UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO

RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May 2020

Commission File No. 001-38691

AURORA CANNABIS INC.

 


(Translation of registrant's name into English)

500 - 10355 Jasper Avenue
Edmonton, Alberta, T5J 1Y6, Canada

 


(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F

Form 20-F ☐          Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1)  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7)  ☐

 

 

 

 

 
 

SUBMITTED HEREWITH

 

 

 

Exhibits Description 
99.1   Condensed Consolidated Interim Financial Statements for the three and nine months ended March 31, 2020 and 2019
99.2   Management’s Discussion and Analysis for the three and nine months ended March 31, 2020
99.3   Certification of Chief Executive Officer
99.4   Certification of Chief Financial Officer

 

 
 

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AURORA CANNABIS INC.

/s/ Glen Ibbott

 


Glen Ibbott
Chief Financial Officer

Date: May 14, 2020

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AURORA CANNABIS INC.

 

Condensed Consolidated Interim Financial Statements

(Unaudited)

 

 

 

For the three and nine months ended March 31, 2020 and 2019

(in Canadian Dollars)

 
 

Table of Contents

 

Condensed Consolidated Interim Statements of Financial Position 3
Condensed Consolidated Interim Statements of Comprehensive Loss 4
Condensed Consolidated Interim Statements of Changes in Equity 6
Condensed Consolidated Interim Statements of Cash Flows 8
Notes to the Condensed Consolidated Interim Financial Statements  

 

Note 1 Nature of Operations 9   Note 14 Convertible Debentures 24
Note 2 Significant Accounting Policies and Judgments 9   Note 15 Loans and Borrowings 25
Note 3 Accounts Receivable 12   Note 16 Share Capital 27
Note 4 Strategic Investments 12   Note 17 Share-Based Compensation 28
Note 5 Marketable Securities and Derivatives 15   Note 18 Earnings Per Share 29
Note 6 Investments in Associates and Joint Ventures 17   Note 19 Other (Losses) Gains 30
Note 7 Biological Assets 17   Note 20 Supplementary Cash Flow Information 30
Note 8 Inventory 18   Note 21 Commitments and Contingencies 30
Note 9 Property, Plant and Equipment 19   Note 22 Revenue 32
Note 10 Business Combinations 20   Note 23 Segmented Information 33
Note 11 Non-Controlling Interests 21   Note 24 Fair Value of Financial Instruments 34
Note 12 Assets Held for Sale 21   Note 25 Financial Instruments Risk 35
Note 13 Intangible Assets and Goodwill 22   Note 26 Subsequent Events 36
             
             
             

 

 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Financial Position

As at March 31, 2020 and June 30, 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars)

  Notes March 31, 2020 June 30, 2019
    $ $
Assets      
Current      
      Cash and cash equivalents 15(a) 230,208   172,727  
      Restricted cash 15(a)  -   46,066  
      Accounts receivable 3, 25(a) 80,296   103,493  
      Income taxes receivable   51   8,833  
      Marketable securities 5(a) 11,834   143,248  
      Derivatives 5(b) 9,585    -  
      Biological assets 7 30,572   51,836  
      Inventory 8 251,189   113,641  
      Prepaids and other current assets   31,884   24,323  
      Assets held for sale 12 8,630    -  
    654,249   664,167  
       
Property, plant and equipment 9 1,054,862   765,567  
Derivatives 5(b) 39,909   86,409  
Deposits   13,002   6,926  
Loan receivable   3,312    -  
Investments in associates and joint ventures 6 35,850   118,845  
Intangible assets 13 500,950   688,366  
Goodwill 13 2,415,522   3,172,550  
Total assets   4,717,656   5,502,830  
       
Liabilities      
Current      
      Accounts payable and accrued liabilities 25(b) 128,622   152,884  
      Deferred revenue 22 3,841   749  
      Convertible debentures 14 31,880   235,909  
      Loans and borrowings 15 21,772   13,758  
      Contingent consideration payable 24 18,167   28,137  
      Deferred gain on derivatives   20   728  
      Provisions 21(a) 2,135   4,200  
    206,437   436,365  
       
Convertible debentures 14 292,813   267,672  
Loans and borrowings 15 246,246   127,486  
Derivative liability 14(ii) 2,571   177,395  
Other long-term liability    -   11,979  
Deferred tax liability   71,327   91,886  
Total liabilities   819,394   1,112,783  
       
Shareholders’ equity      
Share capital 16 5,675,534   4,673,118  
Reserves   142,923   139,327  
Accumulated other comprehensive loss   (182,570 ) (143,170 )
Deficit   (1,717,812 ) (283,638 )
Total equity attributable to Aurora shareholders   3,918,075   4,385,637  
Non-controlling interests 11 (19,813 ) 4,410  
Total equity   3,898,262   4,390,047  
Total liabilities and equity   4,717,656   5,502,830  

Nature of Operations (Note 1)

Strategic Investments (Note 4)

Commitments and Contingencies (Note 21)

Subsequent Events (Note 26)

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.

3 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Comprehensive Loss

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

    Three months ended
March 31,
Nine months ended
March 31,
   
  Notes 2020 2019 2020 2019
    $ $ $ $
Revenue from sale of goods 22 88,596   72,239   235,576   158,108  
Revenue from provision of services 22 1,013   2,999   4,212   8,804  
Excise taxes   (14,089 ) (10,093 ) (32,996 ) (17,915 )
           
Net revenue   75,520   65,145   206,792   148,997  
           
Cost of sales   43,632   28,914   109,585   68,676  
           
Gross profit before fair value adjustments   31,888   36,231   97,207   80,321  
           
Changes in fair value of inventory sold   15,380   17,407   56,692   48,968  
Unrealized gain on changes in fair value of biological assets 7 (10,897 ) (33,798 ) (70,513 ) (61,461 )
           
Gross profit   27,405   52,622   111,028   92,814  
           
Expense          
      General and administration   56,790   50,786   186,662   130,350  
      Sales and marketing   23,357   16,318   74,499   68,435  
      Acquisition costs   1,300   2,183   4,323   22,855  
      Research and development   5,601   3,516   18,424   8,753  
      Depreciation and amortization 9, 13 14,721   18,182   53,777   52,567  
      Share-based compensation 17(a)(b) 9,204   39,254   53,924   79,534  
    110,973   130,239   391,609   362,494  
           
Loss from operations   (83,568 ) (77,617 ) (280,581 ) (269,680 )
           
Other (expense) income        
      Interest and other income   2,197   1,926   5,368   2,804  
      Finance and other costs   (6,678 ) (13,993 ) (48,466 ) (32,728 )
      Foreign exchange (“FX”) loss   (11,678 ) (45 ) (16,386 ) (553 )
      Other (losses) gains 19 170   (70,390 ) (40,981 ) 38,749  
      Impairment of property, plant and equipment 9, 12 (19,445 )  -   (71,370 )  -  
      Impairment of investment in associates 6 (28,176 )  -   (74,402 ) (69,957 )
      Impairment of intangible assets 13  -   (9,002 ) (158,695 ) (9,002 )
      Impairment of goodwill 13  -    -   (762,231 )  -  
    (63,610 ) (91,504 ) (1,167,163 ) (70,687 )
           
Loss before taxes   (147,178 ) (169,121 ) (1,447,744 ) (340,367 )
           
Income tax recovery          
      Current   884   986   5,586   7,485  
      Deferred, net   8,931   7,940   9,267   37,226  
    9,815   8,926   14,853   44,711  
           
Net loss   (137,363 ) (160,195 ) (1,432,891 ) (295,656 )
           
Other comprehensive (loss) income (“OCI”) that will not be reclassified to net loss          
      Deferred tax recovery   (888 ) (10,819 ) 2,197   7,700  
      Unrealized loss on marketable securities 5(a) (14,314 ) 81,160   (44,869 ) (25,600 )
    (15,202 ) 70,341   (42,672 ) (17,900 )
           
Other comprehensive (loss) income that may be reclassified to net loss          
      Share of loss from investment in associates   (102 )  -   (125 )  -  
      Foreign currency translation gain (loss)   3,669   (3,937 ) (1,828 ) (4,191 )
    3,567   (3,937 ) (1,953 ) (4,191 )
Total other comprehensive loss   (11,635 ) 66,404   (44,625 ) (22,091 )
           
Comprehensive loss   (148,998 ) (93,791 ) (1,477,516 ) (317,747 )
           

 

4 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Comprehensive Loss

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

(Continued)

    Three months ended
March 31,
Nine months ended
March 31,
   
  Notes 2020 2019 2020 2019
    $ $ $ $
Net loss attributable to:          
      Aurora Cannabis Inc.   (137,395 ) (158,354 ) (1,410,768 ) (290,644 )
      Non-controlling interests   32   (1,841 ) (22,123 ) (5,012 )
           
Comprehensive loss attributable to:          
      Aurora Cannabis Inc.   (148,550 ) (86,596 ) (1,454,906 ) (307,359 )
      Non-controlling interests   (448 ) (7,195 ) (22,610 ) (10,388 )
           
Net loss per share          
      Basic and diluted 1, 18 ($1.37 ) ($1.89 ) ($15.34 ) ($3.70 )

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.

5 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Changes in Equity

Nine months ended March 31, 2020

(Unaudited - Amounts reflected in thousands of Canadian dollars, except share amounts)

    Share Capital (1)   Reserves   AOCI      
  Note Common Shares Amount  

Share-Based

Compensation

Compensation

Options/

Warrants

Convertible

Notes

Change in
Ownership  
Interest

Total

Reserves

 

Fair

Value

Deferred

Tax

Associate OCI Pick-up Foreign Currency Translation

Total

AOCI

Retained
Earnings
(Deficit)
Non-Controlling Interests Total
    # $   $ $ $ $ $   $ $ $ $ $ $ $ $
Balance, June 30, 2019   84,786,562   4,673,118     143,947   40,495   41,685   (86,800 ) 139,327     (156,249 ) 18,295   352   (5,568 ) (143,170 ) (283,638 ) 4,410   4,390,047  
Shares released for earn out payments 16(b) 352,424   11,958      -   (5,087 )  -    -   (5,087 )    -    -    -    -    -    -    -   6,871  
Shares issued through equity financing 16(b) 18,193,530   535,761      -    -    -    -    -      -    -    -    -    -    -    -   535,761  
Share issuance costs    -   (11,315 )    -    -    -    -    -      -    -    -    -    -    -    -   (11,315 )
Deferred tax on share issuance costs    -   2,621      -    -    -    -    -      -    -    -    -    -    -    -   2,621  
Conversion of convertible notes 14(i) 5,761,260   433,177      -    -   (41,266 )  -   (41,266 )    -    -    -    -    -    -    -   391,911  
Deferred tax on convertible notes    -   1,888      -    -    -    -    -      -    -    -    -    -   82    -   1,970  
Exercise of stock options 17(a) 92,723   6,266     (3,544 )  -    -    -   (3,544 )    -    -    -    -    -    -    -   2,722  
Exercise of warrants 16(c) 986   102      -   (29 )  -    -   (29 )    -    -    -    -    -    -    -   73  
Exercise of RSUs 17(b) 31,300   1,595     (1,595 )  -    -    -   (1,595 )    -    -    -    -    -    -    -    -  
Share-based compensation (2) 17  -    -     48,068   7,049    -    -   55,117      -    -    -    -    -    -    -   55,117  
Change in ownership interests in subsidiaries 11 217,554   20,363      -    -    -    -    -      -    -    -    -    -   (18,263 ) (2,100 )  -  
Choom marketable securities transferred to investment in associate 4(g)  -    -      -    -    -    -    -     5,225    -    -    -   5,225   (5,225 )  -    -  
Comprehensive income (loss) for the period    -    -      -    -    -    -    -     (44,869 ) 2,197   (125 ) (1,828 ) (44,625 ) (1,410,768 ) (22,123 ) (1,477,516 )
Balance, March 31, 2020   109,436,339   5,675,534     186,876   42,428   419   (86,800 ) 142,923     (195,893 ) 20,492   227   (7,396 ) (182,570 ) (1,717,812 ) (19,813 ) 3,898,262  
(1) Common share amounts have been retrospectively restated for all prior periods to reflect the Share Consolidation effected on May 11, 2020. Refer to Note 2(a) - Basis of Presentation and Measurement for more information.
(2) Included in share-based compensation is $(0.9) million and $7.1 million (recovery) expense relating to milestone payments for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - $8.4 million). Of the total $55.1 million share-based compensation reserve, $0.1 and $1.2 million was capitalized to property, plant and equipment for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - nil).

 

As at March 31, 2020, there are 50,282 shares in escrow (June 30, 2019 - 60,271 common shares). These securities were originally deposited in escrow on November 30, 2017 in connection with the acquisition of H2 Biopharma Inc. The escrowed common shares are to be released upon receipt of relevant licenses to cultivate and sell cannabis. During the nine months ended March 31, 2020, the Company released 9,989 escrowed common shares on achievement of the milestones (nine months ended March 31, 2019 - 2,099,257 common shares).

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.

6 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Changes in Equity

Nine months ended March 31, 2019

(Unaudited - Amounts reflected in thousands of Canadian dollars, except share amounts)

    Share Capital (1)   Reserves   AOCI      
    Common Shares Amount  

Share-Based

Compensation

Compensation

Options/

Warrants

Convertible Notes Change in
Ownership  
Interest

Total

Reserves

 

Fair

Value

Deferred

Tax

Associate OCI Pick-up Foreign Currency Translation

Total

AOCI

Retained Earnings Non-Controlling Interests Total
    # $   $ $ $ $ $   $ $ $ $ $ $ $ $
Balance, June 30, 2018   47,342,761   1,466,433     38,335   307   41,792   (85,719 ) (5,285 )   (539 ) (55 )  -   61   (533 ) 87,749   4,562   1,552,926  
Shares issued for business combinations & asset acquisitions   35,863,343   3,049,871     75,490   27,111    -    -   102,601      -    -    -    -    -    -    -   3,152,472  
Shares issued for earn out payments   20,311   18,227      -    -    -    -    -      -    -    -    -    -    -    -   18,227  
Conversion of convertible notes   27,611   1,539      -    -   (469 )  -   (469 )    -    -    -    -    -    -    -   1,070  
Deferred tax on convertible notes    -    -      -    -   425    -   425      -    -    -    -    -    -    -   425  
Exercise of stock options   1,114,911   100,799     (58,923 )  -    -    -   (58,923 )    -    -    -    -    -    -   415   42,291  
Exercise of warrants   133,766   10,049      -   (1,554 )  -    -   (1,554 )    -    -    -    -    -    -    -   8,495  
Exercise of compensation options   12   2      -   (1 )  -    -   (1 )    -    -    -    -    -    -    -   1  
Exercise of RSUs   57,682   1,966     (1,966 )  -    -    -   (1,966 )    -    -    -    -    -    -    -    -  
Forfeited options    -    -     (541 )  -    -    -   (541 )    -    -    -    -    -   541    -    -  
Share-based compensation    -    -     71,133   8,401    -    -   79,534      -    -    -    -    -    -    -   79,534  
Contribution from NCI    -    -      -    -    -    -    -      -    -    -    -    -    -   5,850   5,850  
Change in ownership interests in subsidiaries    -    -      -    -    -   (4 ) (4 )    -    -    -    -    -    -   4    -  
Australis Capital first tranche private placement    -   7,800      -    -    -    -    -      -    -    -    -    -    -    -   7,800  
Australis Capital non-controlling interest reclass on loss of control    -   (6,348 )    -    -    -    -    -      -    -    -    -    -    -   6,348    -  
Spin-out of Australis Capital    -    -      -    -    -    -    -      -    -    -    -    -   (151,695 ) (6,348 ) (158,043 )
Reclass gain from Australis Capital shares on derecognition upon spin-out    -    -      -    -    -    -    -     (76,873 ) 6,402    -    -   (70,471 ) 70,471    -    -  
Comprehensive income (loss) for the period    -    -      -    -    -    -    -     (25,600 ) 7,700    -   (4,191 ) (22,091 ) (290,644 ) (5,012 ) (317,747 )
Balance, March 31, 2019   84,560,397   4,650,338     123,528   34,264   41,748   (85,723 ) 113,817     (103,012 ) 14,047    -   (4,130 ) (93,095 ) (283,578 ) 5,819   4,393,301  

(1) Common share amounts have been retrospectively restated for all prior periods to reflect the Share Consolidation effected on May 11, 2020. Refer to Note 2(a) - Basis of Presentation and Measurement for more information.

 

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.

7 

AURORA CANNABIS INC.

Condensed Consolidated Interim Statements of Cash Flows

Nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars)

 

 

    Nine months ended March 31,
  Notes 2020 2019
    $ $
Operating activities      
Net loss for the period   (1,432,891 ) (295,656 )
Adjustments for non-cash items:      
Unrealized gain on changes in fair value of biological assets 7 (70,513 ) (61,461 )
Changes in fair value included in inventory sold   56,692   48,968  
Depreciation of property, plant and equipment 9 57,746   35,501  
Amortization of intangible assets 13 31,127   35,863  
Share-based compensation   53,924   79,534  
Non-cash acquisition costs    -   4,243  
Impairment of property, plant and equipment 9 71,370    -  
Impairment of investment in associate 6 74,402   69,957  
Impairment of intangible assets 13 158,695   9,002  
Impairment of goodwill 13 762,231    -  
Accrued interest and accretion expense 14, 15 2,921   22,126  
Interest and other income   (1,834 ) 332  
Deferred tax expense (recovery)   (14,853 ) (37,226 )
Other (losses) gains 19 40,981   (38,749 )
Foreign exchange loss   16,386   508  
Changes in non-cash working capital 20 (94,686 ) (60,579 )
Net cash used in operating activities   (288,302 ) (187,637 )
       
Investing activities      
Marketable securities, derivatives and convertible debenture investments 5 (2,000 ) (50,055 )
Proceeds from disposal of marketable securities 5 84,770   46,663  
Loan receivable   (3,312 )  -  
Purchase of property, plant and equipment and intangible assets 9 (321,058 ) (246,850 )
Disposal of property, plant and equipment   2,100    -  
Acquisition of businesses, net of cash acquired 10  -   117,091  
Payment of contingent consideration   (1,993 ) (1,608 )
Deposits   (5,117 ) (2,011 )
Investments in associates 6  -   959  
Net cash used in investing activities   (246,610 ) (135,811 )
       
Financing activities      
Proceeds from long-term loans   86,394   611,570  
Repayment of long-term loans   (57,354 ) (19,142 )
Repayment of short-term loans    -   (175 )
Payments of lease liabilities 15(b) (12,926 )  -  
Restricted cash   46,064   (30,159 )
Financing fees   (1,789 ) (21,226 )
Shares issued for cash, net of share issue costs   527,241   50,783  
Capital contribution from non-controlling interest    -   5,854  
Net cash provided by financing activities   587,630   597,505  
Effect of foreign exchange on cash and cash equivalents   4,763   (2,937 )
Increase in cash and cash equivalents   57,481   271,120  
Cash and cash equivalents, beginning of period   172,727   76,785  
Cash and cash equivalents, end of period   230,208   347,905  

Supplemental cash flow information (Note 20)

The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.

8 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 1 Nature of Operations

 

Aurora was incorporated under the Business Corporations Act (British Columbia) on December 21, 2006 as Milk Capital Corp. Effective October 2, 2014, the Company changed its name to Aurora Cannabis Inc. The Company’s shares are listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the trading symbol “ACB”, and on the Frankfurt Stock Exchange (“FSE”) under the trading symbol “21P”.

 

The Company’s head office and principal address is Suite 500 - 10355 Jasper Avenue, Edmonton, Alberta, Canada, T5J 1Y6. The Company’s registered and records office address is Suite 1500 - 1055 West Georgia Street, Vancouver, BC V6E 4N7.

 

The Company’s principal strategic business lines are focused on the production, distribution and sale of cannabis in Canada and internationally. Aurora currently conducts the following key business activities in the jurisdictions listed below:

 

Production, distribution and sale of medical and consumer cannabis products in Canada pursuant to the Cannabis Act; and
Distribution of wholesale medical cannabis in the European Union (“EU”) pursuant to the German Medicinal Products Act and German Narcotic Drugs Act.

 

The United States (“U.S.”) represents the largest cannabis and hemp-derived cannabidiol (“CBD”) market globally and as such, Aurora continues to evaluate its alternatives to establishing an operating footprint in the U.S. As part of the U.S. market strategy, we are considering how various state and federal regulations will affect the Company’s business prospects. The Company is committed to only engage in activities which are permissible under both state and federal laws.

 

Note 2 Significant Accounting Policies and Judgments

 

(a) Basis of Presentation and Measurement

 

The condensed consolidated interim financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Accounting Standards 34, “Interim Financial Reporting” (“IAS34”) as issued by the International Accounting Standards Board (“IASB”), and interpretations of the IFRS Interpretations Committee (“IFRIC”). Unless otherwise noted, all amounts are presented in thousands of Canadian dollars, except share and per share data.

 

The condensed consolidated interim financial statements are presented in Canadian dollars and are prepared in accordance with the same accounting policies, critical estimates and methods described in the Company’s annual consolidated financial statements, except for the adoption of new accounting standards and/or estimates identified in Note 2(d), Note 12 and Note 13. Given that certain information and footnote disclosures, which are included in the annual audited consolidated financial statements, have been condensed or excluded in accordance with IAS 34, these financial statements should be read in conjunction with our annual audited consolidated financial statements as at and for the year ended June 30, 2019, including the accompanying notes thereto.

 

For comparative purposes, the Company has reclassified certain immaterial items on the comparative consolidated statement of financial position and the consolidated statement of comprehensive loss to conform with current period’s presentation.

 

On May 11, 2020, the Company completed a one-for-twelve (1:12) reverse share split of all of its issued and outstanding common shares (“Share Consolidation”), resulting in a reduction in the issued and outstanding shares from 1,321,072,394 to approximately 110,089,366. Shares reserved under the Company’s equity and incentive plans were adjusted to reflect the Share Consolidation. All share and per share data presented in the Company’s consolidated financial statements have been retroactively adjusted to reflect the Share Consolidation unless otherwise noted.

 

(b) COVID-19 Estimation Uncertainty

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, did not materially disrupt the Company’s operations during the third quarter of 2020. The production and sale of cannabis have been recognized as essential services across Canada and Europe. As at March 31, 2020, we have also not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic.

 

Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact that COVID-19 will have on our business, financial position and operating results in the future. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business.

 

(c) Basis of Consolidation

 

The condensed consolidated interim financial statements include the financial results of the Company and its subsidiaries. Subsidiaries include entities which are wholly-owned as well as entities over which Aurora has the authority or ability to exert power over the investee’s financial and/or operating decisions (i.e. control), which in turn may affect the Company’s exposure or rights to the variable returns from the investee. The condensed consolidated interim financial statements include the operating results of acquired or disposed entities from the date control is obtained or the date control is lost, respectively. All intercompany balances and transactions are eliminated upon consolidation.

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

The Company’s principal subsidiaries are as follows:

Major subsidiaries Percentage Ownership Functional Currency
1769474 Alberta Ltd. (“1769474”) 100% Canadian Dollar
2105657 Alberta Inc. (“2105657”) 100% Canadian Dollar
Aurora Cannabis Enterprises Inc. (“ACE”) 100% Canadian Dollar
Aurora Deutschland GmbH (“Aurora Deutschland”) 100% European Euro
Aurora Nordic Cannabis A/S (“Aurora Nordic”) 51% Danish Krone
CanniMed Therapeutics Inc. (“CanniMed”) 100% Canadian Dollar
H2 Biopharma Inc. (“H2” or “Aurora Eau”) 100% Canadian Dollar
MedReleaf Corp. (“MedReleaf”) 100% Canadian Dollar
Peloton Pharmaceuticals Inc. (“Peloton” or “Aurora Vie”) 100% Canadian Dollar
Whistler Medical Marijuana Corporation (“Whistler”) 100% Canadian Dollar

 

All shareholdings are of ordinary shares or other equity. Other subsidiaries, while included in the consolidated financial statements, are not material and have not been reflected in the table above.

 

(d) Adoption of New Accounting Pronouncements Effective July 1, 2019

 

(i) IFRS 16 Leases

 

In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which replaces IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term exceeding 12 months, unless the underlying asset is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessors continue to classify leases as operating or finance, with lessor accounting remaining substantially unchanged from the preceding guidance under IAS 17. The Company adopted the standard on July 1, 2019 using the modified retrospective method, with the cumulative effect initially recognized in retained earnings, and no restatement of prior comparative periods.

 

The majority of our property leases, which were previously treated as operating leases, were impacted by IFRS 16. The adoption of IFRS 16 has resulted in:

 

i) higher non-current assets related to the initial recognition of the present value of our unavoidable future lease payments as right-of-use assets under property, plant and equipment, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the balance sheet as at July 1, 2019;
ii) higher current and non-current liabilities related to the concurrent recognition of lease liabilities, which are measured at the present value of the remaining fixed lease payments, discounted by our weighted average incremental borrowing rate of 5.62% as of July 1, 2019;
iii) replacement of rent expense previously recorded in cost of goods sold, general and administration, and sales and marketing expenses with depreciation expense of these right-of-use assets and higher finance costs related to the accretion and interest expense of the corresponding lease liabilities; and
iv) variable lease payments and non-lease components are expensed as incurred.

 

The new standard does not change the amount of cash transferred between the lessor and lessee but impacts the presentation of the operating and financing cash flows presented on the Company’s consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.

 

The Company elected to apply the following recognition exemptions and practical expedients, as described under IFRS 16:

 

i) recognition exemption of short-term leases;
ii) recognition exemption of low-value leases;
iii) application of a single discount rate to a portfolio of leases with similar characteristics on transition;
iv) exclusion of initial direct costs from the measurement of the right-of-use assets upon transition;
v) application of hindsight in determining the applicable lease term at the date of transition; and
vi) election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

The following table summarizes the adjustments to opening balances resulting from the initial adoption of IFRS 16, with the effects on transition being recognized directly to retained earnings:

As at July 1, 2019 As previously reported under IAS 17 IFRS 16 transition adjustments As reported under
IFRS 16
  $ $ $
Prepaid deposits 24,323   (585 ) 23,738  
Property, plant and equipment 765,567   96,049   861,616  
Current loans and borrowings (13,758 ) (6,630 ) (20,388 )
Non-current loans and borrowings (127,486 ) (88,834 ) (216,320 )
Accumulated deficit 283,638    -   283,638  

 

The following table reconciles the operating lease commitments as at June 30, 2019 to the opening balance of lease liabilities as at July 1, 2019:

Operating lease commitments as at June 30, 2019 $ 94,780  
Add: finance lease liabilities recognized as at June 30, 2019 1,326  
Add: adjustments as a result of a different treatment for extension and termination options 94,829  
Effect of discounting using the lessee's incremental borrowing rate (88,767 )
Less: lease commitments not yet in effect (4,068 )
Less: short-term, low-value asset leases and others (1,318 )
Lease liabilities recognized as at July 1, 2019 $ 96,782  

 

As a result of adopting IFRS 16, the Company updated its lease accounting policies as follows:

 

The Company assesses whether a contract is or contains a lease at inception of the contract. A lease is recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in “finance and other costs” in the condensed consolidated interim statement of comprehensive loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Lease liabilities represent the net present value of fixed lease payments (including in-substance fixed payments); variable lease payments based on an index, rate, or subject to a fair market value renewal condition; amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if it is probable that the lessee will exercise that option.

 

The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise.

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in general and administration and sales and marketing expense in the condensed consolidated interim statement of comprehensive loss. Short-term leases are defined as leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index, rate, or subject to a fair market value renewal condition are expensed as incurred and recognized in costs of goods sold, general and administration or sales and marketing expense, as appropriate given how the underlying leased asset is used, in the consolidated statement of comprehensive loss.

 

Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. The depreciation is recognized from the commencement date of the lease.

 

(ii) IFRIC 23 Uncertainty Over Income Tax Treatments

 

IFRIC 23 provides guidance that adds to the requirements in IAS 12, Income Taxes by specifying how to reflect the effects of uncertainty in accounting for income taxes. IFRIC 23 requires an entity to determine whether uncertain tax positions are assessed separately or as a group; and assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. If not, the entity should reflect the effect of uncertainty in determining its accounting tax position. The Company adopted IFRIC 23 effective July 1, 2019 and was applied using the modified retrospective approach without restatement of comparative information. There was no material impact on the Company’s consolidated financial statements.

 

(e) New Accounting Pronouncements

 

The following IFRS standards have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to have a significant impact have been excluded.

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Amendments to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform

 

The amendments revise the existing requirements for hedge accounting and are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as Interbank Offered Rates (“IBOR”). The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The amendments are effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

Amendments to IAS 1: Classification of Liabilities as Current or Non-current

 

The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2022. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

Note 3 Accounts Receivable

    March 31, 2020 June 30, 2019
    $ $
Trade receivables 25(a) 70,227   85,232  
Sales taxes receivable   8,368   18,261  
Other receivables (1)   1,701    -  
    80,296   103,493  
(1) Includes interest receivable from the unsecured convertible debenture held in Choom Holdings Inc. bearing interest at 6.5% per annum (Note 4(g))

 

Note 4 Strategic Investments

 

(a) Cann Group Limited (“Cann Group”)

 

Cann Group is a public company listed on the Australian Stock Exchange and is licensed in Australia for research and cultivation of medical cannabis for human use.

