EX-99.2 3 sndl-ex992_9.htm EX-99.2 sndl-ex992_9.htm

EXHIBIT 99.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

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

For the three and nine months ended September 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 nine months ended September 30, 2020 is dated November 11, 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 nine months ended September 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 & OUTLOOK4

OPERATIONAL AND FINANCIAL HIGHLIGHTS7

OPERATIONAL RESULTS8

FINANCIAL RESULTS9

DISCONTINUED OPERATIONS – ORNAMENTAL FLOWERS18

SELECTED QUARTERLY INFORMATION18

LIQUIDITY AND CAPITAL RESOURCES19

CONTRACTUAL COMMITMENTS AND CONTINGENCIES27

NON-IFRS MEASURES27

RELATED PARTIES29

OFF BALANCE SHEET ARRANGEMENTS29

CRITICAL ACCOUNTING POLICIES AND ESTIMATES29

NEW ACCOUNTING PRONOUNCEMENTS30

RISK FACTORS30

DISCLOSURE CONTROLS AND PROCEDURES33

INTERNAL CONTROLS OVER FINANCIAL REPORTING33

ABBREVIATIONS34

ADVISORY34

ADDITIONAL INFORMATION35

 


 

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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 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 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 nine months ended September 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

At-the-Market Offering Program

On August 13, 2020, the Company entered into an equity distribution agreement to establish an at-the-market equity program (the “ATM Program”). Under the terms of the equity distribution agreement, the Company may offer and sell common shares having an aggregate offering price of up to US$50 million from time to time, which may include block trades or transactions that are deemed to be an at-the-market offering as defined under the Securities Act.

No sales were made under the ATM Program prior to September 30, 2020. During the period from October 1, 2020 to November 9, 2020, the Company sold 121.9 million common shares under the ATM Program at a weighted average price of US$0.2910 for gross proceeds of $46.3 million (US$35.5 million).

As a result of sales of common shares under the ATM Program, the conversion prices and the exercises prices, as applicable, of the Secured Convertible Note (as defined below), Unsecured Convertible Notes (as defined below), Secured Convertible Note Warrants (as defined below), Unsecured Convertible Notes Warrants (as defined below) and the Series A Warrants (as defined below) were adjusted pursuant to the respective terms thereof and such conversion and exercise prices, as applicable, may be further adjusted as a result of future sales under the ATM Program or other offerings, if any.

 

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August 2020 Offering

On August 18, 2020, the Company issued 25.8 million Series A Units (the “Series A Units”), each consisting of one common share and one Series A Warrant (collectively, the “Series A Warrants”) to purchase one common share and 14.3 million Series B Units (the “Series B Units”), each consisting of one pre-funded Series B Warrant (the “Series B Warrants”) to purchase one common share and one Series A Warrant to purchase one common share. Each Series A Unit was sold at a price of US$0.50 per unit and each Series B Unit was sold at a price of US$0.50 per unit, less US$0.0001 per unit. Gross proceeds from this offering were US$20 million. The Series A Warrants and Series B Warrants were exercisable immediately and have a term of five years commencing on the date of issuance. The exercise price of the Series A Warrants was US$0.75 per common share and the exercise price of the Series B Warrants was US$0.0001 per common share.

On August 19, 2020, 9.2 million Series B Warrants were converted into common shares and on August 20, 2020, the remaining 5.1 million Series B Warrants were converted into common shares.

As a result of sales under the ATM Program, the exercise price of the Series A Warrants was adjusted to US$0.1766 per common share as of November 9, 2020. The exercise price of the Series A Warrants may be further adjusted as the result of future sales under the ATM Program or other offerings, if any.

Subsequent to September 30, 2020, 3.0 million Series A Warrants were exercised at a weighted average exercise price of US$0.1766 per warrant resulting in the issuance of 3.0 million common shares and gross proceeds to the Company of US$0.5 million. As of November 9, 2020, 37.1 million Series A Warrants remained outstanding.

Waiver Agreement

On August 14, 2020, the Company entered into a waiver agreement (the “Waiver”) to the Securities Purchase Agreement (as defined below) with the investors party thereto. Under the terms of the Waiver, the Company agreed to waive the monthly limit on the aggregate principal amount of the Unsecured Convertible Notes that may be converted at the alternate optional conversion price as described in the Securities Purchase Agreement, and the investors agreed to waive any participation rights in certain at-the-market offerings made pursuant to the ATM Program following September 30, 2020.

