notes payable | 470 | |||
Total | 1,664 | |||
Net identifiable assets acquired | ||||
Inventory | 40 | |||
Property and equipment | 369 | |||
Intangible assets - licenses | 137 | |||
Deferred tax liability | (37 | ) | ||
Total | 509 | |||
Purchase price allocation | ||||
Net identifiable assets acquired | 509 | |||
Goodwill | 1,155 | |||
Total | 1,664 |
42