UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 40-F
[ ] Registration statement pursuant to Section 12 of
the Securities Exchange Act of 1934
or
[X] Annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: July 31, 2019
Commission File Number: 001-38781
HEXO CORP.
(Exact name of
Registrant as specified in its charter)
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ONTARIO
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2833
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Not Applicable
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(Province or Other Jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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Classification
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Incorporation or Organization)
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Code Number)
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Identification No.)
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490 Boulevard Saint-Joseph, Suite 204
Gatineau,
Québec
Canada J8Y 3Y7
1-(844) 406-1852
(Address and telephone number of Registrant’s principal executive
offices)
CT Corporation System
1015
15th Street N.W., Suite 1000
Washington, DC
20005
(202) 572-3100
(Name, address (including zip
code) and telephone number (including area code) of agent for service in the
United States)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Trading Symbol(s)
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Name of Each Exchange On Which
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Registered:
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Common Shares, no par value
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HEXO
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information
filed with this form:
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[X] Annual Information Form
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[X] Audited Annual Financial Statements
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Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close of the period
covered by the annual report: 256,981,753
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[ X ]
Yes [ ] No
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
such files).
[X] Yes [
] No
Indicate by check mark whether the registrant is an emerging
growth company as defined in Rule 12b-2 of the Exchange Act.
[X] Emerging
growth company
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if the
registrant has elected not to use the transition period for complying with any
new or revised financial accounting standards† provided pursuant to Section
13(a) of the Exchange Act. [ ]
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial
Accounting Standards Board to its Accounting Standards Codification after April
5, 2012.
EXPLANATORY NOTE
HEXO Corp. (the “Company” or “HEXO”) is a
Canadian issuer that is permitted, under the multijurisdictional disclosure
system adopted in the United States, to prepare this annual report on Form 40-F
(this “Annual Report”) pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), in accordance with
Canadian disclosure requirements, which are different from those of the United
States. The Company is a “foreign private issuer” as defined in Rule 3b-4 under
the Exchange Act and Rule 405 under the Securities Act of 1933, as amended.
Equity securities of the Company are accordingly exempt from Sections 14(a),
14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3
thereunder.
The Company’s common shares are listed on the Toronto Stock
Exchange and the New York Stock Exchange under the trading symbol “HEXO”.
In this Annual Report, references to “we”, “our”, “us”, the
“Company” or “HEXO”, mean HEXO Corp. and its wholly-owned subsidiaries, unless
the context suggests otherwise.
FORWARD LOOKING STATEMENTS
This Annual Report includes or incorporates by reference
certain “forward-looking information” and “forward-looking statements”
(collectively, “forward-looking statements”). Such statements can
generally be identified by the use of forward-looking terminology such as
“expect,” “likely”, “may,” “will,” “should,” “intend,” or “anticipate”,
“potential”, “proposed”, “estimate” and other similar words, including negative
and grammatical variations thereof, or statements that certain events or
conditions “may” or “will” happen, or by discussions of strategy.
Forward-looking statements include estimates, plans, expectations, opinions,
forecasts, projections, targets, guidance, or other statements that are not
statements of fact. Forward-looking statements included or incorporated by
reference in this Annual Report include, but are not limited to, statements with
respect to:
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the competitive and business strategies of the Company;
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the intention to grow the business, operations and potential activities of
the Company, including entering into joint ventures and leveraging the brands
of third parties through joint ventures and partnerships;
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the ongoing expansion of the Company’s facilities, its costs and receipt
of approval from Health Canada to complete such expansion and increase
production and sale capacity;
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the expansion of business activities, including potential acquisitions;
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the integration of our acquisition of Newstike Brands Ltd. into our
operations;
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the expected production capacity of the Company;
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the expected sales mix of offered products;
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the development and authorization of new products, including cannabis
edibles, topicals and extracts;
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the competitive conditions of the industry, including the Company’s
ability to maintain or grow its market share;
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the establishment of the Company’s Truss joint venture with Molson Coors
Canada and the future impact thereof;
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the establishment of the Company’s HEXO MED joint venture with QNBS P.C.