 

As of March 31, 2020, the Company held an aggregate of 31,956,347 shares in Cann Group (June 30, 2019 - 31,956,347), representing a 22.4% ownership interest (June 30, 2019 - 22.5%). Given that the Company has significant influence over Cann Group, the investment has been accounted for under the equity method (Note 6). Based on Cann Group’s closing stock price of A$0.69 on March 31, 2020, the 31,956,347 shares classified under investment in associates have a fair value of approximately $19.0 million (A$22.0 million) (June 30, 2019 - $57.0 million (A$62.0 million)). During the three and nine months ended March 31, 2020, the Company assessed the carrying value of the investment against the estimated recoverable amount and as a result, recognized nil and $37.2 million (three and nine months ended March 31, 2019 - nil) of impairment charges, respectively, through the statement of comprehensive loss.

 

(b) Alcanna Inc. (“Alcanna”)

 

Alcanna is an Alberta based public company listed on the TSX. Its principal business activity is the retailing of wines, beers and spirits in Canada and the U.S. Alcanna has also developed and launched a retail cannabis business in Alberta and Ontario, and has advanced plans to develop and launch a retail cannabis business in other Canadian jurisdictions where private retailing is permitted.

 

(i) Common Shares and Investment in Associate

 

As of March 31, 2020, the Company held an aggregate of 9,200,000 shares in Alcanna (June 30, 2019 - 9,200,000) representing a 23.0% ownership interest (June 30, 2019 - 24.8%) with a fair value of $21.2 million (June 30, 2019 - $54.9 million) based on the closing stock price of $2.30 (June 30, 2019 - $5.97). Given that the Company has significant influence over Alcanna, the investment is accounted for under the equity method (Note 6). During the three and nine months ended March 31, 2020, the Company assessed the carrying value of the investment against the estimated recoverable amount. As a result, the Company recognized $27.7 million of impairment charges for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - $68.7 million), which has been recognized through the statement of comprehensive loss.

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

(ii) Warrants

 

During the three and nine months ended March 31, 2020, 10,130,000 warrants in Alcanna expired unexercised. At March 31, 2020, the Company’s remaining 1,750,000 warrants in Alcanna (June 30, 2019 - 11,880,000) had a negligible fair value (June 30, 2019 - $0.4 million) resulting in a net unrealized loss of $0.14 million and $0.4 million for the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - $0.3 million gain and $2.0 million loss) (Note 5(b)). The fair value of the warrants was estimated using the Binomial model with the following weighted average assumptions: risk-free interest rate of 0.75% (June 30, 2019 - 1.93%); dividend yield of 0% (June 30, 2019 - 0%); historical stock price volatility of 64.3% (June 30, 2019 - 46.3%); and an expected life of 1.84 years (June 30, 2019 - 0.49 years). If the estimated volatility increased or decreased by 10%, the estimated fair value would increase or decrease by approximately $0.1 million.

 

(c) Capcium Inc. (“Capcium”)

 

Capcium is a Montreal-based private company which is in the business of manufacturing soft-gels.

 

As of March 31, 2020, the Company held 8,828,662 shares (June 30, 2019 - 8,828,662) in Capcium representing an 18.5% ownership interest (June 30, 2019 - 20.0%). Given that the Company has significant influence over Capcium, the investment has been accounted for under the equity method (Note 6). During the nine months ended March 31, 2020, the Company identified indicators of impairment within its investment in associate and as such assessed the carrying value of the investment against the estimated recoverable amount. The recoverable amount of the investment in associate was determined using a value-in-use calculation by discounting the most recent expected future net cash flows to the Company from the investment in associate. As a result, the Company recognized nil and $9.0 million of impairment charge for the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - nil), which has been recognized through the statement of comprehensive loss.

 

The Company also holds debentures in Capcium that are convertible at the option of Aurora upon the occurrence of a Liquidity Event, which is the occurrence of either a public offering, a reverse take-over or a merger transaction which results in the common shares of Capcium being listed on a recognized stock exchange. The convertible debentures have a fair value of nil (June 30, 2019 - $7.5 million)(Note 5(b)), which resulted in an unrealized loss of nil and $7.5 million for the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - unrealized gain of $0.4 million and $2.3 million). The fair value of the convertible debenture was estimated using the Monte-Carlo and FINCAD model with the following assumptions: share price of $1.13 (June 30, 2019 - $1.13); risk-free rate of 1.96% (June 30, 2019 - 1.83%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 39.0% (June 30, 2019 - 46.0%); an expected life of 0.68 years (June 30, 2019 - 1.44 years); adjusted for a credit spread of 26.0% (June 30, 2019 - 26.0%) and a probability factor of 0% (June 30, 2019 - 80%) for the Liquidity Event. The Company also estimates the probability of collection in its assessment of fair value. If the estimated volatility increased or decreased by 10%, the estimated change in fair value would be negligible.

 

(d) The Green Organic Dutchman Holdings Ltd. (“TGOD”)

 

TGOD is an Ontario based licensed producer of cannabis in Canada, which is publicly listed on the TSX.

 

During the nine months ended March 31, 2020, the Company sold its remaining 28,833,334 common shares of TGOD for gross proceeds of $86.5 million at an average price of $3.00 per share resulting in a realized loss of $115.3 million. The realized loss was calculated based on the deemed cost of $6.94 per share, which represents the September 27, 2018 quoted market price at the time the Company lost significant influence. As of March 31, 2020, the Company no longer holds any shares of TGOD, however, the Company continues to hold warrants to purchase 19,837,292 shares of TGOD, which consist of 16,666,667 subscription receipt warrants and 3,170,625 participating right warrants.

 

As of March 31, 2020, the $0.5 million fair value (June 30, 2019 - $23.6 million) of the remaining 16,666,667 subscription receipt warrants (Note 5(b)) was estimated using the quoted market price of $0.03 (June 30, 2019 - $1.41), contributing to a total fair value loss of $1.5 million and $23.0 million for the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - $29.5 million gain and $50.7 million loss).

 

As of March 31, 2020, the nominal (June 30, 2019 - $0.6 million) fair value of the 3,170,625 participation right warrants was estimated using the Monte-Carlo model with the following weighted average assumptions: share price of $0.30 (June 30, 2019 - $3.23); risk-free interest rate of 1.23% (June 30, 2019 - 1.77%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 297.6% (June 30, 2019 - 74.6%); and an expected life of 0.09 years (June 30, 2019 - 0.84 years). In connection with the valuation of the participation right warrants, the Company recognized a negligible and $0.6 million fair value loss during the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - $1.9 million gain and $2.0 million loss).

 

(e) High Tide Inc. (“High Tide”)

 

High Tide is an Alberta based, retail focused cannabis and lifestyle accessories company.

 

On December 12, 2018, the Company invested $10.0 million in unsecured convertible debentures bearing an interest rate of 8.5% per annum and maturing on December 12, 2020. The December 2018 debentures are convertible into common shares of High Tide at $0.75 per share at the option of the Company at any time after June 12, 2019. On November 14, 2019, the Company invested $2.0 million in senior unsecured convertible debentures of High Tide bearing an interest rate of 10% per annum and maturing on November 14, 2021. The November 2019 debentures are convertible into common shares of High Tide at $0.252 per share at the option of the Company any time after May 14, 2020. The conversion of the derivatives in High Tide are subject to Aurora holding no more than 9.9% ownership interest in High Tide.

 

As of March 31, 2020, the convertible debentures had a fair value of $12.4 million (June 30, 2019 - $10.2 million) resulting in an unrealized loss of $0.5 million and an unrealized gain of $0.2 million for the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - nominal). The fair value of the convertible debentures were estimated using the FINCAD model based on the following weighted average assumptions: share price of $0.12 (June 30, 2019 - $0.36); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 101.8% (June 30, 2019 - 70.2%); credit spread of 13.9% (June 30, 2019 - 13.5%); expected life of 0.88 years (June 30, 2019 - 1.51 years).

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

(f) Australis Capital Inc. (“ACI”)

 

ACI is a public company that is focused on acquisitions in the cannabis space and more specifically, in technology supporting the cannabis industry, with a view of developing the infrastructure required to meet the demands of the growing United States cannabis market. ACI was previously wholly-owned by Aurora and was spun-out to Aurora shareholders on September 19, 2018. As of March 31, 2020, the Company holds the following restricted back-in right warrants:

 

(a) 22,628,751 warrants exercisable at $0.20 per share expiring September 19, 2028; and
(b) The number of warrants equal to 20% of the number of common shares issued and outstanding in ACI as of the date of exercise. The warrants are exercisable at the five-day volume weighted average trading price (“VWAP”) of ACI’s shares and have an expiration date of September 19, 2028.

 

Aurora is restricted from exercising the back-in right warrants unless all of ACI’s business operations in the U.S. are permitted under applicable U.S. federal and state laws and Aurora has received consent of the TSX and any other stock exchange on which Aurora may be listed, as required. As of March 31, 2020, the warrants remain un-exercisable.

 

As of March 31, 2020, the warrants had a fair value of $2.3 million (June 30, 2019 - $10.1 million) estimated using the Binomial model with the following assumptions: share price of $0.20 (June 30, 2019 - $0.92); risk-free interest rate of 1.06% (June 30, 2019 - 1.81%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 117.93% (June 30, 2019 - 48.97%); an expected life of 8.48 years (June 30, 2019 - 9.23 years); and adjusted for a probability factor of legalization of cannabis in the U.S. under federal and certain state laws. As a result, the Company recognized a $3.0 million and $7.8 million unrealized loss on fair value during the three and nine months ended March 31, 2020, respectively (three and nine months ended March 31, 2019 - nil) (Note 5(b)).

 

(g) Choom Holdings Inc. (“Choom”)

 

Choom is an emerging consumer cannabis company that is developing retail networks across Canada. Choom is publicly listed on the Canadian Securities Exchange.

 

On June 12, 2018, the Company subscribed to 9,859,155 common shares of Choom at $0.71 per share for a total cost of $7.0 million, representing an 8% ownership interest. The $9.3 million fair value of the shares at initial recognition was based on a quoted market price of $0.94 per share which differed from the transaction price resulting in an unrealized gain of $2.3 million recognized at inception immediately through profit and loss for the year ended June 30, 2018.

 

On November 2, 2018, the Company subscribed to a $20.0 million unsecured convertible debenture in Choom bearing interest at 6.5% per annum and maturing on November 2, 2022. As at March 31, 2020, the interest receivable balance from Choom was $1.8 million (Note 3). The debenture is convertible into common shares of Choom at $1.25 per share after March 3, 2019. In connection with the debenture, the Company also received an aggregate of 96,464,248 share purchase warrants in Choom. The share purchase warrants are exercisable between $1.25 and $2.75 per share beginning November 2, 2018 and expire on November 2, 2020. Per the terms of the arrangement and in accordance with the Cannabis Retail Regulations in Ontario, licensed producers are subject to an ownership interest in licensed retailers. On December 12, 2019, the Cannabis Retail Regulations in Ontario was amended increasing the ownership restriction to 25% from 9.9%.

 

(i) Common Shares and Investment in Associate

 

As a result of the amendment to the Cannabis Retail Regulations in Ontario, the Company now has the right to acquire up to 25% of the voting rights in Choom, an increase from 9.9%. As a result of this increase to potential future ownership, the Company obtained significant influence in Choom effective December 12, 2019, being the date of the amendment. The 9,859,155 common shares had a fair value of $1.8 million based on a quoted market price of $0.18 and was reclassified from marketable securities (Note 5(a)) to investment in associates (Note 6). The cumulative unrealized loss of $5.2 million as at December 12, 2019 was reclassified from other comprehensive loss to deficit. As of March 31, 2020, the Company held an aggregate of 9,859,155 shares in Choom (June 30, 2019 - 9,859,155) representing a 4.9% (June 30, 2019 - 8.0%) ownership interest with a fair value of $1.0 million (June 30, 2019 - $4.4 million) based on the closing stock price of $0.10 (June 30, 2019 - $0.45). During the three and nine months ended March 31, 2020, the Company assessed the carrying value of the investment against the estimated recoverable amount and as a result, recognized an impairment charge of $0.4 million (three and nine months ended March 31, 2019 - nil) which was recognized through the statement of comprehensive loss.

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AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 5 Marketable Securities and Derivatives

 

(a) Marketable securities

 

At March 31, 2020, the Company held the following marketable securities:

Financial asset hierarchy level Level 1 Level 1 Level 1 Level 1 Level 1 Level 1 Level 3  
Marketable securities designated at fair value through other comprehensive income (“FVTOCI”) Micron Radient TGOD ACI Choom EnWave Other immaterial investments Total
    Note 4(d) Note 4(f) Note 4(g)  
  $ $ $ $ $ $ $ $
Balance, June 30, 2019 1,148   30,866   93,132    -   4,388   12,619   1,095   143,248  
Disposals  -    -   (84,770 )  -    -    -    -   (84,770 )
Transfer to investment in associates  -    -    -    -   (1,775 )  -    -   (1,775 )
Unrealized loss on changes in fair value (1,015 ) (24,280 ) (8,362 )  -   (2,613 ) (8,537 ) (62 ) (44,869 )
Balance, March 31, 2020 133   6,586    -    -    -   4,082   1,033   11,834  
                 
Unrealized gain (loss) on marketable securities                
Three months ended March 31, 2020                
     OCI unrealized loss (66 ) (9,411 )  -    -    -   (4,825 ) (12 ) (14,314 )
                 
Three months ended March 31, 2019                
     OCI unrealized gain (loss) 265   10,540   68,047    -   2,317    -   (9 ) 81,160  
                 
Nine months ended March 31, 2020                
     OCI unrealized loss (1,015 ) (24,280 ) (8,362 )  -   (2,613 ) (8,537 ) (62 ) (44,869 )
                 
Nine months ended March 31, 2019                
OCI unrealized (loss) gain (903 ) (5,648 ) (89,702 ) 76,873   (6,211 )  -   (9 ) (25,600 )

 

15 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

(b) Derivatives

 

At March 31, 2020, the Company held the following derivative investments:

Financial asset hierarchy level Level 3 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 2  
Derivatives and convertible debentures at fair value through profit or loss (“FVTPL”) Micron Radient Alcanna CTT Capcium TGOD ACI Choom Investee-B High Tide Namaste Total
    Note 4(b)   Note 4(c) Note 4(d) Note 4(f) Note 4(g)   Note 4(e)    
  $ $ $ $ $ $ $ $ $ $ $ $
Balance, June 30, 2019 84   65   425   33   7,518   24,162   10,083   19,369   14,316   10,241   113   86,409  
Additions  -    -    -    -    -    -    -    -    -   2,000    -   2,000  
Unrealized (loss) gain on changes in fair value (84 ) (65 ) (376 ) (33 ) (7,518 ) (23,613 ) (7,778 ) (1,116 ) 415   144   (100 ) (40,124 )
Foreign exchange  -    -    -    -    -    -    -    -   1,209    -    -   1,209  
Balance, March 31, 2020  -    -   49    -    -   549   2,305   18,253   15,940   12,385   13   49,494  
Current portion  -    -    -    -    -   (1 )  -    -    -   (9,584 )  -   (9,585 )
Long-term portion  -    -   49    -    -   548   2,305   18,253   15,940   2,801   13   39,909  
                         
Unrealized gain (loss) on derivatives (Note 19)
Three months ended March 31, 2020
Foreign exchange gain  -    -    -    -    -    -    -    -   1,185    -    -   1,185  
Inception gains amortized  -    -    -    -    -    -    -    -    -    -    -    -  
Unrealized (loss) gain on changes in fair value  -    -   (140 ) (7 )  -   (1,501 ) (3,036 ) (269 ) 289   (496 )  -   (5,160 )
   -    -   (140 ) (7 )  -   (1,501 ) (3,036 ) (269 ) 1,474   (496 )  -   (3,975 )
 
Three months ended March 31, 2019
Inception gains amortized 150   226    -    -    -    -    -    -    -    -    -   376  
Unrealized (loss) gain on changes in fair value 92   382   293   (1,257 ) 379   31,359    -   1,477   (98 )  -   (55 ) 32,572  
  242   608   293   (1,257 ) 379   31,359    -   1,477   (98 )  -   (55 ) 32,948  
 
Nine months ended March 31, 2020
Foreign exchange gain  -    -    -    -    -    -    -    -   1,209    -    -   1,209  
Inception gains amortized 306   403    -    -    -    -    -    -    -    -    -   709  
Unrealized (loss) gain on changes in fair value (84 ) (65 ) (376 ) (33 ) (7,518 ) (23,613 ) (7,778 ) (1,116 ) 415   144   (100 ) (40,124 )
  222   338   (376 ) (33 ) (7,518 ) (23,613 ) (7,778 ) (1,116 ) 1,624   144   (100 ) (38,206 )
                         
Nine months ended March 31, 2019
Foreign exchange gain  -    -    -    -    -    -    -    -   600    -    -   600  
Inception gains amortized 456   690    -    -    -    -    -    -    -    -    -   1,146  
Unrealized (loss) gain on changes in fair value (694 ) (731 ) (2,003 ) (15,696 ) 2,293   (52,690 ) 68,514   671   (444 )  -   (345 ) (1,125 )
  (238 ) (41 ) (2,003 ) (15,696 ) 2,293   (52,690 ) 68,514   671   156    -   (345 ) 621  

16 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 6 Investments in Associates and Joint Ventures

 

The carrying value of investments in associates and joint ventures consist of:

    Cann Group Alcanna CTT Capcium Choom Total
    Note 4(a) Note 4(b)   Note 4(c) Note 4(g)
    $ $ $ $ $ $
Balance, June 30, 2019   57,017   50,950   1,025   9,853    -   118,845  
Additions    -    -    -    -   1,775   1,775  
Share of net loss(1)   (1,228 ) (2,230 ) (24 ) (840 )  -   (4,322 )
Impairment   (37,213 )  -    -   (9,013 )  -   (46,226 )
OCI FX and share of OCI income (loss)   (361 ) (22 ) (8 )  -    -   (391 )
Balance, December 31, 2019   18,215   48,698   993    -   1,775   69,681  
Share of net loss(1)   (824 ) (3,412 ) (16 )  -   (359 ) (4,611 )
Impairment    -   (27,748 )  -    -   (428 ) (28,176 )
OCI FX and share of OCI income (loss)   (1,022 ) (102 ) 82    -   (2 ) (1,044 )
Balance, March 31, 2020   16,369   17,436   1,059    -   986   35,850  
(1) Represents an estimate of the Company’s share of net loss based on the latest available information of each investee.

 

Note 7 Biological Assets

 

The following inputs and assumptions are all categorized within Level 3 on the fair value hierarchy and were used in determining the fair value of biological assets:

Inputs and assumptions Description Correlation between inputs and fair value
Average selling price per gram Represents the average selling price per gram of dried cannabis net of excise taxes, where applicable, for the period for all strains of cannabis sold, which is expected to approximate future selling prices. If the average selling price per gram were higher (lower), estimated fair value would increase (decrease).
Average attrition rate Represents the weighted average number of plants culled at each stage of production. If the average attrition rate was lower (higher), estimated fair value would increase (decrease).
Weighted average yield per plant Represents the weighted average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant. If the weighted average yield per plant was higher (lower), estimated fair value would increase (decrease).
Standard cost per gram to complete production Based on actual production costs incurred divided by the grams produced in the period. If the standard cost per gram to complete production was lower (higher), estimated fair value would increase (decrease).
Stage of completion in the production process Calculated by taking the weighted average number of days in production over a total average grow cycle of approximately twelve weeks. If the number of days in production was higher (lower), estimated fair value would increase (decrease).

 

The Company utilizes an income approach to determine the fair value less cost to sell at a specific measurement date, based on the existing cannabis plants’ stage of completion up to the point of harvest. The stage of completion is determined based on the specific date of clipping the mother plant, the period-end reporting date, the average growth rate for the strain and facility environment and is calculated on a weighted average basis for the number of plants in the specific lot. The number of weeks in a production cycle is approximately 12 weeks from propagation to harvest. As of March 31, 2020, the weighted average fair value less cost to complete and cost to sell a gram of dried cannabis was $2.50 per gram (June 30, 2019 - $2.94 per gram).

 

The following table highlights the sensitivities and impact of changes in significant assumptions on the fair value of biological assets:

Significant inputs & assumptions Range of inputs   Impact on fair value
March 31, 2020 June 30, 2019 Sensitivity March 31, 2020 June 30, 2019
Average selling price per gram $5.89   $5.86   Increase or decrease of $1.00 per gram $9,220   $14,868  
Weighted average yield (grams per plant) 39.55 42.85 Increase or decrease by 5 grams per plant $3,840   $6,417  
                   

 

The Company’s estimates are, by their nature, subject to change, and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.

17 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

The changes in the carrying value of biological assets during the period are as follows:

  $
Balance, June 30, 2019 51,836  
Production costs capitalized 40,941  
Changes in fair value less cost to sell due to biological transformation 70,513  
Transferred to inventory upon harvest (132,718 )
Balance, March 31, 2020 30,572  

 

During the three and nine months ended March 31, 2020, the Company’s biological assets produced 36,207 and 108,334 kilograms of dried cannabis, respectively (three and nine months ended March 31, 2019 - 15,590 and 28,408 kilograms, respectively). As at March 31, 2020, it is expected that the Company’s biological assets will yield approximately 26,832 kilograms (June 30, 2019 - 36,010 kilograms) of cannabis when harvested. As of March 31, 2020, the weighted average stage of growth for the biological assets was 45% (June 30, 2019 - 49%).

 

Note 8 Inventory

 

The following is a breakdown of inventory:

  March 31, 2020 June 30, 2019
 

Capitalized

cost

Fair value

adjustment

Carrying

value

Capitalized
cost
Fair value
adjustment
Carrying
value
  $ $ $      
Harvested cannabis            
     Work-in-process 68,161   62,799   130,960   31,381   33,745   65,126  
     Finished goods 19,398   4,091   23,489   7,771   4,182   11,953  
  87,559   66,890   154,449   39,152   37,927   77,079  
Extracted cannabis            
     Work-in-process 29,987   5,647   35,634   4,788   1,761   6,549  
     Finished goods 20,222   3,608   23,830   7,556   1,255   8,811  
  50,209   9,255   59,464   12,344   3,016   15,360  
Hemp products            
     Raw materials 7,482    -   7,482   4,508    -   4,508  
     Work-in-process 1,018    -   1,018   1,000    -   1,000  
     Finished goods 8,912    -   8,912   3,183    -   3,183  
  17,412    -   17,412   8,691    -   8,691  
             
Supplies and consumables 17,133    -   17,133   2,204    -   2,204  
             
Merchandise and accessories 2,731    -   2,731   10,307    -   10,307  
             
             
Ending balance 175,044   76,145   251,189   72,698   40,943   113,641  

 

During the three and nine months ended March 31, 2020, inventory expensed to cost of goods sold was $59.0 million and $166.3 million (three and nine months ended March 31, 2019 - $46.3 million and $117.6 million), respectively, which included $15.4 million and $56.7 million (three and nine months ended March 31, 2019 - $17.4 million and $49.0 million) of non-cash expense, respectively, related to the changes in fair value of inventory sold. During the three and nine months ended March 31, 2020, management recognized an $8.4 million charge to the net realizable value of our inventory due to a decrease in selling price.

18 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

 

Note 9 Property, Plant and Equipment

 

The following summarizes the carrying values of property, plant and equipment for the periods reflected:

  March 31, 2020 June 30, 2019
  Cost Accumulated depreciation Impairment Net book value Cost Accumulated depreciation Net book value
Owned assets              
     Land 38,262    -   (893 ) 37,369   39,532    -   39,532  
     Real estate 530,914   (50,951 ) (10,294 ) 469,669   420,737   (25,682 ) 395,055  
     Construction in progress 373,781    -   (38,720 ) 335,061   222,884    -   222,884  
     Computer software & equipment 29,200   (10,723 ) (105 ) 18,372   20,850   (5,367 ) 15,483  
     Furniture & fixtures 10,873   (3,922 ) (127 ) 6,824   9,312   (2,847 ) 6,465  
     Production & other equipment 140,430   (34,367 ) (9,211 ) 96,852   102,403   (17,894 ) 84,509  
Total owned assets 1,123,460   (99,963 ) (59,350 ) 964,147   815,718   (51,790 ) 763,928  
               
Right-of-use lease assets (1)              
     Land 27,693   (574 )  -   27,119    -    -    -  
     Real estate 69,018   (5,676 ) (2,416 ) 60,926    -    -    -  
     Production & other equipment 5,182   (2,512 )  -   2,670   2,010   (371 ) 1,639  
Total right-of-use lease assets 101,893   (8,762 ) (2,416 ) 90,715   2,010   (371 ) 1,639  
               
Total property, plant and equipment 1,225,353   (108,725 ) (61,766 ) 1,054,862   817,728   (52,161 ) 765,567  
(1) Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(d)(i)).

 

The following summarizes the changes in the net book values of property, plant and equipment for the periods presented:

  Balance, June 30, 2019 IFRS 16 Transition (1) Additions Disposals Other (2) Depreciation Impairment Foreign currency translation Balance, March 31, 2020
Owned assets                  
     Land 39,532    -   495    -   (1,919 )  -   (893 ) 154   37,369  
     Real estate 395,055    -   36,194   (134 ) 73,271   (26,411 ) (10,294 ) 1,988   469,669  
     Construction in progress (3) 222,884    -   248,755    -   (97,903 )  -   (38,720 ) 45   335,061  
     Computer software & equipment 15,483    -   7,934   (43 ) 458   (5,363 ) (105 ) 8   18,372  
     Furniture & fixtures 6,465    -   1,186   (10 ) 367   (1,076 ) (127 ) 19   6,824  
     Production & other equipment 84,509    -   32,199   (2,222 ) 7,492   (16,387 ) (9,211 ) 472   96,852  
Total owned assets 763,928    -   326,763   (2,409 ) (18,234 ) (49,237 ) (59,350 ) 2,686   964,147  
                   
Right-of-use leased assets (1)                
     Land  -   30,936    -    -   (3,243 ) (574 )  -    -   27,119  
     Real estate  -   62,817   6,826   (688 ) (33 ) (5,794 ) (2,416 ) 214   60,926  
     Production & other equipment 1,639   2,296   902   (64 )  -   (2,141 )  -   38   2,670  
Total right-of-use lease assets 1,639   96,049   7,728   (752 ) (3,276 ) (8,509 ) (2,416 ) 252   90,715  
                   
Total property, plant and equipment 765,567   96,049   334,491   (3,161 ) (21,510 ) (57,746 ) (61,766 ) 2,938   1,054,862  
(1) Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(d)(i)).
(2) Includes reclassification of construction in progress cost when associated projects are complete. Includes the $18.2 million transfer of land and real estate to assets held for sale as at December 31, 2019 associated with the Exeter property (Note 12).

 

During the three and nine months ended March 31, 2020, $12.1 million and $25.9 million (three and nine months ended March 31, 2019 - $6.9 million and $8.4 million), respectively, in borrowing costs were capitalized to construction in progress at a weighted average interest rate of 10% and 13% (three and nine months ended March 31, 2019 - 15% and 14%), respectively.

 

As of March 31, 2020, $268.4 million (June 30, 2019 - nil) of property, plant and equipment were temporarily idle as the Company continues to evaluate all capital projects and investments to prioritize core cannabis operations. Of the $268.4 million idle property, plant, and equipment, $257.3 million relates to the Aurora Sun facility, $11.1 million relates to the Nordic Sky Facility.

19 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Depreciation relating to manufacturing equipment and production facilities for owned and right-of-use lease assets is capitalized into biological assets and inventory, and is expensed to cost of sales upon the sale of goods. During the three and nine months ended March 31, 2020, the Company recognized $17.5 million and $57.7 million, respectively, of depreciation expense of which $6.4 million and $18.1 million (three and nine months ended March 31, 2019 - $4.6 million and $5.8 million, respectively) was reflected in cost of sales.

 

Impairments

 

The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the three and nine months ended March 31, 2020, management noted indicators of impairment at the asset specific level and at the Cash Generating Unit (“CGU”) level which are discussed below.

 

Asset specific impairments

 

During the period ended December 31, 2019, the Company halted construction of its Nordic Sky facility which is an indicator of impairment. The fair value of the Nordic Sky facility was determined based on a third-party appraisal using a fair value less cost to dispose (“FVLCD”) approach with the capitalization methodology using unobservable inputs (level 3). As a result, the Company recognized nil and $34.6 million impairment loss for Nordic Sky for the three and nine months ended March 31, 2020 respectively. The Nordic Sky facility, and the corresponding impairment loss, is allocated to the cannabis operating segment (Note 23).

 

During the three and nine months ended March 31, 2020, the Company recognized $9.6 million and $11.0 million impairment losses, respectively, for its Exeter property (Note 12).

 

CGU impairments

 

Canadian Hemp CGU

 

The following factors were identified as impairment indicators for the Canadian Hemp CGU as at March 31, 2020:

 

i. Revenue decline - Slower than anticipated launch of new products has resulted in a decrease of expected sales and profitability for the Canadian Hemp CGU as compared to outcomes initially forecasted by management;
i. Change in strategic plans - Management is currently evaluating the Company’s strategy and market opportunities with respect to hemp-derived CBD. As part of this process, management is considering the divestiture of certain Canadian Hemp assets (Note 26).

 

As a result of the above factors, management performed an impairment test as at March 31, 2020 for the Canadian Hemp CGU.

 

The Company’s Canadian Hemp CGU represents its operations dedicated to the cultivation and sale of hemp products within Canada. This CGU is attributed to the Company’s cannabis operating segment. The $0.2 million recoverable amount was determined using a FVLCD method by discounting the most recent expected future net cash flows attributable to the Canadian Hemp CGU. As a result, management recorded impairment losses of $9.8 million during the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. Management allocated $7.4 million of impairment losses to owned property, plant and equipment and $2.4 million of impairment losses to right-of-use leased assets (Note 9). The recoverable amount of owned property, plant and equipment and right-of-use leased assets within this CGU was determined based on fair value less cost to dispose using a market approach (Level 3 inputs).

