EX-99.2 3 sndl-ex992_12.htm EX-99.2 sndl-ex992_12.htm

EXHIBIT 99.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

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

For the three and six months ended June 30, 2020

 

 

 

 


 

Management’s Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”) of the financial condition and performance of Sundial Growers Inc. (“Sundial” or the “Company”) for the three and six months ended June 30, 2020 is dated August 13, 2020. This MD&A should be read in conjunction with the Company’s condensed consolidated interim financial statements and the notes thereto for the three and six months ended June 30, 2020 and the audited annual consolidated financial statements and notes thereto for the year ended December 31, 2019 (the “Audited Financial Statements”) and the risks identified under “Risk Factors” below and in the Company’s Annual Report on Form 20-F for the year ended December 31, 2019 (the “Annual Report”). This MD&A has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations as issued by the Canadian Securities Administrators and is presented in thousands of Canadian dollars, except where otherwise indicated.

MD&A – Table of Contents

COMPANY OVERVIEW2

RECENT DEVELOPMENTS2

STRATEGY & OUTLOOK5

OPERATIONAL AND FINANCIAL HIGHLIGHTS8

OPERATIONAL RESULTS8

FINANCIAL RESULTS11

DISCONTINUED OPERATIONS – ORNAMENTAL FLOWERS19

SELECTED QUARTERLY INFORMATION19

LIQUIDITY AND CAPITAL RESOURCES20

CONTRACTUAL COMMITMENTS AND CONTINGENCIES27

NON-IFRS MEASURES28

RELATED PARTIES30

OFF BALANCE SHEET ARRANGEMENTS30

CRITICAL ACCOUNTING POLICIES AND ESTIMATES30

NEW ACCOUNTING PRONOUNCEMENTS31

RISK FACTORS31

DISCLOSURE CONTROLS AND PROCEDURES35

INTERNAL CONTROLS OVER FINANCIAL REPORTING35

ABBREVIATIONS36

ADVISORY36

ADDITIONAL INFORMATION37

 


 

1

 

 


 

COMPANY OVERVIEW

Sundial (“SNDL”, “Sundial” or the “Company”) is a licensed producer that grows cannabis using state-of-the-art indoor facilities. Sundial was incorporated under the Business Corporations Act (Alberta) on August 19, 2006. The Company’s common shares are listed under the symbol “SNDL” on the NASDAQ Global Select Market (“Nasdaq”).

Sundial’s Canadian operations cultivate cannabis using an individualized “room” approach, in approximately 479,000 square feet of total space.

Sundial’s brand portfolio includes Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value).

Sundial is headquartered in Calgary, Alberta, with operations in Olds, Alberta, and Rocky View County, Alberta.

Sundial currently produces and markets cannabis products for the Canadian adult-use market. Sundial’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specific cannabis products. The Company has established supply agreements with nine Canadian provinces, with approval recently received from Quebec, and has a distribution network that covers 98% of the national recreational industry.

The Company’s primary focus has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). Upon receiving a licence from Health Canada to sell cannabis oil products, the Company began the sale and distribution of cannabis vape products in December 2019. The Company is currently marketing its adult-use products under its Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio.

The majority of the Company’s revenue in the three and six months ended June 30, 2020 were from sales to provincial boards; however, Sundial continues to enter into agreements to supply other licensed producers in Canada.

The Company’s planned medical cannabis offerings are supported through its 50% equity interest in Pathway Rx Inc. (“Pathway Rx”) which uses advanced technology and an extensive library of cannabis strains to identify and customize targeted treatments for a wide range of medical conditions. The Company has a license agreement with Pathway RX enabling the Company the use of certain strains for commercial production.

In July 2019, the Company acquired Project Seed Topco (“Bridge Farm”) and its wholly owned subsidiaries, a grower of ornamental plants and herbs in the United Kingdom with the intent to transition Bridge Farm’s facilities to the cultivation, processing and distribution of cannabidiol (“CBD”) products. On June 5, 2020, the Company completed the Bridge Farm Disposition as described under “Recent Developments – Bridge Farm Disposition”.

RECENT DEVELOPMENTS

Bridge Farm Disposition

On February 22, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, signed a Sale and Purchase Agreement to acquire all the issued and outstanding shares of Project Seed Topco (“Bridge Farm”). The acquisition closed on July 2, 2019. Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”) extraction and production, subject to certain regulatory, licensing and other restrictions, to launch CBD sales in the United Kingdom. At December 31, 2019, the Company recorded a goodwill impairment based on significant delays and uncertainties in the licensing and regulatory framework in the United Kingdom. As part of the negotiations with the Company’s senior lenders regarding a December 31, 2019 covenant breach and restructuring of its credit agreements, the Company was required to enter into a definitive purchase agreement related to the sale of Bridge Farm.

On May 15, 2020, the Company entered into an agreement to sell all of the outstanding shares of Bridge Farm to a company affiliated with the former management sellers that were parties to the original acquisition (the “Bridge Farm Purchaser”) in exchange for (i) the assumption by the Bridge Farm Purchaser of $45 million of the total $115 million principal amount outstanding under the Term Debt Facility (thereby reducing the Company’s obligations thereunder to $70 million), (ii) the assumption by the Bridge Farm Purchaser of contingent consideration liabilities related to the

 

2

 

 


 

additional share obligation and remaining earn out obligation under the original Bridge Farm acquisition agreement dated July 2, 2019, and (iii) the cancellation of approximately 2.7 million Sundial common shares, representing all of the shares currently held by the management sellers of Bridge Farm issued in connection with the original acquisition of Bridge Farm by the Company in 2019 (collectively, the “Bridge Farm Disposition”). The sale of Bridge Farm closed on June 5, 2020, and the Company reported a loss on disposition of Bridge Farm of $15.0 million. The comparative statement of loss and comprehensive loss and statement of cash flows in the financial statements for the three and six months ended June 30, 2019 have been re-presented to show the discontinued operation separately from continuing operations. See “Discontinued Operations – Ornamental Flowers”.

Amendment and Restatement of SYNDICATED Credit Agreement

On June 5, 2020, the Company entered into an amended and restated credit agreement which included a waiver for the Company’s March 31, 2020 covenant non-compliance, elimination of financial covenants other than a minimum cash balance covenant of $2.5 million until December 31, 2020 or later and a covenant requiring the Company to raise capital of US$10 million by December 1, 2020. Additionally, principal repayments of $2.1 million per quarter have been rescheduled to commence on September 30, 2020. See “Liquidity and Capital Resources – Debt – Syndicated Credit Agreement”.

Extinguishment of Term Debt Facility

Restructuring and Novation Agreement

On June 5, 2020, the Company entered into a restructuring and novation agreement (the “Restructuring and Novation Agreement”) whereby $73.2 million of principal plus accrued interest was assigned to the Company from a subsidiary and $45.0 million of principal was assigned to the Bridge Farm Purchaser as part of the consideration for the sale of Bridge Farm. See “Liquidity and Capital Resources – Debt – Term Debt Facility”.