(formerly Qannabos) for the Company’s Eurozone processing, production and
distribution centre in Greece and the future impact thereof;
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the expansion of the Company’s business, operations and potential
activities outside of the Canadian market, including but not limited to the
U.S., Europe, Latin America and other international jurisdictions;
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whether the Company will have sufficient working capital and its ability
to raise additional financing required in order to develop its business and
continue operations;
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the applicable laws, regulations and any amendments thereof;
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the Company’s ability to maintain its status as neither a “passive foreign
investment company” within the meaning of Section 1297 of the U.S. Internal
Revenue Code of 1986, as amended nor an “investment company” within the
meaning of the U.S. Investment Company Act of 1940, as amended;
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the grant, renewal and impact of any licence or supplemental licence to
conduct activities with cannabis or any amendments thereof;
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the filing of trademark and patent applications and the successful
registration of same;
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the anticipated future gross margins of the Company’s operations; and
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the performance of the Company’s business and operations.
Forward-looking statements are based on our reasonable
assumptions, estimates, internal and external analysis and opinions made
considering our experience and perception of trends, current conditions and
expected developments, as well as other factors that we believe to be relevant
and reasonable at the date that such statements are made. Forward-looking
statements are subject to a variety of known and unknown risks, uncertainties
and other factors that could cause actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements,
including, without limitation, the risks described under the heading “Risk
Factors” in the Company’s Annual Information Form for the fiscal year ended
July 31, 2019. You should not place undue reliance on forward-looking statements
included or incorporated by reference in this Annual Report.
The forward-looking statements included or incorporated by
reference in this Annual Report are made only as of the date of this report. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by applicable law. The Company’s forward-looking statements are
expressly qualified in their entirety by this cautionary statement.
NOTE TO UNITED STATES READERS:
DIFFERENCES IN
UNITED STATES AND CANADIAN REPORTING PRACTICES
The Company is permitted, under a multijurisdictional
disclosure system adopted by the SEC, to prepare this Annual Report in
accordance with Canadian disclosure requirements, which are different from those
of the United States. The Company prepares its financial statements in
accordance with International Financial Reporting Standards (“IFRS”), as
issued by the International Accounting Standards Board, which differ in certain
respects from United States generally accepted accounting principles (“U.S.
GAAP”) and from practices prescribed by the Securities and Exchange
Commission (“SEC”). Therefore, the Company’s financial statements
incorporated by reference in this Annual Report may not be comparable to
financial statements prepared in accordance with U.S. GAAP.
CURRENCY
Unless otherwise indicated, all dollar amounts in this Annual
Report are in Canadian dollars. The exchange rate of Canadian dollars into
United States dollars, on July 31, 2019 based upon the daily exchange rate as
quoted by the Bank of Canada was U.S.$1.00 = Cdn.$1.3148.
ANNUAL INFORMATION FORM
The Company’s Annual Information Form for the fiscal year ended
July 31, 2019 is filed as Exhibit 99.1 to this Annual Report, and is
incorporated by reference herein.
AUDITED ANNUAL FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company
for the year ended July 31, 2019, including the report of the independent
auditors thereon, are filed as Exhibit 99.2 to this Annual Report, and are
incorporated by reference herein.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company’s Management’s Discussion and Analysis for the year
ended July 31, 2019 is filed as Exhibit 99.3 to this Annual Report, and is
incorporated by reference herein.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) designed to ensure
that information required to be disclosed in reports filed or submitted by the
Company under U.S. and Canadian securities legislation is recorded, processed,
summarized and reported within the time periods specified in those rules,
including providing reasonable assurance that material information is gathered
and reported to management, including the Company’s Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), to permit timely
decisions regarding public disclosure.
As of the end of the period covered by this Annual Report, the
Company, under the supervision of the CEO and CFO, carried out an evaluation of
the effectiveness of the Company’s disclosure controls and procedures. Based on
that evaluation, the CEO and CFO have concluded that, as of the end of the
period covered by this Annual Report, because of the material weaknesses in our
internal control over financial reporting described below, our disclosure
controls and procedures were not effective as of July 31, 2019.