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.

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 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 condensed consolidated interim financial statements for the three and nine months ended September 30, 2019, have been re-presented to show the discontinued operation separately from continuing operations. See “Discontinued Operations – Ornamental Flowers”.

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

 

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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.

In March 2020, the federal government launched the Canadian Emergency Wage Subsidy (“CEWS”) to help businesses impacted by the COVID-19 pandemic keep and rehire employees. The CEWS delivered a 75 percent wage subsidy to eligible employers for an initial period of 12 weeks, from March 15, 2020 to July 4, 2020. Eligibility was based on meeting a minimum requirement for decreased revenue. The CEWS was extended to November 21, 2020 and amended to change the eligibility requirements from meeting a certain threshold to being variable based on how much an employer’s revenue decreased. A proposal has been made to continue the CEWS until June 2021, including possible changes to the rates and the top-up calculation.

The Company became eligible for the CEWS based on decreases in revenue during the three months ended June 30, 2020 and has received the subsidy for the periods June 6 to July 4, 2020, July 5 to August 1, 2020, August 2 to August 29, 2020 and August 30 to September 26, 2020. The total subsidy for the periods noted was $4.1 million and has been recognized in the condensed consolidated interim statement of loss and comprehensive loss. There are no unfulfilled conditions or contingencies attached to the CEWS.

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.

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.

 

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

MEETING EVOLVING CONSUMER PREFERENCES BY BEING A MORE AGILE AND RESPONSIVE CONSUMER-CENTRIC ORGANIZATION

The consumer is the core stakeholder of the cannabis industry. The legal cannabis industry is still in its infancy and consumer preferences are ever evolving and changing. To be more agile and responsive to these changing preferences, Sundial continues to emphasize and invest in industry data, with a focus on point-of-sale level retail data and social sentiment and continuous and iterative product development practices.

Data-Driven strategy

Sundial continues to invest in data platforms, data sources and analytics capabilities. The Company’s focus is becoming increasingly centered on retail level point of sale data and social sentiment. It is Sundial’s belief that these data sources best represent the changing consumer trends. The Company utilizes these timely data sources and platforms to develop and adjust product roadmaps, brand portfolios, research and development initiatives, sales and distribution tactics and investment in manufacturing capabilities.

Continuous and Iterative Product Development

Using point-of-sale level data and social sentiment, Sundial is implementing iterative and continuous product development practices. The company continues to focus on the development of inhalable formats through new and unique strains, differentiated product formats and more efficient manufacturing methods. Sundial’s modular cannabis grow rooms provide Sundial with a high frequency of harvests and the large amounts of data derived from the harvests enables Sundial to implement important changes and continuous process improvement

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

Inhalable product formats continue to represent the large majority of sales in the cannabis industry. Sundial’s brand and portfolio strategy continues to emphasize whole flower, pre-roll, vape and concentrate products. In Q3 2020, Sundial continued to expand its product offerings through:

 

The introduction of Sundial’s Blue Nova flower to the Ontario market. Since its release, the product has become the company’s top selling flower SKU in the province.

 

The introduction of the Palmetto Blueberry vape cartridge. Since its release, the product has become one of the company’s top selling vape SKUs.

 

The introduction of the Palmetto brand into the Quebec marketplace.

 

The release of several Top Leaf and Sundial vape SKUs, including Oregon Golden Goat and Strawberry Twist.

 

Began the research and development of the company’s solventless concentrates, including Top Leaf Bubble Hash and Live Rosin

Sundial made additional investments in developing new inhalable products through the acquisition of 62 new genetics, several of which are unique to Sundial. The Company believes the commercialization of these strains will be a key differentiator for Sundial’s Top Leaf, Palmetto and Sundial brands.

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 the cultivation of high quality, high potency flower

 

Increasing our points of distribution and national presence

 

Prioritizing in-store brand experiences and touchpoints

EMPHASIZING THE CULTIVATION OF HIGH QUALITY, HIGH POTENCY FLOWER

Sundial’s ability to consistently delivery high potency flower combined with other quality elements, including the packaging, trim and terpene content, will be the key component of the Company’s success. The Company is emphasizing the development of new strains, the utilization of insights and continuous improvement process to achieve high potency and consistent quality metrics.

 

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INCREASING OUR POINTS OF DISTRIBUTION AND NATIONAL PRESENCE

Sundial continues to invest in increasing the Company’s points of distribution to increase consumer’s access to our products. In Q3 2020, the Company added 3 new members increasing the Company’s commercial coverage across Alberta, Ontario, Manitoba and Saskatchewan.