Securities Restructuring Agreement

On June 5, 2020, in connection with the Restructuring and Novation Agreement, the Company entered into a securities restructuring agreement (the “Securities Restructuring Agreement”) whereby the $73.2 million of principal plus accrued interest assigned to the Company was extinguished and replaced with $73.2 million aggregate principal amount of Secured Convertible Note (as defined below) of the Company. See “Liquidity and Capital Resources – Debt – Secured Convertible Note”.

Secured Convertible Note and Warrants

On June 5, 2020, in connection with the Restructuring and Novation Agreement, the Company entered into the Securities Restructuring Agreement, pursuant to which the $73.2 million balance of the Term Debt Facility was extinguished and replaced with $73.2 million aggregate principal amount of senior second lien convertible notes (the “Secured Convertible Note”), convertible into common shares at an initial price of US$1.00 per common share. The Company also issued common share purchase warrants to acquire up to 17.5 million common shares at an exercise price of US$1.00 per warrant and common share purchase warrants to acquire up to 17.5 million common shares at an exercise price of US$1.20 per warrant (the “Secured Convertible Note Warrants”).

The Secured Convertible Note mature on June 5, 2022 and does not bear interest, except upon the occurrence of defined triggering events. The Secured Convertible Note is secured by a second priority lien on the assets and property of the Company. See “Liquidity and Capital Resources – Debt – Secured Convertible Note”.

In connection with the issuance of the Secured Convertible Note and Secured Convertible Note Warrants, the Company granted certain registration rights to the holder thereof requiring the Company to register the underlying common shares pursuant to a registration rights agreement with the holder dated June 5, 2020 (the “Secured Convertible Note Registration Rights Agreement”.

Unsecured Convertible Notes and Warrants

On June 5, 2020, in connection with the debt restructuring transactions, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) providing for the sale of a new series of unsecured senior subordinated convertible notes (the “Unsecured Convertible Notes”) in the aggregate principal amount of US$18.0 million, convertible

 

3

 

 


 

into common shares at any time at the option of the holder at an initial conversion price of US$1.00, and common share purchase warrants to acquire up to 14.5 million common shares at an initial exercise price of US$0.9338 per common share (the “Unsecured Convertible Note Warrants”). In connection with the securities purchase agreement, placement agents for the offering were issued common share purchase warrants to acquire up to 1,080,000 common shares at an exercise price of US$1.00 per common share (the “Agent Warrants”).

The Unsecured Convertible Notes mature on June 5, 2022 and do not bear interest, except upon the occurrence of defined triggering events. See “Liquidity and Capital Resources – Debt – Unsecured Convertible Notes”.

In connection with the issuance of the Unsecured Convertible Notes and Unsecured Convertible Note Warrants, the Company granted certain registration rights to the investors named in the Securities Purchase Agreement, requiring the Company to register the underlying common shares. The Company has filed a registration statement with the SEC in accordance with the Unsecured Convertible Notes Registration Rights Agreement, which registration statement has become effective on July 20, 2020.

Changes to executive team and board of directors

On January 30, 2020, Sundial announced the following changes to its executive team and board of directors;

 

Zach George, a recently appointed member of Sundial’s board of directors, was appointed as Chief Executive Officer;

 

Andrew Stordeur, formerly President of Sundial's Canadian operations was appointed as President and Chief Operating Officer;

 

Edward Hellard resigned as Executive Chairman;

 

Torsten Kuenzlen, Sundial’s former Chief Executive Officer, resigned and also resigned from the board of directors; and

 

Brian Harriman, Sundial's former Chief Operating Officer, left the Company.

On April 24, 2020, Edward Hellard resigned from the board of directors and announced his decision not to stand for re-election as a member of the board at the Company’s Annual General Meeting and Special Meeting of shareholders.

COVID-19

The Company is continually monitoring and responding to the ongoing and evolving COVID-19 pandemic. The Company’s business activities have been declared an essential service by the Alberta Government and the Company remains committed to the health and safety of all personnel and to the safety and continuity of operations.

In response to COVID-19 the Company activated its Emergency Operations Centre team and Incident Command Centre to protect the health and safety of the Company’s workforce and the public, as well as to ensure the continuity of operations. The Company is monitoring daily developments in the COVID-19 pandemic and actions taken by the government authorities in response thereto. In accordance with the guidance of provincial and federal health officials to limit the risk and transmission of COVID-19, the Company has implemented mandatory self-quarantine policies, travel restrictions, enhanced cleaning and sanitation processes and frequency, and encouraging social distancing measures, including directing office staff to work from home if possible.

The Company believes that it can maintain safe operations with these pandemic-related procedures and protocols in place. Additionally, in order to prevent and minimize any potential COVID-19 outbreak at its facilities, the Company has implemented additional measures as part of its pandemic response, including halting all non-essential external visitors to its facilities and enhanced screening measures prior to allowing employees and visitors into the facilities.

The Company did not experience a material impact to sales in the first half of 2020 from the COVID-19 pandemic. Provincial board sales in the second quarter of 2020 increased compared to the first quarter of 2020 and compared to the fourth quarter of 2019. Nevertheless, the Company has made downward revisions to its sales forecasts for the remainder of 2020, based on the impact of the COVID-19 pandemic, which, among other impacts, is expected to further delay retail store expansion in the Ontario market. In addition, the Company has temporarily curtailed cultivation and harvesting activities, while still maintaining current processing levels, to align its cannabis production with anticipated market demand. The Company is also anticipating an increase in costs associated with the measures implemented at its facilities in response to the COVID-19 pandemic.

 

4

 

 


 

Nasdaq Minimum Bid Requirement

On May 12, 2020, the Company was notified by the Listing Qualifications Department of the Nasdaq that the closing bid price of the Company’s common shares for the 30 consecutive business day period from March 30, 2020 to May 11, 2020 did not meet the minimum bid price of $1.00 per share. The Company has until December 28, 2020 to regain compliance with the Minimum Bid Requirement, as set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on Nasdaq (the “Minimum Bid Requirement”). The notice has no immediate effect on the trading of the Company’s common shares on the Nasdaq.

Pursuant to the Nasdaq Listing Rules, the Company has been provided with a compliance period of 180 calendar days from the date of notification in which to regain compliance with the Minimum Bid Requirement. Additionally, due to the ongoing volatility in the world financial markets, Nasdaq has determined to toll the compliance period for the Minimum Bid Requirement through June 30, 2020 and will reinstate the compliance period on July 1, 2020. As a result, the Company has until December 28, 2020 to regain compliance with the Minimum Bid Requirement. If at any time prior to December 28, 2020 the closing bid price of the Company’s common stock is at least $1.00 for a minimum of ten consecutive business days, the Company will be considered by Nasdaq to have regained compliance with the Minimum Bid Requirement.

