Exhibit 99.1

 

KPMG LLP

205 5th Avenue SW

Suite 3100

Calgary AB T2P 4B9

Tel (403) 691-8000

Fax (403) 691-8008

www.kpmg.ca

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Sundial Growers Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Sundial Growers Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of loss and comprehensive loss, changes in shareholder’s equity, and cash flows for the year ended December 31, 2019, the ten month period ended December 31, 2018 and the year ended February 28, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and its financial performance and its cash flows for the year ended December 31, 2019, the ten month period ended December 31, 2018 and the year ended February 28, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company was in breach of its debt covenants, has net current liabilities, has recurring losses and has a history of negative cash flows from operating activities. These conditions, along with other matters discussed in Note 1, raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG

LLP.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2018.

Calgary, Alberta

October 8, 2020

 

2

 

Sundial Growers Inc.

Consolidated Financial Statements

As at and for the year ended December 31, 2019,

ten months ended December 31, 2018,

and the year ended February 28, 2018

(Expressed in thousands of Canadian dollars)

Sundial Growers Inc.

Consolidated Statements of Financial Position

(Expressed in thousands of Canadian dollars)

 

As at		Note				December 31, 2019				December 31, 2018
Assets
Current Assets
Cash and cash equivalents							45,337				14,121
Restricted cash			13	(a)			15,827				350
Accounts receivable			7				27,638				2,738
Biological assets			8				14,309				876
Inventory			9				59,942				1,234
Prepaid expenses and deposits							9,564				2,390
							172,617				21,709
Non-current assets
Property, plant and equipment			10				281,984				88,491
Intangible assets			5,11				43,995				—
Goodwill			5				11,440				—
Total assets							510,036				110,200
Liabilities
Current liabilities
Accounts payable and accrued liabilities			12				58,110				19,324
Current portion of long-term debt			13,24				177,913				22,477
Convertible notes			15				—				25,449
Current portion of lease obligations			16				722				44
Contingent consideration			5	(a)			32,501				—
Current portion of financial obligations			17				—				2,364
							269,246				69,658
Non-current liabilities
Long-term debt			13,24				—				32,159
Lease obligations			16				16,227				170
Deferred tax liability			18				3,365				—
Financial obligation			17				—				16,121
Total liabilities							288,838				118,108
Shareholders’ equity
Share capital			19	(b)			509,654				65,133
Warrants			19	(c)			27,831				3,108
Contributed surplus			19	(d)			30,192				9,493
Convertible notes – equity component			15				—				3,232
Contingent consideration			5	(b)			2,279				—
Accumulated deficit							(360,338	)			(88,874	)
Accumulated other comprehensive income							6,866				—
Total shareholders’ equity							216,484				(7,908	)
Non-controlling interest			5				4,714				—
Total liabilities and shareholders’ equity							510,036				110,200

Going concern (note 1)

Commitments (note 29)

Subsequent events (notes 5, 28, 30)

See accompanying notes to the consolidated financial statements.

 

Approved by the Board:
“Signed” Bryan Pinney				“Signed” Zachary George
Director				Director

 

F-2

Sundial Growers Inc.

Consolidated Statements of Loss and Comprehensive Loss

(Expressed in thousands of Canadian dollars, except per share amounts)

 

		Note				Year ended December 31 2019 (1) Recast				Ten months ended December 31 2018				Year ended February 28 2018
Gross revenue			21				66,927				—				—
Excise taxes							3,365				—				—
Net revenue							63,562				—				—
Cost of sales							46,721				—				—
Gross margin before fair value adjustments							16,841				—				—
Change in fair value of biological assets							30,340				(1,280	)			366
Change in fair value of biological assets realized through inventory sold							(10,685	)			—				—
Gross margin							36,496				(1,280	)			366
General and administrative			22				38,934				8,309				3,144
Sales and marketing			22				8,068				2,380				1,274
Research & development							2,410				275				413
Pre-production expenses							—				6,457				1,249
Depreciation and amortization							595				920				411
Foreign exchange loss (gain)							939				141				—
Share-based compensation			20				38,698				7,410				4,576
Asset impairment			10				162				523				2,184
Loss from operations							(53,310	)			(27,695	)			(12,885	)
Transaction costs			5	(a)			(8,481	)			—				—
Finance costs			23				(24,216	)			(1,797	)			(75	)
Loss on financial obligation			17				(60,308	)			(27,017	)			—
Gain (loss) on disposition of PP&E							8				(17	)			(35	)
Loss before income tax							(146,307	)			(56,526	)			(12,995	)
Income tax recovery			5	(c),18			3,609				—				—
Net loss from continuing operations							(142,698	)			(56,526	)			(12,995	)
Net loss from discontinued operations			30				(128,931	)			—				—
Net loss							(271,629	)			(56,526	)			(12,995	)
Gain on currency translation of foreign operations			5	(a)			6,866				—				—
Comprehensive loss							(264,763	)			(56,526	)			(12,995	)
Net loss from continuing operations attributable to:
Sundial Growers Inc.							(142,533	)			(56,526	)			(12,995	)
Non-controlling interest			5	(c)			(165	)			—				—
							(142,698	)			(56,526	)			(12,995	)
Net loss from discontinued operations attributable to:
Sundial Growers Inc.							(128,931	)			—				—
Net loss attributable to:
Sundial Growers Inc.							(271,464	)			(56,526	)			(12,995	)
Non-controlling interest			5	(c)			(165	)			—				—
							(271,629	)			(56,526	)			(12,995	)
Comprehensive loss attributable to:
Sundial Growers Inc.							(264,598	)			(56,526	)			(12,995	)
Non-controlling interest			5	(c)			(165	)			—				—
							(264,763	)			(56,526	)			(12,995	)
Net loss per common share
Basic and diluted			25			$	(3.17	)		$	(0.82	)		$	(0.23	)

 

(1)	Year ended December 31, 2019 has been recast to separately present discontinued operations from continuing operations (note 30).

Segment information (note 6)

See accompanying notes to the consolidated financial statements.