In the coming months and quarters, Sundial will continue to support and expand its sales force and customer coverage. The Company’s strategy will emphasize continued expansion in existing cannabis retailers and net new opportunities presented by store front expansion especially in key markets such as Ontario, British Columbia and Alberta.

PRIORITIZING IN-STORE BRAND EXPERIENCES AND TOUCHPOINTS

Cannabis sales continue to be primarily driven by brick and mortar retail sales and the growth in key provinces, like Ontario, new store openings are one of the main drivers of growth. Sundial will continue prioritize the Company’s in-store brand experiences and touchpoints to enable the growth of retail sales and take advantage of net new industry growth. For example, Sundial has significantly increased it investment in retail marketing through national in-store holiday campaigns for the Top Leaf, Palmetto and Sundial brands beginning in mid-November.

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

In Q3 2020, Sundial continued to implement cost cutting and cost discipline strategies started during the previous quarters. Additionally, the impact of the cost cutting initiatives have began to be realized. Compared to the three months ended September 30, 2019, Sundial reduced cultivation and production costs by 50% resulting in quarterly savings of $8.2 million in Q3 2020. Overall, Sundial decreased the cash used from operations quarter over quarter by 69% to $4.4 million in Q3 2020. These significant cost savings have enabled the Company to be more competitive and more capable of proactively managing the continued price compression expected in the industry.

Sundial continues to expect Fiscal 2020 to be a transition year as the Company has reset its strategic focus, continues to streamline its organization structure and implements a comprehensive operational and supply chain optimization program.

Strategic alternatives and capital raising

Following a review of its business, Sundial 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 established the ATM Program covering issuances of up to US$50 million. From June 30, 2020 to November 9, 2020, the Company has raised gross proceeds of US$20.0 million from the August 2020 Offering and gross proceeds of US$35.5 million from sales under the ATM Program. There can be no guarantee that the Company will be able to raise additional capital on terms acceptable to it or at all.

 

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The Company’s financial statements at and for the three and nine months ended September 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.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

($000s, except as indicated)

Q3 2020

 

Q3 2019

 

Change

 

% Change

 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

15,525

 

 

28,690

 

 

(13,165

)

 

-46

%

Net revenue

 

12,865

 

 

28,021

 

 

(15,156

)

 

-54

%

Cost of sales

 

10,259

 

 

20,250

 

 

(9,991

)

 

-49

%

Gross margin before fair value adjustments

 

(17,291

)

 

7,771

 

 

(25,062

)

 

-323

%

Gross margin before fair value adjustments %

 

-134

%

 

28

%

 

 

 

 

-162

%

Loss from operations

 

(89,230

)

 

(9,420

)

 

(79,810

)

 

-847

%

Net loss from continuing operations (1)

 

(71,386

)

 

(85,448

)

 

14,062

 

 

16

%

Per share, basic and diluted (1)

 

(0.53

)

 

(0.93

)

 

0.40

 

 

43

%

Net loss from discontinued operations (1)

 

 

 

(12,004

)

 

12,004

 

 

100

%

Per share, basic and diluted (1)

 

 

 

(0.13

)

 

0.13

 

 

100

%

Net loss (1)

 

(71,386

)

 

(97,452

)

 

26,066

 

 

27

%

Per share, basic and diluted (1)

 

(0.53

)

 

(1.06

)

 

0.53

 

 

50

%

Adjusted EBITDA from continuing operations (2)

 

(4,409

)

 

(6,243

)

 

1,834

 

 

29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

21,044

 

 

141,805

 

 

(120,761

)

 

-85

%

Biological assets

 

4,492

 

 

14,539

 

 

(10,047

)

 

-69

%

Inventory

 

31,672

 

 

28,420

 

 

3,252

 

 

11

%

Property, plant and equipment

 

119,777

 

 

254,097

 

 

(134,320

)

 

-53

%

Total assets

 

227,004

 

 

632,057

 

 

(405,053

)

 

-64

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational

 

 

 

 

 

 

 

 

 

 

 

 

Kilogram equivalents sold

 

5,819

 

 

7,944

 

 

(2,125

)

 

-27

%

Average gross selling price per gram (3)

 

2.67

 

 

3.61

 

 

(0.94

)

 

-26

%

Average net selling price per gram (4)

 

2.21

 

 

3.53

 

 

(1.32

)

 

-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)

Gross selling price net of excise tax.