Additionally, if the Company does not regain compliance with the Minimum Bid Requirement by December 28, 2020, the Company may be eligible for an additional period of 180 days during which to achieve compliance, provided that the Company otherwise meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq other than the Minimum Bid Requirement, and provides written notice to Nasdaq of the Company’s intention to remedy the non-compliance during this second compliance period, by effecting a reverse stock split if necessary. Nasdaq has the right not to grant the additional cure period if it appears to it that the Company will not be able to cure the deficiency or is not otherwise eligible.

The Company will actively monitor its closing bid price during the compliance period and intends to take appropriate measures to remedy the deficiency and regain compliance with the Minimum Bid Requirement.

STRATEGY & OUTLOOK

Sundial’s overall strategy is to build sustainable, long-term shareholder value by reducing leverage, improving liquidity and cost of capital while optimizing the capacity and capabilities of its production facilities in the creation of a consumer-centric brand and product portfolio.

To achieve this, Sundial will continue to focus on:

 

Meeting evolving consumer preferences by being a consumer-centric organization.

 

Delivering industry-leading, best-in-class brands and products with a focus on inhalables.

 

Driving quality in all aspects of our operation and be positioned to deliver products that consumers want when they want them.

 

Improving cost discipline and maintaining a variable cost structure to adapt to industry dynamics.

Meeting Evolving Consumer Preferences by Being a Consumer-Centric Organization

Sundial believes the consumer is the core stakeholder of the cannabis industry. Creating a brand and product portfolio that meets and exceeds their expectations is one of the primary objectives of the Company. To better meet the needs of the cannabis consumer, Sundial continues to emphasize and utilize data-driven decisions based on consumer insights, trends and preferences; continuous and iterative product development processes; and collaborative and symbiotic relationships with industry partners, government agencies and retail customers.

Data-Driven Decisions

Sundial continues to invest in data platforms, data sources and analytics capabilities, including store level point of sale and transactional data. The insights, trends and consumer preferences derived from these platforms and sources will be leading components in product roadmaps, brand portfolios, sales and distribution and partnership strategies and tactics.

 

5

 

 


 

Continuous and Iterative Product Development

The cannabis industry and consumer preferences continue to rapidly change and evolve. Using data and insights as a foundation, Sundial is implementing continuous and iterative product development to provide consumers with new products and improved experiences. To support product development, the Company continues to introduce new cannabis strains, improvement of cultivation methods and practices, processing and extraction infrastructure and product packaging.

Delivering Industry-Leading, Best-In-Class Brands and Products with a Focus on Inhalables

With the introduction of Phase 2 cannabis products, including vape, edibles and beverages, inhalables continue to be the largest segments in the cannabis industry. As a result, Sundial’s product and brand portfolio will continue to focus on whole flower, pre-roll and vape products. In Q2 2020, Sundial continued to expand its product offerings through:

 

The introduction of Palmetto flower with the Nuken 3.5g Whole Flower SKU and the release of the Rascal OG 510 vape cartridge.

 

The release of the Sundial Cannabis Blue Nova flower, the CBD 20:1 sublingual oil and the Lemon Riot disposable vape cartridge.

 

The release of the Bubba flower, which launched with a potency over 25% and quickly became one of the Company’s top selling Flower SKUs, and the Four Star General 510 vape cartridge.

Sundial’s innovation pipeline continues to strengthen in the second half of 2020 as the Company plans to introduce new inhalable solventless concentrate products, including hash and rosin. This expansion further reinforces Sundial’s inhalable-centric strategy.

Driving Quality in all Aspects of Our Operation and be Positioned to Deliver Products that Consumers Want, When They Want Them

Ultimately, it is Sundial’s objective to provide consumers with the products they want, when they want them and how they want to consume them. To achieve this, the Company is focusing on several key initiatives, including:

 

Emphasizing quality in all aspects of the organization

 

Increasing our points of distribution and national presence

 

Creating engaging in-store experiences

Emphasizing Quality In All Aspects of the Organization

The ability to deliver high quality and differentiated products will be a key component of Sundial’s success. Driving the consistent quality in all aspects of our organization from cultivation to extraction to customer service is a core focus of the Company. Sundial will continue to invest in and emphasize the continuous improvement of quality to create better, more valuable and more engaging consumer and customer experiences.

Increasing Our Points of Distribution and National Presence

Sundial continues to invest in increasing the points of distribution and presence of the Company’s brand and product portfolio. In Q2 2020, the Company began distribution in Quebec and is now able to offer products to 97% of Canadians.

In the coming months and quarters, Sundial will continue to expand its sales force to increase the distribution and availability of its brands and products. In July 2020, Sundial added its first commercial representative to the Ontario market and expects to add additional resources in the coming months. The continued opening of new stores and the increase in points of distribution represent a sizeable opportunity for increased revenue for the Company.

Creating Engaging In-Store Experiences

Despite the limitations imposed by the COVID-19 pandemic, cannabis sales are still primarily driven by brick and mortar retail sales. Sundial will continue to emphasize and invest in our retail experience and partners in an effort to create strong consumer experiences and brand awareness. The execution and implementation of point of sale displays, in-store popups and activations and retailer engagement and education will be a core components of Sundial’s overall retail strategy.

 

6

 

 


 

Improving Cost Discipline and Maintaining a Variable Cost Structure to Adapt to Industry Dynamics

In Q2 2020, Sundial continued to implement the cost cutting and cost discipline strategies started during the previous quarter. The labour force of the Company was decreased to better align with the size of the business and the state of the industry. Cost cutting and efficiency initiatives have been implemented throughout Sundial’s cost structure to improve and optimize Sundial’s cultivation and production costs and general and administrative expenses. Overall, Sundial has implemented initiatives that are expected to reduce its cash obligations, including debt service costs, by more than $50 million on an annualized basis.

Sundial expects Fiscal 2020 to be a transition year as the Company has reset its strategic focus, streamlined its organizational structure, and implemented a comprehensive operational and supply chain productivity optimization program.

Strategic alternatives and capital raising

Following a review of its business, Sundial recently initiated and continues a process to explore strategic alternatives focused on maximizing shareholder value. Sundial’s board of directors (“Board”) has authorized management and its external advisors to consider a broader range of strategic alternatives, including a potential sale of the Company, merger or other business combination, investments in other Canadian cannabis companies, including dispensaries and other retail outlets, dispositions of discrete brands and related assets, optimizing its assets, including the potential sale of its Rocky View and Merritt facilities, selling limited quantities of inventory at or below cost and entering into long-term supply agreements with other licensed producers, licensing or other strategic transactions involving the Company, or any combination of the foregoing. Sundial has engaged a financial advisor to assist with these efforts.