 

F-3

Sundial Growers Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of Canadian dollars)

 

		Note				Share capital				Warrants				Contributed surplus				Convertible notes – equity component				Contingent consideration				Accumulated deficit				Accumulated other comprehensive loss				Non- controlling interest				Total equity
Balance at February 28, 2017							15,136				—				—				—				—				(3,615	)			—				—				11,521
Net loss							—				—				—				—				—				(12,995	)			—				—				(12,995	)
Share issuances							8,123				—				—				—				—				—				—				—				8,123
Shares issued to related parties							3,000				—				—				—				—				—				—				—				3,000
Share issuance costs							(515	)			—				—				—				—				—				—				—				(515	)
Share-based compensation							25				—				4,551				—				—				—				—				—				4,576
Balance at February 28, 2018							25,769				—				4,551				—				—				(16,610	)			—				—				13,710
Net loss							—				—				—				—				—				(56,526	)			—				—				(56,526	)
Share issuances							20,452				—				—				—				—				—				—				—				20,452
Shares issued to related parties							16,474				—				—				—				—				—				—				—				16,474
Share issuance costs							(310	)			—				—				—				—				—				—				—				(310	)
Share repurchase							(827	)			—				—				—				—				(15,738	)			—				—				(16,565	)
Fair value allocated to warrants							(3,108	)			3,108				—				—				—				—				—				—				—
Warrants exercised							2,182				—				—				—				—				—				—				—				2,182
Share-based compensation							521				—				6,889				—				—				—				—				—				7,410
Employee warrants exercised							3,980				—				(1,947	)			—				—				—				—				—				2,033
Equity component of convertible notes							—				—				—				3,232				—				—				—				—				3,232
Balance at December 31, 2018							65,133				3,108				9,493				3,232				—				(88,874	)			—				—				(7,908	)
Net loss							—				—				—				—				—				(271,464	)			—				(165	)			(271,629	)
Other comprehensive income (1)							—				—				—				—				—				—				6,866				—				6,866
Share issuances			19	(b)			198,378				—				—				—				—				—				—				—				198,378
Shares issued to related parties			17,19	(b)			63,460				5,833				—				—				—				—				—				—				69,293
Share issuance costs			19	(b)			(12,770	)			—				—				—				—				—				—				—				(12,770	)
Business acquisitions			5				39,849				—				—				—				2,279				—				—				4,879				47,007
Convertible debt - conversions			14,15				113,526				6,731				—				(3,232	)			—				—				—				—				117,025
Warrants reclassified from liability			19	(c)			—				16,091				—				—				—				—				—				—				16,091
Warrants exercised			19	(c)			21,882				(3,932	)			—				—				—				—				—				—				17,950
Share-based compensation			20				2,515				—				37,009				—				—				—				—				—				39,524
Employee warrants exercised			20				17,681				—				(16,310	)			—				—				—				—				—				1,371
Balance at December 31, 2019							509,654				27,831				30,192				—				2,279				(360,338	)			6,866				4,714				221,198

 

(1)	Other comprehensive income is attributable to discontinued operations (note 30)

See accompanying notes to the consolidated financial statements.

 

F-4

Sundial Growers Inc.

Consolidated Statement of Cash Flows

(Expressed in thousands of Canadian dollars)

 

		Note				Year ended December 31 2019 (1) Recast				Ten months ended December 31 2018				Year ended February 28 2018
Cash provided by (used in):
Operating activities
Net loss from continuing operations							(142,698	)			(56,526	)			(12,995	)
Items not involving cash:
Income tax recovery							(3,609	)			—				—
Change in fair value of biological assets							(30,340	)			1,280				(366	)
Share-based compensation			20				38,698				7,410				4,576
Depreciation and amortization			10,11				6,296				920				411
Loss (gain) on disposition of PP&E							(8	)			17				35
Transaction costs							1,279				—				—
Finance costs			23				11,070				917				—
Loss on financial obligation							60,308				18,485				—
Unrealized foreign exchange (gain) loss							671				—				—
Asset impairment							162				523				2,184
Change in non-cash working capital			24				(41,626	)			1,217				910
Net cash used in operating activities from continuing operations							(99,797	)			(25,757	)			(5,245	)
Net cash used in operating activities from discontinued operations			30				(12,939	)			—				—
Net cash used in operating activities							(112,736	)			(25,757	)			(5,245	)
Investing activities
Additions to property, plant and equipment			10				(110,271	)			(76,321	)			(7,588	)
Proceeds from disposal of PP&E							51				—				30
Acquisition of Bridge Farm			5	(a)			(77,023	)			—				—
Change in non-cash working capital			24				1,659				10,282				(2,121	)
Net cash used in investing activities from continuing operations							(185,584	)			(66,039	)			(9,679	)
Net cash from investing activities from discontinued operations			30				(27,560	)			—				—
Net cash used in investing activities							(213,144	)			(66,039	)			(9,679	)
Financing activities
Proceeds from Syndicated Credit Agreement, net of costs			13	(a)			82,687				—				—
(Repayment) proceeds of Credit Facilities			13	(b)			(32,871	)			32,159				—
Proceeds from Term Debt Facility, net of costs			13	(c)			105,539				—				—
(Repayment) proceeds of other debt instruments			13	(d)-(g)			(56,173	)			8,546				7,000
Proceeds from convertible notes, net of costs			14				90,373				27,764				—
Payments on lease obligations							(292	)			(34	)			(109	)
Proceeds from issuance of shares, net of costs			19	(b)			177,202				36,616				9,569
Proceeds from exercise of warrants			19	(c)			17,950				2,182				—
Proceeds from exercise of employee warrants			20				1,371				2,033				—
Settlement of convertible notes			15				(4,190	)			—				—
Settlement of financial obligation			17				(9,500	)			—				—
Restricted cash			13	(a)			(15,477	)			—				—
Repurchase of shares							—				(9,634	)			—
Change in non-cash working capital			24				2,147				(1,393	)			2,426
Net cash provided by financing activities from continuing operations							358,766				98,239				18,886
Net cash provided by financing activities from discontinued operations			30				(499	)			—				—
Net cash provided by financing activities							358,267				98,239				18,886
Impact of foreign currency translation							(1,171	)			—				—
Change in cash and cash equivalents							31,216				6,443				3,962
Cash and cash equivalents, beginning of year							14,121				7,678				3,716
Cash and cash equivalents, end of period							45,337				14,121				7,678

 

(1)	Year ended December 31, 2019 has been recast to separately present discontinued operations from continuing operations (note 30).