(4)

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

 

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OPERATIONAL RESULTS

Kilogram equivalents sold

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

 

2,268

 

 

 

461

 

 

 

7,463

 

 

 

1,094

 

Medical

 

 

 

 

 

2

 

 

 

4

 

 

 

3

 

Licensed producers

 

 

3,551

 

 

 

7,481

 

 

 

8,786

 

 

 

11,911

 

Total kilogram equivalents sold

 

 

5,819

 

 

 

7,944

 

 

 

16,253

 

 

 

13,008

 

For the three months ended September 30, 2020, the Company sold 5,819 kilogram equivalents of cannabis compared to 7,944 kilogram equivalents for the three months ended September 30, 2019. The decrease of 2,125 kilogram equivalents sold was due to a decrease in sales to other licensed producers (“LPs”), partially offset by an increase in sales to provincial boards. The increase in provincial board sales was due to an expanded provincial distribution network with sales to nine different provinces, comprised of branded flower and vapes, compared to six provinces comprised of branded flower in the comparative period.

For the nine months ended September 30, 2020, the Company sold 16,253 kilogram equivalents of cannabis compared to 13,008 kilogram equivalents for the nine months ended September 30, 2019. The increase of 3,245 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 six provinces 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

September 30

 

 

Nine months ended

September 30

 

($/gram equivalent)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

$

5.53

 

 

$

6.34

 

 

$

5.48

 

 

$

6.45

 

Medical

 

$

 

 

$

3.50

 

 

$

6.75

 

 

$

5.00

 

Licensed producers

 

$

0.84

 

 

$

3.44

 

 

$

1.77

 

 

$

3.66

 

Average gross selling price

 

$

2.67

 

 

$

3.61

 

 

$

3.47

 

 

$

3.89

 

Excise taxes

 

$

(0.46

)

 

$

(0.08

)

 

$

(0.58

)

 

$

(0.14

)

Average net selling price

 

$

2.21

 

 

$

3.53

 

 

$

2.90

 

 

$

3.75

 

For the three months ended September 30, 2020, the average net selling price was $2.21 per gram equivalent compared to $3.53 for the three months ended September 30, 2019. The decrease of $1.32 per gram equivalent was due to lower prices for both provincial sales and bulk sales to other LP’s and a higher percentage of total sales to provincial boards subject to excise taxes. Sale prices 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 nine months ended September 30, 2020, the average net selling price was $2.90 per gram equivalent compared to $3.75 for the nine months ended September 30, 2019. The decrease of $0.86 per gram equivalent was due to price discounts and return provisions, lower prices for both provincial and 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 ongoing price compression in the market. A return provision was recorded in the current period estimated based on the likelihood of having additional slow moving and aged product returned. Sale prices have decreased due to downward price pressure in the market due to excess industry production capacity relative to current distribution channels. These factors contributed to a significant decrease in the average gross selling price when compared to the prior period.

 

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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 nine months ended September 30, 2020 and 2019 are only calculated based on adult-use cannabis sales to provincial boards.

Cash cost to produce

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of sales

 

 

10,259

 

 

 

20,250

 

 

 

41,102

 

 

 

31,462

 

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

1,289

 

 

 

1,072

 

 

 

3,618

 

 

 

1,927

 

Cash cost of sales

 

 

8,970

 

 

 

19,178

 

 

 

37,484

 

 

 

29,535

 

Packaging costs

 

 

128

 

 

 

328

 

 

 

1,489

 

 

 

362

 

Cash cost to produce (1)

 

 

8,842

 

 

 

18,850

 

 

 

35,995

 

 

 

29,173

 

Cash cost to produce per gram equivalent

 

$

1.52

 

 

$

2.37

 

 

$

2.21

 

 

$

2.24

 

(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 September 30, 2020, the cash cost to produce was $8.8 million compared to $18.9 million for the three months ended September 30, 2019. The decrease of $10.1 million was due to a decrease in kilogram equivalents sold compared to the prior period. The decrease in cash cost to produce per gram was due to a large bulk sale to an LP that had a low per gram cost.

For the nine months ended September 30, 2020, the cash cost to produce was $36.0 million compared to $29.2 million for the nine months ended September 30, 2019. The increase of $6.8 million was due to an increase in kilogram equivalents sold compared to the prior period. The decrease in cash cost to produce per gram was due to a large bulk sale to an LP that a low per gram cost, partially offset by 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.