There can be no assurance that the exploration of strategic alternatives will result in any transaction or specific course of action. The Company has not set a timetable for the conclusion of its review of strategic alternatives and does not intend to disclose developments with respect to the exploration of strategic alternatives unless and until its Board has approved a specific transaction or course of action or the Company has otherwise determined that further disclosure is appropriate or required by law.

In addition, Sundial will require additional funding to meet its ongoing obligations and to fund anticipated operating losses. As a result, Sundial continues to seek ways of improving its working capital and overall liquidity position, including through a review of its existing capital structure, financings or re-financings of its existing indebtedness, and sales of equity and equity-linked securities (including at-the-market offerings and other underwritten offerings). The Company has filed a registration statement for a mixed shelf prospectus allowing it to issue common shares in an amount up to US$100 million at its discretion, and intends to establish an at-the-market equity program covering issuances of up to US$50 million. Additional financings may take a form similar to the Secured Convertible Note or the Unsecured Convertible Notes discussed above under “Recent Developments”. There can be no guarantee that the Company will be able to raise additional capital on terms acceptable to it or at all.

The Company’s financial statements at and for the three and six months ended June 30, 2020 include a going concern qualification. The ability of the Company to continue as a going concern depends on maintaining its Health Canada licenses, the continued support of its lenders, its ability to achieve profitable operations and its ability to raise additional financing to fund current and future operating and investing activities. There is no assurance that the Company will be able to accomplish any of the foregoing objectives. Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

 

7

 

 


 

OPERATIONAL AND FINANCIAL HIGHLIGHTS

The following table summarizes selected operational and financial information of the Company for the periods noted.

 

 

 

 

 

 

 

 

 

 

 

 

 

($000s, except as indicated)

Q2 2020

 

Q2 2019

 

Change

 

% Change

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

24,341

 

 

20,284

 

 

4,057

 

 

20

%

Net revenue

 

20,194

 

 

19,299

 

 

895

 

 

5

%

Cost of sales

 

17,336

 

 

10,434

 

 

6,902

 

 

66

%

Gross margin before fair value adjustments

 

(7,168

)

 

8,865

 

 

(16,033

)

 

-181

%

Gross margin before fair value adjustments %

 

-35

%

 

46

%

 

 

 

 

-81

%

Loss from operations

 

(29,550

)

 

(4,282

)

 

(25,268

)

 

-590

%

Net loss from continuing operations (1)

 

(31,483

)

 

(12,322

)

 

(19,161

)

 

-156

%

Per share, basic and diluted (1)

 

(0.30

)

 

(0.16

)

 

(0.14

)

 

-88

%

Net loss from discontinued operations (1)

 

(28,860

)

 

 

 

(28,860

)

 

100

%

Per share, basic and diluted (1)

 

(0.27

)

 

 

 

(0.27

)

 

100

%

Net loss (1)

 

(60,343

)

 

(12,322

)

 

(48,021

)

 

-390

%

Per share, basic and diluted (1)

 

(0.57

)

 

(0.16

)

 

(0.41

)

 

-256

%

Adjusted EBITDA from continuing operations (2)

 

(3,898

)

 

(455

)

 

(3,443

)

 

-757

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

21,629

 

 

38,434

 

 

(16,805

)

 

-44

%

Biological assets

 

3,047

 

 

12,835

 

 

(9,788

)

 

-76

%

Inventory

 

55,633

 

 

17,485

 

 

38,148

 

 

218

%

Property, plant and equipment

 

183,990

 

 

152,182

 

 

31,808

 

 

21

%

Total assets

 

302,562

 

 

369,217

 

 

(66,655

)

 

-18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational

 

 

 

 

 

 

 

 

 

 

 

 

Kilogram equivalents sold

 

5,997

 

 

4,741

 

 

1,256

 

 

26

%

Average gross selling price per gram (3)

 

4.06

 

 

4.28

 

 

(0.22

)

 

-5

%

Average net selling price per gram (4)

 

3.37

 

 

4.07

 

 

(0.70

)

 

-17

%

Kilograms harvested

 

6,012

 

 

9,551

 

 

(3,539

)

 

-37

%

(1)

Net loss from continuing operations, net loss from discontinued operations, net loss and related per share amounts are attributable to owners of the Company.

(2)

Adjusted EBITDA does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-IFRS measure of adjusted EBITDA is reconciled to net loss in accordance with IFRS in the “NON-IFRS MEASURES” section of this MD&A and discussed further in the “ADVISORY” section of this MD&A.

(3)

Net of marketing fees, salvage fees and early payment discounts with respect to sales under Sundial’s supply agreements with Canadian provincial regulatory authorities.

(4)

Gross selling price net of excise tax.

OPERATIONAL RESULTS

Kilograms harvested

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Kilograms harvested

 

 

6,012

 

 

 

9,551

 

 

 

16,266

 

 

 

11,447

 

For the three months ended June 30, 2020, the Company harvested 6,012 kilograms of cannabis compared to 9,551 kilograms for the three months ended June 30, 2019. The decrease of 3,539 kilograms harvested was due to curtailing

 

8

 

 


 

cultivation and harvesting activities, while still maintaining current processing levels, to align with anticipated market demand.

For the six months ended June 30, 2020, the Company harvested 16,266 kilograms of cannabis compared to 11,447 kilograms for the six months ended June 30, 2019. The increase of 4,819 kilograms harvested was due to the production capacity added to the Olds facility throughout the prior year, partially offset by the curtailment of cultivation and harvesting activities to align with anticipated market demand.

Kilogram equivalents sold

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

 

3,198

 

 

 

520

 

 

 

5,195

 

 

 

633

 

Medical

 

 

 

 

 

1

 

 

 

4

 

 

 

1

 

Licensed producers

 

 

2,799

 

 

 

4,220

 

 

 

5,235

 

 

 

4,430

 

Total kilogram equivalents sold

 

 

5,997

 

 

 

4,741

 

 

 

10,434

 

 

 

5,064

 

For the three months ended June 30, 2020, the Company sold 5,997 kilogram equivalents of cannabis compared to 4,741 kilogram equivalents for the three months ended June 30, 2019. The increase of 1,256 kilogram equivalents sold was due to an expanded provincial distribution network resulting in increased sales to provincial boards, partially offset by a decrease in sales to other licensed producers (“LPs”). Provincial board sales in the current period were made to nine different provinces, comprised of branded flower and vapes, compared to one province comprised of branded flower in the comparative period.