See accompanying notes to the consolidated financial statements.

 

F-5

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

1.	Description of business

Sundial Growers Inc. (“Sundial” or the “Company”) was incorporated under the Business Corporations Act (Alberta) on August 19, 2006.

The Company’s head office is located at 300, 919 11th Avenue SW, Calgary, Alberta, Canada.

The principal activities of the Company are the production, distribution and sale of cannabis in Canada and the production, distribution and sale of ornamental flowers and herbs in the United Kingdom. On June 5, 2020, the Company disposed of Bridge Farm and the Bridge Farm results are presented herein as discontinued operations (note 30). The production, distribution and sale of cannabis was regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in Canada, up to and including October 16, 2018. On October 17, 2018, the ACMPR was superseded by the Cannabis Act which regulates the production, distribution, and possession of cannabis for both medical and adult recreational access in Canada.

On August 1, 2019, the Company’s common shares began trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “SNDL”.

Sundial does not engage in any U.S. cannabis-related activities as defined in Canadian Securities Administrators Staff Notice 51-352.

Going concern assumption

These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company is an early-stage company, has accumulated significant losses and was not in compliance with its loan covenants (note 10a) as at December 31, 2019 and March 31, 2020. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flows from operating activities.

The Company has a Producer’s License at each of its two Canadian facilities, a license to sell live plants to other licensed producers and its standard processing and sales license from Health Canada. The Company has maintained compliance with all Health Canada’s requirements under these licenses.

The ability of the Company to continue as a going concern depends on Health Canada maintaining such 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.

During the year ended December 31, 2019, the Company sourced the capital and liquidity to advance its strategic growth initiatives by way of the capital transactions described in notes 13, 14 and 19. At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the full principal amount of the Term Debt Facility were classified as current liabilities on the Company’s statement of financial position.

On May 14, 2020, the Company obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach.

On June 5, 2020, the Company entered into an amended and restated credit agreement (note 10a), executed a refinancing transaction under its Term Debt Facility (note 10b), executed an intercreditor agreement and closed the sale of Bridge Farm (note 3). The amended and restated credit agreement includes 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 were rescheduled to commence on September 30, 2020.

Additionally, based on the Company’s most recent financial projections, management is forecasting that the Company will be in violation of the Syndicated Credit Agreement senior funded debt to EBITDA covenant at December 31, 2020. The Company plans to access the capital markets to raise additional liquidity. The Company has filed registrations statements for a base shelf prospectus allowing it to issue common shares in an amount up to US$100 million at its discretion, and to establish an at-the-market equity program covering common share issuances of up to US$50 million. There can be no guarantee that the Company will be able to raise additional capital on terms acceptable to it or at all. 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.

These events, combined with the accumulated losses to date, indicate the existence of a material uncertainty that casts substantial doubt on the Company’s ability to continue as a going concern. These consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern.

 

F-6

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

After giving consideration to current initiatives, the use of the going concern assumption is considered appropriate and the Company’s consolidated financial statements have been prepared on a going concern basis.

 

2.	Basis of presentation

 

a)

Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”) in effect as of December 31, 2019, except as described in note 3.

During 2018, the Company changed its fiscal year end from February 28 to December 31 and accordingly a ten-month period ended December 31, 2018 is presented in these consolidated financial statements. The change in fiscal year was made to better align the Company’s reporting calendar with other publicly listed companies.

These consolidated financial statements have been prepared on a going concern basis (note 1), based on Management’s assessment that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. These consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern.

These financial statements have been recast to separately present discontinued operations from continuing operations (note 30).

Certain prior period amounts have been reclassified to conform to current year presentation. Specifically, the loss on financial obligation was included in finance costs in the prior year but has been disclosed as its own line item on the statement of comprehensive loss.

These consolidated financial statements were approved and authorized for issue by the Board of Directors (“Board”) on October 8, 2020.

 

b)

Basis of measurement

These consolidated financial statements have been prepared on a historical cost basis, except for biological assets and related inventory and certain financial instruments which are measured at fair value with changes in fair value recorded in earnings.

 

c)

Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Company and its Canadian based subsidiaries. Subsidiaries incorporated in the jurisdiction of England and Wales use the Great Britain Pound as its functional currency. Sundial Deutschland GmbH and Sundial Portugal, Unipessoal LDA use the European Euro as their functional currency. Transactions in currencies other than the functional currency are translated at the rate prevailing at the date of transaction. Monetary assets and liabilities that are denominated in foreign currencies are translated at the rate prevailing at each reporting date. Income and expense amounts are translated at the dates of the transactions.

In preparing the Company’s consolidated financial statements, the financial statements of foreign subsidiaries are translated into Canadian dollars, the functional currency of the Company. The assets and liabilities of foreign subsidiaries that do not have a functional currency of Canadian dollars, are translated into Canadian dollars using exchange rates at the reporting date. Revenues and expenses of foreign operations are translated into Canadian dollars using foreign exchange rates that approximate those on the date of the underlying transactions. Foreign exchange differences from the translation of foreign subsidiaries into Canadian dollars are recognized in Other Comprehensive Income.

 

F-7

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

d)

Basis of consolidation

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in these consolidated financial statements from the date that control commences until the date that control ceases.

 

Subsidiaries		Jurisdiction of incorporation		Percentage ownership
Sprout Technologies Inc.		Alberta, Canada			100	%
KamCan Products Inc.		British Columbia, Canada			100	%
2011296 Alberta Inc.		Alberta, Canada			100	%
Sundial Deutschland GmbH		Germany			100	%
Sundial Portugal, Unipessoal LDA		Portugal			100	%
Pathway Rx Inc.		Alberta, Canada			50	%
2082033 Alberta Ltd.		Alberta, Canada			100	%
SGI Managing Partner Inc.		Alberta, Canada			100	%
SGI Partnership		Alberta, Canada			99.99	%
Sundial UK Limited (1)		England and Wales			100	%
Project Seed Topco (1)		England and Wales			100	%
Project Seed Bidco (1)		England and Wales			100	%
Bridge Farm Nurseries Limited (1)		England and Wales			100	%
Neame Lea Nursery Limited (1)		England and Wales			100	%
Neame Lea Marketing Limited (1)		England and Wales			100	%
Neame Lea Fresh Limited (1)		England and Wales			100	%
Zyon UK Flowers and Plants Limited (1)		England and Wales			100	%

 

(1)	Discontinued operations (note 30)

 

3.	Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held with banks and other short-term liquid investments with maturities of less than 90 days.