FINANCIAL RESULTS

Revenue

Revenue by form

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue from dried flower

 

 

11,629

 

 

 

20,609

 

 

 

39,443

 

 

 

42,584

 

Revenue from vapes

 

 

3,577

 

 

 

 

 

 

14,185

 

 

 

 

Revenue from oil

 

 

319

 

 

 

8,081

 

 

 

2,828

 

 

 

8,081

 

Gross revenue

 

 

15,525

 

 

 

28,690

 

 

 

56,456

 

 

 

50,665

 

 

9

 

 


 

Revenue by channel

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Provincial boards

 

 

12,552

 

 

 

2,921

 

 

 

40,885

 

 

 

7,059

 

Medical

 

 

6

 

 

 

7

 

 

 

27

 

 

 

15

 

Licensed producers

 

 

2,967

 

 

 

25,762

 

 

 

15,544

 

 

 

43,591

 

Gross revenue

 

 

15,525

 

 

 

28,690

 

 

 

56,456

 

 

 

50,665

 

Excise taxes

 

 

(2,660

)

 

 

(669

)

 

 

(9,391

)

 

 

(1,846

)

Net revenue

 

 

12,865

 

 

 

28,021

 

 

 

47,065

 

 

 

48,819

 

Gross revenue per gram sold

 

$

2.67

 

 

$

3.61

 

 

$

3.47

 

 

$

3.89

 

Net revenue per gram sold

 

$

2.21

 

 

$

3.53

 

 

$

2.90

 

 

$

3.75

 

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 nine months ended September 30, 2020, provincial board sales represented the majority of cannabis revenue, a milestone for the Company.

Gross revenue for the three months ended September 30, 2020 was $15.5 million compared to $28.7 million for the three months ended September 30, 2019. The decrease of $13.2 million was mainly due to a decrease of $22.8 million in sales to LP’s, partially offset by an increase of $9.7 million in provincial board sales. The increase in provincial board sales was due to the Company expanding its provincial distribution network 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 six provinces 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 nine months ended September 30, 2020 was $56.5 million compared to $50.7 million for the nine months ended September 30, 2019. The increase of $5.8 million was mainly due to an increase of $33.8 million in provincial board sales partially offset by a decrease of $28.1 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 six provinces 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 shipped from the production facility in its final consumer-facing packaging. 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 September 30, 2020 were $2.7 million compared to $0.7 million for the three months ended September 30, 2019. The increase of $2.0 million was due to an increase in sales to provincial boards from the comparative period.

Excise taxes for the nine months ended September 30, 2020 were $9.4 million compared to $1.8 million for the nine months ended September 30, 2019. The increase of $7.6 million was due to an increase in sales to provincial boards from the comparative period.

 

10

 

 


 

Cost of sales

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s, except as indicated)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of sales

 

 

10,259

 

 

 

20,250

 

 

 

41,102

 

 

 

31,462

 

Cost of sales per gram sold

 

$

1.76

 

 

$

2.55

 

 

$

2.53

 

 

$

2.42

 

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 September 30, 2020 were $10.3 million compared to $20.3 million for the three months ended September 30, 2019. The decrease of $10.0 million was due to a decrease in kilograms sold and a large bulk sale to an LP that had a low per gram cost, partially offset by newer strains having higher costs. Cost of sales per gram sold for the three months ended September 30, 2020 were $1.76 compared to $2.55 for the three months ended September 30, 2019. The decrease of $0.79 was mainly due to a bulk sale to an LP that had a low per gram cost.

Cost of sales for the nine months ended September 30, 2020 were $41.1 million compared to $31.5 million for the nine months ended September 30, 2019. The increase of $9.6 million was due to an increase in kilograms sold compared to the prior period, extraction costs related to vapes and newer strains having higher costs. Cost of sales per gram sold for the nine months ended September 30, 2020 were $2.53 compared to $2.42 for the nine months ended September 30, 2019. The increase of $0.11 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, partially offset by a bulk sale to an LP that had a low per gram cost.