For the six months ended June 30, 2020, the Company sold 10,434 kilogram equivalents of cannabis compared to 5,064 kilogram equivalents for the six months ended June 30, 2019. The increase of 5,370 kilogram equivalents sold was due to the Company expanding its provincial distribution network to nine Canadian provinces and launching additional brands and product formats. Provincial board sales in the current period were made to nine different provinces and were comprised of branded flower and vapes, as compared to one province comprised of branded flower in the comparative period. During the current period, the Company entered into a supply agreement with another LP to provide bulk flower for the first half of 2020. The Company also made bulk flower and oil sales to other LP’s in the current period.

Selling price

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($/gram equivalent)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

$

5.67

 

 

$

6.53

 

 

$

5.45

 

 

$

6.54

 

Medical

 

$

 

 

$

7.00

 

 

$

5.25

 

 

$

8.00

 

Licensed producers

 

$

2.22

 

 

$

4.00

 

 

$

2.40

 

 

$

4.02

 

Average gross selling price

 

$

4.06

 

 

$

4.28

 

 

$

3.92

 

 

$

4.34

 

Excise taxes

 

$

(0.69

)

 

$

(0.21

)

 

$

(0.65

)

 

$

(0.23

)

Average net selling price

 

$

3.37

 

 

$

4.07

 

 

$

3.28

 

 

$

4.11

 

For the three months ended June 30, 2020, the average net selling price was $3.37 per gram equivalent compared to $4.07 for the three months ended June 30, 2019. The decrease of $0.70 per gram equivalent was due to price discounts and return provisions, lower prices for bulk sales to other LP’s and a higher percentage of total sales to provincial boards subject to excise taxes. Price discounts were granted to provincial boards to promote the movement of slower selling products and price compression in the market. A return provision was recorded in the current period due to the likelihood of having returned product. Sale prices to other LP’s have decreased due to downward price pressure in the market. These factors contributed to a significant decrease in the average gross selling price when compared to the prior period.

For the six months ended June 30, 2020, the average net selling price was $3.28 per gram equivalent compared to $4.11 for the six months ended June 30, 2019. The decrease of $0.83 per gram equivalent was due to price discounts and return provisions, lower prices for bulk sales to other LP’s and a higher percentage of total sales to provincial boards subject to

 

9

 

 


 

excise taxes. Price discounts were granted to provincial boards to promote the movement of slower selling products and ongoing price compression in the market. A return provision was recorded in the current period due to both physical returns of product and the likelihood of having additional slow moving and aged product returned. Sale prices to other LP’s have decreased due to downward price pressure in the market. These factors contributed to a significant decrease in the average gross selling price when compared to the prior period.

The principal drivers of the Company’s realized prices are the formats of the products sold (currently both bulk and packaged flower, vape cartridges and accessories, trim and bulk extracted oil) and the channels in which products are sold (principally Canadian provincial boards and LP’s).

Excise taxes are the federal excise duties and additional provincial or territorial duties payable on adult-use cannabis products. Excise taxes for the six months ended June 30, 2020 and 2019 are only calculated based on adult-use cannabis sales to provincial boards.

Cash cost to produce

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of sales

 

 

17,336

 

 

 

10,434

 

 

 

30,843

 

 

 

11,212

 

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

1,549

 

 

 

791

 

 

 

2,329

 

 

 

855

 

Cash cost of sales

 

 

15,787

 

 

 

9,643

 

 

 

28,514

 

 

 

10,357

 

Packaging costs

 

 

185

 

 

 

84

 

 

 

1,361

 

 

 

34

 

Cash cost to produce (1)

 

 

15,602

 

 

 

9,559

 

 

 

27,153

 

 

 

10,323

 

Cash cost to produce per gram equivalent

 

$

2.60

 

 

$

2.02

 

 

$

2.60

 

 

$

2.04

 

(1)

Cash cost to produce and the related per gram amounts do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-IFRS measure of cash cost to produce is discussed further in the “ADVISORY” section of this MD&A.

Cash cost to produce is defined as cost of sales less depreciation and packaging costs and provides a measure of the cash cost to produce the cannabis that has been sold in the period.

For the three months ended June 30, 2020, the cash cost to produce was $15.6 million compared to $9.6 million for the three months ended June 30, 2019. The increase of $6.0 million was due to an increase in kilogram equivalents sold compared to the prior period. The increase in cash cost to produce per gram was due to newer strains having a higher cost per gram and vapes having a higher cost per gram due to costs associated with converting dried flower to oil.

For the six months ended June 30, 2020, the cash cost to produce was $27.2 million compared to $10.3 million for the six months ended June 30, 2019. The increase of $16.9 million was due to an increase in kilogram equivalents sold compared to the prior period. The increase in cash cost to produce per gram was due to newer strains having a higher cost per gram and vapes having a higher cost per gram due to costs associated with converting dried flower to oil.

Cash cultivation and production (“C&P”) costs

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

C&P costs added to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biological assets

 

 

5,972

 

 

 

13,485

 

 

 

16,176

 

 

 

20,652

 

Inventory

 

 

4,035

 

 

 

1,122

 

 

 

9,265

 

 

 

1,122

 

Total C&P costs (1)

 

 

10,007

 

 

 

14,607

 

 

 

25,441

 

 

 

21,774

 

(1)

Cash cultivation and production costs do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-IFRS measure of cash cultivation and production costs is reconciled to cost of sales in accordance with IFRS in the “NON-IFRS MEASURES” section of this MD&A and discussed further in the “ADVISORY” section of this MD&A.

C&P costs are defined as the costs related to growing, harvesting, processing and selling cannabis. Management believes that C&P costs are the most complete measure of operational performance at the facilities. C&P costs are comprised of

 

10

 

 


 

labour, power, nutrients, growing supplies, supplies and tools, transportation, maintenance, consumables, third party extraction, testing and irradiation. C&P costs are initially added to biological assets and inventory and are only reflected on the statements of loss and comprehensive loss within cost of sales as sales of cannabis are recognized.

For the three months ended June 30, 2020, C&P costs were $10.0 million compared to $14.6 million for the three months ended June 30, 2019. The decrease of $4.6 million was associated with the curtailment of cultivation and harvesting activities to align with anticipated market demand.

For the six months ended June 30, 2020, C&P costs were $25.4 million compared to $21.8 million for the six months ended June 30, 2019. The increase of $3.6 million was due to increases in labour, energy costs, packaging, testing and other growing costs, partially offset by the curtailment of cultivation and harvesting activities to align with anticipated market demand.