Management's Report on Internal Control over Financial
Reporting
The Company’s management, including the CEO and CFO, is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The
Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
IFRS. The Company’s internal control over financial reporting includes those
policies and procedures that:
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(i)
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the Company’s assets;
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(ii)
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provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with IFRS, and that the Company’s receipts and expenditures are
being made only in accordance with authorizations of the Company’s
management and directors; and
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(iii)
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provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.
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Management, including the CEO and CFO, does not expect that the
Company’s internal controls will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of internal controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. Also, any
evaluation of the effectiveness of controls in future periods are subject to the
risk that those internal controls may become inadequate because of changes in
business conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In connection with the Company’s reporting obligations in
Canada and its obligations under Rule 13a-15(c) under the Exchange Act,
management, under the supervision and with the participation of its CEO and CFO,
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting as of July 31, 2019, the end of the period covered by
this Annual Report, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework (2013). Based on this evaluation, management concluded that as at July
31, 2019, the Company’s internal control over financial reporting was not
effective based on the material changes to the control environment and the
material weaknesses in our internal control over financial reporting described
below.
Material Changes to the Control Environment
During the period covered by this Annual Report, the Company
continued to embark on a transformation project, enabled by a new end to end
Enterprise Resource Planning (“ERP”) system. When completed, the project
will provide an integrated system for inventory tracking and valuation from seed
to sale. The project was launched in November 2017 to standardize and automate
business processes and controls across the organization. As at July 31, 2019,
the system’s Finance, Sales and Procurement processes were functional. It will
continue to be rolled out for inventory tracking and processing throughout the
fiscal year. The project is a major initiative that is utilizing third party
consultants, and a solution designed specifically for the cannabis industry. The
new ERP is intended to facilitate improved reporting and oversight and enhance
internal controls over financial reporting.
Also, during the period were changes made to the Company’s
inventory count process, procedures and estimate approach. Due to the
significant increase in volume as the Company’s production levels rise, there
were additional complexities added to this process. Additional resources were
required to complete the inventory count including the reallocation of personnel
from other departments and the use of third-party services. This inherently
creates an increased risk environment in that less experienced personnel were
involved in the process.
Identified Material Weaknesses and Remediation
Plan
Complex Spreadsheet Controls
Management concluded that the Company did not implement and
maintain effective controls surrounding complex spreadsheets. Spreadsheets are
inherently prone to error due to the manual nature and increased risk of human
error. The Company’s controls related to complex spreadsheets did not address
all identified material risks associated with manual data entry, documentation
of assumptions, completeness of data entry, and the accuracy of formulas.
The Company has engaged a third party to aid in the
identification, assessment and remediation over the design and implementation
effectiveness of complex spreadsheet internal controls over financial reporting.
The Company intends to move towards an ERP which possesses specific
functionality to remove the manual nature and usage of complex spreadsheets in
future periods.
Implementation of an ERP
The Company did not have effective information technology (IT)
general controls over all operating systems, databases, and IT applications
supporting financial reports. Accordingly, process-level automated controls and
manual controls that were dependent upon the information derived from IT systems
were also determined to be ineffective. The Company has engaged a third party to
aid in the identification, assessment and remediation over the design and
implementation effectiveness of IT related internal controls over financial
reporting. The Company intends to fully implement the ERP during fiscal 2020 and
will only take reliance upon such controls once the appropriate level of testing
is reached.
Inventory Count
The Company did not have effective controls around its year-end
inventory count procedures, specifically with respect to its reconciliation of
the ERP system due to the details outlined in the previous change to control
environment section.
To further strengthen controls surrounding inventory,
management has initiated or enhanced the following procedures:
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Segregation of duties to initiate work, production orders and inventory
adjustments will be strengthened;
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Work, production orders and inventory adjustments will be reviewed and
approved by the relevant supervisor;
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Further enhancements to the ERP inventory processing, tracking and
reporting functionality and supporting work procedures in order to ensure
their sustainability;
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Additional training, guidance and communications to internal teams and
third-party inventory count providers regarding inventory management and count
procedures.
Procurement
The Company did not maintain effective controls over the
purchasing of capital goods and services, including the authorization of
purchases, processing and payment of vendor invoices, the classification of
various expenses and capitalization of assets.