 

During the three and nine months ended March 31, 2020, the Company recognized impairment losses within its Latin American Hemp CGU, and its European Hemp CGU, and allocated impairment losses of nil and $15.9 million, respectively, to property, plant and equipment (Note 9). The property, plant and equipment of the Latin American Hemp CGU, and the European Hemp CGU and the corresponding impairment losses are allocated to the cannabis operating segment (Note 23).

 

Note 10 Business Combinations

 

Whistler Medical Marijuana Corporation (“Whistler”)

 

On March 1, 2019, the Company acquired Whistler, a Canadian private licensed producer of organic cannabis products.

 

The Company acquired all of the issued and outstanding shares of Whistler for aggregate consideration of $158.1 million comprised of:

13,460,833 common shares with a fair value of $130.8 million;
$2.9 million related to the settlement of a pre-existing loan; and
$24.4 million of contingent consideration, which represents the estimated fair value of $25.1 million gross consideration to be paid in Aurora common shares upon achievement of certain milestones related to Whistler’s Pemberton facility obtaining a cannabis license and the facility being fully planted.

 

The Company also issued 207,100 common shares with a fair value of $2.1 million for finders’ fees related to this acquisition.

Under the terms of the purchase agreement, a further $14.9 million in gross contingent consideration is to be paid out to the former shareholders of Whistler subject to the continued employment of the founder of Whistler. In accordance with IFRS 3, the additional cost of this consideration is accounted for as share-based compensation expense for post-combination services provided in the period that the applicable conditions are met.

20 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

During the three months ended March 31, 2020, management finalized the purchase price allocation of Whistler based on the Company’s estimated fair value of the identifiable assets acquired and the liabilities assumed on the acquisition date. No changes were made to the purchase price allocation disclosed in the audited consolidated financial statements for the year ended June 30, 2019.

 

Note 11 Non-Controlling Interests (“NCI”)

 

Aurora Nordic

 

As of March 31, 2020, the Company held a 51% ownership interest in Aurora Nordic. The following table presents the summarized financial information for Aurora Nordic before intercompany eliminations.

    March 31, 2020
    $
Current assets   3,937  
Non-current assets   29,860  
Current liabilities   3,492  
Non-current liabilities   74,385  
Revenue for the nine months ended   5,062  
Net loss for the nine months ended   45,148  

 

Hempco

 

Hempco is a producer of industrial hemp products and is developing hemp foods, hemp fiber and hemp nutraceuticals. Aurora initially acquired a 22.3% ownership interest in Hempco by subscribing to its private placement of 10,558,676 units at $0.3075 per unit for gross proceeds of $3.2 million. On March 22, 2018 and May 7, 2018, the Company increased its ownership in Hempco to 35.1% and 52.3%, respectively, through the exercise of 10,558,676 share purchase warrants at $0.41 for a cost of $4.3 million, and the exercise of its call option to purchase 10,754,942 shares from the two founders at $0.40 per share for a cost $4.3 million, respectively.

 

In August 2019, the Company completed the acquisition of the remaining common shares of Hempco not previously owned by Aurora. The Company issued a total of 217,554 shares and reserved 242,602 of shares issuable upon the potential exercise of certain outstanding Hempco stock options. As Aurora previously controlled Hempco with a 51% ownership interest, the transaction resulted in a change to Aurora’s ownership stake and was accounted for as an equity transaction. The $18.3 million difference between the $2.1 million in NCI interest and the $20.4 million fair value of consideration paid was recognized directly in deficit. Prior to the acquisition of the remaining ownership interest, Hempco was listed on the TSX Venture Exchange.

 

Note 12 Assets Held for Sale

 

Accounting Policy

 

Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognized in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortized or depreciated.

 

 

 

In connection with management’s plan to rationalize capital expenditures to align the Company’s cultivation footprint to current demand, in November 2019, the Company committed to sell its Exeter land and greenhouse (the “Exeter Property”) and reclassified it from property, plant and equipment to assets held for sale. The Company obtained a third-party appraisal to determine the fair value of the Exeter Property based on a direct comparison approach (Level 2). Subsequent to March 31, 2020, the Company accepted an offer to sell the property for net proceeds of $8.6 million. Based on the estimated fair value less cost of disposal of $8.6 million, the Company recognized a $9.6 million and $11.0 million impairment loss during the three and nine months ended March 31, 2020, respectively. The Exeter Property, and the corresponding impairment loss, is allocated to the cannabis operating segment (Note 23).

  Land Building & Improvements Total Value
  $ $ $
Balance, June 30, 2019 2,653   17,430   20,083  
Depreciation  -   (406 ) (406 )
Balance, November 25, 2019 2,653   17,024   19,677  
Impairment (1,219 ) (9,828 ) (11,047 )
Fair value at March 31, 2020 1,434   7,196   8,630  

 

21 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 13 Intangible Assets and Goodwill

 

The following is a continuity schedule of intangible assets and goodwill:

  March 31, 2020 June 30, 2019
  Cost Accumulated amortization Impairment Net book value Cost Accumulated amortization Net book value
Definite life intangible assets:              
     Customer relationships 86,278   (26,260 ) (4,203 ) 55,815   86,278   (14,710 ) 71,568  
     Permits and licenses 216,220   (26,645 ) (4,977 ) 184,598   227,916   (18,588 ) 209,328  
     Patents 1,895   (431 )  -   1,464   1,895   (293 ) 1,602  
     Intellectual property and know-how 82,500   (22,095 ) (4,401 ) 56,004   82,500   (12,386 ) 70,114  
     Software 32,187   (2,845 )  -   29,342   17,824   (1,172 ) 16,652  
Indefinite life intangible assets:              
     Brand 148,399    -   (1,700 ) 146,699   148,399    -   148,399  
     Permits and licenses 170,442    -   (143,414 ) 27,028   170,703    -   170,703  
Total intangible assets 737,921   (78,276 ) (158,695 ) 500,950   735,515   (47,149 ) 688,366  
Goodwill 3,177,753    -   (762,231 ) 2,415,522   3,172,550    -   3,172,550  
Total 3,915,674   (78,276 ) (920,926 ) 2,916,472   3,908,065   (47,149 ) 3,860,916  

 

The following summarizes the changes in the net book value of intangible assets and goodwill for the periods presented:

  Balance, June 30, 2019 Additions Disposals Amortization Impairment Foreign currency translation Balance, March 31, 2020
Definite life intangible assets:              
     Customer relationships 71,568    -    -   (11,550 ) (4,203 )  -   55,815  
     Permits and licenses 209,328    -   (11,696 ) (8,057 ) (4,977 )  -   184,598  
     Patents 1,602    -    -   (138 )  -    -   1,464  
     Intellectual property and know-how 70,114    -    -   (9,709 ) (4,401 )  -   56,004  
     Software 16,652   14,363    -   (1,673 )  -    -   29,342  
Indefinite life intangible assets:              
     Brand 148,399    -    -    -   (1,700 )  -   146,699  
     Permits and licenses (1) 170,703    -    -    -   (143,414 ) (261 ) 27,028  
Total intangible assets 688,366   14,363   (11,696 ) (31,127 ) (158,695 ) (261 ) 500,950  
Goodwill 3,172,550    -    -    -   (762,231 ) 5,203   2,415,522  
Total 3,860,916   14,363   (11,696 ) (31,127 ) (920,926 ) 4,942   2,916,472  
(1) Indefinite life permits and licenses are predominantly held by the Company’s foreign subsidiaries. Given that these permits and licenses are connected to the subsidiary rather than a specific asset, there is no foreseeable limit to the period over which these assets are expected to generate future cash inflows for the Company.

 

As at March 31, 2020, all of the $173.7 million (June 30, 2019 - $319.1 million) indefinite life intangibles are allocated to the group of CGUs that comprise the cannabis segment.

 

Impairments

 

At the end of each reporting period, the Company assesses whether there were events or changes in circumstances that would indicate that a CGU or group of CGUs were impaired. The Company considers external and internal factors, including overall financial performance and relevant entity-specific factors, as part of this assessment.

 

As at March 31, 2020 management had noted indicators of impairment present within its Canadian Hemp CGU and as a result performed an indicator-based impairment test as at March 31, 2020. Refer to Note 9 for the valuation method and significant assumptions used in determining the Canadian Hemp CGU’s recoverable amount.

 

As the Canadian Hemp CGU is allocated to the cannabis operating segment, management also tested the cannabis operating segment which contains the associated goodwill as at March 31, 2020. The recoverable amount of the cannabis operating segment was determined using the same valuation methodology and significant assumptions used during the Company’s December 31, 2019 impairment test updating the forecast for actual Q3 2020 results (see Cannabis Operating Segment (Goodwill) below). Management compared the recoverable amount to the updated carrying value of the cannabis operating segment as at March 31, 2020 and as the recoverable amount was higher than the carrying value, no additional impairment was recognized.

 

22 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

 

 

The following factors were identified as impairment indicators as at December 31, 2019:

 

i. Revenue decline - Constraints in the provincial retail distribution network, including a slower than expected roll-out of retail stores across Canada, has resulted in a decrease of expected sales and profitability as compared to outcomes initially forecasted by management;
ii. Change in strategic plans - Halting of construction at Aurora’s Nordic Sky Facility and deferral of the majority of final construction and commissioning activities at its Aurora Sun Facility;
iii. Decline in stock price and market capitalization - As at December 31, 2019, the carrying amount of the Company’s total net assets exceeded the Company’s market capitalization.

 

As a result of these factors, management performed an indicator-based impairment test as at December 31, 2019 for the Canadian Cannabis CGU, Latin American CGU, European Hemp CGU, and the Analytical Testing CGU.

 

The Company allocated all of its goodwill to the cannabis operating segment for the purpose of the impairment test as this represented the lowest level at which management monitored goodwill. As the cannabis operating segment is comprised of various CGUs, management tested the individual CGUs, which had indicators of impairment, for impairment before the cannabis operating segment which contains the associated goodwill. The recoverable amount of all CGUs was determined based on a Fair Value Less Cost of Disposal (“FVLCD”) using level 3 inputs in a Discounted Cash Flow (“DCF”) methodology. The significant assumptions applied in the determination of the recoverable amount are described below:

 

i. Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. The forecasts are extended to a total of five years (and a terminal year thereafter);
ii. Terminal value growth rate: The terminal growth rate was based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth;
iii. Post-tax discount rate: The post-tax discount rate is reflective of the CGUs Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, an unsystematic risk premium, and after-tax cost of debt based on corporate bond yields; and
iv. Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date.

 

Key assumptions used in calculating the recoverable amount for each CGU tested for impairment as at December 31, 2019 is outlined in the following table:

  Canadian Cannabis CGU Latin American CGU European Hemp CGU Analytical Testing CGU
Terminal value growth rate 3.0 % 3.0 % 3.0 % 3.0 %
Discount Rate 11.5 % 31.8 % 15.0 % 14.0 %
Budgeted Revenue growth rate (average of next five years) 46.0 % 3.0 % 13.5 % 12.5 %
Fair Value Less Cost to Dispose $ 3,712,967   $ 12,386   $ 11,572   $ 8,064  
                         

 

Canadian Cannabis CGU

 

The Company’s Canadian Cannabis CGU represents its operations dedicated to the cultivation and sale of cannabis products within Canada. Management concluded that the recoverable amount was higher than the carrying value as at December 31, 2019, and no impairment was recognized within the Canadian Cannabis CGU.

 

Latin American (“LATAM”) CGU

 

The Company’s LATAM CGU represents its operations dedicated to the cultivation and sale of cannabis and hemp products within LATAM. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $152.3 million during the nine months ended March 31, 2020 (nine months ended March 31, 2019 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. Management allocated $143.4 million of impairment losses to the CGU’s indefinite life permits and licenses and $8.8 million of impairment losses to property, plant and equipment (Note 9).

 

European Hemp CGU

 

The Company’s European Hemp CGU represents its operations dedicated to the cultivation and sale of hemp products within Europe. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $7.0 million during the nine months ended March 31, 2020 (nine months ended March 31, 2019 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was fully allocated to property, plant and equipment (Note 9).

 

Analytical Testing CGU

 

The Company’s Analytical Testing CGU represents its operations dedicated to analytical and quality control testing of cannabis. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $12.8 million during the nine months ended March 31, 2020 (nine months ended March 31, 2019 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was allocated among intangible assets including customer relationships, definite life permits and licenses, know-how and brand.

23 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Patient Counseling CGU

 

The Company’s Patient Counseling CGU represents its operations dedicated to patient counseling and educational operations. This CGU is attributed to the Company’s cannabis operating segment. The recoverable amount of $0.5 million was determined using a FVLCD method by discounting the most recent expected future net cash flows to the Company from the investment. Management concluded that the estimated recoverable amount of the investment is nominal and as a result, recorded impairment losses of $2.5 million during the nine months ended March 31, 2020 (nine months ended March 31, 2019 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was allocated to the customer relationship intangible asset.

 

Cannabis Operating Segment (Goodwill)

 

The recoverable amount of the cannabis operating segment was determined based on FVLCD using Level 3 inputs in a DCF analysis. The Company uses its market capitalization and comparative market multiples to corroborate discounted cash flow results. The significant assumptions applied in determining the recoverable amount are described below:

 

i. Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. The forecasts was five years (June 30, 2019 - 3 years) including a terminal year thereafter. Management used an average sales growth rate of 49% (June 30, 2019 - 69%) over the forecasted period (exclusive of terminal year). The average sales growth rate was decreased from the June 30, 2019 forecast to reflect constraints in the provincial retail distribution network, including a slower than expected roll-out of retail stores across Canada;
ii. Terminal value growth rate: Management used a 3.0% (June 30, 2019 - 3.0%) terminal growth rate which is based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth;
iii. Post-tax discount rate: Management used a 13.0% post-tax discount rate (June 30, 2019 - 13.5%) which is reflective of the cannabis operating segment’s WACC. The WACC was estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields; and
iv. Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date.

 

As a result of the impairment test as at December 31, 2019, management concluded that the carrying value of the cannabis operating segment was higher than the $3.9 billion recoverable amount and recorded impairment losses of $762.2 million during the three months ended December 31, 2019. The impairment was allocated entirely to reduce goodwill for the cannabis operating segment. The impairment loss was recognized due to a change in overall industry/market conditions, a change in management’s forecasted sales and profitability outlook and a realignment and refocus of strategic plans to meet market demand.

 

Note 14 Convertible Debentures

  Mar 2018
(i)
Jan 2019
(ii)
Total
  $ $ $
Balance, June 30, 2019 212,094   291,487   503,581  
Conversion of debt (219,614 )  -   (219,614 )
Interest paid (7,948 ) (27,789 ) (35,737 )
Accretion 9,857   19,651   29,508  
Accrued interest 7,917   18,993   26,910  
Principal repayments (2,306 )  -   (2,306 )
Unrealized gain on foreign exchange  -   22,351   22,351  
Balance, March 31, 2020  -   324,693   324,693  
Current portion  -   (31,880 ) (31,880 )
Long-term portion  -   292,813   292,813  

 

(i) In November 2019, the Company provided notice to all holders of Aurora’s $230.0 million 5% unsecured, convertible debentures issued on March 9, 2018 and due March 9, 2020 (the “Debentures”) of an option to voluntarily convert their Debentures at a temporarily amended early conversion price of $39.40 (the “Amended Early Conversion Price”) calculated based on a 6% discount to the average daily VWAP of Aurora’s common shares on both the Canadian and U.S. stock exchanges.

24 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

On November 25, 2019, $227.0 million principal amount, or approximately 99%, of the Debentures were converted under the Amended Early Conversion Price into 5,761,260 common shares of Aurora. Debenture holders that elected to convert also received a total of $7.9 million of interest paid in cash which was comprised of: (i) $4.7 million of accrued and unpaid interest from the last interest payment date, being June 30, 2019, up to, but excluding, November 25, 2019, and (ii) $3.2 of million future unpaid interest from November 25, 2019, up to, but excluding, the date of maturity of the Debentures, being March 9, 2020. In accordance with IAS 32 - Financial Instruments: Presentation, the reduction of the conversion price to induce early conversion resulted in a loss of $172.3 million during the nine months ended March 31, 2020 (Note 19). The loss is calculated as the difference between the fair value of the consideration the holders received on conversion under the revised terms and the fair value of the consideration the holders would have received under the original terms of the agreement. On March 6, 2020, the Company repaid the remaining principal balance of $2.3 million in cash.

 

(i) On January 24, 2019, the Company issued $460.6 million (US$345.0 million) in aggregate principal amount of Convertible Senior Notes due 2024 (“Senior Notes”) issued at par value. Holders may convert all or any portion of the Senior Notes at any time. The Senior Notes are unsecured, mature on February 28, 2024 and bear cash interest semi-annually at a rate of 5.5% per annum. The initial conversion rate for the Senior Notes is 138.37 common shares per US$1,000 principal amount of Senior Notes, equivalent to an initial conversion price of approximately US$7.23 per common share.

 

In accordance with IFRS 9, the equity conversion option embedded in the Senior Notes was determined to be a derivative liability, which has been recognized separately at its fair value. Subsequent changes in the fair value of the equity conversion option will be recognized through profit and loss (i.e. FVTPL). The equity conversion option was classified as an option liability as it can be settled through the issuance of a variable number of shares, cash or a combination thereof, based on the exchange rate and or trading price at the time of settlement.

 

As of March 31, 2020, the conversion option had a fair value of $2.6 million (June 30, 2019 - $177.4 million) and the Company recognized a $5.9 million and $174.8 million unrealized gain on the derivative liability for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - $101.5 million loss), respectively. The fair value of the conversion option was determined based on the Kynex valuation model with the following assumptions: share price of US$0.91 (June 30, 2019 - US$7.82), volatility of 75% (June 30, 2019 - 60%), implied credit spread of 4,288 bps (June 30, 2019 - 897 bps), and assumed stock borrow rate of 50% (June 30, 2019 - 15%). As of March 31, 2020, the Company has accrued interest of $19.0 million on these Senior Notes.

 

Note 15 Loans and Borrowings

 

As at March 31, 2020, the Company had the following loans and borrowings:

  Note March 31, 2020 June 30, 2019
    $ $
Term loan credit facilities 15(a) 149,578   139,900  
Revolving credit facility 15(a) 22,000    -  
Debentures   4   18  
Lease liabilities 15(b) 96,436   1,326  
Total loans and borrowings   268,018   141,244  
Current portion   (21,772 ) (13,758 )
Long-term   246,246   127,486  

 

(a) Credit facilities

 

The changes in the carrying value of current and non-current term loans are as follows:

  Term loan credit facilities Revolving credit facility
  $ $
Balance, June 30, 2019 139,900    -  
Additions 64,394   22,000  
Deferred financing fee (1,789 )  -  
Gain on debt modification (2,154 )  -  
Accretion 9,615   12  
Interest payments (5,340 ) (12 )
Principal repayments (55,048 )  -  
Balance, March 31, 2020 149,578   22,000  
Current portion (16,013 )  -  
Long-term portion 133,565   22,000  

 

On August 29, 2018, the Company entered into a secured credit agreement (as amended, the “Credit Agreement”) with Bank of Montreal (“BMO”) and certain lenders to establish a credit facility (as amended, the “Credit Facility”). Under the original terms of the Credit Facility, we had access to an aggregate of $200.0 million in funds that are available through a $50.0 million revolving credit facility (“Facility A”) and a $150.0 million non-revolving facility (“Facility B”).

25 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

On September 4, 2019, the Company executed an amendment and upsized its existing C$200.0 million Credit Facility to C$360.9 million (the “First Amended and Restated Credit Agreement”). The First Amended and Restated Credit Agreement consisted of an additional C$160.9 million comprised of a $64.4 million non-revolving facility (“Facility C”), a $96.5 million non-revolving facility (“Facility D”) which represented capital committed for the construction of Aurora Sun, and an additional option to increase the amended credit facility by $39.1 million subject to certain customary terms and conditions.

 

On March 25, 2020, the Company executed an amendment to the First Amended and Restated Credit Agreement (the “First Amendment to the First Amended and Restated Credit Agreement”) which reduces the overall borrowing capacity to C$264.4 million by eliminating Facility D, as a result of the Company halting construction on Aurora Sun. In conjunction with the First Amendment to the First Amended and Restated Credit Agreement, the Company utilized its $45.0 million restricted cash collateral balance to repay and permanently reduce the outstanding term loan balance under Facility C.

 

On March 27, 2020, the Company drew $22.0 million under Facility A which bears interest at a rate of 4.70%, based on a Canadian prime rate of 2.45% plus an applicable margin of 2.25%, payable monthly. Draws under Facility A are subject to a borrowing base limit determined based on certain eligible receivables less certain statutory payables. As at March 31, 2020, $26.0 million of total borrowing capacity remains under Facility A, of which $4.6 million is available to the Company.

 

As at March 31, 2020, the Company had a total of $2.0 million of letters of credit and $22.0 million of principal outstanding under Facility A, $137.8 million principal outstanding under Facility B, and $17.8 million principal outstanding under Facility C. In accordance with IFRS 9, the amounts outstanding under the amended Credit Facility were initially recorded at fair value and subsequently accounted for at amortized cost based on the effective interest rate.

 

Under the terms of the First Amended and Restated Credit Agreement, the Company is subject to certain customary financial and non-financial covenants and restrictions. The Credit Facility matures on August 29, 2021 and has a first ranking general security interest in the assets of Aurora and the loans can be repaid at any time without penalty at Aurora’s discretion. Interest and standby fees are accrued at variable rates based on the Company’s borrowing elections and certain financial metrics.

 

Under the terms of the First Amended and Restated Credit Agreement and the First Amendment to the First Amended and Restated Credit Agreement, the Company can elect, at its sole discretion, to receive advances under Facility A, Facility B and Facility C through certain availment options, which includes prime rate loans and bankers’ acceptances with maturity dates up to six months that, at the discretion of the Company, roll over upon their maturities unless Aurora elects to convert the then outstanding principal into prime rate loans at any time before August 29, 2021. During the six months ended December 31, 2019, the Company rolled over its advances for Facility B and C using the bankers’ acceptances with 3-month maturity dates at an average rate of 5.33%. During the three months ended March 31, 2020, the Company elected to revert back to prime rate loans for Facility B and Facility C to take advantage of a lower interest rate of 4.70%. In accordance with IFRS 9, the loan conversion was determined to be a non-substantial modification of the loan terms. As a result, the Company recognized gains of $2.1 million and $2.2 million in the condensed consolidated interim statement of comprehensive loss for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - $0.2 million and $2.0 million gains), respectively, with a corresponding adjustment to the carrying value of the Credit Facility. The gains were determined based on the difference between the original contractual cash flows and the modified expected cash flows, which was discounted at the original effective interest rate.

 

The First Amendment to the First Amended and Restated Credit Agreement reformulated the financial covenants governing the Credit Facility, and as of the execution of the First Amendment to the First Amended and Restated Credit Agreement, the Company is required meet the following financial covenants:

 

Total funded debt to shareholders’ equity is not to exceed 0.20:1 at any time. Total funded debt includes all obligations (except those noted below) which constitute debt and is calculated as the total principal outstanding under Facility A, Facility B, Facility C, the January 24, 2019 Senior Notes, total obligations under capital leases determined in accordance with IAS 17 - Leases, and other obligations secured by Purchase-Money Security Interests, capitalized interest, the redemption price of any securities which are redeemable at the option of the holder, and any aggregate actual hedge liability. Total funded debt excludes accounts payable, payroll accruals, accruals in respect of normal business expenses and future income taxes;
Maintenance of a minimum $35.0 million unrestricted cash balance at any time. Unrestricted cash is defined as the amount of cash held in bank accounts of secured companies maintained by BMO that are not subject to any lien or any other restriction that would prevent the Company from using such cash for operating purposes in the ordinary course of business, less any outstanding principal drawn under Facility A; and
Achievement of certain quarterly minimum Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) thresholds beginning in the quarter ending September 30, 2020. For the purposes of this calculation, EBITDA is defined as the consolidated net income of the Company excluding the following: extraordinary or non-recurring income (expenses) and gains (losses), non-cash gains (losses) (such as unrealized foreign exchange gains (losses)) and income of the unsecured subsidiaries (except to the extent that dividends in respect of such income have been paid in cash by such unsecured subsidiaries to a secured company); plus the following amounts (to the extent such amounts were deducted in determining such consolidated net income, and without duplication): (a) Interest, fees and expenses paid in connection with permitted funded debt; (b) income and capital taxes; (c) depreciation and amortization; (d) non-cash charges and expenses such as unrealized foreign exchange losses and charges relating to the impairment of goodwill and other intangible assets; (e) non-cash share-based compensation; (f) extraordinary non-recurring expenses or losses to the extent approved by the lenders in writing; and (g) any other expenses approved in writing by the lenders in their discretion.

26 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

As of March 31, 2020, the Company was in compliance with all applicable covenants under the First Amendment to the First Amended and Restated Credit Agreement to the Credit Facility and term loans.

 

(b) Lease liabilities

 

The following is a continuity schedule of lease liabilities for the nine months ended March 31, 2020:

    $
Balance, June 30, 2019   1,326  
IFRS 16 transition (1)   95,464  
Lease additions   8,866  
Disposal of leases   (747 )
Lease payments   (12,926 )
Changes due to foreign exchange rates   240  
Interest expense on lease liabilities   4,213  
Balance, March 31, 2020   96,436  
Current portion   (5,759 )
Long-term portion   90,677  
(1) Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(d)(i)).

 

Note 16 Share Capital

 

(a) Authorized

 

The authorized share capital of the Company is comprised of the following:

 

(i) Unlimited number of common voting shares without par value.
(ii) Unlimited number of Class “A” Shares each with a par value of $1.00. As at March 31, 2020, no Class “A” Shares were issued and outstanding.
(iii) Unlimited number of Class “B” Shares each with a par value of $5.00. As at March 31, 2020, no Class “B” Shares were issued and outstanding.

 

(b) Shares Issued and Outstanding

 

As described under Note 2(a), on May 11, 2020, the Company completed a one-for-twelve (1:12) reverse share split of all of its issued and outstanding common shares. Shares reserved under the Company’s equity and incentive plans were adjusted to reflect the Share Consolidation. All current and prior period share and per share data presented below has been retroactively adjusted to reflect the Share Consolidation unless otherwise noted.

 

At March 31, 2020, 109,436,339 common shares (June 30, 2019 - 84,786,562) were issued and fully paid.

 

During the three and nine months ended March 31, 2020, the Company issued 11,734,539 and 18,193,530 common shares, respectively, under its At-the-Market (“ATM”) program (Note 25(b)) for gross proceeds of $210.6 million and $535.8 million (US$153.6 million and US$398.9 million) at an average price of $17.95 and $29.45 per share (US$13.09 and US$21.92 per share), respectively. The Company paid commissions of $4.2 million and $10.7 million (US$3.1 million and US$8.0 million) for net proceeds of $206.4 million and $525.0 million (US$150.6 million and US$390.9 million), respectively.

 

During the three and nine months ended March 31, 2020, the Company issued nil and 5,761,260 common shares (three and nine months ended March 31, 2019 - nil and 331,328), respectively, in connection with the conversion of its Debentures as described in Note 14(i).

 

During the three months ended March 31, 2020, the Company issued 262,840 common shares for milestone payments in connection with the acquisition of Whistler and 62,173 common shares for milestone payments in connection with the acquisition of Larssen Ltd. During the nine months ended March 31, 2020, the Company issued 352,424 common shares for milestone payments in connection with three acquisitions.

27 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

(c) Share Purchase Warrants

 

Each whole warrant entitles the holder to purchase one common share of the Company. A summary of warrants outstanding is as follows:

  Warrants

Weighted average

exercise price

  # $
Balance, June 30, 2019 1,982,156   95.76  
     Issued 13,706   116.04  
     Exercised (986 ) 73.80  
     Expired (992,918 ) 109.80  
Balance, March 31, 2020 1,001,958   82.08  

 

The following table summarizes the warrants that remain outstanding as at March 31, 2020:

Exercise Price ($) Expiry Date Warrants (#)
36.00 - 48.00 November 2, 2020 473,766  
112.44 - 116.04 August 9, 2023 to August 22, 2024 528,192  
    1,001,958  

 

Note 17 Share-Based Compensation

 

(a) Stock Options

 

A summary of stock-options outstanding is as follows:

 

Stock

Options

Weighted Average

Exercise Price

  # $
Balance, June 30, 2019 5,693,397   95.88  
Granted 598,612   88.32  
Exercised (1) (92,723 ) 29.40  
Expired (135,926 ) 51.72  
Forfeited (469,601 ) 104.16  
Balance, March 31, 2020 5,593,759   96.48  

 

(1) The weighted average share price during the three and nine months ended March 31, 2020 was $22.68 and $45.72, respectively (three and nine months ended March 31, 2019 - $121.80 and $119.04).

 

The following table summarizes the stock options that remain outstanding as at March 31, 2020:

Exercise Price ($) Expiry Date Weighted Average Remaining Life Options Outstanding (#) Options Exercisable (#)
3.60 - 83.88 June 13, 2020 - February 28, 2025 2.52   1,447,488   1,051,907  
84.00 - 119.88 June 13, 2020 - September 19, 2024 3.61   1,654,055   567,939  
120.00 - 131.88 January 15, 2023 - March 13, 2026 5.57   1,971,434   646,642  
132.00 - 202.32 June 13, 2020 - May 28, 2024 3.61   520,782   178,502  
    4.02   5,593,759   2,444,990  

 

During the three and nine months ended March 31, 2020, the Company recorded aggregate share-based compensation expense of $8.7 million and $42.4 million (three and nine months ended March 31, 2019 - $29.6 million and $67.0 million), respectively, for all stock options granted and vested during the period. This expense is reflected in the share-based compensation line on the statement of comprehensive loss.