Restricted cash and cash equivalents

Restricted cash is recorded as current assets representing the minimum balance required in accordance with the Syndicated Credit Agreement for interest coverage and funds held in trust by the Town of Olds, Alberta in accordance with municipal regulations related to the granting of a building permit.

Biological assets

The Company’s biological assets consist of cannabis plants and ornamental flowers. The Company capitalizes all direct and indirect costs related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest, including labour related costs, grow consumables, materials, utilities, facilities costs, depreciation and quality and testing costs. Biological assets are then recorded at fair value and consist of cannabis plants in various stages of vegetation, including cannabis 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 valued in accordance with IAS 41 and 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 adjusts the amount for the expected selling price less costs to sell per gram. The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. Our method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest. The estimated expected harvest yield is based on assumptions of the estimated yield per plant and the weighted average number of growing weeks completed as a percentage of total expected growing weeks as at year end. These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. Differences from the anticipated yield will be reflected in the net change in fair value of biological assets in future periods.

 

F-8

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Inventory

Inventories of harvested cannabis are valued at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value less cost to sell up to the point of harvest, which becomes the initial deemed cost. All subsequent direct and indirect post-harvest costs are capitalized to inventory as incurred, including labor related costs, consumables, materials, packaging supplies, utilities, facilities costs, as well as quality and testing costs. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Inventories for resale and cannabis supplies and consumables are initially valued at cost and subsequently at the lower of cost and net realizable value.

The valuation of biological assets at the point of harvest is used as the measurement basis for all cannabis-based inventory and, thus, any critical estimates and judgements related to the valuation of biological assets are also applicable to inventory. The valuation of work-in-progress and finished goods also requires the estimate of conversion costs incurred, which become part of the carrying amount of the inventory. We must also determine if the cost of any inventory exceeds its net realizable value, such as cases where prices have decreased, or inventory has spoiled or has otherwise been damaged.

Property, plant, and equipment

Property, plant and equipment are carried at cost less accumulated depreciation, less any recognized impairment losses. The cost of additions, betterments, renewals, and interest during construction is capitalized. Each part of an component of property, plant and equipment with a cost that is significant in relation to the total cost of the component is depreciated separately. When the cost of replacing a portion of a component of property and equipment is capitalized, the carrying amount of the replaced component is derecognized.

Depreciation of construction in progress assets commences when the assets are ready for their intended use or when a Health Canada producer’s license is granted. The assets’ residual values and useful lives are reviewed, and adjusted as appropriate, at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by adjusting the depreciation period or method, as appropriate, and are treated as changes in accounting estimates.

Any gain or loss arising on the disposal or retirement of a component of property and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the consolidated statements of loss and comprehensive loss.

Property, plant and equipment are depreciated as they become available for use. Buildings are not depreciated until a producer’s license is obtained. For assets available for use, depreciation is computed using the straight-line method over the estimated useful life of the assets, as described below:

 

Land		n/a
Production facilities		20 years
Equipment		2 to 10 years
Right-of-use assets		Lease term
Construction in progress		n/a

Intangible assets

Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is provided on a straight-line basis over their estimated useful lives, once the intangible asset is available for use, as described below. If the intangible asset is not yet available for use it will be tested for impairment on an annual basis in accordance with IAS 38.

The Company’s intangible assets are comprised of the following:

 

•

Intellectual property purchased from Sun 8 Holdings Inc. consisting of world-wide proprietary rights to certain cannabis brands, including patents, copyrights and trademarks with a useful life of 15 years.

 

•

Intellectual property acquired through the acquisition of Pathway RX Inc. consisting of proprietary rights to certain technology, copyrights and trademarks with a useful life of 20 years.

 

•

Intellectual property acquired through the acquisition of Bridge Farm consisting of customer relationships and brands with useful lives of 3 to 20 years.

Impairment of assets

Management assesses and continually monitors internal and external indicators of impairment relating to our assets. The assessment of indicators of impairment takes into account various factors including the likelihood of obtaining future licenses from Health Canada, the demand for cannabis for medical and adult-use purposes, the price of cannabis, and changes in market discount rates.

 

F-9

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

(i)

Financial assets

We apply an expected credit loss, or ECL, model to all debt financial assets not held at fair value through profit and loss, or “FVTPL”, where credit losses that are expected to transpire in futures years are provided for, irrespective of whether a loss event has occurred or not as at the statement of financial position date. For trade receivables, we have applied the simplified approach under IFRS 9 and have calculated ECLs based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions. ECL’s are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of the difference between the cash flows due in accordance with the contract and the cash flow we expect to receive. ECL’s are discounted at the effective interest rate of the financial asset.

 

(ii)

Non-financial assets

The carrying amounts of our property, plant and equipment and intangible assets are assessed for impairment indicators at each reporting period end to determine whether there is an indication that such assets have experienced impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s or group of assets estimated fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable independent cash inflows (a cash generating unit, or CGU).

Where an impairment loss is subsequently determined to have reversed, the carrying amount of the asset (or CGU) is adjusted to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) previously. A reversal of an impairment loss is recognized immediately in the statements of comprehensive loss.

Financial instruments

The Company classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instruments:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. A financial asset or liability is measured initially at fair value plus, for an item not measured at FVTPL, transaction costs that are directly attributable to its acquisition or issuance.

 

(i)

Financial assets

At initial recognition, a financial asset is classified and measured at: amortized cost, FVTPL or Fair Value Through Other Comprehensive Income depending on the business model and contractual cash flows of the instrument.

Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. A substantial modification to the terms of an existing financial asset results in the derecognition of the financial asset and the recognition of a new financial asset at fair value. In the event that the modification to the terms of an existing financial asset do not result in a substantial difference in the contractual cash flows the gross carrying amount of the financial asset is recalculated and the difference resulting from the adjustment in the gross carrying amount is recognized in earnings or loss.