Gross margin

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

 

12,865

 

 

 

28,021

 

 

 

47,065

 

 

 

48,819

 

Cost of sales

 

 

10,259

 

 

 

20,250

 

 

 

41,102

 

 

 

31,462

 

Inventory obsolescence and impairment

 

 

19,897

 

 

 

 

 

 

37,638

 

 

 

 

Gross margin before fair value adjustments (1)

 

 

(17,291

)

 

 

7,771

 

 

 

(31,675

)

 

 

17,357

 

Change in fair value of biological assets

 

 

194

 

 

 

11,675

 

 

 

4,853

 

 

 

24,541

 

Change in fair value realized through inventory

 

 

(2,447

)

 

 

(5,875

)

 

 

(18,352

)

 

 

(7,564

)

Gross margin

 

 

(19,544

)

 

 

13,571

 

 

 

(45,174

)

 

 

34,334

 

(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 September 30, 2020 was negative $17.3 million compared to $7.8 million for the three months ended September 30, 2019. The decrease of $25.1 million was mainly due to an inventory obsolescence provision, lower revenue caused by a decrease in kilogram equivalents sold and lower sales prices, partially offset by lower cost of sales. The obsolescence provision was applied across all cannabis inventory formats, bulk and packaged, due to a lack of market demand.

 

11

 

 


 

Gross margin before fair value adjustments for the nine months ended September 30, 2020 was negative $31.7 million compared to $17.4 million for the nine months ended September 30, 2019. The decrease of $49.1 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 across all cannabis inventory formats, bulk and packaged, 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 nine months ended September 30, 2020 was $48.6 million, with $37.6 million relating to cost of sales and $11.0 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 September 30, 2020 was an increase of $0.2 million compared to an increase of $11.7 million for the three months ended September 30, 2019. The decrease of $11.5 million was due to a decrease in the number of plants, a decrease in the expected selling price less costs to sell per gram and a decrease in the weighted average maturity of the stage of growth.

Change in fair value of biological assets for the nine months ended September 30, 2020 was an increase of $4.9 million compared to an increase of $24.5 million for the nine months ended September 30, 2019. The decrease of $19.6 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.

Change in fair value realized through inventory

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Change in fair value realized through inventory sold

 

 

(1,475

)

 

 

(5,619

)

 

 

(7,357

)

 

 

(7,308

)

Change in fair value recognized through inventory obsolescence provision

 

 

(972

)

 

 

(256

)

 

 

(10,995

)

 

 

(256

)

Change in fair value realized through inventory

 

 

(2,447

)

 

 

(5,875

)

 

 

(18,352

)

 

 

(7,564

)

The change in fair value realized through inventory for the three months ended September 30, 2020 was a decrease of $2.4 million compared to a decrease of $5.9 million for the three months ended September 30, 2019. The increase of $3.5 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 nine months ended September 30, 2020 was a decrease of $18.4 million compared to a decrease of $7.6 million for the nine months ended September 30, 2019. The decrease of $10.8 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.

 

12

 

 


 

General and administrative

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Salaries and wages

 

 

3,353

 

 

 

5,323

 

 

 

9,992

 

 

 

9,105

 

Consulting fees

 

 

273

 

 

 

1,775

 

 

 

1,836

 

 

 

4,596

 

Office and general

 

 

1,937

 

 

 

1,935

 

 

 

7,789

 

 

 

4,948

 

Professional fees

 

 

577

 

 

 

1,060

 

 

 

2,878

 

 

 

1,953

 

Director compensation

 

 

87

 

 

 

 

 

 

277

 

 

 

 

Other

 

 

931

 

 

 

2,322

 

 

 

2,729

 

 

 

3,258

 

 

 

 

7,158

 

 

 

12,415

 

 

 

25,501

 

 

 

23,860

 

General and administrative expenses for the three months ended September 30, 2020 were $7.2 million compared to $12.4 million for the three months ended September 30, 2019. The decrease of $5.2 million was mainly due to decreases in salaries and wages and consulting fees as a result of workforce optimizations implemented during the current year and decreases in other costs.

General and administrative expenses for the nine months ended September 30, 2020 were $25.5 million compared to $23.9 million for the nine months ended September 30, 2019. The increase of $1.6 million was mainly due to increases in salaries and wages, office and general and professional fees, 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.

Sales and marketing

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Sales and marketing

 

 

1,117

 

 

 

2,056

 

 

 

3,427

 

 

 

4,801

 

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 September 30, 2020 were $1.1 million compared to $2.1 million for the three months ended September 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 nine months ended September 30, 2020 were $3.4 million compared to $4.8 million for the nine months ended September 30, 2019. The decrease of $1.4 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.