 

Included in the $8.7 million and $42.4 million share-based compensation expense for the three and nine months ended March 31, 2020, respectively, is $0.2 million and $4.0 million (three and nine months ended March 31, 2019 - nil and nil), respectively, related to 1,663,480 stock options granted to the company of Aurora’s strategic advisor, Nelson Peltz. These stock options are exercisable at $124.08 per share over seven years and vest ratably over a four-year period on a quarterly basis, subject to accelerated vesting based on the occurrence of certain events. The Company has rebutted the presumption that the fair value of the services received can be estimated reliably due to the unique nature of the strategic advisor’s services. As such, in accordance with IFRS 2 for share-based payments granted to non-employees, the Company has measured the fair value of the options indirectly by reference to the fair value of the equity instruments granted. The Company will continue to fair value the unvested options at each period until they are fully vested.

 

Stock options granted during the respective periods highlighted below were fair valued based on the following weighted average assumptions:

28 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

  Three months ended March 31, Nine months ended March 31,
  2020 2019 2020 2019
Risk-free annual interest rate (1) 1.35 % 1.60 % 1.54 % 1.84 %
Expected annual dividend yield 0 % 0 % 0 % 0 %
Expected stock price volatility (2) 86.68 % 83.79 % 80.04 % 81.03 %
Expected life of options (years) (3) 2.38   3.74   2.32   3.35  
Forfeiture rate 12.69 % 1.29 % 10.32 % 1.92 %
(1) The risk-free rate is based on Canada government bonds with a remaining term equal to the expected life of the options.
(2) Volatility was estimated by using the average historical volatility of the Company.
(3) The expected life in years represents the period of time that options granted are expected to be outstanding.

 

The weighted average fair value of stock options granted during the three and nine months ended March 31, 2020 was $10.92 and $39.48 (three and nine months ended March 31, 2019 - $84.60 and $57.60) per option.

 

(b) Restricted Share Units (“RSU”) and Deferred Share Units (“DSU”)

 

A summary of the RSUs and DSUs outstanding are as follows:

  RSUs and DSUs Weighted Average Issue Price of RSUs and DSUs
  # $
Balance, June 30, 2019 169,195   59.28  
     Issued 260,125   8.40  
     Vested, released and issued (31,300 ) 51.00  
     Forfeited (3,004 ) 33.48  
Balance, March 31, 2020 395,016   46.08  

 

During the three and nine months ended March 31, 2020, the Company recorded share-based compensation of $1.5 million and $4.5 million (three and nine months ended March 31, 2019 - $1.2 million and $4.2 million), respectively, for RSUs and DSUs granted and vested during the period. This expense is included in the share-based compensation line on the statement of comprehensive loss.

 

The following table summarizes the RSUs and DSUs that remain outstanding as at March 31, 2020:

Weighted Average Issue Price ($) Expiry Date Outstanding (#) Vested (#)
21.72 - 41.64 September 29, 2020 - February 10, 2025 288,689   106,917  
56.52 - 94.92 August 3, 2021 - March 13, 2023 75,659   12,183  
102.48 - 123.84 July 12, 2021 - January 15, 2023 30,667   11,796  
    395,015   130,896  

 

Note 18 Loss Per Share

 

The following is a reconciliation of basic and diluted loss per share:

  Three months ended March 31, Nine months ended March 31,
  2020 2019 2020 2019
Net loss attributable to Aurora shareholders ($137,395 ) ($158,354 ) ($1,410,768 ) ($290,644 )
Weighted average number of common shares outstanding 100,027,594   83,586,161   91,938,055   78,620,221  
Basic and diluted loss per share ($1.37 ) ($1.89 ) ($15.34 ) ($3.70 )

 

Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of convertible debentures, restricted share units, warrants and share options is anti-dilutive.

29 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

         

Note 19 Other (Losses) Gains

    Three months ended
March 31,
Nine months ended
March 31,
  Note 2020 2019 2020 2019
    $ $ $ $
Share of loss from investment in associates 6 (4,611 ) (770 ) (8,933 ) (3,779 )
Gain on deemed disposal of significant influence investment    -    -    -   144,368  
Loss on induced conversion of debenture 14  -    -   (172,291 )  -  
Unrealized (loss) gain on derivative investments 5(b) (3,975 ) 32,948   (38,206 ) 621  
Unrealized gain (loss) on derivative liability 14(ii) 5,899   (101,521 ) 174,824   (101,521 )
Unrealized gain (loss) on changes in contingent consideration fair value 24 2,391   (1,253 ) 3,106   (3,318 )
Gain on debt modification 15(a) 2,101   206   2,154   1,980  
Gain on loss of control of subsidiary   500    -   500   398  
Provision 21(a) (2,135 )  -   (2,135 )  -  
Total other (losses) gains   170   (70,390 ) (40,981 ) 38,749  

 

Note 20 Supplemental Cash Flow Information

 

The changes in non-cash working capital are as follows:

  Nine months ended March 31,
  2020 2019
  $ $
Accounts receivable 25,099   (38,125 )
Biological assets (40,941 ) (25,855 )
Inventory (61,761 ) (5,968 )
Prepaid and other current assets (7,548 ) (2,815 )
Accounts payable and accrued liabilities (18,106 ) 22,438  
Income taxes payable 9,679   (8,658 )
Deferred revenue 3,092   (1,596 )
Provisions (4,200 )  -  
Changes in operating assets and liabilities (94,686 ) (60,579 )

 

Additional supplementary cash flow information is as follows:

  Nine months ended March 31,
  2020 2019
  $ $
Property, plant and equipment in accounts payable 30,713   18,577  
Right-of-use asset additions 7,728    -  
Capitalized borrowing costs 25,927   8,362  
Interest paid 41,077   5,470  
Interest received 2,541   2,549  

 

Note 21 Commitments and Contingencies

 

(a) Claims and Litigation

 

From time to time, the Company and/or its subsidiaries may become defendants in legal actions and the Company intends to take appropriate action with respect to any such legal actions, including by defending itself against such legal claims as necessary. Other than the claims described below, as of the date of this report, Aurora is not aware of any other material or significant claims against the Company.

 

On November 29, 2017, a claim was commenced against the Company regarding 300,000 stock options with an exercise price of $0.39 per share (equivalent to 25,000 stock options with an exercise price of $4.68 per share following the Consolidation) issued to a consultant pursuant to an agreement dated March 16, 2015. The agreement was terminated on March 8, 2016, and in accordance with the Company’s stock option plan, the unexercised options expired 90 days from the date of the termination of the agreement. The option holder is attempting to enforce exercise rights which the Company believes do not exist. The Company believes the action to be without merit and intends to defend this claim. Examinations for discovery were completed in January 2019 and the matter is currently scheduled for court in April 2021. Due to the uncertainty of the timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at March 31, 2020.

30 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

On October 3, 2018, a claim was commenced against the Company regarding the failure to supply product under a recently acquired subsidiary’s supply agreement. The plaintiff was seeking specific performance of the supply agreement and damages for breach of contract for approximately $21.0 million (#eu#14.7 million) plus legal costs. In accordance with the terms of the agreement, the Company had terminated the contract due to a breach by the plaintiff. Subsequent to March 31, 2020, the Company fully settled this claim for $0.2 million.

 

In connection with the acquisition of MedReleaf, the Company assumed a contingent liability associated with a formerly terminated MedReleaf employee. The claimant sought performance under the terms of his employment agreement related to a severance obligation. The Company recognized a provision of $4.2 million as part of the purchase price allocation in the prior year and the amount was fully settled during the nine months ended March 31, 2020.

 

The Company and certain of its directors and officers are subject to multiple purported class action proceedings in the United States District Court for the District of New Jersey on behalf of persons or entities who purchased, or otherwise acquired, publicly traded Aurora securities between October 23, 2018 and January 6, 2020. The complaints allege, inter alia, that we and certain of our current officers and directors violated the federal securities laws by making false or misleading statements, materially overstated the demand and potential market for our consumer cannabis products; that our ability to sell products had been materially impaired by extraordinary market oversupply, that our spending growth and capital commitments were slated to exceed our revenue growth; that we had violated German law mandating that companies receive special permission to distribute medical products exposed to regulated irradiation techniques, and that the foregoing, among others, had negatively impacted the Company’s business, operations, and prospects and impaired the Company’s ability to achieve profitability. We dispute the allegations in the complaints and intend to vigorously defend against the claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above. As such, no provision has been recognized as at March 31, 2020.

 

Pursuant to a manufacturing agreement, the Company is contractually committed to purchase a minimum number of softgels during calendar 2020. If the Company fails to meet the required purchase minimum, then it is required to pay a penalty fee equal to the difference between the actual purchased quantity and the required purchase minimum multiplied by cost of the softgels. As of March 31, 2020, the Company believes that it is more likely than not that the minimum quantity will not be met as of December 31, 2020. As a result, the Company has recognized a provision of $2.1 million as at March 31, 2020.

 

(b) Commitments

 

(i) The Company has various lease commitments related to various office space, production equipment, vehicles, facilities and warehouses expiring between April 2020 and June 2033. The Company has certain leases with optional renewal terms that the Company may exercise at its option. The Company also has an option to purchase lands located in Cremona, Alberta which are currently being leased.

 

(ii) In connection with the acquisition of MedReleaf, the Company has an obligation to purchase certain intangible assets on December 8, 2019 and December 8, 2020 through the issuance of common shares contingent upon the seller meeting specified revenue targets. The agreed upon purchase price of each intangible asset is $3.3 million and $3.0 million, respectively. As at March 31, 2020, the Company had not purchased the December 2019 intangible asset as the seller had not met the specified revenue targets.

 

In addition to lease liability commitments disclosed in Note 25(b), the Company has the following future capital commitments, purchase commitments and license and sponsorship fee payments, which are due in the next five years and thereafter:

  $
Next 12 months 21,955  
Over 1 year to 2 years 22,316  
Over 2 years to 3 years 28,555  
Over 3 years to 4 years 29,639  
Over 4 years to 5 years 30,777  
Thereafter 50,191  
  183,433  

 

31 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Note 22 Revenue

 

The Company generates revenue from the transfer of goods and services over time and at a point-in-time from the revenue streams below. Net revenue from sale of goods is reflected net of actual returns and estimated variable consideration for future returns and price adjustments of $2.9 million and $13.5 million for the three and nine months ended March 31, 2020 (three and nine months ended March 31, 2019 - nil), respectively. The estimated variable consideration is based on historical experience and management’s expectation of future returns and price adjustments. As of March 31, 2020, the return liability for the estimated variable revenue consideration was $2.6 million (June 30, 2019 - nil) and is included in deferred revenue on the condensed consolidated interim statements of financial position.

Three months ended March 31, 2020 Point-in-time Over-time Total
  $ $ $
Cannabis      
Revenue from sale of goods 88,337    -   88,337  
Revenue from provision of services  -   1,013   1,013  
Other      
Revenue from sale of goods 259    -   259  
Excise taxes (14,089 )  -   (14,089 )
Net Revenue 74,507   1,013   75,520  

 

Three months ended March 31, 2019 Point-in-time Over-time Total
  $ $ $
Cannabis      
Revenue from sale of goods 71,589    -   71,589  
Revenue from provision of services  -   2,999   2,999  
Other      
Revenue from sale of goods 650    -   650  
Excise taxes (10,093 )  -   (10,093 )
Net Revenue 62,146   2,999   65,145  

 

Nine months ended March 31, 2020 Point-in-time Over-time Total
  $ $ $
Cannabis      
Revenue from sale of goods 234,522    -   234,522  
Revenue from provision of services  -   4,212   4,212  
Other      
Revenue from sale of goods 1,054    -   1,054  
Excise taxes (32,996 )  -   (32,996 )
Net Revenue 202,580   4,212   206,792  

 

Nine months ended March 31, 2019 Point-in-time Over-time Total
  $ $ $
Cannabis      
Revenue from sale of goods 156,217    -   156,217  
Revenue from provision of services  -   8,804   8,804  
Other      
Revenue from sale of goods 1,891    -   1,891  
Excise taxes (17,915 )  -   (17,915 )
Net Revenue 140,193   8,804   148,997  

 

32 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 23 Segmented Information

Operating Segments Cannabis

Horizontally Integrated

Businesses (2)

Corporate (1)

 

Total

  $ $ $ $
Three months ended March 31, 2020        
     Net revenue 75,261   259    -   75,520  
     Gross profit (loss) 27,693   (288 )  -   27,405  
     Net (loss) income (186,107 ) 1,270   47,474   (137,363 )
         
Three months ended March 31, 2019        
     Net revenue 64,494   651    -   65,145  
     Gross profit 52,451   171    -   52,622  
     Net (loss) income 23,194   (5,143 ) (178,246 ) (160,195 )
         
Nine months ended March 31, 2020        
     Net Revenue 205,738   1,054    -   206,792  
     Gross profit 111,022   6    -   111,028  
     Net loss (1,266,348 ) (260 ) (166,283 ) (1,432,891 )
         
Nine months ended March 31, 2019        
     Net Revenue 147,106   1,891    -   148,997  
     Gross profit 92,068   746    -   92,814  
     Net loss (25,246 ) (5,525 ) (264,885 ) (295,656 )
(1) Net (loss) income under the Corporate allocation includes fair value gains and losses from investments in marketable securities, derivatives and investment in associates. Corporate and administrative expenditures such as regulatory fees, share based compensation and financing expenditures relating to debt issuances are also included under Corporate.
(2) During the three and nine months ended March 31, 2020, the Company sold B.C. Northern Lights Enterprises Ltd. (“BCNL”) and sold certain assets of Urban Cultivator Inc (“UCI”). The remaining UCI operations were wound down as of March 31, 2020. Both BCNL and UCI represent the indoor cultivator CGU which forms the horizontally integrated businesses segment.
Geographical Segments Canada EU Other Total
  $ $ $ $
Non-current assets other than financial instruments        
     March 31, 2020 3,835,078   95,499   89,609   4,020,186  
     June 30, 2019 4,442,849   82,922   226,483   4,752,254  
         
Three months ended March 31, 2020        
     Net revenue 69,466   5,638   416   75,520  
     Gross profit (loss) 23,485   4,074   (154 ) 27,405  
         
Three months ended March 31, 2019        
     Net revenue 60,673   3,144   1,328   65,145  
     Gross profit 49,431   1,769   1,422   52,622  
         
Nine months ended March 31, 2020        
     Net revenue 191,824   13,633   1,335   206,792  
     Gross profit (loss) 100,485   10,551   (8 ) 111,028  
         
Nine months ended March 31, 2019        
     Net revenue 136,310   9,876   2,811   148,997  
     Gross profit 87,059   4,211   1,544   92,814  

 

Included in net revenues arising from the Canadian cannabis operating segment for the three months ended March 31, 2020 are net revenues of approximately $12.7 million, $9.2 million, $8.2 million and $8.0 million (three months ended March 31, 2019 - $10.5 million and $9.0 million) which arose from sales to the Company’s major customers. Included in net revenues arising from the Canadian cannabis operating segment for the nine months ended March 31, 2020 are net revenues of approximately $25.8 million, $23.8 million and $23.7 million (nine months ended March 31, 2019 - $15.7 million and $15.6 million) which arose from sales to the Company’s major customers. No other single customers contributed 10 per cent or more to the Company’s net revenue during the three and nine months ended March 31, 2020.

33 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

Note 24 Fair Value of Financial Instruments

 

Financial instruments are measured either at fair value or at amortized cost. The table below lists the valuation methods used to determine the fair value of each financial instrument.

  Fair Value Method
Financial Instruments Measured at Fair Value
Marketable securities Closing market price of common shares as of the measurement date (Level 1)
Derivatives Closing market price (Level 1) or Black-Scholes, Binomial, Monte-Carlo & FINCAD valuation model (Level 2 or 3)
Contingent consideration payable Discounted cash flow model (Level 3)
Derivative liability Kynex valuation model (Level 2)
Financial Instruments Measured at Amortized Cost
Cash and cash equivalents, restricted cash, accounts receivable, loans receivable Carrying amount (approximates fair value due to short-term nature)
Accounts payable and accrued liabilities Carrying amount (approximates fair value due to short-term nature)
Convertible debentures, loans and borrowings Carrying value discounted at the effective interest rate which approximates fair value

 

The carrying values of the financial instruments at March 31, 2020 are summarized in the following table:

  Amortized cost FVTPL

Designated

FVTOCI

Total
  $ $ $ $
Financial Assets        
Cash and cash equivalents 230,208    -    -   230,208  
Accounts receivable, excluding sales taxes receivable 71,928    -    -   71,928  
Marketable securities  -    -   11,834   11,834  
Derivatives  -   49,494    -   49,494  
Loans receivable 3,312    -    -   3,312  
Financial Liabilities        
Accounts payable and accrued liabilities 128,622    -    -   128,622  
Convertible debentures (1) 324,693    -    -   324,693  
Contingent consideration payable  -   18,167    -   18,167  
Loans and borrowings 268,018    -    -   268,018  
Derivative liability  -   2,571    -   2,571  
(1) The fair value of convertible notes includes both the debt and equity components.

 

The following is a summary of financial instruments measured at fair value segregated based on the various levels of inputs:

  Note Level 1 Level 2 Level 3 Total
    $ $ $ $
As at March 31, 2020          
Marketable securities 5(a) 10,834    -   1,000   11,834  
Derivative assets 5(b)  -   33,505   15,989   49,494  
Contingent consideration payable    -    -   18,167   18,167  
Derivative liability 14(ii)  -   2,571    -   2,571  
           
As at June 30, 2019          
Marketable securities 5(a) 142,248    -   1,000   143,248  
Derivative assets 5(b)  -   64,001   22,408   86,409  
Contingent consideration payable    -    -   28,137   28,137  
Derivative liability 14(ii)  -   177,395    -   177,395  

 

There have been no transfers between fair value categories during the period.

34 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

The following is a continuity schedule of contingent consideration payable:

  Note CanvasRx H2 Whistler Immaterial transactions Total
Balance, June 30, 2019   1,985   1,231   24,771   150   28,137  

Unrealized (gain) loss on changes in contingent consideration fair value

 

19 8   (49 ) (3,065 )  -   (3,106 )
Payments   (1,993 ) (1,182 ) (3,689 )  -   (6,864 )
Balance, March 31, 2020    -    -   18,017   150   18,167  

 

The Company’s contingent consideration payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value of these liabilities is primarily driven by the Company’s expectations of the respective subsidiaries achieving certain milestones. The expected milestones were assigned probabilities and the expected related cash flows were discounted to derive the fair value of the contingent consideration. At March 31, 2020, the probability of achieving all milestones was estimated to be 100% and the discount rates were estimated to be 2.13%. If the probabilities of achieving the milestones decreased by 10%, the estimated fair value of the contingent consideration would decrease by approximately $1.8 million (June 30, 2019 - $2.8 million). If the discount rates increased or decreased by 5%, the estimated fair value of contingent consideration would increase or decrease by approximately $0.3 million (June 30, 2019 - $0.3 million). If the expected timing of the achievement is delayed by six months, the estimated fair value of contingent consideration would decrease by approximately $0.2 million (June 30, 2019 - $0.4 million).

 

Note 25 Financial Instruments Risk

 

The Company is exposed to a variety of financial instrument related risks. The Board mitigates these risks by assessing, monitoring and approving the Company’s risk management processes.

 

(a) Credit risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is moderately exposed to credit risk from its cash and cash equivalents, accounts receivable and loans receivable. The risk exposure is limited to their carrying amounts reflected on the statement of financial position. The risk for cash and cash equivalents is mitigated by holding these instruments with highly rated Canadian financial institutions. As the Company does not invest in asset-backed deposits or investments, it does not expect any credit losses. The Company periodically assesses the quality of its investments and is satisfied with the credit rating of the financial institutions and the investment grade of its GICs. The Company mitigates the credit risk associated with the loans receivable by managing and monitoring the underlying business relationship.

 

Accounts receivable primarily consist of trade accounts receivable and sales tax receivable. The Company provides credit to certain customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Credit risk is generally limited for receivables from government bodies, which generally have low default risk, and medical sales direct to patients, where payment is required prior to the delivery of goods. Credit risk for non-government wholesale customers is assessed on a case-by-case basis and a provision is recorded where required. As of March 31, 2020, $9.8 million of accounts receivable are from non-government wholesale customers (June 30, 2019 - $25.1 million). As of March 31, 2020, the Company recognized a $2.0 million provision for expected credit losses (June 30, 2019 - $3.1 million).

 

The Company’s aging of trade receivables was as follows:

  March 31, 2020 June 30, 2019
  $ $
0 - 60 days 49,840   49,602  
61+ days 20,387   35,630  
  70,227   85,232  

 

(b) Liquidity risk

 

The composition of the Company’s accounts payable and accrued liabilities was as follows:

  March 31, 2020 June 30, 2019
  $ $
Trade payables 44,541   38,671  
Accrued liabilities 51,098   79,933  
Payroll liabilities 23,295   17,727  
Excise tax payable 6,949   10,040  
Other payables 2,739   6,513  
  128,622   152,884  

 

35 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with its financial liabilities when they are due. The Company manages liquidity risk through the management of its capital structure and resources to ensure that it has sufficient liquidity to settle obligations and liabilities when they are due. As at March 31, 2020, the Company has a $264.4 million Credit Facility with BMO, of which $2.0 million letters of credit and $22.0 million of principal are outstanding under Facility A, $137.8 million of principal is outstanding under Facility B, and $17.8 million of principal is outstanding under Facility C (Note 15(a)). On April 2, 2019, the Company filed a Shelf Prospectus and a corresponding Registration Statement with the SEC, which allows Aurora to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. In connection with the Shelf Prospectus, the Company also filed an ATM supplement which provides for US$400.0 million in common shares to be sold by registered dealers on behalf of Aurora in the United States at prevailing market prices at the time of sale. For the nine months ended March 31, 2020, the Company had raised $535.8 million (US$398.9 million) gross proceeds under its ATM program. On April 16, 2020, the Company filed a second ATM supplement which provides for an additional US$250.0 million in common shares to be sold through the NYSE, increasing the total financing available under the ATM to US$650.0 million.

 

While the Company did not incur any significant disruptions to its operations during the third quarter of 2020 from COVID-19, subsequent to March 31, 2020, the Company took the following precautionary measures to strengthen the Company’s balance sheet and preserve flexibility given the macroeconomic uncertainty caused by COVID-19:

 

On April 16, 2020, the Company filed a prospectus supplement for a renewed ATM program which provides for an additional US$250.0 million in common shares to be sold by registered dealers on behalf of Aurora in the United States, thus increasing the total financing available under the ATM to US$650.0 million.
Subsequent to March 31, 2020, the Company issued 629,367 common shares under the ATM program for US$5.6 million gross proceeds.

 

These capital raises, along with our cash and cash equivalents as at March 31, 2020 provides us with approximately $237.9 million in cash on hand to support ongoing operations and near term contractual obligations.

 

In addition to the commitments outlined in Note 21, the Company has the following undiscounted contractual obligations as at March 31, 2020, which are expected to be payable in the following respective periods:

  Total ≤1 year Over 1 year - 3 years Over 3 years - 5 years > 5 years
  $ $ $ $ $
Accounts payable and accrued liabilities 128,622   128,622    -    -    -  
Convertible notes and interest (1) 591,897   26,683   53,365   511,849    -  
Lease liabilities (2) 184,830   11,254   34,028   30,303   109,245  
Loans and borrowings excluding lease liabilities (2) 165,051   27,089   137,962    -    -  
Contingent consideration payable (3) 39,695   38,595   1,100    -    -  
  1,110,095   232,243   226,455   542,152   109,245  
(1) Assumes the principal balance of the notes outstanding at March 31, 2020 remains unconverted and includes the estimated interest payable until the maturity date.
(2) Includes interest payable until maturity date.
(3) $36.7M of the undiscounted contingent consideration obligation is payable in common shares of Aurora.

 

Note 26 Subsequent Events

 

Sale of Assets

 

In connection with management’s plan to rationalize capital expenditures, on April 8, 2020, the Company accepted an offer to sell the Exeter property for gross proceeds of $9.0 million, which consisted of $7.5 million for the greenhouse and $1.5 million for the underlying parcel of land. The sale is subject to customary closing conditions and is expected to be finalized during May 2020.

 

In April 2020, the Company sold 5,302,227 common shares of EnWave Corporation at $0.80 per share for net proceeds of $4.1 million.

 

In May 2020, the Company accepted an offer to sell its Jamaica property for gross proceeds of US$3.4 million. The property is currently idle and has a carrying value of $4.2 million as of March 31, 2020. The property is classified within the Corporate segment.

 

Equity Financing

 

Subsequent to March 31, 2020, the Company issued 629,367 common shares under the ATM program for US$5.6 million gross proceeds.

36 

AURORA CANNABIS INC.

Notes to the Condensed Consolidated Interim Financial Statements

Three and nine months ended March 31, 2020 and 2019

(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)

 

 

Disposition of the Hemp Business

 

Aligning with the Company’s strategic plan to focus on core cannabis operations, in May 2020, the Board of Directors of Aurora approved the divestiture of the Company’s wholly owned subsidiary, Aurora Hemp Europe UAB (“Aurora Hemp EU”), formerly UAB Agropro and UAB Borela, and the divestiture of certain assets of Hempco Food and Fiber Inc. (“Hempco”). Hempco and Aurora Hemp EU represents the Canadian Hemp CGU and the European Hemp CGU, respectively, both of which form part of the cannabis operating segment. The Company has received an offer for the sale of Aurora Hemp EU for a nominal amount. Certain of Hempco’s assets will also be sold and the Company will subsequently wind down the remaining operations of Hempco.

 

Disposition of Aurora Larssen Projects Inc.

 

In connection with the Company’s strategic plan, in May 2020, the Board of Directors of Aurora approved the sale of the Company’s wholly owned subsidiary, Aurora Larssen Projects Inc., back to its former founding owner. As part of the divestiture, the Company will pay the remaining $3.0 million milestone payments under the original acquisition agreement over the next two years. The divestiture was completed in the first half of May 2020. Aurora will retain a preferential pricing services agreement with ALPs should ongoing maintenance or engineering services be required in the future.

 

 

 

 

 

 

 

37 

Exhibit 99.2

 

 

 

 

 

 

 

 

 

 

 

AURORA CANNABIS INC.

 

Interim Management’s Discussion & Analysis

(Unaudited)

 

For the three and nine months ended March 31, 2020 and 2019

(in Canadian Dollars)

 
 

Interim Management’s Discussion & Analysis

Table of Contents

Business Overview 3
Condensed Statement of Comprehensive (Loss) Income 5
Key Quarterly Financial and Operating Results 6
Financial Highlights 6
Key Developments During the Three Month Period Ended March 31, 2020 8
Key Developments Subsequent to March 31, 2020 9
Financial Review 10
Liquidity and Capital Resources 18
Related Party Transactions 22
Critical Accounting Estimates 23
New or Amended Standards Effective July 1, 2019 23
Recent Accounting Pronouncements 24
Financial Instruments 25
Financial Instruments Risk 26
Summary of Outstanding Share Data 27
Historical Quarterly Results 28
Risk Factors 29
Internal Controls Over Financial Reporting 30
Cautionary Statement Regarding Forward-Looking Statements 30
Cautionary Statement Regarding Certain Non-GAAP Performance Measures 31
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

Interim Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended March 31, 2020

 

The following Interim Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Aurora Cannabis Inc. (“Aurora” or the “Company”) should be read in conjunction with the Company’s condensed consolidated interim financial statements as at and for the three and nine months ended March 31, 2020 and the accompanying notes thereto (the “Financial Statements”), which have been prepared in accordance with International Accounting Standards 34 - Interim Financial Reporting (“IAS 34”) of International Financial Reporting Standards (“IFRS”). The MD&A has been prepared as of May 14, 2020 pursuant to the disclosure requirements under National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102”) of the Canadian Securities Administrators (“CSA”). Under the United States (“U.S.”) / Canada Multijurisdictional Disclosure System, we are permitted to prepare the MD&A in accordance with Canadian disclosure requirements which may differ from U.S. disclosure requirements.

 

Given the Company’s recent business transformation initiatives to realign its operational footprint and increase financial flexibility, this MD&A provides additional comparative disclosures related to the third quarter ended March 31, 2020 (“Q3 2020”) and the second quarter ended December 31, 2019 (“Q2 2020”). Management believes that these comparatives provide more relevant and current information. The Company has also reclassified certain items, which are not material, on the condensed consolidated interim statement of comprehensive loss to conform with the current period’s presentation and improve comparability.

 

All dollar amounts are expressed in thousands of Canadian dollars, except for share and per share amounts, and where otherwise indicated.

 

On May 11, 2020, the Company completed a one-for-twelve (1:12) reverse share split of all of its issued and outstanding common shares (“Share Consolidation”), resulting in a reduction in the issued and outstanding shares from 1,321,072,394 to approximately 110,089,366. Shares reserved under the Company’s equity and incentive plans were adjusted to reflect the Share Consolidation. All share and per share data presented in the Company’s consolidated financial statements and this MD&A have been retroactively adjusted to reflect the Share Consolidation unless otherwise noted.

 

This MD&A contains forward-looking information within the meaning of Canadian securities laws, and the use of non-GAAP measures. Refer to “Cautionary Statement Regarding Forward-Looking Statements” and “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” included within this MD&A.