The Company’s cash and cash equivalents, restricted cash and accounts receivable are measured at amortized cost. The Company has no financial assets measured at FVTPL or Fair Value Through Other Comprehensive Income.

 

(ii)

Financial liabilities

Financial liabilities are initially measured at amortized cost or FVTPL. Accounts payable and accrued liabilities are initially recognized at the amount required to be paid less any required discount to reduce the payables to fair value. Long-term debt is recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.

 

F-10

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Financial liabilities are derecognized when the liability is extinguished. A substantial modification of the terms of an existing financial liability is recorded as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the consideration paid is recognized in earnings or loss. Where a financial liability is modified in a way that does not constitute an extinguishment, the modified cash flows are discounted at the liability’s original effective interest rate. Transaction costs paid to third parties in a modification are amortized over the remaining term of the modified debt.

The Company’s accounts payable and accrued liabilities and long-term debt are measured at amortized cost. The Company’s convertible notes were designated as FVTPL upon initial recognition as the notes contained multiple embedded derivatives. The Company’s contingent consideration is designated as FVTPL.

Non-monetary transactions

All non-monetary transactions are measured at the fair value of the asset surrendered or the asset received, whichever is more reliable, unless the transaction lacks commercial substance, or the fair value cannot be reliably established. The lack of commercial substance requirement is met when the future cash flows are expected to change significantly as a result of the transaction. When the fair value of a non-monetary transaction cannot be reliably measured, it is recorded at the carrying amount (after reduction, when appropriate, for impairment) of the asset given up, adjusted by the fair value of any monetary consideration received or given. When the asset received or the consideration given consists of shares in an actively traded market, the value of those shares will be considered fair value.

Repurchase of common shares

The repurchase of common shares are recorded at the value of the consideration given. All common shares repurchased are cancelled. Any excess of the purchase price over the carrying amount will be charged to accumulated deficit as share repurchase premiums.

Compound financial instruments

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability which does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument taken as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition.

Interest and losses and gains relating to the financial liability are recognized in the consolidated statements of loss and comprehensive loss. On conversion, the financial liability is reclassified to equity; no gain or loss is recognized on conversion.

Convertible notes are compound financial instruments which are accounted for separately by their components: a financial liability and an equity instrument. The financial liability, which represents the obligation to pay coupon interest on the convertible notes in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual amount is accounted for as an equity instrument at issuance.

The identification of the components of convertible notes is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management. The determination of the fair value of the liability is also based on various assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.

Revenue

Under IFRS 15, to determine the amount and timing of revenue to be recognized, we follow a five-step model:

 

1.

Identifying the contract with a customer

 

2.

Identifying the performance obligations

 

3.

Determining the transaction price

 

4.

Allocating the transaction price to the performance obligations

 

5.

Recognizing revenue when/as performance obligations are satisfied

Gross revenue from the direct sale of cannabis for a fixed price is recognized when we transfer control of the goods to the customer. The transfer of control is specific to each contract and can range from the point of delivery to a specified length of time for the customer to accept the goods. Gross revenue from the sale of ornamental flowers and herbs is recognized when we transfer control of the goods to the customer, which is at the point of delivery.

 

F-11

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

For contracts that permit the customer to return goods, revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Therefore, the amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data and management’s expectation of future returns. In these circumstances, a refund liability and a right to recover returned goods asset are recognized. The right to recover returned goods asset is measured at the former carrying amount of the inventory less any expected costs to recover goods. The refund liability is included in accounts payable and accrued liabilities and the right to recover returned goods is included in inventory. The Company reviews its estimate of expected returns at each reporting date and updates the amounts of the asset and liability accordingly.

Gross revenue earned in Canada includes excise taxes, which we pay as principal, but excludes duties and taxes collected on behalf of third parties. Net revenue is gross revenue less excise taxes. Gross revenue is recognized to the extent that it is highly probable that a significant reversal will not occur. Therefore, gross revenue is stated net of expected price discounts, allowances for customer returns and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing.

Research and development

Research costs are expensed in the period incurred. Development costs are expensed in the period incurred unless the Company believes a development project meets the generally accepted criteria for deferral and amortization of IAS 38 “Intangible Assets”. Research and development costs comprise consulting fees and license acquisition fees. No development costs have been capitalized as at December 31, 2019 or December 31, 2018.

Share-based compensation

The fair value of share-based compensation expenses is estimated using the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted. Share-based compensation expense includes the expense for the issue of simple and performance warrants to employees, directors, and others at the discretion of our board of directors. Given the absence of an active trading market for the Company’s common shares prior to its initial public offering, determining the fair value of the Company’s common shares required our board of directors to make complex and subjective judgments. Our 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; the Company’s financial condition and operating results, including its revenue, history of net losses and levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. 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 the instruments involved illiquid securities of a private company. Subsequent to the Company’s IPO on August 6, 2019, the fair value of the Company’s shares is based on public trading data. In determining the amount of share-based compensation expense, the Company utilized the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted.

Income taxes

Income taxes are recognized in the consolidated statements of loss and comprehensive loss, except to the extent that they relate to items recognized directly in equity, in which case the tax is recognized in equity.

Current taxes are generally the expected income tax payable on taxable income for the reporting period, calculated using rates enacted or substantively enacted at the consolidated statements of financial position dates, and includes any adjustment to income tax payable or recoverable in respect of previous periods.

Uncertain income tax positions are accounted for using the standards applicable to current income tax assets and liabilities. Liabilities and assets are recorded to the extent they are deemed to be probable.

Deferred tax is recognized using the asset and liability method, based on temporary differences between financial statement carrying amounts of assets and liabilities, and their respective income tax bases. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the consolidated statements of financial position date and are expected to apply when the related deferred tax asset is realized, or the deferred tax liability is settled. Deferred tax is not accounted for where it arises from initial recognition of an asset or liability in a transaction other than a business combination which, at the time of the transaction, affects neither accounting nor taxable income (loss). The amount of deferred tax recognized is based on the expected manner and timing of realization or settlement of the carrying amount of assets and liabilities. Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available for which the temporary differences can be utilized. Deferred tax assets are reviewed at each consolidated statements of financial position date and adjusted to the extent that it is no longer probable that the related tax benefit will be realized.