 

13

 

 


 

Share-based compensation

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Simple warrants

 

 

1,611

 

 

 

4,746

 

 

 

3,385

 

 

 

19,743

 

Performance warrants

 

 

 

 

 

1,182

 

 

 

(42

)

 

 

11,757

 

Stock options

 

 

167

 

 

 

 

 

 

489

 

 

 

 

Restricted share units

 

 

769

 

 

 

 

 

 

1,454

 

 

 

 

Deferred share units

 

 

571

 

 

 

325

 

 

 

1,779

 

 

 

325

 

Shares issued for services

 

 

 

 

 

1,738

 

 

 

 

 

 

2,320

 

 

 

 

3,118

 

 

 

7,991

 

 

 

7,065

 

 

 

34,145

 

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.

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 September 30, 2020 was $3.1 million compared to $8.0 million for the three months ended September 30, 2019. The decrease of $4.9 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, shares issued for services in the prior period and a decrease in the value of the share-based compensation awards granted. Share-based compensation expense for the three months ended September 30, 2020 included the issuance of 900 RSUs and 1,400,352 DSUs. Share-based compensation expense for the three months ended September 30, 2019 included the issuance of 1,232,000 simple warrants at an average exercise price of $6.45 and 155,200 performance warrants at an average exercise price of $8.33.

Share-based compensation expense for the nine months ended September 30, 2020 was $7.1 million compared to $34.1 million for the nine months ended September 30, 2019. The decrease of $27.0 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, shares issued

 

14

 

 


 

for services in the prior period and a decrease in the value of the share-based compensation awards granted. Share-based compensation expense for the nine months ended September 30, 2020 included the issuance of 2,999,813 RSUs, 2,690,253 DSUs and 481,600 stock options at an average exercise price of $1.16. Share-based compensation expense for the nine months ended September 30, 2019 included the issuance of 4,795,200 simple warrants at an average exercise price of $6.32 and 723,200 performance warrants at an average exercise price of $12.23.

Restructuring costs

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Restructuring costs

 

 

1,108

 

 

 

 

 

 

6,190

 

 

 

 

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 $1.1 million and $6.2 million for the three and nine months ended September 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

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Asset impairment

 

 

60,000

 

 

 

 

 

 

65,659

 

 

 

162

 

The Company determined that indictors of impairment existed during the nine months ended September 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 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.

The Company determined that indicators of impairment existed during the nine months ended September 30, 2020 with respect to the Company’s Alberta CGU as a result of decreasing estimates for the size of the potential Canadian cannabis market, the Company curtailing the number of flowering rooms being used for cultivation at its Olds facility and the carrying value of the Company’s total net assets significantly exceeding the Company’s market capitalization. A test for impairment was performed at the CGU level by comparing the estimated recoverable amount the carrying values of the assets. The estimated recoverable amount of the assets was determined to be their value in use and an impairment of $60.0 million was recorded to write down the assets to their estimated recoverable amount of $103.2 million.

Transaction costs

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Transaction costs

 

 

364

 

 

 

6,315

 

 

 

2,762

 

 

 

6,315

 

Transaction costs of $2.8 million for the nine months ended September 30, 2020 include legal costs and various financing initiatives.

 

15

 

 


 

Finance (income) costs

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash finance expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on Term Debt Facility

 

 

 

 

 

1,667

 

 

 

2,936

 

 

 

1,759

 

Interest on Syndicated Credit Agreement

 

 

1,025

 

 

 

454

 

 

 

3,279

 

 

 

454

 

Interest on Credit Facilities

 

 

 

 

 

486

 

 

 

 

 

 

1,818

 

Interest on Senior Convertible Notes

 

 

 

 

 

3

 

 

 

 

 

 

375

 

Interest on Convertible Notes

 

 

 

 

 

691

 

 

 

 

 

 

2,442

 

Interest on other debt

 

 

 

 

 

(9

)

 

 

 

 

 

1,526

 

Other finance costs

 

 

355

 

 

 

451

 

 

 

495

 

 

 

3,999

 

 

 

 

1,380

 

 

 

3,743

 

 

 

6,710

 

 

 

12,373

 

Non-cash finance expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion

 

 

 

 

 

2,379

 

 

 

1,622

 

 

 

4,632

 

Amortization of debt issue costs

 

 

223

 

 

 

476

 

 

 

946

 

 

 

1,016

 

Interest on Senior Convertible Notes

 

 

 

 

 

1,903

 

 

 

 

 

 

1,903

 

Loss on derivative liabilities

 

 

 

 

 

1,649

 