 

This MD&A, condensed consolidated interim financial statements and the Company’s most recent annual audited consolidated financial statements, annual information form (“AIF”) and press releases have been filed in Canada on SEDAR at www.sedar.com and in the U.S. on EDGAR at www.sec.gov/edgar. Additional information can also be found on the Company’s website at www.auroramj.com.

 

Business Overview

 

Aurora was incorporated under the Business Corporations Act (British Columbia) on December 21, 2006 as Milk Capital Corp. Effective October 2, 2014, the Company changed its name to Aurora Cannabis Inc. The Company’s shares are listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the trading symbol “ACB”, and on the Frankfurt Stock Exchange (“FSE”) under the trading symbol “21P”.

 

The Company’s head office and principal address is Suite 500 - 10355 Jasper Avenue, Edmonton, Alberta, Canada, T5J 1Y6. The Company’s registered and records office address is Suite 1500 - 1055 West Georgia Street, Vancouver, BC V6E 4N7.

 

Aurora is a Canadian cannabis company focused on world-class cultivation and production of consistent, high quality cannabis for both the global medical and Canadian consumer use markets. The Company has differentiated itself through its purpose-built growing facilities, which we believe are the most technologically advanced indoor agricultural growing facilities in the world. These facilities consistently produce high-quality cannabis at scale and aim to lower the risk of crop failure, which allows the Company to lower per-unit production costs. We support research into the myriad of potential medical uses of cannabis and have built a plant and human science team.

The Company’s principal strategic business lines are focused on the production, distribution and sale of cannabis in Canada and internationally. The Company currently views its primary market opportunities as follows:

 

Global medical cannabis market: Production, distribution and sale of pharmaceutical-grade cannabis products in countries around the world where permitted by government legislation. Currently, there are approximately 50 countries that have implemented regimes for some form of access to cannabis for medical purposes, and the Company’s current principal markets include Canada, Germany, Denmark and Italy;

 

Global consumer use cannabis market: Currently, only Canada and Uruguay have implemented regulated consumer use of cannabis regimes and the Company has primarily focused on operations in Canada. However, the Company believes that the increasing popularity of medical cannabis regimes globally may eventually lead to increased legalization of adult-use consumer markets. The Company believes its investment in international infrastructure and global market position currently positions the Company to capture these potential opportunities as legalization evolves globally; and

 

Global hemp-derived cannabidiol (“CBD”) market: The Company expects consumer demand for products including CBD derived from hemp plants to be an exciting growth opportunity in the coming years. The Company currently believes that the most important near-term market opportunity for hemp-derived CBD is in the U.S.
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Business Transformation Update

 

On February 6, 2020, the Company announced a business transformation plan intended to better align the business financially with the current realities of the cannabis market in Canada while maintaining a sustainable platform for long-term growth. These actions included a significant reduction in selling, general & administrative ("SG&A") expenses and capital investment plans.

 

Management committed to reset the Company to an SG&A run rate, including research and development (“R&D”), of $40 million to $45 million per quarter by the end of the fiscal fourth quarter of 2020 by focusing the business on its core areas: 1) Canadian consumer market; 2) Canadian medical market; 3) established international medical markets; and 4) U.S. market initiatives. Management also stated its intention to reduce cash capital expenditures for the second half of fiscal 2020 to below $100 million in total through a detailed evaluation of all capital projects underway through a lens of optimizing near-term investor returns.

 

SG&A Update

 

The Company reported $80.1 million of SG&A expense and $5.6 million of R&D expense in Q3 2020. SG&A expense in Q3 included $5.0 million of one-time severance and related benefit costs related to the announced reset. After adjusting for severance costs, the reduction of $24.7 million in SG&A from Q2 2020 reflected the partial quarter impact of the decisions taken mid-way through Q3 2020 for the business reset. As of the date of this report, the Company’s current run rate for SG&A and R&D combined is approximately $60 million. This significant reduction from the $106.7 million reported for SG&A and R&D combined in Q2 2020 to the current rate of $60 million results from a focus on the core business and elimination of projects that do not contribute meaningfully to that focus. Reductions include: cancellation of a number of information technology projects, elimination of a number of projects that required significant external professional fees, renegotiation of several key marketing and research contracts, reduction in certain marketing programs, elimination of headcount across the SG&A functions, and the divestiture (as described below) of several non-core subsidiaries that had very low gross margins and carried heavy SG&A burden.

 

Management reiterates its intention to manage the business to a run rate of $40 to $45 million SG&A, including R&D, as we exit Q4 2020. This is particularly important in the context of the current COVID-19 environment as described below. While the timing of the growth of the cannabis market is difficult to predict, we can control our production and SG&A costs. Further reductions are planned and will come from (i) the completion of several projects by the end of June 2020, including the amalgamation of Aurora, MedReleaf and CanniMed (“Amalgamation”), providing for significant sales, fulfillment, and SG&A efficiencies, and (ii) the completion of our year-one Sarbanes-Oxley implementation which consumes significant effort and external spending in the current fiscal year. We will also see further SG&A reductions as we complete the profitability review of several parts of our business.

 

Capital Expenditures Update

 

Management committed to reducing capital spending to below $100.0 million in the second half of fiscal 2020. All capital spending was reviewed with the parameters of generating near term returns, a focus on our core businesses, and the preservation of financial resources.

 

Aurora reported approximately $73.7 million in capital expenditures in Q3 2020, which includes additions to intangible assets and excludes the impact of capitalized borrowing costs and share based compensation. For Q4 2020, management has approved capital spending plans totaling less than $25.0 million. These projects include: (i) the Amalgamation and centralized distribution as described above, (ii) co-generation capabilities at Aurora’s River facility, reducing risk at one of our major facilities and reducing energy costs, with a $10.0 million offsetting grant expected over the next 12 months, (iii) completion of the joint venture arrangement with Iotron Industries Canada Inc. to co-locate treatment within our Polaris facility, thereby significantly reducing treatment costs and release timelines for our cannabis products, (iv) the completion of the first six rooms at Aurora Sun to produce high demand cultivars, and (v) continued development of our German production facility. All projects, except for the German production facility, are expected to be largely complete in Q4 2020. Capital spending in Q1 2021 is planned to be well below Q4 levels.

 

Cash Utilization

 

At Q2 2020, the Company reported $156.3 million of unrestricted cash and $45.0 million of restricted cash. During Q3 2020, the Company predominantly utilized that cash in the following categories:

 

Adjusted EBITDA loss of $50.9 million with operations consuming cash of approximately $55.4 million;
Cash expenditures on capital assets of approximately $83.9 million, which includes invoices paid related to work done in Q2;
Decrease in non-cash working capital of $0.6 million, with an increase in biological assets and inventory of $35.3 million offset by other working capital changes; and
Payment of debt and lease obligations of approximately $60.0 million, of which $45.0 million was repaid using the Company’s previously restricted cash.

 

The Company raised cash through the draw down of $22.0 million under revolving credit facility and $206.4 million in net proceeds under the At-the-Market (“ATM”) program.

 

As at Q3 2020, the Company had $230.2 million of unrestricted cash on hand. Following the business transformation described above, the Company expects the continued reduction of EBITDA loss and capital expenditures. Even with the uncertainty from the COVID-19 pandemic, due to the cost reductions, overall demand on cash is expected to be significantly lower in Q4 2020 than in Q3 2020. Refer to “Liquidity and Capital Resources” section below for further discussion.

 

 

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Coronavirus (“COVID-19”) Update

 

For the third quarter of 2020, the COVID-19 pandemic did not materially disrupt the Company’s business, financial condition, or results of operations. As at the date of the report, the production and sale of cannabis have been recognized as essential services across Canada and Europe. Consumer cannabis sales are primarily with government bodies, which continue to offer end customers online ordering and home delivery options. Consumer market retail stores are generally permitted to remain open subject to adhering to the required social distancing measures. All of the Company’s facilities in Canada and internationally continue to be operational and we continue to work closely with local, national and international government authorities to ensure that we are following the required protocols and guidelines related to COVID-19 within each region. Although there have not been any significant impacts to the Company’s operations to date, the Company cannot provide assurance that there will not be disruptions to its operations in the future. Refer to the “Risk Factors” section below for further discussion on the potential impacts of COVID-19.

 

The Company is closely monitoring the rapid evolution of COVID-19 with a focus on the jurisdictions in which the Company operates. During this period of uncertainty, it is our priority to safeguard the health and safety of our personnel, support and enforce government actions to slow the spread of COVID-19, and continually assess and mitigate the risks to our business operations. The Company has taken responsible measures to maximize the safety of staff working at all of its facilities. This includes reorganizing physical layouts, adjusting schedules to improve physical distancing, implementing extra health screening measures for employees and applying rigorous standards for personal protective equipment. The Company has also introduced a special bonus pay program for active facility-based staff. The Company continues to maintain regular communications with legal and government representatives, suppliers, customers and business partners to identify and monitor any potential risks to our ongoing operations.

 

COVID impact on near term operations

 

The impact of the COVID-19 pandemic on the drivers of growth in the Canadian consumer market is difficult to forecast. While the Company is optimistic about the total accessible market size of Canadian consumer cannabis over time, the variables related to the pandemic make the short-term growth of the market, and the Company’s revenue expectations, not feasible to predict with adequate degree of precision. The COVID-19 pandemic appears to have further slowed the roll-out of new retail locations in key provinces such as Ontario.

 

The Company’s operations remain at full capacity and market positioning is strong with leading market share in Canadian and German medical and Canadian consumer markets.

 

As described above, the Company embarked on an ambitious cost reset prior to the pandemic. The results of this business transformation, and the Company’s success with recent new cannabis brands including Daily Special, have positioned the Company well to manage through the uncertainties of the current market.

 

Condensed Statement of Comprehensive (Loss) Income

  Three months ended Nine months ended
($ thousands)

March 31,

2020

December 31,

2019

March 31,

2019

March 31,

2020

March 31,

2019

Net revenue (1) $75,520   $56,027   $65,145   $206,792   $148,997  
Gross profit before fair value (“FV”) adjustments $31,888   $22,813   $36,231   $97,207   $80,321  
Gross profit $27,405   $29,915   $52,622   $111,028   $92,814  
Operating expenses $110,973   $149,526   $130,239   $391,609   $362,494  
Loss from operations ($83,568 ) ($119,611 ) ($77,617 ) ($280,581 ) ($269,680 )
Other (expense) income (2) ($63,610 ) ($1,210,566 ) ($91,504 ) ($1,167,163 ) ($70,687 )
Net loss ($137,363 ) ($1,305,898 ) ($160,195 ) ($1,432,891 ) ($295,656 )
Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) (3) ($50,850 ) ($80,246 ) ($36,572 ) ($170,763 ) ($148,862 )
(1) Net revenue represents our total revenue exclusive of excise taxes levied by the Canada Revenue Agency (“CRA”) on the sale of medical and consumer cannabis products effective October 17, 2018. Management records actual and expected product returns and price adjustments against net revenue (three months ended March 31, 2020, December 31, 2019 and March 31, 2019 - $2.9 million, $10.6 million, and nil; nine months ended March 31, 2020 and 2019 - $13.5 million and nil).
(2) Other (expense) income includes an impairment of $19.4 million and $71.4 million to property plant and equipment, $28.2 million and $74.4 million to investments in associates, nil and $158.7 million to intangible assets and nil and $762.2 million to goodwill, for the three and nine months ended March 31, 2020, respectively. Refer to Notes 9, 6 and 13, respectively, of the Financial Statements for the three and nine months ended March 31, 2020.
(3) This term is defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A. Refer to the “Adjusted EBITDA” section for reconciliation to the IFRS equivalent.
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Key Quarterly Financial and Operating Results

($ thousands, except Operational Results) Q3 2020 Q2 2020 $ Change % Change
Financial Results        
Total net revenue (1) $75,520   $56,027   $19,493   35 %
Cannabis net revenue (1)(2)(3a) $69,637   $52,676   $16,961   32 %
Medical cannabis net revenue (2)(3a) $31,086   $27,386   $3,700   14 %
Consumer cannabis net revenue (1)(2)(3a) $38,551   $22,906   $15,645   68 %
Wholesale bulk cannabis net revenue (2)(3a)  -   $2,384   ($2,384 ) (100 )%
Gross margin before FV adjustments on cannabis net revenue (2)(3b) 44 % 44 % N/A 0 %
Gross margin before FV adjustments on medical cannabis net revenue (2)(3b) 58 % 54 % N/A 4 %
Gross margin before FV adjustments on consumer cannabis net revenue (2)(3b) 34 % 32 % N/A 2 %
Gross margin before FV adjustments on wholesale bulk cannabis net revenue (2)(3b) N/A 45 % N/A N/A
Adjusted gross margin before FV adjustments on cannabis net revenue (2)(3b) 54 % 55 % N/A (1 )%
Selling, general and administration expense $80,147   $99,882   ($19,735 ) (20 )%
         
Balance Sheet        
Working capital $447,812   $415,936   $31,876   8 %
Cannabis inventory and biological assets (2)(4) $244,485   $216,735   $27,750   13 %
Total assets $4,717,656   $4,671,912   $45,744   1 %
         
Operational Results - Cannabis        
Cash cost to produce per gram of dried cannabis sold (2)(3c) $0.85   $0.88   ($0.03 ) (3 )%
Active registered patients 86,674   90,307   (3,633 ) (4 )%
Average net selling price of medical cannabis (2) $8.12   $7.99   $0.13   2 %
Average net selling price of consumer cannabis (2) $4.33   $4.76   ($0.43 ) (9 )%
Average net selling price of wholesale bulk cannabis (2) N/A $1.90   N/A N/A
Kilograms produced 36,207   30,691   5,516   18 %
Kilograms sold (5) 12,729   9,501   3,228   34 %
(1) Includes the impact of actual and expected product returns and price adjustments (three and nine months ended March 31, 2020 - $2.9 million and $13.5 million; three and nine months ended March 31, 2019 - nil).
(2) These terms are defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A.
(3) Refer to the following sections for reconciliation of non-GAAP measures to the IFRS equivalent measure:
a. Refer to the “Revenue” section for a reconciliation of cannabis net revenue to the IFRS equivalent.
b. Refer to the “Gross Margin” section for reconciliation to the IFRS equivalent.
c. Refer to the “Cash Cost of Sales of Dried Cannabis and Cash Cost to Produce Dried Cannabis Sold - Aurora Produced Cannabis” section for reconciliation to the IFRS equivalent.
(4) Represents total biological assets and cannabis inventory, exclusive of merchandise, accessories, supplies and consumables.
(5) The kilograms sold is offset by the grams returned during Q3 2020.

 

Financial Highlights

 

Revenue

 

Medical Cannabis Net Revenue

 

During Q3 2020, our Canadian medical cannabis net revenue increased to $27.0 million in Q3 2020 as compared to $25.6 million in Q2 2020. The 6% increase was primarily attributable to sales growth in our cannabis derivative products, which includes cannabis oils, capsules, softgels, sprays, topicals, edibles and vaporizers. The sale of Cannabis 2.0 products was legalized in Canada effective October 17, 2019, however our sales effectively began December 17, 2019. This revenue growth was offset by a 4% decrease in the number of active registered patients.

 

During Q3 2020, our international medical cannabis net revenue increased by $2.2 million, or 125%, to $4.0 million. The growth in international medical cannabis sales is directly attributable to our resumption of sales operations in the European Union (“EU”) in February 2020, which had been suspended since December 2019, following the receipt of the necessary approvals from German regulators.

 

Our Canadian medical cannabis net revenue and gross margins continue to be negatively impacted by excise taxes levied on the sale of cannabis products in Canada. Given our patient-first commitment and belief that medical cannabis should not be subject to excise tax, we do not pass the cost of these excise taxes onto our medical cannabis patients. As a result, excise taxes negatively impacted our Q3 2020 Canadian medical cannabis net revenue and gross margin by $3.3 million and 5%, respectively ($3.3 million and 6% for Q2 2020). Excluding the impact of excise taxes, Canadian medical cannabis net revenue and gross margin would have been $30.3 million and 61%, respectively for Q3 2020 as compared to $28.9 million and 61%, respectively for Q2 2020.

 

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Consumer Cannabis Net Revenue

 

Consumer cannabis net revenue increased by $15.6 million, or 68%, from $22.9 million in Q2 2020 to $38.6 million in Q3 2020. The increase is primarily attributable to (i) a net $4.2 million increase in revenue resulting from a higher overall volume of product sold, which included a significant shift in our product mix towards our new Daily Special value brand, which launched in February 2020, (ii) a $2.8 million increase in our Cannabis 2.0 sales, which commenced near the end of December 2019, and (iii) a $7.6 million reduction in actual net returns, price adjustments and provisions as compared to Q2 2020.

 

Q3 2020 consumer cannabis net revenue is presented net of $0.9 million of actual returns and price adjustments and a $2.0 million net revenue provision for future returns and price adjustments. Before the impact of returns, price adjustments and the recognition of the revenue provision, consumer cannabis net revenue would have increased by $8.0 million or 24% as compared to Q2 2020. Management continues to work closely with provincial government bodies to monitor inventory levels and related sell-through rates to manage the level of future product returns.

 

During Q3 2020, consumer cannabis net revenue comprised 51% of our total consolidated net revenue, and 55% of cannabis net revenue.

 

Production

 

During Q3 2020, Aurora produced 36,207 kilograms of cannabis as compared to 30,691 kilograms in Q2 2020. The 18% increase in output was a return to targeted production rates following the Q2 2020 pivot of production towards the cultivation of certain strains to align production capacity with evolving consumer preferences. Management continues to evaluate its need and timing for additional production capacity to better align its operating footprint with forecasted supply and demand in Canadian and international cannabis markets.

 

Aurora’s current operating facilities production capacity is approximately 150,000 kilograms annually. The Company continues to focus on producing consistent high-quality, low-cost product to meet evolving market demands. Our design philosophy is intended to allow us to respond to market conditions quickly with consistent production volumes and potencies, and increased harvest cycles, which allows us to be more flexible in our facilities and reactive to changes in demand.

 

Cash Cost to Produce

 

Cash cost to produce per gram of dried cannabis sold decreased to $0.85 per gram and gram equivalent compared to $0.88 per gram in the prior quarter. In Q3 2020, the Company produced 36,207 kilograms, a 18% increase from Q2 2020 which resulted in higher overhead absorption. This was offset by an increase in labor costs associated with additional overtime hours to supplement increased absences due to COVID-19 and increased utility costs. Although the Company continues to produce cannabis at less than $1.00 per gram, in order to protect healthy gross margins as the consumer market evolves to lower priced products, Aurora has a continuous improvement process related to production, manufacturing, packaging and distribution efficiencies. This program includes workflow redesign, ongoing automation of higher cost processes, fine-tuning of growing conditions for top quality flower, and yield and potency enhancement science and cultivation programs, all of which are intended to deliver ongoing cost per gram improvements and optimized alignment to consumer preferences.

 

Gross Margins

 

Gross margin before fair value adjustments on cannabis net revenue was 44% in Q3 2020, unchanged as compared to 44% in Q2 2020. The stability of our gross margin is primarily attributable to (i) a decrease in our cash cost to produce per gram of dried cannabis sold as described above, (ii) consistent medical cannabis sales prices relative to prior quarter, (iii) growth in our consumer cannabis sales resulting from a significant shift in our product sales mix towards our competitively priced Daily Special value brand, which decreased our average net selling price of consumer cannabis from $4.76 per gram in Q2 2020 to $4.33 per gram in Q3 2020, (iv) renewed contribution from higher margin German sales, and (v) the $7.6 million decline in revenue provisions. Excluding the impact of revenue provisions, gross margin before fair value adjustments on cannabis net revenue would have been 47% in Q3 2020 as compared to 48% in Q2 2020.

 

The adjusted gross margin before fair value adjustments on cannabis was 54% in Q3 2020 compared to 55% in Q2 2020 for the reasons noted above.

 

Selling, General and Administration (“SG&A”)

 

During Q3 2020, SG&A was $80.1 million, a decrease of $19.7 million from the $99.9 million in the prior quarter. The decrease was primarily due to management’s business transformation plan announced on February 6, 2020 to rationalize all spending and focus on activities that generate near-term positive impact to earnings and reflected a blend of pre- and post-reset spending plans. Q3 2020 also includes approximately $5.0 million of one-time severance and related benefit costs.

 

The Company is entering Q4 2020 at an SG&A quarterly run rate of approximately $60 million, including research and development (“R&D”), and reaffirms its ongoing commitment to reduce SG&A, including R&D, to a level of between $40 million and $45 million entering fiscal Q1 2021.

 

Refer to the “Key Developments During the Three Month Period Ended March 31, 2020 - Business Transformation Plan” and the “Liquidity and Capital Resources” section for further discussion.

 

Impairment

 

During Q3 2020, the Company recorded a $7.4 million impairment charge to property, plant and equipment and a $2.4 million impairment charge to right-of-use assets associated with the Canadian Hemp Cash Generating Unit (“CGU”). The impairment charges are allocated to the Company’s cannabis operating segment. Impairment charges during the period were primarily attributable to slower than initially expected sales and profitability for the Canadian Hemp CGU. Refer to Note 9 of the Financial Statements for a description of the key assumptions used in the impairment test.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Additionally, the Company also recognized an impairment charge of $28.2 million on its investments in associates to reflect current market values, and a $9.6 million write-down on the Exeter property, acquired as part of the MedReleaf transaction, which the Company has accepted an offer to sell for $9.0 million. Refer to Note 6 and Note 12 of the Financial Statements for further information.

 

Net Loss

 

During Q3 2020, net loss was $137.4 million, as compared to $1.3 billion in Q2 2020. The quarter-over-quarter improvement in net loss is primarily due to the $762.2 million goodwill impairment charge and $210.6 million impairment charge on intangibles and property, plant and equipment that was recognized in Q2 2020.

 

Adjusted EBITDA

 

The Company defines adjusted EBITDA as net (loss) income excluding interest income (expense), accretion, income taxes, depreciation, amortization, changes in fair value of inventory sold, changes in fair value of biological assets, share-based compensation, foreign exchange, changes in fair value of financial instruments, gains and losses on deemed disposal, and non-cash impairment of intangibles, goodwill, and other assets.

 

The adjusted EBITDA loss for Q3 2020 was $50.9 million as compared to a $80.2 million loss in the prior quarter. The $29.4 million improvement in our adjusted EBITDA loss is primarily due to the quarter-over-quarter $19.5 million increase in net revenue, and a $19.7 million decrease in SG&A, which was offset by a $10.4 million increase in cost of goods sold. Excluding the $5.0 million in one-time severance and related benefit costs, adjusted EBITDA loss would have been $45.9 million, a decrease of $34.4 million, or 43% as compared to Q2 2020.

 

Key Developments During the Three Month Period Ended March 31, 2020

 

Facility Update

 

On February 3, 2020, we announced that our Aurora River production facility, located in Bradford, Ontario, has received its EU Good Manufacturing Practice (“EU GMP”) certification. Aurora River has a cultivation capacity of 28,000 kilograms per year across its 17 fully-planted, independently climate-controlled grow rooms. The EU GMP certification of Aurora River enables the Company to allocate both a greater quantity of dried and extracted product to international markets as well as introduce new products grown and produced in the facility.

 

Retirement of Chief Executive Officer (“CEO”), Appointment of Interim CEO, and Board Expansion

 

On February 6, 2020, the Company announced the retirement of Terry Booth, its CEO, and concurrent appointment of Michael Singer as Interim CEO. As part of the succession plan, Terry Booth has retained his position as a Director. The Company also announced the appointment of two new independent Directors, Lance Friedmann and Michael Detlefsen to Aurora’s Board of Directors.

 

Business Transformation Plan

 

On February 6, 2020, we announced a business plan to align SG&A and capital expenditures with current market conditions. Management is currently working towards reducing SG&A to a target SG&A range of $40.0 million to $45.0 million per quarter by the end of the fiscal fourth quarter of 2020. To achieve this, management has focused the business on its core areas: (i) Canadian consumer market; (ii) Canadian medical market; (iii) established international medical markets; and (iv) U.S. market initiatives. As part of the transformation plan, the Company eliminated close to 500 full-time equivalent staff across the company, including approximately 25% of corporate positions. Management is also re-evaluating spending plans on information technology projects, sales and marketing initiatives, travel and entertainment, professional services, and other non-revenue-generating third party costs, which do not provide an immediate impact to earnings. We have also reduced capital expenditures to below $100 million in the second half of fiscal 2020.

 

Financing Activities

 

On March 25, 2020, the Company executed an amendment to the existing C$360.9 million credit facility that was executed on September 4, 2019 (the “First Amended and Restated Credit Agreement”) with the Bank of Montreal (“First Amendment to the First Amended and Restated Credit Agreement”). The amendment eliminated the $96.5 million non-revolving facility (“Facility D”) as the funds were initially earmarked for the construction of Aurora Sun which has since been deferred; utilized the $45.0 million restricted cash to repay and permanently reduce the outstanding term loan balance under Facility C; and amended our financial covenant ratios. Refer to the “Liquidity and Capital Resources” section for additional discussion.

 

Launch of Value Brand

 

In response to growing consumer demand for lower priced dried flower in the Canadian consumer market, in February 2020 Aurora launched a new brand called “Daily Special”. Daily Special targets the value segment of the consumer market by delivering high-potency THC with a variety of package sizes at competitive price points.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Restricted Share Unit (“RSU”), Deferred Share Unit (“DSU”) and Option Grants

 

During Q3 2020, the Company granted 185,047 RSUs to senior officers related to recent promotions and retention incentives. 10,049 RSUs vest annually over three years and 174,998 RSUs vest periodically tied to certain events. 4,834 DSUs were granted to Directors as part of their annual retainer, paid quarterly.

 

During Q3 2020, the Company granted 56,054 stock options exercisable between $21.72 and $56.52 to senior officers and directors of the Company related to recent promotions and retention incentives. Of the 56,054 stock options granted, 23,558 stock options vest in Q1 2021, 17,720 vest annually over 3 years, and 14,776 vest annually over 1 year.

 

Key Developments Subsequent to March 31, 2020

 

Financing Activities

 

On April 16, 2020, we filed a second At-the-Market (“ATM”) supplement which provides for an additional US$250.0 million in common shares to be sold by the executing sales agents at market prices, increasing the total financing available under the ATM to US$650.0 million. Refer to the “Liquidity and Capital Resources” section for further details. Subsequent to March 31, 2020, we issued 629,367 common shares under the ATM for gross proceeds of US$5.6 million.

 

Sale of Assets

 

In connection with management’s plan to rationalize capital expenditures, the Company accepted an offer to sell the Exeter property for gross proceeds of $9.0 million, and accepted an offer to sell our Jamaica property for gross proceeds of US$3.4 million.

 

In April 2020, the Company sold 5,302,227 common shares of EnWave Corporation at $0.80 per share for net proceeds of $4.1 million.

 

NYSE Continued Listing Standard Notification

 

On April 8, 2020, the Company received notification from the NYSE that, as a result of its common share price falling below an average of U.S.$1.00 for a consecutive 30 trading-day period, it was not in compliance with one of the NYSE’s continued listing standards. Although the Company’s Board of Directors considered many factors when approving the share consolidation described below, the share consolidation is being partially implemented in response to this NYSE notification. The share consolidation has restored compliance with NYSE listing requirements and continues to provide access to a broad range of investors, access to equity capital, and trading liquidity. Non-compliance with the NYSE’s price listing standard does not affect the Company’s business operations or its reporting requirements to any regulatory authorities, nor does it breach or cause an event of default under any of the Company’s agreements with its lenders. In addition, non-compliance with the NYSE price listing standard does not affect the continued listing and trading of the Common Shares on the TSX.

 

Share Consolidation

 

On May 11, 2020, the Company completed the Share Consolidation, resulting in a reduction in the issued and outstanding shares from 1,321,072,394 to approximately 110,089,366. Shares reserved under the Company’s equity and incentive plans were adjusted to reflect the Share Consolidation.

 

Disposition of Hemp Business

 

Aurora initially invested in Hemp operations to provide optionality for low cost CBD extraction. As regulations have developed, it is clear that hemp biomass is, and will continue to be, available on the market at very low cost. Further, with our outdoor R&D grow in Canada last season, the Company is also confident that higher potency CBD cannabis biomass can be grown at very low cost for extraction. As such, management does not consider the hemp production and foods business to be core to Aurora’s future and has agreements to divest of certain Canadian and European Hemp assets for a nominal amount in May 2020. Aurora’s hemp business was projected to require further capital investment and continued absorption of operating losses for at least the next 18 months. This divestiture will relieve the Company of a low margin business that carried approximately $3.0 million of SG&A per quarter.

 

Disposition of Aurora Larssen Projects Inc. (“ALPS”)

 

Aurora initially acquired Larssen Ltd. in December 2017 as the Company executed an aggressive expansion strategy including the construction of a number of highly-advanced cannabis production facilities. By bringing Larssen’s world-leading expertise in-house, this acquisition allowed Aurora to save considerable project-related expenses over the intervening two and a half years of global expansion. With Aurora’s major production facilities either completed or well planned, the Company recognized the opportunity to reduce ongoing SG&A of approximately $2.0 million per quarter through the divestiture of ALPS. The divestiture occurred in the first half of May 2020 for a nominal amount. Aurora will retain a preferential pricing services agreement with ALPS should ongoing maintenance or engineering services be required in the future.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

 

Financial Review

 

Revenue

 

The Company primarily operates in the cannabis market. Effective October 17, 2018, the Cannabis Act took effect in Canada and Aurora began selling cannabis to the consumer market across Canada. Aurora also derives revenues from auxiliary support functions, which include patient counseling services and design, engineering and construction services. The table below outlines the reconciliation from the Company’s total net revenue to its cannabis net revenue metric.