 

F-12

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Current tax assets and liabilities are offset when the Company has a legally enforceable right to offset the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Business combinations

Business combinations are accounted for using the acquisition method of accounting when the acquired assets meet the definition of a business. The acquired identifiable assets and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date. The cost of an acquisition is measured as cash paid and the fair value of assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. Any excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, the difference is recognized immediately in net income. Transactions costs associated with business combinations are expensed as incurred.

Goodwill

The Company records goodwill relating to a business combination when the purchase price exceeds the fair value of the net identifiable assets and liabilities of the acquired business. The goodwill balance is assessed for impairment annually or when facts and circumstances indicate that it is impaired. Goodwill is tested for impairment at a CGU level by comparing the carrying amount to the recoverable amount, which is determined as the greater of fair value less costs of disposal and value in use. Any excess of the carrying amount over the recoverable amount is the impaired amount. The recoverable amount estimates are categorized as Level 3 according to the fair value hierarchy. Impairment charges are recognized in net income. Goodwill is reported at cost less any accumulated impairment. Goodwill impairments are not reversed.

Non-controlling interests

The Company recognizes non-controlling interests in an acquired entity either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets, determined on an acquisition-by-acquisition basis.

New accounting standards

The Company has adopted the following standards effective January 1, 2019:

 

(a)

IFRS 16, Leases

On January 1, 2019, the Company adopted IFRS 16, “Leases” using the modified retrospective approach which replaces IAS 17 Leases, which came into effect for annual periods beginning on or after January 1, 2019. The modified retrospective approach does not require restatement of comparative financial information as it recognizes the cumulative effect on transition as an adjustment to opening retained earnings and applies the standard prospectively. Comparative information in the Company’s consolidated statements of financial position, consolidated statements of loss and comprehensive loss, consolidated statements of changes in equity, and consolidated statements of cash flows has not been restated.

Under the new standard, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease obligation at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease obligation. Depreciation is recognized on the lease asset over the shorter of the estimated useful life of the asset or the lease term. The lease obligation is initially measured at the present value of the lease payments that have not been paid at the commencement date, discounted at the rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease obligation is subsequently increased by the interest cost on the lease obligation and decreased by lease payments made. Lease payments are allocated between the liability and interest expense. Interest expense is recognized on the lease obligation using the effective interest rate method and payments are applied against the lease obligation.

The carrying amounts of the right-of-use assets, lease obligations, and the resulting interest and depreciation expense are based on the implicit interest rate within the lease arrangement or, if this information is unavailable, the incremental borrowing rate. Incremental borrowing rates are based on judgments including economic environment, term, and the underlying risk inherent to the asset.

 

F-13

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Impacts on Transition

The lease assets were initially recognized at an amount equal to the discounted lease payments using an incremental borrowing rate of 5.95%.

The adoption of IFRS 16 using the modified retrospective approach allowed the Company to use the following practical expedients in determining the opening transition adjustment:

 

•

The weighted average incremental borrowing rate in effect at January 1, 2019 was used as opposed to the rate in effect at inception of the lease;

 

•

Leases with a term of less than 12 months as at January 1, 2019 were accounted for as short-term leases;

 

•

Leases with an underlying asset of low value are recorded as an expense and not recognized as a lease asset; and

 

•

Leases with similar characteristics were accounted for as a portfolio using a single discount rate.

The cumulative effect of initial application of the standard was to recognize a $1.3 million increase to right-of-use assets (“Lease assets”), and a $1.3 million increase to lease obligations. The impact on transition is summarized below:

 

		January 1, 2019
Lease assets			1,333
Lease obligations			1,333

On transition to IFRS 16, a reconciliation of the lease assets and lease obligations recognized by the Company is as follows:

 

Lease assets		January 1, 2019
Net book value of lease assets recognized at December 31, 2018			227
Discounted using the implicit rate at January 1, 2019			212
Add: Lease assets recognized at January 1, 2019			1,121
Lease assets recognized at January 1, 2019			1,333

 

Lease obligations		January 1, 2019
Operating lease commitment at December 31, 2018			1,144
Discounted using the implicit rate at January 1, 2019			1,121
Add: Finance lease liabilities recognized at January 1, 2019			212
Lease obligations recognized at January 1, 2019			1,333

 

(b)

Amendments to definition of a business under IFRS 3

In October 2018, the International Accounting Standards Board (IASB) issued amendments to the definition of a business in IFRS 3 Business Combinations. These amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.

IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments include the following:

 

•

Clarify the minimum requirements for a business;

 

•

Remove the assessment of whether market participants are capable of replacing any missing elements;

 

•

Add guidance to help entities assess whether an acquired process is substantive;

 

•

Narrow the definition of a business and of outputs; and

 

•

Introduce an optional fair value concentration test.

The IASB also added examples to illustrate the application of the guidance in IFRS on the definition of a business. The amendments to IFRS 3 are effective for annual reporting periods beginning on or after January 1, 2020 with early adoption permitted.

 

4.	Significant accounting estimates, assumptions and judgements

The preparation of these consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

F-14

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Judgement is used mainly in determining whether a balance or transaction should be recognized in the consolidated financial statements. Estimates and assumptions are mostly used in determining the measurement of recognized transactions and balances. However, judgements and estimates are often interrelated.

Judgements, estimates and assumptions are continually evaluated and are based on factors including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected.

Judgements, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment include the following:

Impairments

CGU’s are defined as the lowest grouping on integrated assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGU’s requires significant judgement and interpretations with respect to the integration between assets, the existence of active markets, external users, shared infrastructures and the way in which management monitors the Company’s operations.

The recoverable amounts of CGU’s and individual assets have been determined as the higher of the CGU’s or the asset’s fair value less costs of disposal and its value in use. These calculations require the use of estimates and assumptions and are subject to changes as new information becomes available including information on the likelihood of obtaining future licenses from Health Canada, demand for cannabis for recreational and medical purposes, future selling prices, expected sales volumes, discount rates and future development and operating costs. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGU’s.

Biological assets and inventory

Biological assets, comprising cannabis plants, agricultural product consisting of cannabis and ornamental flowers, are measured at fair value less costs to sell up to the point of harvest.