FINANCIAL RESULTS

Revenue

Revenue by form

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue from dried flower

 

 

16,090

 

 

 

20,284

 

 

 

27,814

 

 

 

21,975

 

Revenue from vapes

 

 

6,259

 

 

 

 

 

 

10,608

 

 

 

 

Revenue from oil

 

 

1,992

 

 

 

 

 

 

2,509

 

 

 

 

Gross revenue

 

 

24,341

 

 

 

20,284

 

 

 

40,931

 

 

 

21,975

 

Revenue by channel

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

 

18,133

 

 

 

3,393

 

 

 

28,333

 

 

 

4,138

 

Medical

 

 

5

 

 

 

7

 

 

 

21

 

 

 

8

 

Licensed producers

 

 

6,203

 

 

 

16,884

 

 

 

12,577

 

 

 

17,829

 

Gross revenue

 

 

24,341

 

 

 

20,284

 

 

 

40,931

 

 

 

21,975

 

Excise taxes

 

 

(4,147

)

 

 

(985

)

 

 

(6,731

)

 

 

(1,177

)

Net revenue

 

 

20,194

 

 

 

19,299

 

 

 

34,200

 

 

 

20,798

 

Gross revenue per gram sold

 

$

4.06

 

 

$

4.28

 

 

$

3.92

 

 

$

4.34

 

Net revenue per gram sold

 

$

3.37

 

 

$

4.07

 

 

$

3.28

 

 

$

4.11

 

The Company’s revenue comprises bulk and packaged sales under the Cannabis Act pursuant to its supply agreements with Canadian provincial regulatory authorities and to other LP’s. The Company’s sales growth strategy is to target branded sales and during the three and six months ended June 30, 2020, provincial board sales represented the majority of cannabis revenue, a milestone for the Company.

Gross revenue for the three months ended June 30, 2020 was $24.3 million compared to $20.3 million for the three months ended June 30, 2019. The increase of $4.0 million was mainly due to an increase of $14.7 million in provincial board sales, partially offset by a decrease of $10.7 million in sales to LP’s. The increase in provincial board sales was due to the Company expanding its provincial distribution network and launching additional brands and product formats. Current period board sales were partially offset by price discounts to promote the movement of slower selling products. Provincial board sales in the current period were made to nine different provinces and were comprised of branded flower

 

11

 

 


 

and vapes, as compared to one province comprised of branded flower in the comparative period. The Company also made bulk flower and oil sales to other LP’s in the current period.

Gross revenue for the six months ended June 30, 2020 was $40.9 million compared to $22.0 million for the six months ended June 30, 2019. The increase of $18.9 million was mainly due to an increase of $24.2 million in provincial board sales partially offset by a decrease of $5.2 million in sales to LP’s. The increase in provincial board sales was due to the Company expanding its provincial distribution network and launching additional brands and product formats. Current period board sales were partially offset by price discounts to promote the movement of slower selling products and a provision for product returns for slower selling products. Provincial board sales in the current period were made to nine different provinces and were comprised of branded flower and vapes, as compared to one province comprised of branded flower in the comparative period. During the current period, the Company entered into a supply agreement with another LP to provide bulk flower, the supply of which will extend into the second half of 2020. The Company also made bulk flower and oil sales to other LP’s in the current period.

Excise taxes are the federal excise duties and additional provincial or territorial duties payable on adult-use cannabis products at the time such product is delivered to the purchaser, such as provincially authorized distributors or retailers. Federal duties on adult-use cannabis products are calculated as the greater of (i) $0.25 per gram of flowering material, (ii) $0.75 per gram of non-flowering material or $0.25 per viable seed or seedling and (iii) 2.5% of the dutiable amount as calculated in accordance with the Excise Act, 2001. The rates of provincial or territorial duties vary.

Excise taxes for the three months ended June 30, 2020 were $4.1 million compared to $1.0 million for the three months ended June 30, 2019. The increase of $3.1 million was due to an increase in sales to provincial boards from the comparative period.

Excise taxes for the six months ended June 30, 2020 were $6.7 million compared to $1.2 million for the six months ended June 30, 2019. The increase of $5.5 million was due to an increase in sales to provincial boards from the comparative period.

Cost of sales

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of sales

 

 

17,336

 

 

 

10,434

 

 

 

30,843

 

 

 

11,212

 

Cost of sales per gram sold

 

$

2.89

 

 

$

2.20

 

 

$

2.96

 

 

$

2.21

 

Cost of sales includes three main categories: pre-harvest, post-harvest and shipment and fulfillment costs. These costs are incurred in respect of cultivating, harvesting, processing and packaging cannabis products. Pre-harvest costs include all direct and indirect costs incurred between initial recognition and the point of harvest, including labour-related costs, grow consumables, materials, utilities, facilities costs and depreciation related to production facilities. Post-harvest costs include all direct and indirect costs incurred subsequent to the point of harvest, including labour-related costs, consumables, materials, utilities and facilities costs. Shipment and fulfillment costs include packaging, transportation, quality control and testing costs.

Cost of sales for the three months ended June 30, 2020 were $17.3 million compared to $10.4 million for the three months ended June 30, 2019. The increase of $6.9 million was due to extraction costs related to vapes and oil, newer strains having higher costs and an increase in kilograms sold compared to the prior period. Branded and bulk flower sales in the prior period were comprised of only one strain. Cost of sales per gram sold for the three months ended June 30, 2020 were $2.89 compared to $2.20 for the three months ended June 30, 2019. The increase of $0.69 was due to newer strains having a higher cost per gram and vapes having a higher cost per gram due to costs associated with converting dried flower to oil.

Cost of sales for the six months ended June 30, 2020 were $30.8 million compared to $11.2 million for the six months ended June 30, 2019. The increase of $19.6 million was due to doubling kilogram equivalents sold compared to the prior period and extraction costs related to vapes and oils that were not in the comparative period. Cost of sales per gram sold for the six months ended June 30, 2020 were $2.96 compared to $2.21 for the six months ended June 30, 2019. The

 

12

 

 


 

increase of $0.75 was due to newer strains having a higher cost per gram and vapes having a higher cost per gram due to costs associated with converting dried flower to oil.

Gross margin

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

 

20,194

 

 

 

19,299

 

 

 

34,200

 

 

 

20,798

 

Cost of sales

 

 

17,336

 

 

 

10,434

 

 

 

30,843

 

 

 

11,212

 

Inventory obsolescence and impairment

 

 

10,026

 

 

 

 

 

 

17,741

 

 

 

 

Gross margin before fair value adjustments (1)

 

 

(7,168

)

 

 

8,865

 

 

 

(14,384

)

 

 

9,586

 

Change in fair value of biological assets

 

 

(1,756

)

 

 

12,174

 

 

 

4,659

 

 

 

12,866

 

Change in fair value realized through inventory

 

 

(6,213

)

 

 

(1,769

)

 

 

(15,905

)

 

 

(1,689

)

Gross margin

 

 

(15,137

)

 

 

19,270

 

 

 

(25,630

)

 

 

20,763

 

(1)

Gross margin before fair value adjustments does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-IFRS measure of gross margin before fair value adjustments is discussed further in the “ADVISORY” section of this MD&A.