($ thousands) Three months ended Nine months ended
March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019
Net revenue 75,520   65,145   206,792   148,997  
Design, engineering and construction services  -   (914 )  -   (2,403 )
Patient counseling services (489 ) (809 ) (2,239 ) (4,385 )
Analytical testing services (630 ) (1,238 ) (2,083 ) (3,051 )
Other cannabis segment revenues (accessories, hemp, other) (4,504 ) (962 ) (8,327 ) (4,521 )
Horizontally integrated business revenue (260 ) (2,570 ) (1,054 ) (3,811 )
Cannabis net revenue 69,637   58,652   193,089   130,826  

 

During the three months ended Q3 2020, cannabis net revenue increased by $11.0 million or 19% as compared to the same period in the prior year. The change was due to an increase in consumer cannabis net revenue of $9.0 million, an increase in medical cannabis net revenue of $4.1 million, and a decrease in wholesale bulk cannabis net revenue of $2.1 million as compared to the previous period. Net revenue from the sale of consumer cannabis in Q3 2020 is presented after recognizing the impact of $0.9 million of actual returns and price adjustments and a $2.0 million provision for future returns and price adjustments (three and nine months ended March 31, 2019 - nil). The $2.0 million provision is based on historical experience and management’s estimate of future returns and price adjustments. Before considering the cumulative $2.9 million impact of the product returns, price adjustments and the revenue provision, total cannabis net revenue in Q3 2020 would have increased by $13.9 million or 24% as compared to the three months ended March 31, 2019. Of the $11.0 million increase in total cannabis net revenue for the three months ended Q3 2020, $0.8 million is attributed to the acquisition of Whistler which occurred on March 1, 2019.

 

During the nine months ended Q3 2020 cannabis net revenues increased by $62.3 million, or 48%, as compared to the same period in the prior year. The increase is primarily attributable to (i) a $39.8 million increase in consumer cannabis net revenue; (ii) a $10.6 million increase in wholesale bulk cannabis net revenue; and (iii) a $11.9 million increase in medical cannabis net revenue primarily driven by an increase in extract sales. Included in the increase in total cannabis net revenue for the nine months ended Q3 2020 is a $3.3 million increase attributed to the acquisition of Whistler which occurred on March 1, 2019.

 

The table below outlines the breakdown of cannabis net revenue between our medical, consumer and wholesale bulk markets, as well as our dried cannabis and cannabis extracts for the three months ended March 31, 2020, three months ended December 31, 2019, and nine months ended March 31, 2020 and 2019.

($ thousands) Three months ended Nine months ended
March 31, 2020 December 31, 2019 March 31, 2020 March 31, 2019
Medical cannabis net revenue        
Canada dried cannabis 14,894   14,803   44,579   43,663  
Canada cannabis extracts (1) 12,155   10,791   33,552   23,715  
International dried cannabis 4,020   1,758   10,331   9,660  
International cannabis extracts (1) 17   34   460    -  
Total medical cannabis net revenue 31,086   27,386   88,922   77,038  
         
Consumer cannabis net revenue        
Dried cannabis 32,996   28,778   88,663   46,790  
Cannabis extracts (1) 8,473   4,693   16,299   4,924  
Net revenue provisions (2,918 ) (10,565 ) (13,483 )  -  
Total consumer cannabis net revenue 38,551   22,906   91,479   51,714  
         
Wholesale bulk cannabis net revenue        
Dried cannabis  -   2,352   9,784   2,074  
Cannabis extracts (1)  -   32   2,904    -  
Wholesale bulk cannabis net revenue  -   2,384   12,688   2,074  
         
Total cannabis net revenue 69,637   52,676   193,089   130,826  
(1) Cannabis extract revenue includes cannabis oils, capsules, softgels, sprays, topicals, edibles and vaporizer revenue.
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Medical Cannabis Net Revenue

 

During the three months ended Q3 2020, the Company’s medical cannabis net revenue increased by $3.7 million, or 14%, as compared to the prior quarter. The increase in medical cannabis net revenue for the current quarter was primarily due to (i) a $2.2 million increase in European sales as the Company resumed EU cannabis sales in February 2020, which had been suspended since December 2019, following the receipt of the necessary approvals from German regulators; and (ii) a $0.9 million increase in Canadian Cannabis 2.0 sales in the medical channel. Q3 2020 includes the first full quarter of Cannabis 2.0 revenue as sales commenced near the end of December 2019. The sales of such cannabis derivative products were legalized in Canada effective October 17, 2019, but were effectively available for sale from December 17, 2019.

 

For the nine months ended Q3 2020, medical cannabis net revenue increased by $11.9 million, or 15%, as compared to the same period in the prior year. The increase was primarily driven by an increase in cannabis extract sales, which was comprised of (i) a $10.8 million increase in Canadian medical sales, of which $1.9 million was from the March 2019 acquisition of Whistler; (ii) a 9,538 increase in our registered medical patients; and (iii) a $1.1 million increase in European sales.

 

Consumer Cannabis Net Revenue

 

During the three months ended Q3 2020, consumer cannabis net revenue increased by $15.6 million, or 68% compared to the prior quarter. The increase is primarily attributed to:

 

(i) a net $4.2 million increase in dried cannabis revenue resulting from a higher overall volume of product sold, which included a significant shift in our product mix toward our Daily Special value brand. Consequently, these sales volume increases were offset by the impact of the lower and more competitive price point of Daily Special and our average net selling price of consumer cannabis decreased from $4.76 per gram in Q2 2020 to $4.33 per gram in Q3 2020;
(ii) a $7.6 million reduction in actual net returns, price adjustments and provisions as compared to Q2 2020; and
(iii) a $2.8 million increase from the inclusion of a full quarter of Cannabis 2.0 revenue. Sales of our Cannabis 2.0 products commenced near the end of December 2019 with the initial provincial load-ins from Aurora.

 

Included in consumer cannabis net revenue for Q3 2020 is a $0.9 million net revenue adjustment for actual returns and price adjustments as well as a $2.0 million net revenue provision for estimated future returns and price adjustments (three months ended Q2 2020 - $6.9 million and $3.7 million, respectively). The $2.0 million provision is based on historical experience and management’s estimate of future returns and price adjustments. Before considering the cumulative impacts of price adjustments and revenue provisions, consumer cannabis net revenue would have increased $8.0 million, or 24%, as compared to the prior quarter.

 

For the nine months ended Q3 2020, consumer cannabis net revenue increased by $39.8 million, or 77% compared to the same period in prior year. The increase was primarily due the recognition of a full nine months of consumer cannabis sales over the comparative period as legalization under the Cannabis Act came into effect on October 17, 2018.

 

Wholesale Bulk Cannabis Net Revenue

 

During the three months ended Q3 2020, the Company generated a nominal amount of wholesale bulk cannabis net revenue as compared to $2.4 million in the prior quarter. The Company generates revenue from wholesale bulk cannabis from time-to-time when pricing and terms are appropriate. In Q2 2020, wholesale bulk cannabis revenue was generated from the sale of trim, which has a lower potency and therefore commands a lower average net selling price per gram.

 

During the nine months ended March 31, 2020, the Company’s wholesale bulk cannabis net revenue increased by $10.6 million as compared to the same period in prior year as the Company had only begun generating wholesale transactions in Q3 2019.

 

Gross Margin

  Three months ended Nine months ended
($ thousands)

March 31,

2020

December 31,

2019

March 31,

2019

March 31,

2020

March 31,

2019

Net revenue 75,520   56,027   65,145   206,792   148,997  
Cost of sales (43,632 ) (33,214 ) (28,914 ) (109,585 ) (68,676 )
Gross profit before FV adjustments (1) 31,888   22,813   36,231   97,207   80,321  
Changes in fair value of inventory sold (15,380 ) (22,778 ) (17,407 ) (56,692 ) (48,968 )
Unrealized gain on changes in fair value of biological assets 10,897   29,880   33,798   70,513   61,461  
Gross profit 27,405   29,915   52,622   111,028   92,814  
Gross margin 36 % 53 % 81 % 54 % 62 %
(1) Gross profit before fair value adjustments is a non-GAAP measure. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined term.
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

The table below outlines adjusted gross profit and margin before FV adjustments on cannabis net revenue for three months ended March 31, 2020, December 31, 2019, March 31, 2019, and nine months ended March 31, 2020 and March 31, 2019.

  Three months ended Nine months ended
($ thousands)

March 31,

2020

December 31,

2019

March 31,

2019

March 31,

2020

March 31,

2019

Gross profit before FV adjustments (1) 31,888   22,813   36,231   97,207   80,321  
Adjustments:          
     Gross profit from non-cannabis auxiliary support functions (908 ) 296   (3,828 ) (1,776 ) (9,715 )
     Depreciation 6,445   5,657   4,619   18,073   5,833  
Adjusted gross profit before FV adjustments on cannabis net revenue (1) 37,425   28,766   37,022   113,504   76,439  
Cannabis net revenue (1) 69,637   52,676   58,652   193,089   130,826  
Adjusted gross margin before FV adjustments on cannabis net revenue (1) 54 % 55 % 63 % 59 % 58 %
(1) These terms are defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A

 

The table below outlines gross profit and margin before fair value adjustments for the three months ended March 31, 2020, December 31, 2019 and March 31, 2019.

($ thousands) Medical Cannabis Consumer Cannabis Wholesale Bulk Auxiliary Support Functions Total
Three months ended Q3 2020          
Revenue 34,339   49,387    -   5,883   89,609  
Excise taxes (3,253 ) (10,836 )  -    -   (14,089 )
Net revenue 31,086   38,551    -   5,883   75,520  
Cost of sales (13,085 ) (25,572 )  -   (4,975 ) (43,632 )
Gross profit before FV adjustments (1) 18,001   12,979    -   908   31,888  
Gross margin before FV adjustments (1) 58 % 34 %  - % 15 % 42 %
           
Three months ended Q2 2020
Revenue 30,665   28,622   2,384   3,351   65,022  
Excise taxes (3,279 ) (5,716 )  -    -   (8,995 )
Net revenue 27,386   22,906   2,384   3,351   56,027  
Cost of sales (12,722 ) (15,541 ) (1,304 ) (3,647 ) (33,214 )
Gross profit before FV adjustments (1) 14,664   7,365   1,080   (296 ) 22,813  
Gross margin before FV adjustments (1) 54 % 32 % 45 % (9 )% 41 %
           
Three months ended Q3 2019          
Revenue 29,962   36,709   2,074   6,493   75,238  
Excise taxes (2,961 ) (7,132 )  -    -   (10,093 )
Net revenue 27,001   29,577   2,074   6,493   65,145  
Cost of sales (10,705 ) (14,705 ) (839 ) (2,665 ) (28,914 )
Gross profit before FV adjustments (1) 16,296   14,872   1,235   3,828   36,231  
Gross margin before FV adjustments (1) 60 % 50 % 60 % 59 % 56 %
(1) Gross profit and gross margin before fair value adjustments are both non-GAAP measures. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms.

 

Medical Cannabis Gross Margin

 

Gross margin before fair value adjustments on medical cannabis net revenue was 58% in Q3 2020 as compared to 54% in Q2 2020. The increase in gross margin before fair value adjustments was a result of:

 

a $2.2 million increase in revenue related to the resumption of EU sales, as described above; and
an increase in the European average net selling price of medical cannabis from $6.53 in Q2 2020 to $8.35 in Q3 2020. Sales generated in the EU yield higher average net selling prices and margins.
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Gross margin before fair value adjustments on medical cannabis net revenue in Q3 2019 was 60%. The decrease in Q3 2020 as compared to Q3 2019 was primarily attributable to the following factors:

 

a decrease in the average net selling price of our Canadian oil extracts from $11.22 in Q3 2019 to $9.38 in Q3 2020 to reflect current market demands and offer a more competitive price point on our products; which was offset by
a reduction in our cash cost to produce per gram of dried cannabis sold from $1.42 in Q3 2019 to $0.85 in Q3 2020.

 

The Company does not pass the cost of excise taxes onto medical patients. Of the $14.1 million excise taxes incurred during the three months ended Q3 2020, $3.3 million relates to excise taxes levied on cannabis products that we sold to medical patients in Canada. As such, these excise taxes on medical cannabis revenues directly impacted our bottom line and decreased our gross margin by 4%. Excluding the impact of excise taxes on medical cannabis revenue, our gross margin on medical cannabis would have been 62%, 59% and 64% for the three months ended Q3 2020, Q2 2020 and Q3 2019, respectively.

 

Consumer Cannabis Gross Margin

 

Gross margin before fair value adjustments on consumer cannabis net revenue increased slightly to 34% in Q3 2020 as compared to 32% in Q2 2020 which was a result of:

 

(i) a net $4.2 million increase in dried cannabis revenue resulting from a higher overall volume of product sold, which was offset by a significant shift in our product sales mix towards our Daily Special value brand which is sold at a more competitive price point for the value segment of the market. As a result of these factors, our average net selling price of consumer cannabis decreased from $4.76 per gram in Q2 2020 to $4.33 per gram in Q3 2020.
(ii) a decrease in the cash cost of sales per dried gram of cannabis sold due to lower packaging costs as the Company increased sales of multi-gram dried cannabis products; and
(iii) a decrease of $6.0 million in actual net returns and price adjustments for the period to $0.9 million and a decrease of $1.7 million in the net revenue provision to $2.0 million as compared to the prior period. Excluding the impact of revenue provisions, gross margin before fair value adjustments on consumer cannabis would have been 38% in Q3 2020 as compared to 43% in Q2 2020.

 

Gross margin before fair value adjustments on consumer cannabis net revenue for Q3 2020 was 34% as compared to 50% Q3 2019. The 16% decrease from Q3 2019 is primarily due to the impact of actual net returns, price adjustments and the net revenue provision described above, and a decline in the average net selling price of consumer cannabis from $5.48 in Q3 2019 to $4.33 in Q3 2020 primarily due to the overall market pricing compression and increased sales from our value brand, Daily Special, which was launched in February 2020.

 

The table below outlines gross profit and margin before fair value adjustments for the nine months ended Q3 2020 and Q3 2019.

($ thousands) Medical Cannabis Consumer Cannabis Wholesale Bulk Auxiliary Support Functions Total
Nine months ended Q3 2020          
Revenue before excise taxes 98,592   114,805   12,688   13,703   239,788  
Excise taxes (9,670 ) (23,326 )  -    -   (32,996 )
Net revenue 88,922   91,479   12,688   13,703   206,792  
Cost of sales (36,944 ) (55,109 ) (5,605 ) (11,927 ) (109,585 )
Gross profit before FV adjustments (1) 51,978   36,370   7,083   1,776   97,207  
Gross margin before FV adjustments (1) 58 % 40 % 56 % 13 % 47 %
           
Nine months ended Q3 2019
Revenue before excise taxes 82,905   63,761   2,074   18,172   166,912  
Excise taxes (5,867 ) (12,048 )  -    -   (17,915 )
Net revenue 77,038   51,713   2,074   18,172   148,997  
Cost of sales (33,141 ) (26,239 ) (839 ) (8,457 ) (68,676 )
Gross profit before FV adjustments (1) 43,897   25,474   1,235   9,715   80,321  
Gross margin before FV adjustments (1) 57 % 49 % 60 % 53 % 54 %
(1) Gross profit and gross margin before fair value adjustments are both non-GAAP measures. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms.

 

Medical Cannabis Gross Margin

 

Gross margin before fair value adjustments on medical cannabis net revenue for the nine months ended Q3 2020 was 58% compared to 57% for the same period ended Q3 2019. The increase in our medical cannabis gross margin was driven by our ability to significantly reduce our production costs through the increase of production capacity and realization of economies of scale at our Sky, River and Ridge facilities, offset by a decrease in the average net selling price per gram from $8.60 per gram in Q3 2019 to $8.04 per gram in Q3 2020. The decrease in the average net selling price is driven by our Canadian oil extracts as described above.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Consumer Cannabis Gross Margin

 

Gross margin before fair value adjustments on consumer cannabis net revenue decreased by 9% for the nine months ended Q3 2020 as compared to the same period ended Q3 2019. The decrease is primarily due to the impact of the $13.5 million actual net revenue returns, price adjustments and provision. The average net selling price of consumer cannabis also decreased from $5.57 per gram in Q3 2019 to $4.72 per gram in Q3 2020 as a result of the major shift in our product sales mix towards our Daily Special value brand, which has a lower price point.

 

Wholesale Bulk Cannabis Gross Margin

 

Gross margin before fair value adjustments on wholesale bulk net revenue decreased to 56% during the nine months ended Q3 2020 as compared to 60% in the same period ending in Q3 2019. The decrease was primarily attributable to a $0.52 decrease in the average net selling price to $3.00 per gram resulting from the sales of cannabis trim during the current period. Cannabis trim generally contains lower quantities of cannabinoids and are thus sold at a lower average net selling price.

 

Cash Cost of Sales of Dried Cannabis and Cash Cost to Produce Dried Cannabis Sold - Aurora Produced Cannabis

($ thousands) Three months ended Nine months ended
March 31, 2020 December 31, 2019 March 31, 2019 March 31, 2020 March 31, 2019
Total cost of sales 43,632   33,214   28,914   109,585   68,676  
Adjustments:          
     Non-cannabis segment and non-cannabis cost of sales (1) (5,759 ) (4,373 ) (2,804 ) (13,661 ) (13,200 )
     Cash cost of sales for cannabis extracts (11,153 ) (7,405 ) (3,466 ) (27,016 ) (9,557 )
     Cost of cannabis purchased from other licensed producers (434 ) (304 ) (1,750 ) (1,083 ) (4,399 )
     Depreciation (6,445 ) (5,657 ) (4,619 ) (18,073 ) (5,833 )
     Cost of accessories (2)  -   (347 )  -   (402 ) (823 )
Cash cost of sales of dried cannabis sold (3) 19,841   15,128   16,275   49,350   34,864  
Packaging costs (8,555 ) (6,818 ) (4,968 ) (19,223 ) (9,708 )
Cash cost to produce dried cannabis sold (3) 11,286   8,310   11,307   30,127   25,156  
           
Kilogram equivalents of cannabis sold produced by Aurora (4) 13,239   9,450   7,935   35,152   15,633  
Cash cost of sales per gram of dried cannabis sold (3) $1.50   $1.60   $2.05   $1.40   $2.23  
Cash cost to produce per gram of dried cannabis sold(3) $0.85   $0.88   $1.42   $0.86   $1.61  
(1) Non-cannabis segment cost of sales consists of cost of sales from the production and sale of indoor cultivation systems. Non-cannabis cost of sales consists of cost of sales from patient counseling services, hemp products, design, engineering and construction services, and analytical product testing. These were removed from consolidated cost of sales to determine cash costs solely related to the sales of dried cannabis produced by Aurora.
(2) Cost of accessories includes cost of sales from vaporizers, grinders, and capsule fillers.
(3) Cash cost of sales per gram of dried cannabis sold and cash cost to produce per gram of dried cannabis sold are non-GAAP financial measures and are not recognized, defined, or subject to standardized measurement under IFRS. These respective metrics represent the blended and consolidated cash costs for dried cannabis produced by Aurora operations and sold under our Aurora, CanniMed, MedReleaf and ICC operations during the three and nine months ended March 31, 2019. However, due to the acquisitions completed and growth achieved in fiscal 2019, the metrics for the periods ended March, 31, 2019 and December 31, 2019, reflect the blended and consolidated cash costs of dried cannabis produced and sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms.
(4) Kilograms of dried cannabis sold includes dried kilograms sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations, but excludes kilograms returned and dried kilograms sold purchased from other Licensed Producers.

 

Cash cost of sales per gram of dried cannabis sold decreased by $0.10 per gram, or 6%, as compared to Q2 2020. The decrease was primarily attributable to lower packaging costs as the Company increased sales of multi-gram dried cannabis products, including the Company’s newly launched Daily Special value brand.

 

Cash cost to produce per gram of dried cannabis sold decreased by $0.03 per gram, or 3%, compared to Q2 2020. In Q3 2020, the Company produced 36,207 kilograms, an 18% increase from Q2 2020 which resulted in higher overhead absorption. This was offset by a temporary increase in labor costs associated with additional overtime hours to supplement absences due to COVID-19, a temporary special COVID-19 related bonus for production staff, and a seasonal increase in utility costs.

 

Cash cost of sales per gram of dried cannabis sold decreased by $0.55 and $0.83 for the three and nine months ended Q3 2020, respectively, as compared to the same periods in prior year. In the prior year, we incurred higher inventory management, infrastructure and distribution costs to meet demand with the legalization of the consumer cannabis sales in Canada which came into effect on October 17, 2018. In addition, we also incurred increased packaging costs in the prior year resulting from new excise tax stamping, packaging and regulatory requirements mandated under the Cannabis Act.

 

Cash cost to produce per gram of dried cannabis sold decreased by $0.57 and $0.75 for the three and nine months ended Q3 2020, respectively, as compared to the same periods in prior year due to the integration of Aurora’s yield expertise at acquired production facilities and the realization of economies of scale with the ramp up of Aurora Sky, which were partially offset by higher labor and logistics costs incurred in preparation for the legalization of the consumer market. The Company produced 108,334 kilograms as compared to 28,408 kilograms for the nine months ended Q3 2020.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Grams of Dried Cannabis and Grams Equivalent of Extracts Produced

 

Grams of dried cannabis produced refers to the grams of dried cannabis harvested from plants during the period. The Company calculates grams produced based on the final recorded weight of dried harvested buds that have completed the drying stage net of any weight loss during the drying process for the period.

 

Grams equivalent of cannabis extracts produced represents the equivalent number of dried grams used to produce the cannabis extract product. Dried cannabis is first extracted into a bulk concentrate, which is then diluted into cannabis oil, or further processed into a cannabis capsule product. The “grams equivalent” measure is used to disclose the volume in grams, of extracts sold and/or produced in the period as opposed to milliliters, or number of capsules, as the case may be. The actual grams used in the production of cannabis oils and cannabis capsules can vary depending on the strain of dried cannabis used, which can yield different potencies and strengths. The Company estimates and converts its cannabis extract inventory to equivalent grams based on the THC and CBD content in the cannabis extract product. On average, for the three months ended March 31, 2020, December 31, 2019, and March 31, 2019, one bottle of cannabis oil was equivalent to 8.4, 8.3 and 8.6 gram equivalents of dried cannabis, respectively. On average, for the three months ended March 31, 2020, December 31, 2019, and March 31, 2019, one bottle of cannabis capsules was equivalent to 3.2, 3.4 and 3.0 gram equivalents of dried cannabis, respectively.

 

Operating Expenses

  Three months ended Nine months ended
($ thousands) March 31, 2020 December 31, 2019 March 31, 2019 March 31, 2020 March 31, 2019
General and administration 56,790   70,751   50,786   186,662   130,350  
Sales and marketing 23,357   29,131   16,318   74,499   68,435  
Research and development 5,601   6,775   3,516   18,424   8,753  
Depreciation and amortization 14,721   20,847   18,182   53,777   52,567  
Share-based compensation 9,204   19,963   39,254   53,924   79,534  

 

General and administration (“G&A”)

 

On February 6, 2020, the Company announced a business transformation plan to streamline and reduce the Company’s cost infrastructure to focus on activities that generate near-term positive impact to earnings. As a result, during Q3 2020 G&A decreased by $14.0 million, or 20%, as compared to prior quarter due to a partial quarter impact of the business transformation plan announced on February 6, 2020, including reduced salaries from the headcount reduction and decreases in information technology, travel, legal and professional fees. These savings were offset by $5.0 million in severance and related benefit costs associated with our business transformation plan.

 

During the three and nine months ended Q3 2020, G&A expenses increased by $6.0 million and $56.3 million, respectively, as compared to the same periods in the prior year. The increase was primarily attributable to higher salaries, wages and benefit costs associated with a larger headcount base relative to 2019. Other increases include higher professional and consulting fees related to general corporate matters, and corporate office charges related to the expansion of domestic and international operations and business functions.

 

Sales and marketing (“S&M”)

 

During Q3 2020, S&M decreased by $5.8 million, or 20%, as compared to prior quarter. The decrease was primarily a result of reduced headcount, consulting, and travel expenses following the business transformation plan announced on February 6, 2020.

 

During the three and nine months ended Q3 2020, S&M increased by $7.0 million and $6.1 million, respectively, as compared to the same periods in the prior year. In both comparative periods, the Company incurred a similar level of marketing and campaign expenses related to the legalization of consumer cannabis use in October 2018 and the legalization of Cannabis 2.0 products in October 2019. The increases described above were primarily attributable to our sponsorship fee from our multi-year global partnership with the Ultimate Fighting Championship (“UFC”) which was not present in the same prior comparative periods.

 

R&D

 

During Q3 2020, R&D decreased by $1.2 million, or 17%, as compared to the prior quarter. The decrease is primarily driven by a decrease in product development costs related to the legalization and preparation for the launch of our Cannabis 2.0 products in Q2 2020.

 

During the three and nine months ended Q3 2020, R&D expenses increased by $2.1 million and $9.7 million, respectively, as compared to the same periods in the prior year. The increase was primarily due to product development costs relating to vaporizers, edibles and encapsulated cannabis oils; clinical studies focused on the management of pain, epilepsy, post-traumatic stress disorder, anxiety, opioid sparing, cancer, and neurodegeneration; as well as our multi-year global partnership with the UFC which were not present in the comparative periods.

 

Depreciation and amortization

 

Depreciation and amortization expense for the three months ended Q3 2020 decreased by $6.1 million and $3.5 million as compared to the previous quarter and the same period in the prior year, respectively. The decrease is mainly due to the $19.4 million and $85.0 million impairment charge expense on property, plant and equipment and definite life intangible assets for the three and nine months ended Q3 2020 which decreased their respective carrying values.

 

During the nine months ended Q3 2020, depreciation and amortization expense increased by $1.2 million as compared to the same period in the prior year. The increase was primarily due to (i) the depreciation of right-of-use assets which are capitalized as a result of the adoption of IFRS 16 effective July 1, 2019 (see “New or Amended Standards Effective July 1, 2019” for discussion of transitional impact); (ii) the depreciation of construction costs related to the retrofitting and completion of new grow facilities, such as Aurora Sky; (iii) additions to software and licensing intangible assets; offset by (iv) the impairment charge recognized on the property, plant and equipment and definite life intangible assets described above.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Share-based compensation

 

During the three months ended Q3 2020, share-based compensation expense decreased by $10.8 million as compared to Q2 2020. The decrease is primarily due to forfeitures of equity awards associated with the headcount reduction completed in February 2020, and a reduction in post-combination contingent consideration share-based payments relating to business combinations completed in the prior year.

 

During the three and nine months ended Q3 2020, share-based compensation expense decreased by $30.1 million and $25.6 million, respectively, as compared to the same periods in the prior year. The decrease was primarily due to the headcount reduction mentioned above, a reduction in post-combination contingent consideration share-based payments relating to business combinations completed in the prior year, as well as a reduction in the fair value of options previously issued to an independent strategic advisor and new options issued during the respective periods. The decline in fair value is directly attributable to the decline in the Company’s stock price.

 

Other (expense) income

 

For the three months ended Q3 2020, other expense was $63.6 million and consisted of (i) a $28.2 million impairment loss on investment in associates; (ii) a $19.4 million impairment loss on certain property, plant and equipment; (iii) a $11.7 million loss on foreign exchange; (iv) a $4.6 million loss pickup from investment in associates; (v) $4.0 million of fair value losses on derivative investments; which was offset by (vi) a $5.9 million fair value gain on the derivative liability related to the $345 million U.S. dollar denominated convertible senior notes.

 

For the nine months ended Q3 2020, other expense was $1.2 billion and was primarily attributable to (i) a $762.2 million impairment loss on goodwill; (ii) $158.7 million impairment loss on intangible assets; (iii) a $74.4 million impairment loss on investment in associates; (iv) a $71.4 million impairment loss on property, plant and equipment; (v) a $172.3 million loss on the induced conversion of the March 2018 convertible debentures, (vi) $38.2 million of fair value losses on derivative investments; (vii) a $16.4 million loss on foreign exchange; (viii) a $8.9 million loss pickup from investment in associates; which was offset by (ix) a $174.8 million fair value gain on the derivative liability related to the $345 million U.S. dollar denominated convertible senior notes.

 

Refer to Note 5(b) and Note 14 of the Financial Statements for the three and nine months ended March 31, 2020 for a summary of the Company’s derivative investments and convertible debentures.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Adjusted EBITDA

 

The following is the Company’s adjusted EBITDA:

($ thousands) Three months ended Nine months ended

March 31,

2020

December 31,

2019

March 31,

2019

March 31,

2020

March 31,

2019

Net loss (137,363 ) (1,305,898 ) (160,195 ) (1,432,891 ) (295,656 )
Finance costs 6,678   23,877   13,993   48,466   32,728  
Interest income (2,197 ) (2,194 ) (1,926 ) (5,368 ) (2,804 )
Income tax (expense) recovery (9,815 ) (24,279 ) (8,926 ) (14,853 ) (44,711 )
Depreciation and amortization 21,166   26,504   18,182   71,850   53,777  
EBITDA (121,531 ) (1,281,990 ) (138,872 ) (1,332,796 ) (256,666 )
Changes in fair value of inventory sold 15,380   22,778   17,407   56,692   48,968  
Unrealized gain on changes in fair value of biological assets (10,897 ) (29,880 ) (33,798 ) (70,513 ) (61,461 )
Share-based compensation 9,204   19,963   39,254   53,924   79,534  
Foreign exchange loss (gain) 11,678   999   45   16,386   553  
Share of loss from investment in associates 4,611   1,930   770   8,933   3,779  
Gain on loss of control of subsidiary (500 )  -    -   (500 ) (398 )
Fair value changes in contingent consideration (2,391 ) (778 ) 1,253   (3,106 ) 3,318  
Fair value changes on derivative investments 3,975   20,113   (32,948 ) 38,206   (621 )
Fair value changes on derivative liabilities (5,899 ) (25,111 ) 101,521   (174,824 ) 101,521  
Loss on induced conversion of debenture  -   172,291    -   172,291    -  
(Gain) loss on debt modification (2,101 ) 362   (206 ) (2,154 ) (1,980 )
Gain on deemed disposal of significant influence investment  -    -    -    -   (144,368 )
Impairment of property, plant and equipment 19,445   51,925    -   71,370    -  
Impairment of investment in associates 28,176   46,226    -   74,402   69,957  
Impairment of intangible assets  -   158,695   9,002   158,695   9,002  
Impairment of goodwill  -   762,231    -   762,231    -  
Adjusted EBITDA(1) (50,850 ) (80,246 ) (36,572 ) (170,763 ) (148,862 )
(1) Adjusted EBITDA is a non-GAAP financial measure and is not a recognized, defined, or standardized measure under IFRS. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of the MD&A.