Determination of the fair values of the biological assets and the agricultural product requires the Company to make assumptions about how market participants assign fair values to these assets. These assumptions primarily relate to the level of effort required to bring the cannabis up to the point of harvest, costs to convert the harvested cannabis to finished goods, sales price, risk of loss, expected future yields from the cannabis plants and estimating values during the growth cycle.

The valuation of biological assets at the point of harvest is used as the measurement basis for all cannabis-based inventory and thus any critical estimates and judgements related to the valuation of biological assets are also applicable to inventory. The valuation of work-in-progress and finished goods also requires the estimate of conversion costs incurred, which become part of the carrying amount of the inventory. The Company must also determine if the carrying value of any inventory exceeds its net realizable value, such as cases where prices have decreased, or inventory has spoiled or has otherwise been damaged.

Revenue

Government customers typically have a right of product return, and in some cases, the right to pricing adjustments for products that are subsequently discounted or sold for a lower price in another jurisdiction. Licensed Producers can, in some cases, have a right of product return or warranty period. The estimate of potential future returns and pricing adjustments includes the use of estimates and assumptions and are subject to change as new information becomes available.

Deferred tax assets

Deferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be affected.

Share-based compensation

The fair value of share-based compensation expenses is estimated using the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted.

 

F-15

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

Convertible instruments

Convertible notes are compound financial instruments which are accounted for separately by their components: a financial liability and an equity instrument. The financial liability, which represents the obligation to pay coupon interest on the convertible notes in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual amount is accounted for as an equity instrument at issuance.

The identification of the components of convertible notes is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management. The separation of the components affects the initial recognition of the convertible debenture at issuance and the subsequent recognition of interest on the liability component. The determination of the fair value of the liability is also based on various assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.

Financial obligations

The financial obligation arising pursuant to a royalty agreement, requires management to make assumptions and use judgement in determining the generation of future revenues and an appropriate discount rate.

Acquisitions

The Company assesses whether an acquisition should be accounted for as an asset acquisition or a business combination under IFRS 3. This assessment requires management to make judgements on whether the assets acquired and liabilities assumed constitute a business as defined in IFRS 3 and if the integrated set of activities, including inputs and processes acquired, is capable of being conducted and managed as a business and the Company obtains control of the business inputs and processes.

Fair value of assets acquired and liabilities assumed in a business combination

The fair value of assets acquired and liabilities assumed in a business combination, including contingent consideration and goodwill, is estimated based on information available at the date of acquisition. Various valuation techniques are applied for measuring fair value including market comparables and discounted cash flows which rely on assumptions such as future selling prices, expected sales volumes, discount rates and future development and operating costs. Changes in these variables could significantly impact the carrying value of the net assets. Specific judgement is required in the identification of intangible assets.

 

5.	Business acquisitions

 

(a)

Acquisition of Bridge Farm

On February 22, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, signed a Sale and Purchase Agreement (“SPA”) to acquire all the issued and outstanding shares of Project Seed Topco (“Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”). 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 UK. The acquisition closed on July 2, 2019. On June 5, 2020, the Company disposed of Bridge Farm and the Bridge Farm results are presented herein as discontinued operations (note 30).

The acquisition consideration was comprised of:

 

(i)

Cash consideration in the amount of $77.0 million (£45.0 million);

 

(ii)

The issuance of 2.4 million common shares valued at $37.2 million based on the fair value of a common share of the Company on the closing date and contingent consideration of $8.4 million representing the value of incremental shares potentially issuable on the one year anniversary of the closing date; and

 

(iii)

Contingent consideration valued at $7.2 million representing the fair value of earn-out payments ranging from nil to a maximum of an additional 1.6 million common shares of the Company based on a prescribed formula based on future earnings.

The Company has engaged independent valuation experts to assist in determining the fair value of certain assets acquired and liabilities assumed and related deferred income tax impacts.

 

F-16

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

The fair value of the assets and liabilities acquired was as follows:

 

		July 2, 2019				Adjustments				December 31, 2019
Cash			77,023				—				77,023
Issuance of common shares			37,248				—				37,248
Contingent consideration			15,630				361				15,991
			129,901				361				130,262

The purchase price was allocated as follows:

 

		July 2, 2019				Adjustments				December 31, 2019
Accounts receivable			7,403				—				7,403
Inventory			469				1				470
Biological assets			1,233				55				1,288
Property, plant and equipment			57,717				651				58,368
Intangible assets			25,636				(165	)			25,471
Accounts payable			(14,293	)			—				(14,293	)
Long term debt			(33,618	)			—				(33,618	)
Lease obligations			(15,567	)			388				(15,179	)
Deferred income tax liability			(3,038	)			(1,317	)			(4,355	)
Goodwill			103,959				748				104,707
			129,901				361				130,262

The Company recorded adjustments to the fair value in the fourth quarter of 2019 to reflect facts and circumstances in existence at the date of the acquisition. These adjustments primarily relate to changes in preliminary valuation assumptions, including refinement of biological assets, intangible assets and deferred income tax liability based on new information that became available that existed at the date of the acquisition. All measurement period adjustments were offset to goodwill.

On October 10, 2019, the earn-out payment terms whereby the sellers would be entitled to earn from nil to a maximum of an additional 1.6 million common shares based on a prescribed formula based on future earnings were replaced with the following terms:

 

(i)

Common shares of 320,000 earned upon the commissioning of the woodfired boilers at CLay Lake Phase 2 with confirmation that grant funding would be secured;

 

(ii)

Common shares of 320,000 earned upon completion of the Clay Lake Phase 2 facility before March 30, 2020;

 

(iii)

Common shares of 320,000 earned upon completing a budget for Clay Lake Phase 3;

 

(iv)

Common shares of 320,000 earned upon the acquisition of the minority interest in Zyon Plants and Flowers Limited;

 

(v)

Common shares of 320,000 earned upon the passage of 18 months from the amendment date

During the year ended December 31, 2019, the fair value of the incremental share portion of the contingent consideration was adjusted to $27.5 million and the fair value of the earn out portion was adjusted to $5.0 million. These adjustments resulted in a loss on contingent consideration of $18.6 million.