Gross margin before fair value adjustments

Gross margin before fair value adjustments is defined as net revenue less cost of sales before adjusting for the non-cash changes in the fair value adjustments on the sale of inventory and the growth of biological assets.

Gross margin before fair value adjustments for the three months ended June 30, 2020 was negative $7.2 million compared to $8.9 million for the three months ended June 30, 2019. The decrease of $16.1 million was mainly due to an inventory obsolescence provision, higher cost of sales and flat revenue caused by lower sales prices which offset an increase in kilogram equivalents sold. The obsolescence provision was applied primarily to bulk shake and slow-moving bulk oil inventory due to a lack of market demand.

Gross margin before fair value adjustments for the six months ended June 30, 2020 was negative $14.4 million compared to $9.6 million for the six months ended June 30, 2019. The decrease of $24.0 million was mainly due to increased cost of sales relating to extraction costs for vapes and oils, an inventory obsolescence provision and price discounts which impacted net revenue. The inventory obsolescence provision was applied primarily to bulk shake and slow-moving bulk oil inventory due to a lack of market demand. Price discounts were granted to provincial boards to promote the movement of slower selling products.

The total inventory obsolescence and impairment recognized during the six months ended June 30, 2020 was $27.8 million, with $17.7 million relating to cost of sales and $10.0 million relating to the change in fair value realized through inventory.

Change in fair value of biological assets

Change in fair value of biological assets for the three months ended June 30, 2020 was a decrease of $1.8 million compared to an increase of $12.2 million for the three months ended June 30, 2019. The decrease of $14.0 million was due to a decrease in the number of plants and a decrease in the expected selling price less costs to sell per gram, partially offset by an increase in the weighted average maturity of the stage of growth.

Change in fair value of biological assets for the six months ended June 30, 2020 was an increase of $4.7 million compared to an increase of $12.9 million for the six months ended June 30, 2019. The decrease of $8.2 million was due to a decrease in the number of plants and a decrease in the expected selling price less costs to sell per gram, partially offset by an increase in the weighted average maturity of the stage of growth.

Biological assets consist of cannabis plants in various stages of vegetation, including clones, which have not been harvested. Net unrealized changes in fair value of biological assets less cost to sell during the period are included in the results of operations for the related period. Biological assets are presented at their fair values less costs to sell up to the point of harvest. The fair values are determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusted for the amount for the expected selling price less costs to sell per gram.

 

13

 

 


 

Change in fair value realized through inventory

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Change in fair value realized through inventory sold

 

 

(2,849

)

 

 

(1,769

)

 

 

(5,882

)

 

 

(1,689

)

Change in fair value recognized through inventory obsolescence provision

 

 

(3,364

)

 

 

 

 

 

(10,023

)

 

 

 

Change in fair value realized through inventory

 

 

(6,213

)

 

 

(1,769

)

 

 

(15,905

)

 

 

(1,689

)

The change in fair value realized through inventory for the three months ended June 30, 2020 was a decrease of $6.2 million compared to a decrease of $1.8 million for the three months ended June 30, 2019. The decrease of $4.4 million was due to the fair value component of the excess and obsolete inventory provision and the reversal of prior period increases in fair value of biological assets as they are transferred to inventory and sold.

The change in fair value realized through inventory for the six months ended June 30, 2020 was a decrease of $15.9 million compared to a decrease of $1.7 million for the six months ended June 30, 2019. The decrease of $14.2 million was due to the fair value component of the excess and obsolete inventory provision and the reversal of prior period increases in fair value of biological assets as they are transferred to inventory and sold.

Change in fair value realized through inventory comprises fair value adjustments associated with the cost of inventory when such inventory is sold. Inventories are carried at the lower of cost and net realizable value. When sold, the cost of inventory is recorded as cost of sales, while fair value adjustments are recorded as change in fair value realized through inventory.

General and administrative

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Salaries and wages

 

 

2,366

 

 

 

2,432

 

 

 

6,639

 

 

 

3,782

 

Consulting fees

 

 

450

 

 

 

1,078

 

 

 

1,563

 

 

 

2,821

 

Office and general

 

 

2,958

 

 

 

1,594

 

 

 

5,852

 

 

 

3,013

 

Professional fees

 

 

765

 

 

 

783

 

 

 

2,301

 

 

 

893

 

Director compensation

 

 

80

 

 

 

 

 

 

190

 

 

 

 

Other

 

 

1,116

 

 

 

567

 

 

 

1,798

 

 

 

936

 

 

 

 

7,735

 

 

 

6,454

 

 

 

18,343

 

 

 

11,445

 

General and administrative expenses for the three months ended June 30, 2020 were $7.7 million compared to $6.5 million for the three months ended June 30, 2019. The increase of $1.2 million was mainly due to increases in office and general expenses, partially offset by decreases in salaries and wages and consulting fees as a result of workforce optimizations implemented during the period. The increase in office and general expenses was mainly due to director and officer insurance and property insurance expenses.

General and administrative expenses for the six months ended June 30, 2020 were $18.3 million compared to $11.4 million for the six months ended June 30, 2019. The increase of $6.9 million was mainly due to increases in salaries and wages, office and general, professional fees and other costs, partially offset by a decrease in consulting costs.

Salaries and wages increased throughout 2019 due to the significant growth and expansion of the Company. During the first and second quarters of 2020, the Company commenced and continues to implement several streamlining and efficiency initiatives which include workforce optimization. Office and general costs increased mainly due to property and director and officer insurance costs. Professional fees increased due to legal fees and financial consulting fees. Other costs increased mainly due to royalties on Top Leaf products.

 

14

 

 


 

Sales and marketing

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Sales and marketing

 

 

518

 

 

 

1,533

 

 

 

2,310

 

 

 

2,745

 

Sales and marketing expenses consist of brand development and promotion expenses, marketing personnel and related costs.

Sales and marketing expenses for the three months ended June 30, 2020 were $0.5 million compared to $1.5 million for the three months ended June 30, 2019. The decrease of $1.0 million was mainly due to a decrease in general marketing expenses as a result of the termination and renegotiation of the marketing contract with a former related party as part of the ongoing cost optimization initiatives.

Sales and marketing expenses for the six months ended June 30, 2020 were $2.3 million compared to $2.7 million for the six months ended June 30, 2019. The decrease of $0.4 million was mainly due to a decrease in general marketing expenses as a result of the termination and renegotiation of the marketing contract with a former related party as part of the ongoing cost optimization initiatives.