 

Aurora’s adjusted EBITDA loss decreased by $29.4 million, or 37%, during Q3 2020 as compared to Q2 2020. The decrease was primarily due to the quarter-over-quarter $19.5 million increase in net revenue and $19.7 million decrease in SG&A, offset by a $10.4 million increase in cost of goods sold. As discussed above, the Company recognized $5.0 million in severance and related benefit costs associated with our business transformation plan. Excluding the $5.0 million severance and related benefit costs, adjusted EBITDA loss would have been $45.9 million, a decrease of $34.4 million, or 43% as compared to Q2 2020.

 

Aurora’s adjusted EBITDA loss increased by $14.3 million, or 39%, during Q3 2020 as compared to the three months ended Q3 2019. The increase was primarily driven by the $13.0 million increase in SG&A cost infrastructure resulting from the Company’s exponential growth in fiscal 2019 as described above, offset by a $2.1 million increase in gross profit before fair value adjustments, excluding the impact of depreciation allocated to cost of sales. Excluding the $5.0 million severance and related benefit costs in Q3 2020, adjusted EBITDA loss would have increased by $9.3 million, or 25%, as compared to Q3 2019.

 

Adjusted EBITDA loss increased by $21.9 million, or 15%, for the nine months ended Q3 2020 as compared to the same period in prior year. The increase was primarily attributable to (i) $62.4 million of higher SG&A costs related to the Company’s larger cost infrastructure relative to 2019; and (ii) a $9.7 million increase in R&D; offset by (iii) a $18.5 million decrease in acquisition costs due to a reduction in mergers and acquisition activity; and (iv) a $33.7 million increase in gross profit before fair value adjustments, excluding the impact of depreciation allocated to cost of sales. Excluding the $5.0 million severance and related benefit costs in Q3 2020, adjusted EBITDA would have increased by $16.9 million, or 11%, as compared to the nine months ended Q3 2019.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Liquidity and Capital Resources

($ thousands) March 31, 2020 June 30, 2019
Cash and cash equivalents (1) 230,208   172,727  
Restricted cash  -   46,066  
Marketable securities 11,834   143,248  
     
Working capital 447,812   227,802  
Total assets 4,717,656   5,502,830  
Total non-current liabilities 612,957   676,418  
     
Capitalization    
Convertible notes 324,693   503,581  
Loans and borrowings 268,018   141,244  
Total debt 592,711   644,825  
Total equity 3,898,262   4,390,047  
Total capitalization 4,490,973   5,034,872  
(1) Included in cash and cash equivalents is a requirement to maintain a minimum $35.0 million unrestricted cash balance at any time. Refer to the “Credit Facility” discussion below.

 

During the three and nine months ended March 31, 2020, the Company primarily financed its operations, capital expenditures and growth initiatives through the generation of net revenue, and the assumption of debt and equity financing. For more information on key cash flows related to operations, investing and financing activities during the quarter, refer to the “Cash Flow Highlights” discussion below.

 

The Company’s objective when managing its liquidity and capital resources is to maintain sufficient liquidity to support financial obligations when they come due, while executing operating and strategic plans. The Company manages liquidity risk by monitoring its operating requirements and preparing budgets and cash flow forecasts to identify cash flow needs for general corporate and working capital purposes, as well as for expansion initiatives. Our ability to fund our operating requirements depends on future operating performance and cash flows, which are subject to economic, financial, competitive, business and regulatory conditions, and other factors, some which are beyond our control, such as the potential impact of COVID-19. Our primary short-term liquidity needs are to fund our net operating losses, capital expenditures to maintain existing facilities, debt repayments, and lease payments. Our medium-term liquidity needs primarily relate to debt repayments and lease payments. Our long-term liquidity needs primarily relate to potential strategic plans.

 

In an effort to manage liquidity prudently while the Company moves toward profitability and positive cash flow, Aurora has taken the following steps to re-position Aurora for long term success:

 

In November 2019, the Company announced that it had ceased construction of its Aurora Nordic Sky facility in Denmark and deferred spending on construction and commission costs for its Aurora Sun facility.
On November 25, 2019, the Company reduced its near term debt obligations when holders of $227.0 million principal amount, or approximately 99%, of the Company’s Debentures voluntarily elected to convert their Debentures pursuant to the Early Amended Conversion Privilege (the “Elected Debentures”). Under the terms of the Supplemental Indenture, the Elected Debentures were converted into common shares of the Company (the "Common Shares") at the Amended Early Conversion Price (as defined in the Supplemental Indenture) of $39.40 resulting in the issuance of an aggregate of 5,761,260 Common Shares. The remaining $2.3 million principal amount of these Debentures were repaid in cash in Q3 2020. For more information, refer to Note 14(i) of the Financial Statements for the three and nine months ended March 31, 2020.
In February 2020, the Company announced a restructuring plan to reduce operating expenses and further streamline capital investments. These actions are expected to reset SG&A expenses to approximately $40 million to $45 million at the beginning of fiscal Q1 2021.
In April 2020, the Company accepted an offer to sell its Exeter property for gross proceeds of $9.0 million. The sale is subject to customary closing conditions and is expected to be finalized during May 2020. The Company also accepted an offer to sell its Jamaica property for gross proceeds of US$3.4 million.
In April 2020, the Company sold 5,302,227 common shares of EnWave Corporation at $0.80 per share for net proceeds of $4.1 million.
On April 16, 2020, the Company filed a second At-the-Market (“ATM”) supplement to its existing Shelf Prospectus (described below), which provides for an additional US$250.0 million in common shares to be sold by the executing sales agents at market prices, thus increasing the total available financing under the ATM from US$400.0 million to US$650.0 million.
On May 11, 2020, the Company completed a twelve-for-one (12:1) Share Consolidation. The Share Consolidation is expected to restore compliance with the NYSE’s continued listing standards and provide access to a broad universe of investors, equity capital and trading liquidity.

 

These initiatives are expected to provide the Company with increased liquidity and flexibility to meet its financial commitments, including its near- term obligations of $254.2 million (refer to the “Contractual Obligations” table below). As of March 31, 2020, the Company has access to the following capital resources available to fund operations and obligations:

 

$230.2 million cash and cash equivalents;
$4.6 million available under the August 29, 2018 secured credit agreement with BMO (the “Credit Agreement” as described below);
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Subsequent to March 31, 2020, the Company raised US$5.6 million gross proceeds under its ATM program, with US$245.5 million of remaining available room under the ATM and US$100.0 million remaining available room under the Shelf Prospectus for future financings or issuances of securities.

We intend to use the net proceeds from any offerings under the ATM program and/or Shelf Prospectus to support our short-term liquidity needs, debt repayments, general corporate purposes, working capital requirements and potential acquisitions. Volatility in the cannabis industry, stock market and Company’s share price may impact the amount and our ability to raise financing under the ATM Program and Shelf Prospectus. If the Company were to draw down its maximum available room under both the ATM program and Shelf Prospectus, this would result in the Company issuing 21,353,432 and 8,503,401 common shares, respectively, based on the March 31, 2020 stock price of US$11.76.

 

From time-to-time, management may also consider the sale of its marketable securities and shares held in publicly traded investments in associates to help support near term cash and liquidity needs.

 

Based on all of the aforementioned factors, the Company believes that its reduction of operating costs, current liquidity position, and access to the ATM and Shelf Prospectus are adequate to fund operating activities and cash commitments for investing and financing activities for the foreseeable future.

 

Credit Facility

 

On August 29, 2018, the Company entered into a secured credit agreement (as amended, the “Credit Agreement”) for $200.0 million with Bank of Montreal (“BMO”) and certain lenders to establish a credit facility (as amended, the “Credit Facility”). The $200.0 million of funds are accessible through a $50.0 million revolving credit facility (“Facility A”) and a $150.0 million non-revolving credit facility (“Facility B”).

 

On September 4, 2019, the Company entered into an amendment to the Credit Agreement via the “First Amended and Restated Credit Agreement”, which increased the Credit Facility by approximately $160.9 million and provided for a $39.1 million accordion feature. The additional $160.9 million of funds are accessible through a $64.4 million non-revolving credit facility (“Facility C”) and a $96.5 million non-revolving credit facility (“Facility D”), which represented capital committed for the construction of Aurora Sun.

 

On March 25, 2020, the Company executed the First Amendment to the First Amended and Restated Credit Agreement, which eliminated the Facility D due to the Company halting and deferral of the construction of Aurora Sun, utilized the $45.0 million of restricted cash to repay and permanently reduce the outstanding term loan balance under Facility C; and amended the following financial covenant ratios:

 

i. the complete removal of a senior funded debt to EBITDA covenant of 3.00:1 and a total funded debt to EBITDA covenant of 4.00:1 ;
ii. the complete removal of a 1.25:1 minimum fixed charge coverage ratio;
iii. an adjustment to the total funded debt to adjusted shareholders’ equity ratio not to exceed 0.25:1 prior to September 30, 2020 to 0.20:1 effective March 31, 2020. Total funded debt includes all obligations (except those noted below) which constitute debt and is calculated as the total principal outstanding under Facility A, Facility B, Facility C, the January 24, 2019 Senior Notes and total obligations under capital leases determined in accordance with IAS 17 - Leases, and other obligations secured by Purchase-Money Security Interests, capitalized interest, the redemption price of any securities which are redeemable at the option of the holder, and any aggregate actual hedge liability. Total funded debt excludes accounts payable, payroll accruals, accruals in respect of normal business expenses and future income taxes;
iv. maintenance of a minimum $35.0 million unrestricted cash balance at any time. Unrestricted cash is defined as the amount of cash held in bank accounts maintained by BMO that is not subject to any lien or any other restriction that would prevent the Company from using such cash for operating purposes in the ordinary course of business less any outstanding principal drawn under Facility A; and
v. achievement of certain quarterly minimum EBITDA thresholds beginning in the quarter ending September 30, 2020. For the purposes of this calculation, EBITDA is defined as the consolidated net income of the Company excluding the following: extraordinary or non-recurring income (expenses) and gains (losses), non-cash gains (losses) (such as unrealized foreign exchange gains (losses)) and income of the unsecured subsidiaries (except to the extent that dividends in respect of such income have been paid in cash by such unsecured subsidiaries to a secured company); plus the following amounts (to the extent such amounts were deducted in determining such consolidated net income, and without duplication): (a) Interest, fees and expenses paid in connection with permitted funded Debt; (b) income and capital taxes; (c) depreciation and amortization; (d) non-cash charges and expenses such as unrealized foreign exchange losses and charges relating to the impairment of goodwill and other intangible assets; (e) non-cash share-based compensation; (f) extraordinary non-recurring expenses or losses to the extent approved by the lenders in writing; and (g) any other expenses approved in writing by the lenders in their discretion.

 

As at March 31, 2020, the Company had $2.0 million letters of credit and $22.0 million of principal outstanding under Facility A, $137.8 million of principal outstanding under Facility B, and $17.8 million of principal outstanding under Facility C. For additional information about the First Amendment to the First Amended and Restated Credit Agreement, refer to Note 15(a) of the Financial Statements for the three and nine months ended March 31, 2020.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Shelf Prospectus and ATM Program

 

On April 2, 2019, the Company filed a Shelf Prospectus with the securities regulators in each province of Canada, except for the Province of Quebec, and a corresponding shelf registration statement on Form F-10 (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”). The Shelf Prospectus and the Registration Statement was declared effective on May 9, 2019 and May 10, 2019, respectively. The Shelf Prospectus and Registration Statement allows the Company to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof of up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. Whenever the Company raises financing under the Shelf Prospectus, the specific terms, including the use of proceeds from any offering, will be set forth in a related prospectus supplement, which will be filed with the applicable Canadian securities regulatory authorities and the SEC. The Company also filed a prospectus ATM supplement which provides for the sale of up to US$400 million of common shares by registered dealers on behalf of Aurora at prevailing market prices at the time of sale. As at March 31, 2020, the Company raised $535.8 million (US$398.9 million) under its ATM program, with US$1.1 million of remaining available room under the ATM and US$350.0 million of available room under the Shelf Prospectus for future financings. As described above, on April 16, 2020, the Company filed a second ATM supplement which provides for an additional US$250.0 million in common shares to be sold, increasing the total financing available under the ATM from US$400.0 million to US$650.0 million.

 

Cash Flow Highlights

 

The table below summarizes the Company’s cash flows for the three and nine months ended Q3 2020 and Q3 2019


($ thousands)
Three months ended Nine months ended
March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019
Cash used in operating activities (58,687 ) (54,685 ) (288,302 ) (187,637 )
Cash used in investing activities (85,539 ) (91,031 ) (246,610 ) (135,811 )
Cash provided by financing activities 212,575   446,104   587,630   597,505  
Effect of foreign exchange 5,525   (498 ) 4,763   (2,937 )
Increase in cash and cash equivalents 73,874   299,890   57,481   271,120  

 

Cash used in operating activities for Q3 2020 increased by $4.0 million as compared to Q3 2019. This was primarily attributable to an increase in operational spending related to newly acquired subsidiaries. This was offset by a $25.8 million decrease in changes in non-cash working capital over the prior period driven by a $25.1 million increase in accounts payable and accrued liabilities, a $22.4 million decrease in accounts receivable, offset by a $17.1 million increase in inventory and biological assets, and a $10.3 million increase in prepaids and other current assets.

 

Cash used in operating activities for the nine months ended Q3 2020 increased by $100.7 million compared to the nine months ended Q3 2019. The increase was primarily due to a $34.1 million increase in non-cash working capital over the prior quarter driven by a $40.5 million decrease in accounts payable and accrued liabilities, a $70.9 million increase in inventory and biological assets, offset by a $63.2 million decrease in accounts receivable over the prior period.

 

Cash used in investing activities for Q3 2020 decreased by $5.5 million as compared to Q3 2019. The decrease was primarily attributable to a $12.8 million decrease in property, plant and equipment expenditures, offset by a $11.1 million decrease in cash generated from the disposal of marketable securities as compared to the prior period.

 

Cash used in investing activities for the nine months ended Q3 2020 increased by $110.8 million compared to the nine months ended Q3 2019. The increase was primarily attributable to a $117.1 million decrease in net cash acquired from business combinations, a $74.2 million increase in property, plant and equipment expenditures, offset by a $38.1 million increase in proceeds generated from the disposal of marketable securities, and a $48.1 million decrease in investment outlays on marketable securities, derivatives and convertible debentures as compared to the prior year.

 

Cash provided by financing activities for Q3 2020 decreased by $233.5 million as compared to Q3 2019. The decrease was primarily attributable to a $422.7 million decrease in proceeds from long term loans net of financing fees, offset by a $194.1 million increase in cash generated from share issuances mainly from equity financing.

 

Cash provided by financing activities for the nine months ended Q3 2020 decreased by $9.9 million as compared to the nine months ended Q3 2019. The decrease was mainly due to a $525.2 million decrease in proceeds drawn under long term loans through the BMO Credit Facility and a $12.9 increase in principal payments on lease liabilities, offset by $476.5 million cash generated from share issuances primarily from equity financing, and a $76.2 million decrease in restricted cash.

 

Capital Expenditures

 

The Company’s major capital expenditures for the nine months ended March 31, 2020 mainly consisted of equipment purchases and construction activities at Aurora Nordic Sky, Aurora Sun and Aurora Polaris. However, during the three months ended December 31, 2019, the Company decided to defer construction activities related to new production facilities, Aurora Nordic Sky and Aurora Sun, in an effort to align with global demand. Remaining major capital commitments primarily pertain to initiatives designed to reduce operating costs or reduce production risks.

 

For Q4 2020, management has approved capital spending plans totaling less than $25.0 million. These projects include: (i) the Amalgamation and centralized distribution as described in the “Business Transformation Update” section above, (ii) co-generation capabilities at Aurora’s River facility, reducing risk at one of our major facilities and reducing energy costs, with a $10.0 million offsetting grant expected over next 12 months, (iii) completion of the joint venture arrangement with Iotron Industries Canada Inc. to co-locate treatment within our Polaris facility, thereby significantly reducing treatment costs and release timelines for our cannabis products, (iv) the completion of the first six rooms at Aurora Sun to produce high demand cultivars, and (v) continued development of our German production facility. All projects, except for the German production facility, are expected to be largely complete in Q4 2020. Capital spending in Q2 2021 is planned to be well below Q4 levels.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Contractual Obligations

 

As at March 31, 2020, the Company had the following contractual obligations:

($ thousands) Total ≤ 1 year Over 1 year to 3 years Over 3 years to 5 years > 5 years
Accounts payable and accrued liabilities 128,622   128,622    -    -    -  
Convertible notes and interest (1) 591,897   26,683   53,365   511,849    -  
Lease liabilities (2) 184,830   11,254   34,028   30,303   109,245  
Loans and borrowings excluding lease liabilities (2) 165,051   27,089   137,962    -    -  
Contingent consideration payable 39,695   38,595   1,100    -    -  
Capital commitments (3) 14,869   14,869    -    -    -  
Purchase commitments (4) 21,349   4,132   8,264   8,264   689  
License and sponsorship fees 147,215   2,954   42,607   52,152   49,502  
Total contractual obligations 1,293,528   254,198   277,326   602,568   159,436  
(1) Assumes the principal balance outstanding at March 31, 2020 remains unconverted and includes the estimated interest payable until the maturity date.
(2) Includes interest payable until maturity date.
(3) Relates to remaining commitments that the Company has made to vendors for equipment purchases and capital projects pertaining to existing construction.
(4) Relates to a manufacturing agreement with Capcium for the encapsulation of softgels.

 

Contingencies

 

From time to time, the Company and/or its subsidiaries may become defendants in legal actions and the Company intends to take appropriate action with respect to any such legal actions, including by defending itself against such legal claims as necessary. Other than the claims described below, as of the date of this report, Aurora is not aware of any other material or significant claims against the Company.

 

On November 29, 2017, a claim was commenced against the Company regarding 300,000 stock options with an exercise price of $0.39 per share (equivalent to 25,000 stock options with an exercise price of $4.68 per share post-reverse share consolidation) issued to a consultant pursuant to an agreement dated March 16, 2015. The agreement was terminated on March 8, 2016, and in accordance with the Company’s stock option plan, the unexercised options expired 90 days after the date of the termination of the agreement. The option holder is attempting to enforce exercise rights, which the Company believes do not exist. The Company believes the action to be without merit and intends to defend this claim. Examinations for discovery were completed in January 2019 and the matter is currently scheduled for court in April 2021. Due to the uncertainty of the timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at March 31, 2020.

 

On October 3, 2018, a claim was commenced against the Company regarding the failure to supply product under a recently acquired subsidiary’s supply agreement. The plaintiff is seeking specific performance of the supply agreement and damages for breach of contract for approximately $21.0 million (#eu#14.7 million) plus legal costs. In accordance with the terms of the agreement, the Company had terminated the contract due to a breach by the plaintiff. Subsequent to March 31, 2020, the Company fully settled this claim for $0.2 million.

 

In connection with the acquisition of MedReleaf, the Company assumed a contingent liability associated with a formerly terminated MedReleaf employee. The claimant was seeking performance under the terms of his employment agreement related to a severance obligation. The Company recognized a provision of $4.2 million as part of the purchase price allocation in the prior year and the amount was fully settled during the nine months ended March 31, 2020.

 

The Company and certain of its directors and officers are subject to multiple purported class action proceedings in the United States District Court for the District of New Jersey on behalf of persons or entities who purchased, or otherwise acquired, publicly traded Aurora securities between October 23, 2018 and January 6, 2020. The complaints allege, inter alia, that we and certain of our officers and directors violated the federal securities laws by making false or misleading statements, materially overstated the demand and potential market for our consumer cannabis products; that our ability to sell products had been materially impaired by extraordinary market oversupply, that our spending growth and capital commitments were slated to exceed our revenue growth; that we had violated German law mandating that companies receive special permission to distribute medical products exposed to regulated irradiation techniques, and that the foregoing, among others, had negatively impacted the Company’s business, operations, and prospects and impaired the Company’s ability to achieve profitability. We dispute the allegations in the complaints and intend to vigorously defend against the claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above.

 

Off-balance sheet arrangements

 

As at the date of this MD&A, the Company has $2.0 million letters of credit outstanding under Facility A of its BMO Credit Agreement. There are no other material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the financial performance or financial condition of the Company

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Related Party Transactions

 

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Compensation expense for key management personnel was as follows:

  Three months ended Nine months ended
($ thousands) March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019
  $ $ $ $
Short-term employment benefits (1) 1,957   1,605   6,272   4,124  
Termination benefits 2,450    -   3,350    -  
Directors’ fees (2) 164   99   419   245  
Share-based compensation (3) 3,567   3,918   15,808   12,391  
Total management compensation (4) 8,138   5,622   25,849   16,760  
(1) Short-term employment benefits include salaries, wages, bonuses and non-monetary benefits such as subsidized vehicle costs. Short-term employment benefits are measured at the exchange value, being the amounts agreed to by each party.
(2) Includes meeting fees and committee chair fees.
(3) Share-based compensation represent the contingent consideration, and the fair value of options, restricted share units, and deferred share units granted and vested to key management personnel and directors of the Company under the Company’s share-based compensation plans (see Note 17 of the consolidated financial statements for Q3 2020).
(4) As of March 31, 2020, $2.1 million is payable or accrued for key management compensation (June 30, 2019 - $2.6 million).

 

The following is a summary of the significant transactions with related parties:

  Three months ended Nine months ended

($ thousands)

 

March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019
  $ $ $ $
Operational, administrative and service fees (1)  -   2,143    -   6,696  
Marketing fees (2)  -    -    -   3,292  
Production costs (3) 2,921   271   6,074   500  
Services and advisory fees (4)  -   48   859   160  
  2,921   2,462   6,933   10,648  
(1) Operational, administrative and service fees paid or accrued pursuant to a service agreement between CanvasRx and Canadian Cannabis Clinics (“CCC”). Aurora has an option to acquire CCC if CCC breaches the terms of the service agreement.
(2) Marketing fees paid to Colour Creative Persuasion Inc., a company partially owned by a former officer of the Company.
(3) Production costs incurred with (i) Capcium Inc. (“Capcium”), a company where Aurora holds significant influence; and (ii) Iotron Industries Canada Inc. (“Iotron”), an associate of the Company’s joint venture company. Aurora does not have the authority or ability to exert power over either Capcium or Iotron’s financial and/or operating decisions (i.e. control).
(4) Finders’, service and advisory fees paid to Belot Business Consulting Corp., Lola Ventures Inc., and Superior Safety Codes, all of which are companies controlled by current and former officers of Aurora.

 

The following amounts were receivable from (payable to) related parties:

($ thousands)

 

March 31, 2020 June 30, 2019
  $ $
Loan receivable from investments in associates (1) 2,909    -  
Production costs with investments in associates (2)(3) (2,185 )  -  
  724    -  
(1) Relates to the purchase of production equipment on behalf of the Company’s joint venture, Iotron Industries Canada Inc. The loan bears interest at 5% per annum, payable monthly. The loan is to be repaid in installments on an annual basis in an amount equal to 50% of the associate’s EBITDA. The unpaid balance of the loan matures 10 years from the funding date.
(2) Production costs incurred with (i) Capcium Inc., who manufactures softgels for the Company and (ii) Iotron Industries Canada Inc. who provides cannabis processing services to the Company. Aurora has significant influence over Capcium Inc. and is party to a common joint venture with Iotron Industries Canada Inc.
(3) Amounts are due upon the issuance or receipt of invoices, are unsecured and non-interest bearing.
(4) Pursuant to a manufacturing agreement with Capcium Inc., the Company is contractually committed to purchase a minimum number of softgels during calendar 2020 and thereafter. If the Company fails to meet the required purchase minimum, then it is required to pay a penalty fee equal to the difference between the actual purchased quantity and the required purchase minimum multiplied by cost of the softgels. The Company is committed to purchase 60.7 million capsules in calendar 2020, and 40.0 million capsules per calendar year until December 31, 2026.
(5) Under a License Agreement with CTT Pharmaceutical Holdings Inc., a company where Aurora holds significant influence, the Company also has a commitment to pay royalties at a rate of 5% of gross sales of all products and licensed services under the agreement.

 

These transactions are in the normal course of operations and are measured at the exchange value, being the amounts agreed to by the parties.

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

Critical Accounting Estimates

 

The preparation of the Company’s Financial Statements under IFRS requires management to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

 

Other than the estimates used in the adoption of IFRS 16 (refer to Note 2(d)(i) in the Financial Statements), assets-held-for-sale (refer to Note 12 in the Financial Statements), intangible assets (refer to Note 13 in the Financial Statements) and the impacts of COVID-19 (refer to “Risk Factors” section below), there have been no changes in Aurora's critical accounting estimates during the three and nine months ended March 31, 2020. For more information on the Company’s accounting policies and key estimates, refer to the note disclosures in the annual consolidated financial statements and MD&A as at and for the year ended June 30, 2019.

 

New or Amended Standards Effective July 1, 2019

 

The Company has adopted the following new or amended IFRS standards for the period beginning July 1, 2019.

 

(i) IFRS 16 Leases

 

In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which replaces IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term exceeding 12 months, unless the underlying asset is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessors continue to classify leases as operating or finance, with lessor accounting remaining substantially unchanged from the preceding guidance under IAS 17. The Company adopted the standard on July 1, 2019 using the modified retrospective method, with the cumulative effect initially recognized in retained earnings, and no restatement of prior comparative periods.

 

The majority of our property leases, which were previously treated as operating leases, were impacted by IFRS 16. The adoption of IFRS 16 has resulted in:

 

i) higher non-current assets related to the initial recognition of the present value of our unavoidable future lease payments as right-of-use assets under property, plant and equipment, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the balance sheet as at July 1, 2019;
ii) higher current and non-current liabilities related to the concurrent recognition of lease liabilities, which are measured at the present value of the remaining fixed lease payments, discounted by our weighted average incremental borrowing rate of 5.62% as of July 1, 2019;
iii) replacement of rent expense previously recorded in costs of goods sold, general and administration, and sales and marketing expenses with depreciation expense of these right-of-use assets and higher finance costs related to the accretion and interest expense of the corresponding lease liabilities; and
iv) variable lease payments and non-lease components are expensed as incurred.

 

The new standard does not change the amount of cash transferred between the lessor and lessee but impacts the presentation of the operating and financing cash flows presented on the Company’s consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.

 

The Company elected to apply the following recognition exemptions and practical expedients, as described under IFRS 16:

 

i) recognition exemption of short-term leases;
ii) recognition exemption of low-value leases;
iii) application of a single discount rate to a portfolio of leases with similar characteristics on transition;
iv) exclusion of initial direct costs from the measurement of the right-of-use assets upon transition;
v) application of hindsight in determining the applicable lease term at the date of transition; and
vi) election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.

 

The following table summarizes the adjustments to opening balances resulting from the initial adoption of IFRS 16 on July 1, 2019, with the effects on transition being recognized directly to retained earnings:

($ thousands) As previously reported under IAS 17 IFRS 16 transition adjustments As restated under
IFRS 16
Prepaid deposits 24,323   (585 ) 23,738  
Property, plant and equipment 765,567   96,049   861,616  
Current loans and borrowings (13,758 ) (6,630 ) (20,388 )
Non-current loans and borrowings (127,486 ) (88,834 ) (216,320 )
Accumulated deficit 283,638    -   283,638  

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

The following table reconciles the operating lease commitments as at June 30, 2019 to the opening balance of lease liabilities as at July 1, 2019:

($ thousands) $
Operating lease commitments as at June 30, 2019 94,780  
Add: finance lease liabilities recognized as at June 30, 2019 1,326  
Add: adjustments as a result of a different treatment for extension and termination options 94,829  
Effect of discounting using the lessee’s incremental borrowing rate (88,767 )
Less: leases commitments not yet in effect (4,068 )
Less: short-term, low-value asset leases and others (1,318 )
Lease liabilities recognized as at July 1, 2019 96,782  

 

As a result of adopting IFRS 16, the Company updated its lease accounting policies as follows:

 

The Company assesses whether a contract is or contains a lease at inception of the contract. A lease is recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in “finance and other costs” in the condensed consolidated interim statement of comprehensive (loss) income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Lease liabilities represent the net present value of fixed lease payments (including in-substance fixed payments); variable lease payments based on an index, rate, or subject to a fair market value renewal condition; amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if it is probable that the lessee will exercise that option.

 

The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise.

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in general and administration and sales and marketing expense in the condensed consolidated interim statement of comprehensive (loss) income. Short-term leases are defined as leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index, rate, or subject to a fair market value renewal condition are expensed as incurred and recognized in costs of goods sold, general and administration and sales and marketing expense, as appropriate given how the underlying leased asset is used, in the consolidated statement of comprehensive income.