The financial statements incorporate the operations of Bridge Farm commencing July 2, 2019. During the period July 2, 2019 to December 31, 2019, the Company recorded revenues of $12.3 million and a net loss of $124.5 million relating to the operations of Bridge Farm, which includes the $100.3 million goodwill impairment noted below.

Had the acquisition closed on January 1, 2019, management estimates that for the period January 1, 2019 to July 1, 2019, revenue would have increased by an additional $23.7 million and net loss would have increased by $19.5 million, In determining these amounts, management assumes the fair values on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2019.

 

(b)

Bridge Farm goodwill impairment

At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the licensing and regulatory framework in the U.K. The goodwill impairment was recognized in the Bridge Farm CBD CGU and is the full amount of goodwill that was attributable to this CGU. The Bridge Farm CBD CGU is the business line focused on developing a CBD business in the U.K. The recoverable amount of the CGU was determined to be its fair value less costs of disposal and is categorized as level 3 in the fair value hierarchy. Management has determined that because the Bridge Farm acquisition was completed within the last 12 months and that the Clay Lake assets are newly constructed, the fair value less costs of disposal would not be lower than the carrying amount of the tangible assets.

 

F-17

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

(c)

Acquisition of Pathway Rx

On March 13, 2019, the Company acquired 50% of the issued and outstanding shares of Pathway RX Inc. (“Pathway”), which was a private company.

Pathway was acquired to develop cannabis-based pharmaceutical drugs to treat symptoms associated with a wide range of medical conditions.

The purchase price was as follows:

 

Issuance of common shares			2,601
Contingent consideration (i)			2,279
			4,880

 

(vi)

Contingent consideration valued at $2.3 million representing the granting of up to 280,000 warrants to purchase common shares of the Company at an exercise price of $1.81 per share, subject to the achievement of certain milestone gross revenue derived from the Pathway Royalty Activities, which has been presented on the consolidated statement of financial position as contingent consideration in the form of equity.

The purchase price was allocated as follows:

 

		March 13, 2019				Adjustments				December 31, 2019
Intangible assets			13,368				184				13,552
Accounts payable and accrued liabilities			—				(184	)			(184	)
Deferred tax liability			(3,609	)			—				(3,609	)
Non-controlling interest (50%)			(4,879	)			—				(4,879	)
			4,880				—				4,880

The shares in Pathway were acquired by issuance of 296,800 common shares of the Company at a price of $8.76 per common share to the acquired company’s existing shareholders. In conjunction with the acquisition, the Company entered into a license agreement that provides for use of Pathway’s intellectual property in exchange for:

 

(i)

A royalty of 3% of gross revenues derived from activities which use the intellectual property that is the subject matter of the license agreement (“Pathway Royalty Activities”), which royalty percentage is increased to 5% of gross revenues derived from Pathway Royalty Activities upon the achievement of certain gross revenue milestones in one calendar year;

 

(ii)

50% of net revenues received from the Company from the sale of certain of the licensed products or the use of certain licensed intellectual property; and

 

(iii)

A fixed payment of $1.4 million, payable in quarterly installments of $87,500 over the first four years of the term of the agreement.

Pathway consisted solely of intellectual property comprising the identifiable net assets of the entity. The non-controlling interest recognized at the acquisition date was recorded at their proportionate 50% share of the fair value of the identifiable net assets. Net loss attributable to the non-controlling interest for the year ended December 31, 2019 was $165.0 thousand.

Subsequent to recording the purchase price allocation, the deferred tax liability was adjusted to nil with the offsetting adjustment to income tax recovery on the basis that both the Company and the acquired private company are subject to income tax under the same taxation authority.

The Company recorded adjustments to the preliminary fair value to reflect facts and circumstances in existence as of the date of acquisition. These adjustments primarily related to accounts payable and accrued liabilities based on new information available that existed at the date of acquisition. These measurement adjustments were offset to the fair value of intangible assets.

 

F-18

Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

(Expressed in thousands of Canadian dollars, except where otherwise noted)

 

6.	Segment information

The Bridge Farm operations comprised the Company’s entire Ornamental Flower segment located in the United Kingdom. The Ornamental Flower segment was not previously classified as held-for-sale or as a discontinued operation as it was not highly probable that the carrying amount of the disposal group would be recovered through a sale transaction rather than through continuing use. The comparative statement of loss and comprehensive loss and statement of cash flows has been recast to separately present discontinued operations from continuing operations (note 30). With the disposition of the Ornamental Flower segment, the Company no longer has multiple segments. Accordingly, the Cannabis operations in Canada comprise the entire operations of the Company.

 

7.	Accounts receivable

 

		December 31, 2019				December 31, 2018
Trade receivables			24,684				209
Other receivables			2,954				2,529
			27,638				2,738

On June 5, 2020, the Company disposed of Bridge Farm and the Bridge Farm results are presented herein as discontinued operations (note 30).

 

8.	Biological assets

The Company’s biological assets consist of cannabis plants in various stages of vegetation, including plants which have not been harvested, and a variety of flowers in various stages of growth. The change in carrying value of biological assets are as follows:

 

		December 31, 2019				December 31, 2018
Balance, beginning of year			876				54
Increase in biological assets due to capitalized costs			62,331				2,537
Net change in fair value of biological assets			30,726				(1,280	)
Transferred to inventory upon harvest			(80,991	)			(435	)
Acquisitions (note 5a)			1,288				—
Foreign currency translation			79				—
Balance, end of year			14,309				876

Biological assets are valued in accordance with IAS 41 and are presented at their fair value less costs to sell up to the point of harvest. This is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price less costs to sell per gram.

Cannabis plants

The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. The Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest.

Management believes the most significant unobservable inputs and their impact on fair value of biological assets are as follows:

 

Assumption		Input				Weighted average input								Effect of 10% change ($000s)
						December 31 2019				December 31 2018				December 31 2019				December 31 2018
Yield per square foot of growing space (1)			Grams				47				45				1,183				87
Average net selling price (2)		$	/gram				5.47				5.25				3,021				294
After harvest cost to complete and sell		$	/gram				2.34				0.70				267				39

 

(1)	Varies by strain; obtained through historical growing results or grower estimate if historical results are not available.

(2)	Varies by strain and sales market; obtained through average selling prices or estimated future selling prices if historical results are not available.

These estimates are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

 

F-19