To strengthen the controls surrounding the procurement process,
management has initiated or enhanced the following procedures:
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Enhancements to the ERP’s purchasing functionality; including segregation
of duties to initiate and release purchase orders;
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Additional training, guidance and communications to internal teams
regarding the Company’s procurement policies and required adherence to the
Governance Authority Matrix.
Financial Reporting
The Company did not maintain effective process level and
management review controls over manual financial reporting processes and the
application of IFRS and accounting measurements related to certain significant
accounts and non-routine transactions.
To strengthen the controls surrounding the financial reporting
process, management has initiated the following:
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Assessing the financial and accounting resources in order to identify the
areas and functions that lack sufficient personnel and other resources.
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Hiring additional personnel, to be dedicated to the implementation,
maintenance and monitoring of disclosure and financial controls, including our
current efforts to recruit a Director of Finance; and,
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Engaging third-party advisors with appropriate expertise to assist in the
application of complex accounting measurements and non-routine transactions.
No Attestation Report of the Registered Public Accounting
Firm.
This Annual Report does not include an attestation report of
the Company’s independent registered public accounting firm relating to the
Company’s internal control over financial reporting due to a transition period
established by rules of the SEC for newly public companies. In addition, as an
“emerging growth company” (as such term is defined in Rule 12b-2 under the
Exchange Act), the Company is not required to provide such a report. The Company
will be required to provide such an attestation report when it no longer
qualifies as an emerging growth company.
Changes in Internal Control Over Financial Reporting
The Company is establishing and implementing controls over the
integration of its material business acquisitions, investment in associates and
joint ventures.
In addition to the implementation of an ERP system and other
remediation efforts described above, the legalization of recreational cannabis
in Canada during the first quarter of fiscal 2019 resulted in a significant
change in the Company’s internal control over financial reporting for the year
ended July 31, 2019. The Company expanded its business model and its revenue
streams now include retail sales and business to business sales in the
recreational cannabis market. New processes and controls have been designed,
implemented and continue to be assessed with respect to the expansion of our
business and revenue streams for internal control over financial reporting
purposes.
Given the fast pace of ongoing expansion of the business,
management has also performed additional account reconciliations and other
analytical and substantive procedures to ensure reliable financial reporting and
the preparation of financial statements in accordance with IFRS.
CORPORATE GOVERNANCE
The Company’s Board of Directors (the “Board”) is
responsible for the Company’s corporate governance and has a
separately-designated standing Human Resource and Corporate Governance Committee
(the “HR&CG Committee”), and Audit Committee. The charters of each
committee can be viewed on the Company’s corporate website at
https://www.hexocorp.com/governance/. In addition, the Company’s Audit
Committee Charter is attached as Schedule “A” to the Annual Information Form,
which is filed as Exhibit 99.1 to this Annual Report.
Human Resource and Corporate Governance Committee
The Human Resource and Corporate Governance Committee has been
appointed for the purpose of assisting the Board in fulfilling its oversight
responsibilities for: (a) establishing the Company’s corporate governance
policies and practices generally; (b) identifying and recommending to the Board
individuals qualified to become members of the Board; (c) reviewing the
composition, effectiveness and independence of the Board and its committees; (d)
monitoring and reviewing compensation policies and practices and administering
the Company’s share compensation plans, which is then to be presented to the
Board for approval; and (e) reviewing compensation for the Chief Executive
Officer and members of the Board, which is then to be approved or presented to
the Board for approval. The HR&CG Committee annually assesses the skills and
qualifications of directors and nominees to ensure the members of the Board have
the requisite skills and qualifications to meet the current needs of the
Company. The HR&CG Committee is comprised of Nathalie Bourque (Chair),
Vincent Chiara and Jason Ewart. The Board has determined that all three members
of the HR&CG Committee are independent, based on the criteria for
independence prescribed by Section 303A.02 of the NYSE Listed Company Manual.
AUDIT COMMITTEE
The Board has established a separately-designated standing
Audit Committee in accordance with Section 3(a)(58)(A) of the Exchange Act and
Section 303A.06 of the NYSE Listed Company Manual for the purpose of overseeing
the Company’s accounting and financial reporting processes and the audit of its
annual financial statements.