 

Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. The depreciation is recognized from the commencement date of the lease.

 

(ii) IFRIC 23 Uncertainty Over Income Tax Treatments

 

IFRIC 23 provides guidance that adds to the requirements in IAS 12, Income Taxes by specifying how to reflect the effects of uncertainty in accounting for income taxes. IFRIC 23 requires an entity to determine whether uncertain tax positions are assessed separately or as a group; and assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. If no, the entity should reflect the effect of uncertainty in determining its accounting tax position. The Company adopted IFRIC 23 effective July 1, 2019 and was applied using the modified retrospective approach without restatement of comparative information. There was no material impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

The following IFRS standards have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to have a significant impact to the Company have been excluded.

 

Amendments to IFRS 3: Definition of a Business

 

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform

 

The amendments revise the existing requirements for hedge accounting and are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as Interbank Offered Rates (“IBOR”). The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The amendments are effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

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Amendments to IAS 1: Classification of Liabilities as Current or Non-current

 

The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2022. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

 

Financial Instruments

Financial instruments are measured either at fair value or at amortized cost. The table below lists the valuation methods used to determine the fair value of each financial instrument.

  Fair Value Method
Financial Instruments Measured at Fair Value  
Marketable securities Closing market price of common shares as of the measurement date (Level 1)
Derivatives Closing market price (Level 1) or Black-Scholes, Binomial, Monte-Carlo & FINCAD valuation model (Level 2 or 3)
Contingent consideration payable Discounted cash flow model (Level 3)
Derivative liability Kynex valuation model (Level 2)
Financial Instruments Measured at Amortized Cost
Cash and cash equivalents, restricted cash, accounts receivable, loans receivable Carrying amount (approximates fair value due to short-term nature)
Accounts payable and accrued liabilities Carrying amount (approximates fair value due to short-term nature)
Convertible debentures, loans and borrowings Carrying value discounted at the effective interest rate which approximates fair value

Summary of Financial Instruments

 

The carrying values of the financial instruments at March 31, 2020 are summarized in the following table:

($ thousands) Amortized Cost FVTPL Designated FVTOCI Total
Financial Assets        
Cash and cash equivalents 230,208    -    -   230,208  
Accounts receivable, excluding sales taxes receivable 71,928    -    -   71,928  
Marketable securities  -    -   11,834   11,834  
Derivatives  -   49,494    -   49,494  
Loans receivable 3,312    -    -   3,312  
Financial Liabilities        
Accounts payable and accrued liabilities 128,622    -    -   128,622  
Convertible debentures (1) 324,693    -    -   324,693  
Contingent consideration payable  -   18,167    -   18,167  
Loans and borrowings 268,018    -    -   268,018  
Derivative liability  -   2,571    -   2,571  
(1) The fair value of convertible notes includes both the debt and equity components.

 

Fair Value Hierarchy

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and
Level 3 Inputs for the asset or liability that are not based on observable market data.

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

The following is a summary of financial instruments measured at fair value segregated based on the various levels of inputs as at March 31, 2020:

($ thousands) Level 1 Level 2 Level 3 Total
As at March 31, 2020        
Marketable securities (1) 10,834    -   1,000   11,834  
Derivative assets (1)  -   33,505   15,989   49,494  
Contingent consideration payable (2)  -    -   18,167   18,167  
Derivative liability (2)  -   2,571    -   2,571  
         
As at June 30, 2019        
Marketable securities 142,248    -   1,000   143,248  
Derivative assets  -   64,001   22,408   86,409  
Contingent consideration payable  -    -   28,137   28,137  
Derivative liability (2)  -   177,395    -   177,395  
(1) For a reconciliation of realized and unrealized gains and losses applicable to financial assets measured at fair value for the three and nine months ended March 31, 2020, refer to Notes 5(a) and (b) in the Financial Statements.
(2) For a reconciliation of unrealized gains and losses applicable to financial liabilities measured at fair value for the three and nine months ended March 31, 2020, please refer to Note 14(ii) and Note 24 in the Financial Statements.

 

There have been no transfers between fair value levels during the period.

 

Financial Instruments Risk

 

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board mitigates these risks by assessing, monitoring and approving the Company’s risk management processes.

 

Credit risk

 

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is moderately exposed to credit risk from its cash and cash equivalents, restricted cash, accounts receivable and loans receivable. The risk exposure is limited to their carrying amounts reflected on the statement of financial position. The risk for cash and cash equivalents and restricted cash is mitigated by holding these instruments with highly rated Canadian financial institutions. As the Company does not invest in asset-backed deposits or investments, it does not expect any credit losses. The Company periodically assesses the quality of its investments and is satisfied with the credit rating of the financial institutions and the investment grade of its GICs. The Company mitigates the credit risk associated with the loans receivable by managing and monitoring the underlying business relationship.

 

Accounts receivable primarily consist of trade accounts receivable and sales tax receivable. The Company provides credit to certain customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Credit risk is generally limited for receivables from government bodies, which generally have low default risk, and medical sales direct to patients, where payment is required prior to the delivery of goods. Credit risk for non-government wholesale customers is assessed on a case-by-case basis and a provision is recorded where required. As of March 31, 2020, $9.8 million of accounts receivable are from non-government wholesale customers (June 30, 2019 - $25.1 million). As of March 31, 2020, the Company recognized a $2.0 million provision for expected credit losses (June 30, 2019 - $3.1 million).

 

The Company’s aging of trade receivables was as follows:

($ thousands) March 31, 2020 June 30, 2019
     
0 - 60 days 49,840   49,602  
61+ days 20,387   35,630  
  70,227   85,232  

 

Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with its financial liabilities when they are due. The Company manages liquidity risk through the management of its capital structure and resources to ensure that it has sufficient liquidity to settle obligations and liabilities when they are due. As at March 31, 2020, the Company has a $264.4 million credit facility with BMO, of which $2.0 million letters of credit and $22.0 million of principal are outstanding under Facility A, $137.8 million principal is outstanding under Facility B, and $17.8 million principal is outstanding under Facility C. On April 2, 2019, the Company filed a Shelf Prospectus and a corresponding Registration Statement with the SEC, which allows Aurora to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. In connection with the Shelf Prospectus, the Company also filed an ATM supplement which provided for US$400.0 million in common shares to be sold by registered dealers on behalf of Aurora in the U.S. at prevailing market prices at the time of sale. For the nine months ended March 31, 2020, the Company raised $535.8 million (US$398.9 million) of gross proceeds under its ATM program. On April 16, 2020, the Company filed a second ATM supplement which provides for an additional US$250.0 million in common shares to be sold through the NYSE, increasing the total financing available under the ATM to US$650.0 million.

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

While the Company did not incur any significant disruptions to its operations during the Q3 2020 from COVID-19, subsequent to March 31, 2020, the Company took the following precautionary measures to strengthen the Company’s balance sheet and preserve flexibility given the macroeconomic uncertainty caused by COVID-19:

 

On April 16, 2020, the Company filed a prospectus supplement for a renewed ATM program which provides for an additional US$250.0 million in common shares to be sold by registered dealers on behalf of Aurora in the United States, thus increasing the total financing available under the ATM to US$650.0 million.
Subsequent to March 31, 2020, the Company issued 629,367 common shares under the ATM for gross proceeds of $7.8 million (US$5.6 million)

 

These capital raises, along with our cash and cash equivalents as at March 31, 2020 provides us with approximately $237.9 million in cash on hand to support ongoing operations and near-term contractual obligations. Refer to the “Key Developments During the Three Month Period Ended March 31, 2020” and “Risk Factors” sections for further discussion on COVID-19.

 

Summary of Outstanding Share Data

 

The Company had the following securities issued and outstanding as at April 30, 2020:

Securities (1) Units Outstanding
Issued and outstanding common shares 110,071,815  
Stock options 5,558,153  
Warrants 1,001,957  
Restricted share units 371,694  
Deferred share units 10,016  
Convertible debentures 3,978,138  
(1) Refer to Note 14 “Convertible Debentures”, Note 16 “Share Capital” and Note 17 “Share-Based Compensation” in the Company’s Financial Statements for a detailed description of these securities. All references to the number of securities above have been retroactively adjusted to reflect the Share Consolidation effective May 11, 2020.

 

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| AURORA CANNABIS INC. Q3 2020 MD&A

 

Historical Quarterly Results

($ thousands, except earnings per share and Operational Results) Q3 2020 Q2 2020 Q1 2020 Q4 2019 (6)
Financial Results        
Net revenue (1) $75,520   $56,027   $75,245   $98,942  
Gross margin on cannabis net revenue (2) 44 % 44 % 58 % 58 %
Adjusted gross margin before FV adjustments on cannabis net revenue (3) 54 % 55 % 67 % 64 %
Earnings (loss) attributable to common shareholders ($137,395 ) ($1,286,129 ) $12,756   ($193 )
Basic and dilutive earnings (loss) per share ($1.37 ) ($14.16 ) $0.15   $0.00  
         
Balance Sheet        
Working capital $447,812   $415,936   $123,750   $227,802  
Cannabis inventory and biological assets (4) $244,485   $216,735   $178,748   $144,275  
Total assets $4,717,656   $4,671,912   $5,606,799   $5,502,830  
         
Operational Results - Cannabis        
Cash cost of sales per gram sold (5) $1.50   $1.60   $1.15   $1.47  
Cash cost to produce per gram sold (5) $0.85   $0.88   $0.85   $1.14  
Active registered patients 86,674 90,307 91,116 84,729
Average net selling price of dried cannabis (3) $4.64   $4.69   $4.90   $4.91  
Average net selling price of cannabis extracts (3) $9.61   $9.97   $11.21   $10.37  
Kilograms produced 36,207 30,691 41,436 29,034
Kilograms sold 12,729 9,501 12,463 17,793
         
  Q3 2019 Q2 2019 Q1 2019 Q4 2018
Financial Results        
Net revenue (1) $65,145   $54,178   $29,674   $19,147  
Gross margin on cannabis net revenue (2) 55 % 54 % 70 % 74 %
Adjusted gross margin before FV adjustments on cannabis net revenue (3) 63 % 55 % 53 % 76 %
Earnings (loss) attributable to common shareholders ($158,354 ) ($237,752 ) $105,462   $79,868  
Basic and dilutive earnings (loss) per share ($1.89 ) ($3.00 ) $1.44   $1.56  
         
Balance Sheet        
Working capital $469,729   $274,629   $548,446   $144,533  
Cannabis inventory and biological assets (4) $118,023   $79,924   $75,944   $39,602  
Total assets $5,549,780   $4,875,884   $4,955,361   $1,886,510  
         
Operational Results - Cannabis        
Cash cost of sales per gram sold (5) $2.05   $2.60   $1.90   $1.87  
Cash cost to produce per gram sold (5) $1.42   $1.92   $1.45   $1.70  
Active registered patients 77,136 73,579 67,484 43,308
Average net selling price of dried cannabis (3) $5.86   $6.23   $8.39   $8.02  
Average net selling price of cannabis extracts (3) $11.01   $10.00   $12.12   $13.52  
Kilograms produced 15,590 7,822 4,996 2,212  
Kilograms sold 9,160 6,999 2,676 1,617  
(1) Net revenues represent our total gross revenues net of excise taxes levied by the CRA effective October 17, 2018, on the sale of medical and consumer use cannabis products. Given that our gross revenue figures exclude excise taxes that were levied and billed back to customers, as reflected in accordance with IFRS 15, we believe that the presentation of net revenue more accurately reflects the level of revenue earned during the relevant period.
(2) Gross margin on cannabis net revenue is a non-GAAP measure. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined term. Gross margin on cannabis net revenue for Q2 2019 and subsequent periods were comprised of revenues from both medical and consumer markets, while gross margin on cannabis net revenues for the periods prior to Q2 2019 were comprised of revenues from medical cannabis only. Given that our gross revenue from the sale of goods figure excludes excise taxes, we believe that the presentation of gross margin on cannabis net revenue more accurately reflects the level of gross profit earned from cannabis products during the relevant period.
(3) Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms.
(4) Represents total biological assets and cannabis inventory, exclusive of merchandise, accessories, supplies and consumables.
(5) Cash cost of sales per gram of dried cannabis sold and cash cost to produce per gram of dried cannabis sold are non-GAAP financial measures and are not a recognized, defined, or standardized measure under IFRS. These respective metrics represents the blended and consolidated cash costs for dried cannabis produced and sold by our Aurora and CanniMed operations during the year ended June 30, 2018. However, due to the acquisitions completed and growth achieved in fiscal 2019, the metrics for fiscal 2019 and fiscal 2020 reflect the blended and consolidated cash costs of dried cannabis produced and sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms.
(6) During the three months ended June 30, 2019, the Company recorded non-material year end corrections to: (i) capitalize certain payroll, share-based compensation and borrowing costs, related to the construction of our production facilities that were incorrectly expensed in prior periods; and (ii) reverse items that had been over-accrued in prior periods. The net impact of these adjustments to the three months ended June 30, 2019 Adjusted EBITDA was a $14.9 million reduction in reported operating expenses.
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Risk Factors

 

In addition to the other information included in this report, readers should consider carefully the following factors, which describe the risks, uncertainties and other factors that may materially and adversely affect our business, products, financial condition and operating results. There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in the forward-looking statements (“FLS”) set forth in this report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such FLS to reflect events or circumstances after the date of this MD&A.

 

These risks include, but are not limited to the following:

 

risk that government will continue to be slow in roll out strategy;
risk of managing the integration of acquisitions;
risk of managing the business transformation plan and becoming EBITDA positive;
risk of breaching the financial covenant ratios of the First Amendment to the First Amended and Restated Credit Agreement;
ability to successfully obtain and renew Cannabis Act licenses, adhere to all regulatory requirements, and maintain the good standing of our licenses;
actions by governmental authorities, including changes in laws, regulations and guidelines, which may have adverse effects on the Company’s operations;
risk of failure or delay to acquire regulatory approvals required to produce and sell cannabis;
the Company has a limited operating history and no assurance of profitability;
risks related to negative public perception of cannabis consumption which may have an adverse effect on the Company’s operational results, consumer base, financial results, and the desire of third parties doing business with us;
competition in the Company’s industry where current and future competitors may have longer operating histories, more financial resources, and lower costs than the Company;
risk of whether the Company is able to realize its growth targets;
ability to execute the Company’s strategy without additional financing;
operating hazards and uninsured risks;
attracting and retaining key employees;
ability to expand operations into international jurisdictions;
availability of strategic alliances which complement or augment the Company’s existing business;
possibility of product liability claims against the Company;
risk of product recalls and returns;
ability to successfully develop new products and obtain required regulatory approvals;
conflicts of interest which may arise between the Company and its directors and officers;
potential for legal proceedings arising in the normal course of business;
risks related to agricultural operations, including disease, insect pests, and changes in climate;
the Company’s dependence on transportation services and the possibility of disruptions;
the price of production of cannabis will vary based on a number of factors outside of our control;
risks related to compliance with safety, health, and environmental regulations;
ability to protect and preserve intellectual property rights;
risk of political and economic instability in the jurisdictions in which the Company operates;
execution of the Company’s growth strategy;
ability to successfully identify and make attractive acquisitions, joint ventures or investments, or successfully integrate future acquisitions;
volatility in the Company’s common share price on the TSX and NYSE;
global economy risk, which may impact the Company’s ability to raise equity or obtain additional financing;
risks associated with foreign currency translation losses;
restrictions and covenants from the Company's loan facilities may limit the Company's ability to execute its plans;
future issuances of equity could decrease the value of the Company's shares;
the regulated nature of the industry could discourage any takeover offers;
risks associated with the absence of dividends paid to shareholders;
misappropriation of assets and security breaches;
risks associated with breaches of security at our facilities or in respect of electronic documents and data storage and risks related to breaches of applicable privacy laws;
cyber security risks, loss of information and computer systems;
no assurance we will continue to meet listing standards of the NYSE and TSX;
risk that the Company will not be able to develop and maintain strong internal controls and be SOX compliant by the mandated deadline; and
risk associated with COVID-19 and the government response thereto, set out in greater detail below.

 

Infectious diseases, including COVID-19 pandemic, and related government responses could have a material and adverse effect on our business, financial condition and results of operations

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The Company’s business, including its operations, supply chains and interactions with counterparties, and its financial condition may be adversely impacted by the effects of COVID-19 and other infectious diseases.

 

The extent to which COVID-19 and other infectious diseases may impact the Company’s business, including its operations and the market for its securities and its financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak and the actions taken by applicable governmental entities to address and mitigate COVID-19 or any other infectious diseases. In particular, the continued spread of COVID-19 globally could materially and adversely impact the Company’s business including, without limitation, employee health, workforce productivity, increased insurance premiums, limitations on travel, disruption to supply chains and the ability to deliver the Company’s products to end customers. In addition, government efforts to curtail the spread of COVID-19 may result in temporary or long-term suspensions or shut-downs of our operations, impact our customers and affect our supply chain. Such suspensions and disruptions may have a material and adverse effect on the Company’s business, financial condition and results of operations.

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In connection with COVID-19, we are taking additional safety measures at our facilities. However, such measures and related government mandates may not be effective, and one or more of our employees may get sick and may come to work infected, necessitating a short or long-term closure of the affected facilities, disrupting production. Such measures and mandates may also increase our expenses and otherwise impair our production levels or cause us to close or severely limit production at our facilities. Further, legal cannabis dispensaries in certain Canadian markets may close voluntarily or be forced to close by the provincial governments, reducing our ability to distribute cannabis. For example, the Ontario government required retail dispensaries in the province to close for a short period, after which they were allowed to reopen, subject to certain limitations. In addition, consumer demand for cannabis and our other products may be reduced as a result of reductions in consumers’ disposable income associated with lay-offs and work or pay limitations due to mandatory social distancing and lockdown measures implemented by governments in the geographies where we operate. Production limitations or stoppages, social distancing measures and other impediments affecting our suppliers, partners or our facilities, should they materialize, may make it difficult, more costly, or impossible for us to conduct portions of our business. Limitations on the function of Health Canada and other regulators as a result of remote work of its employees or redeployment of its resources to addressing the pandemic may delay our communications with the regulatory authorities and delay renewal of our existing licences or the receipt of additional licences required for our operations, should such licences be sought. If macroeconomic conditions continue to worsen in Canada and around the world, demand for cannabis and our other products may significantly decline and industry participants, including our customers and suppliers, may face financial hardship. In addition, the increased market volatility resulting from global business and economic disruption related to the pandemic and measures to contain it has made it more difficult for companies to access capital markets. The duration and severity of the COVID-19 pandemic is currently unknown, and the pandemic may continue for a significant period of time. Any of the foregoing may adversely affect our business, financial position and results of operations.

 

Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to reliably estimate the length and severity of these developments and its impact on the Company. As a result, any of the risks associated with COVID-19 as described above may impact key estimates and assumptions used in the Company’s financial statements. Such changes could be material and may impact, among other things, an impairment of long-lived assets including intangibles and goodwill.

 

For additional information regarding the risks that the Company is exposed to, see the disclosure provided under the heading “Risk Factors” in the Company’s AIF dated September 10, 2019, which is available on the SEDAR website at www.sedar.com.

 

Internal Controls over Financial Reporting

 

There were no significant changes in Aurora’s internal controls over financial reporting (“ICFR”) during the period covered by this MD&A that materially affected, or are reasonably likely to materially affect, the Company’s ICFR, except to the extent they relate to internal controls of acquired entities. Management continues to perform additional account reconciliations and other analytical and substantive procedures to ensure reliable financial reporting and the preparation of financial statements in accordance with IFRS.

 

Aurora has limited the scope of the design of disclosure controls and procedures and ICFR to exclude controls, policies, and procedures over entities that were acquired by the Company not more than 365 days before the end of the financial period. The only entity controlled by Aurora but was scoped out of the design of controls and procedures and ICFR was Chemi Pharmaceuticals Inc. (acquired April 24, 2019).

 

Excluding goodwill and intangible assets, Chemi constitutes approximately $0.2 million of the Company’s current assets, $0.3 million of total assets, and a nominal amount of current liabilities and total liabilities. Chemi contributed a nominal amount of revenue and $0.9 million of losses to the Company’s net loss for the nine months ended March 31, 2020.

 

Cautionary Statement Regarding Forward-Looking Statements

 

This MD&A contains certain statements which may constitute “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities law requirements (collectively, “forward-looking statements” or “FLS”). These forward-looking statements are made as of the date of this MD&A and the Company does not intend, and does not assume any obligation, to update these FLS, except as required under applicable securities legislation. FLS relate to future events or future performance and reflect Company management’s expectations or beliefs regarding future events. In certain cases, FLS can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved” or the negative of these terms or comparable terminology. In this document, certain forward-looking statements are identified by words including “may”, “future”, “expected”, “intends” and “estimates”. By their very nature FLS involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the FLS. The Company provides no assurance that FLS will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on FLS. Certain FLS in this MD&A include, but are not limited to the following:

 

pro forma measures including revenue, registered medical patients and grams produced;
the completion of construction of production facilities, associated costs, and receipt of licenses from Health Canada to produce and sell cannabis and cannabis related products from these facilities;
the successful integration of CanniMed and MedReleaf and other subsidiaries into Aurora’s operations;
strategic investments and capital expenditures, and related benefits;
future growth expansion plans;
expectations regarding production capacity, costs and yields;
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product sales expectations and corresponding forecasted increases in revenues; and
the impact of the COVID-19 pandemic on the Company’s business, operations, capital resources and/or financial results.

 

The above and other aspects of the Company’s anticipated future operations are forward-looking in nature and, as a result, are subject to certain risks and uncertainties. Although the Company believes that the expectations reflected in these FLS are reasonable, undue reliance should not be placed on them as actual results may differ materially from the forward-looking statements. Such FLS are estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. These risks include, but are not limited to, the ability to retain key personnel, the ability to continue investing in infrastructure to support growth, the ability to obtain financing on acceptable terms, the continued quality of our products, customer experience and retention, the development of third party government and non-government consumer  sales channels, management’s estimates of consumer demand in Canada and in jurisdictions where the Company exports, expectations of future results and expenses, the availability of additional capital to complete construction projects and facilities improvements, the risk of successful integration of acquired business and operations, management’s estimation that SG&A will grow only in proportion of revenue growth, the ability to expand and maintain distribution capabilities, the impact of competition, the general impact of financial market conditions, the yield from marijuana growing operations, product demand, changes in prices of required commodities, competition, the possibility for changes in laws, rules, and regulations in the industry, epidemics, pandemics or other public health crises, including the current outbreak of COVID-19, the “Risk Factors” section of the MD&A, as well as updates provided herein.

 

Cautionary Statement Regarding Certain Non-GAAP Performance Measures

 

This MD&A contains certain financial performance measures that are not recognized or defined under IFRS (termed “Non-GAAP Measures”). As a result, this data may not be comparable to data presented by other licensed producers of cannabis and cannabis companies. For an explanation of these measures to related comparable financial information presented in the consolidated financial statements prepared in accordance with IFRS, refer to the discussion below. The Company believes that these Non-GAAP Measures are useful indicators of operating performance and are specifically used by management to assess the financial and operational performance of the Company. These Non-GAAP Measures include, but are not limited, to the following:

 

Cash cost of sales of dried cannabis sold is calculated by taking the cost of sales, excluding the effect of changes in the FV of biological assets and inventory, and deducting non-cash production costs, cannabis extract conversion costs, cost of accessories, cost of products purchased from other Licensed Producers that were sold, and cost of sales from non-cannabis producing subsidiaries. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash cost of sales of dried cannabis sold divided by total grams of dried cannabis sold in the period that was produced by Aurora. Management believes these measures provide useful information about the efficiency of production and fulfillment for our core cannabis operations.
Cash cost to produce dried cannabis sold is equal to cash cost of sales of dried cannabis sold less packaging costs (i.e. post-production costs). Cash cost to produce per gram of dried cannabis sold is calculated by taking cash cost to produce dried cannabis sold divided by total grams of dried cannabis sold in the period that was produced by Aurora. Management believes these measures provide useful information about the efficiency of our production of cannabis.
Cannabis net revenue represents revenue from the sale of cannabis products, excluding excise taxes and revenues from patient counseling services, design, engineering and construction services, and analytical testing services. Cannabis net revenue is further broken down as follows:
Medical cannabis net revenue represents Canadian and international cannabis net revenue for medical cannabis sales only, excluding wholesale bulk cannabis net revenue.
Consumer cannabis net revenue represents cannabis net revenue for consumer cannabis sales only.
Wholesale bulk cannabis net revenue represents cannabis net revenue for wholesale bulk cannabis only.

Management believes the cannabis net revenue measures provide more specific information about the net revenue purely generated from our core cannabis business and by market type.

Average net selling price per gram and gram equivalent is calculated by taking cannabis net revenue divided by total grams and grams equivalent of cannabis sold in the period. Average net selling price per gram and gram equivalent is further broken down as follows:
Average net selling price per gram of dried cannabis represents the average net selling price per gram for dried cannabis sales only, excluding wholesale bulk cannabis sold in the period.
Average net selling price per gram equivalent of cannabis extracts represents the average net selling price per gram equivalent for cannabis extracts only, excluding wholesale bulk cannabis extracts sold in the period.
Average net selling price per gram and gram equivalent of medical cannabis represents the average net selling price per gram and gram equivalent for dried cannabis and cannabis extracts sold in the medical market.
Average net selling price per gram and gram equivalent of consumer cannabis represents the average net selling price per gram and gram equivalent for dried cannabis and cannabis extracts sold in the consumer market.
Average net selling price per gram and gram equivalent of wholesale bulk cannabis represents the average net selling price per gram and gram equivalent of wholesale bulk cannabis and cannabis extracts sold in the period. Wholesale bulk cannabis sales are not subject to excise taxes.

Management believes the average net selling price per gram or gram equivalent measures provide more specific information about the pricing trends over time by product and market type.

Gross profit before FV adjustments on cannabis net revenue is calculated by subtracting (i) cost of sales, before the effects of changes in FV of biological assets and inventory, and (ii) cost of sales from non-cannabis auxiliary support functions, from total cannabis net revenue. Gross margin before FV adjustments on cannabis net revenue is calculated by dividing gross profit before FV adjustments on cannabis net revenue divided by cannabis net revenue. Gross profit and gross margin before FV adjustments on cannabis net revenue is further broken down as follows:
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| AURORA CANNABIS INC. Q3 2020 MD&A

 

 

 

Gross profit and gross margin before FV adjustments on medical cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated in the medical market only.
Gross profit and gross margin before FV adjustments on consumer cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated in the consumer market only.
Gross profit and gross margin before FV adjustments on wholesale bulk cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated from wholesale bulk cannabis only.

Management believes that these measures provide useful information to assess the profitability of our cannabis operations as it excludes the effects of non-cash FV adjustments on inventory and biological assets, which are required by IFRS.

Adjusted gross profit and adjusted gross margin before FV adjustments on cannabis net revenue represents cash gross profit and gross margin on cannabis net revenue and is calculated by (i) subtracting gross profit from non-cannabis auxiliary support functions, and (ii) adding back cost of sales depreciation, from total gross profit before fair value adjustments. Management believes adjusted gross profit and adjusted gross margin on cannabis net revenue provides useful information as it represents the cash gross profit and margin generated from cannabis operations.
Adjusted EBITDA is calculated as net income (loss) excluding interest income (expense), accretion, income taxes, depreciation, amortization, changes in fair value of inventory sold, changes in fair value of biological assets, share-based compensation, foreign exchange, changes in fair value of financial instruments, gains and losses on deemed disposal, and non-cash impairment of equity investments, goodwill, and other assets. Adjusted EBITDA is intended to provide a proxy for the Company’s operating cash flow and is widely used by industry analysts to compare Aurora to its competitors, and derive expectations of future financial performance for Aurora. Adjusted EBITDA increases comparability between comparative companies by eliminating variability resulting from differences in capital structures, management decisions related to resource allocation, and the impact of FV adjustments on biological assets and inventory and financial instruments, which may be volatile and fluctuate significantly from period to period.

 

Non-GAAP measures should be considered together with other data prepared accordance with IFRS to enable investors to evaluate the Company’s operating results, underlying performance and prospects in a manner similar to Aurora’s management. Accordingly, these non-GAAP measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

 

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Exhibit 99.3

 

 

 

Form 52-109F2

Certification of Interim Filings

Full Certificate

 

I, Michael Singer, Chief Executive Officer of Aurora Cannabis Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Aurora Cannabis Inc. (the “issuer”) for the interim period ended March 31, 2020.

 

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

 

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

 

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organization of the Treadway Commission (COSO).

 

5.2 ICFR - material weakness relating to design: N/A

 

5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A

 

(a) the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

 

(i) N/A;

 

(ii) N/A;

 

(iii) a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and

 

(b) summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

 

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2020 and ended on March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: May 14, 2020

 

/s/ Michael Singer                     

Michael Singer

Chief Executive Officer

 

 

Exhibit 99.4

 

 

 

Form 52-109F2

Certification of Interim Filings

Full Certificate

 

I, Glen Ibbott, Chief Financial Officer of Aurora Cannabis Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Aurora Cannabis Inc. (the “issuer”) for the interim period ended March 31, 2020.

 

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

 

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

 

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organization of the Treadway Commission (COSO).

 

5.2 ICFR - material weakness relating to design: N/A

 

5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A

 

(a) the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

 

(i) N/A;

 

(ii) N/A;

 

(iii) a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and

 

(b) summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

 

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2020 and ended on March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: May 14, 2020

 

/s/ Glen Ibbott                           

Glen Ibbott

Chief Financial Officer