Share-based compensation

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Simple warrants

 

 

257

 

 

 

13,337

 

 

 

951

 

 

 

14,997

 

Performance warrants

 

 

 

 

 

(390

)

 

 

(42

)

 

 

10,575

 

Stock options

 

 

159

 

 

 

 

 

 

319

 

 

 

 

Restricted share units

 

 

423

 

 

 

 

 

 

685

 

 

 

 

Deferred share units

 

 

1,046

 

 

 

 

 

 

1,208

 

 

 

 

Shares issued for services

 

 

 

 

 

499

 

 

 

 

 

 

582

 

 

 

 

1,885

 

 

 

13,446

 

 

 

3,121

 

 

 

26,154

 

Share-based compensation expense includes the expense related to the issuance of simple and performance warrants, stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees, directors, and others at the discretion of the Company’s board of directors.

Fair value pre-IPO

Given the absence of an active trading market for the Company’s common shares prior to its initial public offering (“IPO”), determining the fair value of the Company’s common shares required the Company’s board of directors to make complex and subjective judgments. The Company’s board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common shares as of the date of each grant. For periods prior to January 1, 2019, the fair value of share-based compensation expense was primarily estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee. Subsequent to January 1, 2019, the fair value of share-based compensation expenses was estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee, as well as other factors, including: the Company’s stage of development; the impact of significant corporate events, operational changes or milestones; material risks related to the business; regulatory developments in the Company’s industry that the Company expected to have an impact on its operations or available markets for its products; the Company’s financial condition and operating results, including its revenue, losses and levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. and Canadian market conditions; the likelihood and potential timing of achieving a liquidity event or completing an offering of common shares, such as an initial public offering; and that the instruments involved illiquid securities of a private company.

 

15

 

 


 

Fair value post-IPO

Subsequent to the consummation of the Company’s IPO on August 6, 2019, the fair value of the Company’s shares is based on public trading data. The estimated fair value of the Company’s common shares at the time of grant is used to determine the associated share-based compensation expense. The Company determines the amount of share-based compensation expense by utilizing the Black-Scholes pricing model with inputs based on the terms of the award, including the strike price, and other estimates and assumptions, including the expected life of the award, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of the awards granted.

Share-based compensation expense for the three months ended June 30, 2020 was $1.9 million compared to $13.4 million for the three months ended June 30, 2019. The decrease of $11.5 million was due to the accelerated vesting of share-based compensation awards in the prior period due to the completion of the initial public offering and a decrease in the value of the share-based compensation awards granted, partially offset by an increase in the number of awards granted. Share-based compensation expense for the three months ended June 30, 2020 included the issuance of 1,982,953 RSUs, 1,257,369 DSUs and 481,600 stock options at an average exercise price of $1.16. Share-based compensation expense for the three months ended June 30, 2019 included the issuance of 2,315,200 simple warrants at an average exercise price of $5.82 and 40,000 performance warrants at an average exercise price of $1.72.

Share-based compensation expense for the six months ended June 30, 2020 was $3.1 million compared to $26.2 million for the six months ended June 30, 2019. The decrease of $23.1 million was due to the accelerated vesting of share-based compensation awards in the prior period due to the completion of the initial public offering and a decrease in the value of the share-based compensation awards granted, partially offset by an increase in the number of awards granted. In addition, the comparative period included adjustments to the fair value of performance warrants that were recognized in share-based compensation expense. Share-based compensation expense for the six months ended June 30, 2020 included the issuance of 2,998,913 RSUs, 1,289,901 DSUs and 481,600 stock options at an average exercise price of $1.16. Share-based compensation expense for the six months ended June 30, 2019 included the issuance of 3,563,200 simple warrants at an average exercise price of $6.28 and 568,000 performance warrants at an average exercise price of $12.42.

Restructuring costs

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Restructuring costs

 

 

2,363

 

 

 

 

 

 

5,082

 

 

 

 

As part of the Company’s objective to optimize asset utilization and reduce costs, the Company commenced and continues to implement several streamlining and efficiency initiatives to align its cost structure and labour force costs with current market conditions. Restructuring costs of $2.4 million and $5.1 million for the three and six months ended June 30, 2020 represent severance costs relating to the workforce reductions, legal, professional and consulting fees that relate directly to the restructuring and finance costs relating to the amendment and restatement of the Syndicated Credit Agreement and extinguishment of the Term Debt Facility.

Asset impairment

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Asset impairment

 

 

 

 

 

 

 

 

5,659

 

 

 

162

 

The Company determined that indictors of impairment existed during the six months ended June 30, 2020 with respect to the Company’s British Columbia cash generating unit (“CGU”) as a result of the Company’s disposition of its Kamloops property and decision to suspend further construction and development activities on its Merritt facility due to market conditions and available financing. Approximately $10.0 million had been invested into the Merritt facility which consisted of land and construction in progress. A test for impairment was performed at the CGU level by comparing the estimated recoverable amount to the carrying values of the assets. The estimated recoverable amount of the assets was determined

 

16

 

 


 

to be their fair value less costs of disposal and an impairment of $5.7 million was recorded to write down the assets to their recoverable amount of $4.2 million.

Transaction costs

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Transaction costs

 

 

1,297

 

 

 

 

 

 

2,398

 

 

 

 

Transaction costs of $2.4 million for the six months ended June 30, 2020 include legal costs and various financing initiatives.

Finance costs

 

 

Three months ended

June 30

 

 

Six months ended

June 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash finance expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on Term Debt Facility

 

 

133

 

 

 

92

 

 

 

2,936

 

 

 

92

 

Interest on Syndicated Credit Agreement

 

 

1,057

 

 

 

 

 

 

2,254

 

 

 

 

Interest on Credit Facilities

 

 

 

 

 

717

 

 

 

 

 

 

1,332

 

Interest on Senior Convertible Notes

 

 

 

 

 

372

 

 

 

 

 

 

372

 

Interest on Convertible Notes

 

 

 

 

 

901

 

 

 

 

 

 

1,751

 

Interest on other debt

 

 

 

 

 

738

 

 

 

 

 

 

1,535

 

Other finance costs

 

 

(54

)

 

 

3,006

 

 

 

140

 

 

 

3,548

 

 

 

 

1,136

 

 

 

5,826

 

 

 

5,330

 

 

 

8,630

 

Non-cash finance expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion

 

 

88

 

 

 

1,419

 

 

 

1,622

 

 

 

2,253

 

Amortization of debt issue costs

 

 

367

 

 

 

288

 

 

 

723

 

 

 

540

 

Change in fair value of convertible notes

 

 

(489

)

 

 

 

 

 

(489

)

 

 

 

Change in fair value of derivative warrant liabilities

 

 

(411

)

 

 

 

 

 

(411

)

 

 

 

Other

 

 

(66

)

 

 

 

 

 

(40

)

 

 

 

 

 

 

(511

)

 

 

1,707

 

 

 

1,405

 

 

 

2,793

 

Less: interest capitalized relating to construction in progress

 

 

 

 

 

(175

)

 

 

 

 

 

(1,280

)

Interest income

 

 

(34

)

 

 

 

 

 

(162

)