The Audit Committee is comprised of Jason Ewart (Chair),
Nathalie Bourque and Vincent Chiara. The Board has determined that the Audit
Committee meets the composition requirements set forth by Section 303A.07 of the
NYSE Listed Company Manual, and that each of the members of the Audit Committee
is independent as determined under Rule 10A-3 under the Exchange Act and Section 303A.02 of the
NYSE Listed Company Manual. All three members of the Audit Committee are
financially literate, meaning they are able to read and understand the Company’s
financial statements and to understand the breadth and level of complexity of
the issues that can reasonably be expected to be raised in the Company’s
financial statements.
The Board has determined that Jason Ewart qualifies as an
“audit committee financial expert” (as defined in paragraph (8)(b) of General
Instruction B to Form 40-F), has financial management expertise (pursuant to
section 303A.07 of the NYSE Listed Company Manual) and is independent (as
determined under Exchange Act Rule 10A-3 and section 303A.02 of the NYSE Listed
Company Manual).
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED
BY
INDEPENDENT AUDITOR
The Audit Committee Charter sets out responsibilities regarding
the provision of non-audit services by the Company’s external auditors and
requires the Audit Committee to pre-approve all permitted non-audit services to
be provided by the Company’s external auditors, in accordance with applicable
law. The Company also requires pre-approval of all audit services to be provided
by its external auditors. All audit and non-audit services performed by the
Company’s external auditors for the fiscal year ended July 31, 2019 were
pre-approved by the Audit Committee and none were approved on the basis of the
de minimis exemption set forth in Rule 2-01(c)(7)(i)(C) of Regulation S-X.
PRINCIPAL ACCOUNTING FEES AND SERVICES - INDEPENDENT
AUDITORS
The following table sets forth information regarding amounts
billed to us by our independent auditor for each of our last two fiscal years
ended July 31 in Canadian dollars:
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July 31, 2019
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July 31, 2018
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Audit Fees(1)
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$949,933
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$236,590
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Audit-Related Fees(2)
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$Nil
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$Nil
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Tax Fees(3)
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$19,795
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$22,475
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All Other Fees
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$Nil
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$Nil
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Notes:
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(1)
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Includes fees for the performance of the annual audit and
quarterly reviews of the financial statements.
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(2)
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Denotes fees related to assurance services not inclusive
in (1), in regard to the performance of the annual audit and quarterly
reviews of the financial statements.
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(3)
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Includes fees for services related to assistance with tax
returns and amalgamation assistance.
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OFF-BALANCE SHEET ARRANGEMENTS
Please see the section entitled “Off-Balance Sheet Arrangements
and Contractual Obligations” at page 32 of the Company’s Management’s Discussion
and Analysis for the year ended July 31, 2019 contained in Exhibit 99.3 to this
Annual Report (which sections are incorporated by reference in this Annual
Report) for a discussion of certain off-balance sheet arrangements.
CODE OF ETHICS
The Company has adopted a Code of Business Conduct and Ethics
(the “Code”) that applies to all of our directors, officers and employees
and certain contractors. A copy of the Code is posted on the Company’s website
at www.hexocorp.com/governance. The Code meets
the requirements for a “code of ethics” within the meaning of paragraph 9(b) of
General Instruction B to Form 40-F. No substantive amendments were made to the
Code during the fiscal year ended July 31, 2019, and no waivers of the Code were
granted to any principal officer of the Company or any person performing similar
functions during the fiscal year ended July 31, 2019.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table lists, as of July 31, 2019, information
with respect to the Company’s known contractual obligations (in Cdn. thousands).
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Payments due by period
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Contractual Obligations
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Total
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< 1 year
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1-3 years
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3-5 years
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5+ years
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Long Term Debt Obligations
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34
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3
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31
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-
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-
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Operating Lease Obligations
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101,421
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5,718
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10,450
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10,035
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75,218
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Purchase Obligations
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39,828
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39,828
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-
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-
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-
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Total
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141,283
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45,549
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10,481
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10,035
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75,218
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NOTICES PURSUANT TO REGULATION BTR
There were no notices required by Rule 104 of Regulation BTR
that the Company sent during the year ended July 31, 2019 concerning any equity
security subject to a blackout period under Rule 101 of Regulation BTR.