 

 

 

 

 

1,649

 

Change in fair value of convertible notes (1)

 

 

(9,742

)

 

 

 

 

 

(10,231

)

 

 

 

Change in fair value of derivative warrant liabilities (1)

 

 

(10,057

)

 

 

 

 

 

(10,468

)

 

 

 

Other

 

 

18

 

 

 

 

 

 

(22

)

 

 

 

 

 

 

(19,558

)

 

 

6,407

 

 

 

(18,153

)

 

 

9,200

 

Less: interest capitalized relating to construction in progress

 

 

 

 

 

 

 

 

 

 

 

(1,280

)

Interest income

 

 

(19

)

 

 

 

 

 

(181

)

 

 

 

 

 

 

(18,197

)

 

 

10,150

 

 

 

(11,624

)

 

 

20,293

 

(1)

Refer to note 22 in the condensed consolidated interim financial statements for the three and nine months ended September 30, 2020, for valuation methodology.

Finance costs include interest on the Company’s indebtedness, accretion expense associated with the Company’s indebtedness, changes in the fair value of the Secured Convertible Note, Unsecured Convertible Notes and derivative warrant liabilities and certain other expenses, net of capitalized interest related to construction in progress.

Finance income for the three months ended September 30, 2020 was $18.2 million compared to an expense of $10.2 million for the three months ended September 30, 2019. The decrease in costs of $28.4 million was due the changes in fair value of the convertible notes and derivative warrant liabilities, decreased interest expense on the Company’s debt instruments due to the extinguishment of the Term Debt Facility and principal payments made on the Syndicated Credit Agreement, decreased accretion and amortization of debt issue costs due to the extinguishment of the Term Debt Facility, and non-cash finance expenses in the comparative period relating to the Senior Convertible Notes and derivative liabilities.

Finance income for the nine months ended September 30, 2020 was $11.6 million compared to an expense of $20.3 million for the nine months ended September 30, 2019. The decrease in costs of $31.9 million was due to decreased interest expense due to the extinguishment and settlement of various debt instruments, changes in fair value of the convertible notes and derivative warrant liabilities, decreased accretion and amortization of debt issue costs due to the extinguishment of the Term Debt Facility, and non-cash finance expenses in the comparative period relating to the Senior Convertible Notes and derivative liabilities. In the prior period, the production facilities were under construction and the related interest cost was capitalized to construction in progress.

 

16

 

 


 

Income tax recovery

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Income tax recovery

 

 

 

 

 

 

 

 

 

 

 

3,609

 

Income tax recovery represents the Company’s intention to settle provincial and federal income taxes payable and recoverable on a net basis between entities under common control subject to income tax under the same taxation authority.

Income tax recovery for the nine months ended September 30, 2019 was $3.6 million and was due to the Company’s acquisition of a 50% interest in Pathway Rx. Upon acquisition of the Company’s 50% interest in Pathway Rx, $3.6 million of the purchase price was allocated to a deferred tax liability. This liability was subsequently adjusted to nil, with a corresponding adjustment of $3.6 million recorded to income tax recovery, on the basis that the Company and Pathway Rx are subject to income tax under the same taxation authority.

Net loss from continuing operations

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss from continuing operations

 

 

(71,397

)

 

 

(85,487

)

 

 

(142,173

)

 

 

(114,539

)

Net loss for the three months ended September 30, 2020 was $71.4 million compared to a net loss of $85.5 million for three months ended September 30, 2019. The decrease of $14.1 million was due to decreases in cost of sales, change in fair value realized through inventory, decreases in general and administrative expenses, share-based compensation, an increase in government subsidies, decreases in transaction costs, finance costs and loss on financial obligation, partially offset by a decrease in net revenue, an inventory obsolescence provision, decrease in the change in fair value of biological assets, and an asset impairment.

Net loss for the nine months ended September 30, 2020 was $142.2 million compared to a net loss of $114.5 million for nine months ended September 30, 2019. The increase loss of $27.7 million was due lower net revenue, higher cost of goods sold, an inventory obsolescence provision, change in fair value of biological assets and change in fair value realized through inventory, increases in general and administrative expenses, restructuring costs and an asset impairment, partially offset by a decrease in share-based compensation, an increase in government subsidies, decreases in transaction costs, finance costs and the loss on financial obligation.

Adjusted EBITDA from continuing operations

 

 

Three months ended

September 30

 

 

Nine months ended

September 30

 

($000s)