NYSE CORPORATE GOVERNANCE
The Company complies with corporate governance requirements of
both the TSX and the NYSE. As a “foreign private issuer” as defined in Rule 3b-4
under the Exchange Act, the Company is not required to comply with all of the
corporate governance requirements of the NYSE; however, the Company adopts best
practices consistent with domestic NYSE listed companies when appropriate to its
circumstances.
The Company has reviewed the NYSE corporate governance
requirements and confirms that, except as described below, the Company is in
compliance with the NYSE corporate governance standards in all significant
respects:
Shareholder Meeting Quorum Requirement: The NYSE is of
the opinion that the quorum required for any meeting of shareholders should be
sufficiently high to ensure a representative vote. The Company’s quorum
requirement is set forth in its Articles. A quorum for shareholders’ meeting,
section 9.12 of By-Law No. 1 provides all of the shareholders or two
shareholders, whichever number be the lesser (personally present or represented
by proxy), shall constitute a quorum of any meeting of any class of
shareholders. This is consistent with the laws, customs and practices in Canada.
Proxy Delivery Requirement: The NYSE requires the
solicitation of proxies and delivery of proxy statements for all shareholder
meetings and requires that these proxies shall be solicited pursuant to a proxy
statement that conforms to SEC proxy rules. The Company is a “foreign private
issuer” as defined in Rule 3b-4 under the Exchange Act, and the equity
securities of the Company are accordingly exempt from the proxy rules set forth
in Sections 14(a), 14(b), 14(c) and 14(f) of the Exchange Act. The Company
solicits proxies in accordance with applicable rules and regulations in Canada.
Shareholder Approval Requirement: The NYSE requires
shareholder approval for issuances of common shares, or any securities
convertible or exercisable into common shares:
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(a)
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to directors, officers or substantial security holders of
the Company (each, a “Related Party”), a subsidiary, affiliate or
other closely-related person of a Related Party or any company or entity
in which a Related Party has a substantial interest, where the number of
common shares, or the number of common shares into which the securities
are convertible or exercisable, exceeds either (i) 1% of the outstanding
common shares before the issuance; or (ii) 1% of the voting power of the
outstanding common shares before the issuance, in either case except for
substantial security holders paying cash and full book and market value
for less than 5% of the number of common shares and voting power
outstanding before the issuance;
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(b)
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the common shares, or the number of common shares into
which the securities are convertible or exercisable, constitute at least
(i) 20% of the voting power of the outstanding common shares before the
issuance; or (ii) 20% of the outstanding common shares before the
issuance, in either case except for public offerings of common shares for
cash and private financings involving sales of common shares at a price,
or securities convertible or exercisable into common shares with a
conversion or exercise price, of at least the market values of the common
shares; and
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(c)
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where the issuance would result in a change of control of
the Company.
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The Company will follow TSX rules for shareholder approval of
new issuances of its common shares, in lieu of the foregoing requirements of the
NYSE. Following TSX rules, shareholder approval is required for certain
issuances of shares that: (i) materially affect control of the listed issuer; or
(ii) provide consideration to insiders in aggregate of 10% or greater of the
market capitalization of the listed issuer, during any six-month period, and has
not been negotiated at arm's length. Shareholder approval is also required,
pursuant to TSX rules, in the case of private placements: (a) for an aggregate
number of listed securities issuable greater than 25% of the number of
securities of the listed issuer which are outstanding, on a non-diluted basis,
prior to the date of closing of the transaction if the price per security is
less than the market price; or (b) that during any six month period are to
insiders for listed securities or options, rights or other entitlements to
listed securities greater than 10% of the number of securities of the listed
issuer which are outstanding, on a non-diluted basis, prior to the date of the
closing of the first private placement to an insider during the six month
period. The rules of the TSX also require shareholder approval in connection
with an acquisition by a listed issuer where the number of securities issued or
issuable in payment of the purchase price for the acquisition exceeds 25% of the
number of securities of the listed issuer that are outstanding, on a non-diluted
basis.
Equity Compensation Plans: The NYSE also requires
shareholder approval of all plans or other arrangements that provide for equity
securities as compensation to employees, directors or service providers, and any
material revisions to such plans or arrangements, except for certain plans and
arrangements, including:
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(a)
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those plans or arrangements allowing employees, directors
or service providers to buy such securities on the open market or from the
Company for current fair market value;
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(b)
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grants of options or other equity-based compensation as a
material inducement upon hiring or to new employees in connection with a
merger or acquisition; and
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(c)
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conversions, replacements or adjustments of outstanding
options or other equity compensation awards to reflect a merger or
acquisition.
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The TSX requires shareholder approval of all security based
compensation arrangements, and any material amendments to such arrangements,
except for arrangements used as an inducement to persons or companies not
previously employed by and not previously an insider of the listed issuer,
provided that: (i) such persons or companies enter into a contract of full time
employment as an officer of the listed issuer; and (ii) the number of securities
made issuable to such persons or companies during any twelve month period does
not exceed in aggregate 2% of the number of securities of the listed issuer
which are outstanding, on a non-diluted basis, prior to the date the exemption
is first used during such twelve month period. Such shareholder approval is
required when the security-based arrangement is instituted and every three years
thereafter if the arrangement does not have a fixed maximum aggregate of
securities issuable. The TSX considers a security-based compensation arrangement
to be any compensation or incentive mechanism involving the issuance from
treasury or potential issuance from treasury of securities of a listed issuer.
Insiders of a listed issuer that are entitled to receive a
benefit under a security-based compensation arrangement are not eligible to vote
their securities in respect of the shareholder approval required by the TSX
unless such security-based compensation arrangement contains an “insider
participation limit”. An “insider participation limit” is a provision typically
found in security-based compensation arrangements which limits the number of a
listed issuer’s securities: (i) issued to insiders of the listed issuer, within
any one-year period; and (ii) issuable to insiders of the listed issuer at any
time, to 10% of the listed issuer’s total issued and outstanding securities.
For the purposes of security-based compensation arrangements,
the definition of “insider” would include the CEO, CFO, all directors of the
listed issuer and its major subsidiaries, any person responsible for a principal
business unit, division or function, and any shareholder that has beneficial
ownership or control or direction over, more than 10% of the issued and
outstanding common shares of the listed issuer. The Company obtains shareholder
approval of its equity compensation plans in accordance with applicable rules
and regulations of the TSX.
Compensation and Corporate Governance Committee Independence
Requirement: The NYSE requires listed companies to have a compensation
committee and a nominating/corporate governance committee, each of which must be
composed entirely of independent directors, as determined using the criteria
prescribed by Section 303A.02 of the NYSE Listed Company Manual. The NYSE rules
permit listed companies to allocate the responsibilities of the compensation and
nominating/corporate governance committees to committees of their own
denomination provided that the committees are composed entirely of independent
directors.
The Company has a separately-designated standing Human Resource
and Corporate Governance Committee. The Board has determined that all three
members of the Human Resource and Corporate Governance Committee (Nathalie
Bourque (Chair), Vincent Chiara and Jason Ewart) are independent.
The foregoing is consistent with the laws, customs and
practices in Canada.
MINE SAFETY DISCLOSURE
Not applicable.
UNDERTAKING
The Company undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the SEC staff, and to
furnish promptly, when requested to do so by the SEC staff, information relating
to: the securities registered pursuant to Form 40-F; the securities in relation
to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities.
CONSENT TO SERVICE OF PROCESS
The Company has previously filed with the SEC a written consent
to service of process on Form F-X. Any change to the name or address of the
Company’s agent for service shall be communicated promptly to the SEC by
amendment to the Form F-X referencing the file number of the Company.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Company
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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HEXO CORP.
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Date: October 29, 2019
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/s/
Sebastien St-Louis
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Name: Sebastien St-Louis
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Title: President and Chief Executive Officer
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EXHIBIT INDEX
* To be filed by amendment.
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